SFK pulp

[lessthaniv]

SFK Pulp arranges refinancing for conversion

 

2010-05-12 20:20 ET - News Release

 

Ms. Patsie Ducharme reports

 

SFK PULP ANNOUNCES REFINANCING TRANSACTIONS

 

SFK Pulp Fund has made a series of transactions intended to, among other things, refinance its existing credit facilities. The refinancing transactions, which are conditional upon the closing of the reorganization of SFK Pulp into a corporation, consists of:

 

    * A five-year term loan with a subsidiary of Societe generale de financement du Quebec, for an amount in Canadian dollars equivalent to $75-million (U.S.) (SGF loan);

    * A $40-million (gross proceeds) offering of rights to subscribe for common shares (rights offering) of Fibrek Inc., the successor entity of SFK Pulp Fund following the completion of its reorganization into a corporation, for which Fairfax Financial Holdings Ltd., SFK Pulp's largest unitholder, has agreed to purchase any common shares that are not otherwise subscribed for under the rights offering;

    * A $75-million three-year asset-based secured revolving facility with GE Canada Finance Holding Company (GE Capital).

 

"The board of directors and management of SFK Pulp thoroughly considered various alternatives in light of the upcoming maturities of the existing credit facilities," said Hubert T. Lacroix, chairman of the board.

 

"We believe that the refinancing transactions will provide an opportunity to implement a capital structure that will appropriately respond to the needs of SFK Pulp's business and will provide the necessary financial flexibility and capital resources to pursue its development and improve the stability and sustainability of its business model," said Pierre Gabriel Cote, president and chief executive officer.

 

Pursuant to the refinancing transactions, SFK Pulp will repay its existing revolving credit facility maturing on Oct. 30, 2010, and existing term loan maturing on Oct. 30, 2012, in the total principal amount of approximately $143-million as at March 31, 2010. The refinancing transactions will also provide SFK Pulp with approximately $60-million of liquidity after full repayment of the existing credit facilities (excluding transaction costs) based on SFK Pulp's March 31, 2010, financial position.

 

"The refinancing transactions will generate financial stability and flexibility as SFK Pulp continues as Fibrek," said Patsie Ducharme, vice-president and chief financial officer. "Fibrek will be set to profit from a recovering economy with a substantial debt reduction, superior liquidity and the ability to better pursue its business objectives."

 

Each of the components of the refinancing transactions is conditional upon the closing of the reorganization of SFK Pulp into a corporation, which is subject to the approval of SFK Pulp's unitholders at the annual and special meeting to be held on May 19, 2010, and upon the closing of all the other components of the refinancing transactions. Each of the components of the refinancing transactions is also subject to necessary approvals, including approvals from regulatory authorities and the Toronto Stock Exchange, as applicable. It is anticipated that the closing will occur on or about July 20, 2010.

 

TD Securities Inc. is acting as financial adviser to SFK Pulp in connection with the refinancing transactions.

 

SGF Loan

 

The SGF loan will provide for a five-year secured term loan in a principal amount in Canadian dollars equivalent to $75-million (U.S.) and is subject to the satisfaction of certain customary closing conditions including the completion of due diligence and the negotiation, execution and delivery of definitive documentation.

 

All obligations in respect of the SGF loan will be secured by a first-ranking hypothec on all the assets, movable and immovable, present and future, of Fibrek and its subsidiaries, with the exception of the assets securing the asset-based revolving credit facility. The SGF loan will contain and provide for certain covenants and events of default as are customary in transactions of this nature.

 

Rights offering

 

Following the completion of the reorganization of SFK Pulp into Fibrek, Fibrek intends to file a short-form prospectus qualifying the distribution of rights to subscribe for and purchase common shares in the capital of Fibrek for gross proceeds of $40-million. Each shareholder will receive one right for each common share held. Holders of rights who will exercise their rights in full will be entitled to subscribe pro rata for additional common shares. Fibrek will apply to list the rights and the common shares issuable upon the exercise of the rights on the TSX and the approval of such listing will be subject to Fibrek fulfilling all of the listing requirements of the TSX. TD Securities Inc. is acting as dealer manager for the rights offering.

