The good news today is that the always innovative UK Bond Network has finally produced what we think is a real first. It’s latest deal is a publicly listed business using an alternative finance platform to raise growth capital via a debt issue – in this particular case a convertible which carries a decent interest rate and some upside equity option if things go right.
The box below gives more detail on the business in question – Venture Life. We can’t say we know much about the business but it seems to be in a promising part of the healthcare segment. What we can say is that its financials look half decent although it’s important to say that it isn’t profitable. Hopefully the newly acquired business will help the drive towards profitability and a cashflow positive position, but at the moment the listed business is burning through its cash. The table below gives you more detail on the AIM listed outfit.
The reason for the convertible issue – it’s called a convertible because one part of the structure allows the investor to convert the debt instrument into equity – is a takeover. Venture Life is buying Periproducts Limited for cash of £5.6m. This new addition to the group is a UK-based oral care products company with a range of premium products including mouthwashes, which are alcohol-free, and toothpastes. Periproducts recorded turnover and an operating profit of £2.8 million and £0.2 million respectively in the year ended 30 November 2015. On a cash and debt-free basis, the headline consideration represents a multiple of 1.4 times Periproducts' turnover for the year ended 30 November 2015. It’s worth noting that in the period between 2012 through to 2014 Periproducts made a loss. Net assets of the business amount to £1.7m.
To fund the purchase Venture is issuing 2.4m shares raising £1.7m. There’s also the aforementioned convertible bond issue which it hopes will raise up to £2.0 million, of which £1.5 million has been underwritten – it seems almost certain that at least £1.9min bonds will be issued.
And the bond itself? Here’s the main features:
The Convertible Bond will pay a coupon of between 7%-9%, with the exact rate being determined by participating bond investors through UK Bond Network's auction process
The Convertible Bond may be repaid by Venture Life at any time on or after 3 March 2018, with full repayment of the principal amount of the Convertible Bond due on 3 March 2019.
The Convertible Bonds accrue interest daily, payable in quarterly instalments by the Company.
converted into Ordinary Shares will represent a 25% premium to the Placing Price.
If the maximum amount of £2.0 million is raised by the Convertible Bond Issue, and each Bondholder were to convert his/her entire holding of Convertible Bonds into Ordinary Shares, then the Bondholders would be required to pay a conversion price per Ordinary Share of 87.5 pence
The second box below gives much more detail about the security of the loan.
We don’t know the business well enough to make any comment on the trading prospects – or the potential value of the equity option. For the purposes of this analysis we assume that the convertible share option is essentially worthless – though it may prove to be very valuable of course if the share price does rise dramatically.
As an investor you should be concerned with three aspects of the offer in our opinion.
Firstly in a firesale would I get my money back ? With net assets running at around £15m, once we net off euro denominated borrowings, there’s potentially £12m of assets available. This strikes us as reasonable cover although we would also observe that in a firesale asset values tend to fall dramatically. Still on initial inspection this seems well backed.
Secondly has the business enough cashflow to fund the interest payments and the repayment ? If we assume a mid yield of 8% coming out of the auction, and a full fund raising of £2m, the business is in effect looking at additional interest cash costs of £0.5m over the next three years. At the last trading statement there was available cash of £3.3m but the there’s also a fairly consistent cash outflow of more than a £1 million a year. Unless the business moves into profit, there’s a possibility that the business could run out of cash. Hopefully the business will be in profit within a year or two and if worst comes to worst it could always raise extra cash via another placing. Still we think there is some risk with the operating cashflow. This would suggest to us that a higher yield of 9% might be a more appropriate level of reward.
Lastly is the overall level of return appropriate compared to other investments? If we assume that the yield moves closer to 9%, for three years (and the convertibles aren’t called) then this seems a sensible though not generous return. Being honest if this was a private business – and equally loss making – we’d view a yield of between 10 and 12.5% as much more appropriate when compared to other similar asset classes. Yet we’d also concede that the convertible options might have some value and the public nature of the business also is a big plus – it gives investors real transparency. But even allowing for these two factors we’d have though the yield should be closer to 9 to 10% all things being equal.
Still, all in all, an innovative structure from a well-regarded platform which sets its stall by a high level of due diligence. Let’s hope that many more small listed businesses decide to take the plunge and issue bonds and convertibles like Venture.
Highly respected bond issuance platform
Public business listed on AIM
The business looks to be growing internationally, with a string of acquisitions behind it
Half decent yield for two/three years
Reasonable asset backing and not obviously subordinated i.e if the business goes bust you look to be fairly senior
Convertible equity option may have value in the future
It’s not profitable and is cashflow negative
If it was a private business would probably yield more
Aim businesses can be very volatile
Growth via acquisition can be very risky, especially in terms of integration
The convertible equity component is risky and may well expire worthless