£80.8 million Rights Issue

 

NOT FOR PUBLICATION, RELEASE OR DISTRIBUTION, DIRECTLY OR INDIRECTLY, IN WHOLE OR IN PART, IN OR INTO THE UNITED STATES OF AMERICA, AUSTRALIA, CANADA, JAPAN AND THE REPUBLIC OF SOUTH AFRICA OR ANY OTHER JURISDICTION IN WHICH IT WOULD BE UNLAWFUL TO DO SO. PLEASE SEE THE IMPORTANT NOTICE AT THE END OF THIS ANNOUNCEMENT 

 

THIS ANNOUNCEMENT IS AN ADVERTISEMENT AND DOES NOT CONSTITUTE A PROSPECTUS OR PROSPECTUS EQUIVALENT DOCUMENT. NOTHING HEREIN SHALL CONSTITUTE AN OFFERING OF NEW SHARES. NOTHING IN THIS ANNOUNCEMENT SHOULD BE INTERPRETED AS A TERM OR CONDITION OF THE RIGHTS ISSUE. ANY DECISION TO PURCHASE, SUBSCRIBE FOR, OTHERWISE ACQUIRE, SELL OR OTHERWISE DISPOSE OF ANY NIL PAID RIGHTS, FULLY PAID RIGHTS OR NEW SHARES MUST BE MADE ONLY ON THE BASIS OF THE INFORMATION CONTAINED IN AND INCORPORATED BY REFERENCE INTO THE PROSPECTUS ONCE PUBLISHED. COPIES OF THE PROSPECTUS WILL, FOLLOWING PUBLICATION, BE AVAILABLE FROM THE REGISTERED OFFICE OF CHEMRING GROUP PLC AND ON ITS WEBSITE AT WWW.CHEMRING.CO.UK.

 

21 January 2016

 

Chemring Group PLC ("Chemring" or the "Company")

4 for 9 fully underwritten £80.8 million Rights Issue

Further to the announcement on 26 October 2015, the Board of Chemring Group PLC today announces a fully underwritten rights issue to raise gross proceeds of approximately £80.8 million to reduce its indebtedness. Chemring's full year results for the financial year ended 31 October 2015 have also been released today in a separate announcement.

Reasons for the Rights Issue and use of proceeds:

 

·      The Rights Issue is being pursued in order to assist the Group with reducing its indebtedness thereby enabling additional time and resources to be made available for further operational improvement and adequate investment in fully capturing the longer term growth opportunities available to the Group.

·      US Noteholders and the Group's banking syndicates have provided waivers and variations to amend the operation of the relevant covenants to ensure the Group remains in compliance with its Existing Finance Agreements; these amendments only serve as a short-term solution that would not fundamentally address the Group's balance sheet and capitalisation concerns over the longer term.

·      The Board believes that the appropriate leverage target for the Group over the medium-term is a net debt to EBITDA ratio of between 1.0x and 1.5x as the Group's annual average; the proposed rights issue is a critical step towards achieving this target.

·      Net proceeds of £75.2 million will be used to redeem £48.5 million in aggregate principal amount of the US Notes, with the balance used for make-whole premiums, waiver fees and general corporate purposes with the Board having regard to future debt maturities.

 

Update on current trading

·      Full year results for the year ended 31 October 2015, released today, are in line with revised, lower expectations set out in 26 October 2015 statement

·      The Board's expectations for the current financial year, and significant H2 weighting, remain unchanged

 

Details of the rights issue

·      The Rights Issue is a fully underwritten 4 for 9 rights issue at a price of 94 pence per New Share.

·      The Issue Price represents a 38.2 per cent. discount to the theoretical ex-rights price of an Existing Share, when calculated by reference to the closing middle-market price of 178 pence per Existing Share on 20 January 2016 (being the last business day prior to the date of this announcement).

·      The Rights Issue, which is subject to shareholder approval, is fully underwritten by Investec and J.P. Morgan Cazenove acting as Joint Sponsors, Joint Global Coordinators and Joint Bookrunners and Barclays as Co-Bookrunner.

 

Michael Flowers, Chief Executive, commented:

 

"The recent progress of the Group has been impeded by its high levels of debt and associated interest costs. Significant time and effort has been spent managing this debt at the expense of further operational improvement. The proposed Rights Issue gives us a solid foundation to address these high levels of debt and provides a competitive capital structure for the future. With an encouraging outlook for the Group, we are excited about the potential to better capture the growth opportunities available to Chemring."

 

Documentation

 

·      The Prospectus containing full details of the Rights Issue is expected to be posted to shareholders and made available on www.chemring.co.uk shortly.

·      The Prospectus will be submitted to the National Storage Mechanism and will be available for inspection at www.morningstar.co.uk/uk/nsm shortly.

 

Indicative abridged timetable:
Publication and posting of the Prospectus, the Notice of General Meeting and the Form of Proxy	21 January 2016
Record Date for entitlements under the Rights Issue	close of business on 05 February 2016
Latest time and date for receipt of General Meeting Forms of Proxy	9.30 a.m. on 06 February 2016
General Meeting	9.30 a.m. on 08 February 2016
Date of dispatch of Provisional Allotment Letters	08 February 2016
Dealings in New Shares, nil paid, commence on the London Stock Exchange	8.00 a.m. on 09 February 2016
Shares marked ex-Rights	09 February 2016
Latest time and date for acceptance and payment in full and registration of renounced Provisional Allotment Letters	11.00 a.m. on 23 February 2016
Dealings in the New Shares to commence on the London Stock Exchange fully paid	8.00 a.m. on 24 February 2016

Capitalised terms used in this announcement shall have the meanings set out in Appendix 2 of this announcement.

- ENDS -

 

Enquiries:

 

Chemring Group PLC
Michael Flowers	Group Chief Executive	+44 (0)1794 833 901
Steve Bowers	Group Finance Director
Rupert Pittman	Group Director of Corporate Affairs
MHP Communications
Andrew Jaques		+44 (0)20 3128 8100
John Olsen
James White
Rothschild (Financial Adviser)
John Deans		+44 (0)20 7820 5000
Richard Sedlacek
Investec Bank PLC (Joint Sponsor, Joint Global Co-ordinator and Joint Bookrunner)
Keith Anderson		+44 (0)20 7597 4000
Christopher Baird
Carlton Nelson
J.P. Morgan Cazenove (Joint Sponsor, Joint Global Co-ordinator and Joint Bookrunner)
Robert Constant		+44 (0)20 7742 4000
Laurene Danon
Steve Smith

 

Barclays (Co-Bookrunner)

Barry Myers

+44 (0)20 7773 2500

Ben West

 

 

IMPORTANT NOTICE

 

This announcement has been issued by and is the sole responsibility of Chemring. The information contained in this announcement is for background purposes only and does not purport to be full or complete.  No reliance may or should be placed by any person for any purpose whatsoever on the information contained in this announcement or on its accuracy or completeness.  The information in this announcement is subject to change.

 

This announcement is not a prospectus but an advertisement and investors should not acquire any Nil Paid Rights, Fully Paid Rights or New Shares referred to in this announcement except on the basis of the information contained in the Prospectus to be published by Chemring in connection with the Rights Issue. The information contained in this announcement is for background purposes only and does not purport to be full or complete. The information in this announcement is subject to change.

 

A copy of the Prospectus will, following publication, be available from the registered office of Chemring and on Chemring's website at www.Chemring.co.uk. The Prospectus is not, subject to certain exceptions, available (through the website or otherwise) to Shareholders in the United States or the Commonwealth of Australia, its territories and possessions, Canada, Japan and the Republic of South Africa (each an "Excluded Territory"). Neither the content of Chemring's website nor any website accessible by hyperlinks on Chemring's website is incorporated in, or forms part of, this announcement. The Prospectus will provide further details of the New Shares, the Nil Paid Rights and the Fully Paid Rights being offered pursuant to the Rights Issue.

