Investors in convertible debentures have won a significant victory that in all likelihood will end up a brand new standard, all to assist ensure their rights are fully protected come maturity time.
The victory became official now when Premium Brands Holdings Corp. raised $75 million by means of an offering of 4.65 percent five-year converts. The proceeds will help Vancouver-based Premium finance the $146 million takeover of Montreal based C&C Packing.
The breakthrough is detailed in 11 lines contained in the so-called term sheet. Under the section titled Restriction on Share Redemption Right, investors are told Premium “shall not, directly or indirectly undertake or announce any rights offering, [or] issuance of securities,” whereby the number and value of securities to become issued is “related” to the “exercise from the share redemption right or the current market price.”
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While the word what is complex, the result is the fact that when the maturity date rolls around, the issuers need to either redeem for money or shares. In other words there will be no funny business where say, a rights offering could be used to dilute the “value” of the shares being given towards the debenture holders.
Put it down as a response to the traumatic era of late last year at Calgary-based Perpetual Energy, where rather than paying out a maturing $50 million issue of seven percent convertible debentures in cash, the organization offered to redeem in stock (as is its right) simultaneously because it raised $25 million by way of a heavily discounted rights offering.
That rights offering was backed through the company’s chairman and largest shareholder. The holders of the convertibles were upset: the rights offering brought a brand new amount of uncertainty to a maturing convertible issue; there is a large distinction between the conversion price for that converts and also the “price” for new shares issued within the rights offering; they weren’t meant to be part of the rights offering; and thru the rights offering, control flowed towards the founder – and never them.
To illustrate: Perpetual issued 232.07 million shares to the holders from the convertible (to stay a $50 million obligation) and 665.4 million shares – about half which visited the chairman – to boost just $25 million in the rights offering.
Goodmans LLP acted for a group of debenture holders before the ASC. While the ASC ruled towards Perpetual, the panel noted the debenture holders have “other avenues – the commercial court – to deal with such unfairness as may there be proved.” The panel noted that another Perpetual-like situation “might face a very different response if presented either to ACS staff in order to a hearing panel.”
Indeed it’s worth noting the positioning advocated by Goodman’s with respect to the applicants within the Perpetual Energy case seems to have had an impact on the word what used by Premium Brands. In the ASC, Goodman’s argued that rights offerings (done at the time of a share redemption right) devalue the text holders and switch them into equity claimants which affects their power inside a bankruptcy and undermines the value of the bonds.
That’s now changed because the new measure seems to protect the bond-holders from the prospect of the company carrying out a rights offering to dilute the text holder interests in the event the company chooses to pay for the text holders in equity and not cash.
In short investors are better protected today than they were last week.
bcritchley@nationalpost.com
