On occasion, even the experts find they have things to learn about their subject of interest. I found that I am no exception to that rule. Admittedly, that knowledge might come with a harsh price to pay. Navios Maritime Holdings (NYSE:NM), as I write, has presented an Offer To Exchange, that if accepted by 2/3's of their preferred series shareholders, individually and collectively (NM must have its tender offer, as presented, accepted individually by 2/3's of the total number of preferreds issued for each individual series), which then must be ratified by the common shareholders. Were this to happen, all the preferred shareholders remaining would be forced to give up their particular rights as a preferred shareholder as promised in their particular preferred prospectus. The price offered is a mere fraction of the preferreds par value of $25.00, and not totally in cash, but cash plus a set number of common shares per preferred tendered. And for this pittance of a payoff and buyout this is what the remaining preferred shareholders are forced to relinquish because they refused to tender their shares.
The following is copied directly from the Offer To Exchange:
We are seeking the consent of holders to the proposed amended and restated certificates of designation of the Series G Preferred and Series H Preferred. The amendments will eliminate substantially all of the voting rights and restrictive covenants in our existing Preferred Shares certificates of designation, including:
• deleting the requirement for payment of accrued dividends on the Preferred Shares, whether in the future or in arrears;
• deleting the requirement that, if and when dividends on the Preferred Shares are in arrears for six or more quarterly periods, whether or not consecutive (and whether or not such dividends shall have been declared and whether or not there are profits, surplus, or other funds legally available for the payment of dividends), the holders will have the right to elect a member of our Board of Directors or receive any increase in the dividend rate for such Preferred Shares;
• amending the requirement that, without the affirmative vote or consent of the holders of at least 66 2/3% of the outstanding series of Preferred Shares, ((NYSE:I)) voting as a single class, the Company shall not adopt any amendment to the Articles of Incorporation, as amended from time to time ("Articles of Incorporation"), that materially and adversely alters the preferences, power or rights of such Preferred Shares, to be reduced to the affirmative vote or consent of the holders of at least a majority of the outstanding series of Preferred Shares and (ii) voting as a class together with holders of any other parity securities, the Company shall not create or issue any senior securities, to be reduced to the affirmative vote or consent of the holders of at least a majority of the outstanding series of Preferred Shares;
• deleting the requirement that, without the affirmative vote or consent of the holders of at least 66 2/3% of the outstanding series of Preferred Shares, voting as a class together with holders of any other parity securities, the Company shall not issue any parity securities if the cumulative dividends payable on outstanding Preferred Shares are in arrears; and
• deleting the requirement that, in the event that full cumulative dividends on the Preferred Shares and any parity securities shall not have been paid or declared and set apart for payment, none of the Company or any Affiliate of the Company may repurchase, redeem or otherwise acquire any series of Preferred Shares or parity securities.
Furthermore, to make matters worse, I believe, the nature of the offer is not meant to save the company, but rather an opportune moment for the company insiders to benefit from a perceived company weakness and the investors' fear of a potential bankruptcy, which would in effect wipe out each investor's entire, or a majority, of his preferred investment. I don't know if the company will succeed in its extortionate fear-driven Offer To Exchange, however, it has thrown cold water on what I believe is the only way I can lose as a cumulative preferred investor. It also appears that the clause allowing this is a regular feature included in the fine print of the offering prospectus of many companies.
I have mounted a campaign against accepting this offer and allowing NM to gain the shareholder's agreement to tender 2/3's of both, individually and separately, Series G & H preferred shares necessary to sanction this offer. If we fail to stop this exchange, I fear this might become the example and blueprint to follow by other companies facing a similar set of circumstances in the future.
What is now a rare occurrence might in the future become commonplace. I view this as a cautionary tale that all prospective preferred investors should be made aware of. And if NM succeeds, be very wary of investing in the preferreds of equally high risk companies, and those situated in high risk sectors that, as a rule, offer higher yields to entice investors to purchase their preferreds.
Examples of such sectors are: Shipping, Oil E&P's, mREIT's, and certain pharmaceutical R&D's. And the following are just a tiny partial list of companies that might follow, and offer a similar Faustian bargain: Gastar (NYSEMKT:GST), Legacy Reserves (NASDAQ:LGCY), Vanguard Natural Resources (NYSE:VNR), Peregrine Pharmaceuticals (NASDAQ:PPHM), Chesapeake Energy (NYSE:CHK), Diana Shipping (NYSE:DSX), Global Ship Lease (NYSE:GSL), International Shipping (OTCQX:ISHC), Safe Bulkers (NYSE:SB), and Teekay Offshore Partners (NYSE:TOO).
Finally, any clause, allowing companies to exercise future actions detrimental to the preferred shareholder's interests, should be exposed and stricken from all future prospectuses. There should be no company wiggle-room allowed for future mitigation of the preferred shareholder's rights as set down in the offering prospectus. I further suggest that we lobby for passage of a law that will restrict such clauses, and if any should slip through, they should be deemed improper and non-exercisable. Any future modification to an offering prospectus, if warranted, must be instituted by the investors without even a hint of company solicitation or suggestion. If it is discovered otherwise, a legal action might be warranted and if proven, the offending company should be severely penalized. The preferred investor's right must be sacrosanct.
Disclosure: I am/we are long NM-G, NM-H, GST-A, GSL-B, PPHMP, LGCYO, VNRCP, ISHCO, TOO-B.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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