 

This announcement does not contain or constitute an offer to sell or the solicitation of an offer to purchase securities to any person with a registered address in, or who is resident in, an Excluded Territory or in any jurisdiction in which such an offer or solicitation is unlawful. None of the securities referred to herein have been or will be registered under the relevant laws of any state, province or territory any Excluded Territory. Subject to certain limited exceptions, none of these materials will be released, published, distributed or forwarded in or into an Excluded Territory.

 

This announcement does not contain or constitute an offer for sale or the solicitation of an offer to purchase securities in the United States. The securities referred to herein have not been and will not be registered under the Securities Act or with any securities regulatory authority of any state or jurisdiction of the United States, and may not be offered or sold in the United States absent registration under the Securities Act or an available exemption from, or transaction not subject to, the registration requirements of the Securities Act. There will be no public offer of the securities in the United States. None of the New Shares, the Nil Paid Rights, the Fully Paid Rihts, the PAL or the Form of Proxy, this announcement or any other document connected with the Rights Issue has been or will be approved or disapproved by the United States Securities and Exchange Commission or by the securities commissions of any state or other jurisdiction of the United States or any other regulatory authority, and none of the foregoing authorities or any securities commission has passed upon or endorsed the merits of the offering of the New Shares, the Nil Paid Rights, the Fully Paid Rights, the PAL, the Form of Proxy or the accuracy or adequacy of this announcement or any other document connected with the Rights Issue. Any representation to the contrary is a criminal offence in the United States.

 

This announcement is for information purposes only and is not intended to and does not constitute or form part of any offer or invitation to purchase or subscribe for, or any solicitation to purchase or subscribe for, Nil Paid Rights, Fully Paid Rights or New Shares or to take up any entitlements to Nil Paid Rights in any jurisdiction. No offer or invitation to purchase or subscribe for, or any solicitation to purchase or subscribe for, Nil Paid Rights, Fully Paid Rights or New Shares or to take up any entitlements to Nil Paid Rights will be made in any jurisdiction in which such an offer or solicitation is unlawful. The information contained in this announcement is not for release, publication or distribution to persons in the United States or any other Excluded Territory, and should not be distributed, forwarded to or transmitted in or into any jurisdiction, where to do so might constitute a violation of local securities laws or regulations.

 

The Nil Paid Rights, the Fully Paid Rights, the New Shares and the Provisional Allotment Letters have not been and will not be registered under the Securities Act or under any securities laws of any state or other jurisdiction of the United States and may not be offered, sold, taken up, exercised, resold, renounced, transferred or delivered, directly or indirectly, within the United States except pursuant to an applicable exemption from or in a transaction not subject to the registration requirements of the Securities Act and in compliance with any applicable securities laws of any state or other jurisdiction of the United States. There will be no public offer of the Nil Paid Rights, the Fully Paid Rights or the New Shares in the United States.

 

The distribution of this announcement into jurisdictions other than the United Kingdom may be restricted by law, and, therefore, persons into whose possession this announcement comes should inform themselves about and observe any such restrictions. Any failure to comply with any such restrictions may constitute a violation of the securities laws of such jurisdiction. In particular, subject to certain exceptions, this announcement, the Prospectus (once published) and the Provisional Allotment Letters (once printed) should not be distributed, forwarded to or transmitted in or into the United States or any other Excluded Territory.

 

Recipients of this announcement and/ or the Propsectus should conduct their own investigation, evaluation and analysis of the business, data and property described in this announcement and/or if and when published the Prospectus.  This announcement does not constitute a recommendation concerning any investor's options with respect to the Rights Issue. The price and value of securities can go down as well as up. Past performance is not a guide to future performance. The contents of this announcement are not to be construed as legal, business, financial or tax advice. Each Shareholder or prospective investor should consult his, her or its own legal adviser, business adviser, financial adviser or tax adviser for legal, financial, business or tax advice.

 

Notice to all investors

 

J.P. Morgan Securities plc (which conducts its UK investment banking services as "J.P. Morgan Cazenove") and N M Rothschild & Sons Limited ("Rothschild") are authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Investec Bank plc ("Investec") is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.  Barclays Bank plc ("Barclays") is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority J.P. Morgan Cazenove, Investec, Barclays and Rothschild are acting for Chemring and are acting for no one else in connection with the Rights Issue and will not regard any other person as a client in relation to the Rights Issue and will not be responsible to anyone other than Chemring for providing the protections afforded to their respective clients, nor for providing advice in connection with the Rights Issue or any other matter, transaction or arrangement referred to herein.

 

Apart from the responsibilities and liabilities, if any, which may be imposed on J.P. Morgan Cazenove and Investec in their capacities as Joint Sponsors by the FSMA, none of J.P. Morgan Cazenove, Investec, Barclays or Rothschild accept any responsibility or liability whatsoever and make no representation or warranty, express or implied, for the contents of this announcement, including its accuracy, fairness, sufficiency, completeness or verification or for any other statement made or purported to be made by it, or on its behalf, in connection with Chemring or the Nil Paid Rights, Fully Paid Rights, Provisional Allotment Letters, New Shares or the Rights Issue and nothing in this announcement is, or shall be relied upon as, a promise or representation in this respect, whether as to the past or future. Each of J.P. Morgan Cazenove, Investec, Barclays and Rothschild accordingly disclaims to the fullest extent permitted by law all and any responsibility and liability whether arising in tort, contract or otherwise (save as referred to above) which it might otherwise have in respect of this announcement or any such statement. Each of J.P. Morgan Cazenove, Investec, Barclays and Rothschild and/or their affiliates provides various investment banking, commercial banking and financial advisory services from time to time to Chemring.

 

No person has been authorised to give any information or to make any representations other than those contained in this announcement and the Prospectus and, if given or made, such information or representations must not be relied on as having been authorised by Chemring or J.P. Morgan Cazenove, Investec, Barclays and Rothschild. Subject to the Listing Rules, the Prospectus Rules and the Disclosure and Transparency Rules of the Financial Conduct Authority, the issue of this announcement shall not, in any circumstances, create any implication that there has been no change in the affairs of Chemring since the date of this announcement or that the information in it is correct as at any subsequent date.

 

J.P. Morgan Cazenove, Investec and Barclays and their respective affiliates, acting as investors for their own accounts, may, in accordance with applicable legal and regulatory provisions, engage in transactions in relation to the Nil Paid Rights, the Fully Paid Rights, the New Shares and/or related instruments for their own account for the purpose of hedging their underwriting exposure or otherwise. Accordingly, references in the Prospectus to the Nil Paid Rights, Fully Paid Rights or New Shares being issued, offered, subscribed, acquired, placed or otherwise dealt in should be read as including any issue or offer to, or subscription, acquisition, placing or dealing by, J.P. Morgan Cazenove, Investec and Barclays and any of their respective affiliates acting as investors for their own accounts. Except as required by applicable law or regulation, J.P. Morgan Cazenove, Investec and Barclays do not propose to make any public disclosure in relation to such transactions.

 

Cautionary statement regarding forward-looking statements

 

This announcement may contain certain forward-looking statements, beliefs or opinions, with respect to the financial condition, results of operations and business of Chemring and the Group.

