Eratat Lifestyle

[felixleong]

Eratat, a cash rich company, issuing 2 year bonds at 12.5% per annum

Gee why did they not invite me in this fund raising exercise as well, I would be interested. It has better yields than the shares

wow super red flag, gg to shareholders

[newbiestock]

Non convertible bonds usually has a much higher interest rate than convertible bonds.

But at least non convertible bonds won't lead to a share dilution.

Mr Lim has pledged his shares for the bond, which I see it a test of confidence of their upcoming expansion growth strategy.

Apple is also a cash rich company but why does it issue bonds recently. There are reasons for companies issuing bonds.

- savings from tax
- using the money to fund expansion
- and maybe even use it to fund sharebuyback

dont forget the company is in China and kept most of its money in RMB. To transfer the money from China to sg will incur some transaction cost.

Time will tell...

[CY09]

Non convertible bonds usually has a much higher interest rate than convertible bonds.

But at least non convertible bonds won't lead to a share dilution.

Mr Lim has pledged his shares for the bond, which I see it a test of confidence of their upcoming expansion growth strategy.

Apple is also a cash rich company but why does it issue bonds recently. There are reasons for companies issuing bonds.

- savings from tax
- using the money to fund expansion
- and maybe even use it to fund sharebuyback

dont forget the company is in China and kept most of its money in RMB. To transfer the money from China to sg will incur some transaction cost.

Time will tell...

Hi newbie,

Apple issued bonds because 1) it was cheaper to raise money in US and pay the 2+% annual interest than paying the US tax of 15% or is it 30% if it transfer its foreign money back into US. Essentially, apple is making use of low I/r environment to play with its cash holdings. Eratat does not have such problems see reason below

Secondly, eratat's operation is in China so there is no need to transfer "the money from china to sg" since money is in china and all its operations are in China too. No transaction costs.

[qwerty89]

Hi all,

Full disclosure: I’m vested in Eratat.

I agree the interest on the bond is high and I don’t like it. However, if you were to dig further into the details, some points may prove interesting.

There are two possible scenarios: either Eratat is a dud or it’s not.

1) Eratat is a dud; it is a very risky coy, the cash is not there, it needs urgent cash infusion, hence the high interest rate.

If we assume this scenario is true, a few questions emerge.

From SHK’s point of view:
• Why would SHK even agree to lend?
o Didn’t they do their due diligence to ensure the cash is there?
• Why is the charged security so minimal?
o 121,500,000 shares * $0.135 * 5 = ~RMB82m, which is only 60% of the principal amount.

From Eratat’s point of view:
• Why didn’t Eratat opt for a convertible bond?
o If Eratat is really desperate for cash, why not opt for convertible, which will have a lower interest?
• Why is the bond only for two years?
o If the company is having cash problems, why are they so confident of paying it back within two years?

Which brings us to the second possible scenario.

2) Eratat doesn’t need the cash; it borrows for some other benefits.

• Eratat is paying for SHK’s stamp of approval and its network.
o Eratat hopes it will have “access to new contacts and opportunities through the Subscriber’s(SHK) network, thereby increasing exposure of the Company’s shares to new investor communities, funds and financial institutions in Hong Kong and the PRC.”
• Eratat, a perennially neglected stock, will finally enjoy greater investor prominence.
o Biggest beneficiary will be the CEO as the largest shareholder of the company.

To me, it appears that the bond is structured to aggressively participate in any upside, rather than protecting the downside, which is odd if SHK have serious doubts about Eratat. Warrant exercise price is 89% above the current price, and with an exercise period of only two years. Does SHK really think Eratat has a chance of hitting that? If not, why set such a high bar?

And if the price does reach that level, coincidentally, compounded annual return for current shareholders will be the same as that of SHK through its bond deal – 30%.

Given the drastic undervaluation as compared with the asset base and operating results, I’ll still be holding on to my Eratat shares, as I find that the rewards continue to outweigh the risks.

