15
July 2024
LMS Capital Plc ("LMS" or the
"Company")
This announcement contains
inside information
Update on
Investment
LMS Capital announces changes to the governance and
financial structure of its investment in Dacian Petroleum (Dacian),
the Romanian oil and gas production company.
Key highlights of the changes are as follows:
· The
Company's existing interest in senior loan notes in Dacian, along
with the interests of co-investors (together the "Original Investor Group"), will convert
into equity in Dacian with preferential distribution rights (the
"Equity Swap");
· Certain
of the Original Investor Group, including two of the Company's
directors although not the Company (the "Bridge Lenders"), will provide
financing of $1 million to Dacian for one year on an unsecured
basis (the "Bridge Loan")
with an entitlement to an equity subscription of 5% of Dacian's
issued share capital, at nominal value;
· The
Original Investor Group will have increased board representation
rights and will be able to appoint a majority of the Dacian
board.
The Bridge Loan will take effect immediately but the
Equity Swap, the entitlement of the Bridge Lenders to subscribe for
equity and the changes to the board rights, remain subject to
regulatory clearances in Romania. Further details regarding the
changes and the background to the changes are set out below.
The carrying value of the Company's investment in
Dacian has been reviewed and, on the assumption that the necessary
regulatory clearances are received, and the changes outlined below
are implemented, it is estimated that the Net Asset Value (the
"NAV") of the Company would be reduced by approximately £1.3
million compared to the last reported NAV as at 31 March 2024.
Chair, Jamie Wilson
commented:
"The early period of operations at Dacian has been more
challenging than anticipated, but we continue to believe that the
company will generate returns for its investors and that the
changes agreed will put the company on a sound footing to take
advantage of the opportunities open to it"
Background
The Original Investor Group, which included and was
led by LMS, invested in Dacian in 2020. LMS, through its wholly
owned subsidiaries, invested $9.1 million as part of a $14.0
million financing by way of senior loan notes with a coupon of 14%
per annum on a compounding basis (the "Senior Loan Notes"), and an equity
subscription at nominal value giving the Company an equity stake of
32.3%. in Dacian (the "Original
Investment"). The Original Investor Group in total held 50%
of the equity and the founding team (the "Founders") held 50%.
The Original Investor Group comprises the Company,
certain third parties and three of the Company's directors, being
Robert Rayne, Jamie Wilson and Nick Friedlos, with the investment
in 2020 having been made in accordance with the Company's published
Co-Investment Policy.
Until 12 July 2024 the board of Dacian comprised two
of the Company's Directors, Robert Rayne and Nick Friedlos, and
three Dacian Founders. Effective 12 July 2024, one of the Founders
resigned to be replaced by Jamie Wilson, the Chairman of LMS.
Dacian
Operations
As previously announced in the Company's 2023 annual
report and accounts, Dacian experienced a significant engineering
issue in 2023 which impacted gas production levels materially and
postponed planned production enhancement projects. Due to this,
Dacian has continued to experience lower than target production
levels through 2024 and as such, revenues achieved by Dacian in
2023 and so far in 2024 have been significantly below
expectations.
Financial
position
Dacian currently services third-party debt, which was
put in place in 2020, with payments to the third party of
approximately $300,000 per month. The amount currently outstanding
is $1.3 million, which will be fully repaid by late November 2024,
following which Dacian's free cashflow is expected to increase
significantly. The original amount of the debt was $6 million.
Dacian is also meeting its obligations under the
recently imposed Romanian Solidarity tax of some $100,000 per month
payable until April 2025.
Whilst Dacian has been continuing to meet its
financial obligations notwithstanding its lower revenues, it has
become clear that Dacian would benefit from additional financing in
the interim period to ensure it has sufficient working capital. In
addition, as it currently stands, due to the total value of the
Senior Loan Notes as at 30 June 2024 (with interest compounded)
being $22.1 million, Dacian's capital structure is in a deficit
position which, under Romanian Law should be rectified.
Following consideration of a number of options, it
has been concluded that the best route forward for Dacian and for
all of the Original Investor Group (including the Company) is for
additional financing of $1 million by way of a bridge loan to be
made and for the existing Senior Loan Notes to convert into equity
in Dacian (the "Equity
Swap") (together the "Restructuring") as further described
below.
The
Restructuring
Bridge
Loan
Pursuant to the above, it has been agreed that the
Bridge Loan of $1 million be made available to Dacian by certain of
the Original Investor Group. All Founders and the Original Investor
Group were offered the opportunity to participate in the Bridge
Loan pari passu to their
equity holding. The Company is not participating in the Bridge Loan
due to its investment in Dacian already exceeding 15%. of its NAV
and there being an investment restriction in the Company's
Investment Policy that no investment should represent greater than
15% of the Company's NAV measured at the time of investment. Three
of the Original Investor Group, including Robert Rayne and Jamie
Wilson who are Directors of the Company plus one of the Founders
are participating (together the "Bridge Lenders").
