The continuing saga of Pinetree Capital

Pinetree Capital (TSX: PNP) announced it will be redeeming another $10 million in its debentures on June 5, 2015. This is on top of the $10 million that was already redeemed on April 30, 2015.

For those of you following the Pinetree Capital saga (history of posts here), I continue to hold Pinetree debentures (TSX: PNP.DB) as I believe it is more probable than not they will be made whole at maturity.

On December 31, 2014 Pinetree Capital had approximately $107 million of investment assets on its balance sheet (at fair value, $75 million level 1, $8 million level 2 and $23 million level 3) and $54.8 million in debentures that are now senior and secured by all assets of the company. They have no other debt. When the debtholders got three of their directors on the board when Pinetree defaulted on their debt covenants in late January, presumably on February they start on their liquidation spree. On March 29, 2015 they had $14.3 million cash in the bank which they used to redeem the first $10 million of debt. After June 5, 2015, they will have $34.8 million in debentures outstanding.

Debentureholders will also receive their semi-annual interest payment (10% annual coupon) on May 31, 2015.

As part of their forbearance agreement (to stave off their debt being declared fully payable with likely CCAA implications), Pinetree Capital was required to redeem a minimum of $20 million face value in debentures by July 31, 2015. They had the option of redeeming the debentures with 1/3rd equity, which they have not done so to date. They are also required to maintain a debt-to-assets ratio of 50% until October 31, 2015 and then 33% afterwards.

When doing a quick and dirty pro-forma with no change in assumed asset value other than the payment of interest and principal on debentures, after the June 5 redemption they will have a debt-to-assets ratio of 40.5%. If Pinetree were to redeem another $11 million in principal by the end of August, this would bring the ratio to 33%. Presumably they would want a little bit of a margin of error to work with, so it is likely before October 31, 2015 that they will redeem around $15-20 million in further principal which would bring them safely below the 33% mark.

Not surprisingly, the market has picked up on this and has bidded up the debentures to 88 cents on the dollar. What has previously been a 75 cent dollar is now considerably more expensive and will likely converge to par throughout 2015 with diminishing market liquidity as the debenture supply dries up.

Disclosure: Still long on PNP.DB, but as the redemptions occur, my portfolio weighting decreases.

19 thoughts on “The continuing saga of Pinetree Capital”

  1. I looked into PNP over the last week and constructed a few spreadsheets.. PNP redeemed $20MM by selling their most liquid substantial position.. sphere3d. They had a ~7x avg daily volume position.

    However, the other positions (except for Keek) are way more illiquid at 15x to 248x avg daily volume, with the ~$20MM level3 private assets as the ultimate question mark, both in terms of liquidity and pricing.

    Sacha, I was wondering about your take on:

    1) POET Technologies – now the key position. I read their annual report. It sent the shivers down my spine. I would never touch this and short it if I could.

    This is a C$250MM market cap stock. While the report notes “According to IC Insights (2013), R&D spending by the top 10 semiconductor companies has grown to a
    record-high $28 billion”, the company itself spent only $2.7 million (!) in R&D in 2014, while stock-based comp was $4.6 million.

    It’s promotion all over. I always look for participation of a major company as a proof-of-concept in smaller companies, as their due diligence is obviously much stronger than mine (also in mining etc). There is none. The talk about BAE is a fad: they only rent some facilities.

    When the promotion fizzles out, the law of gravity will kick in. The stock borrow rate is telling: 35% to 50% annual rate over the past month. This is a big problem for PNP, because the resulting increase in debt/asset ratio will create a self-reinforcing cycle.

    2) Keek – the share position is immaterial now, but if the stocks blows up, the $3MM note is also a pretty significant hit. Sheldon’s gone now, but Keek might also be a solid contestant for nr 1 in “how to blow money in the shortest time span ever.”

    3) overhead run rate, probably somewhat reduced, but kicking in harder than ever due to lower assets (office lease commitments etc).

    I would say this makes the debentures way more risky than pricing suggests. I have no position in either PNP stock or debentures, but if I would have the latter, I would surely take the higher prices and leave now..

    Looking forward to hearing your thoughts. Thanks!

