Origin Energy has announced a capital raising that should soothe the nerves of its hybrid investors (ASX Code: ORGHA). The company will raise $2.5bn via a heavily discounted equity raising, cut dividends for the next two years, slash spending and sell some assets in order to bolster its balance sheet. Like most energy producers, Origin has been hit by low prices, large debt and high capital expenditure programmes. The company treasurer, Peter Rice confirmed that the company would be exercising its option to redeem its hybrid securities on the ‘first call’ date in December 2016.
The Origin hybrids have been trading at a sharp discount to the face value at around $94 per security. With a first-call date in December 2016 the market was hoping the company would take up the opportunity to redeem them at that date but there has been conjecture they may not – hence the sharp trading discount to the $100 face value.
In essence, the conjecture centred around the different ratings agencies’ views of the securities and whether they were deemed to be equity or debt. You can read our previous article here but as it stood, S&P gave the notes a 50% equity credit. Had Origin announced that they would redeem the notes without having made alternate arrangements to raise other capital, Origin’s debt rating would likely have been downgraded and put pressure on the company to bolster its balance sheet. In the end, Origin has bitten the bullet and it’s the equity holders that will suffer dilution or have to stump up more cash.
Recent hybrid purchasers that risked buying the hybrids at a shade over $94 will see a $6 capital gain on top of the distribution income over the next 12 months. Existing holders will heave a sigh of relief that the securities will be redeemed at $100.