For companies, the knock-on effects of external events can be devastating, and require management to take difficult but necessary decisions. Consider the situation at Winnipeg-based Lanesborough REIT whose primary market is Fort McMurray, Alberta.
Two months back it reported its 2015 operating results: they weren’t good, in large part because of Lanesborough’s operations in Fort McMurray. “During 2015, the yearly average occupancy level of the Fort McMurray properties dropped to 68%, compared to 86% in 2014,” it said at the time, adding that a recovery, or otherwise, in oil prices, oilsands development activity and rental market conditions all presented “additional challenges.” And that was written before the devastating fire hit the town.
Thursday another shoe dropped. The company put forward a plan to “extend and amend” its Series G unsecured debentures. Those 9.50 per cent debentures — and $24.8 million are outstanding — were set to mature on June 30, 2018. The company wants to extend the maturity date to June 30, 2022. Over the past year the debentures have traded in the range $8-$86.50.
But in a twist, Lanesborough is not offering the holders an incentive to extend. Unlike (among others) Aston Hill Financial and Clarke Inc., which went down the same path and offered holders a higher coupon over a longer time period, Lanesborough is offering a lower interest rate for a longer term.
Instead of 9.50 per cent, plans call for the holders to receive five per cent, a proposal to be voted on at a June 21 meeting. Lanesborough, which said it advanced the idea after holders indicated they didn’t want the debentures to default, gave three reasons for holders to accept:
it will provide the issuer “the opportunity” to pay interest and principal when due rather than default;it will buy Lanesborough some time “to endure its current financial challenges and carry on as a going concern;” and,other lenders are doing the same thing.
Lanesborough said the providers of a revolving loan have agreed to cut the interest rate on their loan to five per cent from 12 per cent. (The loan is provided by 2668921 Manitoba Ltd.) However they have attached a condition to that potential concession: it will only proceed if the debenture holders accept the offer from Lanesborough.
The lender, 2668921 Manitoba Ltd is “owned by a family member of an officer and trustee of the Trust.” At March 31, 2016, the loan stood at $18 million. But since then, $3.9 million has been repaid, leaving a balance of $14.1 million.
Lanesborough’s financial statements show a company working on many levels to right-size its business. For instance the $85 million in assets held for sale on March 31 2016 was $30 million more than one year earlier. As well, property management fees (normally paid monthly) have been deferred for April and May, while in the first quarter, Lanesborough defaulted on “debt service requirements” on 12 mortgage loans (all in Fort McMurray) with a principal value of almost $194 million.
“What we are doing is trying to keep it going and praying for an eventual recovery in Fort McMurray and the oilsands,” said chief executive Arni Thorsteinson. “And we want to demonstrate that everybody is doing their fair share to get the situation into a salvageable mode,” he added.