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National Bank led the financing, which also included Eight Capital Corp., Scotia Capital Inc., BMO Nesbitt Burns Inc. and RBC Dominion Securities Inc.

CHRIS WATTIE/Reuters

Eric Fier, the chief executive officer of SilverCrest Metals Inc., says he’s “surprised” and “disappointed” that National Bank Financial Inc. walked away from a recent financing agreement, as the silver company considers taking legal action against the investment bank.

Earlier in the month, National Bank informed SilverCrest that it was invoking the “disaster out” clause to terminate a $75-million bought deal, citing the extraordinary financial turmoil created by COVID-19.

Although rarely used, disaster out clauses can be invoked by underwriters in extreme situations to walk away from their legal obligations in a bought deal.

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“We’re long-term clients of National Bank,” Mr. Fier said. “I’m very disappointed in the lack of support in this situation and their unwillingness to stand by a key client when the going gets tough.”

Mr. Fier said that National Bank has no right to invoke the legal out in this instance, saying all parties entered into the financing agreement with their “eyes wide open” about the elevated risks around COVID-19.

The novel coronavirus pandemic was “fully evident” when the bought deal was agreed upon, SilverCrest said in a statement on March 18.

“We intend to enforce our legal rights to protect our shareholders,” Mr. Fier added.

National Bank led the financing, which also included Eight Capital Corp., Scotia Capital Inc., BMO Nesbitt Burns Inc. and RBC Dominion Securities Inc.

In a bought deal, an investment banking syndicate buys shares in a company at a discount to the market price and then flips the securities to investors, usually in a matter of hours. Normally, the company receives the funds whether the syndicate sells all of the shares or not. Most bought deals go off without a hitch, but occasionally trouble arises.

On the morning of March 11, Vancouver-based SilverCrest announced that a syndicate of investment banks had agreed to buy 11 million common shares in the company at $8.25 a share, a 5-per-cent discount to the previous close. Heading into the session, SilverCrest had been on a roll. With the number of coronavirus cases rapidly growing around the world, and with Italy in a national lockdown, investors were seeking the safety of precious metals stocks. However, investor sentiment was about to shift in a dramatic fashion.

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Later that day, the World Health Organization declared COVID-19 a pandemic, inciting market pandemonium around the world. Virtually every stock and every sector got hit. Shares in SilverCrest fell by 16 per cent, closing at $7.30 a share on the Toronto Stock Exchange, well below the bought deal price. The company tumbled another 15 per cent the next day.

Stock markets were “not functioning in a remotely normal fashion,” making it impossible to complete the financing, said Brian Davis, co-CEO of National Bank.

The disaster out clause meant the bank had the right to terminate the financing without liability, according to Mr. Davis, because COVID-19 was an event of “national or international consequence” that “materially adversely" affected financial markets.

SilverCrest doesn’t see it that way.

Mr. Fier said the banking syndicate would have been fully aware that market risk was elevated, well before COVID-19 was upgraded to pandemic status and, in the days preceding the financing, markets had already been extremely volatile.

Even in optimal market conditions, bought deals can be risky with banks occasionally getting stuck with unsold shares if they misjudge the market. In such instances of “hung" deals, dealers usually either hold on to the shares until the market recovers or reprice the transaction at a lower price. The inherent riskiness of bought deals is a big reason commissions for these types of financings are particularly lucrative. In this case, bankers would have earned 5 per cent of the value of the deal, or $3.75-million shared among the syndicate.

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When asked if National considered eating the loss on the financing for the sake of saving the relationship with SilverCrest, which goes back about seven years, Mr. Davis said: “We regard SilverCrest very highly. I understand from their press release they don’t necessarily feel as positively about us. I hope that changes over time.”

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