As we all know, YLO.PR.A is convertible at the option of the company into common commencing March 31. We also know that YLO.PR.B is similarly convertible (with a premium) commencing June 30.
But Assiduous Reader JY tells me:
The other bigger issue is that it appears to us that they cannot convert the preferred series 1 to either common or a similar financial instrument (IR’s words and as of a few weeks ago this was still on the table according to [redacted]). The roadblock is that they have to pay at least the one dividend on the preferred A’s either in cash or shares. The issue then becomes since the preferreds are pari-pasu or equal then pay one, you have to pay all 4 series. As you are probably aware they have to do this before the end of the year. The one possible way out is if they can somehow say that the dividend is not a dividend but additional shares. Our feeling is that is a bit of a stretch but given how this situation has gone; perhaps a sharp lawyer can get them around this.
So the idea is: the conversion value of the preferreds includes accrued but unpaid dividends; therefore, conversion of YLO.PR.A will involve giving value for the accrued but unpaid dividends; therefore, they won’t be able to convert YLO.PR.A or YLO.PR.B without bringing the dividends on YLO.PR.C and YLO.PR.D up to date.
However, there’s a section in the 2009-9-15 prospectus for YLO.PR.D (and probably the others as well – I didn’t check) that states:
Unless all accrued and unpaid dividends on outstanding Series 3 Preferred Shares and Series 4 Preferred Shares and all accrued and unpaid dividends on all other outstanding shares ranking senior to or on parity with the Series 3 Preferred Shares and Series 4 Preferred Shares have been declared and paid or set apart for payment, YPG Holdings will not, without the approval of the holders of outstanding Series 3 Preferred Shares and Series 4 Preferred Shares, in each case voting as a series: … declare, pay or set apart for payment any dividends on any of its shares ranking as to dividends on parity with or junior to the Series 3 Preferred Shares or Series 4 Preferred Shares, as applicable (other than stock dividends payable in shares of YPG Holdings ranking as to dividends and capital junior to the Series 3 Preferred Shares or Series 4 Preferred Shares, as applicable);
So … given that there’s an exemption available for “stock dividends”, which is not a defined term, could YLO claim that paying the conversion price in common shares make the dividend count as a stock dividend, which will not trigger mandatory payment of the other outstanding dividends? I will leave that one for the lawyers.
The YLO preferreds (YLO.PR.A, YLO.PR.B, YLO.PR.C & YLO.PR.D) were last mentioned on PrefBlog when S&P downgraded them to C. All the issues are tracked by HIMIPref™ but are relegated to the Scraps index on credit concerns.
OK, so why does YLO NEED to convert the prefs to common?? So the cumulative accrued dividend doesn’t pile up any more? What is the urgency for them? Are those accrued dividends going to rank any higher in the pecking order than the pref principal itself? Now they have defaulted, why sweat this little stuff based on bits of paper rather than cash?
YLO pref investors couldn’t count on their dividends when the company was still solvent (and profitable), so why should they “count” on a conversion to common (that on paper might yield a 100%+ return at current prices with 12.5 common ($1.25 at 0.10 each common) for a 60 cent pref)?
The company hasn’t paid too much attention to seniority in the past, so can we be sure it will in the future?
For YLO.PR.A, there is a retraction right at $25 at the end of 2012, if the shares still exist. So the company is under the gun for this series.
For YLO.PR.B, the retraction right doesn’t come until 2017, so the decision there is not nearly so urgent.
It’s worth reading all the restrictions relating to unpaid dividends on the Cs and Ds. This clause below is more restrictive. I read it to say that they can’t even issue new shares, unless the Cs and Ds are paid all outstanding dividends. Do others see it that way?
—
except where the net cash proceeds of an issue of shares ranking as to the payment of dividends or capital junior to Series 3 Preferred Shares or Series 4 Preferred Shares, as applicable, are used to pay all accrued and unpaid dividends up to and including the dividend payable for the last completed period for which dividends were payable on the Series 3 Preferred Shares or Series 4 Preferred Shares, as applicable, if any, or except pursuant to the exercise of stock options or otherwise under YPG Holdings’s security-based
compensation arrangements in effect at any time and from time to time, issue any additional shares ranking as to dividends or capital junior to the Series 3 Preferred Shares or Series 4 Preferred Shares, as applicable.
—
I read it to say that they can’t even issue new shares, unless the Cs and Ds are paid all outstanding dividends. Do others see it that way?
I see it that way too. If the preferred dividends are in arrears, then the proceeds of any common issue have to be used to bring them up to date.