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Sunday, 5 April 2015

Bond Repayment and a Recapitalisation of CCP?

[this is not an ISK making post but one that focuses on the company CCP]


Convertible Bond Redemption

I have just noticed that CCP has decided to redeem their Convertible Bonds that they issued in mid 2013.

The reason I have only just noticed is that the announcement is in Icelandic and not on the CCP website - that may suggest a bigger matter is underway here, more on that below.

The redemption is not a bad idea given the interest CCP had to pay on the $20m bonds was 7% (I.e $1.4m per year) and this bond was due for repayment in July 2017 anyway.  In today's world of falling yields that is an extremely high rate.

What is interesting though is CCP does not have the ability to repay this $20m (plus any outstanding interest).

Therefore, CCP will need to replace this $20m convertible with new debt.  That is quite normal, most companies roll over their old debt into new debt.

The hope is that CCP will be paying a lower interest rate given how rates have fallen globally (CCP should be able to halve their interest rate) + most of CCPs revenues are not in Iceland ($/Euro/GBP revenues paying $/Euro/GBP debt) + Iceland is getting closer to rejoining the international financial markets anyway.

This whole transaction perhaps explains why the 2014 accounts seem to be later than usual (I.e. not out yet).

Worth noting that the original prospectus allows the bond holders to take shares of CCP instead of repayment.  The redemption notice was given on 27 March 2015 and so the holders have 30 days to notify CCP if they want shares instead of cash.

"Prior to any voluntary prepayment of the Bonds, each registered Bondholder will receive at least thirty (30) calendar days’ advance notice, and during such period will have the right to convert its Bonds to common shares in lieu of the voluntary prepayment."

That may not be a bad idea given how profitable CCP could be if all it did was just Eve Online.  Though I am surprised, therefore, that the 2014 accounts are not out to give the bond holders an idea of how the company currently looks.


Something Bigger going on - like a Recapitalisation?

This all suggests something bigger at CCP, indeed it is possible that CCP is going through a recapitalisation process - an action that companies undertake when their balance sheet is under pressure and they need new capital to continue, either from new or exist shareholders (sounds the most likely action here) or from the banks swapping their debt into equity (sounds unlikely action here).

When i review my forecasts for CCP i was assuming that the revenues in the second half of 2014 were the same as the first half leading to a 6% decline in Eve Online 2014 revenues compared to 2013 revenues, and after China sales a 4% total decline in revenues.  That may prove to be optimistic - but lets stick with it for now.

I then struggled to work out the R&D (a lot going on) but i suspect the company was going to make about $13.8m EBITDA (earnings before interest, tax, depreciation, amortisation) but a total loss of $23.3m.

In all, that would leave the company with a net debt to ebitda ratio of 1.3x.  If it gets to 1.5x then the debt holders start to get more control (i.e. the debt covenants are set at 1.5x ebitda).

The full post i wrote back in September on the CCP financials is here and demonstrates how 2015 will be a tougher year under the current balance sheet structure (i.e. with the $20m convertable bond debt) . . . . . i am though missing a lot of information to make head or tail of all the underlying actions.

I suspect, now that the decision has been taken to effectively cease / reduce spending on World of Darkness and Dust514, the company is in a better position to attract new capital to overcome the gap left in the balance sheet from the above two projects.

My personal view is that Eve Online itself is a very profitable though low growth venture and the surplus cash flows can be used to fund another project.  Unfortunately, World of Darkness and Dust514 did not work out as planned and the company saddled itself with expensive debt in the process which has put it in a tight spot.

I believe the company may be drawing a line under this all, perhaps adding new shareholder funds to the balance sheet and swapping the expensive Convertible Bond debt for cheaper debt.  In doing so, CCP will have a good profit stream from Eve Online, a new venture in Valkyrie and will be pondering what to do with Dust514.

In all, this should be good news for CCP and Eve Online.




[Edit - corrected Dust517 to Dust514]

12 comments:

  1. Very cool analysis, I enjoyed reading it... I've never heard much about the actual company and it's financial information.

    How would I be able to purchase any future bonds issued by CCP?

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    1. thanks. I don't honestly know how you would go about purchasing the bonds. There is a decent chance that the new debt is not listed (held by a bank). The current Convertable Bonds are listed here (http://www.nasdaqomxnordic.com/bonds/iceland/microsite?Instrument=ICE95410) though these are the ones that are about to be recalled.

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  2. Obligatory rumor that CCP is either going public or bust :) Thanks for the analysis, enjoyed it.

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    1. i don't think CCP is going bust - merely rearranging itself after a couple of tough ventures. Eve Online is an amazingly profitable business - i suspect CCP needs a little help in the short term.

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  3. CCP has recently said that Dust514 is now a profitable game for them. Do we know how much they are profitable, or if they're not counting costs for game improvements and maintenance? Would this make any difference?

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    1. i don't know how profitable Dust517 is - i suspect we may get an idea one the 2014 Accounts are released, though more likely when the H1 2015 Accounts are released.

      To make the statement Dust517 is profitable, i would believe they would have to take into account game improvements and maintenance, as well as any amortisation of past R&D (most of which is written off anyway).

      In summary, i suspect Dust517 is running at a level CCP is happy with and could either be sold or kept on the current path.

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    2. Very interesting. Yeah if they truly are profitable, they can continue iterating on Dust moving towards porting to PC when there agreements with Sony have run out. I'm not sure on the details with that though.

      I'm curious though, you're calling Dust 517 instead of Dust 514. Is it listed as Dust517 in CCP financial statements?

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    3. yep - i mean Dust514. Good spot.

      that is what a bottle of wine does to me . . . . . .

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    4. Cheers, happy Easter! It's interesting to see CCP rise & fall & then rise again over the last few years. It's an exciting time for the EVE universe I think.

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  4. How did you manage to type dust517 three times in the previous comment? Must have been a big bottle of wine :P

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  5. I find your analysis to be interesting; however, I think your personal view/desire has somewhat tainted your objectivity. You seem to work pretty hard to prove that CCP is still doing well, although the actual numbers say otherwise.

    2014 was a particularly bad year for CCP and the financials will undoubtedly show a strong decline. CCP has already written down much of its losses on WoD and DUST, so they won't be able to hide much more behind creative accounting.

    Essentially, they don't have much cash reserve. They have debt, for which they really don't have a plan to pay off. They have declining revenues and increasing costs - which is normal with an aging product which needs continued updates to remain viable. EVE Online is effectively in maintenance mode - CCP simply cannot afford to do Jesus-type expansions any more - and subscriber numbers are dropping. And, they have no serious prospects for new revenue streams to replace the losses or attract new investment.

    I think that CCP and EVE Online has had a good run, though. Far better than most MMOs. The best they can do at this point is to continue to downsize the company, drop both DUST and Valkyrie completely, and to do as much as they can creatively do to keep EVE Online fresh, with as few resources as possible, to milk it for as long at it lasts. Properly managed, EVE Online could easily run another 5-10 years. Getting further in debt, however, to fund pie-in-the-sky projects, will only hasten the end of both CCP and EVE Online.

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    1. I agree with much of what you say though i would suggest that it is Eve Online that is doing well, not CCP as a whole for the reasons you point out.

      I agree with your point on the debt which is why i think new shareholder capital will be injected.

      I suspect Eve Online can show low growth and strong cash flows for a while yet. I agree with you that 2014 will not look good for Eve and CCP.

      In all, i believe CCP has enough with Eve to finance another project (Valkyrie).

      If not, then CCP may as well sell Eve Online to another games developer.

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