CI Financial misleading PR & distressed financing dealThe May 11 PR failed to provide the fundamentally important liqudidation value and liquidation event terms of the convertible preferred shares.
If a defined liquidation event occurs between closing and year 3, the investor group's U$1 B investment will receive U$1.5 B in value - the step up offers an immediate U$0.5 billion potential gain. If a defined liqudity event occurs between years 3-6, the U$1.5 B in value will grow from U$1.5 B to U$2.25 B, or a compound rate of 14.5%. The investor group has the right to force a defined liquidity event 3 months prior to the 6 year anniversary so that they will experience U$2.25 B on their U$1 B investment in year 6.
The investor group is made of alternative credit funds and not private equity funds. The initial investment reflects an advertised yet fundamentally misleading EV of C$7.1 B for US business unit. The derived EV is irrelevant. The formuala governing the liquidation value and defined liquidation events will provide the credit funds their investment return. These funds could potentially own 100% of the US business unit if the unit is worth less than U$2.25 B in 6 years. If US unit is worth less than U$2.25 B in 6 years, the credit funds should do well but not enjoy a 14.5% compound return over the 6 year period.
Very strange the CI raises capital effectively secured by US subsidiary at a cost of 14.5% ++ and uses proceeds to buy C$ parent company bonds at single A yields over Canada's whose interest payments generate a tax deduction. This appears to more of a form of distressed financing. If this deal is the best form of financing available to CI, and management and the board pursued took it, rather than refinance C$ bonds at they matured with higher coupons, does the deal foreshadow significant risk to US business?? Canadian analysts maitained a value for US business at U$1.8 B (C$2.4 B). Will CI hand over the keys of US business to US investor group over next 6 years to provide group with up to U$2.25 B and CI shareholders will only be left with Canadian business unit?
Will CI CEO Kurt MacAlphine be gone in next year after laying waste to CI and its shareholders?
I recognize CI argues their plan is to grow the value of US business but how will they do that without raising capital in US business?? They have spent a huge amount of capital raised in the form of C$ parent company debt. Now they want to reduce debt so Canadian CF will be dedictated to public debt repayments and purchases.
Very strange. If the headline was U$1 B 14.5% US preferred shares issued and proceeds used to repay C$1 B in C$ public debt at coupons of 2.25%-2.75% (and yields of 5.4%-7.3%) - how would the news been received??
Just sayin...
if this is the best deal CI's advisor, RBC, can come up with, CI shareholders should be very troubled