SFK pulp

[SharperDingaan]

 

Re disclosure; we've taken some $ off the table, & rebalanced between debs & common. 

 

SD

[alertmeipp]

SD, mind to tell us why u take some off the table now?

 

Is it to get $ ready for the rights?

[Guest Dazel]

SD,

 

You are not alone it looks like there was a race for the exits many did not want to see their big winner go down...human nature. I was way early at $1 selling some shares..I hope you regret

your decision is much as I do! I am holding and getting interested in adding at these levels. Debs are the safer route though I understand your postion had grown large.

 

Dazel.

[SharperDingaan]

 

We went back & re-read the terms of rights offering. Nothing happens untill SFK files the final prospectus, & nothing requires them to file it by June-30 (which starts the calculation now). The market has assumed that they need the cash right now; they don't, so why would a rational management not simply delay the filing by a month so that all the calculations will be post conversion closing, & presumably a lot higher?

 

We bought the debs < 40 & sold > 98. If you think the debs might get taken out at 101 within 3 months, the best you can do is another 5% [(102.75/98.0)-1]. If Mr Market is being manic we can very easily do 50% in the common, & don't have 10x the risk.

 

We haven't sold all our debs (we could be wrong), just reinvested 1/2 the proceeds in the common. As the remaining proceeds are in cash, we're happy with the incremental risk.

 

SD

[Cardboard]

SD,

 

FYI, it sounded more like you had sold common and bought debs in your previous post.

 

Now, regarding the obligation to go ahead:

 

"Timing of Rights Offering. Subject to and in accordance with the terms hereof,

the Corporation agrees that it will file with the Canadian Securities Commissions: (i) the Preliminary Prospectus, together with the other requisite

filings and documentation, no later than 2 Business Days following closing of the

Conversion, which date shall not be later than June 30, 2010 (the "Outside Filing

Date"); and (ii) the Final Prospectus, together with the other requisite filings and documentation, on or before the day which is two Business Days following the date on which all necessary approvals and consents are received from the

Canadian Securities Commissions and the TSX that are necessary or advisable, in the Corporation's opinion, acting reasonably, to proceed with the filing of the

Final Prospectus and completion of the Rights Offering. The Corporation will use

commercially reasonable efforts to obtain a receipt (or analogous decision

document) as soon as possible following the filing of each of the Preliminary

Prospectus and Final Prospectus with the Canadian Securities Commissions."

 

Based on the agreement with Fairfax quoted above, the preliminary prospectus has to be filed 2 business days following the conversion (May 27?, see below). Now, regarding the timing required to obtain what is necessary to file the final prospectus, it is about 10 calendar days based on a previous situation that I have seen. That puts us on June 8 or 2 business days, 10 days after.

 

The vote for conversion is happening tomorrow and the court hearing is the next day or May 20. They said that they could convert as early as May 25 if it goes per plan and by the sound of it, they want it badly. Will they delay indefinitely past the court order? Not likely. They also have an interest to move quickly since the SGF and GE loans are conditional upon conversion.

 

It seems to me that the only way out of this is for Fairfax and SFK to mutually agree to postpone or cancel the rights offering. Or they declare some kind of material event. If not, this is happening rather quickly based on the terms of the agreement.

 

I wish I could be more optimistic, but this is what they agreed to. I am also not totally clear on Fairfax intentions. It sounds like that they want to average down to end up with some return on this investment (current cost base of $4 a share?). Also, a move above 20% ownership will likely require equity method of accounting which has some implications for Fairfax (taxes, reporting, etc.)

 

Cardboard

[T-bone1]

S&P puts SFK pulp on watch positive on refinancing plan

[SharperDingaan]

Agreed they want the conversion asap, & the preliminary filing will be May-27 or abouts.

 

But there is nothing that says you have to start on the Final Prospectus immediately thereafter; it's only the common practice because it reduces the associated uncertainty. In this case the existence of the proposed offering is a material fact, ahead of a material vote; they're pretty much required to disclose its existence.

