Convertible Bond Yielding > 20%

[netnet]

Any suggestions as to why Zargon has traded down again?

[Cardboard]

I think that there has been a realization over the last 3 months that they may not continue liquidating which was accretive (the hiring of Macquarie and mandate confirms that) and that the remaining business does only $8 M/year of FFO at current prices. So the remaining $33 million in net debt is still just over 4 times which is over the 3 times that likely would be wanted. Moreover, their ASP project is still not operating as per the original plan and requires a decent amount of spending in polymer each year.

 

I do believe that the selloff has been accentuated by tax loss selling and some getting out like UBS yesterday.

 

However, the situation appears easily fixable to me with many options available.

 

Cardboard

[Cardboard]

Regarding the converts, what is your risk?

 

If they ever were to convert the debentures into shares (worst case scenario, last option IMO), you would end up with a debt free company with $24.5 million of cash on the balance sheet. Annual interest payments of $3.5 million would be gone or directly adding up to FFO.

 

An oil weighted, debt free company with 11% corporate decline rate should easily trade for 7 times FFO. So that is 7 x $11.5 million + $24.5 million or $105 million. For perspective, par for the convertible is $57.5 million. Current EV is $57.5 - $24.5 + $20 or $53 million.

 

There are many ways to slice it but, it does not seem like a complicated exercise of financial engineering to make value surface.

 

Cardboard 

[misterkrusty]

I just don't see any risk to the converts (full disclosure: I own them)  equitization of the converts would be a huge win for holders, as Cardboard points out.  but it's extremely unlikely to happen ... would need sustained plunge (from current levels) in oil & gas prices.  Otherwise, Hansen has ever reason (fiduciary obligation and personal financial interest) to avoid such a fate.  IMO, most likely scenarios are a) pay off debs in cash at maturity, or b) exchange offer to extend maturity in return for a higher coupon and/or lower conversion price.  the latter requires 2/3 approval (measured by $ value of debs).

 

keep in mind that the remaining assets are basically 4 main properties, 2 that are generating solid cash flow at $48 WTI and 2 that are just about breakeven.

[Cardboard]

Don't forget the possibility of mixing a) and b). It would make a lot of sense to keep some of this long term financing in place.

 

Another asset that is lost in the panic is $129 million of NOL's. These are not of the exploration type but, the regular tax carry forward.

 

So a profitable company like Imperial Oil could buy this thing for say $1.50/share (big premium from here), settle the converts at par or spend a grand sum of $104 million. Cash in the $24.5 million in cash, deduct $129 million from its 2016 taxable income and fire sale the oil business for $50 million. So net proceeds of $204 million for an investment of $104 million.

 

Even if they were to give away the oil assets for $1 it would still make a lot of sense to do.

 

Cardboard

[misterkrusty]

agree!  the tax losses have a lot of value to an acquirer - more so to someone who bought the entire Zargon C-corp, less so if the assets are sold off piecemeal

 

tax losses at Canadian E&Ps come in about 4 or 5 different flavors.  long story short, past M&A suggests these are worth between 5-12 cents on the dollar (of losses) depending on type.  Taking the low-end, Zargon's should be worth at least $21M ... pretty significant in relation to anything else at this company

[Pelagic]

Thoughts on Zargon's debenture restructuring proposal?

 

http://zargon.ca/wp-content/uploads/2017/01/Jan-6-2017-Presentation-final.pdf

 

-extending the maturity date of the Debentures from June 30, 2017 to December 31, 2019

- increasing the interest rate of the Debentures from 6.0% per annum to 8.0% per annum

- reducing the conversion price in effect for each common share of Zargon to be issued upon the conversion of the Debentures from $18.80 to $1.25

- providing debenture holders a “put right” to redeem up to $19 million of Debentures at a cash price set by a “Dutch auction” with minimum and maximum prices of $890 and $1,000 per Debenture.

 

I guess this first question is will it be approved? Should it be approved it seems to reduce equity upside to around $1.25 for the short term but dramatically reduces debt and buys the company another 3 years to get things together or sell itself.

