Joe689 Posted February 29, 2020 Share Posted February 29, 2020 I found it telling that they primed their shareholders with specifics of income hit. If they were going to test their luck, I see no PR needed to shareholders because it would be a wait and see. If they do get some equity, it will be interesting the type i.e preferred, warrants, etc Link to comment Share on other sites More sharing options...
heth247 Posted February 29, 2020 Share Posted February 29, 2020 I don't see Morguard has much leverage, not to mention owning the company post BK. My understanding of US BK law is that such above-market lease will be rejected in BK, and all they can do is file a damage claim, which will be capped at one year's rent or 15% of remaining lease term. Is Canada different? Link to comment Share on other sites More sharing options...
bizaro86 Posted February 29, 2020 Share Posted February 29, 2020 I don't see Morguard has much leverage, not to mention owning the company post BK. My understanding of US BK law is that such above-market lease will be rejected in BK, and all they can do is file a damage claim, which will be capped at one year's rent or 15% of remaining lease term. Is Canada different? Canada is different. A similar formula exists for BIA insolvencies. This would almost certainly be a CCAA insolvency, which has no specified formula - the landlord's claim is based on the specific damages and facts of the case. This would be pretty cut and dried that the damages on the sub leases are the present value of the difference between the head lease and sub lease. I found a big-law summary of lease rules in CCAA. Its targeted toward retail, but the principals should be the same. https://www.google.com/url?sa=t&source=web&rct=j&url=https://blakes.com/getmedia/6E537852-D203-47A9-BED0-DEB7E8CA9B99/Retail_Insolvency_Series__Landlord_Perspectives.aspx&ved=2ahUKEwiqoby40_fnAhVLsp4KHepVBkkQFjAAegQIARAB&usg=AOvVaw21U8-Y9uphtSdq-FquDnOX Link to comment Share on other sites More sharing options...
Joe689 Posted February 29, 2020 Share Posted February 29, 2020 I imagine it would not help landlord's case that the lease is well above market value not even considering the subleases. Link to comment Share on other sites More sharing options...
heth247 Posted February 29, 2020 Share Posted February 29, 2020 Canada is different. A similar formula exists for BIA insolvencies. This would almost certainly be a CCAA insolvency, which has no specified formula - the landlord's claim is based on the specific damages and facts of the case. This would be pretty cut and dried that the damages on the sub leases are the present value of the difference between the head lease and sub lease. I found a big-law summary of lease rules in CCAA. Its targeted toward retail, but the principals should be the same. https://www.google.com/url?sa=t&source=web&rct=j&url=https://blakes.com/getmedia/6E537852-D203-47A9-BED0-DEB7E8CA9B99/Retail_Insolvency_Series__Landlord_Perspectives.aspx&ved=2ahUKEwiqoby40_fnAhVLsp4KHepVBkkQFjAAegQIARAB&usg=AOvVaw21U8-Y9uphtSdq-FquDnOX Thanks, good for me to read and learn. But the link says on page 4 that CCAA does have a formula: "As noted previously, if a landlord’s lease is disclaimed, it will have a claim for unsecured damages in the CCAA proceeding. In a proposal proceeding under the Bankruptcy and Insolvency Act (Canada) (BIA) — restructuring proceedings typically used for smaller and less complicated businesses — there is a specific formula that is set out to quantify landlord claims. The BIA proposal formula permits a landlord to file a claim for the lesser of (i) the aggregate of the rent for the first year following the date on which the disclaimer became effective and 15 per cent of the rent for the remainder of the term of the lease after that year; and (ii) three years’ rent. " Link to comment Share on other sites More sharing options...
bizaro86 Posted February 29, 2020 Share Posted February 29, 2020 That says the BIA has a formula. CCAA is different. It's sort of like the difference between chapter 11 and chapter 7 in the US. A clear quote from later in the same document. "Landlords have resisted importing the BIA proposal formula, or variations thereof, into CCAA proceedings in which there is no statutory formula." In CCAA landlords have to back up their claim, but there isnt a formulaic limit. In this case, it would be really easy (imo) for Morguard to prove damages. I'm almost certain they'd be awarded an unsecured claim for the present value of the difference between the head lease rate and the sublease rate for the remainder of the head lease. Link to comment Share on other sites More sharing options...
heth247 Posted March 1, 2020 Share Posted March 1, 2020 That says the BIA has a formula. CCAA is different. It's sort of like the difference between chapter 11 and chapter 7 in the US. A clear quote from later in the same document. "Landlords have resisted importing the BIA proposal formula, or variations thereof, into CCAA proceedings in which there is no statutory formula." In CCAA landlords have to back up their claim, but there isnt a formulaic limit. In this case, it would be really easy (imo) for Morguard to prove damages. I'm almost certain they'd be awarded an unsecured claim for the present value of the difference between the head lease rate and the sublease rate for the remainder of the head lease. Sorry I was confused between BIA and CCAA. Just did some readings on their differences. https://www.gdlaw.ca/blog/2016/11/corporate-restructuring-under-the-bia-and-ccaa-key-differences.html It seems CCAA has fewer rules and is better for companies with complex debt profiles, and BIA proceedings are typically faster and less costly due to more rules. Given OBE's simple debt structure, and small size, why wouldn't they choose BIA over CCAA? Link to comment Share on other sites More sharing options...
