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JEFF McINTOSH/The Globe and Mail

Arcan Resources Ltd. is getting serious push-back from one of its debenture holders to a deal that would result in the lion's share of the struggling oil producer being absorbed by privately held Aspenleaf Energy Ltd.

Arcan, which is hobbled by heavy debt, announced in June a friendly transaction that involves Aspenleaf taking over 87.5 per cent of its light oil assets in the Swan Hills area of north-central Alberta. Arcan would form a new junior oil company with the remaining Swan Hills interests, and Aspenleaf, which is backed by Arc Financial Corp. and Ontario Teachers Pension Plan, would own 6.7 per cent of it.

However, Stornoway Portfolio Management, whose funds own Arcan convertible subordinated unsecured debentures, has voted against the deal. The firm is displeased with a key aspect of the rescue transaction – a haircut for debenture holders that it pegs at 17.5 per cent. Aspenleaf is offering $825 per $1,000 principal amount of debentures, plus 100 warrants in the new company. The debentures traded in the $610 range before the deal was announced.

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"Stornoway acknowledges that Arcan has too much debt and that cash flow is being diverted to paying interest rather than growing the business," the fund manager said in a statement. "The Aspenleaf proposal, in effect, unfairly shifts the burden of corporate accountability for Arcan's current financial condition from the board and management, where it legally and properly resides, to Arcan's debentureholders."

Arcan's major shareholders include Crescent Point Energy Corp. and Lightstream Resources Ltd. In its second-quarter results, announced on Thursday, Lightstream said it does not believe the Aspenleaf offer provides "optimum value" for its 16.9-per-cent stake.

The arrangement requires approval by both equity and debt holders. A meeting is scheduled for Aug. 20.

Stornoway said it is prepared to work with Arcan to come up with another solution. However, the Aspenleaf deal is the only one that emerged from a nearly year-long process in which 22 interested companies signed confidentiality agreements.

"It's not that there's not much more to give them – there's no more," said Bryan Gould, Aspenleaf's CEO. "We didn't come to this transaction to save a nickel, we came to it because it's the only way to see a transaction through. We would observe that the consideration price is in line with what the market has valued the company at for quite some time and is, in fact, a premium."

Mr. Gould said the benefit of the deal is that each of the stakeholders gets some value. His company could not devise another resolution that took into consideration the fiduciary duty of Arcan's board, he said.

"Stornoway or others are completely free to put forward superior proposals. That's completely contemplated and allowed within the agreement that we have with Arcan," he said. "So if they have an idea, I say, why don't they put it forward?"

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On Wednesday, Arcan issued opinions from shareholder advisory firms Institutional Shareholder Services Inc. and Glass, Lewis & Co., both recommending shareholders approve the transaction.

"In light of the high leverage level of the company which could potentially lead to going concern uncertainty, the transaction may be viewed as a better alternative for shareholders given the lack of other superior proposals at this stage," Arcan quoted ISS as saying. "In addition, although the transaction involves both shareholders and debenture holders, there appears no significant evidence that shareholders are treated more unfavorably than debenture holders in terms of the transaction terms."

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