Want to make a few pennies? Temple Hotels Debentures

This is a bet on the confidence of your fellow investors to vote against a bad deal.

Temple Hotels (TSX: TPH) is a borderline-profitable hotel operating company. Financially they are in miserable condition. They have mortgages that are in covenant default, loads of debt and other issues (being in the wrong geography at the wrong time).

For whatever reason (still can’t figure it out today), on December 2015 Morguard Corporation (TSX: MRC) decided to take them over (via control of the asset management agreement) and recapitalize the corporation with equity capital through a rights offering. They used the funds ($50 million) primarily to retire about $60 million in convertible debentures in cash. Morguard owns about 56% of Temple’s stock.

Temple still has about $80 million in convertibles outstanding (TPH.DB.E, TPH.DB.F), and $45 million of it is about to mature on September 30, 2017. Yes, that’s in about three weeks.

Looking at their June 30 balance sheet, they have $14 million in cash and the Morguard parent would need to pay up. (I’ll note at this point the busy Canadian summer hotel season will produce about $7 million in operating cash flow, but this is not including mortgage principal payments and maintenance capital expenditures which would bring this figure down a little).

Management, therefore, is floating a proposal to extend the maturity of the debentures 3 years to September 2020. The terms are to keep the interest rate the same (7.25%), decrease the conversion price to something astronomically high ($40.08/share) to something very high ($15/share, or something that’d need to more than triple in order to get at-the-money) and do a 5% redemption at par at the end of the month.

In other words, they are offering nearly zero incentive for debenture holders to extend.

Indeed, management is continuing a practice that the Securities Act should ban, which is the payment to third-party dealers to solicit YES votes in proxies:

Subject to certain terms and conditions described elsewhere in this Circular, the Corporation will pay a solicitation fee equal to $7.00 per $1,000 principal amount of Debentures that are voted FOR the Debenture Amendments, payable to the soliciting dealer who solicits such proxy or voting instruction voted FOR the Debenture Amendments, subject to a minimum fee of $150.00 and a maximum fee of $1,500.00 per beneficial owner of Debentures who votes Debentures with principal value of $10,000 or greater FOR the Debenture Amendments. No solicitation fees will be paid to the soliciting dealers if the Debenture Amendments are not approved by the Debentureholders at the Debentureholder Meeting.

Insiders own 2.49% of the debentures. The vote requires 2/3rds of those voting to pass and a minimum quorum of 25% (which should be attained).

So this becomes a test of whether your fellow debtholders are stupid enough to vote in favour of this agreement or not, and also a function of whether you believe Morguard will back up Temple in the event that this proposal fails. You would think Morguard would provide some debt credit to Temple because otherwise why dump the tens of millions of dollars into the corporation and just have it get thrown away with a CCAA arrangement at this stage? Or have they decided that the salvage operation they are currently conducting is negative value and basically want to throw away this asset?

Since the TPH.DB.E series is trading at 96.5 cents on the dollar, it means that if you bought $1,000 par value you’d be looking at a 3.6% gain in three weeks if the proposal is rejected (it is too late for management to exercise the share conversion option) AND that Morguard gives capital into Temple to pay off the subordinated debt (nobody else would be sane enough to do it without ridiculous concessions).

The risk/reward is isn’t high enough for me to take the risk but I’m floating this one out here for the reader if you are!

16 thoughts on “Want to make a few pennies? Temple Hotels Debentures”

  1. HCG investor just voted against a bad deal. Investors do turn down the obvious atrocious deals.

    What are the chance of Morguard just walk away & let it die? In this case, there probably won’t be anything left to pay back the debenture holder after paying off the mortgages in a firesale.

  2. Walk away and let it die…..I doubt it, Temple is 30 hotels, 8 being in Fort McMurray….some of these properties are profitable. I’m sure they thought out the different scenarios before investing in Temple.
    I owned all four of the debentures, and sold them off as they reached par. I am hoping the deal is accepted, which will probably cause E&F to drop to about 92…..where I will purchase again.
    I think Morguard owns a big chunk of the debentures , perhaps they have a another large holder on side already??? Morguard may sell the whole lot (TPH) to another REIT….should be interesting.

