- Canada oil company bondholders say deal benefits stockholders
- ‘Unnerving precedent’ seen, though alternatives are scarce
Twin Butte Energy Ltd.’s plan to sell itself is starting to face resistance from some bondholders who say the deal rewards equity holders in the troubled Canadian energy company at their expense.
The oil-and-gas producer that’s been staving off default in recent months agreed to sell itself last month to a group consisting of Hong Kong and Canadian domiciled Reignwood Group Co. and Horizon Holding Group. Under the terms, equity holders would receive 6 Canadian cents per share, or C$21 million ($16 million), while the convertible-debt holders would receive 14 percent of the face value, or C$12 million.
That breakdown has run afoul of some Twin Butte bondholders who say they collectively hold about 3.8 percent of its C$80.6 million in outstanding convertible debt and are trying to enlist other creditors to vote against the deal, according two people with knowledge of the matter who requested to not be named because it is private. The dissident creditors need more than a third of the votes cast at a meeting expected in mid-August to go against the plan in order for it to be rejected, and one analyst said they may succeed.
"We believe that debt holders will be unwilling to support the proposal," Aaron Bilkoski, a Calgary-based analyst with Toronto-Dominion Bank’s TD Securities unit, said in a note to clients last month after the deal was announced. "Not only does the plan result in debt holders receiving less cash than a more junior security class, supporting the transaction sets an unnerving precedent for similar situations in the future."
The company’s shares fell 9.1 percent to 5 Canadian cents at 10:46 a.m. in Toronto. The convertible debentures jumped as much as 3.5 percent to 15 Canadian cents on the dollar.
The Canadian company’s efforts to find a buyer follow other troubled Calgary oil and gas companies like Penn West Petroleum Ltd., Lightstream Resources Ltd. and Connacher Oil & Gas Ltd. that have looked for ways to solve their debt and cash-flow problems amid the oil rout.
Twin Butte’s market capitalization has tumbled to C$19.5 million from a peak of nearly C$862 million on April 23, 2014, as the price of oil has fallen 56 percent from a June 2014 high and prevented the company from generating enough cash from its Alberta operations to meet its debt obligations. In December, Twin Butte began a strategic review of its options, including a debt restructuring and a sale of all or part of the company.
The company announced the sale to the Reignwood group on June 24 after its bankers granted it multiple short-term credit-line extensions, some as short as one day, to keep pursuing alternatives. It entered into a forbearance agreement with its bank syndicate after defaulting on its payment due June 23 on an C$85 million subordinated credit facility. Twin Butte had C$294 million in debt as of March 31, according to the company’s first-quarter results.
The company is required to close the sale by Aug. 15, with a possible extension of up to 90 days to meet regulatory approvals. It requires the acceptance of two-thirds of the company’s convertible-debt holders.
"The proposed transaction in our collective judgment is the best alternative, in the current circumstances, available to the company," Rob Wollmann, chief executive officer of Twin Butte, said by e-mail. More than 400 companies were contacted during the strategic review, including Canadian and internationally based producers and financial counter-parties, he said.
The dissident bondholders argue that by granting those quick extensions, Twin Butte’s bankers essentially forced the company to sell itself, leading to the low offer from Reignwood and Horizon, the people said. They are urging the company to explore other alternatives, including asset sales, new management, a restructuring or a better offer.
The dissidents have reached out to other Canadian oil and gas players to gauge their interest in acquiring part or all of the company, according to the people, especially in light of the premium paid recently in the Calgary energy space, including the C$975 million paid by Teine Energy for a group of Penn West Petroleum Ltd.’s Saskatchewan properties last month.
It’s "not surprising at all" that some debenture holders would be opposed to the deal with Reignwood and Horizon, said Ken Lin, an equity analyst at Paradigm Capital Inc. The stock is worth nothing because there’s no way to pay off the debt.
Still, "I think this is the best deal that they could have received," he said. "You look at who the group was that purchased the shares, it’s an Asian group. So that means that no one domestically was interested in this company."
There has been a recent case where equity holders received a premium over the convertible-debt holders, Calgary Sinoenergy Investment Corp.’s acquisition of Long Run Exploration Ltd. in December valued at C$765 million including debt, TD’s Bilkoski said.
The Long Run transaction was approved by both the equity- and bondholders although, as Bilkoski notes, the convertible-debt holders were made 75 percent whole, which was "much more tolerable" than the 14 percent offered to Twin Butte holders.
Such an outcome probably isn’t in the cards for Twin Butte, Paradigm Capital’s Lin said, and that the only other option would be to seek bankruptcy protection.
While some debenture holders will be upset with the sale, "they’ll end up voting in favor of it because there’s no other alternative, really," he said. "Any resolution is probably better than going through bankruptcy."