Post by
logicandinertia on Feb 11, 2021 9:12am
FORKS IN THE ROAD
It will be interesting to see how Fowler manages this.
SIR went public in the fall of 2004, during the height of Income Trust mania. By august 2004, there were 144 income trusts and by 2006 that had grown to 250. The purpose was to avoid paying corporate tax, by paying out most of the income thru distributions to unit holders, who then paid the tax . Flaherty changed the tax code in 2006 due to the Feds losing more than $1 billion in tax revenues. Existing trusts had four years to adjust to the new taxation, and the only category untouched was REITs. In other words, the raison d'etre of being an income trust got blown up back then.
THe structure is complex and paper work heavy, but at this point, tough to collapse, as you have minority shareholders to answer to. There are cross-collateral agreements between the corp, fund and the LP, but these are ostensibly managed by the exact same exec team managing SIR CORP. The minority shareholders have independent board members providing representation, due to the inherent conflict of the situation described above.
One can see why Fowler wants to collapse it all. THe worry is the leeway the CORP has in putting(or not putting) new concepts/brands into the fund, rather than develop new brands (like his new Chicken brand) which will never be vended into the fund. This worrisome scenario sees the pool of restaurants shrink over time, which impacts the future cash flows which are forecasted out to drive a DCF for the fund. And the fund almost becomes like a long duration loan book in run-off mode, still driving cash flow, but shrinking and becoming less valuable over time.
THe terse, and combative nature of the SIR CORP press releases are concerning. Time will tell.
and yes, the senior lender can restrict distributions to the LP and fund if SIr CORP is not meeting debt covenant conditions, which they clearly have not been. Once EBITDA regains a certain level which meets the DEBT/EBITDA covenant thresholds, that will be reassessed and distributions will resume. Could CORP bring in new equity to pay down debt TODAY? sure. but they won't , as that would dilute their ownership to the benefit of the minority shareholders.
Pretty good case study in minority shareholder rights...