Afren: Back us, or lose it all

Afren has reached an agreement in principle to address its short and longer-term funding needs and recapitalise its capital structure. The heavily-indebted oil company could receive an extra $300 million of net total funding by the end of June. However, it's the bondholders that are calling the shots here and existing shareholders face substantial dilution from any recapitalisation. Unfortunately for them, there is little alternative.

"If shareholders do not approve the recapitalisation…existing shareholders would be unlikely to see any return on their current investment," warn Afren chiefs. That's because if they don't, there will be no reduction in the amount due under the 2016 notes, 2019 notes and 2020 notes, and amendments to new senior notes will increase the return to noteholders.

About 42% of noteholders have agreed to provide $200 million of net interim funding via a super senior private placement notes (PPN) to be issued by the end of this month. That gives Afren breathing space to organise the recapitalisation, agreed by over two-thirds of the lenders under its existing $300 million Ebok credit facility. As part of that, a refinancing of the PPN through a $321 million new high yield note - the new senior notes, which will pay annual interest at 15% - will provide another $100 million in net cash for the company.

A quarter of the 2016, 2019 and 2020 notes will be converted into equity with the rest reinstated and extended to 2019 and 2020 at an annual coupon of 9.1%. The Ebok facility will be extended until 2019, and existing noteholders who subscribe for the PPN and the new senior notes will get new shares - 50% of the fully diluted share capital immediately following the debt-for-equity swap.

There will be an open offer of up to $75 million available to all shareholders who will own just a tenth of the business just before the fundraising. Noteholders will own 80% of company, but after the open offer they will then receive another 10% of the equity.

Once the dust has settled, existing shareholders will hold no more than 11% of the fully diluted share capital of the business.

There was an operational update on Friday, too.

Net production last year was a little below guidance at 31.8 kbopd (thousand barrels of oil per day), and a fall in revenue from $1.6 billion to $0.9 billion was also disappointing. Expect full-year net production of 29-36 kbopd in 2015, says Afren, and capital expenditure of about $0.5 billion. A slump in oil prices also means post-tax impairments of about $2 billion.

A new CEO will also be appointed "shortly". He'll replace former boss Osman Shahenshah, sacked last year along with COO Shahid Ullah after receiving $17 million of unauthorised payments.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.