[barminov]

They currently have $57.5m of debentures outstanding (at face value) and are paying $3.45m/year in interest. If this gets approved and they redeem $19m at $1000 per, they will have $38.5m of debt remaining and will be paying $3.08m/year in interest (could be slightly lower if they redeem at a lower price). So, they push the debt out 2.5 years and yearly interest payments are reduced somewhat.

 

What's the cost to this? Above $1.25, the holders of the debentures would be able to convert their debentures into 32.4m ($38.5/$1.19) shares. Once again, this could be slightly lower if the redemption is at a price lower than $1000. Currently we've got 30.6m shares outstanding so current shareholders would be left with roughly half of the company at that point. So, the upside north of $1.25 is cut in half but the risk of even bigger dilution is pushed out 2.5 years. At a share price of $0.80, even after buying back $20m of debt, about 47m shares would have to be issued if this deal does not go through and they can't come up with the money through asset sales/refinancing. 

 

Overall, I think it's a fair deal although I don't particularly like it. Debt holders get a higher interest rate, equity upside north of $1.25 (which I think is worth a lot), protection from early redemption, and the ones that don't like it can put most of their debt back to the company at or near par. On the last point, I'm assuming that most of the debenture holders that vote for the deal (it needs a vote of 66 2/3% to pass) will want to keep their bonds so the remaining ones who voted no have the option of getting out. This might not be a good assumption. Equity holders, on the other hand,  give up half the equity north of $1.25 but in return get 2.5 more years to let things play out and hopefully for value to be realized.

 

As a shareholder, I'm not particularly fond of the deal. I would have preferred a sale of the entire company but they hinted fairly strongly that this is the course they were going to take so can't say it was unexpected. If the deal goes through, my estimate of fair value for the shares will go from $2/share to ~$1.50. If it doesn't go through, I hope they have something else lined up. I'm wondering if the reason they haven't decided to sell the company is because they are not getting offers/getting lowball offers or if it is because management is intent on riding this out and thinks oil will rebound strongly.

[sculpin]

Assuming the price of oil goes to $65 by mid 2017 I don't think it is a stretch to assume Zargon can increase their cap ex somewhat to be producing 3,000 boed mostly oil by 2nd half 2017.

 

At that point I would think the Company would be worth mininum $60,000 per flowing barrel or $180 million total enterprise value - this would place a value on the shares of $3 and $240 per $100 ($100/$1.25 times $3) face value of debenture.

 

This is a win win situation for both shareholders and debenture holders.

[sculpin]

https://reminiscencesofastockblogger.com/2017/01/08/revisiting-zargon-after-the-debenture-amendment/

 

Revisiting Zargon after the debenture amendment

 

by Lsigurd on January 8, 2017

 

I wrote about my position in Zargon in my September update.  I bought the stock because, after a large asset sale of their Saskatchewan properties at a favorable price, the company seemed poised to recover with an uptick in the price of oil.

 

As an aside, what a long post that update was!  I really was cramming a lot of information into the monthly updates I used to focus on.  Hopefully having the updates dispersed into smaller chunks will make for easier reading.

 

On Friday Zargon announced that their 6.00% convertible unsecured subordinated debentures due June 30, 2017 would be amended, pending approval of holders. The amendments are as follows:

 

debenture_terms

 

When I looked at Zargon in the fall I did so with the assumption that they would have to dilute to raise capital to pay back the debentures.  I was optimistically thinking that would happen at around a 80c share price.

 

With this deal Zargon is using the cash it has available to pay what of the debenture it can, and then, rather than issuing equity at the current level, its saying give us 3 years and we will issue equity at a 50% premium.

 

So its much less dilutive than I had been anticipating.

 

I took a look at what Zargon would look like if the debentures are converted.  This happens at a stock price of $1.25, so I took a look at the company at $1.30.  That implies over 50% appreciation from the current level.  What I’m doing here is asking the question “is this is a reasonable valuation for this company?” – if it is, then there is a lot of upside in the stock.

 

If I assume that Zargon uses the $19 million to purchase the  debentures at par (as opposed to 89% of par), which would be the worst case outcome of the put option, they end up diluting 31 million shares with the rest of the debentures (at $1.30 the debentures would be in the money).  The capitalization and metrics look something like this:

 

incomestatement(Note that my $52 scenario assumes a 1.28 CAD/USD exchange whereas my $45 scenario assumes 1.33 exchange.  I am trying to be conservative by using an $18 differential between WTI and what Zargon realized.  This differential was $10/bbl in the third quarter)

 

Total market capitalization is still only $80 million.  There is no debt.  And you have a company with a best in class decline rate of ~10%, producing 2,500boepd that is 75% oil.

