Starting in 2016, Clairvest has been, I believe, executing a strategy intended to avoid making repayment of the $34 million outstanding principal of the 8.375% debentures when required in June 2018. This has included transfering a significant part of the equity in Discovery Air Defense Services held by Discovery Air (the one real asset with long term potential that currently supports the eventual repayment of the DA.DB.A principal) to Clairvest. The three transactions pushed through in 2017 were done at a Clairvest determined "valuation" that did not reflect the recently announced $1 billion 10 year CATS contract. Now get ready for Clairvest to announce they will take repayment of their secured debenture in March 2018 in shares of DADS, leaving nothing of value in the Corporate shell of DA.A to pay back the 8.375% debenture holders.
Given the CATS contract, it will be difficult for them to ignore the Minority Holder rules that would require a proper valuation to be conducted to value the remaining DADS equity og the DA.A books. Not that will stop them getting expensive legal opinions, paid for by DA.A, to justify why the transaction can happen and DA.DB.A bond holders can be legally shafted.
Not that any of this was planned when Ken Rotman wrote to us back in October 2014:
Dear Discovery Air Debentureholder:
As you know, in 2013 Discovery Air Inc. (the “Corporation”) embarked on a new strategy that exploits our unique expertise and potential, and focuses our energy while seizing redefined opportunities. We determined our ‘Growth Engines’ to be Discovery Air Defence Services and Great Slave Helicopters in the first phase, with Discovery Air Fire Services in the second. Our strategic priorities will offer attractive cash flow potential and margins but they also require up front capital investment. It is the first phase of this strategy that we are currently executing on with increased international expansion.
A number of milestones in the past year have confirmed our growth strategy is on the right track: In December 2013, we acquired ATSI, a U.S. based combat support services business with a fleet of A-4N high subsonic aircraft giving us a strong presence in the U.S. In January 2014, we won a contract to provide combat support services to Germany, establishing ourselves in Europe and providing a foundation for future expansion in that important continent. We are executing on a contract to acquire six F-16s and six A-4Ns that will enable us to be the single most advanced and largest outsourced combat support services program in North America. No other provider in the world has F-16s (a fourth generation fighter plane) or anything comparable and the A-4N is an attractive complement to the F-16 for high subsonic applications.
To realize this growth opportunity we need increased financial flexibility across our balance sheet to access the additional capital needed. Our largest shareholder and long-time supporter, Clairvest Group Inc. (“Clairvest”), has advised of their continued interest in providing equity financing. This offer to support our growth strategy follows the rights offering completed in May 2014 where approximately 89% of the equity capital raised was from Clairvest.
In order to ensure Clairvest has the ability to participate in future equity financings and enable the Corporation to opportunistically and rapidly access capital, we require an amendment to the current indenture. In its current form, should Clairvest’s equity interest exceed 50% (currently at 48.8%) the change of control provision in the indenture would be triggered and force the Corporation to repurchase the debentures thereby hindering our ability to use that capital for growth. This would further create a refinancing obligation that may not be as attractively priced. As such we are requesting your support in changing the indenture to set aside the change of control provision with respect to Clairvest’s ownership position. In practical terms this will enable Clairvest to provide additional equity without triggering the early repurchase provisions resulting from a change of control. Without this financial flexibility, the Corporation may be left in a position where funding its growth initiatives may require additional financing through senior indebtedness or on terms not in the best interests of Debentureholders.
In addition, as we take this important step in the first phase of our growth plan, we believe it is prudent to ensure we are thinking ahead by positioning our Corporation to capitalize on both the near and long-term opportunities that may arise. We need to ensure we are as responsive as possible in a capital-intensive industry by achieving maximum balance sheet flexibility. This means allowing time to realize the benefits from any newly raised capital and allowing time for the new growth strategy to develop. As such, we believe it is necessary to extend the maturity date of the Debentures from June 30, 2016 to June 30, 2018. The extension of the maturity date would be subject to the Corporation completing, prior to
June 29, 2016, an equity offering of the Corporation’s Class A voting common shares and/or Class B variable voting shares for minimum aggregate gross proceeds of CAD$5,000,000.
While maintaining the flexibility needed to pursue our investment strategy and to continue to build value for all stakeholders, the extension will provide Debentureholders, with a longer period of time during which to receive, what we believe to be, an attractive yield in the current interest rate environment, based on the continued cash interest rate of 8.375%. We believe it will be difficult for the Corporation to raise additional capital if the maturity date is not extended.
We are pleased that two Debentureholders, including our largest institutional Debentureholder, are as supportive of our new strategy and proposed amendments as we are. Holding an aggregate of 28% of the Debentures, two Debentureholders have entered into lock-up agreements and intend to vote for/consent to the Debenture Amendments. They recognize the advantage in being able to retain a cash interest bearing investment which allows for participation in the Corporation’s strategic growth.
The Board has determined that the proposed amendments are in the best interests of the Corporation as they will advance our strategy of expanding internationally and position us well for the future.
Your vote is important. Whether or not you attend the meeting, please take the time to vote your Debentures, in accordance with the instructions contained in the Form of Proxy and Consent or Voting Instruction Form, as applicable. If you have any questions, or require assistance completing the Form of Proxy and Consent or Voting Instruction Form, please contact our Proxy Solicitation and Information Agent Kingsdale Shareholder Services at 1-888-518-6559 (toll-free in North America) or collect call outside North America at 416-867-2272, or by e-mail at contactus@kingsdaleshareholder.com.
‘Signed’
Kenneth Rotman
Chairman of the Board