Element Financial
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.
Canexus
General
Offering by the Corporation of $75 million of 6.5% convertible unsecured subordinated debentures at their principal amount ($1,000 per debenture), with a maturity date of December 31, 2021 and convertible at a conversion price of $6.50 per common share. The interest is payable semi-annually in arrears. The Debentures have been conditionally approved for listing on the TSX.
Cash payment option
Provided it gives notice at least one business day prior to the conversion date, the Corporation has the option, upon a holder electing to convert, to pay in cash (based on the 10-day VWAP of the Corporation's common shares on the TSX commencing on the third day following the conversion date) in lieu of delivering shares.
Redemption/Share payment
The debentures are optionally redeemable by the Corporation during the two-year period following December 31, 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
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 101% of the principal amount (plus accrued and unpaid interest). Furthermore, if there is a Change of Control occurring on or before December 31, 2019 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.
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.
The Corporation
The Corporation is an Alberta corporation which is the successor to the Canexus Income Fund. It produces sodium chlorate and chlor-alkali products largely for the pulp and paper and water treatment industries and also provides trans-loading services.
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. Where the Corporation pays cash pursuant to the cash conversion option, the resident holder will be considered to have disposed of the debentures for such cash consideration (except any interest received in satisfaction of interest).
Chesswood
General
Offering by the Corporation of $20 million of 6.5% convertible unsecured subordinated debentures at their principal amount ($1,000 per debenture), and with a maturity date of December 31, 2018. The interest is payable semi-annually in arrears. The Debentures are conditionally listed on the TSX.
Repayment/Conversion
Provided it gives notice at least one business day prior to the conversion date, the Corporation has the option, upon a holder electing to convert, to pay in cash (based on the 10-day VWAP of the Corporation's common shares on the TSX commencing on the third day following the conversion date) in lieu of delivering shares. The debentures are optionally redeemable by the Corporation during the year following December 31, 2016 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.
Change of control
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 101% of the principal amount (plus accrued and unpaid interest). Furthermore, if there is a Change of Control in which 10% or more of the consideration consists of cash or non-traded securities, then commencing 10 days before the effective date up until 30 days after the effective date of the Change of Control, holders will be entitled to convert using a discounted conversion price based on prorating a conversion premium of 35% for the number of days remaining until December 31, 2017 compared to the total number of days from the issue date to that date (so that, for example, if the Change of Control occurred 1/4 (or 3/4) of the way to December 31, 2017, the conversion price of $21.25 would be divided by 122.5% (or 107.5%).)
Business
The Corporation is an Ontario corporation which is the successor to the Chesswood Income Fund. It invests in the financial services industry in the U.S. and Canada.
Canadian tax consequences
Conversion. Although the matter is not free from doubt, a resident holder who converts a Debenture into common shares pursuant to the conversion privilege should be deemed not to have disposed of the Debentures. [See AC58563 and 91 C.R.-Q.17.]
Entrec
General
Offering by ENTREC of $22 million of 7.00% convertible unsecured subordinated debentures at their principal amount ($1,000 per debenture), and with a maturity date of October 31, 2017. The interest is payable semi-annually in arrears.
Repayment/Conversion
ENTREC has the option, upon conversion of the debentures, to pay in cash based on the 10-day VWAP of the ENTREC common shares on the TSX-V commencing on the third day following the conversion date. The debentures are optionally redeemable by the Corporation during the year following October 31, 2015 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, ENTREC may repay the principal amount by delivering common shares whose number is based on a 5% discount to the shares' market price, as computed.
Change of control
In the event of a Change of Control (as defined and including a sale of substantially all the assets), the debenture holders may elect to have their debentures paid in cash at 101% of the principal amount or (at their option) may convert using a discounted conversion price based on prorating a conversion premium of 35% for the number of days from issue to that event (so that, for example, if the Change of Control occurred 1/7 (or 6/7) of the way through the term, the conversion price of $2.60 would be divided by 130% (or 105%).)
Business/pro forma capitalization
ENTREC is an Alberta corporation specializing in the lifting, transportation and off-loading of oversized cargoes for the oil and gas, construction, mining and power generation industiries. It has debt of $65.5 million (including convertible debentures of $18.9 million) and shareholders' equity of $82.0 million.
Canadian tax consequences
The tax disclosure states that an arm's length non-resident generally will not be subject to withholding tax on interest. However, the Risk Factors contain a detailed discussion of the possibility that the debentures may not be excluded obligations and that the possibility of conversion may cause all interest to be considered to be participating interest.