  3. It’s a possibility albeit one that seems very unlikely. But it leaves the question of why wait and do this thing last-second? There is zero amendment possibility due to the late maturity date. I think the 98% probable scenario in the event of rejection is they’ll get some secured financing from Morguard but this just seems to be a bit slap-dash “take a wild guess they’ll approve it” sort of financing that costs a few hundred thousand dollars of legal and proxy solicitation fees to try.

  4. That article also indicates they are paying third party brokers to solicit YES votes, with the carrot of 7.00 per 1k debenture (minimum fee 150.00, max 1500.00 per debenture holder they sucker).

    I hold TBE debentures that their mgmt thought they could screw debenture holders when they offered 140.00 per 1000.00 deb when they were on the verge of bankruptcy…problem is they were offering shareholders more of the pie than debenture holders, where shareholders were NOT entitled to one penny until debenture holders were paid in full.

    Obviously shareholders voted yes to that deal, but we deb holders voted overwhelmingly NO. They essentially went thru CCAA, liquidated, and shareholders got ZERO, while Deb holders are getting back ~800.00 per 1000.00 deb.

    Shows how incompetent mgmt was. and oh yes, mgmt held plenty of shares but very little debs, so they really had a conflict but they got away with it. Mgmt is now trying to claim severance when they were the ones who were in control but the company failed!

    All imo

  5. Don’t forget that Canaccord Genuity was retained to give a supplemental “fairness opinion” to debentureholders which said the arrangement was “fair” for them! I’m surprised 68% voted against the arrangement!

  6. Look at the timeline for the debentureholder “fairness opinion” (Cannacord). It came well after the shareholder “fairness opinion” (Peters Co) and was only an afterthought by mgmt once debentureholder criticism/complaints began to come forward.

    Mgmt had to postpone the original meeting because they didn’t do what should have been done from the beginning. The first fairness opinion by was no surprise…to say the deal is fair to shareholders (not a word about it being fair to debenture holders), because Cannacord couldn’t say it was fair to debentureholders. Nor were they the ones to provide the second fairness opinion…tbe had to solicit another company. For Cannacord to say it wasn’t fair to shareholders would have been laughable knowing they were not entitled to a penny, yet were being given more money that the debentureholders, (who were entitled to full repayment, yet only being offered 14c on the dollar).

    Note the first opinion said it was fair to shareholders from a ‘financial standpoint”.

    Debentureholders had already made up their mind by the time that 2nd “fairness opinion” was (FORCED) provided, and I, and obviously most other debentureholders didn’t give it any weight (based on the vote).

    Sorry but if you run a company, and are trying to sell it, your obligation is to ALL the parties that have a financial interest, so in my opinion, mgmt was incompetent to only get an opinion for only a portion of the parties involved.

  7. @DJ: Completely agreed. Also a reason why I won’t put any money into the Dundee gong show since it was perfectly evident by the previous preferred share proposal that they’re actively looking at ways of screwing them over in the future.

  8. Agreed, the deal is still very crappy. If they lowered the conv price to $5, I think it would have been a fair (but not great) deal. But $9.75 is still triple out-of-the money and has little value.

  9. I told them why I was voting no, …the partial redemption feature. I don’t need the paperwork headache for my cash account holdings. They do the opposite, now instead of one partial redemption this year, they add a second and third one for 2018 and 2019!

    The conversion option wasn’t a particular concern to me since I had no intention of ever exercising it.

    I’m maintaining my no vote. They already know they didn’t have enough yes votes to get it through, but must be close or they would have just cancelled it and looked at repaying.