 

Assuming conversion is voted in tommorrow & that day 1 is May-19; 40 trading days later is around Jul-15. If you accept that the early disclosure is neccessary, but disruptive, you also accept that you need to mitigate it; a 6 week delay in filing the final prospectus to obtain a minimum trading record under the materially different structure, is not unreasonable.

 

Everything about these transactions screams 'fairness', but it's because its 'too' clean relative to market expectations that we're having this problem. Mr Market would seem to prefer that it remained hidden, because that's the norm?

 

SD

 

 

[SharperDingaan]

 

Couple of relevant add-ons:

 

We expect that FFH will end up with minimal, if any, backstopping on the rights issue (hence the 20% discount is effectively irrelevant). They will essentially get 400K to reduce their cost base.

 

We think the rights are going to act as options on the Q2 results, & as every speculator will want the embeded leverage; the rights should drag the stock up. Gravy  ;D

 

Elegance.

 

SD

 

 

 

 

[Guest Dazel]

http://www.paperage.com/foex/pulp.html

 

pulp prices up again this week!

 

I think that Fairfax is setting them selves up. They have been involved in restructuring several companies in the last year...This is what they do very well. The management obviously do not want to get bought out as they hold very few shares...(i hate that)...Fairfax is essentially prepackaging SFK...The new company will either move towards book value because of its stability, cash and ops or it will be sold. The managemnet will have the opportunity to bring value ie bookvalue or Fairfax will have it sold...Either way they win. We are in early days.

 

Dazel.

[lessthaniv]

These rights are transferable and will be listed on the TSX. The rights are not likely to provide full value to the seller as any buyer of the rights would only execute his/her purchase if he/she is getting an arbitrage opportunity of some sort otherwise they would just buy the stock. However, they should hold some value given the steep discount in the current stock price and the tailwind with pulp pricing moving forward as Fibrek. If you were a hedge/mutual fund wanting to establish a position in the stock post conversion, the rights market may provide a 21 day window of opportunity. Once the rights issue is completed, investors will look forward to a corporate structure that has cleaned up its balanced sheet, reduced its interest costs and is enjoying very high pulp prices. Yes, dilution will effect the valuation metrics however the stock remains cheap from its current level including dilution. Also, the share price should begin to trade freely again once the financing is complete.  Ultimately, we'll have to see what the market is like for the rights, but shareholders who can't afford to pony up another 30% to this position likely won't be fully diluted. They should get some value for their rights in the secondary market, I would think.

 

 

 

 

 

 

 

[lessthaniv]

 

We expect that FFH will end up with minimal, if any, backstopping on the rights issue (hence the 20% discount is effectively irrelevant). They will essentially get 400K to reduce their cost base.

 

SD

 

SD, the pricing on the rights must be for all shareholders. This isn't just a deal for Fairfax. Fairfax is entitled to a fee for the backstopping but they can't negotiate a 20% discount that bypasses the rest of the shareholder base. Therefore, the 20% discount is certainly relevant as it will lower the subscription price on the entire rights issue and thus increases the dilution factor.

 

Having said that - Its normal that rights offerings occur at a discount.

 

<IV

 

 

[Cardboard]

SD,

 

I have to disagree with you on this one:

 

"But there is nothing that says you have to start on the Final Prospectus immediately thereafter;"

 

The issuance timing of the preliminary prospectus is crystal clear and the issuance of the final prospectus is based on time required to receive regulatory approvals afterwards. I don't know how else I can interpret the agreement with Fairfax.

 

If they don't like the price, they will have to postpone or cancel the rights offering. Or come up with a new prospectus with other terms. Playing with the timing of the issuance of the final prospectus after having in hand all regulatory approvals, which is the condition to issue, IMO is a breach of contract unless approved by Fairfax.

 

Cardboard

[Cardboard]

Dazel,

 

Regarding pulp prices, one thing that I think is very positive for SFK recently is the narrowing discount between BHK and NBSK. In mid-March, Europeans were paying $100 U.S. less per ton for BHK or an 11% discount, today it is $71 less and a 7.5% discount.

