In the past two years, Twin Butte shares have fallen by 98 per cent. By the second quarter of this year, oil and gas production has dropped by almost half from the same period a year earlier.Larry MacDougal/The Canadian Press
A takeover proposal to rescue debt-hobbled Twin Butte Energy Ltd. is in jeopardy as debt holders angry over the prospect of a major markdown in the value of their securities vow to reject the deal.
Holders of Twin Butte's convertible debentures have appealed to other investors, arguing that the proposed buyout by Hong Kong-based Reignwood Resources Pte. Ltd. will result in them getting shortchanged. The debt holders, led by Bockhold Investment Management Group, say they should be afforded more money as a senior security class.
Twin Butte says the arrangement is fair to all stakeholders, and that rejection stands to push the struggling company into receivership, as it has no other deals waiting in the wings following an extensive search for buyers during the worst of the industry downturn.
Stakeholders are slated to vote on the transaction on Monday, following a 19-day postponement. Reignwood has offered $21.3-million for the shares and $12-million for the convertible debt, translating into just 14 cents on the dollar for the notes. The company also has about $223-million in bank debt. An investment banker close to the deal said Twin Butte's decision to extend the bid deadline is an indication they don't have enough support.
Bockhold's resistance represents a big hurdle, and other debt holders have signalled that they will vote against the deal as a matter of principle, the person said. Meanwhile, there is no indication that Reignwood is prepared to amend the terms.
"I think significant votes would have to swing within the next 48 hours from no to yes to get there," the banker said.
The heated battle highlights the dilemma many smaller oil companies face as they seek to wring some value out of their assets following the oil price crash while lenders slash their exposure to the industry. In many cases, such as Twin Butte, equity value has been obliterated as cash flow dwindled and efforts to scare up a higher-priced deal came up dry.
In the past two years, Twin Butte shares have fallen by 98 per cent. By the second quarter of this year, oil and gas production has dropped by almost half from the same period a year earlier.
Twin Butte hired Peters & Co. Ltd and National Bank Financial to search for a buyer in late 2015, and announced its agreement with Reignwood in late June. In the leadup, it convinced its banking syndicate to give it several extensions to avoid defaulting on $225-million of credit facilities.
TD Securities analyst Aaron Bilkoski said this week that he believes the opposition among debenture holders will sink the deal. Two-thirds of them must vote in favour for it to pass.
"Not only does the plan result in debt holders receiving less cash than a more junior security class, supporting the transaction sets an unnerving precedent for similar situations in the future," he wrote in a research note.
Twin Butte has warned that debenture and equity holders could be left with nothing if the deal gets scuttled.
The situation could end up in similar fashion to that of Pacific Exploration & Production Corp., the Latin America-focused company whose major shareholder convinced other investors to reject a cash deal that would have cured its debt worries last year, said Ken Lin, an analyst at Paradigm Capital. This week, an Ontario judge approved a restructuring of the company under creditor protection.
The Bockhold group had proposed to Reignwood to exchange their debentures for shares, but the buyer rejected that, Twin Butte said on Thursday. Indeed, Reignwood has said it will not renegotiate any part of its offer, Twin Butte said.
"They haven't blinked in the least," the banker said.
"And the banks have been patient but we're talking about a file where there were eight extensions and one non-extension just because there was a lot of tension. Now roll forward, the commodity [price outlook] is no better and there's a bunch of pressure on the deal from creditors who are sitting behind the first secured debt holders, and it's tense."