TIDMCHG
RNS Number : 5435M
Chemring Group PLC
21 January 2016
NOT FOR PUBLICATION, RELEASE OR DISTRIBUTION, DIRECTLY OR
INDIRECTLY, IN WHOLE OR IN PART, IN OR INTO THE UNITED STATES OF
AMERICA, AUSTRALIA, CANADA, JAPAN AND THE REPUBLIC OF SOUTH AFRICA
OR ANY OTHER JURISDICTION IN WHICH IT WOULD BE UNLAWFUL TO DO SO.
PLEASE SEE THE IMPORTANT NOTICE AT THE END OF THIS ANNOUNCEMENT
THIS ANNOUNCEMENT IS AN ADVERTISEMENT AND DOES NOT CONSTITUTE A
PROSPECTUS OR PROSPECTUS EQUIVALENT DOCUMENT. NOTHING HEREIN SHALL
CONSTITUTE AN OFFERING OF NEW SHARES. NOTHING IN THIS ANNOUNCEMENT
SHOULD BE INTERPRETED AS A TERM OR CONDITION OF THE RIGHTS ISSUE.
ANY DECISION TO PURCHASE, SUBSCRIBE FOR, OTHERWISE ACQUIRE, SELL OR
OTHERWISE DISPOSE OF ANY NIL PAID RIGHTS, FULLY PAID RIGHTS OR NEW
SHARES MUST BE MADE ONLY ON THE BASIS OF THE INFORMATION CONTAINED
IN AND INCORPORATED BY REFERENCE INTO THE PROSPECTUS ONCE
PUBLISHED. COPIES OF THE PROSPECTUS WILL, FOLLOWING PUBLICATION, BE
AVAILABLE FROM THE REGISTERED OFFICE OF CHEMRING GROUP PLC AND ON
ITS WEBSITE AT WWW.CHEMRING.CO.UK.
21 January 2016
Chemring Group PLC ("Chemring" or the "Company")
4 for 9 fully underwritten GBP80.8 million Rights Issue
Further to the announcement on 26 October 2015, the Board of
Chemring Group PLC today announces a fully underwritten rights
issue to raise gross proceeds of approximately GBP80.8 million to
reduce its indebtedness. Chemring's full year results for the
financial year ended 31 October 2015 have also been released today
in a separate announcement.
Reasons for the Rights Issue and use of proceeds:
-- The Rights Issue is being pursued in order to assist the
Group with reducing its indebtedness thereby enabling additional
time and resources to be made available for further operational
improvement and adequate investment in fully capturing the longer
term growth opportunities available to the Group.
-- US Noteholders and the Group's banking syndicates have
provided waivers and variations to amend the operation of the
relevant covenants to ensure the Group remains in compliance with
its Existing Finance Agreements; these amendments only serve as a
short-term solution that would not fundamentally address the
Group's balance sheet and capitalisation concerns over the longer
term.
-- The Board believes that the appropriate leverage target for
the Group over the medium-term is a net debt to EBITDA ratio of
between 1.0x and 1.5x as the Group's annual average; the proposed
rights issue is a critical step towards achieving this target.
-- Net proceeds of GBP75.2 million will be used to redeem
GBP48.5 million in aggregate principal amount of the US Notes, with
the balance used for make-whole premiums, waiver fees and general
corporate purposes with the Board having regard to future debt
maturities.
Update on current trading
-- Full year results for the year ended 31 October 2015,
released today, are in line with revised, lower expectations set
out in 26 October 2015 statement
-- The Board's expectations for the current financial year, and
significant H2 weighting, remain unchanged
Details of the rights issue
-- The Rights Issue is a fully underwritten 4 for 9 rights issue
at a price of 94 pence per New Share.
-- The Issue Price represents a 38.2 per cent. discount to the
theoretical ex-rights price of an Existing Share, when calculated
by reference to the closing middle-market price of 178 pence per
Existing Share on 20 January 2016 (being the last business day
prior to the date of this announcement).
-- The Rights Issue, which is subject to shareholder approval,
is fully underwritten by Investec and J.P. Morgan Cazenove acting
as Joint Sponsors, Joint Global Coordinators and Joint Bookrunners
and Barclays as Co-Bookrunner.
Michael Flowers, Chief Executive, commented:
"The recent progress of the Group has been impeded by its high
levels of debt and associated interest costs. Significant time and
effort has been spent managing this debt at the expense of further
operational improvement. The proposed Rights Issue gives us a solid
foundation to address these high levels of debt and provides a
competitive capital structure for the future. With an encouraging
outlook for the Group, we are excited about the potential to better
capture the growth opportunities available to Chemring."
Documentation
-- The Prospectus containing full details of the Rights Issue is
expected to be posted to shareholders and made available on
www.chemring.co.uk shortly.
-- The Prospectus will be submitted to the National Storage
Mechanism and will be available for inspection at
www.morningstar.co.uk/uk/nsm shortly.
Indicative abridged timetable:
Publication and posting of the 21 January 2016
Prospectus, the Notice of General
Meeting and the Form of Proxy
Record Date for entitlements close of business
under the Rights Issue on 05 February
2016
Latest time and date for receipt 9.30 a.m. on 06
of General Meeting Forms of Proxy February 2016
General Meeting 9.30 a.m. on 08
February 2016
Date of dispatch of Provisional 08 February 2016
Allotment Letters
Dealings in New Shares, nil paid, 8.00 a.m. on 09
commence on the London Stock February 2016
Exchange
Shares marked ex-Rights 09 February 2016
Latest time and date for acceptance 11.00 a.m. on 23
and payment in full and registration February 2016
of renounced Provisional Allotment
Letters
Dealings in the New Shares to 8.00 a.m. on 24
commence on the London Stock February 2016
Exchange fully paid
Capitalised terms used in this announcement shall have the
meanings set out in Appendix 2 of this announcement.
- ENDS -
Enquiries:
Chemring Group PLC
+44 (0)1794
Michael Flowers Group Chief Executive 833 901
Steve Bowers Group Finance Director
Rupert Pittman Group Director of Corporate
Affairs
MHP Communications
+44 (0)20
Andrew Jaques 3128 8100
John Olsen
James White
Rothschild (Financial Adviser)
+44 (0)20
John Deans 7820 5000
Richard Sedlacek
Investec Bank PLC (Joint Sponsor, Joint Global
Co-ordinator and Joint Bookrunner)
+44 (0)20
Keith Anderson 7597 4000
Christopher
Baird
Carlton Nelson
J.P. Morgan Cazenove (Joint Sponsor, Joint Global
Co-ordinator and Joint Bookrunner)
+44 (0)20
Robert Constant 7742 4000
Laurene Danon
Steve Smith
Barclays (Co-Bookrunner)
+44 (0)20
Barry Myers 7773 2500
Ben West
IMPORTANT NOTICE
This announcement has been issued by and is the sole
responsibility of Chemring. The information contained in this
announcement is for background purposes only and does not purport
to be full or complete. No reliance may or should be placed by any
person for any purpose whatsoever on the information contained in
this announcement or on its accuracy or completeness. The
information in this announcement is subject to change.
This announcement is not a prospectus but an advertisement and
investors should not acquire any Nil Paid Rights, Fully Paid Rights
or New Shares referred to in this announcement except on the basis
of the information contained in the Prospectus to be published by
Chemring in connection with the Rights Issue. The information
contained in this announcement is for background purposes only and
does not purport to be full or complete. The information in this
announcement is subject to change.
A copy of the Prospectus will, following publication, be
available from the registered office of Chemring and on Chemring's
website at www.Chemring.co.uk. The Prospectus is not, subject to
certain exceptions, available (through the website or otherwise) to
Shareholders in the United States or the Commonwealth of Australia,
its territories and possessions, Canada, Japan and the Republic of
South Africa (each an "Excluded Territory"). Neither the content of
Chemring's website nor any website accessible by hyperlinks on
Chemring's website is incorporated in, or forms part of, this
announcement. The Prospectus will provide further details of the
New Shares, the Nil Paid Rights and the Fully Paid Rights being
offered pursuant to the Rights Issue.
