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Francis Griffin
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I am an investor with experience as a portfolio manager and analyst at distressed debt, fixed income and macro hedge funds in New York and London. While rooted in fundamental value, I also acknowledge the importance of opportunistic trades.
  • BBRY - Bond Indenture And Implications For The Stock 0 comments
    Nov 21, 2013 4:08 PM | about stocks: BBRY

    On November 18, 2013, Blackberry filed its Form 6-K that included the Indenture for its recent $1.0BN placement of 6% Convertible Unsecured Subordinated Debentures. Here are the important points to consider:

    Negative Implications for the Stock

    Limitations on senior debt - The indenture limits the additional debt that BlackBerry is able to raise to $1BN. Of the $1.0BN, the secured basket is limited to $550MM, while BlackBerry can raise another $450MM of debt through capital leases, real estate sale and leaseback transactions, accounts receivable factoring, and unsecured debt. Given the $2.3BN of cash and short-term investments, $1.7BN of A/R, and $0.9BN of inventory at 9/30/2013 (to say nothing of the $1.0BN raised through the convertible and the value of its real estate) the $1.0BN senior debt limitation seems extremely conservative. Especially in light of the $0.5BN burn last quarter, the carve out does not present much optionality to the equity.

    Size of the transaction - I had hoped that the Fairfax-led convertible would have increased in size to $1.25BN. Given the performance of the stock after the placement (and the implied decreased value of the convertible feature of the debt), I view it as unlikely that the incremental $250MM will be placed. While I believe the convertible debt is relatively expensive, I viewed the additional liquidity as another buffer to operational difficulties and a validation of a long investment in BlackBerry.

    Positive Implications for the Stock

    No financial covenants - While the indenture does present reporting and listing covenants, it does nor present financial covenants which would grant the Fairfax convertible group the opportunity to impose more restrictive or punitive terms on the company.

    No Equity Clawback - The indenture does not provide the noteholders the ability to clawback any future equity proceeds that BlackBerry may raise. While I do not anticipate that BlackBerry will need to raise any additional equity, the inability of the convertibles to clawback such proceeds (typically 30-40% under indentures that grant debtholders the right) limits the possibility that BlackBerry would need to do a highly dilutive rights offering.

    Asset Sales Proceeds - The indenture does not require BlackBerry apply proceeds toward repayment of the convertible. This feature means that sale proceeds would be available for general corporate purposes, which extends the window that management has to generate value for the equity.

    Mixed Implications for the Stock

    Ability to sell or spin-off assets - The indenture provide BlackBerry with a tremendous amount of flexibility to perform asset sales or spin-off assets in transactions that could either separate problematic operations from the company or shift higher growth / more sustainable assets toward shareholders. The indenture does require that convertible securities retain the option to purchase a pro rata share of the stock in any spin-off.

    Change of Control Premium / Call Protection - The 115 change of control purchase premium and the call schedule (non-callable for 3 years, then stepping down from 4% by 1% per year in years 4 -7) were largely spelled out by BlackBerry already. While the change of control premium could shift $0.29 / share away from the equity, such a payment likely only be made with transaction that is beneficial for the common as well. Similarly, call premiums could potentially shift up to $0.08 / share away from common. Bullish shareholders should be willing to trade off that potential shift relative to the cost of tendering for non-callable bonds should operations stabilize or turn around.

    Conclusion

    I still don't think the new $1.0 convertible was a move by Fairfax to grab BlackBerry's assets through a restructuring. I still view the equity as the fulcrum security in any restructuring (which I am not anticipating or projecting). The bulls and bears will focus on the pluses and minuses of the convertible. From my standpoint as an investor who had been trading around the stock based largely on the news flow, my primary takeaway from the indenture is that BlackBerry is more restricted in senior financing options than I would have anticipated. Since I believe that BlackBerry is trading largely based on the optionality afforded by corporate events and an operational turnaround, I view the totality of the indenture as a slight negative for BlackBerry shares.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Additional disclosure: I have previously help opportunistic, short-term long positions in the stock. I do not currently hold a position (either long or short) in BBRY shares.

    Stocks: BBRY
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