Wellington Weekly
Wednesday Market Note (Incl. An ECM Update)
December 18, 2024
Subs -
WE ARE LIVE.
Qualified Canadian Readers Only.
This will be the final edition of the Wellington Weekly for 2024 before we shut for the holidays. Short and sweet, and no better way to end the year, than with some grifter-esq deals, and a summation of the year.
First, we highlight Bay Street’s week in review.
Several issuers announced deals across equity and debt markets, totaling $332 million. The bulk of the transaction value was ATS Corp’s $200 million high yield reopening. Next in line ranked by value was Satellos Bioscience’s $55 million common share offering led by Jolyon Burton over at Healthcare-focused investment bank, Bloom Burton. Nothing special of note for these transactions…let’s move down the food chain to a press release that caught my attention. Small cap cannabis company, LEEF Brands, announced a US$5 million bitcoin-backed debenture offering. Let me say that again. LEEF Brands, the $45 million cannabis manufacturer, announced a US$5 million debenture offering to purchase Bitcoin at spot with the net proceeds from the offering.
The offering is being structured as a unit deal, with each unit consisting of i) US$1,000 principal amount of debentures being issued at par; and ii) 5,660 detachable warrants. Let’s dive into the wildly off-market terms:
Each debenture will bear interest at 10% per annum, payable at maturity.
10% on a 5-year note implies the company’s credit spread is 575 bps. Add a zero, and the spread is likely more appropriate. Recall, LEEF generates approximately $6mm of CAD sales per quarter, and burns approximately $45 million of cash flow per year. Also recall, credit spreads for junk stressed companies is over 1,000 bps.
The coupon is payable at maturity or upon conversion. Why? Because the company has no money to sustain a US$250K semi-annual cash coupon or a US$500K per annum cash coupon.
Each debenture will be convertible into common shares at the option of the holder at US$0.18 per share.
At the Fixed Exchange Rate of 1.415, this represents a 4% conversion premium…a highly punitive and dilutive deal for the company.
If the 10-day volume weighted average price (VWAP) of the common shares is greater than C$0.25, the company has the option to force convert the debentures.
This is a call feature at a 42% premium to the reference price - for reference, a standard call provision on convertible debentures is 130% of the conversion price following the first 3-years - think warrant accelerator with a lead foot on the gas.
The debentures will be redeemable by the company if the 10-day VWAP is not less than 110% of the conversion price.
See above, now rinse and repeat with another punitive redemption option to the holder.
The Debentures will be the Company’s first lien debt obligations with respect to the Bitcoin held by the Company.
These new debentures will be first lien on the Bitcoin purchased, and require a carve-out on permitted liens from the existing debentureholders. Put simply, these new bondholders will be asking existing bondholders for a first priority on Bitcoin assets. If you are sitting in first priority on assets, why take a backseat to the new party, unless proceeds will be used to recapitalize the balance sheet or reduce leverage.
Last I checked, no waiver has been filed on Sedar to the existing indenture - as it stands, this structure is not feasible.
5,660 purchase warrants per US$1,000 convertible note, with each warrant entitling the holder to purchase one common share at an exercise price of US$0.28 per common share for 3-years.
This represents a 60% conversion premium on the warrant, for 3-years - oddly attractive to the company, and oddly unattractive to the investor taking credit risk on a company facing a near-term liquidity crunch.
At 5,660 warrants struck at US$0.28 per share, per US$1,000 debenture, this represents ~160% warrant coverage. Now you may be thinking…wow, that’s some great warrant coverage to attract investors. You would be correct, but there are regulations in the world of securities offerings, and one of which is Policy 6.2: Distributions & Corporate Finance from the Canadian Securities Exchange which outlines that warrant coverage shall not exceed the total number of securities issued in connection with the private placement i.e. warrant coverage cannot exceed 100%.
Lastly, the company has granted the agents an over-allotment option for 15%…or a Greenshoe, as I like to call it.
Agents cannot stabilize stock by buying convertible debenture units. Period. Full-stop. This is like making orange juice with a cow’s utters. It cannot be done.
Call up your advisors LEEF, something isn’t right!
I would like to unpack why a cannabis, or a general manufacturing company should not be using Bitcoin as its treasury reserve. But I fear the answer is so obvious, explaining to management why they need a stabilized treasury balance would simply fall on deaf ears.
Is this LEEF’s final Hail Mary to make money? Go leveraged long the most volatile asset-class in the world? Find out next time…on Wellington Weekly…
To wrap up the year, I’ve put together a league table summarizing independent investment banking activity throughout 2024. This may be a monthly recurring table, but for now, enjoy!
Greenshoe Gary’s 2024 Investment Banking League Tables
ECM World
Top Notable Transactions
ATS Corporation
$200MM High Yield Tap
Satellos Bioscience Inc.
$55MM Overnight Marketed of Commons
Bloom Burton w/ CG, Haywood, Leede
VersaBank
$75MM Marketed Underwritten of Commons
RJ w/ Roth
BriaCell Therapeutics
$5.5MM Overnight Marketed of Units
ThinkEquity
VitalHub
$30MM Bought Deal of Commons
Cormark w/ TD, CG, Beacon
Happy holidays,
G.G.