 

These statements, which contain the words "anticipate", "believe", "intend", "estimate", "expect", "may", "will", "seek", "continue", "aim", "target", "projected", "plan", "goal," "achieve" and words of similar meaning, reflect the Company's beliefs and expectations and are based on numerous assumptions regarding the Company's present and future business strategies and the environment the Company and the Group will operate in and are subject to risks and uncertainties that may cause actual results to differ materially. No representation is made that any of these statements or forecasts will come to pass or that any forecast results will be achieved. Forward-looking statements involve inherent known and unknown risks, uncertainties and contingencies because they relate to events and depend on circumstances that may or may not occur in the future and may cause the actual results, performance or achievements of the Company or the Group to be materially different from those expressed or implied by such forward looking statements. Many of these risks and uncertainties relate to factors that are beyond the Company's or the Group's ability to control or estimate precisely, such as increased competition, the loss of or damage to one or more key customer relationships, changes to customer ordering patterns, delays in obtaining customer approvals for engineering or price level changes, the failure of one or more key suppliers, the outcome of business or industry restructuring, the outcome of any litigation, changes in economic conditions, currency fluctuations, changes in interest and tax rates, changes in raw material or energy market prices, changes in laws, regulations or regulatory policies, developments in legal or public policy doctrines, technological developments, the failure to retain key management, or the key timing and success of future acquisition opportunities or major investment projects. Past performance of the Company cannot be relied on as a guide to future performance. As a result, you are cautioned not to place undue reliance on such forward-looking statements. The list above is not exhaustive and there are other factors that may cause the Company's or the Group's actual results to differ materially from the forward-looking statements contained in this announcement. Forward-looking statements speak only as of their date and the Company, its parent and subsidiary undertakings, the subsidiary undertakings of such parent undertakings, J.P. Morgan Cazenove, Investec, Barclays and Rothschild and any of such persons' respective directors, officers, employees, agents, affiliates or advisers expressly disclaim any obligation to supplement, amend, update or revise any of the forward-looking statements made herein, except where it would be required to do so under applicable law.

 

You are advised to read this announcement and the Prospectus (once published) in their entirety for a further discussion of the factors that could affect Chemring's future performance. In light of these risks, uncertainties and assumptions, the events described in the forward-looking statements in this announcement may not occur.

No statement in this announcement is intended as a profit forecast or a profit estimate and no statement in this announcement should be interpreted to mean that earnings per share of Chemring for the current or future financial years would necessarily match or exceed the historical published earnings per share of Chemring.

 

 

 

 

Proposed 4 for 9 Rights Issue of 85,915,828 New Shares at 94 pence per New Share

1.         Introduction

The Board of Chemring announces today that it intends to raise approximately £80.8 million (before expenses) by way of a rights issue. A prospectus is to be sent to shareholders shortly.

 

2.         Background to and reasons for the Rights Issue

2.1        Background

During the period from 2005 to 2011 when global defence markets were growing strongly on the back of conflict, particularly in the Middle East and Afghanistan, Chemring grew rapidly through a series of acquisitions which were predominantly debt funded. The Group shifted much of its focus through acquisition towards sensors, electronics and detection equipment. By February 2012, when the United States had started to withdraw its troops from those regions, Chemring's net debt was approximately £340.0 million, predominantly in the form of loan notes issued via a series of US private placements. As these major conflicts subsided, there followed a significant decline in global defence spending, which has impacted the Group.

 

Steve Bowers was appointed Group Finance Director in January 2013, and Michael Flowers was appointed Group Chief Executive in June 2014. The Board has since been focused on reducing Chemring's debt burden, restructuring the cost base, driving operational improvements and repositioning the Group to take advantage of available opportunities for growth. In 2014, following a strategic review, Chemring disposed of its European munitions business and other assets, generating gross proceeds of £137.1 million. Of the net proceeds, £101.7 million were applied in the early repayment of US Notes in June and September 2014, to reduce the gross debt position and to lower ongoing interest charges. In July 2014, the Company refinanced its Facility Agreement providing committed funding to 2018.

 

The Group has been streamlined operationally including reducing overheads within the businesses, the removal of its divisional structure, closure of four corporate and administrative offices and a 50.0 per cent. reduction in corporate headcount, which has delivered approximately £10.0 million per annum in savings. Several of the businesses have been integrated, including the combination and restructuring of Chemring Energetic Devices' operations in Torrance and Downers Grove and the combination of Non-Intrusive Inspection Technology ("NIITEK") and Chemring Detection Systems in the Sensors & Electronics division. Similarly, the separation of the Roke contract R&D business from Chemring Technology Solutions' product business resulted in additional overhead savings in the 2015 financial year. There is further scope to integrate businesses and consolidate sites which is expected to reduce costs and release capital over the medium term, including the closure of Chemring Energetic Devices' Torrance sites (expected to deliver approximately $5.0 million in annual overhead costs savings) in the 2018 financial year and the anticipated Alloy Surfaces' Plant 2 closure in the 2017 financial year which is enabled by an investment of approximately $3.0 million at Alloy Surfaces' remaining production facility and is expected to be required to support this and is expected to deliver approximately $1.4 million in annual cost savings from the 2018 financial year. There is also further corporate restructuring to be carried out in North America which is expected to reduce costs and promote greater collaboration among the Group's businesses.

 

The removal of the divisional structure and the integration of businesses has improved responsiveness, accountability and collaboration across the Group. The sharing of knowledge and best practice has enhanced production and safety performance, and shared and closer customer interaction and insight has improved the Group's anticipation of and reaction to changes in customer needs.

 

The Group's portfolio and segmental strategies have been aligned to meet future demand, and this focus has delivered significant results against a challenging defence market.

 

Much of Chemring's growth between 2005 and 2011 was driven through the success of key US programmes including the Husky Mounted Detection System ("HMDS"), ground penetrating radar ("GPR"). As a result of the success of these products, they are currently transitioning through research and development phases, prior to becoming long-term Programs of Record, which are programs that are approved and funded across the DoD's Future Year Defense Program through its Program of Memorandum. In the future, as a core capability, these Programs of Record will be funded by the DoD's base budget.

 

Chemring has achieved key strategic wins on these long-term US programmes including being awarded the sole source Engineering and Manufacturing Development contract to design the next generation HMDS A2; being confirmed as the sole source provider for the Joint Biological Tactical Detection System ("JBTDS"); being down-selected on all three variants of the Next Generation Chemical Detection ("NGCD") development programme; and being the sole qualified supplier for the global F-35 fleet with Chemring Australia progressing well in its efforts to become a second source.

 

While significant progress has been made, the transition through research and development phases and the resulting pause in manufacturing for some of the Group's key sensors and electronics products has resulted in a temporary decline in earnings derived from these products. To counteract both this, and the pause in demand from its traditional US and UK customer base, Chemring has sought to target opportunities in other markets, particularly for the sale of its Sensors & Electronics products, with a focus on growing sales to customers based in the Middle East and Asia-Pacific.

 

During the financial year ended 31 October 2015, negotiations surrounding the supply of US Sensors & Electronics products into NATO countries and the Middle East were substantively progressed, however the receipt of orders was and continues to be slower than anticipated and as a result Sensors & Electronics reported an underlying profit of £9.3 million for the year ended 31 October 2015 (2014: £31.9 million; 2013: £44.7 million) on revenue of £99.1 million (2014: £154.4 million; 2013: £211.3 million).

 

At its interim results in June 2015, Chemring announced that since the period ending 30 April 2015, orders exceeding £50.0 million had been received, primarily for supply to customers in the Middle East. Included within this order intake was a significant award for the provision of non-standard ammunition under a US government contract, which was expected to be wholly fulfilled in the 2015 financial year. In a trading update issued on 14 September 2015, the Group announced that this order was to be terminated for convenience by the US government. The loss of this contract was, however, anticipated to be offset in part by profits from a recently received order, valued in excess of £100.0 million, relating to the supply of 40mm ammunition to a Middle East customer. At that time, the order for 40mm ammunition was expected to contribute both to the 2015 financial year results and to future financial years.

