The Company has received several emails seeking clarification on the EFH facility announced on 22 December, 2016.
In addition, there has been a significant amount of chatter on internet stock market forums, much of which is misguided.
As such, the Company provides the following FAQ to help clarify its arrangements with EFH.
Q: Why is the EFH offering only open to ‘708’ investors?
A: Based on EFH’s licensing, the Company’s products are only available to sophisticated and professional investors under Section 708 of the Corporations Act 2001. The ‘708’ classification is covered further below.
Q: Who can participate in the EFH arrangement?
A: Any Option-holder who is eligible as a ‘sophisticated’ or ‘professional’ investor is encouraged to contact ECT to formally express their interest.
‘Sophisticated’ or ‘professional’ are classifications used to describe investors who are deemed to be more experienced and able to evaluate investment opportunities without a prospectus or other regulated disclosure documents.
The requirements for each classification, under Section 708 of the Corporations Act 2001, are summarised below.
- Hold an Australian Financial Services License (AFSL); or
- Have or control gross assets of at least $10m
- Have gross personal income over the last 2 years of at least $250k; or
- Have net assets of over $2.5m
In our announcement on 22 December 2016 we advised qualified investors who would like to know more, to contact ECT to discuss further. The details will then be passed to EFH if the option-holder wishes to formally apply. Acceptance is subject to EFH terms and conditions and each interested option holder will be advised if there is available capacity under the facility.
All potential EFH clients must also undergo EFH’s “know your customer”/anti-money laundering (KYC/AML) screening process before any transaction is executed.
To date, ECT has received formal interest under the following allocations:
Q: How much of the EFH arrangement will be taken up by Directors and staff?
A: The Directors’ allocation was prioritised for the following primary reasons:
- To lead by example, under the principle that the Company couldn’t expect eligible Option-holders to take up something the Directors themselves weren’t prepared to take up
- To subsidise the interest rate of the 2 year loans for the eligible Option-holders
- To provide additional comfort to EFH in taking the extended 3 year terms ahead of the shorter, 2-year term loans.
The Company has capped the maximum allocation that Directors and staff can take under the arrangement to 75 million shares to ensure that the predominance of the participation is offered to eligible Option-holders.
Q: Is the EFH facility an arm’s-length transaction?
A: The EFH facility is offered on the same terms that EFH generally offers borrowers for all their loans. The loan agreement is between EFH and the Option-holder. There have been no special privileges created for those taking up this arrangement for financing options conversion.
Eligible Option-holders could approach EFH independent of ECT and traditionally, this is how EFH has offered this type of facility. The difference with the EFH-ECT arrangement is that the proceeds of the loan are non-discretionary, meaning they must be used solely for options conversion.
The arrangement complies with ASX Listing Rule 10, in addition to Part 2E (Related Party Transactions) and Part 2J of the Corporations Act 2001.
s.260A of the Corporations Act 2001 states that a company may financially assist a person to acquire shares (or units of shares) in the company or a holding company of the company only if giving the assistance does not materially prejudice the interests of the company or its shareholders or the company’s ability to pay its creditors.
In the case of the EFH facility, it materially benefits shareholders in several ways:
- It facilitates the conversion of options by eligible applicants, delivering capital to the Company to support its stated objectives in pursuit of long-term shareholder value
- The cost of financing the interest component is less than the Company’s historical weighted average cost of capital (WACC), thereby benefiting the Company and shareholders as a whole
- The shares are held by a responsible third party who does not seek to impact the Company’s share price up or down, providing for an orderly market.
Q: Are Directors and staff obtaining an advantage over the eligible Option-holders?
A: Any director or staff taking up the EFH loan will be required to adopt a 3 year term, 12 months longer than the other eligible Option-holders. Repayment of interest at the end of the term by directors and staff will be triggered at a lower price than the other eligible Option-holders. Both points highlight that it is the eligible Option-holders who obtain an advantage relative to Directors and staff.
Q: Can EFH trade the ESI collateral (i.e. the shares in the Company)?
A: EFH has the right to trade the collateral held under its custodian and has advised that any and all trading associated with ESI collateral is designed to have no impact on share price.
Q: Is the Company concerned about EFH’s trading influencing share price?
A: Given the long history and the clean track record with global regulators, the Company is satisfied that EFH’s trading of ECT shares is unlikely to have a material effect on its share price.
Q: Why is this EFH arrangement with ECT and its Option-holders different to all the other facilities EFH has provided ?
A: This is the first facility where the Company is the sole beneficiary of the loan proceeds. This heightens the alignment of interests between lender, borrower and Company. The proceeds of these loans can only be used to convert options into fully paid ordinary shares.
Q: What other ASX company shares have EFH loans?
A: Traditionally, EFH transacts with substantial shareholders of companies looking to access capital. As any financial institution should, EFH takes client privacy and security very seriously and does not share information related to individual transactions publicly, unless authorised by its clients. Recently in Australia, EFH has executed transactions with shareholders of Diversa Limited, NearMap and MaynePharma, among others.
Q: Can the Company stop the EFH arrangement?
A: Following the establishment of each loan between EFH and an Option-holder, the term of that loan must be completed. Early termination of an EFH loan is generally not allowed, except in exceptional circumstances like a takeover. That being said, ECT can cease offering this arrangement to eligible Option-holders at any time for any remaining capacity. There is no cost to ECT in terminating the arrangement on this basis.
Q: Can EFH short sell or on-lend the ECT shares?
A: EFH is contractually prohibited from short selling, on-lending or hypothecating ESI shares held in their custodian.
Q: Why is it in EFH’s interest to have a rising share price?