SharperDingaan Posted March 1, 2020 Share Posted March 1, 2020 Some very basic numbers per the note disclosure as at 09/30/2019. OBE owes Morguard 177M (8+33+33+33+33+37). Morguard has to take 52.5M (2.5+10+10+10+10+10), or put OBE in BK and stand in line as an unsecured creditor, with 2 buildings materially empty. However, sublessees in the same building, over the same period, owe OBE 83M. Morguard could just say no, be out 177M, and make a claim as just another unsecured creditor Morguard could agree to OBE's 52.5M offer, and have OBE assign its 83M of subleases over to them. Morguard gets enough cash flow to keep the buildings open, the loss falls to 41.5M, and they now have a tenant that is a better credit. However, since 09/30/2019, OBE has paid its regular 2.75M/month (33M/12) for 5 months through 02/29/2020, or 13.75M. If Morguard accepts the new terms, and the sublease assignment, the loss is now only 27.75M As accounting rules permit forward amortization over the remaining term of the lease, Morguard takes a before-tax hit of just 5.55M/yr, or 3.33M/yr after 40% tax. What do you think is the more attractive option? Put OBE into BK, sit on 2 huge and empty buildings in downtown Calgary that in today's climate will take years to lease up, and keep having to front the monthly cash cost of heat, light, taxes, and mortgage while you are waiting. Or keep the buildings at least covering their costs, swallow the 5.55M/year loss for 5 years, and benefit from whatever incremental lease up you can do over the next 5 years. SD Link to comment Share on other sites More sharing options...
bizaro86 Posted March 1, 2020 Share Posted March 1, 2020 The size of their business (multiple JVs, asset size, etc) makes CCAA almost certainly the way they would go. I dont think public companies ever go the other way. The process is too prescriptive, and the direct bankruptcy liquidation if creditors vote down a plan isnt seen as a pro by management teams. If the file I'd be willing to offer 20-1 odds its would be under CCAA. Link to comment Share on other sites More sharing options...
heth247 Posted March 1, 2020 Share Posted March 1, 2020 The size of their business (multiple JVs, asset size, etc) makes CCAA almost certainly the way they would go. I dont think public companies ever go the other way. The process is too prescriptive, and the direct bankruptcy liquidation if creditors vote down a plan isnt seen as a pro by management teams. If the file I'd be willing to offer 20-1 odds its would be under CCAA. I see, thanks. Even they go for CCAA, I still doubt they will be able to file a full claim of $177M. Link to comment Share on other sites More sharing options...
bizaro86 Posted March 1, 2020 Share Posted March 1, 2020 Morguard wouldn't have a claim for the full rent owed. They'd have a claim for the rent owed minus the current value of the space. Which is pretty easy to establish given a lot of it has been subleased. The subleases would get assigned to morguard and they would have an unsecured claim for the difference. Link to comment Share on other sites More sharing options...
longlake95 Posted March 1, 2020 Share Posted March 1, 2020 "Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks." WEB Link to comment Share on other sites More sharing options...
SharperDingaan Posted March 1, 2020 Share Posted March 1, 2020 Morguard has zero claim on the sub-leases, in a CCAA filing it is an asset to be sold, the proceeds of which go to all OBE unsecured creditors. Morguard has to buy them at MV. SD Link to comment Share on other sites More sharing options...
Cigarbutt Posted March 1, 2020 Share Posted March 1, 2020 ^From a Bennett Jones presentation Subtenants and Bankruptcy • LRBA provides that if the trustee disclaims or assigns the lease, the subtenant can apply to court for an order giving it the same interest it had as a subtenant under the new arrangement. • The subtenant takes on the tenant’s obligations as they existed at the date of bankruptcy (except as to rent), and the subtenant has to follow the same conditions applicable to an assignment of a lease by the trustee. • The subtenant has to pay at least as much rent as it paid to the tenant, even if the subtenant was paying more rent to the tenant than the tenant paid to the landlord. • The court can order that the subtenant be given the right to acquire possession for the unexpired term and may also take an assignment of the head lease if the court deems fit. Link to comment Share on other sites More sharing options...
