I’ve written about Pinetree Capital in the past (TSX: PNP) (previous articles), but it appears that management is cutting it really close with a debt-to-assets covenant on their convertible debentures. The indenture document, as amended (amendment 1, amendment 2), broadly stipulates that the debt-to-asset ratio cannot exceed 33%. If the company cannot cure this condition within 30 days of being called on it by the trustee, bondholders can declare the company in default and demand immediate payment (which would clearly result in Pinetree going into creditor protection).
The relevant clauses are quoted as follows:
7.10 (c) Until the earlier of May 31, 2016 and the date when no Initial Debentures remain outstanding, neither the Company nor any of its Subsidiaries shall incur any Designated Indebtedness or issue any Debentures if, after giving effect thereto, the aggregate amount of all Designated Indebtedness and Debentures would exceed 33% of the aggregate value of the total consolidated assets of the Company and its Subsidiaries as at the end of the immediately preceding month, as reflected on the unaudited consolidated balance sheet of the Company as at the end of such month.
(d) Until the earlier of May 31, 2016 and the date when no Initial Debentures remain outstanding, the Company shall not, as of the 15th day of each month, permit the aggregate amount of its Designated Indebtedness and Debentures to exceed 33% of the aggregate value of the total consolidated assets of the Company and its Subsidiaries as at the end of the immediately preceding month, as reflected on the unaudited consolidated balance sheet of the Company as at the end of such month.
According to a November 24, 2014 press release, Pinetree has until January 23, 2015 to cure the existing default condition as their debt-to-assets ratio was 38.8% as of October 31, 2014, based off of a net asset value of 47 cents per share (disclosed November 11, 2014).
On December 2, 2014, Pinetree also breached a debt incurrence covenant by accumulating $3.3 million of margin debt subsequent to the debt-to-assets ratio breach occurring, but this was subsequently cured on December 12, 2014 when presumably they sold securities to cover this amount.
Scouring SEDI, Pinetree Capital disposed of the following securities from November 24, 2014 onwards, of which they are required to disclose in the event of them being 10% or greater owners, or an insider of Pinetree is also an insider of the following issuer:
Canadian Orebodies Inc.
Caracara Silver Inc.
Gold Canyon Resources Inc.
Macarthur Minerals Limited
Manitex Capital Inc.
Mega Uranium Ltd.
Sanatana Resources Inc.
The dispositions of these securities alone do not account for $3.3 million, so there are other companies in the portfolio where Pinetree is not a 10% owner that must have accounted for other cash raised.
There is a major complication at this stage with Pinetree Capital and their ability to obtain a waiver or cure the default.
On November 26, 2014, they filed a notice with SEDAR that an extraordinary meeting will be called on January 22, 2015 for debentureholders on record as of December 18, 2014. The relevant regulations concerning notification to securityholders is through NI 54-101, Communication With Beneficial Owners of Securities of a Reporting Issuer; Section 2.12 (which applies to securityholders in this particular circumstance) states that proxy materials need to be sent 3 business days before the 21st day of the scheduled date of the meeting. The deadline for this was December 24, 2014, which means there can be no brokered agreement with debentureholders as there is no time left for the January 23, 2015 default date.
This leaves them with the following options:
1. Purchase debentures, approximately $11 million face value at 80 cents of par value, which will bring them relatively close to the 33% level. The complication with this is that there is little liquidity in the marketplace, coupled with a lack of time, and the inability to execute on a dutch auction in such a short period of time. They would need to find a private seller of debentures and make a private purchase from them off-market. This is not a trivial amount of debt to be repurchased in a short period of time.
2. Issue equity – given that their stock price is in the toilet, it would be highly dilutive. At a share price of 13 cents, they would need to dilute the existing firm about 40% in order to raise enough in assets to get below the 33% debt-to-assets mark. Pinetree would have to apply to exempt themselves from TSX rules and have this classified as a distressed situation that does not need shareholder approval in order to proceed.
3. If by whatever miracle their assets appreciated by December 31, 2014 to the point where the debt-to-assets ratio went below 33%, they bought themselves at least another three months, depending on what happens to the assets.
Note that simply selling securities in their portfolio would not help their situation – even if they received fair market value for their securities (which is unlikely given the illiquid nature), the debt-to-assets ratio would still remain the same. In order for the ratio to change, their asset value needs to increase significantly, or they need to repurchase debt.
There have been no reported debt repurchases by Pinetree, nor any other insider activity other than insider management issuing options to themselves consisting of approximately 1.76% of the outstanding shares of the company, with a strike price of 16 cents per share and a 2019 expiration date.
How this is going to play out over the next couple of weeks is going to be very, very interesting. There is also a distinct possibility that the company will opt for going into creditor protection via the CCAA (Companies’ Creditors Arrangement Act) and restructure their debentures through that route. This would presumably be a sub-optimal route for management, however, since they would most likely lose control of the company; it would be in the debentureholders’ best interests to see a timely liquidation of a company that presumably still has a positive net asset value of 46 cents per share, as reported on December 15, 2014 – it would be a good educated guess that they could derive $54.8 million in remaining par value with the $148 million in reported assets on the books.
And finally, yes, I will disclose that I own some debentures in this train wreck. This one is not for the faint of heart, nor for those that will have issues with liquidity in the future (there will be none if they go through the creditor protection route, rather there will be a payout by the trustee at some distant point in the future).
Good summary Sacha. This investment story is a cautionary tale of the importance of understanding the capital structure of an enterprise and knowing where (if anywhere) to position oneself.