Petropavlovsk launches underwritten rights issue, convertible bond

By Toni Weeks

San Luis Obispo, Calif., Feb. 2 – Petropavlovsk plc said it has launched its refinancing, which is necessary to keep the group continuing as a going concern, according to a press release.

The refinancing, which consists of an underwritten rights issue, a debt-for-equity exchange, new convertible bonds, and bank waivers and consents from senior lenders, requires the approval of both bondholders and shareholders at their respective general meetings.

The bondholder meeting will be convened to change the terms of the bonds. Holders of two-thirds of the principal amount of bonds by value is needed for a quorum, and the 75% of those voting must approve the changes. As of Monday, a group of bondholders representing more than 71% of the principal amount of the bonds have committed to give their support to the refinancing, the company noted.

At the shareholders meeting, scheduled for Feb. 26, the company needs approval of 75% of those shareholders to vote to effect the refinancing.

If shareholders do not support the resolutions, the refinancing will fail, the release said, and the cross-default on the group’s loan facilities would mean that shareholders will lose the entire value of their investment.

“[Last year] was, in the opinion of the board, a transformational year for the group, as the team implemented its plan of strategic development to adjust to a new lower gold price environment and to deleverage the group,” chairman Peter Hambro said in a press release.

“However, our operational and exploration success has been overshadowed by a liquidity problem and the need to refinance our outstanding $310.5 million convertible bonds, with the resulting uncertainty causing a sharp decline in our share price.”

Hambro also said that negotiations for the refinancing with bondholders and senior lenders have been “particularly challenging,” taking place against a backdrop of gold price volatility and “significant uncertainty” in key markets. Although the process was slow, the company feels the refinancing package provides the best outcome for shareholders, the release said.

The package gives shareholders the right, but not the obligation, to preserve their investment from dilution by subscribing for new equity, Hambro added. And the group has been able to establish a stable financial platform by gaining the underwriting commitment, he said.

Rights issue

The fully preemptive 157-for-10 rights issue at 5p per share will raise £155.1 million. Petropavlovsk said the price was set by the board, as required by a group of bondholders. The cash underwriting of £50.8 million was arranged by Hambro and chief executive officer Pavel Maslovskiy and committed to by certain bondholders. All but £400,000 of the rights issue will be underwritten.

The company said that post-completion of the refinancing, it expects net debt of about $700 million.

Debt for equity

For new ordinary shares not taken up in the rights issue or placed, some bondholders have agreed to exchange their bonds for new ordinary shares in an amount of £104 million.

Any new ordinary shares not underwritten or taken up may be issued as part of a mandatory debt-for-equity exchange.

Convertibles

The company will launch a new, five-year $100 million convertible bond issued by Petropavlovsk 2010 Ltd. and guaranteed by Petropavlovsk plc. As previously reported, the new convertibles will mature on Dec. 31, 2019 and pay a quarterly coupon of 9%. The conversion price will be a 50% premium to the theoretical ex-rights price.

Petropavlovsk will be able to call the new convertibles after three years subject to a trigger of 150% of the conversion price.

Bank waivers and consents

The company said that VTB, ICBC and Sberbank have signed waiver documentation. A waiver between Sberbank and some of the company’s subsidiaries is expected to be executed shortly.

Some of the waivers are conditional on the other financing to be completed.

IRC is seeking an extension of the availability period under the ICBC facility for the remaining committed $52 million of funds, the receipt of which is also a condition for implementation of the refinancing.

Related party transaction

Petropavlovsk also reported that Hambro, Maslovskiy and a business partner have jointly committed to subscribe for £19.8 million. The transaction, which will constitute a related party transaction, will be subject to a separate shareholder vote at the general meeting.

History

The company said on Jan. 5 that it had received the approval of bondholders representing over 75% of its existing $310.5 million of 4% guaranteed convertible bonds due Feb. 18, 2015 to extend the bonds’ deadline by one month to March 18, 2015.

The company was seeking support of a refinancing plan for the bonds but, due to the complexity of the documentation for the required bondholder and shareholder meeting, disruption caused by the extended seasonal holidays in Europe and Russia and the minimum periods required for shareholder and bondholder notices as well as for the trading in the nil paid rights, it needed more time, because the refinancing was unlikely to be completed by the bonds’ original maturity date.

As previously reported, the company reached an agreement with holders of 62% of the convertibles to refinance the debt for new convertible bonds and cash.

The refinancing deal had been arranged with an ad hoc committee made up of five institutions holding 33% of the bonds and an additional four institutions owning 29% of the bonds.

The bondholders signed a lock-up agreement that committed them to vote in favor of a bondholders’ resolution to approve the financing.

Some bondholders agreed to provide $45 million in cash by participating in the rights offering, and they were to receive priority in receiving cash or new convertible bonds for their existing holdings, with the cash capped at their commitment to the rights offering. Bondholders participating in the agreement were also to participate in a debt-for-equity exchange for more than $130 million of the bonds and were to gain second priority in receiving cash or new convertible bonds for the existing convertibles that they owned, capped at the level of their commitment to the exchange.

Any remaining cash raised in the rights issue and any remaining new convertibles were to be allocated to redeem at par any of the existing convertibles that were still outstanding after these two steps. Accrued interest on the existing convertibles will be paid in cash.

An early consent fee of 0.25% is expected to be paid to bondholders who vote in favor of the recapitalization by an early deadline.

Petropavlovsk said previously that the mandatory debt for equity exchange would be on the same terms as the voluntary commitment but without the priority election mechanism. Any mandatory exchange would be capped at 10% of the existing convertibles, or $31 million.

A fee of 5% would be paid for the cash commitments from existing holders of the convertibles and from Hambro and Maslovskiy. Investors who committed to the voluntary debt-to-equity exchange were to receive 4%.

Bank of America Merrill Lynch and Sberbank CIB are coordinators of the refinancing.

“Upside potential for the business exists because the margin between the U.S. dollar-related gold price that the group currently receives and its operating costs remains strong,” Hambro said in a previous announcement. “This is the result of a number of factors including: reduction in operating costs, lower stripping ratios, new gold discoveries and a substantial depreciation in the foreign exchange value of the Russian ruble against the U.S. dollar.”

Petropavlovsk, formerly Peter Hambro Mining plc, is a London-based gold mining company that operates in Russia.

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