 

On 26 October 2015, Chemring announced that, notwithstanding whether the 40mm contract delivered the revenue and profit in the year ended 31 October 2015 previously expected, the Board had concluded that in any event it was in the best interests of the Group to significantly reduce its structural indebtedness and that the appropriate leverage target for the Group over the medium-term would be a net debt to EBITDA ratio of between 1.0x and 1.5x as the Group's annual average. As a result, the Board intended to undertake a rights issue to raise up to £90 million, conditional on securing covenant waivers from the Group's debt providers as a result of the reduction in the Group's profit and cash positions. The proposed rights issue was fully underwritten on a standby basis by Investec and J.P. Morgan Cazenove, the Group's joint brokers. The standby agreement contained customary representations and warranties, undertakings, conditions, and termination rights.

 

On 25 November 2015, Chemring announced that its trading performance for the year ended 31 October 2015 remained in line with guidance given in the trading update issued on 26 October 2015. Revenue in the final quarter of the 2015 financial year was £124.8 million, resulting in revenue for the year ended 31 October 2015 of £377.3 million (2014: £403.1 million). The Group also confirmed that no revenue or cash advance payment in respect of the 40mm ammunition contract to the Middle East, as disclosed in the 26 October 2015 trading update, was recognised for the year ended 31 October 2015, and that the export approvals associated with the contract have now been granted, and revenues on this contract are expected to commence once the cash advance is received. At 31 October 2015, the Group's order book was £569.6 million (2014: £486.8 million). Additionally, the Group announced that its net debt at 31 October 2015 was £154.3 million (2014: £135.6 million), just below the lower end of the £155-165 million range set out in the 26 October 2015 trading update.

 

Additionally, the Group announced that it had reached agreement with Esterline Corporation ("Esterline") to buy patents, equipment, stock and selected contracts relating to Esterline's UK-based subsidiary, Wallop Defence Systems Limited, for an initial cash consideration of £2.5 million. Additional payments of up to £9.0 million, which are conditional on the receipt of specific orders in the future, may be made over the next three years. The assets to be purchased relate to air countermeasures and pyrotechnic products, which, pending regulatory approval, will be manufactured at Chemring's existing UK operations and further expand the Group's product offerings in Countermeasures. Completion of the transaction, which is subject to approval by the MoD and the UK Competition and Markets Authority ("CMA"), is expected to occur in the second quarter of the 2016 financial year.

 

Chemring also announced that positive discussions, in relation to the waiver of any event of default that may have arisen from the matters described in the 26 October 2015 trading update and amendments to the operation of covenants, were continuing with the banks providing the Group's revolving credit facility and its loan note holders. The 25 November 2015 trading update also confirmed the Group's continued preparations for the proposed rights issue of up to £90 million described in the 26 October 2015 trading update, and that the proposed rights issue was anticipated to be launched in the first quarter of the 2016 financial year alongside the Group's 2015 financial year results.

 

Following the receipt of the export approvals, in the period since 31 October 2015, the Group provided a loan of $5.0 million to its distributor in anticipation, and to avoid delay for reasons under the Group's control, of receipt of the cash advance payment

 

2.2        Reasons for the Rights Issue

Whilst the Board's priority to date has been to effect the operational improvements referred to above, the recent progress of the Group has been impeded by its high level of debt and associated interest costs. Significant financial costs, including costs associated with the Group's previous debt covenant renegotiations, have been incurred and management time has been spent managing this debt, at the expense of further operational improvement and adequate investment in fully capturing the longer term growth opportunities open to the Group. Furthermore, the uneven timing of the Group's contracts coupled with challenging markets and the constraints of the financial covenant tests in the Group's existing finance agreements made it difficult for the Group to operate.

 

The Board considered a number of options before deciding to pursue the Rights Issue, including negotiating amendments to the Existing Finance Agreements without undertaking an equity capital raising, disposals of non-core assets and a smaller, non-preemptive placing of shares and/or waivers. However, predominantly due to timing concerns, which drove the stand-by nature of the Rights Issue, as well as the limited number of assets viewed as non-core and amount of funds that would be raised by the other options, the Board determined that the Rights Issue was in the best interest of the Group going forward.

 

The Board has sought and received confirmation from the banks providing its debt facilities and from holders of its US Notes ("US Noteholders") that they have amended the operation of relevant covenants, such that the Group expects to remain in compliance with the terms of its Existing Finance Agreements. This expectation is dependent on the Group strengthening its capital structure through the proposed Rights Issue. While the Group is, as at the most recent test date (31 October 2015), in compliance with the unmodified financial covenants in its Existing Finance Agreements, and has agreed an unconditional waiver and variation of certain maximum leverage ratios under its Existing Finance Agreements for the 31 January 2016 test date, there is minimal headroom under a reasonable worst case scenario with no Rights Issues proceeds and therefore a risk that the Group will exceed the unmodified maximum leverage ratios permitted under the Existing Finance Agreements as at 30 April 2016 and subsequent quarterly test dates if the Rights Issue does not proceed. Any breach of these covenants would entitle the Group's lenders and US Noteholders to demand accelerated payment in full of the relevant amounts (principal and other items) outstanding (£238.5 million as at 31 December 2015) following the issuance of a compliance certificate from the Group notifying the breach (which would be required, should a breach occur, to be delivered no later than 14 June 2016 in respect of the UK Club Facility Documents and 21 May 2016 in respect of the US Note Purchase Agreements, being the deadlines for the Group's certification of covenant compliance for the 30 April 2016 test date).

 

The Board accordingly believes it is in the best interests of the Group to significantly reduce its structural indebtedness and that the appropriate leverage target for the Group over the medium-term is a net debt to EBITDA ratio of between 1.0x and 1.5x as the Group's annual average. The proposed rights issue is a critical step towards achieving this medium-term target.

 

In addition to substantially reducing the risk of financial covenant breach, a more appropriate capital structure will allow management to spend less time managing the Group's financial covenants and more time on the business. It will also enable the Group to pursue certain growth initiatives and further cost reduction over the medium-term including, among other things: investment in the modernisation of facilities to enable further site consolidation, including the expected Torrance facility and the Alloy plant 2 closures in the 2018 and 2017 financial years respectively; new product investments and R&D; supply chain and inventory management; and small scale accretive acquisitions that would strengthen existing market positions or capabilities. Furthermore, if the Group's debt rating improves due to the reduction in its indebtedness, the Group may be able to obtain better pricing for future refinancings, expected in the financial years ended 31 October 2017, 2018 and 2019, respectively, than would be the case if the Rights Issue did not occur.

 

3.         Use of proceeds

The Rights Issue is expected to raise £80.8 million in gross proceeds.

 

Of the expected approximate £75.2 million of net proceeds from the Rights Issue, the Group expects to redeem or repurchase a minimum of £48.5 million in aggregate principal amount of the US Notes, with the balance of the net proceeds to be used for make whole premiums pursuant to the terms of the US Note Purchase Agreements (£4.8 million), waiver fees (£1.6 million), and general corporate purposes with the Board having regard to the scheduled repayment of any amount outstanding of its $80 million 5.26 per cent. notes due 19 November 2016. 

 

4.         Financial impact of the Rights Issue

Had the Rights Issue taken place (and had part of the proceeds been used to reduce the Group's borrowings) as at the last balance sheet date, being 31 October 2015, the effect on the balance sheet would have been an increase in cash and cash equivalents of £20.3 million, and an increase in share capital and share premium totalling £75.2 million. The Group's pro forma net debt to Consolidated EBITDA ratio as at 31 October 2015 would have reduced from 2.83x as reported, to 1.63x taking into account the receipt of the net proceeds of the Rights Issue and the repayment of debt under the US Notes.

 

Your attention is also drawn to Part VII "Unaudited Pro Forma Financial Information" of the Prospectus to be published shortly which contains an unaudited pro forma statement of net assets that illustrates the effect of the Rights Issue and the repayment of debt under the US Notes on the Group's net assets as at 31 October 2015 as if the Rights Issue had been undertaken at that date.

