In fact, following feedback from investors as part of the marketing of a placing and open offer of a five year zero dividend preference share issue, and a proposed issue of convertible unsecured loan stock, the company’s chief executive Geoff Miller has resigned and has been be replaced by executive director Andy Whelan pending the appointment of a permanent replacement. The proposed fundraising has been scrapped too.
The board have reassessed their overall strategy and will now aim to maximise the value in the 19 platform investments the company has made by supporting and developing those platforms with the greatest potential to generate incremental value. They have also sensibly assessed the ability of the company to pay a dividend while also offering the financial flexibility to support the rapidly growing portfolio of platform assets. As a result, the board are proposing to declare an annual dividend of not less than 2.5p a share, payable on a quarterly basis.
But to do so the company needs to put its finances on a firmer footing and in particular address the issue of the £24.9m currently owed by the company on its Sancus loan facility which accrues an interest rate of 11 per cent per annum. So in order to substantially repay the debt, the board have been in discussions with a potential investor, Somerston, to enter into a strategic relationship whereby Somerston’s newly formed special purpose vehicle, Golf Investments, will subscribe for 37m new shares in GLI Finance at a price of 37p each to raise £5.55m. GLI Finance will also sell 15m of the shares it holds in speciality finance investment company GLI Alternative Finance (GLAF: 101p) priced at the lower of 100p a share or GLI Alternative Finance’s net asset value (99.75p at the end of November) to raise a further £15m. Somerston is a privately owned group of companies based in Jersey and is primarily focused on real estate investment and private equity and venture capital.
In addition, and subject to shareholder approval, Golf Investments would be given warrants exercisable over 32m GLI Finance shares as follows: 10m warrants exercisable at 40p a share; 10m warrants at 45p a share; and 12m warrants at 55p a share. GLI currently has 229.6m shares in issue so the 15m new shares issued to Golf Investments as part of the placing equate to 6.5 per cent of the existing share capital and the 32m warrants, which if they were all exercised would raise a further £15.1m of cash for the company, equate to 13.9 per cent of the existing share capital.
Golf Investments would also have the right to procure or subscribe to 10m ‘C’ shares in GLI Alternative Finance within 12 months of completion of the aforementioned proposals; appoint one director to the board of GLI Finance and two to the board of GLI Asset Management, a subsidiary of GLI Finance; and purchase a 50 per cent stake in GLI Asset Management for £250,000, with the intention of developing the joint venture with a view to expanding GLI Alternative Finance and developing other income related products which will support the growth of GLI Finance. It’s worth noting that GLI Finance’s board will now only consider future debt facilities in the context of lowering its cost of capital while maintaining a high level of cover on the existing zero dividend preference shares.
The bottom line
My own take on these complex set of proposals is that it’s a better deal for ordinary shareholders than the one previously proposed. Firstly, although the placing of 15m shares in GLI Finance is at a discount to its last reported net asset value of 52.3p, the dilution for existing shareholders is only 2 per cent and proforma net asset value is still 51.3p.
Secondly, the sale of 15m shares in GLI Alternative Finance means that GLI Finance still retains 25.27m shares in that company, or 48 per cent of the issued share capital, so shareholders in GLI Finance will still benefit from the value creation and dividend income from that investment.
Thirdly, the blended average exercise price of the proposed issue of 32m call warrants in GLI Finance to Golf Investments is 47.1p a share, representing 92 per cent of the company’s net asset value post the placing of shares. It’s also 27 per cent above GLI Finance’s current share price. In other words, the placing of 15m shares and the exercise of 32m call warrants only reduces GLI Finance’s net asset value by less than 3 per cent from 52.3p to 50.8p a share. That doesn’t seem a high price to pay to rid the company of an expensive 11 per cent loan facility with Sancus and enable the board to be able to pay out a dividend of 2.5p a share.
Fourthly, at the current price GLI Finance’s shares offer a prospective dividend yield of 6.7 per cent based on the 2.5p a share payout and are rated on a 28 per cent discount to net asset value of 51.3p post the placing of 15m shares to Golf Investments. Importantly, the issue of the dividend has been addressed, a point I made back in November ('High yield P2P play', 18 November 2015).
Fifthly, acting chief executive Andy Whelan is also the chief executive of Sancus Holdings Limited, an offshore alternative secured lending business, which makes loans to Channel Islands-based entrepreneurs, SMEs, high net worth individuals and professionals. He is also a founding shareholder of that company so is well acquainted with GLI Finance’s platform of investments. GLI Finance in effect acquired the operating companies of Sancus in December 2014 by issuing the vendors with 34.1m new GLI Finance shares at 56.5p, and 20m zero dividend preference shares at 100p each, maturing in December 2019 at 130p. Given the vendors are showing a 33 per cent loss on their equity holdings in GLI Finance, then they have a vested interest in maximising the value in the company’s portfolio of P2P investments.
The bottom line is that once the dust settles I feel that investors are likely to focus on the more secure dividend prospects GLI Finance now offers; the capital upside potential in its portfolio; and the firm financial footing the company is now on to be able to launch additional managed funds to ramp up its asset management business and for GLI Alternative Finance to expand its portfolio to generate additional fee income for GLI Finance.
And that's why I am keeping faith even though the holding in GLI Finance is showing a net loss of 16 per cent since I initiated coverage at 53.25p ('Funded for growth', 25 Feb 2014) and that’s after factoring in the seven quarterly dividends of 1.25p a share paid out in the interim. Recovery buy.
Please note that I have published four columns today, all of which are available on my home page.
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