By: Arif Habib Limited
As per KSE notice, the BoD of Pak Electron Limited (PAEL) have decided to issue 40mn ordinary shares to the National bank of Pakistan (NBP) to redeem Privately Placed Term Finance Certificates (PPTFC) of PKR 3,166mn currently held by NBP subject to regulatory and shareholders approvals. The company EOGM in this regard is scheduled for July, 23, 2015. The below table exhibits various market and conversion price ranges amid different discount rates offered to NBP for the conversion of its loan into equity:
Debt conversion goes hand in hand with market price Based on PAEL’s last closing price at PKR 78.70, the ‘issue price’ works out to be PKR 58.84 (based on the given formula for issue price), that is 25% discount to current market price. At this price, the total debt converting into equity would be PKR 2,354mn (74% conversion). Thus, in order to convert the entire amount of PPTFC of PKR 3,166mn, as of Mar’15 balance sheet, the market price of PAEL should be ~PKR 107.7 with issue price being PKR 79.1, as per our workings (given the company retires no loan before necessary approvals). This should support PAEL’s stock price, in our view, as 100% issue price comes close to market price.
Interestingly, as per the management the deal also tags a clause that, if the differential debt remains post conversion, say in case of lower-than desirable market price i.e. ~PKR 107.7, the outstanding debt amount would be put back on the loan sheet (to be amortized over 24 quarterly installments or 6 years, which is the original term of the loan).