This announcement does not contain or constitute an offer to
sell or the solicitation of an offer to purchase securities to any
person with a registered address in, or who is resident in, an
Excluded Territory or in any jurisdiction in which such an offer or
solicitation is unlawful. None of the securities referred to herein
have been or will be registered under the relevant laws of any
state, province or territory any Excluded Territory. Subject to
certain limited exceptions, none of these materials will be
released, published, distributed or forwarded in or into an
Excluded Territory.
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This announcement does not contain or constitute an offer for
sale or the solicitation of an offer to purchase securities in the
United States. The securities referred to herein have not been and
will not be registered under the Securities Act or with any
securities regulatory authority of any state or jurisdiction of the
United States, and may not be offered or sold in the United States
absent registration under the Securities Act or an available
exemption from, or transaction not subject to, the registration
requirements of the Securities Act. There will be no public offer
of the securities in the United States. None of the New Shares, the
Nil Paid Rights, the Fully Paid Rihts, the PAL or the Form of
Proxy, this announcement or any other document connected with the
Rights Issue has been or will be approved or disapproved by the
United States Securities and Exchange Commission or by the
securities commissions of any state or other jurisdiction of the
United States or any other regulatory authority, and none of the
foregoing authorities or any securities commission has passed upon
or endorsed the merits of the offering of the New Shares, the Nil
Paid Rights, the Fully Paid Rights, the PAL, the Form of Proxy or
the accuracy or adequacy of this announcement or any other document
connected with the Rights Issue. Any representation to the contrary
is a criminal offence in the United States.
This announcement is for information purposes only and is not
intended to and does not constitute or form part of any offer or
invitation to purchase or subscribe for, or any solicitation to
purchase or subscribe for, Nil Paid Rights, Fully Paid Rights or
New Shares or to take up any entitlements to Nil Paid Rights in any
jurisdiction. No offer or invitation to purchase or subscribe for,
or any solicitation to purchase or subscribe for, Nil Paid Rights,
Fully Paid Rights or New Shares or to take up any entitlements to
Nil Paid Rights will be made in any jurisdiction in which such an
offer or solicitation is unlawful. The information contained in
this announcement is not for release, publication or distribution
to persons in the United States or any other Excluded Territory,
and should not be distributed, forwarded to or transmitted in or
into any jurisdiction, where to do so might constitute a violation
of local securities laws or regulations.
The Nil Paid Rights, the Fully Paid Rights, the New Shares and
the Provisional Allotment Letters have not been and will not be
registered under the Securities Act or under any securities laws of
any state or other jurisdiction of the United States and may not be
offered, sold, taken up, exercised, resold, renounced, transferred
or delivered, directly or indirectly, within the United States
except pursuant to an applicable exemption from or in a transaction
not subject to the registration requirements of the Securities Act
and in compliance with any applicable securities laws of any state
or other jurisdiction of the United States. There will be no public
offer of the Nil Paid Rights, the Fully Paid Rights or the New
Shares in the United States.
The distribution of this announcement into jurisdictions other
than the United Kingdom may be restricted by law, and, therefore,
persons into whose possession this announcement comes should inform
themselves about and observe any such restrictions. Any failure to
comply with any such restrictions may constitute a violation of the
securities laws of such jurisdiction. In particular, subject to
certain exceptions, this announcement, the Prospectus (once
published) and the Provisional Allotment Letters (once printed)
should not be distributed, forwarded to or transmitted in or into
the United States or any other Excluded Territory.
Recipients of this announcement and/ or the Propsectus should
conduct their own investigation, evaluation and analysis of the
business, data and property described in this announcement and/or
if and when published the Prospectus. This announcement does not
constitute a recommendation concerning any investor's options with
respect to the Rights Issue. The price and value of securities can
go down as well as up. Past performance is not a guide to future
performance. The contents of this announcement are not to be
construed as legal, business, financial or tax advice. Each
Shareholder or prospective investor should consult his, her or its
own legal adviser, business adviser, financial adviser or tax
adviser for legal, financial, business or tax advice.
Notice to all investors
J.P. Morgan Securities plc (which conducts its UK investment
banking services as "J.P. Morgan Cazenove") and N M Rothschild
& Sons Limited ("Rothschild") are authorised by the Prudential
Regulation Authority and regulated by the Financial Conduct
Authority and the Prudential Regulation Authority. Investec Bank
plc ("Investec") is authorised by the Prudential Regulation
Authority and regulated by the Financial Conduct Authority and the
Prudential Regulation Authority. Barclays Bank plc ("Barclays") is
authorised by the Prudential Regulation Authority and regulated by
the Financial Conduct Authority and the Prudential Regulation
Authority J.P. Morgan Cazenove, Investec, Barclays and Rothschild
are acting for Chemring and are acting for no one else in
connection with the Rights Issue and will not regard any other
person as a client in relation to the Rights Issue and will not be
responsible to anyone other than Chemring for providing the
protections afforded to their respective clients, nor for providing
advice in connection with the Rights Issue or any other matter,
transaction or arrangement referred to herein.
Apart from the responsibilities and liabilities, if any, which
may be imposed on J.P. Morgan Cazenove and Investec in their
capacities as Joint Sponsors by the FSMA, none of J.P. Morgan
Cazenove, Investec, Barclays or Rothschild accept any
responsibility or liability whatsoever and make no representation
or warranty, express or implied, for the contents of this
announcement, including its accuracy, fairness, sufficiency,
completeness or verification or for any other statement made or
purported to be made by it, or on its behalf, in connection with
Chemring or the Nil Paid Rights, Fully Paid Rights, Provisional
Allotment Letters, New Shares or the Rights Issue and nothing in
this announcement is, or shall be relied upon as, a promise or
representation in this respect, whether as to the past or future.
Each of J.P. Morgan Cazenove, Investec, Barclays and Rothschild
accordingly disclaims to the fullest extent permitted by law all
and any responsibility and liability whether arising in tort,
contract or otherwise (save as referred to above) which it might
otherwise have in respect of this announcement or any such
statement. Each of J.P. Morgan Cazenove, Investec, Barclays and
Rothschild and/or their affiliates provides various investment
banking, commercial banking and financial advisory services from
time to time to Chemring.
No person has been authorised to give any information or to make
any representations other than those contained in this announcement
and the Prospectus and, if given or made, such information or
representations must not be relied on as having been authorised by
Chemring or J.P. Morgan Cazenove, Investec, Barclays and
Rothschild. Subject to the Listing Rules, the Prospectus Rules and
the Disclosure and Transparency Rules of the Financial Conduct
Authority, the issue of this announcement shall not, in any
circumstances, create any implication that there has been no change
in the affairs of Chemring since the date of this announcement or
that the information in it is correct as at any subsequent
date.
J.P. Morgan Cazenove, Investec and Barclays and their respective
affiliates, acting as investors for their own accounts, may, in
accordance with applicable legal and regulatory provisions, engage
in transactions in relation to the Nil Paid Rights, the Fully Paid
Rights, the New Shares and/or related instruments for their own
account for the purpose of hedging their underwriting exposure or
otherwise. Accordingly, references in the Prospectus to the Nil
Paid Rights, Fully Paid Rights or New Shares being issued, offered,
subscribed, acquired, placed or otherwise dealt in should be read
as including any issue or offer to, or subscription, acquisition,
placing or dealing by, J.P. Morgan Cazenove, Investec and Barclays
and any of their respective affiliates acting as investors for
their own accounts. Except as required by applicable law or
regulation, J.P. Morgan Cazenove, Investec and Barclays do not
propose to make any public disclosure in relation to such
transactions.
Cautionary statement regarding forward-looking statements
This announcement may contain certain forward-looking
statements, beliefs or opinions, with respect to the financial
condition, results of operations and business of Chemring and the
Group.
