RJH writes...this follows-on from an original CC post here on the group's problems

There was some press comment yesterday to the effect that Sanctuary's two main lenders / bond holders would continue to support them pending a rescue rights issue of £130m. So is the group, at 1.93 pence a share, worth another look?

In August the group was described here as "a bet too far" at 9.5 pence. Now 80% cheaper the price reflects above all the firm's bankrupt (in all but name) state. Their main lenders are simply providing the life-support.

The amount of the latest life-support is £15m for working capital purposes pending the rights issue. The lenders, HBOS and the hedge fund Highbridge, must surely have delivered this at a significant cost to Sanctuary.

But just what cost? Presumably, HBOS have first call on all worthwhile assets (notably the back catalogue) in the event of failure and leverage over various operational aspects and appointments so long as the firm is a going concern. For their part, Highbridge got themselves an option exercisable in 2008 to buy 8.9 million shares at a 75% discount to market if Sanctuary's shares quadruple from the rights price.

Readers may wonder who pays for this. The short answer is existing shareholders who are taking it pretty ferociously from behind: Highbridge and HBOS have covered their risks (insofar as they can) for being such nice guys with the readies; but the dilution (assuming Sanctuary survive) will kill off earnings per share for shareholders for a time to come.

Then there is the core question of will £130m in rights (if taken up) save Sanctuary. The last - dodgy - debt figure from the 2004 accounts was £94m (with £72m of that long term). Since admitting those accounts were not completely fair and true that figure has been revised south.

It would be surprising if HBOS or Highbridge have not negotiated immediate partial loan repayment (ie capital) from amounts raised via the rights issue. How much cash that will leave the firm is an open question. Further, in terms of operations, the jury is out on whether recent changes in the Sanctuary team will improve the group's money management going forward.

Buying Sanctuary is purely speculative. Short-term, buyers may win if the group becomes a bit of a good story. Longer term, the data says they've got it all to do at the cash generation level. Full year results to end December may surprise on the upside - HBOS and Highbridge must have had a sniff of these prior to lending. But shareholders aren't lenders and they/buyers will have to pray it comes right.

If you are going to do it, wait post-rights and don't use the pension fund.

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