The Board of InfraStrata plc, the independent gas storage company, has signed a secured loan facility agreement (Loan Agreement) dated 5 January 2017 with Baron Oil plc (Baron) an AIM-quoted resources company.
Terms of the Loan Agreement
Under the terms of the Loan Agreement, Baron will provide a loan facility of up to £300,000 to InfraStrata (the "Loan"), which will be applied towards InfraStrata's working capital requirements. The Board believes that these funds are sufficient, with existing funds, to meet InfraStrata's minimum levels of corporate costs and care and maintenance costs on the Islandmagee gas storage project (the "Project") to the end of 2017. The progression of the Front-End Engineering Design (FEED) for the Project, as announced on 4 November 2016, will require the securing of additional funding, further details of which can be found below.
The Loan is for a term of 12 months from the date of the Loan Agreement. Baron is entitled, acting in its sole discretion, to extend the term of the Loan Agreement by an additional 12 months. The Loan will convert to an on-demand facility, repayable at any time following Baron's demand, with effect from 30 April 2017 in the event that £3.0m of further funding, the amount required to complete the funding for the FEED, has not been received by the Company on or prior to that date. In the event that the Loan does not convert to an on-demand facility, it is repayable by way of a single, bullet repayment on the date falling 12 months from the date of the Loan Agreement or 24 months from the date of the Loan Agreement if Baron exercises its discretion to extend the term of the Loan Agreement, as described above. The Company benefits from a right to prepay the Loan, in full, at any time by giving Baron not less than 10 business days' notice (which notice period may be shortened with the agreement of Baron).
The Loan is subject to an interest rate of 6% of the funds drawn down, which is payable monthly in advance (rising to 9% in a payment default situation). The Loan is available to be utilised by the Company during the period from (and including) the date of the Loan Agreement to (and including) 31 December 2017.
Baron will receive an additional £200,000 (the "Additional Payment") in the event of a sale or disposal by InfraStrata or its subsidiaries, Islandmagee Storage Limited (IMSL) and InfraStrata UK Limited (InfraStrata UK), of substantially all of their assets, which now comprise interests in the Project, and/or a change in control of InfraStrata, IMSL or InfraStrata UK, within two years from the date of the Loan Agreement. Any such disposal or change of control will also trigger a mandatory prepayment of the Loan. In the event of a partial disposal of InfraStrata, IMSL or InfraStrata UK's interests in the Project (whereby InfraStrata and InfraStrata UK retain control of IMSL, the company through which InfraStrata holds its 90% interest in the Project and the operation of the Project) the Additional Payment will be reduced to £100,000, with the remaining £100,000 payable in the event of a subsequent disposal or change in control of IMSL or the Project (whereby InfraStrata or InfraStrata UK then lose control of IMSL or the Project) during the two year period, with any such subsequent disposal also triggering a mandatory prepayment of the Loan. The Additional Payment is payable in the above scenarios for the full two year period of the Loan, regardless of whether the Loan has been repaid or prepaid during this period. Notwithstanding survival of the Additional Payment obligation post-repayment or prepayment of the Loan, all security granted in favour of Baron is to be released on the repayment or prepayment of the Loan, leaving the Additional Payment obligation as an unsecured claim.
The Loan is secured by, inter alia: (i) a first-ranking debenture over the undertakings and assets of InfraStrata UK Limited (InfraStrata UK), the wholly owned subsidiary of the Company which owns 90% of IMSL; and (ii) charges over shares in InfraStrata UK (granted by the Company) and IMSL (granted by InfraStrata UK). The Loan can be repaid by InfraStrata in full at any time during its term, which would lead to the release of the security arrangements.
The terms of the Loan Agreement contain a number of customary representations and warranties, information undertakings, and general covenants, which include a negative pledge restricting the Company and InfraStrata UK's ability to grant further security over their assets. The terms of the Loan Agreement also impose certain obligations and restrictions on InfraStrata and InfraStrata UK, including, inter alia, restrictions on disposals, acquisitions and joint ventures, further borrowing and guarantees. The Loan Agreement contains a number of events of default, which are summarised below. Should any of these events of default arise, Baron will be entitled to accelerate repayment of the Loan (if it has not already converted to an on-demand facility, as described above) and to seek to take enforcement action under the security granted in its favour.
