Yesterday, Vonage announced that they had signed an agreement to refinance up to $215M in debt that is maturing on December 16th, 2008. Silver Point Finance will be leading the deal. This effectively removes a major cloud that has been hanging over the stock all year long. However, the terms of the refinancing are scary, and as a result the stock is still stuck at about $1.60 or so.
According to the Form 8-K that the company filed with the SEC, there are two parts to the refinancing - a senior secured debt facility (for $95M-$125M) and a traunch of senior convertible notes (for $90M). Combined, these could provide $215M in proceeds to pay down the $253M in debt that matures in December. The company presumably would use cash on hand to pay off the remaining $38M they owe on the maturing debt. The company also has to pay between $21M and $24M in fees and expenses just to close the new debt round. So, the company is burning $59M to $62M in cash to restructure its debt. As of the company's first quarter report this year, they had only $148M in unrestricted cash to spend on this. We'll find out how much cash the company has now on August 7th, when the company reports 2nd quarter earnings.
The variable interest rate on the new five-year senior secured debt facility starts at about 15% and could go higher based on the higher of LIBOR and the prime rate. The company is also required to prepay some of this loan if assets are sold or if the company has more than $75M in unrestricted cash on hand. Any mandatory or voluntary pre-payments will be encumbered with additional fees that jack up the effective interest rates to even higher levels. These terms leave the company vulnerable to an increasing interest rate environment, and even if the company is successful in generating free cash flow, the company will be paying a big chunk of it to the senior debt holders for the forseeable future.
The $90M convertible notes are on a 7-year amortization schedule and will pay an interest rate of 14%, but some of the interest in the first year is deferred. The notes convert at the lesser of $2 per share or 110% of the 30-day average stock price prior to the "pricing date". The minimum stock price for conversion is $1.65. The company can require the conversion of these notes after three years.
The bottom line for the holders of Vonage stock is that for the next several years, even if the company performs well, the debt holders will reap the rewards instead of the stock holders, and there is the possibility that stock holders will be diluted to the tune of $90M at $1.65 to $2.00 stock prices. If I'm reading it right, this dilution at $1.65 means about 54.5M new shares would be issued, versus the 156.1M shares currently outstanding. The 8-K says something about full-ratchet anti-dilution provisions...I'm not sure what that means, so perhaps a reader of this blog can enlighten me.
In any case, it looks like Vonage is in debtor's prison for a few years and has to earn its way out. Meanwhile, shareholders have a long wait to see much upside. The company has traded the uncertainty of the debt refinancing for the certainty that the company must generate positive cash flow or perish at the hands of their lenders.
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Posted by: Peter Radizeski | July 25, 2008 at 04:21 PM