Blumont exposes chink in watch-list rules
The Singapore Exchange's (SGX) watch-list rules assume that
a company with multi-year losses and a low share price will struggle to
maintain high market capitalisation, but the case of Blumont Group suggests
that this assumption may occasionally be wrong.
Comments
Kenneth Lim
05 January 2017
The Singapore Exchange's (SGX) watch-list rules assume that a company with multi-year losses and a low share price will struggle to maintain high market capitalisation, but the case of Blumont Group suggests that this assumption may occasionally be wrong.
Blumont is a loss-making mining and investment holding company that has been on a slide since imploding in the 2013 penny stock crash, and it has traded below one Singapore cent since mid-2015. In December 2013, the company took on a US$30 million debt facility from Wintercrest Advisors, a unit of now-bankrupt US hedge fund Platinum Partners. The principal amount was later reduced to US$23.5 million, but the total amount owed by Blumont remained at about US$30 million in 2016.
To repay Wintercrest, cash-strapped Blumont struck a deal that required it to, among other things, issue 23 billion new Blumont shares in November 2016 to Wintercrest at a per-share price of 0.088 Singapore cent, which gave Wintercrest an 83.6 per cent stake in Blumont.
Blumont's share price was already trading close to the 0.1 cent trading floor for Singapore-listed stocks, which limited the decline in Blumont's share price on the market given the dilution from the Wintercrest issuance. On Oct 31, 2016, the company had a market cap of only S$13.5 million on a share price of 0.3 cent. On Nov 30, 2016, the company's market cap jumped more than sixfold to S$82.6 million even though the share price was still 0.3 cent.
Possible delisting
Under rules that were adjusted in December 2016, SGX will place mainboard companies on watch lists for possible delisting if they have a six-month average market cap below S$40 million and either post three straight years of pre-tax losses or trade below 20 cents on a six-month volume weighted daily average basis.
A company could therefore have a loss-making record and a meagre share price and yet be immune to the watch lists as long as it has a market cap of at least S$40 million.
Blumont now has 27.5 billion issued shares; it only needs to trade one tick above the floor of 0.1 cent, at 0.2 cent, to maintain a market cap above S$40 million. If it had issued just 12.5 billion more shares, it would have hit 40 billion shares, which would ensure that its market cap can never fall below S$40 million.
That a loss-making company with a rock-bottom share price can render itself invulnerable to the watch lists simply by issuing a tremendous number of shares and not by improving its profitability or stock price may not be the intention of SGX's watch list rules.
The market cap exemption for the watch lists exists partly because it was thought that companies with multi-year losses or weak share prices would not be able to maintain market caps above S$40 million.
Indeed, there are safeguards against such a situation happening. For example, listing rules allow mainboard companies to pursue corporate actions such as bonus share issues or stock splits only if the theoretical post-action share price is at least 50 cents, which prevents companies with low share prices from using such a strategy. New mainboard listings must also meet a minimum IPO price of 50 cents.
It was also thought that weak companies are unlikely to be able to issue enough shares to raise their market cap past S$40 million without answering to existing shareholders, who would typically be averse to unreasonable dilution.
Blumont suggests that these safeguards might not always hold up. The company was struggling to repay debt, so shareholders were faced with dilution versus default. The stock was already around the 0.1 cent trading floor, limiting the dilutive impact that issuing 23 billion shares would have on existing shareholders. Blumont was also issuing the shares to settle debt with a creditor whose parent was facing bankruptcy and therefore might have appreciated the chance to turn potentially irrecoverable debt into quoted equities.
To be fair, Blumont's issuance was a result of a rare set of circumstances, which means that copycats and repeats will appear only infrequently, if at all.
And if a company is consistently loss-making and a perennial penny counter, it will eventually exhaust its reserves anyway and delisting will not be far behind. There may therefore be no urgent need to address this potential loophole.
But it is clear that it is extremely difficult to construct a watch list regime that cannot be exploited in some form or other. The rules as they stand may yet require further calibration.