Details of bridge from their website-excluded from NR...why? Bridge Facility
Under the terms of the Bridge Financing Agreement, Diaquem, Inc. (“Diaquem”), an affiliate of Investissement Qubec (“IQ”), has agreed to advance to one or more of the SWY Parties an estimated amount of up to $11.7 million by way of access to the funds available in a senior loan reserve account maintained by Stornoway’s subsidiary, Stornoway Diamond (Canada) Inc. (“SDCI”). In addition, amounts equivalent to royalty payments to be made by SDCI to Diaquem under the existing royalty agreement, up to an estimated amount of $1.9 million, and to interest payments accruing under the senior loan agreement between SDCI and Diaquem (the “Senior Loan”), up to an estimated amount of $2.5 million, have agreed to be advanced by Diaquem. The Bridge Financing Agreement also provides that the buyers under the Amended and Restated Purchase and Sale Agreement entered into on October 2, 2018 (the “Stream Agreement”) (collectively, the “Buyers”), in proportion to their respective commitments, will advance an amount equivalent to the stream net proceeds payable under the Stream Agreement to the SWY Parties, up to an estimated amount of $5.9 million.
The Bridge Facility will be secured by a first-ranking security interest over all present and after-acquired assets and property of the SWY Parties and will accrue interest at a rate equal to 8.25% per annum.
Amounts owing under the Bridge Facility will become due and repayable in full upon the maturity date, being the earliest to occur of certain stated events, including (i) the completion of a restructuring or other material transaction pursuant to the SISP Process or the sale of all or substantially all of the property, assets and undertakings of Stornoway, and (ii) September 16, 2019 (the maturity date being subject to 30-day extensions by unanimous consent of the Bridge Lenders).
Launch of Sale and Investment Solicitation Process to Seek Out Proposals for Restructuring Transaction
Concurrently with the Bridge Financing Agreement, and as a condition thereto, the SWY Parties have formally launched the SISP Process with the objective of seeking out proposals for a restructuring transaction that would involve an investment in, or the acquisition of all or substantially all of the property, assets and undertakings of Stornoway and its direct and indirect subsidiaries. The Corporation has engaged TD Securities Inc. and Scotia Capital Inc. to assist with the SISP Process. The SISP Process contains specific deadlines for the submission of non-binding indications of interest and, if applicable, binding proposals which may be extended under certain circumstances.
The Buyers and Diaquem are expressly permitted to submit a credit bid up to the amount of their secured debt.
The foregoing is a summary only of certain key terms of the various elements of the Bridge Facility and the SISP Process and is qualified in its entirety by reference to the full text of the Bridge Financing Agreement, which will be available on the SEDAR website maintained by the Canadian securities administrators at www.SEDAR.com. Readers are encouraged to consult the full text of these documents.
Cautionary Statements Regarding SISP Process Outcome and Equity Value
Investors are cautioned that there can be no assurance that the SISP Process will either produce or result in one or more bids or, if one or more bids are submitted, that such bid(s) will lead to a successfully completed transaction. In addition, there can be no guarantee that the SISP Process and any transaction completed thereunder will result in the realization by Stornoway’s stakeholders of any recoverable value. The failure to receive non-binding indications of interest or qualified phase 2 bids within the deadlines provided in the SISP Process constitutes an event of default under the Bridge Financing Agreement. As a result of all of the foregoing, Stornoway’s securityholders (including common shareholders, holders of Convertible Debentures and holders of Warrants) are cautioned that trading in such securities is highly speculative and that the trading prices for such securities may not reflect their underlying value.
Indenture Amendments
Concurrently with the entry into of the Bridge Financing Agreement, Stornoway also entered into a binding term sheet with the holders of more than 75% of the outstanding principal amount of the Convertible Debentures (the “Debenture Amendment Term Sheet”), pursuant to which such holders have consented to postpone interest payments on the Convertible Debentures from June 30 to December 31, 2019 (the “Indenture Amendments”). The Indenture Amendments will be binding on all holders of outstanding Convertible Debentures. The Debenture Amendment Term Sheet also provides that the Corporation shall use its commercially reasonable efforts to issue warrants exercisable to acquire 16 million common shares of the Corporation (the “Warrants”) to all holders of Convertible Debentures in proportion to their respective holdings, with each whole Warrant exercisable for a period of two years for one common share of the Corporation at an exercise price of $0.10 per share. The Indenture Amendments and the issuance of the Warrants are both subject to obtaining all necessary regulatory approvals (including Toronto Stock Exchange (“TSX”) approval).
