19-Oct-2019. I have been very negative about Retail Food Group for a number of years now, particularly when they were up between $5 and $7/share. When Strawman.com's founder, in his former role, said that he thought it was time to SELL RFG, that the final straw had been broken (no pun intended, much), and that his former investment thesis for RFG was now busted, i.e. things had turned decidedly pear-shaped and it was time to cut losses and move on (despite collegues disagreeing and still recommending RFG as either a hold or a buy on sister-services), I warned that they could easily fall to zero. No matter how many times people thought they had likely bottomed, they could always go lower, until they got to $0. I said there was no reason to hold through what was about to unfold. I said a perfectly rational play would be to sell out and step aside - out of the storm - until it had passed.
I'm paraphrasing most likely; I am no longer a member of that service so I can't check my exact words, but the gist of it was that continuing to hold RFG was very risky and the risks of them going to zero eventually (if not sooner) were very real. My comments were prompted by my own real-life experiences. I've lost plenty of money in similar situations, where I was one of the true believers who "invested" with my heart instead of my head. I've now learned never to fall in love with a company or, if you do, be prepared for a very quick divorce if you find that company has been unfaithful and has misled you. I was trying to save people money, not be a smart arse. It resulted in a few interesting debates. Not everybody agrees. That's what makes a market. Nothing wrong with betting on a high-risk play, as long as you're only betting what you can afford to lose. But don't bet any more than that!
So here we are. October 2019. RFG have NOT gone to zero. Yet. They closed at 17 cents on Thursday 10th (Oct), then announced a $160 to $170 million capital raising on Friday 11th - priced at 10 cents per share. They closed yesterday (18th) at 14c/share. Not zero yet, but getting pretty close.
This cap raising was then (as announced on the 15th) "upsized" to a $170M underwritten conditional placement plus an SPP (share purchase plan for existing shareholders) of up to $20M (all at 10c/sh). So now a $190M raising, which formed part of a wider recapitalisation plan, with RFG’s existing senior lenders having entered into a binding commitment letter and term sheet, subject to various conditions including receipt of $118.5M of proceeds from the offer to be applied in partial repayment of the senior debt, by which the Lenders agree to extinguish $71.8M of existing senior debt ("extinguish" being another term for "write off") and to provide a new $75.5M term loan facility maturing in November 2022 to refinance existing senior debt, with new amortisation and covenants. To facilitate the Offer the Lenders have agreed to extend the existing facilities until 28 Feb 2020.
This was once again another last minute move to avoid (or mitigate) the breaching of RFG's lending covenants. However - make no mistake - RFG's future is still firmly in the hands of their lenders - who are also in a difficult position because if they had NOT written off a large portion of the debt and extended the terms of the rest to allow this raising, RFG would have had to have been wound up, and the remaining assets (which are mostly substantially damaged brands) would have been sold off at fire-sale prices (what you often get when you're a forced seller). The sales would never have covered the debt - leaving the lenders with massive write-offs anyway, almost certainly larger write-offs than what they have just agreed to. So they are only doing what they consider to be in their own best interests. As with Dick Smith Holdings, if RFG's lenders ever decide that winding up the company makes the most financial sense for them, they won't hesitate to do it. It just didn't make sense right now - there was just TOO much debt there; They're instead getting people to pour more of their own money in to partially reduce that debt.
If you're unlucky enough to still be an existing RFG shareholder, should you participate in this SPP? 10c seems really cheap, doesn't it? No. If you lose 100% of shares bought at 10c, you still lose all of your money.
In this announcement, they call this an "Equity raising and debt restructuring to successfully recapitalise the Company". Not really. They are partially recapitalising the company, but will still have substantial debt and will still have onerous lending covenants that are strongly linked to further debt reduction. I don't see that they will have the money or the will to invest meaningful sums into revitalising their ailing brands and improving the lot of their struggling franchisees. I think the pressure will still be there for further asset sales, and the NPV of RFG will still continue to shrink. Still very high risk IMHO.