Element Financial -- summary under Convertible Debentures
Overview
In order to finance its acquisition of PHH for U.S.$1.4B, the Corporation is proposing to issue $300M of convertible debentures, $825M in subscription receipts and $125M of fixed non-cumulative non-retractable preferred shares that are redeemable by the Corporation every five years and are convertible into floating rate dividend shares. Although there is some uncertainty as to whether the excess of the fair market value of a Debenture over its issue price on conversion would be participating interest, the Corporation does not currently intend to withhold on conversion by a non-resident.
The Corporation
The Corporation engages in equipment financing, generally through relationships with equipment vendors. The offering proceeds will help finance the "Acquisition" of PHH Corporation (which has a fleet management services business) for a purchase price of U.S.$1.4 billion.
Debentures - General
Offering by the Corporation of $300 million of 5.125% extendible convertible unsecured subordinated debentures at their principal amount ($1,000 per debenture), with a "Final Maturity Date" of June 30, 2021 and convertible at a conversion price of $17.85 per common share. The interest is payable semi-annually in arrears. The Debentures have been conditionally approved for listing on the TSX.
Debenture Redemption/Share payment
The Debentures are optionally redeemable by the Corporation after June 30, 2017 if the market price of the common shares (as defined) exceeds 125% of the conversion price - or earlier, on a change of control. Thereafter, they may be redeemed at par. On redemption or maturity, the Corporation may repay the principal amount by delivering common shares whose number is based on a 5% discount to the shares' market price, as computed (being a 20-day VWAP ending on the 5th preceding trading day).
Change of control re Debentures
In the event of a Change of Control (as defined and including a sale of substantially all the assets), the Corporation is required to offer to purchase debentures for cash at 100% of the principal amount (plus accrued and unpaid interest). Furthermore, if there is a Change of Control occurring on or before June 30, 2017 in which 10% or more of the consideration consists of cash or non-traded securities, then commencing 10 days before the effective date of the Change of Control and up until 30 days after the above Debenture offer is made, holders on conversion will be entitled to receive not only the stipulated number of common shares but also a make-whole premium (generally paid in common shares) interpolated from a table disclosed in the prospectus.
Debenture interest payment option
The Corporation may elect to satisfy its interest obligation in shares, in which event the sole right of the holder will be to receive cash from the Debenture Trustee from the proceeds of the sale of such common shares.
Debenture Canadian tax consequences
Conversion. A resident holder who converts a Debenture into common shares pursuant to the conversion privilege will be deemed not to have disposed of the Debentures.
Withholding issue for non-residents on conversion
"In the event that a Debenture is converted into Common Shares pursuant to the Non-Canadian Holder's conversion privilege…or is purchased by any other resident…of Canada (a "Canadian Transferee")…for an amount which exceeds, generally, the issue price thereof, all or a portion of such excess may be deemed to be interest and may be subject to Canadian non-resident withholding tax. if: (i) all or any portion of such interest is participating debt interest and (ii) the Debenture is not considered to be an "excluded obligation"… . [Such] an excess should generally be equal to the difference between the fair market value of the Common Shares received at the time of conversion…and the issue price of the Debenture. …[I]t is uncertain whether or not any excess would constitute ''participating debt interest''…. The CRA has stated that such excess would not be considered to be participating debt where the relevant debenture is a "traditional convertible debenture"… . The CRA has also made subsequent statements relating to such guidance. Based on such published guidance and subsequent statements by the CRA, the Corporation intends not to withhold tax on any such excess resulting from a conversion of the Debentures into Common Shares, however, the Corporation reserves the right to withhold in such circumstances… ."
Subscription Receipts description
Each Subscription Receipt will evidence the holder's right to receive, upon the Acquisition closing one common share in the capital of the Corporation. If the Acquisition Closing occurs prior to or concurrently with the closing date of the Offering, investors will receive Common Shares instead of Subscription Receipts.
Canadian tax consequences of acquisition of Common Shares under Subscription Receipts
"A Canadian Holder of Subscription Receipts will not realize any capital gain or capital loss upon the acquisition of Common Shares pursuant to the terms of Subscription Receipts. … The cost of a Common Share received pursuant to the terms of a Subscription Receipt will generally be the subscription price of such Subscription Receipt…."
Series E Shares' description
"The holders of the Series E Shares will be entitled to receive fixed, cumulative, preferential cash dividends, if, as and when declared by the Corporation's board of directors…for the initial period from and including the Offering Closing up to but excluding September 30, 2019 (the "Initial Fixed Rate Period") payable quarterly on the last Business Day (as defined herein) of March, June, September and December in each year at an annual rate of $1.60 per share. …For each five-year period after the Initial Fixed Rate Period…the holders of Series E Shares will be entitled to receive fixed, cumulative, preferential cash dividends, if, as and when declared by the Board of Directors, payable quarterly…[and] determined by multiplying …. $25.00…[by] the Government of Canada Yield…plus 4.72%."
Option to Convert Series E Shares into Series F Shares
"[T]he holders of Series E Shares will have the right, at their option, to convert their Series E Shares into Cumulative Floating Rate Preferred Shares, Series F (the "Series F Shares"), subject to certain conditions, on September 30, 2019 and on September 30 every five years thereafter. The holders of Series F Shares will be entitled to receive floating rate cumulative preferential cash dividends, if, as and when declared by the Board of Directors, payable quarterly on the last Business Day of March, June, September and December in each year…in the amount per share determined by multiplying… $25.00…[by] the sum of the T-Bill Rate…plus 4.72%... ."
Series E Shares' redemption
"[O]n September 30, 2019, and on September 30 every five years thereafter, the Corporation may, at its option, redeem all or any part of the then outstanding Series E Shares by the payment of an amount in cash for each Series E Share so redeemed of $25.00 plus all accrued and unpaid dividends… .The Series E Shares and Series F Shares do not have a fixed maturity date and, other than as described herein, are not redeemable at the option of the holders thereof."
Series E Share Canadian tax consequences
Dividends received on Series E or F shares by a Canadian-resident corporation generally will be deductible in computing taxable income. They will be taxable preferred shares, and their terms require the making of an election so that holders will not be subject to Part IV.1 tax.