B2Gold
General
B2Gold is a NYSE MKT and TSX listed B.C. corporation indirectly holding international mining properties. On August 19, 2013, B2Gold announced the offering of US$225 million aggregate principal amount of the Notes to "qualified institutional buyers" in accordance with Rule 144A. The net proceeds from the offering, including from the over-allotment, are approximately US$250.3 million. The Notes accrue interest at a rate of 3.25% per year, payable semiannually in arrears on April 1 and October 1 of each year, beginning on April 1, 2014. The maturity date is October 1, 2018. If as a result of the anti-dilution provisions or other reorganization adjustment provisions, a holder otherwise would be entitled on conversion to receive property other than prescribed securities within five years plus one day of the date of original issuance, B2Gold will have the choice to instead deliver prescribed securities.
Conversion price and conditions
The initial conversion price of the Notes represents a premium of approximately 37.5% to the closing sale price of $2.86 per common share on the NYSE MKT on August 19, 2013. The Notes are convertible prior to July 1, 2018 in the following circumstances: (i) during any calendar quarter commencing after 2013 if the closing sale price of the Company's common shares for at least 20 trading days during the last 30-day trading day period ending at the end of the immediately preceding calendar quarter is 130% or more of the conversion price; (ii) during the five business-day period after any five consecutive trading-day period (the "measurement period") throughout which the trading price of a Note was less than 98% of the product of the B2Gold common share trading price and the conversion rate; (iii) if B2Gold calls the Notes for redemption; or (iv) upon the occurrence of specified (dilutive or fundamental change) corporate events. On or after July 1, 2018 until immediately before October 1, 2018, holders may convert their notes at any time. Delivery of shares or cash on conversion will be deemed to satisfy accrued but unpaid interest.
B2Gold's cash payment option on conversion
Upon conversion of the Notes, holders will receive common shares or, subject to certain conditions, cash or a combination of cash and common shares, at B2Gold's election (provided that it must use the same settlement method for conversions on or after July 1, 2018, as specifed to the trustee no later than that date). Until B2Gold's borrowings under its US$150 million secured revolving credit facility (the "Senior Credit Facility") are repaid in full and the agreement governing the Senior Credit Facility has been terminated or until the agreement governing the Senior Credit Facility has been amended to permit cash settlement or combination settlement, B2Gold is required to settle any conversions in common shares. If B2Gold satisfies the conversion obligation solely in cash or a combination of cash and common shares, the amount of cash and any such common shares will be based in most circumstances on a daily conversion value calculated on a proportionate basis for each trading day in a 20-day trading day observation period generally beginning two trading days after the conversion date.
Fundamental change repurchase condition
If B2Gold undergoes a fundamental change (generally, an acquisition of more than 50% of the voting power, the consummation of specified reorganizations, or a sale of all or substantially all the consolidated assets), it will be required to offer to purchase all or any portion of a holder's Notes for cash, as long as such repurchase is not prohibited under the Senior Credit Facility (the "fundamental change repurchase condition"). The fundamental change repurchase price will be 100% of the principal amount of the Notes to be purchased, plus any accrued and unpaid interest to, but not including, the fundamental change repurchase date.
Redemption conditions
Prior to October 6, 2016, B2Gold may not redeem the Notes, except, subject to certain conditions, in the event of certain changes in Canadian tax law. On or after October 6, 2016, B2Gold at its option may redeem for cash, pursuant to notice given at least 30 days before the redemption date, all or part of the Notes (at 100% of their principal amount plus accrued and unpaid interest) if the last reported sale price of B2Gold's common shares exceeds 130% of the conversion price for at least 20 trading days during any 30 consecutive trading-day period ending within five trading days prior to B2Gold providing the notice of redemption. In the event of a gross-up obligation arising from a change in law or an administrative determination, B2Gold may also redeem. Upon B2Gold giving a notice of redemption, a holder may elect not to have its notes redeemed, in which case such holder would not be entitled to gross-up.
Make-whole
Where a holder elects to convert its Notes in connection with a make-whole fundamental change or a redemption notice, the Company will, under certain circumstances, increase the conversion rate by a number of additional common shares based on a table, so that the specified make-whole is lower for (fundamental change or redemption) triggering dates closer to the maturity date.
Events of default
Include: in the case of a fundamental change, failure to obtain the required consents and waivers from the lenders under the Senior Credit Facility or make any repayments of indebtedness thereunder as necessary to ensure that the fundamental change repurchase condition has been satisfied prior to the fundamental change repurchase date) occurring and continuing.