 

5.         Terms of the Rights Issue and of the New Shares

The Company is proposing to raise approximately £75.2 million (net of expenses) pursuant to the Rights Issue. The Rights Issue is being fully underwritten by the Underwriters, subject to certain customary conditions. The principal terms of the underwriting agreement are summarised in paragraph 16.1 of Part IX "Additional Information" of the Prospectus. The Issue Price of 94 pence per New Share represents a discount of approximately 47.2 per cent. to the closing middle market price of 178 pence per Existing Share on 20 January 2016, the latest Business Day prior to the announcement of the Rights Issue and an approximate 38.2 per cent. discount to the theoretical ex-rights price of 152.15 pence per New Share by reference to the closing middle market price on the same basis.

 

Subject to the fulfilment of, among other things, the conditions set out below, Chemring will offer 4 New Shares to Qualifying Shareholders at an Issue Price of 94 pence per Share, payable in full on acceptance. The Rights Issue will be offered on the basis of:

 

4 New Shares at 94 pence per New Share for every 9 Existing Shares

held on the Record Date, and so in proportion to any other number of Existing Shares then held and otherwise on the terms and conditions set out in the Prospectus. Qualifying Non-CREST Shareholders with registered addresses in the United States or any of the Excluded Territories will not be sent Provisional Allotment Letters and Qualifying CREST Shareholders in such territories will not have their CREST stock accounts credited with Nil Paid Rights, except where Chemring and the Underwriters are satisfied that such action would not result in the contravention of any registration or other legal or regulatory requirement in such jurisdiction and, in the case of Canada, pursuant to and in compliance with such procedures as the Company may approve.

Fractions of New Shares will not be allotted to any Qualifying Shareholders, and, where necessary, fractional entitlements to New Shares will be rounded down to the nearest whole number.

The New Shares will, when issued and fully paid, rank pari passu in all respects with the Existing Shares.

The Rights Issue is conditional, among other things, upon:

(i)         the passing of the Resolutions at the General Meeting without material amendment;

(ii)         Admission of the New Shares becoming effective by not later than 8.00 a.m. on 9 February 2016 (or such later time and/or date as the parties to the Underwriting Agreement may agree);

(iii)        none of the warranties of Chemring under the Underwriting Agreement (in the good faith opinion of either of the Joint Global Co-orindators) being untrue, inaccurate or misleading at the date of the Prospectus and at the time of Admission;

(iv)        save to the extent not material in the context of the Rights Issue, the underwriting of the New Shares or the applications for Admission, Chemring having complied with its obligations under the Underwriting Agreement;

(v)         no material adverse change having occurred in respect of Chemring (together with its subsidiaries and subsidiary undertakings) prior to Admission; and

(vi)        no matter requiring a supplement to the Prospectus having arisen between the time of publication of the Prospectus and Admission and no such supplement being published by Chemring before Admission which, in each case, in the good faith opinion of the either of the Joint Global Coordinators (having consulted with Chemring where reasonably practicable), is materially adverse in the context of Chemring (together with its subsidiaries and subsidiary undertakings) or the Rights Issue.

The Rights Issue is fully underwritten by the Underwriters pursuant to the Underwriting Agreement. The principal terms of the Underwriting Agreement are summarised in Part IX "Additional Information" of the Prospectus.

 

The Rights Issue will result in 85,915,828 New Shares being issued (representing approximately 44.4 per cent. of the existing issued share capital and 30.8 per cent. of the enlarged issued share capital immediately following completion of the Rights Issue).

 

The New Shares, when issued and fully paid, will rank pari passu in all respects with the existing issued Shares, including the right to receive dividends or distributions made, paid or declared after the date of issue of the New Shares. Application will be made to the FCA and to the London Stock Exchange for the New Shares to be admitted to the Official List and to trading on the London Stock Exchange. It is expected that Admission will occur and that dealings in the New Shares (nil paid) on the London Stock Exchange will commence at 8.00 a.m. on 9 February 2016.

Some questions and answers, together with details of further terms and conditions of the Rights Issue, including the procedure for acceptance and payment and the procedure in respect of rights not taken up, will be set out in Parts II and III of the Prospectus and where relevant will also be set out in the Provisional Allotment Letter.

 

Overseas Shareholders should refer to paragraph 2.5 of Part III "Terms and Conditions of the Rights Issue" of the Prospectus for further information on their ability to participate in the Rights Issue.

 

6.         Information relating to Chemring

The Group is a global defence technology company focused on the development and manufacture of Countermeasures, Sensors & Electronics, and Energetic Systems for the aerospace, defence and security markets. The Group offers a diverse portfolio of products that deliver high reliability solutions to protect people, platforms, missions and information against constantly-changing threats. Operating in niche markets and with strong investment in research and development, the Company has the agility to rapidly react to urgent customer needs. The Group employs approximately 3,000 people at fifteen facilities in the United States, the United Kingdom, Australia and Norway, the Group meets demanding customer requirements in defence and security markets in more than 50 countries worldwide.

 

In the year ended 31 October 2015, Chemring reported an underlying profit before tax of £19.8 million (2014: £28.1 million; 2013: £36.5 million) on revenue of £377.3 million (2014: £403.1 million; 2013: £472.3 million). Net assets as at 31 October 2015 were £290.6 million (as at 31 October 2014: £300.3 million; as at 31 October 2013: £383.8 million). Net debt as at 31 October 2015 was £154.3 million (as at 31 October 2014: £135.6 million; as at 31 October 2013: £248.7 million). As at 31 December 2015, the Group's net debt was £195.6 million.

Countermeasures

The Group is the world leader in the design, development and manufacture of advanced expendable countermeasures and countermeasure suites for protecting air, sea and land platforms against guided missile threats. The Group has a broad product range including conventional flares; advanced flares; special material decoys; chaff; naval countermeasures; electronic intelligence equipment; and off-board electronic radio frequency countermeasures.

Sensors & Electronics

In Sensors & Electronics, Chemring serves niche requirements to detect explosive, chemical and biological threats, neutralise improvised explosive devices ("IEDs") and prosecute land-based electronic warfare (detecting, intercepting and jamming electronic communications). The Group also provides research and development services to UK government agencies, including cyber-security consulting services, and is developing network security solutions for civilian use.

Energetic Systems

Chemring is a leading manufacturer of high-quality, high-reliability, energetic subsystems that meet the demanding requirements of mission critical systems in the aerospace, space and defence markets. Applications include emergency egress, missile components and satellite separation systems.

 

Chemring also produces a specialist range of military pyrotechnics and high explosive products, including mine-field clearance systems, demolition stores and 40mm ammunition.

 

7.         Current trading and prospects in respect of Chemring

The Board's expectations for the current financial year remain unchanged. 

 

Trading since the start of the current financial year has been below management's expectations; although order intake remains robust. Revenue has been impacted in part due to rephasing of deliveries. Some customer acceptance delays at the end of the previous financial year have continued but are expected to be resolved shortly, and specific production and contract finalisation issues will result in the phasing of some revenue to later in the current financial year. The first quarter of the Group's financial year typically has a low level of revenues and that is again expected this financial year.

 

The order book as at 31 October 2015 increased 17.0 per cent. to £569.6 million, of which £330.9 million is currently expected to be recognised as revenue in the 2016 financial year, representing approximately 75.0 per cent. of the expected revenue of approximately £450.0 million for the 2016 financial year. Included within the order book at 31 October 2015 is £103.0 million in respect of the major 40mm order secured by Chemring Ordnance in the 2015 financial year. The order book as at 31 December 2015 was £600.5 million.

