Update (9 June 2023): Zip Co (ASX: ZIP) has confirmed completion of the equity placement, with co-founder and chief operating officer Peter Gray noting these funds would be used to retire $39.8 million of convertible notes at a "very significant discount to face value". "Along with the Consent Solicitation process, this exercise will reduce our corporate debt by $192.2 million, further strengthening the balance sheet and positioning the Company for our next phase of growth," he said.
On the back of forecast improvement in its second-half performance, buy-now-pay-later group Zip Co (ASX: ZIP) has moved to shore up its balance sheet through a $24.7 million capital raising that will fund a plan to more than halve the $330 million in outstanding convertible notes it has on issue.
The plan will effectively reduce the company’s debt by $192.2 million in a move that Zip says will be cash neutral for the company and ‘highly value accretive’ to Zip’s shareholders.
However, the company says the capital raising, which will only be open to institutional and sophisticated investors, will not proceed if the note conversion proposal doesn’t garner the support of noteholders.
Zip’s co-founder and global COO Peter Gray describes the plan as a ‘liability management exercise’ that will strengthen Zip’s balance sheet and support the company’s path to profitability.
“We are pleased to launch this liability management exercise which will allow us to retire a significant portion of our liabilities at a fraction of face value and restructure our $330 million zero coupon convertible note to a liability of $137.8 million,” Gray says.
“Once completed, the transaction is expected to be cash neutral for the company, accretive to Zip shareholders and strengthen Zip’s balance sheet, positioning the company for the next leg of growth.”
The conversion price of Zip’s zero coupon senior convertible notes is $12.0576 per share - a far cry from the company’s most recent closing price of 50.5c a share. Zip’s shares were last trading above $12 in early 2021, just ahead of the April 2021 issue date of the notes.
However, since then the company has fallen victim to poor market sentiment towards the BNPL sector, which has been struggling to turn a profit amid rising interest rates, and moves to tighten regulatory controls of the industry.
Zip has painted a risky future ahead if the not conversion does not proceed, with a number of financing facilities outstanding with varying dates of maturity starting from December this year. It says the liability management exercise is designed to give the company future flexibility should it need to raise further funds.
Zip is incentivising noteholders with a cash payment of up to $17.4 million to encourage the $39.9 million conversion into ordinary shares and lead to an extra 3.3 million Zip shares on issue.
Proceeds from the share placement, which is priced at 47c per share, will be applied to fund the cash incentive to noteholders.
But first, noteholders have to consent to amending the terms of the existing notes, while shareholders will also have to vote on the plan at an extraordinary general meeting to be held in July.
“Zip has been very clear on our strategy to focus on sustainable growth in our core markets and fast-tracking profitability,” Gray says.
“This liability management exercise is another significant achievement in the execution of our strategic plan, as we continue to successfully manage our debt funding requirements and liability management programs.
“We are pleased with the support for Zip and our strategic direction demonstrated by noteholders and shareholders through this exercise and look forward to delivering on our objectives.”
Zip’s shares were placed in a trading halt ahead of today’s announcement, which included confirmation by the company that it was on track to deliver up to a 50 per cent core cash EBTDA improvement in the second half of FY23 compared with the $33.2 million result for the first half.
The company also reaffirms that it will have sufficient available cash and liquidity to deliver positive group cash EBTDA in the first half of FY24.
A cost-saving strategy by Zip has led to the company selling its Twisto and Payflex divisions in March this year and plans to wind down its Middle East operations. The company is aiming to neutralise its cash burn by the end of this financial year.
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