 

If a shareholder elects not to exercise the rights issued to him, or elects to sell or transfer those rights, the value of the common shares currently held by that shareholder may be diluted as a result of the exercise of the rights by others. The rights will be fully transferable by holders. A holder of a right will not, by virtue of such right, be a shareholder and will not have any of the rights of a shareholder.

 

Pursuant to a standby purchase agreement, Fairfax has agreed, subject to certain terms and conditions to purchase, at the subscription price, all of the common shares not otherwise purchased pursuant to the rights offering at the expiration time. In consideration of such commitment, Fairfax will be entitled to a $400,000 standby fee, representing 1 per cent of the total gross proceeds of the rights offering. The subscription price, which was determined by negotiation with Fairfax, shall be equal to the lesser of: (a) the volume-weighted average price of the common shares on the TSX for each of the trading days on which there was a closing price during the five trading days immediately preceding the date of filing of the final prospectus, less a discount of 20 per cent; and (b) the volume weighted average price of the common shares on the TSX for each of the trading days on which there was a closing price during the 40 trading days immediately preceding the date of filing of the final prospectus, less a discount of 20 per cent. The commitment of Fairfax is subject to certain customary conditions, including the completion of the reorganization of SFK Pulp into a corporation and the execution and delivery of definitive documentation with respect to the SGF loan and the asset-based revolving credit facility, as well as regulatory approvals.

 

GE Capital asset-based revolving credit facility

 

SFK has entered into a commitment letter with GE Capital for the $75-million asset-based revolving credit facility which will have an initial term of three years and is subject to the satisfaction of certain customary closing conditions including the completion of due diligence, field examinations and the negotiation, execution and delivery of definitive documentation. The amount available to be drawn under the asset-based revolving credit facility will vary from time to time, based upon SFK Pulp's accounts receivable and inventory levels.

 

The obligations under the asset-based revolving credit facility will be secured by, among other things, a first priority security interest on all of the existing and after acquired accounts receivable and inventories of the borrowers and their subsidiaries. The asset-based revolving credit facility will contain and provide for certain covenants and events of default as are customary in transactions of this nature.

 

Documentation

 

A copy of the binding agreements to which Fibrek and SFK Pulp are parties and certain related documents will be filed with the Canadian securities regulators and will be available on SEDAR as soon as practicable following their respective execution.

 

We seek Safe Harbor.

[alertmeipp]

This would explain the continuous selling around 1.5. :)

 

not sure how this will react tmw, normally, rights will mean downward pressure.

 

will be good time to pick up some.

 

converting USD loan is CDN is a good move at current forex.

40 million reduction to debt

[lessthaniv]

This would explain the continuous selling around 1.5. :)

 

not sure how this will react tmw, normally, rights will mean downward pressure.

 

will be good time to pick up some.

 

converting USD loan is CDN is a good move at current forex.

40 million reduction to debt

 

In my opinion this is a big positive for SFK. Questions surrounding how they planned to deal with their maturing debt (with tight credit markets and no cash in the bank) have now been answered. I would be interested to see if they were able to negotiate better interest rates too? It also puts a wad of cash in their hands to deal with the debentures that are approaching maturity. The market has expected dilution in one form or another. This is why Prem is backstopping the deal, I'm sure.

[alertmeipp]

It was obviously from the last few PRs that they are going to do something to reduce debt. I was thinking they will issue shares at a slight discount to pay off part of the convert (like ICO). I think right offering is much better for existing shareholders.

[Myth465]

Great deal for FFH, considering the discount for the shares they will get. For SFK I am guessing this is there least bad option.

[alertmeipp]

>>Great deal for FFH, considering the discount for the shares they will get. For SFK I am guessing this is there least bad option.

 

Yeah, and they get paid for it as well.

