Priszm Income Fund declares bankruptcy

Priszm Income Fund (TSX: QSR.UN) has finally bit the bullet and gone into creditor protection. They will be liquidating the assets of their business.

Units of the trust and debentures (TSX: QSR.DB) have been suspended and will be delisted out of the TSX. They were last trading at around 9 cents on the dollar and as you might glean, does not anticipate much, if any recovery whatsoever.

I had written on the episode of my quick trade in and out of the debentures in earlier posts on this site; I retained the minimum face value ($1,000) of debentures as a “lottery ticket” ($90 market value) that evidently will not be winning. I eagerly anticipate the huge stack of documents in the mail that will politely inform me that my debentures are worthless.

Priszm Income Fund – Specified Defaults

Priszm (TSX: QSR.UN) filed in the documentation pertaining to their bridge loan, and when going through it, came up with the following summary as to what conditions the business defaulted on their senior loan obligation:

I notice that the senior noteholders are three related companies – The Prudential Insurance Company of America, Pruco Life Insurance Company and the Prudential Retirement Insurance and Annuity company. Whoever was the investment manager that picked Priszm for investment isn’t feeling too good right now – and presumably forced to sinking in $4M more into this train wreck in order to salvage the remainder of their investment.

The subordinated debentures (TSX: QSR.DB) traded down today to about 20 cents on the dollar as investors question their sanity for putting money into this venture. To figure out if there is any value left, one has to figure out whether management’s motivation is to eventually resurrect the company, or to generate a tax-loss write-off that works in their own favour (and not necessarily investors). One thing that I believe is virtually guaranteed is that the units are nearly worthless.

Disclosure: I own $200 market value of debentures, which I still believe offers a better payoff ratio than the upcoming Lotto MAX.

The Priszm Income Trust soap opera continues

I have been writing a lot about Priszm Income Fund – a horribly broken trust going through massive financial restructuring.

Today, they announced:

TORONTO, Jan. 19 /CNW/ – Priszm Income Fund (TSX: QSR.UN) (“Priszm” or the “Company”) reported today that the Company has executed a forbearance agreement to extend the maturity date of its senior debt facility, including the payment of all interest accrued but unpaid to January 31, 2011. In addition the senior debt lender will temporarily suspend action to exercise its remedies for the Company’s defaults in respect of the existing terms of its senior debt facility. As part of the agreement, the Company is not permitted to make payments in respect of obligations that are subordinated to the senior debt facility, other than those relating to the direct operation of the business in ordinary course.

The senior debt lender and the Company also executed a separate short-term financing agreement that provides the Company a supplemental facility of up to $4 million to ensure the business has sufficient liquidity to continue operations while a longer-term plan is developed. The facility bears interest of 10% per annum with a maximum one draw per week and matures January 31, 2011.

Translating this into English, the company received a $4M bridge loan in exchange for the creditors not pushing the company into bankruptcy. As part of this loan, the company cannot make payments to subordinated obligations, which would also include the subordinated convertible debentures, amongst other things.

After my January 8, 2011 post regarding the convertible debentures (TSX: QSR.DB), I entered into the market on January 10 and bought $20k face of the debentures at 19 cents on the dollar. My expectations were that the debentures would settle at a value of around 30-35 cents on the dollar. I was aiming for a bit more size on the position, but QSR.DB is illiquid and I did not catch many liquidators on the bid. Today, I sold $19k face for an average of 21.95 cents on the dollar, approximately a 9% gain over my January 10th purchase. After commissions, this will pay for a few sushi dinners. I still hold $1k face value (approximately $230 market value) for entertainment and educational purposes – I want to see how this drama resolves itself. There is also a very slight (and I emphasize very slight, as in less than 5%) chance that the debentures will be redeemed at par by June 2012.

My theory about the valuation of the company changed significantly after some subsequent research and deeper analysis – when the company announced it was exploring a “sale of all assets”, any cash flow generation would have been likely gutted out of the company, leaving purely administrative expenses associated with running a publicly traded company. The company does not have a massive amount of future tax assets which ordinarily gives such unprofitable operations some market value. Assuming the $200k/franchise level that was achieved in the previous sale applied across the 200 remaining franchises would have rendered the company with approximately $40 million further cash, which would have not been enough to pay liabilities, let alone the debentures.