A: The interests of EFH, ECT, and ESI shareholders at large are mutually aligned. An increase in share price is a best-case-scenario for several reasons – first, it increases the likelihood EFH clients will continue to pay interest due on their transactions and repay the principal amount of the loan upon maturity. Also – considering EFH expects to enter into additional future transactions collateralised by ESI shares, an increase in share price makes the EFH transaction more attractive to potential EFH clients.
Q: Why have some people been critical of EFH?
A: EFH is an innovator and global leader in the field of securities-based lending. And, although the company has been around for 15 years, EFH transactions may seem foreign to investors unfamiliar with these types of financing vehicles. This unfamiliarity may cause individuals without a complete understanding of the EFH product, or individual transactions to make assumptions without seeking verification for their statements.
EFH has taken great strides to educate the global marketplace about the company and its products, and as is the case with ECT, always conducts business in a manner that is fully transparent. EFH is happy to answer any questions related to the company or statements made about it to ensure the marketplace is fully informed.
If you wish to raise any questions with EFH, please contact ECT through the Company Secretary and we will collate them and put them to EFH for response.
Q: Have EFH been fined or indicted for securities law breaches?
A: No. Neither EFH nor any of its global subsidiaries have ever been party to any regulatory or legal sanctions related to securities law breaches in any jurisdiction. To the best of ECT’s knowledge and belief, EFH adheres to all requisite legal and regulatory requirements in the course of doing business and the company holds regulatory licences from the Australian Securities and Investments Commission, the Financial Conduct Authority of the United Kingdom, and the Hong Kong Securities and Futures Commission.
Q: Have EFH ever reneged on handing back the shares at the end of a loan?
A: Never. ECT understands that they have a 100% return rate upon transaction maturity and repayment.
Q: How does ECT manage corporate governance, compliance and Board integrity issues?
A: Decisions such as that made regarding EFH, are made after rigorous research by the Company, advice from corporate advisers. The decision by the Executive to pursue this type of funding was strongly supported by the Board.
ECT also maintains policies and procedures in support of governance best practice. Importantly, this framework includes David Smith, an independent non-executive director, fulfilling the role of Integrity Officer. The scope of this role includes:
- acting as contact point for stakeholders who wish to formally raise compliance concerns;
- acting as contact point for internal “whistle-blowers”, and;
- an oversight role including his role as Chair of the Audit and Risk Committee for ensuring suitable processes are in place to manage the risk of non-compliance with relevant laws and rules.
David Smith can be contacted via email at firstname.lastname@example.org.
Q: Will ECT provide support for retail holders of options?
A: ECT, at all times, will endeavour to act in the interests of ALL shareholders. Currently ECT and its service providers are not able to provide options finance solutions to retail investors. This may change in the future, as the Company continues to seek and develop solutions which support all Option-holders.
Q: How does ECT decide what the WACC is?
A: The weighted average cost of capital, also called the WACC, is a calculation of the Company’s cost of financing by comparing the debt and equity structure of the business. Put more simply, it measures the true cost of borrowing money or raising funds through equity to finance the Company’s strategy based on both historic cost and the current level of debt and equity in its structure. The WACC is calculated using a well-accepted formula.
In the case of ECT, ~90% of all capital has been raised through the issuance of equity. Thus, our WACC is relatively high (>25%). Pursuing non-dilutive sources of finance, through the likes of Brevet and EFH, is intentional and designed to start bringing down the long term WACC.
Q: How does ECT decide how to price capital raising alternatives?
A: The Company regularly prices the capital raising alternatives against each other in the form of a comparison matrix, which includes the WACC per $ raised, likely impact on share price, reputation risk and performance risk in the execution of the transaction. In the context of ECT’s historical WACC, the facilities provided by EFH and Brevet are over 30% cheaper than the historical benchmark. Any new alternatives will be compared to the existing alternatives in this matrix and presented to the Board as part of the regular operational reporting.
Q: Is the company trading in its own shares with the EFH arrangement?
A: The Company has carefully reviewed the compliance requirements relating to the EFH facility and is satisfied the arrangements are at arm’s length and do not constitute trading in its own shares, with particular reference to s259 of the Corporations Act.
Q: Why was resolution 4 withdrawn at the Company’s 2016 AGM?
A: Resolution 4 related to the approval of all prior issues of securities under ASX listing Rule 7.1 to give the Company a full ‘reset’ of its ability to issue securities up to 15% of its issued capital in the following 12 months, without having to seek shareholder approval for that issue.
The Company believes that eliminating this as a ‘standard placeholder’ resolution (which had been approved at previous years’ AGMs) is more aligned with the fact that prior issues naturally ‘reset’ on a rolling 12 month basis. It is preferable to reserve the resetting of the issuing capacity for exceptional circumstances where the details of issuance can be provided to shareholders ahead of approving the reset, as was done with Resolution 6 at the 2016 General Meeting. In some instances, an Extraordinary General Meeting can be held to approve a proposed issuance.
In short, the withdrawal of resolution 4 is consistent with the Board’s view that it is generally preferable for shareholders to have more direct transparency and control over the Company issuing further securities.
Q: Why haven’t we had a Master Project Agreement (MPA) update after senior management were sent to India pre-Xmas?
A: The Company continues to provide guidance on the advancement of the MPA based on the information and target timeframes at hand. Updated guidance is provided if circumstances or targets change. In our announcement on 22 December 2016, the Company advised that the parties continue to work to conclude the MPA as expeditiously as possible. It is inappropriate to provide further commentary on discussions currently underway from the perspective of both confidentiality as well as commercial positioning, other than to say all parties remain highly motivated to conclude discussions and move to agreement as quickly as possible. The Company will continue to comply with its continuous disclosure obligations.