Gran Columbia -- summary under Debt into notes or equity
Overview. On December 22, 2015 the shareholders and relevant noteholders of the Company voted in favour of a B.C. Plan of Arrangement under which the Company’s U.S.$100 million of “Gold Notes” would be exchanged for new notes (the “2020 Debentures”) or (at each Noteholder’s option) common shares of the Company, and its U.S.$78 million of “Silver Notes” (which, like the Gold Notes, are in default) would be exchanged for the 2018 Debentures or (at the noteholder’s option) common shares. The Gold Notes bear cash interest at 10% p.a. and entitle the holder to receive cash on maturity, or earlier exercise of put rights, equal to the greater of their principal and the value of specified numbers of gold ounces, so that there is proportionate participation as the price of gold exceeds U.S.$1400 per ounce. The Silver Notes are somewhat similar. The 2020 Debentures have no gold appreciation feature, are convertible into common shares and bear cash interest at a rate of 6.00% per annum, payable monthly in arrears, unless the Company elects for any month to pay pay-in-kind (PIK) interest (i.e., through the issuance of more debentures) at a rate of 9.00% per annum; and somewhat similarly for the 2018 Debentures.
Overview of tax consequences of Restructuring Fee. The amount of Gold Notes which is exchanged for the equivalent principal amount of 2020 Debentures (except to the extent that the Gold Noteholders elect to receive common shares) includes not only their principal and accrued interest but also an increase (styled as an increase to their principal amount and labelled the “Restructuring Fee”) of $2 million. The Restructuring Fee will be income to the Gold Noteholders, whereas for Code purposes it instead represents additional proceeds (in the form of additional 2020 Debentures or common shares) to be received for the Gold Notes.
Overview of interest accrual and exchange consequences. The Debentures "may be" prescribed debt obligations, so that holders might be required to accrue interest at the higher PIK rate under Reg. 7000(2)(c) even if the Company chooses to pay at the lower cash rate. The PIK interest rate option will cause the Debentures to be subject to the U.S. OID rules (requiring inter alia the accrual of original issue discount based on the initial fair market value of the Debentures.) Although the exchange under the Plan of Arrangement of Gold or Silver Notes for shares occurs at the noteholder’s election, s. 51 non-recognition treatment is not considered to apply, and the note-for debenture exchanges are considered to also occur on a taxable basis (no s. 51.1). In the U.S., it is not clear that the exchanges would qualify as recapitalizations as contrasted to taxable exchanges given inter alia that the Debentures have relatively short-term maturities and, therefore, may not qualify as “securities.”
Gold Notes. On October 30, 2012, the Company issued 100,000 Gold Notes at a price of $1,000 principal amount of units for gross proceeds of $100 million. The Gold Notes bear interest at 10% per year, accruing and payable monthly in arrears and mature on October 31, 2017. The holder thereof will be entitled to receive the greater of: (i) the U.S. dollar financial equivalent of approximately 0.7143 ounces of gold per Gold Note plus any accrued interest in cash, and (ii) the U.S. dollar face amount of the Gold Note plus any accrued interest in cash. The holders of the Gold Notes also have the option (the “Put Option”) to require the Company to purchase up to $6.25 million aggregate face amount of the Gold Notes at the end of each three-month period beginning on the 25th month (November 2014) through the 57th month (July 2017) after the issue date, with principal being repaid in the greater of (i) up to US$6.25 million aggregate face amount of the Gold Notes, and (ii) the U.S. dollar financial equivalent of up to 6.25% of the Implied Gold Ounces underlying the Gold Notes.
Silver Notes. On August 11, 2011, the Company issued 80,000 Silver Notes at a price of $1,000 principal amount per Silver Note for gross proceeds of $80 million, but with the Company subsequently repurchasing for cancellation a total of 1,368 Silver Notes on the open market. The Silver Notes, due August 11, 2018, bear interest at a rate of 5% per year, payable semi-annually in arrears. A Holders of a Note will be entitled to receive the greater of the principal amount and the U.S. dollar equivalent of 66.7 ounces of silver per Silver Note, as determined using the average realized silver price by the Company over the six-month period immediately prior to any repayment or redemption of principal. This quantity of silver provides a benefit for silver prices over of $15 per ounce. The Company shall repay, on a pro rata basis, (a) 10%, 20%, 30% and the balance, of the total principal amount of the Silver Notes outstanding on August 11 of 2015, 2016, 2017 and 2018 (the maturity date), respectively, with such payment based on the greater of such principal amount, and the US dollar financial equivalent to 6.67, 13.34, 20.00 and 26.67 ounces of silver per Silver Note, respectively, together with all accrued and unpaid interest thereon.