  2. Baltasar: We will know whether PNP liquidated Sphere3d on their Q1. I’m guessing they did.

    Keek is a hilarious disaster. The only thing PNP might have done right was securing those noted with all the worthless assets of the firm. I’d be shocked if they got more than 40 cents on the dollar in cash out of their notes.

    PTK I agree with your fundamental valuation (ie zero), but clearly there is market value in their (almost equally and unintentionally hilarious) self-promotional marketing. They were able to dump shares as soon as they legally allowed, and now they are under 10% owners they can get rid of the rest.

    Perhaps the low lying fruit is picked but my projections suggest they will be able to raise enough to at least pay off with the 1/3rd equity provision, and probably all cash to make 33% debt to assets by October. The remaining 20 million or so may require some equity redemption. We’ll know very soon.

    The overhead is immaterial in relation to the interest bite on the secured debentures. Fortunately, there’s no more CEO salary to pay! Plus they are trying to sublease their ridiculously large office.

    If PTK collapses too quickly I agree it does not look good. This probably explains the 89 cent level the debentures are trading at instead of par.

  3. I do believe a significant position of POET technology has been liquidated as they are no longer listed as insider (10% ownership).

    They also get rid of 300k shares of KEK at 0.257.

    Base on Dec 31 statement, you have $83+ million level 1 & 2 asset to cover $54+ million of debenture. Base on the listing of their investments at Dec 31 and assuming no change – it is valued at $64 million (assigning a value of zero to warrants and notes they hold). Now the warrants do worth a couple of million as the PTK’s warrant is in the money.

  4. PNP exercised some POET warrants in February (1.5MM @ $0.75).. they sold just a tad more than they needed to (1.057MM shares) to cease to be an insider, which is smart of course. That was also in April, so not to cover the warrant exercise.

    I am unsure whether they are now fully liquidating POET.. it doesn’t look like it from looking at price action. They still held 11.8MM shares and 6.3MM pretty deep in the money warrants at the last filing.. There is no need to sell at this point, so why should they sell all? Only if the debenture holders force them to (which I suggest they should do).

    PNP basically sold the (liquid) silverware with Sphere (there is really nothing else they could have sold to raise the money). My concern is that if they would hypothetically need to redeem all debentures within say next quarter, it would be hard to even raise the money. And there would be a lot of pressure on NAV that’s already nearing the danger zone.

    If the PNP equity is too risky too invest in.. the debentures are also very risky. You’re still investing in a underlying portfolio.. of mostly extremely dodgy stocks. As you say, POET can hold up, but it’s like investing in an option where time value runs out.. and POET still would need to hold up for a year for the debentures. That’s quite some time for a greater fool stock. These things tend to implode suddenly and very fast. A debenture stoploss on $1 POET might be smart.

    PNP itself is already dangerously nearing zero and will more and more become a call option on what might be left after the debentures.. it’s still in-the-money now, but it’s risky.. and if things start to go sour, the spiral might unfold very fast.

    You’re right on about the company, and have done very good due diligence, but I think you might be underestimating how little others might have done and who might still be in for a nasty surprise.. I mean if you just look at the POET message boards, there are really a lot of folks actually believing in that.

    I appreciate your articles about PNP, just wanted to share my view as a thank-you. 🙂

    I wish PNP just sticked to resource stocks, as I think the good ones are an absolute buy now. But PNP’s new tech positions are a total disaster.. they’re in a bubble and an accident waiting to happen in my view.

  5. Baltasar, I completely agree with what you are saying regarding the “timing of liquidation” risk and PTK.

    For portfolio diversification purposes, I would presume they are liquidating PTK as we speak. At least there was that evidence of selling and I would suspect that they would be liquidating 15-20% of daily market volume if it is a typical trading program. I’m guessing they’ll be able to flush the position in 3-4 months, unless if there is some weird price spike (like Keek?) where they’ll get more liquidity.

    I have been utterly fascinated when I gloss through some message boards on POET. I’d be really curious to get a demographic/psychographic snapshot of the people that post on those things. They’re talking like they’ve got the next Intel on their hands.

    As for resource stocks, were you talking about fossil fuels, or metals (precious or otherwise)? I’m somewhat intrigued as my cash percentage is high and my pipeline of candidates is quite thin at the moment.

