Are debentureholders being shortchanged by $12 million?In my opinion, this deal was structured to divert funds to parties related to insiders. If so, I believe that, in a proper liquidation, debentureholders would recieve up to seven times or more cash than in this proposal. In a liquidation (bankruptcy), funds from the buyer would first go the the secured debtholders, which would include debentureholders. But in this arrangement (in my opinion--see disclaimer below), a significant amount is going to the management group for a purpose that would never happen in a court-supervised bankruptcy.
To me, it seems that insiders were more interested in feathering their nests than recovering funds for debentureholders (secured creditors).
Management negotiated terms with the buyer that include, as part of the deal, the provision that the buyer must license the Lakeview flag (brandname) from Lakeview Management Inc. In a bankruptcy, I believe that a court appointed liquidator would never negotiate such a benefit for insiders to the disadvantage of debtholders, whether secured or not.
From the circular: "but for the Transaction, LMI would not receive the License Fees" (my emphasis). How much are those fees? It is not entirely clear, but the paragraph in the circular where they are discussed mentions the figure of "approximately $12 million of license fees and management fees" (p. 30).
According to Arrangment Agreement attached to the circular, this deal would give debentureholders $2.1 million in aggregate for all the debentures and unpaid interest. If the amount going to LMI is $12 million (which is, perhaps deliberately, unclear), and it were to go to the debentureholders instead (as it probably would in a bankruptcy), then debentureholders would be getting $14 million, insteat of $2 million, in other words, 7 times as much money.
But no, management and directors have devised a deal to divert (perhaps technically legally?) to related party LMI funds through a clause to include the Lakeview name. Surely the buyers don't care about that, do they? Why would they pay millions for that name. Why not pay nothing for the name, and rebrand it to something better, as perhaps they will anyway.
I suspect that what the buyers really want is the hard assets, the hotels, that they are willing to pay a certain total amount, and that they don't really care how that amount is distributed amoung the former managers, owners and debtholders of Lakeview Hotel Investment Corp. But we should care.
Here's a final thought from the circular: "concurrently with the completion of the Transaction, Lakeview Management Inc. (“LMI”), Lakeview Flag Licensing General Partnership (“LFLGP”) and the Share Purchaser will enter into a license agreement (the “License Agreement”) whereby, among other things, LFLGP will license the “Lakeview Inn & Suites” and “Lakeview Resorts” flag to the company resulting from the amalgamation of the Share Purchaser with the Company in exchange for continuing license fees (the “License Fees”). LMI, through its direct or indirect ownership of LFLGP, will receive the License Fees." (p.29)
Note that they don't have to disclose exactly how many millions they are receiving in fees (a cash stream which will, perhaps, go on for perpetuity, instead of debentureholders, because (we are supposed to believe) the final amount. If it does go on for perpetuity, it will probably result in much more than the $12 million dollar figure. Probably why it's not clearly disclosed, at least as far as I can see.
Important disclaimer: All the above is intended to express my opinion only. The reader is cautioned that it may contain figurative language including hyperbole. I am not an expert on anything discussed, and it is possible and perhaps likely that I am ill informed on certain aspects. All content is presented for fair comment and discussion purposes only. None of it is intended to be taken as fact and should not be considered reliable. So do not use any of it to make decisions or judgements or to form opinions, and do not use it as the basis of any action. If you do plan to form decisions, judgements, or opinions or to take action on anything discussed, first seek your own independent, expert advice.