These statements, which contain the words "anticipate",
"believe", "intend", "estimate", "expect", "may", "will", "seek",
"continue", "aim", "target", "projected", "plan", "goal," "achieve"
and words of similar meaning, reflect the Company's beliefs and
expectations and are based on numerous assumptions regarding the
Company's present and future business strategies and the
environment the Company and the Group will operate in and are
subject to risks and uncertainties that may cause actual results to
differ materially. No representation is made that any of these
statements or forecasts will come to pass or that any forecast
results will be achieved. Forward-looking statements involve
inherent known and unknown risks, uncertainties and contingencies
because they relate to events and depend on circumstances that may
or may not occur in the future and may cause the actual results,
performance or achievements of the Company or the Group to be
materially different from those expressed or implied by such
forward looking statements. Many of these risks and uncertainties
relate to factors that are beyond the Company's or the Group's
ability to control or estimate precisely, such as increased
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competition, the loss of or damage to one or more key customer
relationships, changes to customer ordering patterns, delays in
obtaining customer approvals for engineering or price level
changes, the failure of one or more key suppliers, the outcome of
business or industry restructuring, the outcome of any litigation,
changes in economic conditions, currency fluctuations, changes in
interest and tax rates, changes in raw material or energy market
prices, changes in laws, regulations or regulatory policies,
developments in legal or public policy doctrines, technological
developments, the failure to retain key management, or the key
timing and success of future acquisition opportunities or major
investment projects. Past performance of the Company cannot be
relied on as a guide to future performance. As a result, you are
cautioned not to place undue reliance on such forward-looking
statements. The list above is not exhaustive and there are other
factors that may cause the Company's or the Group's actual results
to differ materially from the forward-looking statements contained
in this announcement. Forward-looking statements speak only as of
their date and the Company, its parent and subsidiary undertakings,
the subsidiary undertakings of such parent undertakings, J.P.
Morgan Cazenove, Investec, Barclays and Rothschild and any of such
persons' respective directors, officers, employees, agents,
affiliates or advisers expressly disclaim any obligation to
supplement, amend, update or revise any of the forward-looking
statements made herein, except where it would be required to do so
under applicable law.
You are advised to read this announcement and the Prospectus
(once published) in their entirety for a further discussion of the
factors that could affect Chemring's future performance. In light
of these risks, uncertainties and assumptions, the events described
in the forward-looking statements in this announcement may not
occur.
No statement in this announcement is intended as a profit
forecast or a profit estimate and no statement in this announcement
should be interpreted to mean that earnings per share of Chemring
for the current or future financial years would necessarily match
or exceed the historical published earnings per share of
Chemring.
Proposed 4 for 9 Rights Issue of 85,915,828 New Shares at 94
pence per New Share
1. Introduction
The Board of Chemring announces today that it intends to raise
approximately GBP80.8 million (before expenses) by way of a rights
issue. A prospectus is to be sent to shareholders shortly.
2. Background to and reasons for the Rights Issue
2.1 Background
During the period from 2005 to 2011 when global defence markets
were growing strongly on the back of conflict, particularly in the
Middle East and Afghanistan, Chemring grew rapidly through a series
of acquisitions which were predominantly debt funded. The Group
shifted much of its focus through acquisition towards sensors,
electronics and detection equipment. By February 2012, when the
United States had started to withdraw its troops from those
regions, Chemring's net debt was approximately GBP340.0 million,
predominantly in the form of loan notes issued via a series of US
private placements. As these major conflicts subsided, there
followed a significant decline in global defence spending, which
has impacted the Group.
Steve Bowers was appointed Group Finance Director in January
2013, and Michael Flowers was appointed Group Chief Executive in
June 2014. The Board has since been focused on reducing Chemring's
debt burden, restructuring the cost base, driving operational
improvements and repositioning the Group to take advantage of
available opportunities for growth. In 2014, following a strategic
review, Chemring disposed of its European munitions business and
other assets, generating gross proceeds of GBP137.1 million. Of the
net proceeds, GBP101.7 million were applied in the early repayment
of US Notes in June and September 2014, to reduce the gross debt
position and to lower ongoing interest charges. In July 2014, the
Company refinanced its Facility Agreement providing committed
funding to 2018.
The Group has been streamlined operationally including reducing
overheads within the businesses, the removal of its divisional
structure, closure of four corporate and administrative offices and
a 50.0 per cent. reduction in corporate headcount, which has
delivered approximately GBP10.0 million per annum in savings.
Several of the businesses have been integrated, including the
combination and restructuring of Chemring Energetic Devices'
operations in Torrance and Downers Grove and the combination of
Non-Intrusive Inspection Technology ("NIITEK") and Chemring
Detection Systems in the Sensors & Electronics division.
Similarly, the separation of the Roke contract R&D business
from Chemring Technology Solutions' product business resulted in
additional overhead savings in the 2015 financial year. There is
further scope to integrate businesses and consolidate sites which
is expected to reduce costs and release capital over the medium
term, including the closure of Chemring Energetic Devices' Torrance
sites (expected to deliver approximately $5.0 million in annual
overhead costs savings) in the 2018 financial year and the
anticipated Alloy Surfaces' Plant 2 closure in the 2017 financial
year which is enabled by an investment of approximately $3.0
million at Alloy Surfaces' remaining production facility and is
expected to be required to support this and is expected to deliver
approximately $1.4 million in annual cost savings from the 2018
financial year. There is also further corporate restructuring to be
carried out in North America which is expected to reduce costs and
promote greater collaboration among the Group's businesses.
The removal of the divisional structure and the integration of
businesses has improved responsiveness, accountability and
collaboration across the Group. The sharing of knowledge and best
practice has enhanced production and safety performance, and shared
and closer customer interaction and insight has improved the
Group's anticipation of and reaction to changes in customer
needs.
The Group's portfolio and segmental strategies have been aligned
to meet future demand, and this focus has delivered significant
results against a challenging defence market.
Much of Chemring's growth between 2005 and 2011 was driven
through the success of key US programmes including the Husky
Mounted Detection System ("HMDS"), ground penetrating radar
("GPR"). As a result of the success of these products, they are
currently transitioning through research and development phases,
prior to becoming long-term Programs of Record, which are programs
that are approved and funded across the DoD's Future Year Defense
Program through its Program of Memorandum. In the future, as a core
capability, these Programs of Record will be funded by the DoD's
base budget.
Chemring has achieved key strategic wins on these long-term US
programmes including being awarded the sole source Engineering and
Manufacturing Development contract to design the next generation
HMDS A2; being confirmed as the sole source provider for the Joint
Biological Tactical Detection System ("JBTDS"); being down-selected
on all three variants of the Next Generation Chemical Detection
("NGCD") development programme; and being the sole qualified
supplier for the global F-35 fleet with Chemring Australia
progressing well in its efforts to become a second source.
While significant progress has been made, the transition through
research and development phases and the resulting pause in
manufacturing for some of the Group's key sensors and electronics
products has resulted in a temporary decline in earnings derived
from these products. To counteract both this, and the pause in
demand from its traditional US and UK customer base, Chemring has
sought to target opportunities in other markets, particularly for
the sale of its Sensors & Electronics products, with a focus on
growing sales to customers based in the Middle East and
Asia-Pacific.
During the financial year ended 31 October 2015, negotiations
surrounding the supply of US Sensors & Electronics products
into NATO countries and the Middle East were substantively
progressed, however the receipt of orders was and continues to be
slower than anticipated and as a result Sensors & Electronics
reported an underlying profit of GBP9.3 million for the year ended
31 October 2015 (2014: GBP31.9 million; 2013: GBP44.7 million) on
revenue of GBP99.1 million (2014: GBP154.4 million; 2013: GBP211.3
million).