Joe689 Posted March 2, 2020 Share Posted March 2, 2020 At this current WTI, and stock price, OBE has the leverage here. At insolvency, the secured creditors are the AER that wants 800M for cleanup, a syndicate that wants 400M, and note holders that wants another 40M or so. The notion of becoming an unsecured creditor seems frightening. ' The Morguard PR seems to prime their investors for a settlement. Their PR came out 1 hour after OBE. This did not just 'come about', there have been negotiations for months now I assume. I speculate that Morguard needed to see the actual pressure, the actual syndicate contract demanding lower rent for extension, to be able to settle this. Without that pressure, Morguard would be reluctant to settle anything when liquidity is fine. They needed proof that we were in big trouble. Link to comment Share on other sites More sharing options...
bizaro86 Posted March 2, 2020 Share Posted March 2, 2020 At this current WTI, and stock price, OBE has the leverage here. At insolvency, the secured creditors are the AER that wants 800M for cleanup, a syndicate that wants 400M, and note holders that wants another 40M or so. The notion of becoming an unsecured creditor seems frightening. ' The Morguard PR seems to prime their investors for a settlement. Their PR came out 1 hour after OBE. This did not just 'come about', there have been negotiations for months now I assume. I speculate that Morguard needed to see the actual pressure, the actual syndicate contract demanding lower rent for extension, to be able to settle this. Without that pressure, Morguard would be reluctant to settle anything when liquidity is fine. They needed proof that we were in big trouble. It seems to me that the best ask for Morguard would be a convertible pref. Strike at the current share price, then short out as much of the exposure as possible to lock in the fee. Set the face value equal to the NPV of the concession that is being made. The problem is that a ~$40 MM concession (SDs numbers, I didn't calculate) is way more than the 19.9% of the company they can give up without a shareholder vote. Another reason to do a pref I suppose - 19.9% in freely tradeable common, the rest in prefs? Be interesting to see how hard Morguard plays this hand - they don't want OBE to go BK, but I doubt the banks do either - they'd have to get in line behind the AER and try to sell the assets to recover their money. No position ever, but following with interest. Link to comment Share on other sites More sharing options...
Joe689 Posted March 2, 2020 Share Posted March 2, 2020 Has there been cases when a REIT has taken equity in return for lease concessions? Link to comment Share on other sites More sharing options...
Gregmal Posted March 2, 2020 Share Posted March 2, 2020 Has there been cases when a REIT has taken equity in return for lease concessions? Plenty. It’s becoming common Link to comment Share on other sites More sharing options...
Joe689 Posted March 3, 2020 Share Posted March 3, 2020 There has to be a formula for estimating this. I mean if there is ~40m in cash concessions over about 5 years, and an equity currently at ~50m, how would one expect the equity to respond. I would assume that it would all flow to the equity. Having said that, would it mean a near stock double if the landlord got no equity? So maybe issue some warrants at 1+ for maybe 10m? Give the equity owners a near double and dilute them 15% Link to comment Share on other sites More sharing options...
bizaro86 Posted March 3, 2020 Share Posted March 3, 2020 There has to be a formula for estimating this. I mean if there is ~40m in cash concessions over about 5 years, and an equity currently at ~50m, how would one expect the equity to respond. I would assume that it would all flow to the equity. Having said that, would it mean a near stock double if the landlord got no equity? So maybe issue some warrants at 1+ for maybe 10m? Give the equity owners a near double and dilute them 15% I wouldn't expect $40MM in concessions to produce $40MM in stock price gains. I think the stock is trading much like an option on a recovery right now. If the value of the firm goes up by $40MM, some of the gain in intrinsic value will be offset by a loss of option value/time value. Link to comment Share on other sites More sharing options...
Liberty Posted March 3, 2020 Share Posted March 3, 2020 34m market cap, 420m entreprise value, 1.2bn "equity" on the books (mostly PP&E purchased way higher). Happy micro-cap investing... Link to comment Share on other sites More sharing options...
heth247 Posted March 5, 2020 Share Posted March 5, 2020 Still no news, must be tough negotiations... Link to comment Share on other sites More sharing options...
heth247 Posted March 5, 2020 Share Posted March 5, 2020 Still no news, must be tough negotiations... Well, negotiation deadline extended to March 13. Not sure if they will still announce 4Q earning tomorrow. Link to comment Share on other sites More sharing options...
Joe689 Posted March 5, 2020 Share Posted March 5, 2020 Yes, things must be complicated. BTW, I see no announcement on earnings date.... Link to comment Share on other sites More sharing options...
Liberty Posted March 5, 2020 Share Posted March 5, 2020 https://business.financialpost.com/commodities/energy/oil-consumption-to-fall-by-largest-volume-on-record-dealing-fresh-blow-to-oilpatch Link to comment Share on other sites More sharing options...
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