Any thoughts? I welcome feedback.

*Another point I would like to ask forummers here is how prestigious is SHK anyway? I find it difficult to quantify “a seal of approval”, if that is the purpose of the bond issue. However, if you look at Geo Energy, the “giver” of this approval can usually extract quite advantageous terms. Geo Energy has Jim Rogers on its board, and for that, the company has offered him a very deep in-the-money call option on 2 million shares with exercise period from 2015 to 2025.

More details on my blog: http://sgvalueinvesting.wordpress.com/20...013-0-132/

[CY09]

Hi,

I can see where your argument is going under the second case scenario. Assuming the cash on b/s is not a dud and applying the idea of risk/return into the frame of cost/reward, the question as a shareholder is whether the cost of approx. 30M RMB annual payment result in direct increase of reward of similar magnitude? the interest will eat up approx. 20% of eratat's full FY profits
To some shareholders the answer could be yes, to others, the answer maybe no. There is no right or wrong answer to this question.

This whole exercise of giving SHK a 30% interest in return for their intangibles like expertise and contacts tells me that SHK views eratat as a risky proposition. Asking 30% returns p.a. is similar to returns demanded for a Venture capital at the early maturity stage and VC firms tend to be in the group of high risk/high reward category.

<not vested in eratat, once was a shareholder sold after the renovation subsidy announcement>

[Stockerman]

When China Essence extended its convertible bond a few years back, its share price was only around 30 cents but the strike price of the CB was 70 cents [minimal discount to the original strike price]. Seems like a lot of upside for the CB holders if share price WERE to rise beyond 70 cents...

the moral of the story is High Strike Price does not mean Bond Investors have confidence in the company. Look at China Essence now. 2.7 cents.
Share price has dropped 10 times since the rolling over of the CB.

Even if China Essence offers to lower the strike price to 10 cents to the CB holders NOW, dont think the CB holders will want it. With credit crunch in China, China Essence might not be able to borrow from the local Chinese banks...

******

Qingmei has lots of cash too. around 15 cents versus share price of 5 cents. CEO explained that his reason for paring down his stake at current 5 cents was to provide LIQUIDITY to MARKET. A joke of the century??? Has the screw fallen out from its brain?

*********

Lets call a spade a spade..Sporean investors have been taken for a ride by so many S-chips and people just have not learnt their lessons.

Sometimes, a counter is listed for some other motives (e.g. money laundering, etc . Check around the ship building industry in Spore and insiders will tell u real stories how of Ah Longs are washing their money. They dont care whether their own companies are in the RED or not. Their aim is just to wash their money.]

Lets just start a SHORT S-CHIP FUND. Maybe Muddy Waters can help...

Hi all,

Full disclosure: I’m vested in Eratat.

I agree the interest on the bond is high and I don’t like it. However, if you were to dig further into the details, some points may prove interesting.

There are two possible scenarios: either Eratat is a dud or it’s not.

1) Eratat is a dud; it is a very risky coy, the cash is not there, it needs urgent cash infusion, hence the high interest rate.

If we assume this scenario is true, a few questions emerge.

From SHK’s point of view:
• Why would SHK even agree to lend?
o Didn’t they do their due diligence to ensure the cash is there?
• Why is the charged security so minimal?
o 121,500,000 shares * $0.135 * 5 = ~RMB82m, which is only 60% of the principal amount.

From Eratat’s point of view:
• Why didn’t Eratat opt for a convertible bond?
o If Eratat is really desperate for cash, why not opt for convertible, which will have a lower interest?
• Why is the bond only for two years?
o If the company is having cash problems, why are they so confident of paying it back within two years?

Which brings us to the second possible scenario.

2) Eratat doesn’t need the cash; it borrows for some other benefits.

• Eratat is paying for SHK’s stamp of approval and its network.
o Eratat hopes it will have “access to new contacts and opportunities through the Subscriber’s(SHK) network, thereby increasing exposure of the Company’s shares to new investor communities, funds and financial institutions in Hong Kong and the PRC.”
• Eratat, a perennially neglected stock, will finally enjoy greater investor prominence.
o Biggest beneficiary will be the CEO as the largest shareholder of the company.

