Persistence pays off for principled debenture holders

If the holders of $85 million of subordinated debentures issued by Twin Butte Energy in late 2013 want a pleasant weekend, then a quick read of the 10th report by FTI Consulting, the court- appointed manager and receiver for the Calgary based company, will greatly help.

That 18-page report — prepared by the firm appointed last September when debenture holders voted down a management and board- approved plan to sell the company to Singapore’s Reignwood Resources — shows how well that reject decision has turned out. After being snubbed by security holders, Twin Butte went into receivership and a few months later was sold to China’s Henenghaixin Operating Co.

The debenture holders now stand to receive at least 66 per cent of what they invested. “For subordinate debenture holders … the in- itial distribution will total approximately 66 per cent of their claim or 69 per cent of the principal face value of the subordinate debentures,” states the report.

And there could be more. The report says there may be “additional distributions to the subordinate debentures depending on the outcome and resolution of the disputed claims, claims under review and other finalization of other holdbacks.”

The report states $ 14.54 million is being held back.

To put that 66 per cent return in perspective, debenture holders were offered 14 per cent of the face value of the debentures on the original deal. (On that deal, being done by way of a plan of arrangement, equity investors were offered $0.06 a share — a $22.4 million payment. When Twin Butte went into receivership, they got nothing.)

Accordingly, debenture holders stand to receive about five times what they would have received had they voted to accept the original offer. And they stand to receive about twice what all security holders (equity plus debentures) would have received had all parties voted to accept the Reignwood offer.

By any measure, a double ( at the minimum) or a five bagger ( at the maximum) over a one- year period ain’t too shabby. One participant said the debenture holders were “ecstatic.”

Along the way debenture holders were teased as to how much they would receive. ( The purchase price was not disclosed until recently.) In one report, they were told “the purchase price is sufficient to pay all secured lenders in full (including potential lien amounts) and provide for a substantial distribution to the unsecured creditors.”

In April, it emerged that the payout would be in the 45 per cent – 60 per cent range.

The real heroes are the debenture holders who were, in part, organized by brokers whose clients owned them, the brokerage firm, Macquarie Capital Markets and the law firm Bennett Jones.

“A year ago the debenture holders took a position that they weren’t being treated fairly and hired advisers. After a protracted timeline, they have now been justly rewarded. Ultimately we ensured they were treated fairly,” said Sandy Edmonstone, Deputy Head, Global Oil & Gas at Macquarie Capital Markets.

But some participants didn’t cover themselves with glory. Among them are management and the board who proposed a deal that didn’t treat the debenture holders fairly. Instead the original offer treated the equity holders too fairly given that they stood to receive too much of the consideration. (Support from both security holders was required for the transaction to proceed.)

The management and the board also seemed lax in getting a fairness opinion. Originally, Peters & Co., one the two firms retained by Twin Butte to find the original buyer, opined the offer was fair to the shareholders – without referencing the fairness to debenture holders. The debenture holders objected, so after much pressuring, Twin Butte retained Canaccord Genuity, which said the offer was fair.

In the end it didn’t matter: the debenture stood up for principal and emerged the big winners.