Canadian tax consequences
From Risk Factors disclosure in Material Change Report:
[I]f holders of notes would otherwise be entitled to receive, upon conversion of the notes, any property (including cash) or securities that would not constitute "prescribed securities" for the purposes of clause 212(1)(b)(vii)(E) of the Tax Act as it applied for the 2007 taxation year (referred to herein as "ineligible consideration"), such holders shall not be entitled to receive such ineligible consideration but we or a successor or acquirer, as the case may be, shall have the right (at the sole option of us or the successor or acquirer, as the case may be) to deliver either such ineligible consideration or "prescribed securities," for the purposes of clause 212(1)(b)(vii)(E) of the Tax Act as it applied for the 2007 taxation year, with a market value equal to the market value of such ineligible consideration. In general, prescribed securities would include our common shares and other shares which are not redeemable by the holder within five years of the date of issuance of the notes. Because of this, certain transactions may result in the notes being convertible into prescribed securities that are highly illiquid. This could have a material adverse effect on the value of the notes.
Accounting treatment
Under IAS 32 Financial Instruments: presentation, an entity must separately account for the liability and equity components of the convertible debt instruments (such as the notes) that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer's economic interest cost. The effect of IAS 32 Financial Instruments: presentation on the accounting for the notes is that the equity component is required to be included as a component of shareholders' equity on our consolidated balance sheet, and the value of the equity component would be treated as original issue discount for purposes of accounting for the debt component of the notes. As a result, we will be required to record a greater amount of non-cash finance costs as a result of the amortization of the discounted carrying value of the notes to their face amount over the term of the notes. We will report lower net income or increased net loss in our financial results because IAS 32 Financial Instruments: presentation will require finance costs to include both the current period's amortization of the debt discount and the instrument's coupon interest, which could adversely affect our reported or future financial results, the trading price of our common shares and the trading price of the notes.
NAT
General
Offering by NAT of $10 million of 10.00% convertible subordinated debentures at their principal amount ($1,000 per debenture), and with a maturity date of September 30, 2017. The interest is payable semi-annually in arrears. The debentures are partially secured with a limited recourse guarantee of a US subsidiary, namely, a guarantee which is secured by assets with an initial acquisition cost of $5.5 million, and with recourse under the guarantee limited to those assets.
Terms
Generally similar to the ENTREC offering above, except that they are redeemable by NAT afer September 30, 2015 and until maturity if the sustained trading price is at a 25% premium to the $2.90 conversion price (i.e., no subsequent window during which they are redeemable at par), and the amortizing change-of-control conversion premium is 31.26% rather than 35%.
Business/pro forma capitalization
NAT is a BC corporation which processes "bast" feed-stocks such as flax into spinnable, knittable and weavable fibers, and dissolving pulp. It has pro forma debt of $10 million (i.e., only these convertible debentures) and shareholders' equity of U.S.$39.1 million. (Negative) earnings coverage ratio of worse than -7.
Canadian tax consequences
"Generally, a Resident Holder who converts a Debenture into Common Shares (or Common Shares and cash delivered in lieu of a fraction of a Common Share) pursuant to the conversion privilege will be deemed not to have disposed of the Debenture... ." The tax disclosure also states (subject to the increasingly common thin cap exclusion) that an arm's length non-resident generally will not be subject to withholding tax on interest, but states that "this conclusion depends in part on an interpretation of CRA policy that is not fully clear or definitive...and counsel has not provided a legal opiniion, in this regard." The Risk Factors contain a detailed discussion of the point.
Energy Fuel
Interest and conversion rights
The Energy Fuel subordinated debentures will bear interest at a floating rate ranging from 8.50% (if the average uranium (U308) spot price during the applicable semi-annual interest period is under US$55) up to 13.50% (if the average is US$100 or higher). The debentures (having an aggregate principal of $22 million) are convertible into Energy Fuel common shares at a conversion price of $0.30 per common share (as compared to the closing price on the TSX on June 29, 2012 of $0.19 per share). Energy Fuels may redeem the debentures at their $1000 principal amount on or after July 24, 2015 if the average VWAP during the specified 20-trading day period was at least 125% of the conversion price.
There is a typical "Additional Amounts" provision for grossing-up interest payments. Also, a typical Common Share Interest Payment Election provision.
Business
Eagle Fuels (TSX) is an Ontario corporation engaged through US subsidiaries in uranium and vanadium exploration, development and mining operations with its principal place of business in Colorado. "The Company has no history of earnings other than nominal interest income earned on financial assets" (p.31).