To me, it appears that the bond is structured to aggressively participate in any upside, rather than protecting the downside, which is odd if SHK have serious doubts about Eratat. Warrant exercise price is 89% above the current price, and with an exercise period of only two years. Does SHK really think Eratat has a chance of hitting that? If not, why set such a high bar?

And if the price does reach that level, coincidentally, compounded annual return for current shareholders will be the same as that of SHK through its bond deal – 30%.

Given the drastic undervaluation as compared with the asset base and operating results, I’ll still be holding on to my Eratat shares, as I find that the rewards continue to outweigh the risks.

Any thoughts? I welcome feedback.

*Another point I would like to ask forummers here is how prestigious is SHK anyway? I find it difficult to quantify “a seal of approval”, if that is the purpose of the bond issue. However, if you look at Geo Energy, the “giver” of this approval can usually extract quite advantageous terms. Geo Energy has Jim Rogers on its board, and for that, the company has offered him a very deep in-the-money call option on 2 million shares with exercise period from 2015 to 2025.

More details on my blog: http://sgvalueinvesting.wordpress.com/20...013-0-132/

[Greenrookie]

Hi d.o.g and guys,

Tactician from Nextinsight has post:

The 12.5% calculations and methods used by Eratat is the standard way of calculating Bond Interest Rate... so 12.5% is accurately depicted. Personally, I don't like it, but that's apparently Industry standard. At least it resolves an issue which I had.

She felt the bond was expensive, as did I (as mentioned earlier).

The effective annual rate should be the 15.45% using a compounding method of interest calculation. For the lay person's method of thinking of interest rates (I had mentioned earlier that the 12.5% is correctly represented and calculated according to bond calculations there is NO discrepancy apparently).

The quarterly coupons paid should be part of the final amounts, which will add up to 134m after 2 years. Hence, previous calculations brought over by value buddies had effectively double counted, which was the issue I was concerned with. The Effective rate is hence not 30% or so.

Some caveats which she did not like was the 3 day suspension issue which would force Eratat to redeem all the bonds. She felt that such a covenant can potentially be violated quite easily. Although, this would entail that Eratat would have to fork out 33.5m (the difference between 134, amd 100.5m) extra (principal less subscription).

----

I am not vested, but is very confused with so many way of calculation the interest, can someone enlighten me? Why is par value calculated by including the quarterly interest? Is the language used common in such bond issue?? Cma bonds is so much easier to understand. Appreciate a lot if anyone can enlighten me...

[qwerty89]

When China Essence extended its convertible bond a few years back, its share price was only around 30 cents but the strike price of the CB was 70 cents [minimal discount to the original strike price]. Seems like a lot of upside for the CB holders if share price WERE to rise beyond 70 cents...

the moral of the story is High Strike Price does not mean Bond Investors have confidence in the company. Look at China Essence now. 2.7 cents.
Share price has dropped 10 times since the rolling over of the CB.

Even if China Essence offers to lower the strike price to 10 cents to the CB holders NOW, dont think the CB holders will want it. With credit crunch in China, China Essence might not be able to borrow from the local Chinese banks...

******

Qingmei has lots of cash too. around 15 cents versus share price of 5 cents. CEO explained that his reason for paring down his stake at current 5 cents was to provide LIQUIDITY to MARKET. A joke of the century??? Has the screw fallen out from its brain?

*********

Lets call a spade a spade..Sporean investors have been taken for a ride by so many S-chips and people just have not learnt their lessons.

Sometimes, a counter is listed for some other motives (e.g. money laundering, etc . Check around the ship building industry in Spore and insiders will tell u real stories how of Ah Longs are washing their money. They dont care whether their own companies are in the RED or not. Their aim is just to wash their money.]

