A hat-tip to Frank L. for pointing out that Crown Capital Partners (TSX: CRWN), a little-known microcap financing company, on April 11, 2023 issued a proposal to refinance their $20 million face value of convertible debentures trading as (TSX: CRWN.DB).
The salient features they are offering are:
* Extending the maturity date of the Debentures from June 30, 2023 to December 31, 2024;
* Amending the interest rate on the Debentures from 6% to 10% effective July 1, 2023;
* Removing the conversion right of the Debentureholders; and
* Removing the right of the Corporation to repay the principal amount of the Debentures in common shares of the Corporation (“Common Shares”) on the new maturity date or any redemption date.
This company wasn’t on my radar but I gave it a closer look and glossed through their annual financial statement.
First, I noticed that there is quite a bit of consolidation going on in their entity (which means it takes a lot of time to dig through – time I, quite frankly, did not want to spend). A material amount of their assets are in the non-current category consisting of their investments (Crown Partners Fund, leased distributed power equipment, and other property and equipment). Needless to say it isn’t exactly of the variety that you can put it up on Ebay and dump for some quick cash.
The other thing that struck out at me is that they had $7.2 million cash on their balance sheet, and $11.9 million in mortgages payable (November 2023), $18 million in credit facilities (long-dated), and of course the $20 million in convertible debentures.
The credit facility’s fine print, is the following:
Effective February 7, 2023, the Corporation entered into a new senior secured corporate credit facility with Canadian Western Bank of up to $43,500 to be used to fund a full repayment and cancellation of lender commitments in respect of the Crown Credit Facility, support working capital and growth capital requirements of the Corporation and its operating businesses, and to fund the Corporation’s remaining capital commitment in respect of Crown Power Fund. The new senior secured corporate credit facility replaced the Crown Credit Facility and includes an amortizing term loan of up to $30,000 with a maturity date of February 7, 2028, an operating loan of up to $10,000 with availability subject to margin condition restrictions, and a letter of credit facility of up to $3,500. The term loan is comprised of an initial advance of $25,000 plus $5,000 to be advanced upon request by the Corporation prior to June 30, 2023. The term loan and the operating loan provide financing at variable interest rates based on Prime Rate plus 165 bps to 265 bps and 200 bps to 300 bps, respectively, and feature a customary set of covenants.
(You want to know why Canadian Western Bank (TSX: CWB) is trading like it will go First Republic Bank (NYSE: FRC) any moment?)
Pay attention to the rate paid. Prime is 670bps at the moment, so the term loan is 8.35% to 9.35% and the operating loan is 8.7% to 9.7%, floating.
In addition, you have the mortgage payable which has the following fine print:
Effective May 27, 2022, the Corporation entered into an agreement for a mortgage payable of $11,900 that is secured by the value of property under development, has a maturity date of November 30, 2023, and bears interest based on Prime Rate plus 570 bps (with a floor of 8.40%) per annum.
Prime plus 570bps is a 12.4% mortgage! Holy moly!
So why on planet earth would the convertible debenture holders agree to an unsecured 10% coupon when clearly the cost of capital for the other secured lending the corporation is taking is at much higher rates and you lose the (nearer) maturity date advantage? They generously offer a 1% consent fee for a yes vote!
The last thing I’ll point out is that they spent $24.8 million on share repurchases over the past two calendar years. Money that could have been better spent on… perhaps redeeming this debt?
The debentures are really illiquid, the stock is unshortable, and I have no positions in this company, nor do I intend on taking any.
Thanks for the post, Sacha! I was a holder of the debentures and was assuming they would get redeemed at par in June. I just sold out of them for a minor profit.
Well Sacha ,I have a small position in this debenture, bought in at about $60.00 (April 2020)….so 3 yrs of interest. Do you think their going to raise the offer, or pay the debentures in shares , if they dont get the votes?
I would read the fine print on the credit agreement and see if they can pay off the debentures with it. The next step would be to offer some sort of low-strike price conversion option (e.g. $8/share or something). I doubt they can go higher with the coupon, but perhaps they might offer 12%. Something funny and highly unusual is that the stock trades even less than the debt, at least when looking at the past 30 days. Either way, it suggests their financial situation is less liquid than they desired.
have a small position and weighing options – as Sacha says very small company but about 30% owned by insiders (Michael Lee-Chin shows as one also John Albert Brussa on board of several Calgary oil companies) and about 30% owned by institutions (guessing maybe Crown Life Insurance from which it came?) Insiders could no doubt write a cheque themselves to pay off debentures but who knows
“So why on planet earth would the convertible debenture holders agree to an unsecured 10% coupon when clearly the cost of capital for the other secured lending the corporation is taking is at much higher rates and you lose the (nearer) maturity date advantage?”
Well, if you hadn’t enlightened me , I would have voted yes…..10% for 18mths, no share pay back…..as I’m sure most retail holders without your skills would. I’m not sure who the institutional owners are…they will be the deciders and are obviously more educated on the matter.
It’s 10% plus the 1% consent fee plus they likely redeem the debentures prior to the 18 months being complete. I don’t think it’s a bad deal. Every vote probably matters here as the bonds are widely held. When I spoke to them, they were focused on making sure enough people voted to establish a quorum. If you think speaking with the CFO will help you vote yes, let me know. I can probably arrange that. I’m on Twitter as @brownmarubozu.
98% voted in favour. What the hell do I know?
Holders probably own stock too.