  6. It’s best for debenture holders (and equity holders as well) if they did liquidate POET asap.. on the other hand, I wouldn’t be too sure whether they are doing so now.. maybe they only will do so when they are forced to and still gambling with the positions? I don’t know the amount of influence debenture holders can exert.

    As for myself, I am now mostly looking at precious metals as I think gold can move higher.. also there has been a 4 year bear market in the juniors with indiscriminate selling.. I am only interested in the ones backed by majors (proof of concept) and with decent management & corporate governance, which already rules out 90%..

    I hold a position in CA:MAX… US$7 EV/oz; Idaho, USA; strategic antimony byproduct; permitting risk overrated (disturbed brown field & environmental situation will actually improve); very, very well run by integer management.. backed by Teck & Franco-Nevada.. needs a bit higher gold but ticks all boxes.

    Other interesting ones are:

    I am also looking at a list of oil & gas names but would to see a drop in oil first..

    BTW by looking at the former quarterly portfolios, Pinetree should also still hold 6.25 million warrants in Integra Gold expiring 16 June 2016.. those are strike 30cts with the stock at 27 cts.. the list is longer, but the other ‘old’ warrants are miles OTM.. the Integra are most interesting for a possible surprise.

  7. Results are out, as of Mar 31, you have $14 mil cash, $55.5 L1 asset, $7.5 L2 asset, $24.2 L3 asset. The Apr 30 redemption + next coupon should used up all the cash. MD & A mentioned another $10 mil has been raised subsequent to Mar 31 which is for the June redemption.

    They will need another major redemption or debt re-purchase (if allowed) to stay under the 33% covenant in October.

  8. @Baltasar: Thank you. You’ve given me some homework. With regards to the influence the debentureholders can exert, the investment committee that was created as a result of the forbearance agreement stipulated that management is bound by the committee’s decision and can only be over-ridden by the board of directors as a whole. There are two directors on the investment committee, both of them appointed after the forbearance.

    In regards to the Q1-2015 result, there was less transparency in PNP’s portfolio than I had originally desired. They are not disclosing specific quantities of holdings on March 31 and the only hints that I glean out of the statements is the “foreign currency denominated investments” (Sphere 3D? Why didn’t they get rid of that garbage when it spiked earlier?) and Level 2 warrants likely being mostly PTK.

    I was mildly surprised to see the common shares trade up a penny.

  9. Regarding the penny, someone probably isn’t doing their spreadsheet homework.. there is indeed no surprise whatsoever. There sure hasn’t been any move in the underlyings to warrant this.

    But whoever said the markets worked like this… the Venture in particular. They go all over the place. The move to 20cts was truly and utterly insane.

    The Keek jump is also irrelevant. Keek stock is nearly worthless and the $3MM debentures are only an accident waiting to happen as they are valued at par (try to monitize that).

    My thoughts would be this:

    * PTK could collapse quickly in the coming months as the whole unravels.. and PNP wouldn’t be able to get out in time. I’ve actually rarely seen a bigger crock of shit (pardon my French) than PTK. This is huge, even by Venture standards.

    * PTK is key to debenture recovery as it is the largest position by far. But PNP has a 47 volume-day position. Good luck with that when the shoe drops. PNP equity/debt long should be praying PNP is unloading below the radar right now.

    * There is no market for the other positions. Well, Nexgen can be sold.. but when PTK starts to drop, we will see bids dropping on PNP positions just we’ve already seen earlier this year. After all, who is going to walk in front of a freight train?

    * The market turned too optimistic after the two partial redemptions.. that was the easy part with Sphere on hand. There is no easy part anymore.

    * I would actually be willing to short PNP for the ride to zero. This thing will not be around anymore at YE16.

    This also means debentures might very well take a haircut in the end.. not a huge one as there are assets.. but it might lead to a significant relapse in prices in the interim.. which might then present another opportunity.

    I think the debentures not a great opportunity at 92, on the contrary. I agree with your thinking, but it’s still based on the greater fool game.. so you have to take that consensus view in account.

  10. Baltasar: Yes, that run-up in equity was nuts. I wondered about the mentality of people that actually bidded it up. I would guess the line of thought is: “It’s trading at a discount to NAV and the debtholders will let us get it!” while of course the incentives are totally different and the NAV is an accounting fiction given the lack of liquidity.