Exchange under Plan of Arrangement. All accrued and unpaid interest on the Gold Notes plus the “Restructuring Fee” of $2 million will be added to the principal amount of the Gold Notes, and the Gold Notes’ the principal amount (as so increased) will be exchanged for the same principal amount of 2020 Debentures, provided that each Gold Noteholder may elect to convert some or all of their Gold Notes into Common Shares at a conversion price of $0.13 per Common Share. A similar exchange will of Silver Notes for 2018 Debentures will occur, except that the Silver Notes’ principal will not be increased by any fee amount.
Terms of the 2020 Debentures. Amount – The maximum aggregate principal amount is U.S.$100 million plus the addition described above for accrued and unpaid interest on the Gold Notes and the Restructuring Fee. The ultimate aggregate principal will depend on the number of Elected Common Shares issued in exchange for Gold Notes.
Interest. Will bear cash interest at a rate of 6.00% per annum, payable monthly in arrears, unless the Company elects for any month to pay pay-in-kind (PIK) interest at a rate of 9.00% per annum.
Maturity. January 2, 2020.
Conversion. Convertible, at the option of the holder at any time prior to the close of business on the earlier of the Maturity Date and the last business day immediately preceding the date fixed for redemption, at a conversion price of $0.20 per Common Share.
Cash Flow Sweep – A minimum of 75% of the Excess Cash Flow (defined so as to be reduced by exploration and capital expenditures) will be paid into a sinking fund, which will be applied towards repayment, repurchase (in the market, by tender, or by private contract, at any price, which, for greater certainty, may be below par) or other redemption, as the Company elects, of the 2020 Debentures.
Redemption – The 2020 Debentures may be redeemed for cash in whole or in part from time to time at the option of the Company on not less than 30 days’ notice, at a price equal to their principal amount (including any PIK 2020 Debentures issued) plus accrued and unpaid interest.
Change of Control. If a change of control of the Company occurs, each holder of 2020 Debentures will have the option to elect to put its 2020 Debentures to the Company for 101% of their face amount; provided that such put option shall not be available where the acquirer would have a credit rating of B or better on a pro forma post-acquisition consolidated basis and such acquirer agrees to guarantee all obligations of the Company under the 2020 Debentures
Security and Guarantees. The 2020 Debentures and the guarantees thereof by certain subsidiaries should be secured.
Terms of the 2018 Debentures. Amount. Their maximum aggregate principal amount is U.S.$78,632,000 and accrued and unpaid interest that is added to the principal amount of Silver Notes. The ultimate aggregate principal of the 2018 Debentures will depend on the number of Elected Common Shares issued in exchange for Silver Notes. Certain Silver Noteholders and insiders of the Company representing approximately 10% of the Silver Notes, have indicated their intention to exchange their Silver Notes into Elected Common Shares on the Exchange Date rather than into 2018 Debentures.
Interest. Bear cash interest at a rate of 1.00% per annum, payable monthly in arrears or (at the option of the Company for any month) PIK interest at a rate of 2.00% per annum.
Maturity. August 11, 2018.
Conversion. Same as 2020 Debentures, except conversion price of $0.25 per Common Share.
Redemption. Same as 2020 Debentures.
Payment in Common Shares on Maturity. On maturity, the Company may, at its option (and assuming no default) elect to satisfy its obligation to repay principal (including any PIK 2018 Debentures issued) plus accrued and unpaid interest amounts of the 2018 Debentures by issuing and delivering that number of Common Shares obtained by dividing the principal plus accrued and unpaid interest amounts of the outstanding 2018 Debentures by 95% of the volume weighted average trading price of the Common Shares on the TSX for the 20 consecutive trading days ending five trading days preceding the maturity date.
Change of Control. Same as for 2020 Debentures.
Security. Unsecured.
Guarantee. Expected to be guaranteed by certain subsidiaries of the Company.
Listing. The TSX has conditionally approved the listing of the 2020 and 2018 Debentures.
Canadian tax consequences. S. 214(7) interest. When a debenture issued by a person resident in Canada is assigned or otherwise transferred by a non-resident person to a person resident in Canada (which would include a conversion of the obligation or payment on maturity), the amount, if any, by which the price for which the obligation was assigned or transferred exceeds the price for which the obligation was issued is deemed to be a payment of interest on that obligation made by the person resident in Canada to the non-resident (an "excess"). The deeming rule does not apply in respect of certain "excluded obligations", although it is not clear whether a particular convertible debenture would qualify as an "excluded obligation". If a convertible debenture is not an "excluded obligation", issues that arise are whether any excess would be considered to exist, whether any such excess which is deemed to be interest is "participating debt interest", and if the excess is participating debt interest, whether that results in all interest on the obligation being considered to be participating debt interest. The CRA has recently stated that no excess, and therefore no participating debt interest, would in general arise on the conversion of a "standard convertible debenture." The Debentures should generally meet the criteria set forth in the CRA's recent statement.