 

 

[SharperDingaan]

 

Very, very interesting

 

Notice that all the LT debt is essentially being refinanced, including that due within 12 months. If nothing else happened we probably have a material easing in covenants, at least a 250bp reduction on the Term Loan, & a 287.5bp reduction on the Revolver (Q1-2010 financials, Note 3). A minimum saving of 742K/quarter [108,826*.025/4+34,615*.02875/4=742], but realistically something higher still. It's also now virtually certain that the debs will be called, saving another 905K/quarter, materially improving the debt/equity ratio, & eliminating 10.7M shares of potential dilution. Total interest saving of 1600-1750K/quarter.

 

Notable is the dates, & the terms. 1) The pricing period hasn't started yet, 2) The 20% discount suggests they expect a potential price spike well beyond the intrinsic value. Most folks would infer that they are aware of a new buying interest that can only come in post conversion; material enough to overcome the rights dilution & still drive the price up.

 

Very elegant.

 

SD

 

 

[Uccmal]

Looks like a well put together deal.  It has FFH paws all over it.  Reducing and refinancing the debt should do wonders for the stock over the relative short term.  I can live with that.  Whenever you look at FFH influenced companies you see the same MO.  Reduce the debt, and advance it out as far as possible to eliminate refinance risk.  

 

I am wondering about the dilution factor.  It reads a little confusing because the future stock price is not yet known.  

 

 

[Guest Dazel]

 

The stock will be up very large.

 

The banruptsy discount is gone completely...that is why we have traded so low

Fairfax is all over it..and a back stop...stability.

They will have $60m cash plus the $40 million plus they will make in the next 3 quarters...$100m year end.

Debt maturities are safe and the forex gain is substantial

They are a sitting duck from another firm unless the share price rises to level that represents the assets

 

I love the common sense that Fairfax brings to the table...really intelligent decisions...and yes they will make a lot of money with a share rise!

 

Dazel.

 

[lessthaniv]

 

Very, very interesting

 

Notice that all the LT debt is essentially being refinanced, including that due within 12 months. If nothing else happened we probably have a material easing in covenants, at least a 250bp reduction on the Term Loan, & a 287.5bp reduction on the Revolver (Q1-2010 financials, Note 3). A minimum saving of 742K/quarter [108,826*.025/4+34,615*.02875/4=742], but realistically something higher still. It's also now virtually certain that the debs will be called, saving another 905K/quarter, materially improving the debt/equity ratio, & eliminating 10.7M shares of potential dilution. Total interest saving of 1600-1750K/quarter.

Agreed, huge interest savings!

 

Notable is the dates, & the terms. 1) The pricing period hasn't started yet, 2) The 20% discount suggests they expect a potential price spike well beyond the intrinsic value. Most folks would infer that they are aware of a new buying interest that can only come in post conversion; material enough to overcome the rights dilution & still drive the price up.

 

It's customary to offer the rights at a discount. I don't necessarily think this infers they are anticipating a price spike above IV. I think its the cost of doing business when your in need of cash. Although, if you look at the pricing guidelines negotiated by FFH they are definitely protecting themselves from a price spike.

 

The subscription price, which was determined by negotiation with Fairfax, shall be equal to the lesser of: (a) the volume-weighted average price of the common shares on the TSX for each of the trading days on which there was a closing price during the five trading days immediately preceding the date of filing of the final prospectus, less a discount of 20 per cent; and (b) the volume weighted average price of the common shares on the TSX for each of the trading days on which there was a closing price during the 40 trading days immediately preceding the date of filing of the final prospectus, less a discount of 20 per cent.

 

Very elegant.

 

SD

 

 

[lessthaniv]

Two other points to consider;

 

1) It's strange and somewhat irregular to announce a rights offering without fixing a subscription price? The door is opened up to manipulation by enterprising investors who have too much time on their hands. One could conceivably drive the stock price downward 5 days prior to the filing of the final prospectus. The price would be set at the lessor of the volume weighted 5/40 day averages. The 5 day would be likely be lower in such a situation, thereby setting  a lower subscription price.

 

This would seem to further support the notion that they anticipate a higher share price and are not worried? No?

 

2) More of a comment really. Fairfax has about 20% ownership in SFK. To invest more dollars, they would have had to made a bid for the entire company. By doing this rights offering, Fairfax gets paid to increase their stake in SFK at a 20% discount without having to make a bid for the whole company. Let me say that again. They get paid to increase their stake in SFK at a 20% discount without having to make a bid for the whole company. These guys are smart!

