This article first appeared in The Edge Malaysia Weekly, on December 26, 2016 - January 1, 2017.

ONE clear pattern that has emerged in analysing all the deals in the past 12 months involving three Singapore-listed companies — Asiasons Capital Ltd, Blumont Group Ltd and LionGold Corp Ltd— is the issue ofnew shares at highly inflated prices that most analysts agree were not justified by their financial fundamentals.

The big question is, why were there people who were prepared to accept these millions in paper money?

Take the case of US hedge fund Platinum Partners LP. Through a few funds it managed or is linked to, it would have to spend around US$560 million, or almost half of its reported US$1 billion fund size, to get stakes in Asiasons, LionGold and Blumont if all the proposed transactions went through.

These were the deals announced and their current status:

1  On Sept 17, Asiasons said it would place out 212.6 million new shares priced at S$1.1948 apiece to Platinum Partners Value Arbitrage Fund LP (PPVA), Carnegie Hall Group LLC, Spring Road Advisors LLC and Partner Growth Capital LLC. The four would pay a total of S$254 million cashand collectively own 17.68% of Asiasons. Carnegie Hall and Spring Road are related to Platinum Partners as their managing partners are also portfolio managers at the latter. On Oct 17,after the stock price collapsed, Asiasons announced that it did not have the mandate to proceed with the placement.

2  Also on Sept 17, Asiasons announced that it would buy a 27.5% stake in US offshore oil exploration company Black Elk Energy LLC for US$171.65 million (S$227 million) from PPVA via the issue of 194.6 million new Asiasons shares priced at S$1.1948 each. Of the amount, 53.1 million shares would be issued to Black Elk for 9.96 million Black Elk shares. The remaining 129.3 million shares (minus 12.2 million shares given to the introducer of the deal, Jett Capital Advisors) would go to PPVA. This transaction is now in limbo.

3  Platinum Partners Liquid Opportunity Fund (PPLO), Carnegie Hall and Spring Road were to spend US$162 million to take up a private placement of up to 180 million new LionGold shares at S$1.1097 apiece and 135 million new warrants at two Singapore cents each. This placement was called off after LionGold’s share price collapsed on Oct 4. 

4 On Oct 18, Blumont announced that it had secured a US$200 million funding from Platinum Partners via a convertible bond issue. 

Who is Platinum Partners and why would it commit so much cash to these three companies? 

PlatinumPartners was started by former natural gas trader Mark Nordlicht in 2001. In 2003, it started PPVA to take advantage of the rising price of crude oil. PPVA has a strategy to invest about 60% of its capital in a range of liquid trading opportunities and the balance in assets focusing on the mining, healthcare and energy sectors such as its investment in Black Elk.

In 2009, PPVA invested in Black Elk, which is an independent upstream oil and gas exploration and production company based in Houston, Texas, the US. The company was formed in end-2007. Its assets are located primarily in the Gulf of Mexico. As at end-June, it had an aggregate net interest in some 500,370 gross (242,240 net) acres under lease and an interest in 1,094 gross wells, 258 of which are producing. It claims to be producing 13,000 bpd of oil. Black Elk’s strategy is to invest in oil wells near the end of their shelf life that others want to abandon.

Platinum Partners is an early investor in Black Elk and now owns 84% of the oil and gas company through various funds under its management, the largest of which is PPVA. 

Whilst its investment in Black Elk generated smart returns for the fund in the early years, things have deteriorated quite a bit since then.

Black Elk reported a net loss of US$72.2 million last year and US$63.6 million in 1H2013. As at end-June, it had assets totalling US$577.5 million and liabilities totalling US$663.2 million, implying negative shareholder value of US$85.7 million.

Apart from lower prices for oil and natural gas in the US, Black Elk’s earnings were also affected by rising costs and lower production. Things went from bad to worse in November last year, when an explosion and fire occurred on one of its platforms in the Gulf of Mexico. Three workers were killed. The incident is now under investigation by the Bureau of Safety and Environmental Enforcement in coordination with the US Coast Guard. Results of the investigation could have serious repercussions for the company’s entire operations.

Black Elk is reportedly facing multiple civil suits related to the accident. These include two from injured workers — seeking actual and punitive damages totalling US$580 million — as well as suits from the families of the deceased, seeking unspecified amount in damages.

Moody’s Investor Service flagged Black Elk’s deteriorating liquidity position in June, downgrading its Corporate Family Rating to Caa2 from Caa1 with a negative outlook.

To sustain operations, Platinum Partners injected a further US$50 million into the company early this year — bringing its total investment to US$100 million, structured in the form of preferred shares. Black Elk also sold five producing fields for US$65 million this year. The company had cash of only US$12.8 million in end-June 2013.

Underscoring Black Elk’s financial difficulty, Platinum Partners (through another affiliate) bought over its US$25 million revolving credit facility in August — after the company breached some of the financial covenants in the agreement. The credit line was subsequently raised to US$29 million in September and further to US$42 million last month.

Based on its financial results to date, Black Elk anticipates that it will breach a covenant for its outstanding US$149 million secured notes by December. 