 

The multi-year revenues associated with the 40mm contract to supply 40mm ammunition to a Middle East customer are expected to commence in the first half of the current financial year once the cash advance payment is received from the Group's customer and this contract is expected to provide significant contribution to the current financial year. As previously announced, the 40mm contract is expected to result in the Group's financial performance for the current financial year being weighted towards the Energetic Systems segment, with a lower contribution from Sensors & Electronics while its US operations focus on research and development activity under long-term Programs of Record.

 

The expected profile of orders, revenue and margins mean that the Group continues to expect the current financial year to reflect a significant second half weighting.

 

Assuming the successful completion of the proposed Rights Issue, the Group would expect to benefit from a reduction in its future net finance expense from the date of receipt of proceeds of the proposed Rights Issue.

 

The Board expects the wider market backdrop for global defence spending to be one of slow recovery in 2016. The situation for US defence spending is more stable than it has been for some time, and ongoing geopolitical tensions in the Middle East and elsewhere emphasise the need for robust defence and security measures. The timing of Middle East order placement and contract activity remains difficult to predict, in part due to the impact that recent falls in the oil price are having on Government spending in the region. Nevertheless, our continued customer focus means the Group is well positioned to benefit from any sustained increase in demand in its markets.

 

8.         Board Changes

2015 was not an easy year for Chemring but, nevertheless, the Board remains committed to continuing to drive improvements in Chemring's performance. However, following announcement of the rights issue, it is believed to now be the time to reshape the membership of the Board. As a consequence, Peter Hickson has decided to stand down as Chairman, and from the Board, as soon as a suitable replacement has been identified and appointed. A process, run by the Nomination Committee using the services of an outside executive search consultancy, is under way and we expect a number of candidates to be considered for the position.

 

On the non-executive side, the Board is also seeking new directors. The Board has retained the services of a different executive search firm in order to identify suitable candidates. The process has been under way for some months but, due to the impending rights issue, the Board have not yet reached a position of being able to make any appointments. However, the process is continuing with a view to identifying well-qualified candidates.

 

From the current Board, Ian Much, the Senior Independent Director, will retire at the Annual General Meeting, as reported in last year's annual report. He will be succeeded as Senior Independent Director by Nigel Young, the Chairman of the Audit Committee.  The Board would like to thank Ian for his very significant contribution to the Chemring Board over his many years of service and wish him well for the future. In addition, Andy Hamment has indicated that, for personal reasons, he also intends to stand down from the Board as soon as a replacement can be appointed.

 

9.         Intentions of the Directors

The Directors, who hold in aggregate 408,680 Existing Shares, representing 0.21 per cent. of Chemring's existing issued ordinary share capital as at 20 January 2016 (being the last practicable date prior to the publication of the Prospectus), each intend to take up their rights in full or in part in respect of the New Shares to which they are entitled or, where their Shares are held in trust or with nominees, such Chemring Directors intend to recommend that such rights be taken up in full or in part.

10.        Dividends and dividend policy

In view of the proposed Rights Issue, the Board is not recommending a final dividend in respect of the year to 31 October 2015. The total dividend in respect of the 2015 financial year will therefore be the interim dividend of 2.4p (2014: 4.1p).

In addition, the Board does not currently intend to propose an interim dividend in respect of the six month period ending 30 April 2016.

The Board recognises that dividends are an important component of total shareholder returns. The Board intends to propose a final dividend for FY16, assuming it is prudent to do so, and to continue paying dividends thereafter.

11.       Waiver and amendments to the Existing Finance Agreements

11.1      Introduction

On 12 January 2016, Chemring reached an agreement with its Lenders and its US Noteholders to amend and/or waive application of the financial covenants Chemring is subject to under the respective agreements for the 12 month calculation periods existing at 31 October 2015 and 31 January 2016.

11.2      UK Club Facility Documents

The changes made to the financial covenants under the UK Club Facility Documents were, in summary:

·          Changing its interest cover ratio from 4.00x to 3.50x; and

·          Changing its net debt leverage covenant from 3.00x to 3.90x,

 

for the test dates as at 31 October 2015 and 31 January 2016 only.

These amendments are conditional on the Company raising gross proceeds of at least £75,000,000 through the Rights Issue, receiving at least such amount no later than 31 March 2016.

The Lenders have also agreed to unconditionally (whether or not the Rights Issue proceeds) change the net debt leverage ratio from 3.00x to 3.50x for the test date of 31 January 2016 only.

In addition, the Company's Lenders also waived any default that may have arisen under the Company's UK Club Facility Documents occasioned by a material adverse change being revealed by the matters set out in the trading announcement issued on 27 October 2015 or which might have triggered as a cross-default to the extent the US Note Purchase Agreements may otherwise be in default due to a breach of the financial covenants applicable under such agreements as at 31 October 2015.

The agreement reached with the Lenders also states that it will be an event of default if one of the following occurs:

·          the Rights Issue does not proceed and Chemring is in breach of:

o  the interest cover ratio of 4.00x as at 31 October 2015;

o  the net debt leverage covenant of 3.00x as at 31 October 2015;

o  the interest cover ratio of 4.00x as at 31 January 2016; or

o  the net debt leverage ratio cover ratio of 3.50x as at 31 January 2016; or

·          the Rights Issue does proceed and Chemring is in breach of:

o  the interest cover ratio of 3.50x as at 31 October 2015;

o  the net debt leverage covenant of 3.90x as at 31 October 2015;

o  the interest cover ratio of 3.50x as at 31 January 2016; or

o  the net debt leverage ratio cover ratio of 3.90x as at 31 January 2016.

 

11.3      US Note Purchase Agreements

The changes made to the financial covenants under the US Note Purchase Agreements were, in summary, changing its total debt leverage cover ratio from 3.75x to 4.00x for the test dates as at 31 October 2015 and 31 January 2016 only and waiving the adjusted debt covenant for 31 October 2015.

These amendments (save as noted below) are conditional on the Company raising gross proceeds of at least £75,000,000 through the Rights Issue, receiving at least such amount no later than 31 March 2016 and at least 60.0 per cent. of the gross proceeds of the Rights Issue being applied in prepayment of amounts outstanding under the US Note Purchase Agreements by no later than 29 April 2016.

The US Noteholders have also agreed to unconditionally (whether or not the Rights Issue proceeds) change the adjusted debt leverage ratio from 3.00x to 4.00x for the test date of 31 January 2016 only, subject to a payment by the Company of an additional waiver and variation fee of 60bps (approximately £1.0 million) of the outstanding amounts should the Rights Issue not proceed.

A process whereby the Company may run a tender process to offer the whole or part proceeds of the Rights Issue in prepayment to the US Noteholders has also been agreed.

12.        Admission of the New Shares

The New Shares will be issued credited as fully paid on completion of the Rights Issue and will rank pari passu in all respects with the Existing Shares. Chemring will apply for admission of the New Shares to the premium listing segment of the Official List of the UK Listing Authority and to listing on the London Stock Exchange's main market for listed securities ("Admission"). It is expected that Admission of the Nil Paid Rights will take place on 9 February 2016.

 

The Existing Shares are already admitted to the premium listing segment of the Official List and to trading on the London Stock Exchange's main market for listed securities and to CREST. It is expected that all of the New Shares, when issued and fully paid, will be capable of being held and transferred by means of CREST. The New Shares will trade under ISIN GB00B45C9X44 and the SEDOL number of the New Shares is B45C9X4. The ISIN for the Nil Paid Rights is GB00BYVXM652 and the ISIN for the Fully Paid Rights is GB00BYVXM769.

13.        Overseas Shareholders

The attention of Qualifying Shareholders who have registered addresses outside the United Kingdom, or who are citizens or residents of countries other than the United Kingdom, or who are holding Shares for the benefit of such persons (including, without limitation, custodians, nominees, trustees and agents) or who have a contractual or other legal obligation to forward the Prospectus, a Provisional Allotment Letter and any other document in relation to the Rights Issue to such persons, is drawn to the information which will appear in section 2.5 of Part III "Terms and Conditions of the Rights Issue" of the Prospectus.