 

It just shows the tightness in the market since BHK is an inferior pulp (substitution driving a higher BHK price) and BHK is quite important for SFK since it is a big driver of the price obtained for their RBK.

 

Cardboard

[Myth465]

 

Couple of relevant add-ons:

 

We expect that FFH will end up with minimal, if any, backstopping on the rights issue (hence the 20% discount is effectively irrelevant). They will essentially get 400K to reduce their cost base.

 

We think the rights are going to act as options on the Q2 results, & as every speculator will want the embeded leverage; the rights should drag the stock up. Gravy  ;D

 

Elegance.  SD

 

Do you think the trading period will end after Q2 is announced or before?

 

Also my reading is that FFH gets a 20% discount on any unsubscribed shares. lessthaniv

Seems to believe that the pricing is flat regardless of who buys. Whats the boards general conclusion. I would love to be wrong on this one.

[SharperDingaan]

 

LessthanIV: If you think the rights are going to be fairly hot items (ie: leverage); the market will take up all the rights sold, & FFH will not have to backstop anything; if its really strong FFH could even be selling its rights & diluting its position. Keep in mind that the 20% is only if FFH has to buy-in beyond its entitlement - if they dont have to buy-in; the 20% doesn't kick in.

 

Cardboard: Agreed the dates are 'stickier' than we'd like, but we don't see this as being a whole lot different than the typical 'grace period' after failing to make an interest payment. Yes, you haven't strictly met the terms - but if you have a very valid reason for it, we'll give you an extra day or so of 'grace' to rectify. Ideally SFK/FFH will better clarify the intent over the next few days.

 

Once we see how it trades post conversion, these issues may well become moot. If the price is materially higher (expected) the rights will have a +ve value, & much of the uncertainty will dissappear.

 

SD

 

 

[SharperDingaan]

 

Do you think the trading period will end after Q2 is announced or before?

 

We think the trading period ends before the Q2 announcement, but the rights are 'live' over the announcement period. Doesn't mean we're right - but part of the elegance is that the deal concentrates market speculation onto the rights issue, over a strong quarter (assumed), which dramatically reduces the odds on FFH having to backstop.

 

SD 

[Grenville]

 

LessthanIV: If you think the rights are going to be fairly hot items (ie: leverage); the market will take up all the rights sold, & FFH will not have to backstop anything; if its really strong FFH could even be selling its rights & diluting its position. Keep in mind that the 20% is only if FFH has to buy-in beyond its entitlement - if they dont have to buy-in; the 20% doesn't kick in.

 

 

From the SFK Sedar Standby Agreement with Fairfax:

"AND WHEREAS  any  holder  of  Common  Shares who  exercises  his  right  (the "Basic  Subscription  Right")  to  subscribe  for  all  of  the  Common  Shares  that  can  be initially purchased upon exercise of all Rights issued to such holder shall be entitled to subscribe for, at the Subscription Price per share, additional new shares (the "Additional Subscription Privilege") in the manner set forth in National Instrument 45-101 – Rights Offering;"

...

"Subscription Price" means  the price  at which  each Common  Share  is  issuable upon the exercise of Rights pursuant to the Rights Offering;  

....

2.2 Price Determination.    

(a) The  Subscription  Price  shall  be  equal  to  the  lesser  of:  (A)  the  volume-weighted average price of the Common Shares (or the Fund's units, as the case may be prior  to  the Conversion) on  the TSX  for each of  the  trading days on which there was a closing price during the five (5) trading days immediately  preceding  the  date  of  filing  of  the  Final Prospectus,  less  a discount  of  20%  and  (B)  the  volume  weighted  average  price  of  the Common  Shares  (or  the  Fund's  units,  as  the  case may  be  prior  to  the Conversion) on the TSX for each of the trading days on which there was a closing  price  during  the  forty  (40)  trading  days  immediately  preceding the  date  of  filing  of  the  Final  Prospectus  (the  "Trading  Observation Period"), less a discount of 20%;

 

(b) Immediately  following  completion  of  the  Trading  Observation  Period   and  prior  to  the  filing  of  the  Final  Prospectus,  the  Corporation  will determine  the  Subscription Price  and  shall provide Fairfax with written notice thereof.   "

 

From reading this, the subscription price will be at a 20% discount regardless of whether Fairfax takes up any of the additional unsubscribed rights offerings.

