Exchange Income’s two year redemption window rankles some potential investors

, Investment

Exchange Income Corporation opens the market to celebrate eight years as a Toronto Stock Exchange listed company.

Winnipeg-based Exchange Income Corporation typically turns to the capital markets once a year and when it does it typically issues convertible debentures.

This week it presumably filled its 2016 requirements when it brought to market a $60 million offering with a 5.25 per cent coupon.

But to get the current deal over the line, Exchange Income — which issued convertibles in 2012, 2013 and 2014 — was required to incorporate language that’s become the norm in such offerings. That new language has been essential since late last year when Calgary-based Perpetual Energy announced a highly dilutive rights offering at the same time as an outstanding convertible issue was maturing. The rights offering, which was backstopped by the company’s chairman, transferred control of the company to the holders of the common equity from the debenture holders.

The new language, which has been incorporated into issues this year — one by Premium Brands and the other by Kelt Corporation — relates to, what the prospectus refers to as “restriction on share redemption right.”

In essence, the issuer can’t (among other restrictions) do a rights offering where the number and price of securities to be issued is related to the exercise of the share redemption right or the current market price.

To get its money, Exchange Income needed to follow the new market rule. After that it marched to its own tune and brought a seven-year issue to the market, a period that’s two years longer than the norm. (On its three recent converts Exchange Income also issued a security with a seven-year term.)

But the issuer’s planned use of proceeds has upset some investors. Instead of using the cash for capital purposes, it intends to redeem a convertible issue (the Series J) two years before maturity.

“It’s supposed to be out there for two more years. It takes away the upside of the conversion feature which is priced as an option and which factors in how much of a less-of-a-coupon you will pay,” said one investor, who noted the conversion feature “in this case doesn’t have value for the full five years.” Typically an issuer will redeem ahead of time, if it trades 125 per cent above the conversion price or it will call it, at par, early anytime in the last year.

Exchange Income operates differently as is detailed in the prospectus: It can redeem the converts within two years of maturity at par. Because the shares are trading ($31.80) above the $30.60 conversion price the expectation is holders will convert.

Perpetual motion

On the fallout from Perpetual Energy’s 2015 move, shareholders of another Calgary-based public company seem to have taken notice.

Susan Riddell Rose is Perpetual’s chief executive and also a director of Newalta Corp. She was up for reelection at last week’s annual meeting.

While she was returned, the level of support she received was way down. In all 24.09 per cent of shares voted were in the “votes withheld” category — meaning 75.91 per cent of the shares were “votes for.” For Harvey Doerr, the second-least supported director, votes withheld was 5.15 per cent.

At 24.09 per cent the “votes withheld” from Riddell Rose was almost twice as high as the 13.16 per cent votes withheld form her at the 2015 meeting. At the 2014 meeting, votes withheld for her were 4.80 per cent and 95.20 per cent votes for.


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