Change of control
In the event of a Change of Control (as defined and including a sale of substantially all the assets), the debenture holders may elect to have their debentures paid in cash at par or (at their option) may convert using a discounted conversion price based on prorating a conversion premium of 30% for the number of days from issue to that event (so that, for example, if the Change of Control occurred 1/3 (or 2/3) of the way through the term, the conversion price of $0.30 would be divided by 120% (or 110%).)
Canadian income taxation
Conversions generally occur without realization of capital gain or loss. Reference is made to the possibility of the debentures becoming investment contracts (presumably based on an interest subordination clause.) Generally, interest payments made to non-resident holders will be subject to Part XIII tax "since interest payable on the Debentures will be computed by reference to the price of uranium and be "participating debt interest." In the case of US residents entitled to Treaty benefits ("US Holders"), Part XIII tax should only apply to debenture interest
which is determined with reference to the change in the value of any property of the Company. In the case of U.S. Holders, the 8.5% minimum rate of interest should not be subject to Canadian withholding tax under the U.S. Treaty. Any interest paid or credited above the 8.5% minimum rate (including any Additional Amounts payable by the Company) and based on the price of uranium will be subject to withholding tax at a reduced rate of 15%.
Non-residents who dispose of their debentures to a Canadian resident for more than the $1000 issue amount should consult their tax advisors respecting any withholding tax under the s. 214(7) rule.
Automatically Convertible
Emera
Overview
In order to help fund its indirect purchase of TECO Energy for approximately U.S.$8.6 billion, Emera is proposing to issue U.S.$1.2 billion of subordinated notes which mature in 2076, are automatically convertible into preferred shares bearing a cumulative dividend equal to the notes’ interest rate on the occurrence of an Emera insolvency (as defined in detail) and accord Emera the right to defer the due date for any given interest coupon for up to five years. The notes are redeemable at Emera’s option at par after June 15, 2026 (at which point, the interest thereon also converts from fixed to floating). The notes also can be redeemed at par at Emera’s option before that date if it receives a Canadian or U.S. legal opinion that its treatment or intended treatment of the notes in its tax returns (e.g., as to interest deductibility) will not be respected by a relevant tax authority. The Canadian tax disclosure treats the notes as debt, whereas the U.S. tax disclosure is diffident on this issue.
Emera
A TSX-listed company formed under the Companies Act (Nova Scotia) that invests in electricity generation, transmission and distribution, as well as gas transmission and utility energy services.
Use of proceeds for TECO Acquisition
Pursuant to the Acquisition Agreement among Emera, Emera US Inc., a direct wholly-owned subsidiary of Emera US Holdings Inc. and TECO Energy, Emera will indirectly purchase all of the outstanding common shares of TECO Energy for an estimated net purchase price of approximately U.S.$8.6 billion. The net Note proceeds of U.S.$1,183,000,000 will be used to finance, directly or indirectly, part of the purchase price payable for such Acquisition and to reduce amounts outstanding under the Acquisition credit facilities.
Interest/Deferral Right/Dividend Stopper
6.75% per year in equal semi-annual installments. So long as no event of default has occurred and is continuing, Emera may elect to defer the interest payable on the Notes on one or more occasions for up to five consecutive years (a "Deferral Period"). There is no limit on the number of Deferral Periods that may occur. Unless Emera has paid all accrued and payable interest on the Notes, it generally is prohibited from declaring any dividends on its “Dividend Restricted Shares” or pay any interest on equal-ranking notes or redeeming retiring Dividend Restricted Shares or such notes.
Interest reset
Starting on June 15, 2026, and on every March 15, June 15, September 15 and December 15 of each year during which the Notes are outstanding thereafter until June 15, 2076 the interest rate on the Notes will be equal to the three month LIBOR plus 5.44% (or plus 6.19% starting on June 15, 2046).
Automatic Conversion
The Notes will be converted automatically ("Automatic Conversion") into shares of a newly issued series of First Preferred Shares (the "Conversion Preferred Shares") upon the occurrence of specified insolvency-related events including: (i) the making by Emera of a general assignment for the benefit of its creditors or a proposal (or the filing of a notice of its intention to do so) under the Bankruptcy and Insolvency Act (Canada); or (ii) any proceeding instituted by Emera seeking to adjudicate it a bankrupt or insolvent, or, where Emera is insolvent, seeking liquidation, winding up, dissolution, reorganization, arrangement, adjustment, protection, relief or composition of its debts under any law relating to bankruptcy or insolvency in Canada. At the Conversion Time, holders of Notes will receive one Conversion Preferred Share for each U.S.$1,000 principal amount of Notes previously held together with fractional or whole Conversion Preferred Shares respecting accrued and unpaid interest.
