Sherritt International Corp T.S

Redemption of 10.75% PIK Notes

[CPA023]

Answer in the Trust Indenture of the 8.5 % Notes (in the Trust Indenture, the 10.75% PIK Notes are defined as Junior Notes):


"Section 4.07 Limitation on Restricted Payments.

(a) The Company shall not, and shall not permit any of its Restricted Subsidiaries, directly or indirectly, to: 
...

(3) make any principal payment on, or purchase, repurchase, redeem, defease or otherwise acquire or retire for value, in each case prior to any scheduled repayment, scheduled sinking fund payment or scheduled maturity, any Subordinated Obligations or Guarantor Subordinated Obligations, other than: 
...

(C) the making of any interest payment (in cash or in kind) on the Junior Notes in accordance with the terms of the Junior Notes Indenture or, other than a redemption offer under the terms of the Junior Notes Indenture, any acquisition of Junior Notes by tender offer, open market purchases or negotiated transactions..."

Section 4.07(a)(3)(C) includes a restriction and a permission.

First, it restricts "a redemption offer under the terms of the Junior Notes Indenture".

But it also permits "any acquisition of Junior Notes by tender offer, open market purchases or negotiated transactions". That explains why Sherrit was able to redeem 10.75% PIK Notes in 2022.

In that Section, a redemption of Junior Notes is defined as a Restricted Payment.

After Section 4.07(a)(4), we can read that a redemption under the terms of the Junior Notes Indenture is restricted:

"unless, at the time of and after giving effect to such Restricted Payment:

(A) no Default shall have occurred and be continuing (or would result therefrom);

(B) immediately after giving effect to such transaction on a pro forma basis, the Company could incur $1.00 of additional Indebtedness under Section 4.09(a); and

(C) the aggregate amount of such Restricted Payment and all other Restricted Payments declared or made subsequent to the Issue Date (without Execution Version - 66 - duplication and excluding Restricted Payments made pursuant to clauses (1), (2), (3), (4), (7), (8), (10), (11), (12) and (13) of Section 4.07(b)) would not exceed the sum of (without duplication):

(i) 50% of Consolidated Net Income for the period (treated as one accounting period) from January 1, 2020 to the end of the most recent fiscal quarter ending prior to the date of such Restricted Payment for which internal financial statements are available (or, in case such Consolidated Net Income is a deficit, minus 100% of such deficit); plus

(ii) ... plus

(iii) ... plus

(iv) ..." 

So, a redemption under the terms of the Junior Notes Indenture will be permitted if the three conditions (A, B and C) are satisfied, up to the limit amount calculated in (i) to (iv) above.

Condition (A) is satisfied.

It seems that condition (B) is also satisfied.

Condition (C) is the calculation of the amount that can be used to redeem the Junior Notes. My understanding is that only (i) applies for now.

Calculation of (i):

50% of Consolidated Net Income minus 100% of Consolidated Net Deficit from January 1, 2020 to March 31, 2023:

2020                     50% x 14.8 M.                                   7.4   M
2021                   100% x (18.4) M                              (18.4)  M  
2022                     50% x 63.5  M                                 31.75  M
March 2023         50% x 13.3  M                                    6.65  M

Total of                                                                          27.4 M     

The total above should be updated with the results of the second quarter of 2023.

For now, it seems that Sherritt could redeem only 27.4 M of Junior Notes under the terms of the Junior Notes Indenture. But Sherritt could redeem more of the Junior Notes with a tender offer, an open market purchases or negotiated transactions, as permitted by Section 4.07(a)(3)(C).

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[Contrarian333]

Hi CPA023 - I just now saw your post about the Company's ability to redeem PIK bonds based on the basket of qualifying restricted payments and so I went and read the appropriate clause again and wanted to say that I agree with your interpretation and that I now think my previous statement was wrong.  Its unusual for a Company to allow the redemption of subordinate debt ahead of the

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[Oaxacan]

Thank you both CPA023 and Contrarian333 for clarifying this issue.  Good luck to all, in particular those who are long.

[Contrarian333]

I'll just add that there are other investors who don't read the Sr. Indenture that way.

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