 

[oldye]

I'm not sure why they need an extra 40 m from the warrants but I guess this type of move gets deals done and should have them close to zero net debt by end of Q2 and considerable ongoing savings over Q1 where they had 4.6m in finance charges.    

 

Just to make sure I get this, the subscription pricing refers only to Fairfax, each share is entitled to a detachable warrant at about .44cents, so there will be about 180m shares o/s once this is done?  

[lessthaniv]

I'm not sure why they need an extra 40 m from the warrants but I guess this type of move gets deals done and should have them close to zero net debt by end of Q2 and considerable ongoing savings over Q1 where they had 4.6m in finance charges.    

 

Just to make sure I get this, the subscription pricing refers only to Fairfax, each share is entitled to a detachable warrant at about .44cents, so there will be about 180m shares o/s once this is done?  

 

No, not quite Oldye.

 

Every shareholder will receive one right for every share held. So initially there would be about 91M rights issued. But the subscription price hasn't been set yet. Let's say it was set at $1.50/share not taking into account any discounts. So every shareholder gets the right to buy another share at $1.50 for a fixed (short) period of time. They want to raise $40M so this would involve issuing another 27M shares (@ $1.50/share). Remember though there are 91M rights floating around so there would be a conversion ratio established. In my example it would take 3.37 rights to acquire 1 new share (91M/27M). In other words, for every share you currently own they are offering you roughly 30% more shares at the favorable price (1/3.37). As a shareholder you will get your rights issued and then have a decision to make. You can (a) subscribe to the rights issue in full, (b) ignore your rights or © sell the rights to someone else as they will get listed on the TSX. They value of the rights should theoretically offset the dilution you'd experience. So, if you choose (b) and do nothing, you will be diluted and Fairfax will scope your part of the deal.

 

 

 

 

[Myth465]

At a 20% discount. Im wondering if its better to just buy now.

[lessthaniv]

At a 20% discount. I'm wondering if its better to just buy now.

 

Well, what's interesting about this is: a) the subscription price hasn't yet been set (see my post above) and b) consider the implications to the subscription price if a proposed deal was in the works?

 

Allow me to speculate for a minute. If management knew a deal was in the works and the outcome was likely to drive the share price up ... all of a sudden they wouldn't be so worried about the subscription price not being set today as is usually done. Say the price got driven up to $2.50/share on  news that Domtar was buying St. Felicien. If SFK then set the subscription price at $2.25 the dilution is alot less! ($40M/$2.25= 17.7M shares - down significantly from my above example). Fairfax has protected themselves from just such an event as they are requiring the lessor of the 5/40 day weighted average share price. In this case the 40 day weighted average share price would be materially less and they get a 20% discount.

 

I also agree with SD that the dates are interesting. The conversion to a corporation according to a recent press release could happen as early as May 25th assuming they get final court approval on May 20th. Yet, the rights offering is expected to close around July 20th. That leaves about a fifty days between the time they convert to Fibrek and when the rights offering would be closed and subsequently priced.

 

As Dazel suggested earlier ( although subsequently deleted in the hijacking of the website), SFK's assets are worth much more to an entity that can supply themselves with woodchips.

 

Add it all up and it gets more interesting by the day.

 

<IV

[oldye]

If you assume 1,000$/ton for the nbsk mil+working capital = 400 mil

+  rbk mills at auction                 150 mil + working capital = 200m

and that the 60m in cash+ q2 get you pretty close to 1$/share in net debt

 

Leaves about 4.40$ in private business value per share without counting the hidden tax asset or the electrical generation coming online dec. 2012.

 

 

[Grenville]

I'm not sure why they need an extra 40 m from the warrants but I guess this type of move gets deals done and should have them close to zero net debt by end of Q2 and considerable ongoing savings over Q1 where they had 4.6m in finance charges.    

 

Just to make sure I get this, the subscription pricing refers only to Fairfax, each share is entitled to a detachable warrant at about .44cents, so there will be about 180m shares o/s once this is done?  

