Toronto’s Victoria Park transit station renovation by IBI Group has won several awards. Late last week, IBI announced its intention to rework the terms of some convertible debentures
A new proposal to amend the terms of IBI Group Inc.'s convertible debt is raising questions about the incentives companies use to get investor approval for such deals.
Late last week, IBI, a company that specializes in architecture and engineering projects, announced its intention to rework the terms of some convertible debentures. Under the proposal, the convertible notes that pay 7 per cent in interest annually and mature on Dec. 31 would have their maturity date extended five years into the future.
The benefits of such a plan include removing the risk of dilution to shareholders if some noteholders convert their debentures into common shares at maturity, according to the firm's proxy circular. Such a deal will also "better position the corporation to improve operating earnings."
The noteholders don't always see it this way. Some worry the company is simply trying to defer the $46-million that would be due upon maturity because it doesn't have the cash to make such a payment. IBI's shares have been in freefall over the past few years, falling 40 per cent in the past few months alone as the company restructures. The company wrote off $225-million worth of goodwill, work in progress and accounts receivable last year.
More importantly, though, there are concerns about the way in which IBI is seeking approval for the refinancing, according to two people who are irked by the terms. IBI has offered to pay noteholders $70 per $1,000 of convertible debt they own if they vote in favour of the refinancing.
Such consent fees aren't novel. However, companies use them in different ways, and the nuances make a big difference.
Clarke Inc. and Royal Host both used consent fees to amend the terms of their debt in the past, and these refinancings caused frustration because the fees could be paid to the brokers who advise investors – something IBI doesn't allow.
Great-West Lifeco, meanwhile, announced plans to amend the terms of some debentures last year, and also paid a consent fee. However, Great-West agreed to pay the consent fee to all investors of the debt issue at hand if the refinancing went through.
IBI makes it clear that it will only pay those who vote in favour of the deal, even though everyone who owns the convertibles will be bound by the new terms. Such a scenario can be frustrating because convertible debentures are often owned by retail investors who are hard to mobilize by opponents of a deal.
IBI Group did not return a call from The Globe and Mail requesting comment.
Tim Kiladze