Venator Capital Recommends Vote Against Invesque Inc. Debenture Amendments
TORONTO, Oct. 20, 2021 /CNW/ - Venator Capital Management recommends that Invesque Inc. Debentureholders vote AGAINST Debenture Amendments as currently proposed at the Special Meeting of Debentureholders to be held on November 2, 2021
On September 30, 2021, Invesque Inc. issued a circular in connection with a special meeting of 5.00% convertible unsecured subordinated debentureholders ("Debentureholders") to be held on November 2, 2021 to consider certain amendments to the 5.00% convertible unsecured subordinated debentures of Invesque Inc. due January 31, 2022 (the "2022 debentures"). Venator Capital Management, manager of the Venator Alternative Income Fund, a holder of 2022 debentures, has decided to vote "AGAINST" the proposed Debenture Amendments.
The Board of Invesque is effectively asking Debentureholders to convert their current holdings into a new three year bond and we believe that if we are to consider this "new investment" we should get "fair current market terms" in exchange. Venator Capital Management has extensive experience in the convertible bond market and is of the opinion that all the proposed amendments, designed to avoid payment on maturity on January 31, 2022, are woefully inadequate in order to gain our support:
- The proposal that the interest rate be increased from 5.00% to 6.25% is too low. Given that this would be seen as a very low quality credit (the current debt-to-market capitalization ratio is 9-1), we would suggest that the cash interest rate should be well in excess of the coupon provided by the Chemtrade 2025 convertible debentures which was priced at 8.5%. Considering Invesque would be viewed as a higher risk credit than Chemtrade was at the time of issue, the coupon should be in excess of 10%.
- The proposal that the conversion price be lowered from US$11.00 to US$6.00 is still too high a conversion price. Again, using the Chemtrade 2025 debentures as a proxy, the strike price for the conversion was approximately 40% above the market price of the stock when issued, which is typical for new issue convertible bonds. With Invesque stock trading around the US$2.00 level, this would suggest an appropriate strike price of the bonds would be around US$3.00.
- The proposal to extend the maturity date from January 31, 2022 to January 31, 2025 is acceptable with caveats. We would note that another series of convertible debentures matures on September 30, 2023 and there is a significant likelihood that the Company finds itself in a similar situation whereby it cannot afford to repay the debentures. We are of the opinion that 2022 debenture should be amended to provide the Debentureholders with a "Put" option whereby we have the ability to "Put" the amended 2022 debentures back to Invesque in August of 2023, and have the option to amend the terms of the to-be-amended 2022 debentures to the equivalent of the potentially-renegotiated 2023 debentures, should those holders negotiate more favorable terms. This would ensure the Debentureholders have a "seat at the table" should Invesque's financial situation deteriorate further.
We note that the Board has also stated that accepting the proposal will "Eliminate Risk of Receiving Common Shares on Maturity Date". Given the concentrated ownership position, we believe that the dilution in excess of 25% is a risk that shareholders would prefer to avoid as well. Especially given managements valuation of its assets/NAV, which can be found on its financial statements. We would also note that the Board has proposed redeeming for cash US$10,000,000 of the debentures (22.23%). If our proposals, which are simply what we believe are market terms for a new issue convertible bond, is unpalatable to the Board, they can simply attempt to redeem for cash a higher portion of the outstanding debentures. If the Company were to redeem 50% of the debentures and lower the strike price to US$3.00 on the remaining debentures, the resulting dilution (should the stock increase beyond US$3.00) would only be approximately 12.5%. We believe that the proposed lower conversion price incentivizes the Board to redeem a higher proportion of the 2022 debentures in the interest of both the Debentureholders and the shareholders.
We acknowledge that COVID-19 has had a material adverse effect on the Company, but we would note that the balance sheet utilized a high level of leverage entering before the pandemic. Even with our proposals above, the Debentureholders would still be assuming a high level of risk given the significant amount of senior debt still on the balance sheet. We are only proposing current fair market new issue terms for the Debentureholders.
While we can appreciate that the Board "Unanimously Recommends That The Debentureholders Vote For the Debenture Amendments", we would note that the Board is looking out for the current shareholders interest in preference to the Debentureholders and it is rightfully concerned about dilution of its largest shareholders collective ownership interest in excess of 50% of the outstanding shares (through Tiptree Asset Management and Magnestar Capital).
FOR ALL OF THESE REASONS VENATOR CAPITAL MANAGEMENT STRONGLY RECOMMENDS THAT ALL DEBENTUREHOLDERS VOTE "AGAINST" THE PROPOSED AMENDMENTS AS SOON AS POSSIBLE (BEFORE THE OCTOBER 29th DEADLINE) AND ASKS THAT THE BOARD CONSIDER OUR CONCERNS AND AMEND THEIR PROPOSAL TO FAIR MARKET RATES/TERMS.
Yours Truly
Brandon Osten
CEO, Venator Capital Management
416-628-8198
About Venator Capital Management Ltd.
Founded in 2005, Venator Capital Management Ltd. is a Toronto-based investment firm that strives to consistently generate superior, risk-adjusted returns across its various Funds. Latin for 'hunter', Venator employs a fundamental, bottom-up investment approach to identify and invest in under-valued, and often under-followed, businesses across North America. Using equity long/short and fixed income investment strategies, the Venator Funds have significantly outperformed North American equity and credit markets, with less risk and volatility, from inception. Venator is registered with the Ontario Securities Commission as a Portfolio Manager, Investment Fund Manager and Exempt Market Dealer.
SOURCE Venator Capital Management Ltd.
Brandon Osten, CFA, CEO, Venator Capital Management Ltd., [email protected], 416.628.8198.
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