The Bridge Loan will have an interest rate of 14% per
annum and shall be repayable in 12 months from drawdown. As part of
the Restructuring, the Bridge Lenders will also be granted an
entitlement to subscribe for equity representing 5% of Dacian's
share capital, as diluted by the Equity Swap, at a subscription
price of 10 RON per share (approximately £1.70 per share) being
equal to the nominal value of Dacian Shares. The Original
Investment was priced on the same basis. Pending completion of the
Equity Swap set out below, the Senior Loan Notes will be
subordinated to the Bridge Loan. The Bridge Lenders will have the
right to require immediate repayment if the Equity swap is not
completed by 31 December 2024.
The Equity
Swap
In conjunction with the Bridge Loan, it has been
agreed that the Original Investment be restructured such that all
of the Original Investor Group convert the Senior Loan Notes into
equity in Dacian (the "Equity Swap") on the same terms. The purpose
of this is to correct the deficiency in Dacian's net assets under
Romanian law and to strengthen the company's balance sheet.
Following the Restructuring and taking account of the
Equity Swap and the equity subscription by the Bridge Lenders, the
Original Investor Group will own 82.5% of Dacian (LMS' holding will
be 53.3%), the Bridge Lenders will hold 5% and the Founders
12.5%.
Under the terms of the Equity Swap, the Original
Investor Group will have preferential dividend distribution rights
in Dacian, in respect of all of the shares held by them, such that
all dividends will be payable in proportion 95% to the Original
Investor Group and 5% to the Founders and the Bridge Lenders (the
"Preferential Distribution
Rights").
With respect to the shares held by the Founders, the
Preferential Distribution Rights in favour of the Original Investor
Group will continue to apply until the earlier of (i) receipt
by the Original Investor Group of an amount equal to the full
amount of principal and compounding interest that would have been
due had the Senior Loan Notes continued to their original maturity
date; or (ii) Dacian secures an alternative energy project, which
could have a material favourable impact on the value of Dacian.
With respect to the equity subscription shares held
by the Bridge Lenders, the Preferential Distribution Rights in
favour of the Original Investor Group will continue to apply until
the earlier of (i) receipt by the Original Investor Group of an
amount equal to the amount of the original principal under the
Senior Loan Notes; or (ii) Dacian secures an alternative energy
project, which could have a material favourable impact on the value
of Dacian.
Pursuant to the Equity Swap, the Founders' holding in
Dacian will be materially diluted. To incentivise the management
team going forward, it is the intention of the Dacian Board in due
course to issue additional equity to management, on terms to be
agreed but which would require appropriate performance thresholds
to have been met before any such shares acquired material
value.
Governance
The Original Investor Group will have increased
representation on the board of Dacian by virtue of it having the
entitlement to appoint a majority of the directors, subject to
regulatory clearance.
Investment agreement, other documentation and
regulatory clearances
In order to give effect to the Restructuring, the
investment agreement, to which the Original Investor Group
(including the Company) and Founders are parties, and which was put
in place at the time of the Original Investment, has been amended
and restated to reflect the changes outlined above.
Notwithstanding the restatement of the investment
agreement, the Restructuring itself will only be fully implemented
in due course once the process and documentation prescribed under
Romanian law have been prepared and followed and the required
regulatory clearances have been obtained.
In accordance with the Company's Articles of
Association and its Co Investment policy, the arrangements set out
above have been reviewed, in conjunction with external professional
advice, and approved by the two LMS independent non-executive
directors who have no personal interest in Dacian.
Dacian
Outlook
Whilst the production levels have been below
expectations for the reasons set out above, the Board considers the
prospects for Dacian to be positive in the medium term. The current
cashflow projections for Dacian underpinning the Restructuring have
been rebased on the production levels currently being achieved and
Dacian has also identified cost efficiencies which can be made over
the short term which are not expected to impact its maintenance
programme or production. Dacian is expected to be able to repay the
Bridge Loan during 2025. Beyond 2025, it is expected that Dacian
will be sufficiently cash generative to pay dividends to its
investors.
Dacian's estate offers opportunities in alternative
energy related uses. Whilst any such opportunities are still at a
relatively early stage, the Board of the Company are optimistic
about the potential additional benefit that this could bring.
The
person responsible for arranging the release of this announcement
is Nick Friedlos
For
further information please contact:
LMS
Capital plc
Nick Friedlos - Managing Director
0207 935 3555
Shore Capital, Broker
Gillian Martin, Sophie Collins
0207 408 4050