In three weeks shareholders and debenture holders of Twin Butte Energy will meet in Calgary to give their assessment of the board-endorsed takeover of the company by Reignwood Resources, a privately held Singapore-based entity.

And, now that the circular for the Aug. 10 meeting has been released, the convertible debenture holders, who invested $85 million in December 2013 in the hope of receiving 6.25 per cent for the next five years, are madder than ever.

They have pored through the 316-page circular trying to understand why the offer to the common shareholders is better than the offer they’ve received. In all, the shareholders are being offered $0.06 a share — meaning a total payment of $21 million — while the debenture holders will receive $0.14 on the dollar — for a total payment of $12 million.
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Those offers, for the company, whose total return over the past three years is -96.20 per cent and which recently received forbearance from the providers of a non-revolving credit facility for non-payment, came about six months after a strategic review was launched.

“Either the debenture holders will vote down this deal, or this sets an ugly precedent in my view,” said one debenture holder, who believes the food chain of claims should be respected. “As a matter of principle, you would hate to see this go ahead and set a precedent that bond holders don’t have any kind of priority,” he added. To get over the line the transaction requires the support of holders of two-thirds of both groups of investors.

The debenture holders are upset for two reasons.
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First, no comment was given on the fairness of the transaction to the debenture holders. Peters & Co., one of Twin Butte’s financial advisers, said the offer is fair to the common shareholders, but was silent on the fairness for the debenture holders. One debenture holder said the omission “points to the fact that the debenture [holders] are getting a bad deal.”

Second, there was no discussion on how the board allocated the acquisition price between shares and debentures. “As the acquirer is paying cash for both, I assume the acquirer would be indifferent,” noted one holder.

So what does Twin Butte say?

Rob Wollmann, chief executive, said the Reignwood proposal had a “firm, defined allocation of the consideration” to be offered to debenture holders and shareholders. He said the board did not allocate the acquisition price “but is recommending acceptance of the Reignwood proposal as it represents the highest offer for all stakeholders, individually and collectively,” noting the Reignwood offer represents the highest offer received for debenture holders.”

Our debenture holder is still not satisfied. “Why is it important to the buyer to pay $21 million to the equity holders and $12 million to the debenture holders. Why would that [split between the two classes of securities] make a difference to the buyer?” he asked. “If the debt holders aren’t being made whole we have a restructuring and in a restructuring debt holders take priority.”

Twin Butte’s Wollmann said the board “considered many factors” including the possibility of receivership if it didn’t enter into the arrangement with the buyer. In that case, the probability (given the expressions of interest delivered during the strategic review) was that the debenture holders “would receive no consideration in such proceedings due to the amounts owing our bank syndicate under the existing senior secured credit agreement.”

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