Debenture holders left out in cold

the provider of the debtor in possession (DIP) financing and it has made stalking horse bids for Discovery Air’s assets. And they may challenge the decision not to allow competitors to Discovery Air to bid on — and possibly offer a higher price for — the assets that are being sold.

In the normal course of events, debenture holders don’t have much power to enforce their rights. Those rights are governed by a contract and the trustee holds the power to bring any action. It’s understood that Discovery Air debenture holders approached the trustee with a legal opinion arguing that their rights had been jeopardized. It’s understood the trustee also had a legal opinion from Clairvest arguing their rights weren’t jeopardized. As a result, nothing happened. And the regulators have typically adopted a hands-off approach leaving to the courts to settle matters.

If the debenture holders are well financed they have additional options. In late 2015, a group brought an action against the executive director of the Alberta Securities Commission challenging the approval of Perpetual Energy’s $25 million rights offering.

There were two parts to the action: given that they’re higher up the food chain than common shareholders, their rights weren’t being protected; and too much of Perpetual’s equity ownership was transferred to the current shareholders. In that rights offering 665.4 million shares were issued; almost three times the 228.9 million common shares that were issued to the debenture holders.

On Christmas Eve 2015, the ASC dismissed the appeal. The ASC panel added that if the matter was taken to the Civil Courts, a different result might have ensued.

The holders didn’t pursue that option. Instead, given the risks of investors getting bagged in the same way at some future date, the market, came up with a solution. The underwriters and investors got together to develop terms and conditions to ensure that issuers didn’t pull a similar manoeuvre. It took a couple of months to develop the language that became a regular part of the prospectus.