Debenture holders of Perpetual Energy are hoping a hearing before the Alberta Securities Commission Tuesday will end up as a modern day version of the Grinch Who Stole Christmas.
The debenture holders are appealing a decision by the ASC's executive director approving a rights offering by the Calgary-based energy company, which defines itself as having “a spectrum of resource-style opportunities spanning heavy oil, natural gas liquids and bitumen along with a large base of shallow gas assets.”
The debenture holders, who are owed $34.9 million, don't like the terms of that rights offering because they feel it transfers too much of Perpetual's equity ownership to the current shareholders. They also feel that their rights, given that they're higher up the food chain than common shareholders, aren't being protected.
Specifically they disagree with Perpetual's decision to grant rights only to existing shareholders – and not to the new common shareholders who will receive shares when the debentures are converted to equity at year end. In other words, they want a normal Christmas, getting their pile of goodies like everybody else.
Without the rights offering, the debenture holders would have controlled the company. The reason: Perpetual's share price has fallen so drastically and they will be issued millions of shares at low prices. However when the rights offering is added to the mix, the existing common shareholders get control and that control increases as the share price declines.
The rights offering, which will raise $25 million, was part of a series of recapitalization transactions announced last month. Other measures included issuing equity to holders of $34.9 million of 7 per cent convertible debentures, entering a new financing arrangement that gives $18.2 million of additional liquidity collateralized by one million shares of Tourmaline Oil Corp. and extending the bank lending arrangements to Oct. 31, 2016 and providing for $62 million of total borrowing capacity.
Through those measures Perpetual reduced its debt. In a statement last month, the company said the “equity transactions are fair to the holders of the common shares and convertible debentures and are in the best interests of the company and its stakeholders.”
It based that assessment on the work done by the independent committee, by the fairness opinion rendered by the committee's financial adviser and the views of management and their financial adviser. Perpetual said Clay Riddell (chairman) and Sue Riddell Rose (chief executive) recused themselves from voting on the Equity Transactions. A company controlled by Clay Riddell has agreed to backstop the $25 million rights offering.
The market has cast a critical eye. For instance, the debentures which were trading at $95 per $100 face value prior to the announcement –because of the expectation they would be redeemed for cash at $100 per debenture — now change hands at $31. (They hit $26 on Dec. 14.) The shares, which were trading near 45 cents before the announcement now trade below 10 cents — an 80 per cent reduction.
While the low share price means the debenture holders will be issued a ton of equity, existing common shareholders benefit because the price to exercise rights and buy shares is, under the formula developed, set even lower. “The lower it gets, the worse the effect on debenture holders and better for common shareholders,” said one holder because of the “formula used to calculate the number of rights granted and the massive discount to market price.”
Calls to Perpetual seeking a comment weren't returned.