 

No, not quite Oldye.

 

Every shareholder will receive one right for every share held. So initially there would be about 91M rights issued. But the subscription price hasn't been set yet. Let's say it was set at $1.50/share not taking into account any discounts. So every shareholder gets the right to buy another share at $1.50 for a fixed (short) period of time. They want to raise $40M so this would involve issuing another 27M shares (@ $1.50/share). Remember though there are 91M rights floating around so there would be a conversion ratio established. In my example it would take 3.37 rights to acquire 1 new share (91M/27M). In other words, for every share you currently own they are offering you roughly 30% more shares at the favorable price (1/3.37). As a shareholder you will get your rights issued and then have a decision to make. You can (a) subscribe to the rights issue in full, (b) ignore your rights or © sell the rights to someone else as they will get listed on the TSX. They value of the rights should theoretically offset the dilution you'd experience. So, if you choose (b) and do nothing, you will be diluted and Fairfax will scope your part of the deal.

 

 

Very nice, concise explanation!

[SharperDingaan]

 

May-25. Assume conversion. Currently restricted buyers can start to accumulate on May-26. What stock they can't buy outright they can buy later via the warrants, but untill the warrants list they can only get those shares from the limited float. If there is additional demand, the share price can only rise. 

 

Jun-30. Deb holders receive a 30-day call notice along with their interest payment.

 

Jul-20 + a few days after. Rights offering executes, debt is refinanced, Q2 results released, Debs called.

 

August/September. US buyer does a cash bid for the US plants & the sub they're in (tax losses). Cdn buyer does a cash/share bid for Fibrek itself (St Felicien + tax losses). Shareholder approval required for the Fibrek sale, but not the US plants. Vote is sometime in mid November, delisted by Dec-31.

 

Then keep in mind that the sale of the US plants to a US buyer will eliminate much of the FX volatility, & the proceeds will be more than enough to retire all of SFK’s debt. Receiving your proceeds as either shares/cash also allows the buyer to pay more, & you to execute a taxfree roll-over ... and when the target is debt free, it can effectively finance its own takeout.

 

SFK paid relatively little for those US plants, & has taken a couple of years of depreciation against them; NOT getting a healthy ‘gain on sale’ is going to be almost impossible. Same thing for St Felicien except that now it also comes with a power plant, massive incremental cost savings if you have chips, 2 yrs worth of tax losses to shield the record income, & a whack of unspent ‘green’ grants.

 

Christmas could be looking very good this year!

 

SD 

 

 

[Cardboard]

Lots of optimism here!

 

The debt deals are fine, but mathematically the warrants are dilutive to you and to Fairfax no matter how you slice it.

 

If you participate in full in the rights offering, you will continue holding the same share of SFK afterwards. The problem is that there will be more units out there, likely 30 million, the business will generate the same earnings and there will be $40 million more in cash. This means less earnings per share even after assuming a reduction in interest paid due to the cash raised. The only way around that would be to issue the shares at such a price that the reduction in interest paid with the $40 million divided by the new shares is equal to current earnings divided by 90.473 million units.

 

It is the same for book value, unless the units are issued at $4.78 or current book value per unit, it is dilutive on a per unit basis.

 

Even on an EBITDA/Enterprise value, this is dilutive because the cash raised is obtained at a lower price than current trading price. Here the discount of 20% is the issue.

 

IMO, it is a safer route, but the upside in SFK shares has been reduced. That is if they remain an independent entity. However, if their intention is to sell and the additional $40 million makes them look stronger or less of a distressed seller then they can obtain a better price for their assets or the company. That is very short term thinking since cash is coming on the balance sheet anyway at current earnings. So you could argue that a higher sale price per share would have been obtained anyway.

 

ATSG is a great example of a company that went through extreme duress and never issued shares to help them out of it. As it came out from its troubles you can see the upside that was generated. Here the upside should be less because there is a hit on the value per share.

 

Cardboard

[lessthaniv]

That is very short term thinking since cash is coming on the balance sheet anyway at current earnings. So you could argue that a higher sale price per share would have been obtained anyway.

