RF.PR.A: Shareholders to Vote on Manager Change

C.A. BANCORP CANADIAN REALTY FINANCE CORPORATION has released an Information Circular:

You are invited to the Special Meeting of holders of Class A shares and Preferred shares, Series 1 (collectively, the “Shareholders”) of C.A. Bancorp Canadian Realty Finance Corporation (the “Corporation”) to be held at the offices of the Corporation, The Simpson Tower, 401 Bay Street, Suite 1600, Toronto, Ontario, M5H 2Y4 on April 25, 2011 at 2:00 P.M. (the “Meeting”). The purpose of the Meeting is to provide Shareholders with the opportunity to consider and pass a special resolution to approve the following proposed transaction:

  • (a) the acquisition of all of the issued and outstanding shares of C.A. Bancorp Ltd. (the “Manager”) by Green Tree Capital Management Corp. (“Green Tree”) (the “Change of Control”);
  • (b) an amendment to the commitment agreement dated January 31, 2008 between C.A. Bancorp Inc. (the “Parent”) and the Corporation (the “Commitment Agreement”) to permit the Commitment Agreement’s assignment from the Parent to Green Tree and the release of the Parent from any further obligations; and
  • (c) an amendment to the management agreement dated July 6, 2009 between the Manager and the Corporation (the “Management Agreement”) to provide that the Manager is not entitled to payment of a termination fee where the Management Agreement is terminated by the Corporation in the context of a material breach or default.

Approval of the proposed transaction will result in the transfer of control of the Manager from the Parent to Green Tree, an Ontario corporation established for the sole purpose of entering the proposed transaction.

If successful, portfolio management will be contracted to Quantus:

Jamie Spreng formed Quantus Investment Corp. (formerly Spreng Asset Management Inc.) in April 2010. The firm became registered as a portfolio manager and investment fund manager in July 2010. Its offices are located at 36 Toronto Street, Suite 1150 in Toronto, Ontario. The firm subsequently added the registration category of exempt market dealer at the end of 2010. Mr. Spreng acts as Chief Executive Officer, Chief Compliance Officer, Chief Operating Officer, and Ultimate Designated Person for Quantus Investment Corporation. For Quantus, the investment objective is to maximize risk-adjusted returns. The Quantus Funds only charge a performance fee, there is no management fee. Mr. Spreng’s objective is to generate steady, consistent returns for clients pursuant to various hedge fund products.

Super. So the mortgages will be run by a hedge fund specialist with zero track record.

I mocked this issue at its genesis, due largely to the huge leverage. The leverage problem was addressed with a warrants issue and Asset Coverage is now a much more respectable 1.8-:1 based on the December 2010 Financials. So far so good.

But look at the assets! 36.4-milion in mortgages, 18.4-million in cash and 6.4-million in publicly traded securities, including preferred shares and junk bonds! The circular explains:

the uncertainty relating to the ownership of the Manager has depressed the number and quality of new lending opportunities for the Corporation, resulting in the Board’s decision to suspend quarterly distributions on the Class A Shares;

The preferreds have a rather unusual NAV Test:

Pursuant to the Commitment Agreement dated January 31, 2008 between the Parent and the Corporation, the Parent has agreed that, for so long as there are Preferred Shares of the Corporation outstanding, if the Adjusted Net Tangible Asset Value2 is less than 111% of the Original Preferred Share Issue Price3 as at the end of such quarter, the Parent will subscribe for, or arrange for subscriptions for, additional Class A Shares in an amount at least equal to the deficiency, within 10 business days following the end of the quarter (or if a deficiency or increased deficiency is discovered, including as a result of an audit or a review of the financial statements of the Corporation by its auditors, within 10 business days of confirming the amount of such deficiency). If the Parent defaults in its obligation then:

  • (a) under the articles of the Corporation:
  • (i) steps shall be initiated to redeem the Preferred Shares, the funding of which would occur pro rata as funds become available to fund such redemptions;
  • (ii) the Preferred Shares become voting;
  • (iii) the Class A Shares and Class J Shares become non-voting;
  • (iv) the Board of Directors shall call a meeting of shareholders to elect a new Board of Directors, a majority of whom must be independent of the Parent and its affiliates; and
  • (v) the Board of Directors shall appoint a qualified firm or individual to supervise an orderly liquidation of the Corporation;

and from the prospectus:

No distributions will be paid on the Class A Shares if (i) the distributions payable on the Preferred Shares are in arrears, or (ii) after the payment of the distribution by the Corporation the Adjusted Net Tangible Asset Value of the Corporation is less than 111% of the Original Preferred Share Issue Price. See ‘‘Description of Share Capital — Description of Class A Shares’’.

Well, I just plain don’t like this issue and recommend that preferred shareholders vote against the plan. A change in recommendation will be dependent upon:

  • The company should obtain a credit rating for the preferreds
  • The company should present a credible plan for funding the redemption of the preferreds (e.g., a credit line with a major bank).
  • The NAV test should be more stringent.

One Response to “RF.PR.A: Shareholders to Vote on Manager Change”

  1. […] The information circular is available on-line and was discussed in the post RF.PR.A: Shareholders to Vote on Manager Change. […]

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