Question Tag: Equity restructuring

For some years now, Adonten has been reporting operating losses, principally due to competition from better models. Adonten is now considering reorganising its operations and financial structure to allow it to obtain new funding required to develop and launch its new product. This product is tipped by technical experts to fare strongly on the market once launched.

The Statement of Financial Position as at 31 December 2021 is available:

Additional information:

1. Preference dividends have been in arrears for three years.
2. Retained earnings balance is to be eliminated.
3. The following details relate to the assets:
   • Tangible assets: 15% of the book value is to be transferred to the bondholders for an agreed value of GH¢720 million as full settlement of the debt, and the remaining book value of these assets marked up to 110%;
   • Inventories include obsolete items worth GH¢540 million below their book value of GH¢680 million;
   • A bond investment (having 10 months to maturity date) is to be revised to GH¢280 million from its carrying value of GH¢370 million;
   • Receivables with carrying amount of GH¢1,200 million are to be factored out for 70% advance under terms that will allow for refund of any difference between actual collections and the upfront payment from the factor;
   • One customer who owes GH¢828 million is in serious financial difficulty. Only 50% is expected to be received from this customer in one year’s time.
4. The bank has demanded repayment of the bank overdraft, while the Venture Capital Fund (VCF) has accepted to receive 92% of their existing loan in new ordinary shares as full settlement. Upon successful completion of the reorganisation process, however, VCF is ready to immediately buy 15% GH¢900 million debentures in the reconstructed entity’s debts provided the directors will attach the right to convert the debt into shares at maturity. VCF will also require a 10% discount on the convertible debt at issue and a repayment period of three years. The effective rate of interest on this convertible debt, if the discount is granted, is estimated to be 18.7%, and the effective rate of interest on an equivalent non-convertible instrument will be 22.5%.
5. Existing ordinary shareholders are prepared to inject GH¢4,200 million for 840 million new ordinary shares, while preference shareholders have pledged to finance a new production equipment whose estimated fair value is GH¢1,350 million in exchange for 250 million ordinary shares. Each of these shares currently has a value of GH¢5.
6. Half of the trade payables (suppliers) are satisfied to receive ordinary shares in the reconstructed firm.
7. The directors are projecting an annual profit before interest and tax in the reconstructed entity to be GH¢650 million.
8. A firm order has been received from Amanten, a competitor, to buy all the business assets for GH¢7,200 million. 60% of these proceeds relate to properties. Closure costs are estimated at GH¢50 million.

Required: Suggest a scheme of capital reorganisation that would be acceptable to all stakeholders, including a revised statement of financial position.