At its interim results in June 2015, Chemring announced that
since the period ending 30 April 2015, orders exceeding GBP50.0
million had been received, primarily for supply to customers in the
Middle East. Included within this order intake was a significant
award for the provision of non-standard ammunition under a US
government contract, which was expected to be wholly fulfilled in
the 2015 financial year. In a trading update issued on 14 September
2015, the Group announced that this order was to be terminated for
convenience by the US government. The loss of this contract was,
however, anticipated to be offset in part by profits from a
recently received order, valued in excess of GBP100.0 million,
relating to the supply of 40mm ammunition to a Middle East
customer. At that time, the order for 40mm ammunition was expected
to contribute both to the 2015 financial year results and to future
financial years.
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On 26 October 2015, Chemring announced that, notwithstanding
whether the 40mm contract delivered the revenue and profit in the
year ended 31 October 2015 previously expected, the Board had
concluded that in any event it was in the best interests of the
Group to significantly reduce its structural indebtedness and that
the appropriate leverage target for the Group over the medium-term
would be a net debt to EBITDA ratio of between 1.0x and 1.5x as the
Group's annual average. As a result, the Board intended to
undertake a rights issue to raise up to GBP90 million, conditional
on securing covenant waivers from the Group's debt providers as a
result of the reduction in the Group's profit and cash positions.
The proposed rights issue was fully underwritten on a standby basis
by Investec and J.P. Morgan Cazenove, the Group's joint brokers.
The standby agreement contained customary representations and
warranties, undertakings, conditions, and termination rights.
On 25 November 2015, Chemring announced that its trading
performance for the year ended 31 October 2015 remained in line
with guidance given in the trading update issued on 26 October
2015. Revenue in the final quarter of the 2015 financial year was
GBP124.8 million, resulting in revenue for the year ended 31
October 2015 of GBP377.3 million (2014: GBP403.1 million). The
Group also confirmed that no revenue or cash advance payment in
respect of the 40mm ammunition contract to the Middle East, as
disclosed in the 26 October 2015 trading update, was recognised for
the year ended 31 October 2015, and that the export approvals
associated with the contract have now been granted, and revenues on
this contract are expected to commence once the cash advance is
received. At 31 October 2015, the Group's order book was GBP569.6
million (2014: GBP486.8 million). Additionally, the Group announced
that its net debt at 31 October 2015 was GBP154.3 million (2014:
GBP135.6 million), just below the lower end of the GBP155-165
million range set out in the 26 October 2015 trading update.
Additionally, the Group announced that it had reached agreement
with Esterline Corporation ("Esterline") to buy patents, equipment,
stock and selected contracts relating to Esterline's UK-based
subsidiary, Wallop Defence Systems Limited, for an initial cash
consideration of GBP2.5 million. Additional payments of up to
GBP9.0 million, which are conditional on the receipt of specific
orders in the future, may be made over the next three years. The
assets to be purchased relate to air countermeasures and
pyrotechnic products, which, pending regulatory approval, will be
manufactured at Chemring's existing UK operations and further
expand the Group's product offerings in Countermeasures. Completion
of the transaction, which is subject to approval by the MoD and the
UK Competition and Markets Authority ("CMA"), is expected to occur
in the second quarter of the 2016 financial year.
Chemring also announced that positive discussions, in relation
to the waiver of any event of default that may have arisen from the
matters described in the 26 October 2015 trading update and
amendments to the operation of covenants, were continuing with the
banks providing the Group's revolving credit facility and its loan
note holders. The 25 November 2015 trading update also confirmed
the Group's continued preparations for the proposed rights issue of
up to GBP90 million described in the 26 October 2015 trading
update, and that the proposed rights issue was anticipated to be
launched in the first quarter of the 2016 financial year alongside
the Group's 2015 financial year results.
Following the receipt of the export approvals, in the period
since 31 October 2015, the Group provided a loan of $5.0 million to
its distributor in anticipation, and to avoid delay for reasons
under the Group's control, of receipt of the cash advance
payment
2.2 Reasons for the Rights Issue
Whilst the Board's priority to date has been to effect the
operational improvements referred to above, the recent progress of
the Group has been impeded by its high level of debt and associated
interest costs. Significant financial costs, including costs
associated with the Group's previous debt covenant renegotiations,
have been incurred and management time has been spent managing this
debt, at the expense of further operational improvement and
adequate investment in fully capturing the longer term growth
opportunities open to the Group. Furthermore, the uneven timing of
the Group's contracts coupled with challenging markets and the
constraints of the financial covenant tests in the Group's existing
finance agreements made it difficult for the Group to operate.
The Board considered a number of options before deciding to
pursue the Rights Issue, including negotiating amendments to the
Existing Finance Agreements without undertaking an equity capital
raising, disposals of non-core assets and a smaller, non-preemptive
placing of shares and/or waivers. However, predominantly due to
timing concerns, which drove the stand-by nature of the Rights
Issue, as well as the limited number of assets viewed as non-core
and amount of funds that would be raised by the other options, the
Board determined that the Rights Issue was in the best interest of
the Group going forward.
The Board has sought and received confirmation from the banks
providing its debt facilities and from holders of its US Notes ("US
Noteholders") that they have amended the operation of relevant
covenants, such that the Group expects to remain in compliance with
the terms of its Existing Finance Agreements. This expectation is
dependent on the Group strengthening its capital structure through
the proposed Rights Issue. While the Group is, as at the most
recent test date (31 October 2015), in compliance with the
unmodified financial covenants in its Existing Finance Agreements,
and has agreed an unconditional waiver and variation of certain
maximum leverage ratios under its Existing Finance Agreements for
the 31 January 2016 test date, there is minimal headroom under a
reasonable worst case scenario with no Rights Issues proceeds and
therefore a risk that the Group will exceed the unmodified maximum
leverage ratios permitted under the Existing Finance Agreements as
at 30 April 2016 and subsequent quarterly test dates if the Rights
Issue does not proceed. Any breach of these covenants would entitle
the Group's lenders and US Noteholders to demand accelerated
payment in full of the relevant amounts (principal and other items)
outstanding (GBP238.5 million as at 31 December 2015) following the
issuance of a compliance certificate from the Group notifying the
breach (which would be required, should a breach occur, to be
delivered no later than 14 June 2016 in respect of the UK Club
Facility Documents and 21 May 2016 in respect of the US Note
Purchase Agreements, being the deadlines for the Group's
certification of covenant compliance for the 30 April 2016 test
date).
The Board accordingly believes it is in the best interests of
the Group to significantly reduce its structural indebtedness and
that the appropriate leverage target for the Group over the
medium-term is a net debt to EBITDA ratio of between 1.0x and 1.5x
as the Group's annual average. The proposed rights issue is a
critical step towards achieving this medium-term target.
In addition to substantially reducing the risk of financial
covenant breach, a more appropriate capital structure will allow
management to spend less time managing the Group's financial
covenants and more time on the business. It will also enable the
Group to pursue certain growth initiatives and further cost
reduction over the medium-term including, among other things:
investment in the modernisation of facilities to enable further
site consolidation, including the expected Torrance facility and
the Alloy plant 2 closures in the 2018 and 2017 financial years
respectively; new product investments and R&D; supply chain and
inventory management; and small scale accretive acquisitions that
would strengthen existing market positions or capabilities.
Furthermore, if the Group's debt rating improves due to the
reduction in its indebtedness, the Group may be able to obtain
better pricing for future refinancings, expected in the financial
years ended 31 October 2017, 2018 and 2019, respectively, than
would be the case if the Rights Issue did not occur.
3. Use of proceeds
The Rights Issue is expected to raise GBP80.8 million in gross
proceeds.
Of the expected approximate GBP75.2 million of net proceeds from
the Rights Issue, the Group expects to redeem or repurchase a
minimum of GBP48.5 million in aggregate principal amount of the US
Notes, with the balance of the net proceeds to be used for make
whole premiums pursuant to the terms of the US Note Purchase
Agreements (GBP4.8 million), waiver fees (GBP1.6 million), and
general corporate purposes with the Board having regard to the
scheduled repayment of any amount outstanding of its $80 million
5.26 per cent. notes due 19 November 2016.
