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Strategies & Market Trends : Value Investing

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To: CusterInvestor who wrote (41508)	2/23/2011 6:04:40 PM
From: E_K_S	2 Recommendations Read Replies (1) of 78552

Hi Custerinvestor - I believe the MHRpC series was authorized for $100 million (4 million shares) and to sell more shares they would need shareholder approval. It's still pretty expensive money at 10 1/2% at par. I was looking at their other revolving debt facilities and they are much lower around 5% but w/ different loan covenants. To me they have two options: (1) up the authorization limit on the preferred C series from $100 million to $200 million or (2) issue a new series (perhaps a convertible stock option) that has a much lower rate maybe at 5% w/ a stock conversion price at $9.00/share (35% above current price). Within the last 90 days I have had two companies (SFL & ULTR) go with the convertible preferred issue to raise more capital. They typically provide for a non callable initial term (eg 48 months) w/ the option to convert to the common stock at any time. The marketed range was 3.75% to 4.25% coupon at an initial conversion price of 30% to 35% above previous days close for SFL. ULTR did a similar issue but had to offer a 7.5% coupon. SFL raised $100 million and ULTR raised $54 million. Both offerings were over subscribed. You can see that the cost of capital is much less going the convertible route. If they extended the authorization limit in #1 to $200 million, the MHRpC would drop to the $25.00/share PAR. If they did some type of convertible preferred issue the #2 option, the MHRpC would trade higher in price so that the effective yield was equal to similar risk E&P debt and at today's rate/risk would probably yield around 9% (especially if it was superior to any new issue(s)). The common stock would be stuck in a trading zone capped at the conversion price until the fundamentals far exceed the conversion price and/or the convertible preferred series was called in. A lot depends on how much money they need for their capital budget for the next four years. If $100 million is sufficient, I like the idea of a convertible offering. If they need more, they might as well issue more stock, dilute the shares rather than paying for expensive preferred debt. From everything I read, I did not see an estimate by the company of their capital needs four years out. That is what I would like to see both as a holder of the MHRpC shares and common shares. EKS

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