Exchange. The exchange by a Resident Noteholder of Notes for Debentures or Elected Common Shares would result in a capital gain or capital loss to the Resident Noteholder. No formal valuation of the Debentures has been sought, although the trading price of Debentures may be a reference price for these purposes. Certain jurisprudence can be interpreted as implying that a gain arising on the exchange of Notes for Debentures or Elected Common Shares may be treated as equivalent to interest and should be included in computing the Resident Noteholder's income as interest. The Company believes that the better view is that this interpretation should not apply.
Prescribed debt obligation rules. It is possible that the Debentures may be prescribed debt obligations. These rules could require Resident Noteholders to include in income on an accrual basis up to the maximum possible interest applicable to Debentures for each taxation year even if such maximum amount is not actually received or receivable in the taxation year.
Restructuring Fee. While the treatment of the Restructuring Fee is not entirely clear, a Resident Noteholder who is paid the Restructuring Fee will generally be required to include its amount in computing income in the year of receipt.
U.S. tax consequences. Restructuring Fee. The Company intends to take the position, to the extent necessary, that the Restructuring Fee is additional consideration in the exchanges and not a separate fee for Code purposes. As such, a U.S. Holder will not recognize any income as a result of the receipt of the Restructuring Fee and the additional principal amount will be treated as part of the 2020 Debentures and 2018 Debentures, as the case may be, received in the Exchanges and the additional Common Shares received will be treated as having been received in the Share Exchange.
Exchange of notes recognized. The exchange of the Gold Notes and Silver Notes Exchange is believed to constitute a "significant modifications" of the Gold Notes and Silver Notes, so that they will be treated as an "exchange" under the U.S. Regulations.
Taxable exchange or recapitalization. An exchange for shares or an exchange that is treated as a significant modification of the Gold Notes or Silver Notes, will be treated as a disposition of such Gold Notes for 2020 Debentures or Silver Notes for 2018 Debentures in what is generally a taxable transaction unless the exchange qualifies as a "recapitalization" for U.S. federal income tax purposes. For an exchange of Gold Notes to qualify as a recapitalization, both (i) the Gold Notes and (ii) the 2020 Debentures must be treated as "securities" under the relevant provisions of the Code. Debt instruments with a term of ten years or more generally have qualified as securities, whereas debt instruments with a term of less than five years generally have not qualified as securities. Because the 2018 Debentures and the 2020 Debentures will have an initial term of less than five years but both the Gold Notes and the Silver Notes had an initial term of greater than five years but less than ten years, it is unclear whether any of the Gold Notes, Silver Notes or Debentures will qualify as securities. If either the Gold Notes or the 2020 Debentures were not treated as securities, the Exchange of Gold Notes would be taxable to U.S. Holders.
Issue price. The Gold Notes and Silver Notes are publicly traded and the 2020 Debentures and 2018 Debentures will likely be considered “publicly traded,” so that the issue price of the Debentures will be equal to their respective fair market values on the date of the exchange.
Treatment of Cash and PIK Interest as OID. Because the Debentures provide the Issuer with the option to pay PIK interest in lieu of paying cash interest, no stated interest payments on the Debentures will be qualified stated interest for Code purposes (even if paid in cash). As a result, the Debentures will be treated as issued with OID (see below). The increase in the principal amount of the Debentures or the issuance of new Debentures in the amount of the PIK interest thereon will generally not be treated as a payment of interest. Instead, the applicable Debenture and any PIK Debentures issued in respect of PIK interest thereon are treated as a single debt instrument under the OID rules.
Original Issue Discount. Each series of Debentures will be treated as issued with OID in an aggregate amount equal to the difference between (i) the total payments of principal and stated interest on the applicable Debentures and (ii) their “issue price” as described above. A U.S. Holder generally must include OID in gross income (as ordinary interest income) as the OID accrues, in advance of the receipt of cash attributable to such OID. In determining the yield to maturity and the amount of OID attributable to each accrual period, the Company will assume that all stated interest on the Debentures will be payable in cash (rather than PIC interest. If the Company pays PIK interest at any time, the Debentures will be treated solely for purposes of recomputing the OID accruals going forward, as if the Debentures were retired and reissued for their then adjusted issue price. The yield to maturity of the Debentures will be recalculated by treating the amount of the PIK interest the Company elects to pay (and of any prior interest that was paid in the form of PIK interest) as a payment that will be made on the maturity date of such Debentures.
PFIC rules. The Company believes it is not currently a PFIC and does not expect to become one.