The Tribune

IN March 2017, Aliv raised an astonishing $60 million from investors - twice the amount they were looking for. That they require more money now, less than a year later, suggests that something has gone badly wrong.

This sudden need for funds has likely caught management by surprise. At Cable Bahamas' November annual general meeting (AGM), both Aliv and Cable management declined to divulge Aliv's average revenue per user (ARPU). That would have been needlessly secretive if they knew they were going to fully disclose ARPU in this month's offering memorandum anyway. More likely is that management had no intention of raising debt at this time (its $15 million preference share issue) but was caught off-guard by a weaker than expected Christmas quarter. That would make the current capital raise one of necessity, not of convenience - a warning sign for investors.

Whether planned or not, what matters now is whether Aliv will be able to repay current and future debt holders. As one of only two mobile operators in the country, Aliv's ultimate success still seems assured. After a year of badly missed forecasts, however, there is clearly more risk here than we believed in 2017.

Management's best path to reassuring investors is to be honest about what went wrong, and open about the assumptions underlying its current forecasts. Unfortunately, Aliv's offering memorandum misses that mark on both counts. First, with mobile number portability now in place for nine months and counting, blaming BTC and URCA for the stunning 28 per cent shortfall in ARPU versus plan ($33 at the end of December 2017 versus $46 as originally forecast) is no longer a reasonable excuse. Second, despite totalling 99 pages, the memorandum never addresses a key question: What can Aliv do to increase ARPU that it has not already tried? While it is reasonable to expect some ARPU improvement as corporate users increase, the forecast 70 per cent jump from $33 now to $56 in 2021 requires much more justification than we are given.

The ARPU growth assumption is particularly important because of an important disclosure on page 52 of the memorandum: Aliv is also in talks to take on $19.5 million in bank debt. Unlike preference share debt, bank debt comes with covenants, or 'strings attached', to protect the bank. In this case, the string that could unravel everything is that if total debt to EBITDA is above 5.2 by 2021, the bank would get first claim over Aliv's assets and cash flows. This would not occur under Aliv's current subscriber and ARPU assumptions.

However, if we stress management's assumptions by just 8 per cent - that is, if we assume 145,000 subscribers and $52 in ARPU instead of 158,000 and $56 - EBITDA would fall from $33 million to $17 million, and total debt to EBITDA would hit 5.6 times, clearly breaching the covenant. That could result in suspension of payments to bond and preference shareholders until the bank is satisfied. An 8 per cent stress test is by no means aggressive; 10 to 20 per cent is standard. If it is possible for Aliv to breach debt covenants at just 8 per cent below plan, then this is neither an offering investors should be clamouring for nor one that advisors should be recommending. However, if Aliv does indeed raise an extra $35 million from this offering, as rumoured, it most likely can avoid using the bank debt. That would certainly be a relief for current investors. Finally, Aliv's disappointing performance is of paramount interest to Cable Bahamas' common shareholders as well. Cable Bahamas points to ALIV as its future growth engine, and Cable management has said they would resume dividend payments to shareholders in fiscal year 2019. Aliv's continuing losses raise significant doubts about their ability to do that. In fact, Cable will very likely post their sixth straight quarter of multi-million-dollar losses within the next few days. Perhaps this will be the trigger for shareholders to finally demand a full and frank accounting for the Florida and Aliv operations, including details of their recent bank debt renegotiation and realistic timelines for a return to profitability and dividend payments. If management provides this information, shareholders of both Cable Bahamas and Aliv will likely remain patient for a while longer. After all, there is nothing wrong in asking shareholders to "believe in best". Just don't ask them to believe in fairytales.

A concerned investor