 

New Shares will be provisionally allotted (nil paid) to all Qualifying Shareholders, including Overseas Shareholders. However, subject to certain exceptions, Provisional Allotment Letters will not be sent to Qualifying non-CREST Shareholders with registered addresses, or who are resident or located, in the United States, nor will the CREST stock account of Qualifying CREST Shareholders with registered addresses, or who are resident or located, in the United States be credited with Nil Paid Rights. Any person with a registered address, or who is resident or located, in the United States who obtains a copy of the Prospectus or a Provisional Allotment Letter is required to disregard them, except with the consent of the Company.

 

Notwithstanding any other provision of the Prospectus or the Provisional Allotment Letter, the Company reserves the right to permit any Qualifying Shareholder to take up his rights if the Company in its sole and absolute discretion is satisfied that the transaction in question will not violate applicable laws.

 

In addition, persons who have registered addresses in or who are resident in, or who are citizens of, countries other than the United Kingdom should consult their professional advisers as to whether they require any governmental or other consents or need to observe any other formalities to enable them to take up their entitlements to the Rights Issue.

 

14.        Importance of your vote

Your attention is again drawn to the fact that the Rights Issue and, consequently, certain of the amendments and waivers to the Existing Finance Agreements are conditional and dependent upon, amongst other things, the Resolutions being passed at the General Meeting.

 

Shareholders are asked to vote in favour of the Resolutions at the General Meeting in order for the Rights Issue to proceed. The Directors believe that the Rights Issue will significantly strengthen the Group's balance sheet and that this will enable the Group to reduce its net debt, which is important to the future success of the Group.

 

However, if either of the Resolutions is not passed, the Rights Issue will not proceed and certain of the amendments to the Existing Finance Agreements do not become effective and the Group will be subject to the unmodified covenants under the Existing Finance Agreements. While the Group is, as at the most recent test date (31 October 2015), in compliance with the unmodified financial covenants in its Existing Finance Agreements, and has agreed an unconditional waiver and variation of certain maximum leverage ratios under its Existing Finance Agreements for the 31 January 2016 test date (subject to a payment by the Company of an additional waiver and variation fee of 60bps (approximately £1.0 million) of the outstanding amounts by 1 April 2016) should the Rights Issue not proceed there is minimal headroom under a reasonable worst case scenario with no Rights Issue proceeds and therefore a risk that the Group will exceed the unmodified maximum leverage ratios permitted under the Existing Finance Agreements as at 30 April 2016 and subsequent quarterly test dates if the Rights Issue does not proceed. Any breach of these covenants would entitle the Group's lenders and US Noteholders to demand accelerated payment in full of the relevant amounts (principal and other items) outstanding (£238.5 million as at 31 December 2015) following the issuance of a compliance certificate from the Group notifying the breach (which would be required, should a breach occur, to be delivered no later than 14 June 2016 in respect of the UK Club Facility Documents and 21 May 2016 in respect of the US Note Purchase Agreements, being the deadlines for the Group's certification of covenant compliance for the 30 April 2016 test date). Following any such demand, the Group does not expect to have the funds available to repay such amounts at that time. In such circumstances, in the absence of being able to successfully agree or implement any of the alternatives discussed below, the Group would be unable to continue as a going concern.

 

As a result, if the Rights Issue does not proceed, the Group would first seek to renegotiate the terms of the Existing Finance Agreements with the Lenders and Noteholders to secure further waivers of the financial covenants in order to avoid any such breach. However, the Group may be unable to obtain such waivers and amendments from the Lenders and/or US Noteholders either at all or without significant cost to the Group in the form of additional fees payable to the Lenders, increased coupon payments or additional restrictions on corporate actions (e.g. acquisitions and disposals), which could adversely affect or delay implementation of the Group's strategies. Without the proceeds of the Rights Issue, any amendments to the Existing Finance Agreements would only serve as a short-term solution that would not fundamentally address the Group's balance sheet and capitalisation concerns in the longer term.

 

If the Lenders and/or US Noteholders do not agree to commercially acceptable amendments of the Group's financial covenants under the Existing Finance Agreements, the Group may seek alternative long-term committed debt facilities to replace the Facility Agreement and/or refinance amounts outstanding under the US Notes and enable the repayment of its indebtedness, including any make-whole premiums. The terms of any such new facilities, if available at all, would likely be more expensive and onerous than those which currently apply under the Existing Finance Agreements, and which would apply under the amendments if the Rights Issue proceeds to completion. If alternative committed debt facilities could not be secured on commercially acceptable terms, or at all, then the Group could try to secure other forms of funding, such as through a new equity restructuring, which may result in a dilution of Existing Shareholders' equity interests in the Company. The Group could take action to effect disposals of assets, such as the disposal of one or more of the Group's businesses to facilitate a reduction of the Group's outstanding indebtedness. However, the Existing Finance Agreements restrict the Group's ability to make any such disposals and the Group would need to receive the approval of the Lenders and/or the US Noteholders to further amend the Existing Finance Agreements, which could be withheld.

 

As any of these alternatives to the Rights Issue would require the participation, agreement or approval of external parties, the Directors are not confident that any such alternative courses of action could be achieved in the limited time available, or that they ultimately would be successful.

 

As a result, if the Rights Issue does not proceed to completion and the Group is unable to secure amendments to its financial covenants under the Existing Finance Agreements, and is unable to avoid a breach of such financial covenants or refinance the Group's indebtedness through the successful implementation of one or more of the alternatives discussed above, then the Lenders and US Noteholders may demand the accelerated repayment in full of any amounts outstanding under the Existing Finance Agreements, in which case Shareholders could lose all or part of the value of their investment in the Company. Accordingly, the Directors believe that the successful completion of the Rights Issue represents the best option available to the Group.

15.        Recommendation and voting intentions

The Board believes the Rights Issue and the Resolutions to be in the best interest of Chemring and the Shareholders as a whole. Accordingly, the Directors unanimously recommend that the Shareholders vote in favour of the Resolutions to be proposed at the General Meeting to approve the Rights Issue, as the Directors each intend to do in respect of their own legal and beneficial holdings, amounting to 408,680 Existing Shares (representing approximately 0.21 per cent. of Chemring's existing issued ordinary share capital as at 20 January 2016 (being the last practicable date prior to the release of this announcement)).

 

 

 

 

 

 

 

 

 

APPENDIX 1

 

 

Expected timetable of principal events

 

 

 

	2016 (2) (3)
Publication and posting of the Prospectus, the notice of General Meeting and the Form of Proxy	21 January 2016
Record Date for entitlements under the Rights Issue	close of business on 05 February 2016
Latest time and date for receipt of General Meeting Forms of Proxy	9.30 a.m. on 06 February 2016
General Meeting	9.30 a.m. on 08 February 2016
Date of dispatch of Provisional Allotment Letters (to Qualifying non-CREST Shareholders only(1))	08 February 2016
Dealings in New Shares, nil paid, commence on the London Stock Exchange	8.00 a.m. on 09 February 2016
Shares marked ex-Rights	09 February 2016
Nil Paid Rights and Fully Paid Rights enabled in CREST	As soon as practicable after 8.00 a.m. on 09 February 2016
Recommended latest time for requesting withdrawal of Nil Paid Rights or Fully Paid Rights from CREST (i.e. if your Nil Paid Rights or Fully Paid Rights are in CREST and you wish to convert them into certificated form)	4.30 p.m. on 17 February 2016
Latest time and date for depositing renounced Provisional Allotment Letters, nil paid or fully paid, into CREST or for dematerialising Nil Paid Rights into a CREST stock account	3.00 p.m. on 18 February 2016
Latest time and date for splitting Provisional Allotment Letters	3.00 p.m. on 18 February 2016
Latest time and date for acceptance and payment in full and registration of renounced Provisional Allotment Letters	11.00 a.m. on 23 February 2016
Expected date of announcement of results of the Rights Issue through a Regulatory Information Service	24 February 2016
Dealings in the New Shares to commence on the London Stock Exchange fully paid	8.00 a.m. on 24 February 2016
New Shares credited to CREST stock accounts (uncertificated holders only(1))	As soon as practicable after 8.00 a.m. on 24 February 2016
Despatch of definitive share certificates for New Shares in certificated form (to Qualifying non-CREST Shareholders only(1))	by no later than 08 March 2016

Notes:

(1)     Subject to certain restrictions relating to Overseas Shareholders. See paragraph 2.5 of Part III "Terms and Conditions of the Rights Issue" in the Prospectus.

