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Convertible notes’ yield has fund raising appeal

CONVERTIBLE notes are gaining popularity as a fund raising option for Western Australian companies, with Skywest Airlines and Xanadu Wines among local companies joining the trend.

Sydney Gas is another company with a strong Perth connection (via its executive team and shareholder base) that is using convertible notes as a part of its funding mix.

These companies join the likes of Amcom Telecommunications, Brandrill, Consolidated Minerals, Croesus Mining and Evans & Tate, all of which have issued convertible notes in recent years.

Skywest is looking to raise up to $4.2 million to help pay for a restructuring of its business and the refinancing of its aircraft fleet.

The attraction of Skywest’s convertible notes is that investors receive an assured interest income (10.5 per cent per annum) at a time when the business is not yet profitable.

The airline, which had been part of the failed Ansett group, anticipates achieving a profit in 2003-04, after which it may be able to pay a dividend. In those circumstances, the company would be better placed to issue further equity as a prelude to listing on the Australian Stock Exchange (ASX).

Each convertible note will have one free attaching option, giving holders the right to buy shares at 20 cents on or before January 31 2006.

The lead manager of the Skywest issue is Paterson Ord Minnett, which also managed a $4.5 million share issue for the unlisted company last year.

Like Skywest, Xanadu Wines is in the midst of a restructuring and seeking to return to profit.

It is seeking to raise $6.5 million through a rights issue of convertible notes, fully underwritten by Euroz Securities.

Its notes offer a yield of 9.0 per cent per annum with an option to convert to ordinary shares at a 15 per cent discount to the prevailing share price on the ASX.

The company has foreshadowed a loss of $2.0 million for the 2002-03 financial year and forecast a profit of $2.4 million in 2003-04, on rapid growth in sales to $29 million.

Chairman Ross Norgard said all previous capital raisings had been by private placements due to a need at the time to raise funds in a cost effective and timely manner.

ASX-listed Sydney Gas is seeking to raise $15 million through the issue of convertible notes paying 12.0 per cent per annum (and convertible on a one-for-one basis).

The convertible notes are part of a much larger capital management program, which includes a recent share issue, the conversion of options and a funding facility with Westpac.

Chief executive Bruce Butcher said the company should have $52 million of new capital before the end of 2003 to fund its ongoing expansion. Sydney Gas is the first commercial gas producer in NSW, from coal seam methane, and is planning to rapidly expand production over the next few years.

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