On 11 March 2021, NAOS Emerging Opportunities Company Limited (ASX: NCC) launched an offer for NCC Notes (Notes) (prospective ASX code: NCCGA), to raise $23 million, with the ability to raise more or less. The purpose of the transaction is to raise capital for NCC and provide funding flexibility, with the proceeds intended for increasing the size of the investment portfolio without diluting NCC Shareholders. This added flexibility is intended to allow NAOS to take advantage of a number of investment opportunities. These securities are structured as redeemable, unsubordinated, unsecured, convertible notes. Distributions are non-discretionary, fixed rate, paid on a semi-annual basis in arrears until redeemed. The interest rate is fixed initially at 4.50% per annum until 30 September 2026, then fixed at 5.5% per annum until 30 September 2027, then fixed at 6.5% until 30 September 2028.
Holders have the right to convert the Notes at a fixed price of $1.15 up until 10 Business Days before the last day of the Conversion Period. This conversion right is equivalent to having 86.96 call options over NCC ordinary shares with a strike price of $1.15.
This security has a fixed maturity date at 30 September 2028 if not redeemed earlier. There is also a clause stating that if total debt should exceed 50% of the market value of all securities (LTV Ratio), there will be a 2% p.a. step up in the fixed interest rate, for the period in which the breach exists.
We view the Notes as being priced marginally cheap for the inherent risk – however much of this is embedded in the option. Accordingly, from an equity perspective, this is an ideal method of cautiously adding exposure, given access to upside but protection in the form of a bond floor. From a credit perspective, we view the cash yield as acceptable, albeit marginally rich – especially given the duration exposure, however the value of the option more than offsets this drawback. We recommend investors Subscribe.