 

On traditional metrics it looks reasonable.  Even after the large price appreciation the company would still be trading at $31,000 per flowing boe and at a little under 8x EV/EBITDA, which is in-line with peers once you account for the fact that the resulting company has no debt.  At $52 oil ($66 Canadian), they can keep production steady with capital expenditures of $6.3 million (in the recent corporate presentation they breakdown the $7.8 million of capital expenditures they expect to incur in 2017 and $1.5 million of it is for land retention).  This leaves around $4 million of discretionary cash flow for growth.

 

I think Zargon could turn out to be a good idea in a rising oil price environment.  It wasn’t, and isn’t a great company at $40 oil.  Its barely treading water.  At $50 it gets its head above.  In the high $50’s there is real value there.  I thought we were moving into a rising price environment in September and I am more convinced of that now.  So I think there is more chance Zargon moves higher than lower.

[Cardboard]

While I own both the stock and the debentures, I have no idea why they felt they had to bend over so badly to get the debentureholders to sign off on this? The conversion price of $1.25 which is my main disappointment is way too low in my opinion as I was expecting something closer to $2.

 

If you take a look at what Entrec Corporation did offer to its debentureholders, and got approved, you see right away that the terms here are too generous. Zargon was in a much better financial shape than Entrec with no other debt, currently generating positive cash flow and could easily sell more assets. If you compare with Colabor Group's debentures deal it is even worst.

 

So this deal takes away upside from my stock but, gives it to the debentures which I was not expecting. However, overall I think it means less potential so I am not thrilled at all by this offer.

 

Cardboard

[SafetyinNumbers]

As a debenture holder, I can see why they offered as much as they did. With no bank debt here, its not a bad result for me to get stock for my debentures at would surely be a price much lower than this. Deb holders would end up with substantially more than half the company (which is what the result basically is of full conversion above $1.25).

 

ZAR has less leverage on the deb holders than if there was a bunch of bank debt, like in the TBE.DB case.

 

Speaking of which, there seems to be a constructive resolution for the TBE.DB, but not sure exactly what it looks like.

[bizaro86]

I'm a debenture holder, and would absolutely have voted against anything less generous. At 90, the YTM is 20% plus, and if they don't pay out the debentures get control of a debt free company at a great price.

 

The new YTM is way lower, so without a better stick I don't see why anyone would take it. Repricing the option is the very minimum. I still might vote no if I can do that and tender.

[sculpin]

Success!

 

ZARGON ANNOUNCES APPROVAL OF DEBENTURE AMENDMENTS AND COMMENCEMENT OF REDEMPTION AUCTION

 

Eighty-seven per cent of the holders of Zargon Oil & Gas Ltd.'s 6.00 per cent convertible unsecured subordinated debentures voting at the extraordinary meeting of the debentureholders held today voted in favour of an extraordinary resolution approving certain amendments to the trust indenture governing the debentures. They voted to:

 

    extend the maturity date of the debentures from June 30, 2017, to Dec. 31, 2019;

    Increase the interest rate of the debentures from 6.00 per cent per annum to 8.00 per cent per annum, effective April 1, 2017;

    Change the interest payment dates applicable to the debentures under the indenture from June 30 and Dec. 31 to March 31 and Sept. 30;

    Reduce the conversion price in effect for each common share of Zargon to be issued upon the conversion of the debentures from $18.80 to $1.25;

    Amend the redemption provisions of the debentures to provide debentureholders with a right to require Zargon to redeem up to $19-million aggregate principal amount of debentures (or such other amount as may be determined by Zargon) at a cash price to be determined by a Dutch auction process;

    Amend the redemption provisions to provide that (other than in connection with the put right) the debentures will not be redeemable by the company before Jan. 1, 2019, and for the 12 months following Jan. 1, 2019, the debentures may only be redeemed by the company if the current market price (as defined in the indenture) of the common shares exceeds 125 per cent of the reduced conversion price;

    Make such other consequential amendments as required to give effect to the forgoing.

