Everyone Needs to Calm Down and Stop This Receivership TalkThis is like the movie "The Departed", where everyone is pointing a gun at each other, then people start killing each other off. We do not want the company to go into receivership, and hopefully the bank doesn't want it to either. They know they have done a poor job of collecting money, from other receiverships, this past year. Why would the bank want to stop getting a steady stream of interest payments, just because Twin Butte can't immediately pay back the $85 million, in the one facility? Do they want to lend the $85 million to a bunch of homeowners, to make a lower interest rate?
The points are valid that both debenture holders and shareholders, have to approve any deal. So any restructuring, has to be palatable to both parties, to get the deal to pass. Since I have both shares and debentures, I'd like to see some reasonable proposals brought forward. The only thing that is certain right now, is accepting 6 cents cash per share, is not reasonable, and accepting $140 per debenture, is highway robbery. So we need to determine a more reasonable solution.
The proposal of converting debentures to shares, is feasible, and it just depends at what price. While the debenture agreement does state the following:
" 4.6 Right to Repay Principal Portion of Redemption Price in Common Shares
(a) Subject to the receipt of any required regulatory approvals, the provisions governing any series of Debentures, Section 2.4(d) and the other provisions of this Section 4.6, the Corporation may, at its option, in exchange for or in lieu of paying the principal portion of the Redemption Price in money, elect to satisfy its obligation to pay all or any portion of the principal amount of Debentures due upon redemption by issuing and delivering to holders on the Redemption Date that number of Freely Tradeable Common Shares obtained by dividing the principal portion of the Debentures (or applicable portion thereof to be satisfied by the issuance and delivery of Freely Tradeable Common Shares), by 95% of the Current Market Price on the Redemption Date (the "Common Share Redemption Right").
(b) The Corporation shall exercise the Common Share Redemption Right by so specifying in the Redemption Notice which shall be delivered to the Debenture Trustee and the holders of Debentures to be so redeemed not more than 60 days and not less than 40 days prior to the Redemption Date in the manner provided in Section 14.2. The Redemption Notice shall also specify the aggregate principal amount of Debentures in respect of which it is exercising the Common Share Redemption Right."
I better understand this now, and the redemption date has to be called in advance, which would thus depress the stock, if the market is bad. This would result in a large number of shares being issued, greatly reducing the existing shareholder's equity value. We have seen this happen with other debenture conversions.
The solution around this is to agree on some debt to equity conversion, that fixes a certain price. This would then get voted on by both the debenture holders and the shareholders. So all parties have to agree on some reasonable conversion price. A conversion of debentures to shares at 1 cent per share, is not a reasonable price. I am not looking to see shareholders wiped out, to give everything to debenture holders, when I have both. Shareholders have to approve a debenture conversion deal, and if the deal isn't reasonable, they could say they aren't getting anything, and could kill a deal. But the shareholders also want to see more than 6 cents per share, over time.
Another option: how about a partial debenture conversion? Debenture holders could get 20% of their holdings converted to some preferred share that will pay a dividend, once the oil prices improve. The other 80% would be converted to common stock, at 8 cents per share. (Need to all agree on some deemed conversion price, but this is where the stock traded at, prior to this stink-bid takeover.)
The main question is how much debt, can the company take on, that the banks are comfortable with? It may be necessary to still raise more equity, which could be a combination of preferred shares and common stock, to pay back more to the bank. We need to keep the total share count down, as much as possible.
With rising oil prices, more cashflow is generated, and that will work to pay down debt. In time, there will be more value in the stock, and in 2018, when the debentures are due, the equivalent value of the stock to the debenture holders, should be greater than they would have had, if they had just had the debentures. The main thing is to get value for the debenture holders investment, when they are due in 2018, and not sink the debenture holders, right now. So given time, there should be some value growth in the common stock, especially when the oil price rises, in the future.
Let's see how things unfold, but as stated in the Bennett Jones letter:
"Although the ad hoc group strongly disagrees with the conduct and tactics of the board, the ad hoc group believes that Twin Butte has valuable assets and a management group capable of developing those assets. If the arrangement fails to achieve sufficient securityholder support and is voted down, the ad hoc group is prepared to step forward and provide tangible support for alternative paths forward that properly reflect legal priorities and that optimize the recovery for all stakeholders."