    A revised vote meeting 2 days before maturity seems pretty darn tight, sure hope they have a plan b

  10. The timing on their meeting was so tight to the maturity that I never expected them to propose an amendment.

    While I never read the indenture, most of them have a provision where they can delay payment for 30 before holders can declare default. Technically they can prolong it in this period (although I think more educated legal minds can confirm this).

    A $5 conversion would give the debt enough option value to make it worthwhile if there was appreciation in the equity (eg the Alberta market improves), but $9.75 is still a joke.

  11. Sacha,
    They have a 30 days after maturity, for the INTEREST before they are in default (a below), HOWEVER, they are immediately in default if they fail to pay the principal AT MATURITY Sept 30th (b below).

    They have time ‘technically’ after Sept 30th because the next step is where debenture holders would have to take action (and would) if not repaid.

    Events of Default
    The Trust Indenture provides that each of the following events constitutes an “Event of Default” for the purposes of
    thereof:
    (a) if Temple fails for 30 days to pay interest on the Debentures when due;
    (b) if Temple fails to pay principal or premium, if any, on the Debentures when due whether at maturity, upon
    redemption, by declaration or otherwise;
    (c) if a decree or order of a court having jurisdiction in the premises is entered adjudging Temple bankrupt or
    insolvent under the Bankruptcy and Insolvency Act (Canada) or any other bankruptcy, insolvency or analogous
    laws, or issuing sequestration or process of execution against, or against any substantial part of the property of
    Temple, or appointing a receiver of, or of any substantial part of the property of Temple or ordering the windingup
    or liquidation of its affairs, and any such decree or order continues unstayed and in effect for a period of 60
    days;
    (d) if Temple institutes proceedings to be adjudicated a bankrupt or insolvent, or consents to the institution of
    bankruptcy or insolvency proceedings against it under the Bankruptcy and Insolvency Act (Canada) or any other
    bankruptcy, insolvency or analogous laws, or consents to the filing of any such petition or to the appointment of a
    receiver of, or of any substantial part of, the property of Temple or makes a general assignment for the benefit of
    creditors, or admits in writing its inability to pay its debts generally as they become due or becomes insolvent;
    (e) if a resolution is passed for the winding-up or liquidation of Temple, except in the course of carrying out or
    pursuant to an amalgamation, consolidation, merger or internal reorganization of Temple where the conditions set
    forth in the Trust Indenture are duly observed and performed; and
    (f) if any proceedings with respect to Temple are taken with respect to a compromise or arrangement, with respect to
    creditors of Temple generally, under the applicable legislation of any jurisdiction.
    Upon each and every Event of Default, the Indenture Trustee may, in its discretion, and shall, upon receipt of a request in
    writing signed by the holders of not less than 25% in principal amount of the Debentures then outstanding by notice in
    writing to Temple, declare the principal of and premium, if any, and interest on all Debentures then outstanding to be due
    and payable.
    Upon the happening of any Event of Default:
    (a) the holders of the Debentures shall have the power, by requisition in writing by the holders of 66 2/3% of the
    principal amount of the Debentures then outstanding, to instruct the Indenture Trustee to waive any Event of
    Default; and
    23
    (b) the Indenture Trustee, so long as it has not become bound to declare the principal and interest on the Debentures
    then outstanding to be due and payable, or to obtain or enforce payment of the same, shall have power to waive
    any Event of Default if, in the Indenture Trustee’s opinion, the same shall have been cured or adequate
    satisfaction made therefor, and in such event to cancel any such declaration theretofore made by the Indenture
    Trustee in the exercise of its discretion, upon such terms and conditions as the Indenture Trustee may deem
    advisable.

  12. PS It certainly wouldn’t be a positive if this isn’t resolved by Sept 29th, or the stock will definitely take a hit.

  13. @DJ: Thanks for pulling the snippet out of the fine print. I’m going to guess that Morguard has the paperwork ready for some sort of credit agreement with Temple in the event the proposal is rejected and I’m going to guess it’s not going to be pretty for their minority shareholders…

Leave a Reply

Your email address will not be published. Required fields are marked *