RE:Net Debt CalculationI don’t profess to be an “expert” but I think you may be confusing “Debt” with “Obligations”. Not all Convertible Debentures are the same and not technically Debt they are often considered “Obligations”. It’s important to read the prospectus carefully. They often contain clauses that allow the Issuer to convert them to shares instead of redeeming them for cash.
The following is from the Series IV Prospectus. You will notice that they are “Subordinate” to the Credit Facility (and just about everything else). That explains why the “Convertible Debentures” are NOT included in the Credit Facility Covenants.
Payment upon Redemption or Maturity
On redemption or at maturity, the Fund will repay the indebtedness represented by the Series IV Debentures by paying to the Debenture Trustee in lawful money of Canada an amount equal to the aggregate Redemption Price of the outstanding Series IV Debentures which are to be redeemed or the principal amount of the outstanding Series IV Debentures which have matured, as the case may be, together with accrued and unpaid interest thereon. The Fund may, at its option, on not more than 60 days and not less than 40 days prior notice and subject to applicable regulatory approval, elect to satisfy its obligation to pay the Redemption Price of the Series IV Debentures which are to be redeemed or the principal amount of the Series IV Debentures which have matured, as the case may be, by issuing Fund Units to such Debentureholders. Any accrued and unpaid interest thereon will be paid in cash. The number of Fund Units to be issued will be determined by dividing the aggregate Redemption Price of the outstanding Series IV Debentures which are to be redeemed or the principal amount of the outstanding Series IV Debentures which have matured, as the case may be, by 95% of the Current Market Price on the date fixed for redemption or the maturity date, as the case may be. No fractional Fund Units will be issued on redemption or maturity but in lieu thereof the Fund shall satisfy fractional interests by a cash payment equal to the Current Market Price of any fractional interest.
The term “Current Market Price” will be defined in the Indenture to mean the weighted average trading price of the Fund Units on the TSX for the 20 consecutive trading days ending on the fifth trading day preceding the date of the applicable event. The weighted average trading price will be determined by dividing the aggregate sale price of all Fund Units sold on the TSX during the 20 consecutive trading days by the total number of Fund Units so sold.
Subordination
The payment of the principal of, and interest on, the Series IV Debentures will be subordinated in right of payment, as set forth in the Indenture, to the prior payment in full of all Senior Indebtedness of the Fund and indebtedness to trade creditors of the Fund. “Senior Indebtedness” of the Fund will be defined in the Indenture as the principal of and premium, if any, and interest on and other amounts in respect of all indebtedness of the Fund (whether outstanding as at the date of the Indenture or thereafter incurred), other than indebtedness evidenced by the Series IV Debentures and all other existing and 13 future debentures or other instruments of the Fund which, by the terms of the instrument creating or evidencing the indebtedness, is expressed to be pari passu with, or subordinate in right of payment to, the Series IV Debentures. The Indenture will provide that in the event of any insolvency or bankruptcy proceedings, or any receivership, liquidation, reorganization or other similar proceedings relative to the Fund, or to its property or assets, or in the event of any proceedings for voluntary liquidation, dissolution or other winding-up of the Fund, whether or not involving insolvency or bankruptcy, or any marshalling of the assets and liabilities of the Fund, then those holders of Senior Indebtedness, including any indebtedness to trade creditors, will receive payment in full before the Debentureholders will be entitled to receive any payment or distribution of any kind or character, whether in cash, property or securities, which may be payable or deliverable in any such event in respect of any of the Series IV Debentures or any unpaid interest accrued thereon. The Indenture will also provide that the Fund will not make any payment, and the Debentureholders will not be entitled to demand, institute proceedings for the collection of, or receive any payment or benefit (including, without any limitation, by set-off, combination of accounts or realization of security or otherwise in any manner whatsoever) on account of indebtedness represented by the Series IV Debentures (a) in a manner inconsistent with the terms (as they exist on the date of issue) of the Series IV Debentures or (b) at any time when an event of default has occurred under the Senior Indebtedness and is continuing and the notice of such event of default has been given by or on behalf of the holders of Senior Indebtedness to the Fund, unless the Senior Indebtedness has been repaid in full. The Series IV Debentures will also be effectively subordinate to claims of creditors of the Fund’s subsidiaries except to the extent the Fund is a creditor of such subsidiaries ranking at least pari passu with such other creditors. The Series IV Debentures will be subordinated in right of payment to the prior payment in full of all indebtedness of the Fund under any credit facilities and other debt obligations of Canexus and other subsidiaries of the Fund.
As for why they are shown at less than face value on the balance sheet the following is the explanation given in the Q3 report. I certantly don’t understand it but it seems to be standard Corporate Accounting. (Mumbo Jumbo)
“The Series IV, V and VI Convertible Debentures are considered to be Level 2 financial instruments not carried at fair value. Their fair values as noted in the table above were determined using their closing price on the TSX at September 30, 2014, less the fair value of their embedded conversion option derivatives. At September 30, 2014, the fair values of the embedded conversion option derivatives of the Series IV, V and VI Convertible Debentures were $0.9 million, $5 million and $14.9 million, respectively, which were determined using a Jump-Diffusion convertible pricing model.
The Jump-Diffusion convertible pricing model assumes that the share price follows a Black-Scholes lognormal distribution with time-dependent rates and volatilities, but also includes an independent process to model a jump in the share price on default. The explicit default risk is calculated using probabilities implied from market traded credit default swaps, along with estimates of the jump size and recovery rates. The share diffusion price is driven by, and most sensitive to, implied volatilities calculated from listed options’ market prices, as well as time to maturity.”
As Always; Do Your Own Due Diligence; It’s Your Money !!