Just Energy takes a dive

If you were holding preferred shares in Just Energy (TSX: JE.PR.U), you don’t want to be reading this announcement:

Just Energy Group Inc. (“Just Energy” or the “Company”) (TSX:JE) (NYSE:JE) announced today that it has amended its senior secured credit facility to increase the senior debt to EBITDA covenant ratio from 1.50:1 to 2.00:1 for the third quarter of Fiscal 2020. In addition, the Company has amended the covenants on its senior unsecured term loan facility to increase the senior debt to EBITDA covenant ratio from 1.65:1 to 2.15:1 for the third quarter of Fiscal 2020. Both changes are effective only for the third quarter of Fiscal 2020 and the covenants will revert to the prior levels following December 31, 2019.

In connection with the amendments, the agreements governing both facilities have been changed to restrict the declaration and payment of dividends on the Company’s 8.50% Series A Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Shares (“Series A Preferred Shares”) until the Company’s senior debt to EBITDA ratio is no more than 1.50:1 for two consecutive fiscal quarters. Accordingly, the Company is suspending, with immediate effect, the declaration and payment of dividends on the Series A Preferred Shares until the Company is permitted to declare and pay dividends under the agreements governing its facilities. However, dividends on the Series A Preferred Shares will continue to accrue in accordance with Series A Preferred Share terms during the period in which dividends are suspended.

Preferred shares proceeded to trade from $17 the day before to closing at $9.88, a 42% drop. The common stock, which paid out its last dividend in June 2019, traded down about 16%.

I did remark about Just Energy on September 1, 2019 that “Balance sheet is a train wreck, company is exploring a recapitalization, and the business model itself is highly broken. Good luck!”, but specifically, their big problem is this:

About $222 million is due for refinancing in the year 2020, with the lion’s share the first-in-line secured credit facility that has $203 outstanding.

It is pretty evident by the covenant amendment that the third quarter expectations (noting that Just Energy has their fiscal year-end on March) is not going to have a good quarter. They’ve bought themselves a little bit of time to negotiate with the senior secured creditors, but suffice to say, this one is trading low on all fronts (common, preferred and debentures) for a good reason – a recapitalization is probably in order.

In general, I’m not shocked that the market was valuing the yield on a financial product of a company that is in such precarious financial condition quite highly; the chase for yield blinds most individuals as the underlying framework as to what makes yields possible – cash flow and no imminent liquidity crises. These sorts of decisions that companies make are relatively foreseeable and why I do not have them in my portfolio.

The convertible debentures (TSX: JE.DB.C, JE.DB.D) came up on my radar today as a result. The company cannot suspend their semi-annual interest payment without it being an event of default, but right now the most likely outcome appears to be an equity conversion, and this is under the assumption they can come to some sort of arrangement to placate their senior secured creditor.

The most interesting part of this all is that the company also has a tranche of unsecured term loan facility (8.75% maturing on September 2023) which is partially guaranteed by a director: “On July 29, 2019, the Company drew US$7.0 million from the second tranche and US$7.0 million from the third tranche. These draws were secured by a personal guarantee from a director of the Company.” – this would certainly give this director an incentive to seeing the company not default on it!