 

Zargon is also pleased to announce that it has entered into a supplemental indenture with Computershare Trust Company of Canada as debenture trustee to effect the amendments, and, pursuant to the terms of the supplemental indenture, the company's board of directors has approved the commencement of the redemption auction, effective Feb. 14, 2017. The redemption auction will expire at 5 p.m. Eastern Time on March 31, 2017, unless otherwise terminated, extended or amended by Zargon.

 

Pursuant to the put right and redemption auction, Zargon will redeem up to $19-million aggregate principal amount of debentures. Debentureholders tendering debentures for redemption must tender a minimum of $1,000 principal amount of their debentures and any additional debentures in integral multiples of $1,000, and must specify the minimum price per debenture (of not less than $890 and not more than $1,000, in increments of $10), at which that debentureholder is willing to have its debentures redeemed by Zargon.

 

Debentureholders who wish to tender their debentures for redemption under the redemption auction can only do so by contacting their broker, dealer, bank or other financial institution, which will then tender the debentures according to the debentureholders' instructions.

 

If a debentureholder's debentures are redeemed, that debentureholder will be paid the relevant redemption price for each $1,000 principal amount of debentures redeemed in cash, together with all accrued and unpaid interest (from and including Dec. 31, 2016, up to but excluding the redemption date) promptly following the redemption date.

 

The debenture amendments and the terms of the redemption auction are more fully described in the information circular of Zargon dated Jan. 16, 2017, which is available under Zargon's profile on the SEDAR website. For more information, please contact your broker, dealer, bank or other financial institution, or contact the company at zargon@zargon.ca.

 

Strategic alternatives process update

 

In third quarter 2015, Zargon announced the formation of a special board committee to examine alternatives that would maximize shareholder value in a manner that would recognize the company's fundamental inherent value related to Zargon's long-life, low-decline oil assets and their related oil exploitation upside. To this end, the third quarter 2016 southeast Saskatchewan asset sale eliminated all of Zargon's bank debt, allowing the company to focus on the restructuring of the debentures.

 

With today's approval of the amendments, Zargon has taken a significant step to providing the company with a more stable financial position from which to seek additional value for Zargon stakeholders.

 

With the elimination of the company's bank debt and the restructuring of the debentures, Zargon will continue with its strategic alternatives process, which will be refocused to include, among other alternatives, the addition of capital to further develop the potential of the company's assets, a merger, a farm-in or joint venture, the sale of the company or a portion of the company's assets, or other such options as may be determined by the company's board of directors to be in the best interests of the company's stakeholders. Macquarie Capital Markets Canada Ltd. will continue to be Zargon's exclusive financial adviser related to this component of its strategic alternatives process. The company has not set a definitive schedule to complete this process, and there are no guarantees that the process will result in a transaction of any form or, if a transaction is entered into, as to its terms or timing.

[sculpin]

 

http://seekingalpha.com/article/4047169-doorbuster-sale-zargon-energy-common-stock-last

 

[sculpin]

Based on something Sculpin posted I did a cap iq screen of all convertible yielding greater than 20%. Attached is the spreadsheet. I used Excel to filter out issuers with negative equity. A few that I noticed and have come up on other threads:

 

Argent Energy

Zargon oil & Gas

Twin Butte Energy

Pengrowth Energy

Toscana Energy

Fortress Paper

The Argent Energy Convertibles have defaulted and have a 350% yield to maturity.

 

I find there is too much senior debt ahead of the TBE debentures for my comfort - especially with oil down at $33. The Fortress 2019's are a good bet. Don't know Argent or Toscana enough to comment. I like the Zargon debentures and the Pengrowth ones are beginning to get interesting. Two others that may be attractive that I own are the Discovery Air debentures and Western One debentures - both series.

 

Discovery Air debentures which had been trading at $30 now bid $50 on talks of potential takeover.

 

March 06, 2017 13:50 ET

 

Discovery Air Updates Market

TORONTO, ONTARIO--(Marketwired - March 6, 2017) - Discovery Air Inc. ("Discovery Air" or the "Company") (TSX:DA.A) announced, at the request of Market Surveillance on behalf of the TSX, that the Company has been approached on a preliminary basis regarding a potential corporate transaction. The Company has not received a binding proposal and is in discussions as to the viability of such potential transaction.