(2)     The times and dates set out in the expected timetable of principal events above and mentioned throughout the Propsectus, by announcement through a Regulatory Information Services, and in the Provisional Allotment Letter may be adjusted by the Company, in which event details of the new dates will be notified to the FCA and to the London Stock Exchange and, where appropriate, to Shareholders.

(3)     References to times in this announcment are to London time unless otherwise stated.

 

 

 

 

 

APPENDIX 2

 

Definitions and Glossary of Technical Terms

 

 

"Admission"	admission of the New Shares, nil paid, to (a) the Official List, and (b) trading on the London Stock Exchange's main market for listed securities
"Barclays"	Barclays Bank PLC
"Board"	the board of directors, from time to time, of the Company
"certificated" or "in certificated form"	a share or other security which is not in uncertificated form (that is, not in CREST)
"Circular to Shareholders"	the circular to shareholders in connection with the Resolutions and including the General Meeting Notice incorporated in the Prospectus
"Co-Bookrunner"	Barclays
"Company" or "Chemring"	Chemring Group PLC, a public limited company incorporated under the laws of England and Wales
"CREST"	the relevant system (as defined in the CREST Regulations) for the paperless settlement of trades in listed securities in the United Kingdom, of which Euroclear Limited is the operator (as defined in the CREST Regulations)
"Directors" or "Board"	the Executive Directors and Non‑Executive Directors of the Company as at the date of the Prospectus
"Disclosure and Transparency Rules"	the Disclosure Rules and Transparency Rules of the Financial Conduct Authority
"DoD"	US Department of Defense
"EBITDA"	earnings before interest, taxes, depreciation, and amortisation
"Excluded Territories"	the Commonwealth of Australia, its territories and possessions, Canada, Japan and the Republic of South Africa
"Executive Directors"	the executive directors of the Company as at the date of the Prospectus
"Existing Finance Agreements"	UK Club Facility Documents and US Note Purchase Agreements
"Existing Shares"	the existing Shares in issue immediately preceding the issue of the New Shares
"Facility Agreement"	Chemring's unsecured, multi-currency revolving credit facility entered into on 31 July 2014
"Financial Adviser"	Rothschild
"Financial Conduct Authority" or "FCA"	the Financial Conduct Authority acting in its capacity as the competent authority for the purposes of Part VI of the FSMA
"Form of Proxy"	the form of proxy for use by Shareholders in connection with the General Meeting
"FSMA"	the Financial Services and Markets Act 2000, as amended
"Fully Paid Rights"	rights to acquire New Shares, fully paid
"General Meeting"	the general meeting of the Company to be held at 9:30 a.m. on 8 February 2016, notice of which is set out in the Circular to Shareholders
"General Meeting Notice"	the notice of General Meeting set out in the Circular to Shareholders
"Group" or the "Chemring Group"	the Company and its subsidiary undertakings and, where the context requires, its associated undertakings
"Investec"	Investec Bank plc
"ISIN"	International Securities Identification Number
"Issue Price"	94 pence
"J.P. Morgan Cazenove"	J.P. Morgan Securities plc (which conducts its UK investment banking services as J.P. Morgan Cazenove)
"Joint Bookrunners"	Investec and J.P. Morgan Cazenove
"Joint Global Coordinators"	Investec and J.P. Morgan Cazenove
"Joint Sponsors"	Investec and J.P. Morgan Cazenove
"Lenders"	main lenders under the Group's UK Club Facility Documents
"Listing Rules"	the listing rules of the FCA
"London Stock Exchange"	London Stock Exchange plc
"MoD"	UK Ministry of Defence
"NATO"	North Atlantic Treaty Organization
"New Shares"	the 85,915,828 new Shares which the Company will allot and issue pursuant to the Rights Issue, including, where appropriate, the Provisional Allotment Letters, the Nil Paid Rights and the Fully Paid Rights
"Nil Paid Rights"	rights to acquire New Shares, nil paid
"Non‑Executive Directors"	the non‑executive directors of the Company as at the date of the Prospectus
"Official List"	the Official List of the FCA
"Overseas Shareholders"	Qualifying Shareholders with registered addresses in, or who are citizens, residents or nationals of jurisdictions outside the United Kingdom
Prudential Regulation Authority" or "PRA"	Prudential Regulation Authority
"Prospectus" or "this document"	the Prospectus and circular issued by the Company in respect of the Rights Issue, together with any supplements or amendments thereto
"Prospectus Rules"	the Prospectus Rules of the FCA
"Provisional Allotment Letter"	the provisional allotment letter to be issued to Qualifying non‑CREST Shareholders (other than certain Overseas Shareholders)
"Qualifying CREST Shareholders"	Qualifying Shareholders holding Shares in uncertificated form
"Qualifying non‑CREST Shareholders"	Qualifying Shareholders holding Shares in certificated form
"Qualifying Shareholders"	Shareholders on the register of members of the Company at close of business on the Record Date with the exclusion of persons with a registered address or located or resident in an Excluded Territory or, subject to certain exceptions, the United States
"Record Date"	close of business on 5 February 2016
"Regulation S"	Regulation S under the Securities Act
"Resolutions"	the resolutions to be proposed at the General Meeting, notice of which is set out at the back of the Prospectus, to (amongst other matters) give the Directors authority to allot the New Shares
"Rights Issue"	the offer by way of rights to Qualifying Shareholders to subscribe for New Shares, on the terms and conditions set out in the Prospectus and, in the case of Qualifying non‑CREST Shareholders only, the Provisional Allotment Letter
"Rothschild"	N M Rothschild & Sons Limited
"Securities Act"	the US Securities Act of 1933, as amended
"SEDOL"	Stock Exchange Daily Official List
"Shareholders"	holders of Shares
"Shares"	ordinary shares of 1 pence each in the capital of the Company having the rights set out in the Articles as described in paragraph 3 of Part IX "Additional Information"
"UK" or "United Kingdom"	the United Kingdom of Great Britain and Northern Ireland
"UK Club Facility Documents"	facility documents for the Facility Agreement and bonding lines with Barclays Bank PLC and Santander UK plc
"Uncertificated" or "in uncertificated form"	recorded on the register of members as being held in uncertificated form in CREST and title to which, by virtue of the CREST Regulations, may be transferred by means of CREST
"Underwriters"	Investec, J.P. Morgan Cazenove and Barclays
"Underwriting Agreement"	the underwriting arrangements described in paragraph 16.0 of Part IX "Additional Information"
"United States" or "US"	the United States of America, its territories and possessions, any state of the United States and the District of Columbia
"US Note Purchase Agreements"	2007 Note Purchase Agreement and 2009 Note Purchase Agreement, collectively
"US Noteholders"	2007 Noteholders and 2009 Noteholders, collectively
"US Notes"	2007 Notes and 2009 Notes, collectively