Article on AGArctic in default arena
Ice firm put on notice; shares drop
By: Martin Cash
Posted: 09/13/2011 1:00 AM |
Arctic Glacier Income Fund officially received a notice of default from senior lenders Monday, driving shares down again in another unitholder sell-off session.
The company had previously secured a reprieve on compliance with some of its debt covenants, but that expired Friday and the lenders -- West Face Capital and CPPIB Credit Investments Inc., -- refused to extend it.
Although it is technically in default, the company said lenders "have not accelerated the obligations owing," meaning it has not taken action on its security.
Linda Sims, a CPPIB spokeswoman, said, "I can confirm we have a lending relationship with Arctic Glacier, but we are not offering any further comment at this time."
Typically, when a company is in default on its loans, the lender may have the right to take control of the company.
Arctic fell below some of the thresholds in the loan agreement at the end of June, including its net debt-to-equity ratio, which is supposed to be no more than 5.25 to 1. As of June 30, the ratio was 5.45 to 1 on the $185-million West Face/CPPIB term loan.
The Winnipeg packaged-ice company is also in breach of its covenants on a $57.5-million revolving term credit provided by a syndicate of banks. The company said those lenders may also be compelled to issue a notice of default.
Arctic CEO Keith McMahon was unavailable for comment Monday, but a financial services professional familiar with the company said there are plenty of examples of companies being able to manage their way out of these types of challenges.
But Arctic's challenges are epic.
The company has been forced to commit well over $20 million to legal and settlement costs in the past few years battling an antitrust case in the United States and still has substantial civil suits to deal with.
Its inability to refinance a $92-million convertible debenture offering due this summer forced Arctic to convert all that debt to equity, wiping out most of the value held by original unitholders.
And this year it has run into stiff competition in some of its large U.S. markets, in particular California, hampering sales and bringing down its operating profit.
Through it all, industry experts say Arctic is being hobbled by onerous rates from the so-called second-lien loan from CPPIB and West Face. The company is paying well over 10 per cent interest on that term loan.
More recently, a couple of large unitholders who came by their holdings of Arctic Glacier after the debentures were converted to equity, have launched an action to replace the board of trustees with their own slate.
That group, including two U.S. hedge funds (Coliseum Capital Partners and Talamod Master Fund), has also made clear it has the resources and "resolve to sponsor, on behalf of all the unitholders, a financial solution for the fund," including a "willingness to backstop a rights offering."
An industry source said companies such as Arctic that continue to generate operating profit can be reorganized to express value that still exists in the company despite being in technical default.
Arctic's latest problem is that it's ability to generate enough of that cash flow has faltered at exactly the wrong time.The concerned unitholders are seeking to replace the long-tenured current board with a blue-chip roster of mostly Canadian business professionals with lots of experience.
Sources say Arctic has backed itself into a corner with the onerous terms on its second-lien loan. Company officials say it was forced to settle on such terms because of its need to refinance a previous loan while the global credit markets were still reeling after the autumn 2008 market crash.
But critics say management dropped the ball by not acting more swiftly and aggressively in trying to refinance the convertible debenture.
Arctic has scheduled its long-delayed annual meeting for Oct. 17 in Winnipeg. Arctic's units fell 42.3 per cent to 7.5 cents, a drop of 5.5 cents, in heavy trading.
martin.cash@freepress.mb.ca
Provided by Winnipeg Free Press