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It’s not just Neiman Marcus: here’s another laggard in the CPPIB portfolio

The Canada Pension Plan Investment Board is the largest pool of capital in Canada, known for taking a global view for its investments. While they no doubt have their share of winners, some, such as the $1.6-billion equity investment in U.S. luxury retailer Neiman Marcus we looked at in an earlier column, have yet to prove themselves.

Another laggard, albeit a smaller one, is the US$325 million invested in the Florida-based private company 21st Century Oncology Holdings, where the hope is that the money either gets repaid, or is converted to equity — and then becomes a home run investment.

But without the benefit of a crystal ball, that may be a brave hope.

The company, which “operates the world’s largest integrated network of cancer treatment centers and affiliated physician practices,” has some challenges, all of which has consequences for the CPPIB, which in September 2014 provided US$325 million, and received convertible preferred stock.

At the time, CPPIB said the investment “fits well with Relationship Investments’ strategy to provide strategic, long-term capital to industry leading companies where CPPIB can participate in the future success of the business and help create greater value through an ongoing partnership.”

CPPIB’s backing came after the company announced — and then quickly shelved — plans to go public. In early May 2014, the company said it had “commenced” an IPO that planned to raise about US$200 million via the sale of 13.33 million shares priced in the range of US$14-$16 a share. The company also planned to raise US$75 million from the sale of preferred stock. The proceeds were to be used to largely “repay outstanding debt.”

But a couple of weeks later those plans were nixed when, “due to unfavourable current market conditions” the company “postponed its initial public offering.”

But 21st Century did not withdraw the so-called registration statement and said that it “will continue to evaluate the timing for the offerings as market conditions develop. (The IPO plans were finally put to rest in January 2016 when the company withdrew its registration statement.)

In September 2014, the CPPIB arrived with a US$325 million cheque and the right to nominate two directors.

And it would seem the expectations and hope of the CPPIB has not been met — at least judging from publicly available information. (Calls to the company seeking a comment were not returned.)

For instance, 21st Century’s year-to-date financials (for the nine months ended Sept. 30 2016) showed a 5.1 per cent revenue decline compared with the comparable period in 2015 and continued losses (US$92.9 million vs. US$133.9 million in 2015.)

Two weeks back the company made key leadership changes with the hiring of a new interim chief executive officer and a new interim chief financial officer. It said the leadership changes (were made) to “further efforts to solve short- and long-term liquidity challenges.”

A few days later the company announced it had entered into its third amendment to the credit agreement that was originally signed in April 2015. “Amendment No. 3 amends certain provisions in the Credit Agreement to permit the incurrence of additional indebtedness pursuant to the A&R MDL Credit Agreement,” the company said at the time.

It seems the need to amend the credit agreement flows from a decision made on November 1 2016. Then the company “failed to make a semi-annual interest payment,” governing its 11 per cent senior notes due 2023. That decision caused a sharp drop in the price of the bonds (to US$72 per US$100 face value from US82) and a further decline 30 days later (to US$59.625 per US$100 face value) when the failure to cure within 30 days “resulted in an event of default under the Indenture,” the company said in a SEC filing. (That default also “triggered a cross default under the Credit Agreement.”) The bonds closed Friday at US$61.563 — a yield of almost 25 per cent.

CPPIB said that the US$325 million investment in 21st Century has to be put in context.  “We have thousands of investments and lot of them outperform.”

Financial Post
bcritchley@postmedia.com