When you bake in costs of restructuring and/or bankruptcy, there is not much value in the debentures – they will likely be given some sort of settlement offer at a deep discount to face value to get them out of the way. This is when I will get rid of the other $1k face value I own.

The Priszm story continues

I wrote last week about Priszm Income Fund (TSX: QSR.UN) earlier, especially about their near-bankruptcy situation they are currently facing.

Today, they announced that the transaction to liquidate over half their franchises was proceeding, but subject to approvals by two consenting partners, the franchiser (YUM Brands) and the senior creditors. Notably in the release there were two statements:

Although there is no guarantee that the required approvals will be obtained or that the remaining conditions will be satisfied, the transaction is scheduled to close on February 28, 2011 unless the parties agree otherwise.

Presumably February 28th was the mutual date that the various parties agreed to in order to see if they could pursue something a little more substantial, alluded to in the next paragraph of the press release:

The Company also reported that it remains in discussions with its senior debt lender and franchisor on various options to restructure the business which may include the sale of all assets. The Company’s interim agreement with its franchisor, YUM! Restaurants International, with respect to the franchise agreements for 70 restaurants expired on January 15, 2011 as did its interim agreement to defer unpaid continuing fees. The Company continues to work with the two key stakeholders to come to both short and long-term resolutions that are mutually satisfactory.

As of September 5, 2010, the company has a senior credit facility of $65 million to pay off; the aforementioned agreement to sell over half the franchises would result in gross proceeds of $46 million. The company also has about $41 million in other current liabilities and accruals. The subordinated debentures amount to $30 million face value.

It remains to be seen whether the company can generate enough cash through asset sales to pay off the creditors and liabilities; at the current trading price of 21 cents per debenture, the residual value predicted by the marketplace amounts to $6.3 million.

There were 432 franchises as of the September quarterly release, leaving 200 franchises after the execution of the sale agreement.

For risk-takers only: Priszm Income Fund

The most troubled (but not formally bankrupt… yet!) company trading on the TSX is the Priszm Income Fund (TSX: QSR.UN), which operates fast food franchises. The fund owns 60% of a limited partnership that operates 432 restaurants (KFC, Taco Bell and Pizza Hut) across seven Canadian provinces. The other 40% is owned by a corporation controlled by the fund manager.

Unfortunately for the fund, they have substantial balance sheet issues. As of September 5, 2010, they have a $66 million loan that is secured by substantively all assets of the company, and this loan is due at December 31, 2010 (which was not paid). The company had $13.4 million in cash in early September, and cash through operations in the first 9 months of 2010 generated approximately $3.4 million. It should be noted the business is seasonal, with most of the revenues obtained in the third quarter (summer) season.

The company is trying to liquidate over half (232) of their restaurants, all located in BC and Ontario, for $46 million (link) but this deal has not closed yet. Even then, the company is not quite out of the woods in terms of their balance sheet situation.

Notably, the company has $30 million in unsecured convertible debentures outstanding that are due on June 30, 2012. The company has not paid interest on them at the end of December 31, 2010.

The debentures are trading at around 20 cents on the dollar, and have tanked over the past month as the solvency issue became very apparent:

This is a lesson for debenture investors that market valuations can be considerably divergent from the underlying truth – as early as the beginning of December, debentures were worth about 70 cents on the dollar – any investors at that point would have received a 70% haircut in valuation AND also the ignominy of paying the sellers 5 months of accrued interest!

It is also not quite clear even if the fund can realize $46 million in value out of the 232 franchises whether they will be able to avoid bankruptcy – they still have a considerable amount payable after this liquidation. Such a liquidation would occur on January 15, 2011 if approved by the buyer after they do their due diligence.

That said, it makes one wonder whether there is still value in the convertible debentures of Priszm. They are very cheap, but very cheap for a reason – even if the company can liquidate their franchises for an acceptable price, there is a stack of other payables that are due, possibly before or possibly jointly with unsecured debenture holders. Study up on your knowledge of the Bankruptcy and Insolvency Act! Suffice to say, this one would be for extreme risk-takers only.

Disclosure – No positions.