4. Financial impact of the Rights Issue
Had the Rights Issue taken place (and had part of the proceeds
been used to reduce the Group's borrowings) as at the last balance
sheet date, being 31 October 2015, the effect on the balance sheet
would have been an increase in cash and cash equivalents of GBP20.3
million, and an increase in share capital and share premium
totalling GBP75.2 million. The Group's pro forma net debt to
Consolidated EBITDA ratio as at 31 October 2015 would have reduced
from 2.83x as reported, to 1.63x taking into account the receipt of
the net proceeds of the Rights Issue and the repayment of debt
under the US Notes.
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Your attention is also drawn to Part VII "Unaudited Pro Forma
Financial Information" of the Prospectus to be published shortly
which contains an unaudited pro forma statement of net assets that
illustrates the effect of the Rights Issue and the repayment of
debt under the US Notes on the Group's net assets as at 31 October
2015 as if the Rights Issue had been undertaken at that date.
5. Terms of the Rights Issue and of the New Shares
The Company is proposing to raise approximately GBP75.2 million
(net of expenses) pursuant to the Rights Issue. The Rights Issue is
being fully underwritten by the Underwriters, subject to certain
customary conditions. The principal terms of the underwriting
agreement are summarised in paragraph 16.1 of Part IX "Additional
Information" of the Prospectus. The Issue Price of 94 pence per New
Share represents a discount of approximately 47.2 per cent. to the
closing middle market price of 178 pence per Existing Share on 20
January 2016, the latest Business Day prior to the announcement of
the Rights Issue and an approximate 38.2 per cent. discount to the
theoretical ex-rights price of 152.15 pence per New Share by
reference to the closing middle market price on the same basis.
Subject to the fulfilment of, among other things, the conditions
set out below, Chemring will offer 4 New Shares to Qualifying
Shareholders at an Issue Price of 94 pence per Share, payable in
full on acceptance. The Rights Issue will be offered on the basis
of:
4 New Shares at 94 pence per New Share for every 9 Existing
Shares
held on the Record Date, and so in proportion to any other
number of Existing Shares then held and otherwise on the terms and
conditions set out in the Prospectus. Qualifying Non-CREST
Shareholders with registered addresses in the United States or any
of the Excluded Territories will not be sent Provisional Allotment
Letters and Qualifying CREST Shareholders in such territories will
not have their CREST stock accounts credited with Nil Paid Rights,
except where Chemring and the Underwriters are satisfied that such
action would not result in the contravention of any registration or
other legal or regulatory requirement in such jurisdiction and, in
the case of Canada, pursuant to and in compliance with such
procedures as the Company may approve.
Fractions of New Shares will not be allotted to any Qualifying
Shareholders, and, where necessary, fractional entitlements to New
Shares will be rounded down to the nearest whole number.
The New Shares will, when issued and fully paid, rank pari passu
in all respects with the Existing Shares.
The Rights Issue is conditional, among other things, upon:
(i) the passing of the Resolutions at the General Meeting without material amendment;
(ii) Admission of the New Shares becoming effective by not later
than 8.00 a.m. on 9 February 2016 (or such later time and/or date
as the parties to the Underwriting Agreement may agree);
(iii) none of the warranties of Chemring under the Underwriting
Agreement (in the good faith opinion of either of the Joint Global
Co-orindators) being untrue, inaccurate or misleading at the date
of the Prospectus and at the time of Admission;
(iv) save to the extent not material in the context of the
Rights Issue, the underwriting of the New Shares or the
applications for Admission, Chemring having complied with its
obligations under the Underwriting Agreement;
(v) no material adverse change having occurred in respect of
Chemring (together with its subsidiaries and subsidiary
undertakings) prior to Admission; and
(vi) no matter requiring a supplement to the Prospectus having
arisen between the time of publication of the Prospectus and
Admission and no such supplement being published by Chemring before
Admission which, in each case, in the good faith opinion of the
either of the Joint Global Coordinators (having consulted with
Chemring where reasonably practicable), is materially adverse in
the context of Chemring (together with its subsidiaries and
subsidiary undertakings) or the Rights Issue.
The Rights Issue is fully underwritten by the Underwriters
pursuant to the Underwriting Agreement. The principal terms of the
Underwriting Agreement are summarised in Part IX "Additional
Information" of the Prospectus.
The Rights Issue will result in 85,915,828 New Shares being
issued (representing approximately 44.4 per cent. of the existing
issued share capital and 30.8 per cent. of the enlarged issued
share capital immediately following completion of the Rights
Issue).
The New Shares, when issued and fully paid, will rank pari passu
in all respects with the existing issued Shares, including the
right to receive dividends or distributions made, paid or declared
after the date of issue of the New Shares. Application will be made
to the FCA and to the London Stock Exchange for the New Shares to
be admitted to the Official List and to trading on the London Stock
Exchange. It is expected that Admission will occur and that
dealings in the New Shares (nil paid) on the London Stock Exchange
will commence at 8.00 a.m. on 9 February 2016.
Some questions and answers, together with details of further
terms and conditions of the Rights Issue, including the procedure
for acceptance and payment and the procedure in respect of rights
not taken up, will be set out in Parts II and III of the Prospectus
and where relevant will also be set out in the Provisional
Allotment Letter.
Overseas Shareholders should refer to paragraph 2.5 of Part III
"Terms and Conditions of the Rights Issue" of the Prospectus for
further information on their ability to participate in the Rights
Issue.
6. Information relating to Chemring
The Group is a global defence technology company focused on the
development and manufacture of Countermeasures, Sensors &
Electronics, and Energetic Systems for the aerospace, defence and
security markets. The Group offers a diverse portfolio of products
that deliver high reliability solutions to protect people,
platforms, missions and information against constantly-changing
threats. Operating in niche markets and with strong investment in
research and development, the Company has the agility to rapidly
react to urgent customer needs. The Group employs approximately
3,000 people at fifteen facilities in the United States, the United
Kingdom, Australia and Norway, the Group meets demanding customer
requirements in defence and security markets in more than 50
countries worldwide.
In the year ended 31 October 2015, Chemring reported an
underlying profit before tax of GBP19.8 million (2014: GBP28.1
million; 2013: GBP36.5 million) on revenue of GBP377.3 million
(2014: GBP403.1 million; 2013: GBP472.3 million). Net assets as at
31 October 2015 were GBP290.6 million (as at 31 October 2014:
GBP300.3 million; as at 31 October 2013: GBP383.8 million). Net
debt as at 31 October 2015 was GBP154.3 million (as at 31 October
2014: GBP135.6 million; as at 31 October 2013: GBP248.7 million).
As at 31 December 2015, the Group's net debt was GBP195.6
million.
Countermeasures
The Group is the world leader in the design, development and
manufacture of advanced expendable countermeasures and
countermeasure suites for protecting air, sea and land platforms
against guided missile threats. The Group has a broad product range
including conventional flares; advanced flares; special material
decoys; chaff; naval countermeasures; electronic intelligence
equipment; and off-board electronic radio frequency
countermeasures.
Sensors & Electronics
In Sensors & Electronics, Chemring serves niche requirements
to detect explosive, chemical and biological threats, neutralise
improvised explosive devices ("IEDs") and prosecute land-based
electronic warfare (detecting, intercepting and jamming electronic
communications). The Group also provides research and development
services to UK government agencies, including cyber-security
consulting services, and is developing network security solutions
for civilian use.
Energetic Systems
Chemring is a leading manufacturer of high-quality,
high-reliability, energetic subsystems that meet the demanding
requirements of mission critical systems in the aerospace, space
and defence markets. Applications include emergency egress, missile
components and satellite separation systems.
Chemring also produces a specialist range of military
pyrotechnics and high explosive products, including mine-field
clearance systems, demolition stores and 40mm ammunition.