 

[Cardboard]

SD,

 

Why do you expect the share price to pop following conversion? I think that it is a non-event. The market already assumes that this is going through. Have we heard of any opposition or possible showdown tomorrow? None. They also got Fairfax in their back pocket and most vote as management recommends.

 

What the market wants to hear about is the current level of profitability. They want to know if this company can finally make decent money at pulp spot rates that honestly cannot be much better. Q4 was bad, Q1 was disappointing (discounts on NBSK, little to no earnings on RBK). We need some guidance from these fellows. Half the quarter has gone by, so it should not be that hard to compute. Show us the money, then the pricing for the rights will be a heck of a lot better. That is what I read from Mr. Market and I should say that I cannot fully disagree.

 

Cardboard

[oldye]

Q1 was not disappointing, my average cost for the units was about 60 cents..they made about 10 cents in cash during q1...I almost did a back flip when i saw the numbers.  I remember reading about Buffett's partnership days and dreaming about buying companies for 2x earnings...what else can we ask for?  The catalyst is valuation and its still damn cheap at 3$ a unit. 

 

[SharperDingaan]

 

Grenville: This reference is from the standby agreement with FFH, & applies only to any shares that FFH has to buy over & above its entitlement. One of the other posters advised that they had received confirmation from SFK`s IR department to that effect on Sunday.

 

We think the conversion is going to let some US buyers buy what they presently cannot. They will be new & marginal buyers, both CFX & SFK are very cheap (by US standards), & we think their collective impact on the limited float will be enough to move the market. It may take a little time, & our little `puddle`may be in rough equilibrium, but we think its about to get swamped by the broader ocean.

 

- Mgmt has made repeated refs to broader liquidity, wider mkt, etc; higher demand for the same supply.

- The unusual structure of the equity offering itself implies higher prices.

- The smoke of the rumours hasn`t gone away & consistently pointed to higher prices.

 

 

SD

[lessthaniv]

 

Grenville: This reference is from the standby agreement with FFH, & applies only to any shares that FFH has to buy over & above its entitlement. One of the other posters advised that they had received confirmation from SFK`s IR department to that effect on Sunday.

 

Interesting, It's sure not clear from the filings? I placed a call to Patsie Ducharme today. I'll try and clarify if the 20% discount only applies to the excess shares acquired by FFH or not. I'll post what I learn.

[Uccmal]

SD, I did a cursory comparison of Pulp producers and combined P&P producers from NA.  I dont know what companies you are referring to being more expensive than CFX?  It is trading in excess of 2x book in a cyclical business.  In my estimation it is priced to perfection right now. 

 

SFK I have no issue with.  It is cheap for obvious reasons discussed through the thread.

[oldye]

http://www.glgroup.com/News/Despite-Weak-Euro-Pulp-Prices-Still-Increase-48464.html

 

Dave Hillman has been writing some pretty interesting articles lately regarding pulp. 

 

 

 

 

[Grenville]

Anyways, at 1.4, the pps is very cheap. Should be able to make good money on this one.

 

Just got a reply from IR, FFH will have to subscribe fully for its own shares before the 20% kicks in.

 

SD,

 

I think this is the post you're referring to. If this is the case, how do they plan on setting the subscription price on the offering? No where have they stated how they are going to set the price for the rights offering except in the reference to the standby agreement with Fairfax.

 

<IV, Thanks for checking. Hopefully you'll get clarification on how the price will be set.

[finetrader]

I just got a reply by email from Mme Ducharme at SFK and she told me that the 20% discount apply for the normal subscription as well as for the additionnal subscription(if you exercice alll your rights) and is for any shareholder.

 

finetrader