Misek correctly notes that from an operational and financial perspective, everything needs to go precisely according to plan during Q1 and Q2 for VELT to avoid the need for a capital infusion. And VELT has demonstrated repeatedly that their plans go awry, often badly awary.
Since VELT will -- more than likely -- continue to miss plan goals, they will likely experience a cash flow shortage and that generally leaves two options:
1. Divest assets
2. Issue a secondary
As noted in an earlier post, it takes time to plan and action these options. Accordingly, both are currently being aggressively worked through.
You are wrong, my friend. That’s what the HSBC revolver was intended for. BUT, VELT has pulled down the full line – about $30 million. In doing so, they’ve booked debt, and by performing terribly during Q4, their EBIDTA puts them in violation of the HSBC debt covenants. In other words, the full loan balance can be “called” at any time.
Under these circumstances, what bank would extend a short term loan? It’s possible that HSBC could relax the existing revolver conditionals, and issue an additional, increased balance, but on what terms? They’ll be usurious, like 8% with upfront cash payments required, and aggressive, senior repayment requirements. Meaning the cash flow issue might be solved for the very near term, but it creates more cash demands nearly immediately.
And if HSBC says “no” – what other bank is waiting in the wings to loan more money to a covenant delinquent firm showing slowing topline growth and 300+ day DSO’s? Would you be the banker taking that deal to an institutional manager saying, “Yes, let’s do it, VELT is an excellent risk…” Tough sell, imo.
Nearly all banks would tell VELT to go to their owners to get some cash to cover the “temporary” FCF problem. After all, the “owners” stand to gain most from improved operational/financial management and performance. And who are the “owners”?
Those would be the shareholders. And the way to get the owners to invest more cash is to issue more stock. And that’s “a secondary.”