The AMA Group Ltd (ASX: AMA) share price won’t be moving today after the company announced a $150 million capital raising to bolster its balance sheet.
What are the terms of the capital raise?
The $150 million capital raising will comprise of two parts:
- $100 million fully underwritten 1 for 2.80 pro-rata non-renounceable rights offer and;
- $50 million fully underwritten senior unsecured convertible notes due 2027
That’s a lot of finance jargon.
In simple terms, the rights issue offers existing shareholders 1 new share in AMA for every 2.8 that they currently hold. And the convertible note is a debt instrument that can later be converted into shares in AMA.
Shares in the rights offer will be offered for $0.375 per share, which is a 10.7% discount to its last closing price of $0.420.
The offer will increase the share count by 36%. Subsequently, this will dilute current shareholders stake by 26% who decide to take up the offer.
The convertible notes will pay a 4.00% coupon (interest payment) semi-annually and can be convertible to ordinary shares.
Positively, all Directors have expressed their intention to take up their entitlements.
Why is AMA raising capital?
The primary reason for AMA raising capital is to pay down existing debt facilities after being significantly impacted by the pandemic. Restrictions have reduced car travel across various states and subsequent repair volumes.
$72.5 million will be used to repay debt, while $69.3 million will be retained as liquidity to support current activities and growth ambitions.
As a result, the business’s net debt position (debt minus cash) will reduce from $173 million to $32 million. However, including the convertible notes of $50 million, net debt is $82 million.
The business has also restructured its existing debt facilities, which were set to mature in October 2022. Now no debt facility will mature until October 2024 and covenant testing will restart in June 2022.
How will the AMA share price react?
The capital raising was largely already assumed by the market. As a result, shares in AMA are already down 48% for the year.
The AMA share price may react positively to the announcement that the company is using some of the proceeds to fund its growth ambitions.
The business is aiming for over $1 billion in turnover from FY23, 12% earnings before interest, tax, depreciation and amortisation (EBITDA explained) margins and 14% market share.
My take
I’m sceptical when a business raises money to pay down debt. It’s often the result of overborrowing and then needing to dilute shareholders to make up for past unforced errors.
The only real winner in this is investment bank UBS, which will net $8.2 million in fees or over 5% of the raising.
Even if AMA can capitalise on its growth plans, shareholders now own 26% less of the business.
I’d be looking elsewhere for share ideas. I’d recommend the two that my colleague Patrick has recently written about.