7. Current trading and prospects in respect of Chemring
The Board's expectations for the current financial year remain
unchanged.
Trading since the start of the current financial year has been
below management's expectations; although order intake remains
robust. Revenue has been impacted in part due to rephasing of
deliveries. Some customer acceptance delays at the end of the
previous financial year have continued but are expected to be
resolved shortly, and specific production and contract finalisation
issues will result in the phasing of some revenue to later in the
current financial year. The first quarter of the Group's financial
year typically has a low level of revenues and that is again
expected this financial year.
The order book as at 31 October 2015 increased 17.0 per cent. to
GBP569.6 million, of which GBP330.9 million is currently expected
to be recognised as revenue in the 2016 financial year,
representing approximately 75.0 per cent. of the expected revenue
of approximately GBP450.0 million for the 2016 financial year.
Included within the order book at 31 October 2015 is GBP103.0
million in respect of the major 40mm order secured by Chemring
Ordnance in the 2015 financial year. The order book as at 31
December 2015 was GBP600.5 million.
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The multi-year revenues associated with the 40mm contract to
supply 40mm ammunition to a Middle East customer are expected to
commence in the first half of the current financial year once the
cash advance payment is received from the Group's customer and this
contract is expected to provide significant contribution to the
current financial year. As previously announced, the 40mm contract
is expected to result in the Group's financial performance for the
current financial year being weighted towards the Energetic Systems
segment, with a lower contribution from Sensors & Electronics
while its US operations focus on research and development activity
under long-term Programs of Record.
The expected profile of orders, revenue and margins mean that
the Group continues to expect the current financial year to reflect
a significant second half weighting.
Assuming the successful completion of the proposed Rights Issue,
the Group would expect to benefit from a reduction in its future
net finance expense from the date of receipt of proceeds of the
proposed Rights Issue.
The Board expects the wider market backdrop for global defence
spending to be one of slow recovery in 2016. The situation for US
defence spending is more stable than it has been for some time, and
ongoing geopolitical tensions in the Middle East and elsewhere
emphasise the need for robust defence and security measures. The
timing of Middle East order placement and contract activity remains
difficult to predict, in part due to the impact that recent falls
in the oil price are having on Government spending in the region.
Nevertheless, our continued customer focus means the Group is well
positioned to benefit from any sustained increase in demand in its
markets.
8. Board Changes
2015 was not an easy year for Chemring but, nevertheless, the
Board remains committed to continuing to drive improvements in
Chemring's performance. However, following announcement of the
rights issue, it is believed to now be the time to reshape the
membership of the Board. As a consequence, Peter Hickson has
decided to stand down as Chairman, and from the Board, as soon as a
suitable replacement has been identified and appointed. A process,
run by the Nomination Committee using the services of an outside
executive search consultancy, is under way and we expect a number
of candidates to be considered for the position.
On the non-executive side, the Board is also seeking new
directors. The Board has retained the services of a different
executive search firm in order to identify suitable candidates. The
process has been under way for some months but, due to the
impending rights issue, the Board have not yet reached a position
of being able to make any appointments. However, the process is
continuing with a view to identifying well-qualified
candidates.
From the current Board, Ian Much, the Senior Independent
Director, will retire at the Annual General Meeting, as reported in
last year's annual report. He will be succeeded as Senior
Independent Director by Nigel Young, the Chairman of the Audit
Committee. The Board would like to thank Ian for his very
significant contribution to the Chemring Board over his many years
of service and wish him well for the future. In addition, Andy
Hamment has indicated that, for personal reasons, he also intends
to stand down from the Board as soon as a replacement can be
appointed.
9. Intentions of the Directors
The Directors, who hold in aggregate 408,680 Existing Shares,
representing 0.21 per cent. of Chemring's existing issued ordinary
share capital as at 20 January 2016 (being the last practicable
date prior to the publication of the Prospectus), each intend to
take up their rights in full or in part in respect of the New
Shares to which they are entitled or, where their Shares are held
in trust or with nominees, such Chemring Directors intend to
recommend that such rights be taken up in full or in part.
10. Dividends and dividend policy
In view of the proposed Rights Issue, the Board is not
recommending a final dividend in respect of the year to 31 October
2015. The total dividend in respect of the 2015 financial year will
therefore be the interim dividend of 2.4p (2014: 4.1p).
In addition, the Board does not currently intend to propose an
interim dividend in respect of the six month period ending 30 April
2016.
The Board recognises that dividends are an important component
of total shareholder returns. The Board intends to propose a final
dividend for FY16, assuming it is prudent to do so, and to continue
paying dividends thereafter.
11. Waiver and amendments to the Existing Finance Agreements
11.1 Introduction
On 12 January 2016, Chemring reached an agreement with its
Lenders and its US Noteholders to amend and/or waive application of
the financial covenants Chemring is subject to under the respective
agreements for the 12 month calculation periods existing at 31
October 2015 and 31 January 2016.
11.2 UK Club Facility Documents
The changes made to the financial covenants under the UK Club
Facility Documents were, in summary:
-- Changing its interest cover ratio from 4.00x to 3.50x; and
-- Changing its net debt leverage covenant from 3.00x to 3.90x,
for the test dates as at 31 October 2015 and 31 January 2016
only.
These amendments are conditional on the Company raising gross
proceeds of at least GBP75,000,000 through the Rights Issue,
receiving at least such amount no later than 31 March 2016.
The Lenders have also agreed to unconditionally (whether or not
the Rights Issue proceeds) change the net debt leverage ratio from
3.00x to 3.50x for the test date of 31 January 2016 only.
In addition, the Company's Lenders also waived any default that
may have arisen under the Company's UK Club Facility Documents
occasioned by a material adverse change being revealed by the
matters set out in the trading announcement issued on 27 October
2015 or which might have triggered as a cross-default to the extent
the US Note Purchase Agreements may otherwise be in default due to
a breach of the financial covenants applicable under such
agreements as at 31 October 2015.
The agreement reached with the Lenders also states that it will
be an event of default if one of the following occurs:
-- the Rights Issue does not proceed and Chemring is in breach of:
o the interest cover ratio of 4.00x as at 31 October 2015;
o the net debt leverage covenant of 3.00x as at 31 October
2015;
o the interest cover ratio of 4.00x as at 31 January 2016;
or
o the net debt leverage ratio cover ratio of 3.50x as at 31
January 2016; or
-- the Rights Issue does proceed and Chemring is in breach of:
o the interest cover ratio of 3.50x as at 31 October 2015;
o the net debt leverage covenant of 3.90x as at 31 October
2015;
o the interest cover ratio of 3.50x as at 31 January 2016;
or
o the net debt leverage ratio cover ratio of 3.90x as at 31
January 2016.
11.3 US Note Purchase Agreements
The changes made to the financial covenants under the US Note
Purchase Agreements were, in summary, changing its total debt
leverage cover ratio from 3.75x to 4.00x for the test dates as at
31 October 2015 and 31 January 2016 only and waiving the adjusted
debt covenant for 31 October 2015.
These amendments (save as noted below) are conditional on the
Company raising gross proceeds of at least GBP75,000,000 through
the Rights Issue, receiving at least such amount no later than 31
March 2016 and at least 60.0 per cent. of the gross proceeds of the
Rights Issue being applied in prepayment of amounts outstanding
under the US Note Purchase Agreements by no later than 29 April
2016.
The US Noteholders have also agreed to unconditionally (whether
or not the Rights Issue proceeds) change the adjusted debt leverage
ratio from 3.00x to 4.00x for the test date of 31 January 2016
only, subject to a payment by the Company of an additional waiver
and variation fee of 60bps (approximately GBP1.0 million) of the
outstanding amounts should the Rights Issue not proceed.
A process whereby the Company may run a tender process to offer
the whole or part proceeds of the Rights Issue in prepayment to the
US Noteholders has also been agreed.
