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Afren Plc Dives As Shareholders Face “Substantial” Dilution

The future of oil company Afren (LSE: AFR) has been hanging in the balance for weeks. At 7 a.m. today the firm released a further update on its position via the stock exchange’s Regulatory News Service, sending the shares plunging by 20% at the time of writing.

As some of us here at the Motley Fool have been warning, today’s update confirms the likelihood of a debt-for-equity swap to save the company, which is bad news for existing shareholders.

Bizarrely, and symptomatic of the shambles Afren has become, the company inadvertently made the update accessible on its corporate website yesterday evening, causing consternation among shareholders.

Afren said that it had decided to default on a $15m interest payment to its bondholders “in light of the Company’s current liquidity position and in order to preserve cash while the review of the Company’s capital structure and funding alternatives is completed”.

The crucial part of the RNS for existing investors is as follows:

“It is expected that any agreement with the Company’s bond holders and debt providers regarding the provision of interim and longer term funding and a broader consensual restructuring is likely to result in economic terms associated with the new funding and/or the issue of new equity which will substantially dilute the interests of the Company’s current shareholders“. (my bold)

The Board added that:

“While the Company is also having discussions with its other stakeholders and third party investors regarding interim funding and recapitalising the Company, the Board believes that an agreement between the Company’s creditors presents the most likely solution to the immediate issues facing the business”.

What all this means is that the solution to the survival of the company will likely see an agreement whereby bondholders swap some of their debt for equity, with new investors also coming in. To be attractive to bondholders and new investors the Afren’s shares will have to be priced at a substantial discount to the level they’ve been trading at recently. They could be priced as low as 1p a share, creating billions of new shares, which would lead to a massive dilution of existing shareholders’ stake in the company.

Shareholders will have to vote on this. You may think this is like turkeys voting for Christmas, but the alternative would be that the company goes into administration, wiping out shareholders completely. Existing shareholders who believe in the long-term future of the company will likely be offered the opportunity to stump up more cash to participate in the low-priced fundraising.

In early trading this morning, Afren’s shares are changing hands for under 6p, compared with over 9p at yesterday’s close. I think the shares will be available at a lower than 6p in due course, at which point Afren could become an interesting recovery play.

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G A Chester has no position in any shares mentioned. The Motley Fool UK has recommended Afren. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.