Clarke Inc. CEO George Armoyan is looking to make new investments in undervalued firms, and the company is encouraging its convertible-debt holders to give up their right to equity in exchange for a fee and an interest rate increase.Louie Palu/The Globe and Mail
Halifax-based investment firm Clarke Inc. and its leader George Armoyan aren't afraid of friction with investors.
Mr. Armoyan roused supporters in the early 2000s as an activist investor who had success turning around troubled income trusts and other struggling companies. One analyst called the tendency for investors to follow him the "Armoyan effect." After the financial crisis took the wind out of his sails Mr. Armoyan took some time away from the company, but he's since returned and the business is preparing to make new investments in undervalued firms.
Now Clarke is leaning on its convertible debt holders to give up their right to equity in exchange for a small fee and an increase to the interest rate. On Tuesday, Clarke filed a management circular recommending debtholders approve its changes before Dec. 18.
Amending indentures isn't totally uncommon, but trying to get rid of the conversion option entirely is a highly unusual move – the company is effectively looking to turn the convertible debentures into straight debt.
The situation is made more unusual since this is Clarke's second run at the fence. Last summer, the company proposed to eliminate the convertible function of this very same debt while it was still set to expire in December, 2013, but although the stock was trading well below the price to convert, investors didn't bite.
Clarke gained some ground in late January this year when 69 per cent of the debenture holders voted to extend the the maturity date from Dec. 31 of this year to Dec. 31, 2018.
Things have changed since the company first moved to erase the conversion feature, said the company's chief financial officer Andrew Snelgrove. Clarke recently sold its freight company, offering it the financial capacity to wipe out the more than $62-million in outstanding principal debentures.
"We have all this excess cash," he said. "With that cost of debt being so much higher than our other debt, in any other situation it would be a no-brainer to knock out those debentures," Mr Snelgrove said. But investors want the income, he said, and Clarke wants to deploy that capital elsewhere.
So, the company has bumped up the interest rate on the debt from 6 per cent to 6.5 per cent, and offered a consent fee of $2.50 for each $1,000 of the principal amount of debentures, in exchange for the option to gain company equity. Clarke needs a two-thirds approval rating to pass the amendments.
There's also an added sweetener of $7.50 per $1,000 principal applicable to the debtholders' brokers, adding some incentive for brokers to support the company. "We need to get enough people to vote, this pushes the brokers to get out there and inform their clients," Mr. Snelgrove said.
Around the world, companies have been rushing to issue convertible debt this year, with climbing markets generating ideal conditions to offer these securities. Global convertible offerings are being sold at the fastest pace in five years.
Clarke's other motivation to make its exit comes from the fact that its shares have recently bumped above their $7.50 conversion price, closing at $7.85 on Tuesday. It's now an in-the-money convert that still has years left on the clock.
Clarke's share price is still a long ways off its prerecession high of nearly $11, but the stock has gained about 60 per cent since August this year. But since Clarke has its eyes on its next big investment, amending this convertible debt is worth a shot.