12. Admission of the New Shares
The New Shares will be issued credited as fully paid on
completion of the Rights Issue and will rank pari passu in all
respects with the Existing Shares. Chemring will apply for
admission of the New Shares to the premium listing segment of the
Official List of the UK Listing Authority and to listing on the
London Stock Exchange's main market for listed securities
("Admission"). It is expected that Admission of the Nil Paid Rights
will take place on 9 February 2016.
The Existing Shares are already admitted to the premium listing
segment of the Official List and to trading on the London Stock
Exchange's main market for listed securities and to CREST. It is
expected that all of the New Shares, when issued and fully paid,
will be capable of being held and transferred by means of CREST.
The New Shares will trade under ISIN GB00B45C9X44 and the SEDOL
number of the New Shares is B45C9X4. The ISIN for the Nil Paid
Rights is GB00BYVXM652 and the ISIN for the Fully Paid Rights is
GB00BYVXM769.
13. Overseas Shareholders
The attention of Qualifying Shareholders who have registered
addresses outside the United Kingdom, or who are citizens or
residents of countries other than the United Kingdom, or who are
holding Shares for the benefit of such persons (including, without
limitation, custodians, nominees, trustees and agents) or who have
a contractual or other legal obligation to forward the Prospectus,
a Provisional Allotment Letter and any other document in relation
to the Rights Issue to such persons, is drawn to the information
which will appear in section 2.5 of Part III "Terms and Conditions
of the Rights Issue" of the Prospectus.
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New Shares will be provisionally allotted (nil paid) to all
Qualifying Shareholders, including Overseas Shareholders. However,
subject to certain exceptions, Provisional Allotment Letters will
not be sent to Qualifying non-CREST Shareholders with registered
addresses, or who are resident or located, in the United States,
nor will the CREST stock account of Qualifying CREST Shareholders
with registered addresses, or who are resident or located, in the
United States be credited with Nil Paid Rights. Any person with a
registered address, or who is resident or located, in the United
States who obtains a copy of the Prospectus or a Provisional
Allotment Letter is required to disregard them, except with the
consent of the Company.
Notwithstanding any other provision of the Prospectus or the
Provisional Allotment Letter, the Company reserves the right to
permit any Qualifying Shareholder to take up his rights if the
Company in its sole and absolute discretion is satisfied that the
transaction in question will not violate applicable laws.
In addition, persons who have registered addresses in or who are
resident in, or who are citizens of, countries other than the
United Kingdom should consult their professional advisers as to
whether they require any governmental or other consents or need to
observe any other formalities to enable them to take up their
entitlements to the Rights Issue.
14. Importance of your vote
Your attention is again drawn to the fact that the Rights Issue
and, consequently, certain of the amendments and waivers to the
Existing Finance Agreements are conditional and dependent upon,
amongst other things, the Resolutions being passed at the General
Meeting.
Shareholders are asked to vote in favour of the Resolutions at
the General Meeting in order for the Rights Issue to proceed. The
Directors believe that the Rights Issue will significantly
strengthen the Group's balance sheet and that this will enable the
Group to reduce its net debt, which is important to the future
success of the Group.
However, if either of the Resolutions is not passed, the Rights
Issue will not proceed and certain of the amendments to the
Existing Finance Agreements do not become effective and the Group
will be subject to the unmodified covenants under the Existing
Finance Agreements. While the Group is, as at the most recent test
date (31 October 2015), in compliance with the unmodified financial
covenants in its Existing Finance Agreements, and has agreed an
unconditional waiver and variation of certain maximum leverage
ratios under its Existing Finance Agreements for the 31 January
2016 test date (subject to a payment by the Company of an
additional waiver and variation fee of 60bps (approximately GBP1.0
million) of the outstanding amounts by 1 April 2016) should the
Rights Issue not proceed there is minimal headroom under a
reasonable worst case scenario with no Rights Issue proceeds and
therefore a risk that the Group will exceed the unmodified maximum
leverage ratios permitted under the Existing Finance Agreements as
at 30 April 2016 and subsequent quarterly test dates if the Rights
Issue does not proceed. Any breach of these covenants would entitle
the Group's lenders and US Noteholders to demand accelerated
payment in full of the relevant amounts (principal and other items)
outstanding (GBP238.5 million as at 31 December 2015) following the
issuance of a compliance certificate from the Group notifying the
breach (which would be required, should a breach occur, to be
delivered no later than 14 June 2016 in respect of the UK Club
Facility Documents and 21 May 2016 in respect of the US Note
Purchase Agreements, being the deadlines for the Group's
certification of covenant compliance for the 30 April 2016 test
date). Following any such demand, the Group does not expect to have
the funds available to repay such amounts at that time. In such
circumstances, in the absence of being able to successfully agree
or implement any of the alternatives discussed below, the Group
would be unable to continue as a going concern.
As a result, if the Rights Issue does not proceed, the Group
would first seek to renegotiate the terms of the Existing Finance
Agreements with the Lenders and Noteholders to secure further
waivers of the financial covenants in order to avoid any such
breach. However, the Group may be unable to obtain such waivers and
amendments from the Lenders and/or US Noteholders either at all or
without significant cost to the Group in the form of additional
fees payable to the Lenders, increased coupon payments or
additional restrictions on corporate actions (e.g. acquisitions and
disposals), which could adversely affect or delay implementation of
the Group's strategies. Without the proceeds of the Rights Issue,
any amendments to the Existing Finance Agreements would only serve
as a short-term solution that would not fundamentally address the
Group's balance sheet and capitalisation concerns in the longer
term.
If the Lenders and/or US Noteholders do not agree to
commercially acceptable amendments of the Group's financial
covenants under the Existing Finance Agreements, the Group may seek
alternative long-term committed debt facilities to replace the
Facility Agreement and/or refinance amounts outstanding under the
US Notes and enable the repayment of its indebtedness, including
any make-whole premiums. The terms of any such new facilities, if
available at all, would likely be more expensive and onerous than
those which currently apply under the Existing Finance Agreements,
and which would apply under the amendments if the Rights Issue
proceeds to completion. If alternative committed debt facilities
could not be secured on commercially acceptable terms, or at all,
then the Group could try to secure other forms of funding, such as
through a new equity restructuring, which may result in a dilution
of Existing Shareholders' equity interests in the Company. The
Group could take action to effect disposals of assets, such as the
disposal of one or more of the Group's businesses to facilitate a
reduction of the Group's outstanding indebtedness. However, the
Existing Finance Agreements restrict the Group's ability to make
any such disposals and the Group would need to receive the approval
of the Lenders and/or the US Noteholders to further amend the
Existing Finance Agreements, which could be withheld.
As any of these alternatives to the Rights Issue would require
the participation, agreement or approval of external parties, the
Directors are not confident that any such alternative courses of
action could be achieved in the limited time available, or that
they ultimately would be successful.
As a result, if the Rights Issue does not proceed to completion
and the Group is unable to secure amendments to its financial
covenants under the Existing Finance Agreements, and is unable to
avoid a breach of such financial covenants or refinance the Group's
indebtedness through the successful implementation of one or more
of the alternatives discussed above, then the Lenders and US
Noteholders may demand the accelerated repayment in full of any
amounts outstanding under the Existing Finance Agreements, in which
case Shareholders could lose all or part of the value of their
investment in the Company. Accordingly, the Directors believe that
the successful completion of the Rights Issue represents the best
option available to the Group.
15. Recommendation and voting intentions
The Board believes the Rights Issue and the Resolutions to be in
the best interest of Chemring and the Shareholders as a whole.
Accordingly, the Directors unanimously recommend that the
Shareholders vote in favour of the Resolutions to be proposed at
the General Meeting to approve the Rights Issue, as the Directors
each intend to do in respect of their own legal and beneficial
holdings, amounting to 408,680 Existing Shares (representing
approximately 0.21 per cent. of Chemring's existing issued ordinary
share capital as at 20 January 2016 (being the last practicable
date prior to the release of this announcement)).