Other Bridge Arrangements
Concurrently with the entering into of the Bridge Financing Agreement and the Debenture Amendment Term Sheet, the SWY Parties also obtained a waiver from Fonds de Solidarit des Travailleurs du Qubec, Fonds Rgional de Solidarit F.T.Q. Nord-du-Qubec, S.E.C. and Diaquem of the requirement to make interest payments under the Convention de prt dated as of May 3, 2012 from May 1, 2019 until December 31, 2019, inclusively. In addition, the Buyers under the Stream Agreement, Diaquem under the Senior Loan and Caterpillar Financial Services Limited under its master lease agreement with SDCI have each agreed to waive the requirement for the Corporation to have a minimum tangible net worth of $225 million, calculated on a consolidated basis, until July 15, 2019.
Related Party Transaction Analysis
IQ and Caisse de dpt et placement du Qubec (“Caisse”) are related parties of Stornoway under Multilateral Instrument 61101—Protection of Minority Security holders in Special Transactions (“MI 61101”) since (together with their respective affiliates) each of them holds more than 10% of Stornoway’s issued and outstanding voting shares. Accordingly, the Bridge Facility and the Other Bridge Arrangements, insofar as they involve Diaquem and/or IQ and Caisse constitute “related party transactions” under MI 61101. The Bridge Facility and the Other Bridge Arrangements are exempt from the formal valuation requirements pursuant to Section 5.4 of MI 61-101, and are exempt from the minority approval requirements pursuant to Section 5.6 of MI 61-101 on the basis that the Corporation’s board of directors, acting in good faith, has determined, and at least two-thirds of the Corporation’s independent directors, acting in good faith, have determined, that the Corporation is in serious financial difficulty, that the Bridge Facility and the Other Bridge Arrangements are designed to improve the Corporation’s financial position, and that the terms of the Bridge Facility and the Other Bridge Arrangements are reasonable in the circumstances.
As previously announced, the performance of the Corporation’s business has been significantly impacted by the significant drop in the price of diamonds in world markets. The global diamond market is going through a difficult time and Stornoway’s mine sells its product at a lower price than in previous years and much lower than initially anticipated during the construction of the mine. A continued downward pressure on the market price for rough diamonds has inhibited the Corporation’s ability to generate positive free cash flow in 2019. Such events or conditions cast significant doubt about the Corporation’s ability to continue as a going concern.
The Bridge Facility, the Other Bridge Arrangements, the Indenture Amendments and the implementation of the SISP Process are in furtherance of a previously announced strategic review undertaken by the board of directors (the “Board”) of the Corporation to consider all options available to the Corporation while it has continued to take a series of actions to attempt to preserve its liquidity, including, among other things, cost reductions of $18 million to $20 million for fiscal year 2019. Following completion of its strategic review, and after careful review of all relevant circumstances and consideration of all available alternatives with due consideration to the interests of all stakeholders, the Board, with the assistance, input and advice from legal and financial advisors, has unanimously determined that the Bridge Facility, the Other Bridge Arrangements, the Indenture Amendments and the implementation of the SISP Process are, viewed and taken as a whole, in the best interests of the Corporation.
About the Renard Diamond Mine
The Renard Diamond Mine is Quebec’s first producing diamond mine and Canada’s sixth. It is located approximately 250 km north of the Cree community of Mistissini and 350 km north of Chibougamau in the James Bay region of north-central Qubec. Construction on the project commenced on July 10, 2014, and commercial production was declared on January 1, 2017. Average annual diamond production is forecast at 1.8 million carats per annum over the first 10 years of mining. Readers are referred to the technical report dated January 11, 2016, in respect of the September 2015 Mineral Resource estimate, and the technical report dated March 30, 2016, in respect of the March 2016 Updated Mine Plan and Mineral Reserve Estimate for further details and assumptions relating to the project.