TSX:DHT.UN - Post by User
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retiredcfon Apr 16, 2024 8:58am
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Post# 35991151
RBC
RBC Refinances preferred securities, removes ~8.2% near-term dilution & improves deal cost of capital
TSX: DHT-U | CAD 16.97 | Outperform | Price Target CAD 20.00
Sentiment: Positive
Our view: This morning, DRI announced the refinancing of its preferred securities which we view positively. The refinancing has resulted in the removal of near-term dilution (existing warrants were in-the-money; ~11.3% of the outstanding units), lower dilution in future (fewer out-of-the-money new warrants; ~3.1% of outstanding units), longer maturity but a higher face value of debt (+$20.4MM) and a higher interest rate (7.50% payable semi-annually vs. 7.04% previously). We also believe this event streamlines the capital structure with a more traditional mezzanine level at an attractive rate, providing for greater future financial flexibility. After incorporating the higher debt and interest rate less the change in value of the options, we estimate the cost of capital for the preferred securities has improved by ~0.5% after the refinancing and estimate it to be ~11.6%. Recall that last year, DRI received $95MM of gross proceeds from the issuance of $114.76MM of preferred securities and 6.37MM warrants, which were exercisable at US$11.62 (~C$15.99 based on current FX) (here). The new preferred securities have a face value of $135.202MM. We estimate the cash on cash interest of 10.67% per annum payable semi-annually vs. 8.50% previously. The higher interest expense and face value of the debt is offset by fewer number of outstanding options (4.6MM fewer warrants or ~8.2% of outstanding units) and at a higher exercise price (US$15.00 vs. US$11.62 previously). The refinancing is expected to be completed in April 2024.
Refinancing of preferred securities: DRI announced the refinancing of its US$114.760MM of preferred securities and 6,369,180 in-the-money warrants (exercise price: US$11.62 or ~C$15.99) with US$135.202MM of new Series C preferred securities and 1,749,996 new out-of-the-money warrants at an exercise price of US$15.00 (~C$20.64 or ~20% premium to the 5-day VWAP). The new preferred securities will initially pay cash interest at a rate of 7.50% per annum, payable semi-annually (7.04% p.a. previously). We estimate the cash on cash interest of 10.67% per annum payable semi-annually vs. 8.50% previously. The refinancing also extends the initial maturity from December 2027 to April 2029 before the step-up in the interest rate.
Cost of capital associated with the preferred securities: After the refinancing, we estimate the cost of capital associated with the preferred securities to be ~11.6% (see Exhibit 2). We note that the figures may differ slightly based on the inputs used for estimating the Fair Value associated with the Warrants.
Additional terms: The Series C preferred securities will not be redeemable by the Trust prior to April 30, 2029, except in the event of a change of control of the Trust. The interest rate on the Series C preferred securities will increase to 10% p.a. if any of the Series C preferred securities are outstanding on April 30, 2029, and will be subject to an annual increase of 1.5% p.a. if outstanding on each one-year anniversary of such date, up to a specified cap. The warrants will entitle the holders to acquire one unit for an exercise price of US$15.00 at any time until the expiry of the warrants five years from date of issue.