There can be no assurances that a definitive transaction will result from any such proposal, and there may be limited available alternative transactions having regard to the Company's current ownership structure. The Company does not intend to comment further upon any potential corporate transaction, or alternative thereto, unless and until it deems further disclosure is appropriate, or required by law.

[sculpin]

Based on something Sculpin posted I did a cap iq screen of all convertible yielding greater than 20%. Attached is the spreadsheet. I used Excel to filter out issuers with negative equity. A few that I noticed and have come up on other threads:

 

Argent Energy

Zargon oil & Gas

Twin Butte Energy

Pengrowth Energy

Toscana Energy

Fortress Paper

The Argent Energy Convertibles have defaulted and have a 350% yield to maturity.

 

I find there is too much senior debt ahead of the TBE debentures for my comfort - especially with oil down at $33. The Fortress 2019's are a good bet. Don't know Argent or Toscana enough to comment. I like the Zargon debentures and the Pengrowth ones are beginning to get interesting. Two others that may be attractive that I own are the Discovery Air debentures and Western One debentures - both series.

 

WEQ sells Britco Leasing for $41mm

 

This will allow the Company to pay off all bank debt if they so desire. Remaining business I assume is Britco modular and the profitable WIS business. Remaining WEQ debentures (WEQ.DB) should rise to near $100 in price as they are now well covered.

 

 

Black Diamond Group Completes Strategic Acquisition

 

Acquires Britco Rental Business From WesternOne Inc, Enters Into $29 Million Bought Deal Equity Financing and Amends Credit Facilities

CALGARY, ALBERTA--(Marketwired - March 6, 2017) -

 

 

Black Diamond Group Limited ("Black Diamond" or the "Company") (TSX:BDI), a leading provider of modular work space solutions and workforce accommodations in Canada, United States and Australia, is pleased to announce it has completed the acquisition of the modular workspace rental fleet and related assets, including the Britco brand, from Britco LP, a wholly-owned subsidiary of WesternOne Inc. (the "Transaction"). Black Diamond has not acquired the modular manufacturing business of WesternOne Inc. The Transaction is expected to give Black Diamond a leading position in the British Columbia work space solutions market, and provide additional size and scale to the Company's existing BOXX Modular operations. Black Diamond will now operate over 2,000 rental units from five key locations throughout the province of British Columbia.

 

"This acquisition of Britco's modular workspace rental fleet and related assets serves to further diversify our business, expands our customer base and footprint in British Columbia and positions us for future infrastructure projects in the province," said Trevor Haynes, Chairman and CEO of Black Diamond Group. "We will leverage the strong brand that Britco represents in this marketplace and are excited to play a meaningful role in British Columbia and its communities, including First Nations."

The Business

Founded in 1977, Britco has the largest fleet of modular buildings in British Columbia- including site offices, mobile offices, office complexes, classrooms, sales centres, first aid buildings, mobile washroom facilities and container solutions for storage. Britco has a diverse customer base and stable revenue stream, with utilization rates averaging 75% over the last three years.

Summary of Transaction

This is a strategic transaction for Black Diamond to acquire all of the assets pertaining to and currently used in Britco rentals, for cash consideration of approximately $41 million, subject to customary adjustments. The Transaction includes all of Britco's 1,896 rental fleet assets, working capital in the amount of approximately $1,175,000, nearly 1,000 existing customer contracts, nine strategic First Nations partnerships, and the transfer of all key personnel to ensure the seamless transition of Britco operations to Black Diamond. The Company will not be assuming long term liabilities or debt obligations other than real estate leases for the five operating locations. The Transaction has an effective date of March 1, 2017. The Company intends to continue operating as Britco in this marketplace.

Peters & Co. Limited acted as financial advisor to Black Diamond in connection with the Transaction.

Strategic Rationale

The Transaction is expected to:

Provide immediate accretion on a cash flow per share basis;

Further diversify Black Diamond by continuing to scale its non-resource business lines and expand its customer base;

Increase Black Diamond's future cash flow stability;

Position Black Diamond as the largest modular workspace and modular rental provider in British Columbia;

Strengthen Black Diamond's position in future British Columbia infrastructure projects; and

Allow Black Diamond to access new customers through the expanded British Columbia footprint, which includes operating locations in Vancouver, Nanaimo, Prince Rupert, Fort St. John and Kelowna.

