The Gold and Silver Notes of Gran Columbia Gold are to be exchanged for PIK notes with PDO and OID issues and with “receipt” by the Noteholders of a “Restructuring Fee”

On December 22, 2015 the shareholders and relevant noteholders of Gran Columbia Gold 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.

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 Canadian advisors think that the Restructuring Fee will be income to the Gold Noteholders, whereas the U.S. advisors think that it instead represents additional proceeds (in the form of additional 2020 Debentures or common shares) to be received for the Gold Notes.

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.”

Neal Armstrong. Summary of Gran Columbia Gold Circular under Other - Recapitalizations.