Not only does Black Elk need funding for its capital programme, it could also be forced to refinance the US$149 million bonds if it does breach the covenants there and, in the worst-case scenario, should the suits go against the company.

Clearly, more money would be needed over the coming months — perhaps more than what Platinum Partners is willing to invest in a single company. 

Why is Asiasons buying into a company that is facing such apparent operating challenges and is in financial distress? 

Compared with Blumont and LionGold, Asiasons hadbeen relatively quiet on the acquisition front, at least until two months ago. 

In August last year, the company acquired associate stakes in Posh Corridor and Portwell Investment for S$17.3 million. This was followed by the purchase of a 70% stake in Hub Media for S$5.8 million in March. Both purchases were settled via the issuance of new Asiasons shares, priced at 56.5 Singapore cents and 89.09 Singapore cents respectively.

It did, however, make a huge splash on Sept 17 — announcing the proposed acquisition of a 27.5% stake in Black Elk.

Asiasons’ share price started moving noticeably higher last year. Its market capitalisation rose from S$180.7 million in January 2012 to S$955 million in end-August 2013 — an amazing return by most yardsticks. This is particularly so, considering its poor earnings. 

The company reported a net profit of S$28.6 million last year, which included S$18.4 million in fair value gains on financial assets and S$11 million in write-back of other payables. It had a negative cash flow from operations of about S$7.8 million, while net assets stood at S$170.4 million in end-2012. 

In the absence of material fair value gains in 1H2013, Asiasons reported a net loss of S$1.6 million. The company had a net debt of S$13.7 million and net assets of S$177 million in end-June 2013.

From such lofty levels, Asiasons’ market capitalisation jumped even higher through September — after announcing the proposal to buy Black Elk — to S$2.65 billion (RM6.65 billion) on Oct 3.At this market capitalisation, Asiasons, which is just a private equity firm managing US$300 million in funds,was valued more than Bursa Malaysia, which has a market capitalisation of RM4.4 billion (S$1.8 billion), and one-third of the S$8 billion(RM20 billion)market capitalisation of Singapore Exchange.

Its share price rose from S$1.325 just before the announcement to S$2.05 at the close of the first trading day after the announcement. Its market capitalisation gain of S$710 million in just one day after the announcement implied a blue-sky valuation of more than US$2 billion for Black Elk. 

The proposed sale of a 27.5% stake in Black Elk to Asiasons values the oil and gas operator at roughly US$625 million. This would allow Platinum Partners to show a tidy return on its 84% investment in Black Elk, estimated at US$100 million.

If Asiasons is helping Platinum Partners reduce its exposure in Black Elk at a high valuation, the latter is returning the favour by recycling cash into the company.On the same day of Asiasons’ proposed acquisition of Black Elk, it also proposed to make a placement of 212.6 million shares at S$1.1948 to four investors, including PPVA. The deal was worth S$254 million cash to Asiasons.

Adding to the shares Platinum Partners was to receive from the sale of its shares in Black Elk, it should end up with roughly 28.3% (including deemed interest) of the enlarged share capital of Asiasons.

So, the two Asiasons-Platinum Partners transactions would profit both sides. Asiasons receives a US$254 million cash injection, while Platinum Partners gets a high valuation for Black Elk and ends up as a substantial shareholder of Asiasons with a 28.3% stake.This could give it a hand in managing the US$300 million Asiasons handles,including Asiasons Venture Fund and Dragonrider Opportunity Funds I andII.

And considering the placement price, Platinum Partners would have been sitting pretty on paper gains from its holding — if the share price of Asiasons had not collapsed on Oct 4.

Platinum Partners’ deals with Blumont and LionGold

Platinum Partners was not just investing in Asiasons.  In August, LionGold announced a proposed private placement to three investors — PPLO, Carnegie Hall Group and Spring Road Advisors. Each would take 60 million shares, priced at S$1.10907 apiece, and 45 million new warrants, priced at 6.5 Singapore cents, with an exercise price of S$1.1717. The deal would give the three a collective 16.1% stake in LionGold.

The placement will see Platinum Partners invest more than S$200 million in LionGold, without taking into account any proceeds from conversion of the warrants. 

On Oct 17, Platinum Partners agreed to subscribe for US$200 million of convertible bonds issued by Blumont, via PPVA.

What now?

Collectively, therefore, Platinum Partners would have invested up to US$560 million in Asiasons, Blumont and LionGold.This would represent more than half of its assets of US$1 billion. That appears to be a hefty bet on the three companies. 

The injection of fresh funds into the three companies by Platinum Partners are supposed to be monies for more acquisitions, which would perpetuate the positive sentiment surrounding their stocks, instilling greater investor confidence and, in turn, likely push their share prices even higher.

Such acquisitions over the past two years have had magnified impact on LionGold and Blumont’s share prices and more recently, that of Asiasons, well beyond the actual investment amounts. 

The “well-laid” plans were scuttled by the collapse in the share prices of the three companies on Oct 4. 

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