TSX:SOT.DB - Post by User
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incomedreamer11on Jun 25, 2024 3:18pm
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TD comments on potential bankruptcy
TD comments on potential bankruptcyDOWNGRADING TO SELL FROM HOLD ON NOTICE OF TECHNICAL DEFAULT Jonathan Kelcher, CFA^
THE TD COWEN INSIGHT
We are downgrading SOT.un to SELL from Hold following the announcement that its senior lenders have provided Slate with notices of default which, in turn, have restricted Slate from making payments on its convertible debentures. While we see a path for Slate making it through this process, we acknowledge that today's announcement narrows that path and a potential bankruptcy cannot be ruled out.
Impact: NEGATIVE
Our Take: Slate noted that it continues to work with its senior lenders and is hoping to get an amendment to its loan covenants over the near term. That said, we do not believe this will result in interest payments resuming on the converts.
We do not believe that the senior lenders will force Slate into receivership as: a) in our view, they would be less likely to get full value for the assets in the current market; and b) Slate remains current on its interest payments.
However, we believe the risk of bankruptcy has increased following today's announcement, and we see it as prudent to lower our rating to SELL from Hold and reduce our target price to $0.25 from $0.75 previously. With this note, we are also lowering our NAV/unit estimate to $0.90 from $1.90 to reflect the removal of the value we had previously ascribed to vacant office space.
The main risk to our SELL rating includes a potential privatization of the REIT. The most likely candidate, in our view, with the potential to take the REIT private would be its largest shareholder, George Armoyan, who on a diluted basis owns just over 20% of the REIT through G2S2 Holdings. Parent company Slate Asset Management (~10% ownership interest) is another potential purchaser, although we view this as less likely.
Default Details.
Slate announced its senior lenders (credit facility: ~$310mm balance) have provided a technical notice of default due to Slate being offside on its DSCR covenant (we had highlighted the potential for covenant breaches in our Q4 note). Our forecast has Slate being onside by Q4/25 (Fig. 1). The default restricts Slate from making payments on its convertible debentures. Annual convert interest payments of ~$10.2mm will continue to accrue. The converts themselves will also enter into an Event of Default under the terms of the debentures.
Portfolio realignment plan. While additional asset sales were not disclosed, management noted it continues to make progress on its portfolio realignment/disposition plan. As of Q1/24, Slate had completed $40.6mm of dispositions (pricing at 70% of IFRS fair value) and had another $109mm of dispositions under conditional agreement.