A $90 million offering of convertible debentures — the second since issuers introduced new investor friendly rules this year — is set to close Tuesday when Calgary-based Kelt Exploration receives the gross proceeds.
The debentures come with a five-year term, pay five per cent annually and are convertible at $5.50 a share — a 45 per cent premium to the $3.78 share price just prior to the deal being announced.
Investors were attracted because of the yield and the upside in the share price given the prospects for Kelt’s underlying business.
Premium Brands’ deal may set new protection standard for convertible debenture investorsPerpetual Energy Inc shares plunge as Alberta Securities Commission rules in favour of its rights offering
As well the issue was well supported by insiders with “certain directors, officers and employees of the Company, along with certain other subscribers,” putting $15 million into the deal, on a private placement basis.
But the deal was attractive because of the effect of a couple of short paragraphs included in prospectus. Those paragraphs, which provide more protection to holders, were necessary because of the way that Calgary-based Perpetual Energy handled a maturing issue of convertible debentures late last year — a process that led some shareholders to take their complaints to the Alberta Securities Commission.
“The change has revived the debenture space in the same way that the floor [the minimum yield] has revived the rate reset space,” noted one financial adviser, who is supportive of the change. “The change was necessary because what Perpetual did,” he added.
At the ASC hearing, the regulator ruled against Perpetual’s debenture holders who were mighty upset because they claimed Perpetual didn’t treat them fairly: they weren’t offered cash and they weren’t given consideration that was fair for them in their new status as shareholders.
Instead Perpetual offered the holders stock and then negated the effect through a highly dilutive rights offering that was backed by the company’s largest shareholder. The debenture holders were not allowed to participate in the rights offering.
As a result, control of the company passed to the equity investors from the debenture holders.
Now for the second time since Perpetual acted, limits have been placed on the ability of the issuer to make certain changes at maturity. (Premium Brands was the first.)
The section in the prospectus is titled Restriction on Share Redemption or Maturity. In short, doing what Perpetual did is no longer possible.
At maturity, the issuer “shall not, directly or indirectly (through a subsidiary or otherwise) undertake or announce any rights offering, issuance of securities, subdivision of the common shares, dividend or other distribution on the common shares or any other securities, capital reorganization, reclassification or any similar type of transaction.”
And that restriction applies where the number (and price of) securities to be issued along with any property or cash to be distributed or allocated, is “related” to the share redemption price or the current market price. In other words pay back the holders fairly — and don’t dilute the effect of paying in stock through a rights offering.
Sadiq Lalani, chief financial officer at Kelt said the new investor friendly change was put into effect because “there was hesitancy from certain institutional investors to acquire the debentures without the dilution clause.”
While buyers of Kelt’s converts are pleased — the price of the underlying shares are up — Perpetual’s investors are having their own woes. Last Friday, S&P downgraded the company after concluding that “Perpetual has effectively defaulted on its debt,” as a result of a securities swap.