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Investors in convertible debentures have won a significant victory that in all probability will end up a new standard, all to help ensure their rights are fully protected come maturity time.
The victory became official now when Premium Brands Holdings Corp. raised $75 million by way of an offering of 4.65 per cent 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. Underneath 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 price of securities to be issued is “related” towards the “exercise from the share redemption right or even the market price.”
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While the language is complex, the result is that once the maturity date comes around, the issuers have to either redeem for cash 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 to 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 provided to redeem in stock (out of the box its right) simultaneously because it raised $25 million using 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 new degree of uncertainty to some maturing convertible issue; there is a sizable difference between the conversion price for that converts and the “price” for brand new shares issued within the rights offering; they weren’t allowed to be part of the rights offering; and through the rights offering, control flowed towards the founder – and not them.
To illustrate: Perpetual issued 232.07 million shares towards the holders from the convertible (to stay a $50 million obligation) and 665.4 million shares – about half of which visited the chairman – to raise just $25 million in the rights offering.
Goodmans LLP acted for any number of debenture holders prior to the ASC. As the ASC ruled in favour of 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 really different response if presented either to ACS staff or to a hearing panel.”
Indeed it’s important to note the position advocated by Goodman’s with respect to the applicants in the Perpetual Energy case has had an effect on the language used by Premium Brands. At the ASC, Goodman’s argued that rights offerings (done at the time of a share redemption right) devalue the bond holders and switch them into equity claimants which affects their power in a bankruptcy and undermines the value of the bonds.
That’s now changed as the new measure appears to protect the bond-holders against the prospect of the company carrying out a rights offering to dilute the bond holder interests in case the company chooses to pay the text holders in equity and never cash.
In other words investors are better protected today than they were last week.
bcritchley@nationalpost.com
