And yesterday, the penny appeared to finally drop for R&Q shareholders that the group is in a parlous state. The share price – which traded at 190 pence in February 2021 and was subject to a 175 pence per share buyout offer last year – collapsed over 50 percent and closed at a measly 24 pence.
In early trading today, it is down a further 20 percent to 19 pence.
This is because the headline sale price ($465mn) only pays down circa half the debt, there will be no shareholder distribution and the the loss of the profitable Accredited crown jewels leaves a legacy rump with more operational losses in the pipeline and reputational issues following the decision to put Brandywine into receivership. (Will other counterparties sell their legacy liabilities if they fear R&Q will one day decide to stop paying their claims?)
Projected NTA post-bifurcation is a modest 79 cents, or 65 pence, per share – but this does not appear to take into account the $188.8mn+ of letter of credit guarantees and charges supporting collateral to Lloyd’s and other cedants. Nor, obviously, does it account for the prospect of more heavy losses to come – to put in context, R&Q lost an eye-watering $297mn in 2022 and recorded a further $58mn operating loss in H1 2023.
In other words, it is unclear just how much equity there is remaining in the business.
To rub salt into shareholders’ wounds, the management duo who have presided over the last three years – William Spiegel and his CFO Tom Solomon – are hot-footing it over to Accredited and its new owner Onex as part of the deal. They leave a much-diminished business behind but have pocketed millions of dollars in bonuses, pay and stock awards during their three-year reign.
Indeed, Spiegel’s remuneration has been a touchy and controversial subject for much of his tenure. For example, Phoenix Asset Management – one of R&Q’s original shareholders when it listed in 2007 – claimed last year during the activist battle that the reason the 175 pence a share buyout offer was suddenly withdrawn by fellow shareholder Brickell was because of the discovery that Spiegel pushed through a further $6mn+ of executive bonuses despite being asked by the acquirer not to do so.
R&Q never explained the reasons for the collapsed offer but it was revealing that the firm subsequently paid $1.75mn to settle breach of contract allegations (ordinarily, if a buyer withdraws the offer suddenly it is they who pay compensation).
Remarkably, the original offer in 2022 was actually 220 pence a share before more losses came to light and it was reduced to 175 pence per share.
It’s all a fairly miserable state of affairs and especially so when one adds in the repeated AM Best downgrade threats, the emergency capital raises and the heavy losses. But arguably the long-suffering shareholders have to take a share of the blame. After all, they had options to change things last year following the failed attempt to unseat Spiegel by Brickell (and Phoenix) but rejected them.
The shareholders could still block the Accredited sale, of course. But the 20 October announcement made it very clear that this would likely lead to an accelerated terminal decline as the banks and debt-holders would step in and Accredited would likely lose its rating.
“But arguably the long-suffering shareholders have to take a share of the blame”
“A potential default or cross-default by R&Q on its existing debt facilities may lead its lenders to take action to protect their interests by requiring collateral or enforcing their security over certain R&Q assets, resulting in a materially worse outcome for R&Q and its shareholders,” warned the group.
A Hobson’s choice, in other words.
After the failure of the buyout offer and activist campaign, the company’s then two largest shareholders Phoenix and Brickell began selling down their positions. This strategy saved them from yesterday’s financial blood-letting.
This is not the case for the remaining shareholders, including Slater Investments – the UK fund manager that initially supported the rebel shareholders before changing horses and backing the board.
Yesterday, the penny finally dropped for them – indeed that is precisely what R&Q stock appears to be in danger of becoming. And the management duo that allowed this to happen are waving goodbye…
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