The Loan Agreement contains a number of events of default, which are detailed further below. Shareholders should be aware that a number of the events of default contained in the Loan Agreement, such as for example the suspension or cancellation of trading of the Company's ordinary shares on AIM, may be triggered by the action of third parties or circumstances not directly within the Company's control.
In the event that an event of default occurs which cannot be remedied and in the absence of additional financing to allow for repayment of the Loan, then the enforcement of Baron's security arrangements would likely result in the value attributable to shareholders being severely reduced or potentially becoming nil.
Summary events of default (note, unless otherwise specified, an event of default will arise if any of these events occurs in relation to either the Company or InfraStrata UK):
(a) Non-payment of sums due under the Loan Agreement and security documents;
(b) Beyond a non-payment, there is a breach of any other term of any of the documents entered into with Baron in connection with the Loan;
(c) Misrepresentation in relation to any representation, warranty or statement made in the documents entered into with Baron in connection with the Loan;
(d) Suspension or cessation (or threatened suspension or cessation) of all or a material part of business;
(e) A default under the terms of any other loan documentation entered into with a third party;
(f) Insolvency or any distress, attachment, execution, expropriation, sequestration or other analogous legal process being taken against the Company's assets;
(g) Any of the security granted in favour of Baron becomes enforceable;
(h) All or any part of the documents entered into with Baron in connection with the Loan become invalid, unlawful, unenforceable, terminated, disputed or cease to be effective;
(i) The Company rejects, or shows an intention to reject, the terms of any of the documents entered into with Baron in connection with the Loan;
(j) An event or circumstance arises which Baron (acting reasonably) considers will materially adversely affect the Company or InfraStrata UK's: (i) ability to perform their obligations under the documents entered into with Baron in connection with the Loan; (ii) the enforceability of those documents or the rights and remedies under them; or (iii) their business;
(j) The suspension or cancellation of trading of the Company's ordinary shares on AIM; and
(k) Qualification of financial statements by the relevant company's auditor.
Certain of the events of default are subject to grace periods during which the Company can seek to cure the relevant default. In addition, a number of events of default are subject to materiality qualifiers and financial thresholds, which must be established if the relevant event is to constitute an event of default.
Background to and reasons for the Loan
The Board has explored various options to secure the necessary funding for the Company's short to medium term requirements, although as stated in the Company's announcement of 4 January 2017, prior to the execution of the Loan Agreement the Company's working capital position was constrained. Given these circumstances, the Board believes that it would not be possible for the Company to raise debt finance without the granting of security arrangements and in the absence of such finance in the short-term the Company would likely not be able to meet its financial commitments as they fall due and consequently may result in an insolvency event. The Board therefore believes that the Loan represents the best opportunity at this time for the Company to raise funds in short order given the circumstances and its strategy.
The Board aims to raise additional finance to repay the Loan before 30 April 2017. However, in the event that the Loan were to convert to an on-demand facility and Baron subsequently demanded repayment of the Loan, then in the absence of additional financing to allow for repayment, the enforcement of Baron's security arrangements would likely result in the value attributable to shareholders being severely reduced or potentially becoming nil.
As previously announced, the Project has been awarded an EU grant to fund up to 50% of the FEED (the "EU Grant") and been offered conditional secured loans (Contractor Loans) of, in aggregate, up to £1.1 million from the selected FEED contractors, the latter of which is subject to contract and securing the remaining funding for the FEED. At present, the Contractor Loans cannot be entered into until the Loan's security arrangements have been released through repayment of the Loan.
At this point and as outlined in the Company's announcement on 4 November 2016, in addition to the EU Grant and the Contractor Loans, a further amount of £3 million will be required to complete the FEED and commercialisation process on the Project, of a gross £6 million programme which includes funds for corporate overheads, working capital, bridging finance on the EU grant and repayment of the Loan. The bridging finance, which may be in the form of debt, is required to cover the timing of receipt of funds from the European Commission grant which is paid in two stages, with €1.6 million having already been received by the Company but which is not available to meet the Company's short term working capital needs and can only be deployed in the delivery of the FEED services and is therefore held as restricted cash. The balance of the EU Grant is receivable once the FEED work has been completed.
As referred to in the announcement on 4 January 2017, the Company is continuing to examine its options with its advisers for securing the necessary balance of funding to enable work to commence on the FEED and associated activities, including additional working capital for the Company. The Board has recently engaged with potential investors with a view to securing the £3 million of balance funding and this process remains ongoing.