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A look behind Sherritt’s double financing victory

It looks like a classic win-win, now that the second part of a financing package unveiled one month back by Sherritt International has closed: the issuer raised more equity than originally intended and bought back more debt than anticipated — and at a slightly lower price.

Wednesday, Sherritt announced it had bought back $121.223 million of three classes of debt at an aggregate cost of $110.331 million plus accrued interest. Under normal circumstances, that debt was set to mature over the period of 2021-2025. Because of the buy-back the company now has about $600 million of debt outstanding — down from $720 million previously.

Sherritt bought the debt back through a modified Dutch auction: prior to the auction, it posted maximum prices; asked holders to submit their proposals, indicated those proposals “must be less or equal to the maximum price,” and then picked the so-called market-clearing price.

The three maximum prices per $1,000 face value were: $950 (2021 bonds); $900 (2023 bonds) and $880 (2025 bonds.) When the proposals were received, Sherritt was required to pay $950 per $1000 face, $890 and $870 respectively.

One theory is demand by holders to get out of the bonds was so high, the maximum price was lowered on two of the issues. Sherritt could accommodate that extra demand because it had raised more equity.

All up, Sherritt — whose share price has trended lower over the past few years — saved about $10 million in annual interest payments. The buy-back continued recent moves to reduce its debt load, including reducing its stake to 12 per cent from 40 per cent in the Madagascar Ambatovy Joint Venture project.

But nothing is for free: to get those interest savings, Sherritt issued equity, specifically units with each $1.40 unit consisting of a common share plus a warrant linked to the price of cobalt. The exercise price on the three warrants is $1.95, and Sherritt will issue more shares the higher the cobalt price. (Sherritt initially planned to raise $100 million, but investor demand forced it first to $125 million and then to $134 million.) The shares closed at $1.26 on the TSX Wednesday.

What’s interesting is the context of the two financings: two days before results of the buy-back were announced, Sherritt released its 2017 MD&A. In that 62-page document, it listed its priorities, one of which was to “preserve liquidity and build balance sheet strength.”

Expediting Cuban energy receipts is one of those priorities, given that at the end of 2017, “outstanding receivables” were US$132.6 million. One year earlier there was no such reference to outstanding Cuban receivables.

In a few weeks, DBRS is expected to release its annual review on Sherritt and its debt. (The review was presumably held up by Sherritt’s financing package.) At the end of 2016, DBRS maintained Sherritt’s corporate rating at a B, but lowered the rating on its unsecured debentures (to B low from B); and also lowered its recovery rating to RR5 from RR4, meaning the chance of debt holders receiving the return of their investment fell to 10 per cent to 30 per cent from 30 per cent to 60 per cent. DBRS noted it had sufficient cash to retire the 2021 notes. This week Sherritt reported it had $185 million of cash and cash equivalents at the end of 2017.

David Pathe, Sherritt’s chief executive said the company achieved its objective of continuing to deleverage and strengthen its balance sheet. “The markets gave us that opportunity,” he said noting the debt buyback was increased because the equity offering was upsized.

“We maintain our enterprise value but at lower risk to the equity because we are not as highly levered,” he added.

Financial Post

bcritchley@postmedia.com

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