APPENDIX 1
Expected timetable of principal events
2016 (2) (3)
Publication and posting 21 January 2016
of the Prospectus, the notice
of General Meeting and the
Form of Proxy
Record Date for entitlements close of business
under the Rights Issue on 05 February 2016
Latest time and date for 9.30 a.m. on 06 February
receipt of General Meeting 2016
Forms of Proxy
General Meeting 9.30 a.m. on 08 February
2016
Date of dispatch of Provisional 08 February 2016
Allotment Letters (to Qualifying
non-CREST Shareholders only(1)
)
Dealings in New Shares, 8.00 a.m. on 09 February
nil paid, commence on the 2016
London Stock Exchange
Shares marked ex-Rights 09 February 2016
Nil Paid Rights and Fully As soon as practicable
Paid Rights enabled in CREST after 8.00 a.m. on
09 February 2016
Recommended latest time 4.30 p.m. on 17 February
for requesting withdrawal 2016
of Nil Paid Rights or Fully
Paid Rights from CREST (i.e.
if your Nil Paid Rights
or Fully Paid Rights are
in CREST and you wish to
convert them into certificated
form)
Latest time and date for 3.00 p.m. on 18 February
depositing renounced Provisional 2016
Allotment Letters, nil paid
or fully paid, into CREST
or for dematerialising Nil
Paid Rights into a CREST
stock account
Latest time and date for 3.00 p.m. on 18 February
splitting Provisional Allotment 2016
Letters
Latest time and date for 11.00 a.m. on 23
(MORE TO FOLLOW) Dow Jones Newswires
January 21, 2016 02:00 ET (07:00 GMT)
acceptance and payment in February 2016
full and registration of
renounced Provisional Allotment
Letters
Expected date of announcement 24 February 2016
of results of the Rights
Issue through a Regulatory
Information Service
Dealings in the New Shares 8.00 a.m. on 24 February
to commence on the London 2016
Stock Exchange fully paid
New Shares credited to CREST As soon as practicable
stock accounts (uncertificated after 8.00 a.m. on
holders only(1) ) 24 February 2016
Despatch of definitive share by no later than
certificates for New Shares 08 March 2016
in certificated form (to
Qualifying non-CREST Shareholders
only(1) )
Notes:
(1) Subject to certain restrictions relating to Overseas
Shareholders. See paragraph 2.5 of Part III "Terms and Conditions
of the Rights Issue" in the Prospectus.
(2) The times and dates set out in the expected timetable of
principal events above and mentioned throughout the Propsectus, by
announcement through a Regulatory Information Services, and in the
Provisional Allotment Letter may be adjusted by the Company, in
which event details of the new dates will be notified to the FCA
and to the London Stock Exchange and, where appropriate, to
Shareholders.
(3) References to times in this announcment are to London time unless otherwise stated.
APPENDIX 2
Definitions and Glossary of Technical Terms
"Admission" admission of the New Shares,
nil paid, to (a) the Official
List, and (b) trading on the
London Stock Exchange's main
market for listed securities
"Barclays" Barclays Bank PLC
"Board" the board of directors, from
time to time, of the Company
"certificated" a share or other security which
or "in certificated is not in uncertificated form
form" (that is, not in CREST)
"Circular to the circular to shareholders
Shareholders" in connection with the Resolutions
and including the General Meeting
Notice incorporated in the Prospectus
"Co-Bookrunner" Barclays
"Company" or Chemring Group PLC, a public
"Chemring" limited company incorporated
under the laws of England and
Wales
"CREST" the relevant system (as defined
in the CREST Regulations) for
the paperless settlement of trades
in listed securities in the United
Kingdom, of which Euroclear Limited
is the operator (as defined in
the CREST Regulations)
"Directors" or the Executive Directors and Non--Executive
"Board" Directors of the Company as at
the date of the Prospectus
"Disclosure and the Disclosure Rules and Transparency
Transparency Rules of the Financial Conduct
Rules" Authority
"DoD" US Department of Defense
"EBITDA" earnings before interest, taxes,
depreciation, and amortisation
"Excluded Territories" the Commonwealth of Australia,
its territories and possessions,
Canada, Japan and the Republic
of South Africa
"Executive Directors" the executive directors of the
Company as at the date of the
Prospectus
"Existing Finance UK Club Facility Documents and
Agreements" US Note Purchase Agreements
"Existing Shares" the existing Shares in issue
immediately preceding the issue
of the New Shares
"Facility Agreement" Chemring's unsecured, multi-currency
revolving credit facility entered
into on 31 July 2014
"Financial Adviser" Rothschild
"Financial Conduct the Financial Conduct Authority
Authority" or acting in its capacity as the
"FCA" competent authority for the purposes
of Part VI of the FSMA
"Form of Proxy" the form of proxy for use by
Shareholders in connection with
the General Meeting
"FSMA" the Financial Services and Markets
Act 2000, as amended
"Fully Paid Rights" rights to acquire New Shares,
fully paid
"General Meeting" the general meeting of the Company
to be held at 9:30 a.m. on 8
February 2016, notice of which
is set out in the Circular to
Shareholders
"General Meeting the notice of General Meeting
Notice" set out in the Circular to Shareholders
"Group" or the the Company and its subsidiary
"Chemring Group" undertakings and, where the context
requires, its associated undertakings
"Investec" Investec Bank plc
"ISIN" International Securities Identification
Number
"Issue Price" 94 pence
"J.P. Morgan J.P. Morgan Securities plc (which
Cazenove" conducts its UK investment banking
services as J.P. Morgan Cazenove)
"Joint Bookrunners" Investec and J.P. Morgan Cazenove
"Joint Global Investec and J.P. Morgan Cazenove
Coordinators"
"Joint Sponsors" Investec and J.P. Morgan Cazenove
"Lenders" main lenders under the Group's
UK Club Facility Documents
"Listing Rules" the listing rules of the FCA
"London Stock London Stock Exchange plc
Exchange"
"MoD" UK Ministry of Defence
"NATO" North Atlantic Treaty Organization
"New Shares" the 85,915,828 new Shares which
the Company will allot and issue
pursuant to the Rights Issue,
including, where appropriate,
the Provisional Allotment Letters,
the Nil Paid Rights and the Fully
Paid Rights
"Nil Paid Rights" rights to acquire New Shares,
nil paid
"Non--Executive the non--executive directors
Directors" of the Company as at the date
of the Prospectus
"Official List" the Official List of the FCA
"Overseas Shareholders" Qualifying Shareholders with
registered addresses in, or who
are citizens, residents or nationals
of jurisdictions outside the
United Kingdom
Prudential Regulation Prudential Regulation Authority
Authority" or
"PRA"
"Prospectus" the Prospectus and circular issued
or "this document" by the Company in respect of
the Rights Issue, together with
any supplements or amendments
thereto
"Prospectus Rules" the Prospectus Rules of the FCA
"Provisional the provisional allotment letter
Allotment Letter" to be issued to Qualifying non--CREST
Shareholders (other than certain
Overseas Shareholders)
"Qualifying CREST Qualifying Shareholders holding
Shareholders" Shares in uncertificated form
"Qualifying non--CREST Qualifying Shareholders holding
Shareholders" Shares in certificated form
"Qualifying Shareholders" Shareholders on the register
of members of the Company at
close of business on the Record
Date with the exclusion of persons
with a registered address or
located or resident in an Excluded
Territory or, subject to certain
exceptions, the United States
"Record Date" close of business on 5 February
2016
"Regulation S" Regulation S under the Securities
Act
"Resolutions" the resolutions to be proposed
at the General Meeting, notice
of which is set out at the back
of the Prospectus, to (amongst
other matters) give the Directors
authority to allot the New Shares
"Rights Issue" the offer by way of rights to
Qualifying Shareholders to subscribe
for New Shares, on the terms
and conditions set out in the
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