Lets just start a SHORT S-CHIP FUND. Maybe Muddy Waters can help...

Thanks for your input.

I agree with you that high strike price doesn’t necessarily mean bondholders expect the share price to exceed the strike price. Rather, I believe it’s based on a continuum of factors. Regarding China Essence, I don’t think it’s fair to use it as a comparison because of the following:

1) It was a modification to the original CB. Other than the lowering of the conversion price, there are other amendments, such as increasing the principal amount of the bond from HKD218m to HKD260m.
2) The financial position of China Essence at the time of the refinancing was much poorer to begin with, as compared to when it first issued the CB.

Financial statements of China Essence before the refinancing agreement:
http://info.sgx.com/webcoranncatth.nsf/V...B003045DB/$file/ChinaEssence_1QFY2012Results.pdf?openelement

Details of the refinancing:
http://info.sgx.com/webcoranncatth.nsf/V...8002EAB7A/$file/ChinaEssence_Updates_ConvertibleBonds.pdf?openelement

To sum up, my point is that if China Essence were to issue a new CB at that point in time, I don’t think bondholders will set the conversion price at $0.70, assuming they are willing to lend. The conversion price of $0.70 is simply the result of a re-negotiation of terms. (ie. in this case, bondholders probably know that conversion price is unlikely to be reached anyway. Value of conversion option is practically zero, and they would rather push for a higher principal repayment.)

A fairer comparison would be to look at the terms of the original CB at the point when it’s first issued:

http://chinaessence.listedcompany.com/misc/fy07.pdf

At that point in time, when the financial position of the company is much better, the conversion price is a 30% premium to the market price, with an exercise period of five years. Do bondholders think there is a reasonable chance that the market price can exceed the conversion price? Is there any value to the conversion option? At that point in time, I believe the answer is yes.

(Similarly, when United Envirotech issued a CB to KKR, the conversion price was set at $0.45, a 37% premium with exercise period of 5 years, which I believe KKR thinks has a reasonable chance of happening at that point in time. Current price is now ~$0.90.)
http://info.sgx.com/webcoranncatth.nsf/V...E0081801C/$file/Project_Poseid_on_Announcement_01082011.pdf?openelement

***
I agree that Qingmei is shady as well.
***

It’s easy to brush off all China companies as fake. But when they work out, they also offer potentially high returns. Look at Dukang and Sino Grandness.

For Eratat’s bond issue, I don’t like the high interest rate. But I find it’s important to consider other factors as well, such as examining the motives of the parties involved. If you were SHK and you knew that Eratat is a risky coy, would you have set these terms? Is your downside sufficiently protected?

• A lofty warrant exercise price (89% within two years!)
• a charge over assets worth only 60% of the principal amount(potentially less if share price plummets)
• minimal restrictive covenants (no negative pledges, no restriction of additional borrowings, etc. Again, compare with KKR above for how they protect their downside risk.)

http://info.sgx.com/webcoranncatth.nsf/V...00049F195/$file/Eratat_Bonds-Warrants_announcement.pdf?openelement

Ultimately, it boils down to your risk appetite. For a company with a P/E of 2 that is growing both topline and bottomline, I think a position in Eratat is still a risk worth taking.

Further insights welcome.

[cyclone]

Principal = 134 M
Issue at 75% or 25% discount.
Proceeds = 75% x 134 M = 100.5 M
Interest 2 years = 12.5% x 2 x 134 M = 33.5 M

For a proceed of 100.5 M, you have to forked out 167.5 M (134 M + 33.5 M).
What is the "actual" interest rate ? I don't know either.

What projects to undertake to justify such high cost ?

[yeokiwi]

If buying a stock requires such in-depth understanding, interpretation, postulation, guesstimation of the company intention of issuing the bonds, it is probably too much for me.

There are more than 700+ companies in SGX and there are countless that are easier to understand with a higher probability of capital preservation with gain.

Different stroke for different people. I prefer things that are easier to understand with a high probability of guessing the right intention/value.