Pro-Forma Summary of the Transaction

Black Diamond's BOXX Modular business unit is expected to have the following characteristics after giving effect to the Transaction:

With the trailing $6.5 million of Adjusted EBITDA from the Transaction, normalized for approximately $500,000 of synergies, BOXX Modular will represent over 40% of the Black Diamond EDITDA on a trailing basis; and

Largest work space solutions and modular rental provider operating in British Columbia with the most diverse fleet of over 2,000 assets to meet a wide variety of customer needs;

One of the largest modular work space solutions and modular unit operators in Canada; and

Five key operating locations in British Columbia, bringing the total number of BOXX Modular locations to 17 throughout Canada and the United States.

With the completion of the Transaction, Black Diamond's 2017 Adjusted EBITDA guidance increases to a range of $35 million to $45 million.

[gokou3]

Based on something Sculpin posted I did a cap iq screen of all convertible yielding greater than 20%. Attached is the spreadsheet. I used Excel to filter out issuers with negative equity. A few that I noticed and have come up on other threads:

 

Argent Energy

Zargon oil & Gas

Twin Butte Energy

Pengrowth Energy

Toscana Energy

Fortress Paper

The Argent Energy Convertibles have defaulted and have a 350% yield to maturity.

 

I find there is too much senior debt ahead of the TBE debentures for my comfort - especially with oil down at $33. The Fortress 2019's are a good bet. Don't know Argent or Toscana enough to comment. I like the Zargon debentures and the Pengrowth ones are beginning to get interesting. Two others that may be attractive that I own are the Discovery Air debentures and Western One debentures - both series.

 

Discovery Air debentures which had been trading at $30 now bid $50 on talks of potential takeover.

 

March 06, 2017 13:50 ET

 

Discovery Air Updates Market

TORONTO, ONTARIO--(Marketwired - March 6, 2017) - Discovery Air Inc. ("Discovery Air" or the "Company") (TSX:DA.A) announced, at the request of Market Surveillance on behalf of the TSX, that the Company has been approached on a preliminary basis regarding a potential corporate transaction. The Company has not received a binding proposal and is in discussions as to the viability of such potential transaction.

There can be no assurances that a definitive transaction will result from any such proposal, and there may be limited available alternative transactions having regard to the Company's current ownership structure. The Company does not intend to comment further upon any potential corporate transaction, or alternative thereto, unless and until it deems further disclosure is appropriate, or required by law.

 

Discovery Air and Clairvest Enter Into Definitive Agreement for Going Private Transaction

http://web.tmxmoney.com/article.php?newsid=5421092754547494&qm_symbol=DA.A

 

The 8.375% unsecured convertible debenture (DA.A.DB) dropped 5% after the news, presumably because it will remain outstanding after the going-private transaction.  At $44, the deb is trading at 100%+ YTM on June 2018.  Does it mean the market is anticipating that the debenture holders will be screwed, i.e. not paid out at par at maturity?  How would that scenario play out?

 

 

[Cardboard]

There are a few precedents for it or where debentureholders were offered less than par. It requires a vote with 2/3 approval. An offer to extend maturity could also be made.

 

The way minority shareholders have been dealt with in this offer, I would not expect a par offer on these. While true that one could argue that the shares were near worthless and that they have conducted an independent fair value analysis, relative to market price it is very harsh treatment. If they were to offer 75% of par, I doubt it would be turned down considering the situation and how much below that they trade.

 

Another interesting factor is that the secured debentures held by Claivest come to maturity before these. Could that be used to squeeze the unsecured debentures? Can't be repaid at maturity, threaten to call a default and negotiate an offer for the unsecureds?

 

Moreover, the unsecured debentures were amended in November 2014 to allow for Clairvest to expand its ownership beyond 50% without triggering a change of control provision. So this is no longer a potential provision on this take-over to force redemption. And without public shares, these are not really convertible anymore...

 

I wonder what is the larger game plan by buying remaining shares now?

 

Cardboard

 

[rukawa]

Large drop in the discovery debentures.