    About Keek, the fact they got some money out of the equity was a miracle. Now that they’re no longer obligated to report sales, I’m going to guess they netted about $500-600k on equity sales if they dumped the position which is better than zero. The only question at this point is whether they make any recovery on the $3M secured notes they bought.

    Completely agreed about PTK, but there is a particular word I’d use which most people used to describe Enron… that said, I generally am of the belief that management is divesting themselves from it and if I had the unenvious task of getting rid of 10 million shares of PTK, it would be the common shares first and then work on the warrants later (i.e. after you did your supply dump, give the market some time to recover and then exercise and dump).

    I am also expecting management to redeem around $18 million par value in debentures between June 5 and September 30. It is quite likely they will do $12 million cash and $6 million equity. I also believe the 9% discount currently attributed to the debentures is appropriate given the stinking pile of garbage they have for a portfolio. I am not buying or selling, it is precisely in my fair value range at present.

    As for the common shares, I’ll only pay attention to them once this presumed June-September redemption is dealt with.

  11. Thanks everyone for all the intelligent comments. Scanning for ‘distressed’ debt out there, any insight on WesternOne’s common stock (WEQ) and debentures?

  12. Readers should be advised that as of the April 30 disclosure of NAV (which was $0.02 less than March 31) that Pinetree has updated their website and disclosure criteria to only disclose those investments that require public disclosure through SEDI. Most unhelpful!

    My current estimate is that Pinetree will be required to redeem $18 million more in debentures ($12 million cash, $6 million equity) between June 5 and September 30 in order to get the debt-to-assets ratio comfortably less than 33% (define this as less than 30%) assuming no decline in stated asset value.

  13. Are they able to redeem that much more under the forbearance agreement?

    My understanding was they could buy back an additional $5m of debentures in the open market once the $20m in redemptions is completed on June 5.

    I sold some debentures on the quarterly release and then the balance after the most recent NAV update as the margin of safety looks like it will keep shrinking. I’m sure I would feel better if I was one of those hedge funds with a board member on the investment committee but the information asymmetry here is glaring.

  14. I’ve nearly memorized the forbearance agreement to the point I can quote sections by rote.

    The requirement was to redeem $20 million before July 31, 2015. The company (“at the Company’s discretion”) can also repurchase $5 million per their NCIB but note given the average volume NCIB purchases can effectively only take place through the TSX block trade exemption.

    The indenture update allows Pinetree to redeem as many of the debentures as it wants, subject to a maximum of 1/3rd being equity.

    The Initial Debentures will be redeemable prior to the Maturity Date in accordance
    with the terms of Article 4, at the option of the Company, in whole or in part from
    time to time, on notice as provided for in Section 4.3 for the Redemption Price.
    The Redemption Notice for the Initial Debentures shall be substantially in the form
    of Schedule B. In connection with the redemption of the Initial Debentures, the
    Company may, at its option, and subject to the provisions of Section 4.6 and
    subject to regulatory approval, elect to satisfy its obligation to pay up to one-third
    of the aggregate principal amount of the Initial Debentures to be redeemed by
    issuing and delivering to the holders of such Initial Debentures, such number of
    Freely Tradeable Common Shares as is obtained by dividing such amount by 95%
    of the Current Market Price in effect on the Redemption Date. If the Company elects to exercise such option, it shall so specify and provide details in the
    Redemption Notice.

  15. Thanks! You certainly know the agreement better than I do. I would be concerned about getting 1/3rd in equity since a 5% discount doesn’t even cover the bid-ask spread.

  16. Assuming the stock doesn’t move anywhere, if Pinetree redeemed the remainder for 1/3rd equity, the debenture holders would own 41% of the company.

  17. $10 million cash redemption suggests that their liquidation campaign has gone a bit better than one would assume given the garbage in their portfolio. They still need to do another redemption before September 30. Their last trading price (95-96) seems to be a fair reflection on their ability to execute on raising another $10 million.

    NAV is due Monday, and the next quarterly release (which would probably be around early August) would be instructive.

    PNP equity has also taken a disproportionate positive spike up. Why people would assume they would be more shareholder friendly now than before is beyond me.

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