CSE.PR.A: No Conversion

Capstone Infrastructure Corporation has announced:

that none of its Cumulative 5-Year Rate Reset Preferred Shares, Series A (the “Series A shares”) will be converted into Cumulative Floating Rate Preferred Shares, Series B (the “Series B shares”).

On June 10, 2016, Capstone notified holders of Series A shares that they could elect to convert their Series A shares into Series B shares, subject to the terms and conditions of those shares. One such condition is that, following conversion, there be at least 1,000,000 Series B shares outstanding or else no Series A shares will be converted.

As of 5:00 p.m. (EST) on July 18, 2016, the end of the period during which holders of Series A shares could elect to convert their Series A shares into Series B shares, elections for conversion into Series B shares were received in respect of only 429,367 of the 3,000,000 outstanding Series A shares. As a result, the above condition is not satisfied and no Series A shares will be converted into Series B shares. All holders of Series A shares will continue to hold Series A shares.

As previously announced, for the five year period from and including July 31, 2016 to but excluding July 31, 2021, the fixed annual dividend rate for the Series A shares has been set at 3.271% per share, payable in equal quarterly amounts on the last day of each of the months of January, April, July and October if, as and when dividends are declared by the Board of Directors of Corporation.

I have previously reported on the extension of CSE.PR.A, the reset to 3.271% and recommended against conversion.

One Response to “CSE.PR.A: No Conversion”

  1. jarsenault19 says:

    Hi James,

    I was hoping you may have some time to look at some recent activity by Capstone and see whether this is very negative to the preferred shareholders. It appears that after the arrangement for ICON to takeover all of the common stock and debt, Capstone has issued a promissory note (over $300MM) which ranks ahead of the preferred holders. I’m not a securities expert, but am a little confused as to how the common equity on the balance sheet has been reduced tremendously, offset by this new liability. I cannot seem to understand how the assets haven’t grown given the issuance of this note.

    http://business.financialpost.com/investing/investing-pro/capstone-infrastructure-preferred-holders-rank-behind-new-316-million-promissory-note

    As well, the prospectus for the preferred shares states that:

    “In the event of the liquidation, dissolution or winding-up of the Corporation or any other distribution of assets of the Corporation among its shareholders for the purpose of winding-up its affairs, whether voluntary or involuntary, subject to the prior satisfaction of the claims of all creditors of the corporation and of holders of shares of the Corporation ranking prior to the Series A Preferred Shares, the holders of the Series A Preferred Shares will be entitled to receive an amount equal to $25.00 per share, together with an amount equal to all accrued and unpaid dividends up to but excluding the date of payment or distribution (less any tax required to be deducted or withheld by the Corporation), before any amount is paid or any assets of the Corporation are distributed to the holders of any shares ranking junior as to capital to the Series A Preferred Shares. Upon payment of such amounts, the holders of the Series A Preferred Shares will not be entitled to share in any
    further distribution of the assets of the Corporation.”

    Given that a private group now holds full control of the company, especially with the preferred holders having no voting rights, is it possible for them to use financial tactics to extract equity from the company, to the detriment of preferred holders? I still believe that the dividends will continue to be paid to preferred holders, but, I am a little nervous about what happens at the next reset (assuming rates rise materially and these “could” be called”), or, if the company does go under, that there will be no equity left for distribution to preferred holders (while ICON can somehow extract it by other means).

    Anyway, long story short, just wondering if this has hit your radar or if you have any comments to provide to put my mind (as a preferred shareholder) at ease.

    Thanks!

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