Clarke invests in ... Clarke
The activities of Clarke Inc.’ s pension fund was one of the more unusual aspects about the company’s recently cancelled plan to offer holders a higher coupon on an outstanding issue of convertible debentures in exchange for giving up their conversion rights.
That plan, that required approval of the holders, was announced on November 14. In return for a 50 basis points hike in the rate, holders would give up their rights that allowed them to convert at $7.50 a share.
Less than two months later, the plan was called off. “While a majority of the Debentureholders voted in favour of amending the terms of the Debentures, there was not the sufficient two-thirds support required by the terms of the Debentures,” said Clarke in a release. That decision affected about $54-million (face value) of debentures.
But according to SEDI filings, the “trustee of the Clarke Inc. Pension Plan” was a busy buyer of the debentures over the period Nov. 15 to Dec. 19.
Over that period, the pension fund made 11 different purchases. Prior to that buying spree it owned $2-million worth of the debentures; when it was all over about a month later, it owned $7.97-million worth of the debentures that were originally scheduled to be redeemed at the end of 2013 but thanks to receiving support from holders were extended to 2018.
With a stake of $7.97-million, the fund, which at the end of September had $89.54-million in assets, owned more than 10% of the outstanding issue. According to the TSX, there are 538,843 debentures outstanding with a face value of $53.88-million and a market value of $57.66-million
The individual purchases varied from a low of $4,000 (Nov. 25) to $4.11-million on November 27. The prices varied from $100.10 (Nov. 15) to a high of $105.
The activity leads to a few questions: ❚ why was the fund buying the debentures? ❚ under whose instructions was the fund buying the debentures? ❚ why was the fund paying more than face value, given Clarke can redeem the debentures on short notice and pay them face value plus accrued and unpaid interest? Clarke is required to give between 30 and 60 days notice to pull the trigger.
In short, the pension fund was exposed to potential losses in the event that Clarke, which is cashed up, decided to redeem them for $100 face value. And that was always a possibility given that in the circular for the meeting, Clarke said “the Company has the financial capacity to redeem the Debentures at this time.” So what does Clarke say? Andrew Snelgrove, chief financial officer, said the pension fund has two asset managers; one internal with the other being an external or “third party” manager. “The asset manager,” was making the investment decisions, though “I would think that both parties [the third party and Clarke] probably knew about it at some point in time.”
Snelgrove said that while there are no restrictions on what the fund can buy, the fund has its own internal limits. And the debenture purchases have been a good investment given that they now trade at $107. “It [the buying] was purely for investment purposes. It’s still a good yield in an investment we obviously believe in,” he said, adding that he was unsure whether the fund voted the debentures in favor of the proposal.
Off the Record