BSH: Reducing Debt and Increasing Cashflow

Just prior to announcing their interim results on Thursday, Birmingham Sports Holdings also announced a rights issue in an attempt to raise HK$297.7million. The purpose of the rights issue is to reduce the frightening levels of borrowing within the company and to provide more working capital to keep the company going.

Hong Kong Stock Exchange

The announcement is pretty tough going – you can read all 30 pages of it at this link.

This already sounds boring. Why is it important?

While announcements are this pretty good cures for insomnia, It’s important for both the holding company and Blues.

It’s important for the holding company because they need to bring in extra money.

However, BSH have to be careful how they issue new shares. They can’t issue too many to a current shareholder because if they went over 30% then that shareholder would be forced into making an offer for all shares in BSH, and they don’t want to do that.

They also can’t issue too many to a new large shareholder as 25% or more of shares have to be in public circulation – what is called the float.

Thus what BSH have had to do is to create this rights issue. What it means is all existing “Qualifying shareholders” can buy an extra share in the company for every two they own.

BSH have also extracted guarantees from three large shareholders – Trillion Trophy Asia, Ever Depot and Dragon Villa – to take up a certain number of rights to guarantee a certain level of income.

A securities company called Lego Securities are trying to make everything awesome by underwriting another chunk of these rights.

The more “rights” taken up, the less BSH owes and the better health the company is in – which of course is better news for Blues.

Will it change the ownership situation?

Slightly.

Paul Suen’s Trillion Trophy Asia have not guaranteed that they will take up their whole allocation, but Ever Depot (who are connected to the Cambodian project) and Dragon Villa have both confirmed they will pick up any extras they are allowed to.

It’s difficult to predict exactly what will happen until we know how much is taken up, but it looks like Ever Depot and Dragon Villa will both be slightly bigger shareholders and TTA will be smaller.

As Ever Depot and Dragon Villa both have connections to Mr King (Wang Yaohui), this will strengthen his hand slightly further.

Are there any other reasons for this rights issue?

Rumour on the ground in Hong Kong right now is that all of Suen’s businesses are being monitored while he is under investigation by the SFC for insider trading.

The authorities can’t be impressed right now by the level of debt carried by BSH nor the consistently poor results posted by the company.

Therefore it makes sense for BSH to demonstrate they are doing their best to resolve their borrowing, which is confirmed at the date of the announcement to be around HK$411.8 million (just shy of £40 million), at interest rates of between 4.5% and 8%.

BSH also confirm they only have cash in the bank to cover the next three months worth of business so bringing in extra capital for cashflow purposes is a good idea too.

It’s not gone down well with investors though. Shares in BSH dropped by 14.77% with the single day largest trading volume in the company for over a year.

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