 

Cardboard, I agree with everything but what I've quoted. If their intention is to sell assets, doesn't their thinking necessarily need to be shorter term given the cyclical nature of pulp prices? Pulp prices are not likely to stay up at $1000/tonne for too long. I think an asset buyers interest would be peaked knowing they have a tailwind on pulp prices. If you wait too long and pulp price trends reverse with increased supply you're not likely to get top dollar walking into that headwind.

 

That's a hard one to answer, I guess.

[SharperDingaan]

 

We hear you, but it really comes down to whether you see them continuing as is.

 

Sell the units at 3.74 to call the deb, & the 10.7M units of dilution is no more than you were allready expecting. And to get 3.74 the transactions only need reduce the BV discount to 22% from the existing 68%; even the EBITA to Enterprise `floor`value is around 55% of BV. Yes there will be net dilution, but there will also be another 92M of equity to dilute. 

 

By year end most of Chile`s production should be back on, & we will have still more supply from the restarts that are allready in progress. If they are to restructure there`s no better time than near the top of an extended cycle, but the result has to better than liquidation.

 

Process & timing are of course no more than a rational best guess, but at this point - a liquidation vs earnings valuation does seem to make the most sense.

 

SD

 

 

 

 

   

[SharperDingaan]

 

Quick back of the envelope to explain the dilution.

 

90.473M shares x 4.78 = 432.46M of BV. Sell 10.7M shares x 3.74 for 40M & retire 52M in Debs

Share count rises to 101.173M; BV rises to 524.46. BV per share becomes 5.18. Non Dilutive.

 

But if you sell at 2.08 or less ....

Share count rises to 109.72M; BV rises to 524.46. BV per share becomes 4.78 or less. Dilutive.

 

2.08 is 44% of BV, & 36% higher than todays 1.53 close.

Do you really think that after conversion the share price is NOT going to rise by at least 40% when all these transactions, & another good quarter are going through the books  ;D

 

SD

 

 

 

[Cardboard]

SD,

 

First of all, book value will grow by $40M since it is equity that they are raising but, you cannot add $52M to book value if they call the debentures. This is like repaying debt and all that would change on the balance sheet is cash on the asset side and the elimination of debentures on the liability side. There is a small adjustment to equity for the equity component/accretion, but that is only a few millions.

 

Second, to obtain something like $2.08, it means that the shares need to trade at $2.60. That is a heck of a price hike from today's level. It is not impossible, but based on this, I doubt it:

 

"shall be equal to the lesser of: (a) the volume-weighted average price of the common shares on the TSX for each of the trading days on which there was a closing price during the five trading days immediately preceding the date of filing of the final prospectus, less a discount of 20 per cent; and (b) the volume weighted average price of the common shares on the TSX for each of the trading days on which there was a closing price during the 40 trading days immediately preceding the date of filing of the final prospectus, less a discount of 20 per cent."

 

They expect a closing around July 20, but the final prospectus will be mailed to shareholders well before. Closing to me, means that the rights have been exercised. So the condition of 40 trading days means that May and June are likely the ones to watch for. So since the beginning of May we have what? $1.60. Remove 20% and we are issuing shares at $1.28.

 

In any case, the size of this issue makes it manageable. IMO it is not optimal, but it provides cash which will be needed if pulp heads back quickly to something like $800 a ton or to the point of LessthanIV.

 

Cardboard

[alertmeipp]

IMO, on the paper, the book value will likely be diluted. But book value is not important, we traded down to 20 cents while the book value is 5 bucks; so book value or replacement cost is just for the look. :) Their capital structure is too leveraged, it's okay when the market is good, but when time are tough, they will be in trouble. They would have gone under had the pulp market not recover for another year or so.

 

I think dilute while the pulp market is hot is good, the reduction of interest costs although will not be reflected in book value is for real - being a lower cost producer is always good.

 

 

 

 

 

 

[tyska]

A little off topic, but any thoughts of if the rumor of this is what has been creeping FFH stock up lately. See it was almost double average volume yesterday also.

 

 

Dan