Offshore holders on Automatic Conversion
Upon an Automatic Conversion of the Notes, Emera reserves the right not to issue Conversion Preferred Shares to “Ineligible Persons,” (defined respecting residence in any jurisdiction outside Canada or the U.S. where the issuance to such person of Conversion Preferred Shares would require Emera to take any action to comply with securities or analogous laws of such jurisdiction or withholding tax would be applicable on the Automatic Conversion). In such circumstances, Emera will hold all Conversion Preferred Shares that would otherwise be delivered to Ineligible Persons, as agent for Ineligible Persons, and will attempt to facilitate the sale of such shares through a registered dealer on their behalf of such Ineligible Persons of such Conversion Preferred Shares.
Conversion Preferred Shares
Entitled to receive cumulative preferential cash dividends, if and when declared by the Board but subject to the Companies Act, at the same rate as would have accrued on the Notes, and payable on each semi-annual or quarterly dividend payment date.
Note redemption rights
On or after June 15, 2026, Emera may (on giving notice) redeem the Notes on any Interest Payment Date for the principal amount together with accrued and unpaid interest. In the event that the closing of the Acquisition has not occurred by the specifed special mandatory redemption triggering date or the Acquisition Agreement is terminated prior to that date, Emera will be required to redeem the Notes at a redemption price equal to 101% of the aggregate principal amount of the Notes, plus accrued and unpaid interest.
Redemption if interest non-deductible
Prior to June 15, 2026, also redeemable by Emera within 90 days of the occurrence of a "Tax Event," which occurs if Emera receives an opinion of independent counsel of a nationally recognized law firm in Canada or the U.S. to the effect that Emera is, or may be, subject to more than a de minimis amount of additional taxes because the treatment of any of its items of income, taxable income, expense, taxable capital or taxable paid-up capital with respect to the Notes (including the treatment by Emera of interest on the Notes), as reflected in any tax return filed or to be filed will not be respected by a taxing authority.
Subordination
The payment of principal and interest on the Notes will be subordinated in right of payment to the prior payment in full of all present and future Senior Indebtedness (being obligations (other than non-recourse obligations or any other obligations specifically designated as being subordinate in right of payment to Senior Indebtedness) of, or guaranteed or assumed by, Emera.
Canadian tax consequences
Non-residents: Interest on and disposition of Notes
Interest will be exempt from Canadian non-resident withholding tax. No other taxes on income (including taxable capital gains) will be payable under the Tax Act in respect of the acquisition, holding, redemption or disposition of Notes, or the receipt of interest, premium or principal thereon by a non-resident holder solely as a consequence of such acquisition, holding, redemption or disposition of Notes.
Automatic Conversion
A conversion of Notes into Conversion Preferred Shares pursuant to an Automatic Conversion will result in a disposition of such Notes for purposes of the Tax Act for proceeds equal to the fair market value of the Conversion Preferred Shares which the Non-Resident Holder acquires, not including any amount considered to be interest. A Non-Resident Holder will not generally be subject to tax under the Tax Act in respect of such disposition. The aggregate cost to a Non-Resident Holder of the Conversion Preferred Shares ultimately received on an Automatic Conversion will be equal to the fair market value thereof at the time received.
Taxable preferred shares
The Conversion Preferred Shares will be "taxable preferred shares." The terms of the Conversion Preferred Shares will require Emera to make the necessary election under Part VI.1.
U.S. tax consequences
Debt treatment
There is no direct legal authority as to the proper U.S. federal income tax treatment of an instrument such as the Notes that is denominated as a debt instrument and has certain significant debt features, but that provides for a possible Automatic Conversion. Emera intends to treat the Notes as debt for such purposes. If the Notes were treated as equity and Emera were a "passive foreign investment company" for any taxable year of a U.S. investor, the investor could be subject to adverse tax consequences.
Contingent debt payments.
The likelihood that Emera would be required to make payments on a Note that would increase the yield of the Note is "remote," and/or that the amount of any such payments, if made, would be "incidental," in each case within the meaning of the applicable Treasury Regulations. Therefore, Emera intends to take the position that the possibility of such payments does not result in the Notes being treated as contingent payment debt instruments under the applicable Treasury Regulations….
Interest deferral right
Regulations provide that a debt instrument will not be treated as issued with original issue discount, or OID, by reason of its issuer’s ability to defer payments of interest if the likelihood of such deferral is "remote." Emera intends to take the position that, as of the date of this Prospectus, the likelihood of deferring payments of interest under the terms of the Notes is "remote."
Automatic Conversion
The conversion of Notes for Conversion Preferred Shares pursuant to the Automatic Conversion should be treated as a tax-free recapitalization.