Blue Sky expert report on Oaktree deal: ‘not fair but reasonable’

A SPECIAL funding deal involving shares for bloodied fund manager Blue Sky is a bitter pill for investors but it is better if they swallow it, according to an independent expert.

”Not fair but reasonable”: independent expert of Blue Sky’s bitter financial pill

• Blue Sky seals tough deal from Oaktree
• 2017 flashback: Why are things wrong at Blue Sky fund?

A SPECIAL funding deal involving shares for Blue Sky is a bitter pill for investors but it is better if they swallow it, according to an independent expert.

That’s because of the critical circumstances bedevilling the Brisbane-based fund manager, the expert said.

The assessment of the deal, a proposed $50 million funding line from Oaktree Capital that can be partly converted into shares, was: “Not fair but reasonable”. It was provided among a string of announcements from Blue Sky Alternative Investments on Thursday.

Those announcements included acting chief executive officer Kim Morison no longer being a candidate for the permanent job, chief financial officer Matthew Whyte resigning and long-serving director Phil Hennessy planning to resign.

But chairman John Kain, who has steered Blue Sky in the run up and slide down of its share price, plans to remain on the board temporarily despite stepping down from the chairman’s role. The board believed it “important that there be a continuing ‘corporate memory’ at all times” and a number of directors had left, Mr Kain said in a note to shareholders.

Blue Sky’s stockmarket listed fund also is rebadging away from the company’s tainted name, only calling itself the Alternative Markets Access Fund. Further, the fund would drop Blue Sky as manager for an entity backed by Pinnacle Investment Management, and invest in more than just Blue Sky-run assets.

Blue Sky manages more than 80 funds, with assets from student accommodation to a burrito chain.

Once a market darling with stock at $14.99, shareholder faith crumbled in March after short-sellers, who make money from stock falling, questioned the figures behind Blue Sky’s seemingly highly successful performance.

While maintaining its figures’ accuracy, Blue Sky lost $86 million in 2018 and had trouble pulling in new capital.

So California-based investment firm Oaktree, known for extracting tough deals, offered a $50 million loan with caveats — getting the top mortgage, 15 per cent interest on the loan, triggers for calling in their money and converting the finance into up to 30 per cent of Blue Sky’s stock at $1.87 per share.

That last conversion clause needs shareholder support at Blue Sky’s annual general meeting on November 19, so experts Grant Thornton were hired to assess the deal.

They valued Blue Sky’s shares, if the company was being fully taken over, at between $2.56 and $3.06. The value of shares on a minority basis, if the deal went through and new stock was issued, was lower at between $1.94 and $2.22. That meant the proposed issue of shares was therefore not fair, Grant Thornton said.

It was still “reasonable”, they said, with “the proposed issue provid(ing) new capital that is essential for (Blue Sky) to return to its business as usual state”.

Blue Sky was currently “significantly constrained” in its ability to invest and its reputation “adversely affected”, the report said.

But Oaktree, if it converted parts of the loan into shares, would become a cornerstone investor and provide operational support, the report said.

Grant Thornton noted their valuation was based on a fair market value — in which the company involved was a willing party. “However (Blue Sky) can be described as an anxious party,” Grant Thornton said.

Other financial lifeline options could have included seeking to raise new funds from existing investors. But the report noted that directors thought “the appetite (would be) limited” after the company tapped investors for $100 million at $11.50 a share only in March.

Blue Sky stock closed at $1.165 on Thursday.

Grant Thornton also pointed out Blue Sky stock had been hammered again after 2018’s full year results in late August, which showed that net tangible assets were $1.70 per share. That was “significantly lower” than Blue Sky’s estimates of $2.06 given in June.