It’s a good deal for the issuer and its common shareholders but way less attractive for the company’s convertible debenture holders.
That’s the situation at Calgary-based Perpetual Energy Inc., which recently announced a number of recapitalization measures, all of which flowed from a decision on how to repay a $50 million maturing issue of seven per cent convertible debentures. Instead of paying the debenture holders in cash at year-end, Perpetual will offer shares, causing a massive flood of new shares onto the market.
The market has already reacted to the upcoming supply: the shares now trade at less than one-third of their value a month ago. The number of shares to be issued will be determined by 95 per cent of the 20-day “volume weighted average price from November 25 to December 22 inclusively.”
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That’s different from what Perpetual did last year when it paid $25 million in cash for a partial, early redemption of the converts, which reduced the outstandings to $34.878 million.
But given the woes in the oilpatch, both in the recent past and what’s expected, Perpetual is within its rights to redeem for stock if for no other reason than the desire to conserve cash.
That decision surprised the market. “This bond has always traded at par or above because the company had said they intended to pay it off in cash,” noted one broker whose clients own the debentures.
News that holders would receive shares and not cash has led to a dramatic fall in the price of the converts. The debentures, which didn’t trade in the four days before the announcement, have since fallen by about 50 per cent on much larger than normal volume. They closed Thursday at $50.
So far, the normal process has played out.
What’s not good is the next element in the recapitalization process. Perpetual is planning a rights offering designed to raise $25 million. That offering will succeed because it is being backstopped by Dreamworks Investment Holdings Ltd., “a corporation controlled by (Clayton Riddell) the company’s chairman.”
But the holders of the seven per cent convertibles – who won’t be receiving their shares until early January — won’t be joining the party. And given the dilution that’s upcoming, that group represents the largest collection of shareholders.
“This (rights) issue is not available to the new common shareholders (from the bond conversion) but only to prior shareholders,” noted one broker.
And that non-inclusion has upset some of them, especially given the terms of the rights offering.
The prospectus that’s already been filed for the rights offering details some of those terms. As with any rights offering, existing holders will be given rights to acquire shares (in this case it’s one right per share). But the key number is the so-called effective cost per paid share – a number worked out by a complicated formula.
It so happens that, through that formula, the cost for an existing shareholder to buy new shares is significantly below the cost at which the convertible holders were allocated shares. If all works out as planned, the existing shareholders – for putting up $25 million of equity – will end up with 78 per cent of the new Perpetual; whereas the debenture holders – who get $35 million of equity – will have 22 per cent.
Some might say that’s not fair, although Perpetual may disagree.
Calls to Perpetual seeking a comment weren’t returned.