Tom Konrad CFA
A couple readers have asked me if they should accept the New Flyer (NFI-UN.TO/NFYIF.PK) Rights offering to exchange their C$5.53 principal 14% subordinated notes for nine shares of New Flyer common stock. The answer is most emphatically YES.
When I last wrote about New Flyer, I knew that they were planning to convert from their unusual stapled security structure to a more conventional share structure, but I was not certain how they could entice IDS holders to go along with the swap.
Now, it’s clear. The New Flyer IDS is the combination of the C$5.53 note and one common share of New Flyer, and currently trades for C$7.66. The subordinated note is worth more than the face value because of the high interest rate, but is callable for C$5.80 next year, and hence is worth no more than about C$6.40 (call price plus interest) if not exchanged. That means New Flyer common shares are currently worth at least C$7.66-C$6.40 = C$1.26.
The Tender offer gives you the right to exchange the IDS for 10 common shares (one that you already own, 9 in exchange for the subordinated note). This is worth at least C$12.26, 60% more than the current IDS price.
When New Flyer issues all these new common shares in exchange for subordinated notes, note holders who make the exchange will have an instant gain, but the value of all shares will be diluted. Since only the company structure is being changed, not its net value, if everyone exchanges their notes for common shares, the whole exchange will be a wash in terms of the value to IDS holders. But any IDS holder who chooses not to make the exchange will not participate in the gain, yet they will still be diluted by all the new shares issued, and hence will suffer a net loss. If some IDS holders choose not to exercise the Rights, those who do make the exchange will benefit at the expense of any IDS holders who do not exercise their Rights.
In other words, although this exchange is voluntary, any IDS holder who chooses not to participate will suffer immediate dilution and a net loss in the value of their share large enough to more than offset any benefit from holding on to the high-interest subordinated note until it is called.
If you’re a New Flyer IDS holder, you’ve been made an offer you can’t refuse. Don’t.
DISCLOSURE: Long NFYIF.
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