IMF dilution threat

IMF's capital raising makes sense, but shareholders could face dilution beyond because of the litigator's decision to redeem convertible notes.

There’s nothing like a bit of pressure to ensure a successful capital raising, and retail shareholders in litigation funder IMF Australia (IMF) are likely to be feeling a fair bit of that in the wake of the company’s $40 million plus raising.

While the timing and purpose of the new equity sale make a lot of sense, ordinary shareholders who choose not to take up their entitlements could face dilution that is well beyond the impact of the capital raising.

The reason for this is the convertible notes. The Uncapped 100 company plans to use a large part of the proceeds from the raise to redeem the notes.

That appears to be a good idea as the notes are not cheap with a 10.25% coupon attached. Back in 2010 when the debt was issued, it didn’t raise eyebrows. But in today’s ultra-low interest rate environment, the interest rate on the note sounds excessive.

There are around 23 million of these notes that can be converted into ordinary shares on a one-to-one basis. Note holders can decide on taking cash or scrip, and if all choose cash, IMF will have to cough up $38.3 million.

That wouldn’t leave much from the capital raising to help fund IMF’s overseas expansion into the US, UK and Netherlands.

However, a good number of note holders may choose to get scrip instead. I suspect that will be what the board does as board members hold 3.3 million notes.

In fact, its chairman, Robert Ferguson, will see his holdings in IMF double to just over 3.6 million shares if he opted for scrip. 

IMF is conducting a fully underwritten placement to professional and sophisticated investors at $1.70 a new share, which would add $31.4 million to its coffers.

Retail shareholders can buy up to $6000 worth of new shares at the same price, but the retail shareholders’ component of the raising is capped at $10 million.

Assuming most take up their entitlements and note holders choose to convert their holdings into shares, the dilution for those who do not participate would be around 20%.

IMF is in a trading halt and it last traded at $1.85.  

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