Wednesday, November 21, 2012

GMX Resources Form D Filing Regarding Refinancing Deal ($GMXR)

The Form D filing about the refinancing transaction sheds a little more light about what this deal really means:

Total offering includes: $30,000,000 Senior Secured Notes (Series B) due 2017; (subject to original issue discount) 5,942,034 shares Common Stock at $0.48 per share; and the right to purchase10,037,219 shares of Common Stock at $0.01 per share.

Total Amount Sold: $29,952,166
If I understand correctly, the proceeds from the sale of $30 million in new debt plus 15.979 million shares of stock is only going to be $29,952,166. This is because the original issue discount on the sale of the notes is so large - they will owe more money than the cash they are actually receiving from the note sale.

When you step back and look at this transaction, what's really happening is that they are selling $30 million in debt with a 15% PIK coupon for only $29.95 million, and then throwing in almost 16 million shares (20% of the company) for free (or slightly negative).

It's not amazing that they had to sell so cheaply, but that they dressed up the transaction in such a complicated manner and no one seems to have read closely enough to have noticed.

This reminds me of the Georgia Gulf trade from 2009. In that case, the company had agreed to issue a huge number of shares in order to refinance its 2016 notes. (You can see in a chart what this did to the old equity.) Anyway, even though everyone knew that the old equity had been severely diluted, it wasn't until the new shares were registered and hit the market that the price finally corrected.

At some point these 16mm new shares will be issued and freely tradeable by their owners. (And the deal obviously needs to close before the February maturity of the 2013 notes.)

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