Arcan Resources defends plan to redeem convertibles at less than par

By Angela McDaniels

Tacoma, Wash., Aug. 11 – Arcan Resources Ltd. extended the expiration of the warrants to be issued to the holders of its convertible subordinated debentures and defended the plan to redeem the convertibles at a discount.

As reported on June 23, Aspenleaf Energy Ltd. plans to acquire Arcan and will fund the redemption of Arcan’s 6.25% convertibles due Feb. 28, 2016 and 6.5% convertibles due Oct. 31, 2018 for a total of C$141,281,250 plus accrued interest as of the closing date, representing roughly C$825 per C$1,000 principal amount of convertibles. The convertibles will then be canceled.

The holders will also receive 100 warrants per C$1,000 principal amount of convertibles.

Each one-year warrant – extended from nine months – will be exercisable for one share of Miura Energy Ltd., a new junior oil and gas exploration and production company to be spun out to Arcan's shareholders that will hold 12.5% of Arcan's interest in the Swan Hills oil and gas assets. The exercise price will be C$0.43 per share.

The discounted redemption price has drawn objection from debentureholders Ravensource Fund and Stornoway Recovery Fund LP.

In an Aug. 11 news release, Arcan said that “no purchaser has come forward who is prepared to acquire Arcan or its assets at a price that would settle our bank debt and result in more funds being paid to the debentureholders.”

Arcan noted that the redemption price is a premium of about 25% over the closing price of the 6.25% convertibles and about 33% over the closing price of the 6.5% convertibles on June 20.

The company said it has been asked why it cannot convert the debentures into common shares. In response, it said that neither Arcan nor the debentureholders can cause an early conversion without a “massive loss in value for the debentureholders.”

The conversion price is C$8.75. The company said that any amendment to the conversion price would require both its consent and the passing of an extraordinary resolution by the debentureholders.

“If an early conversion were to be completed, it would dilute the existing shareholders to an extreme minority position. Arcan's board of directors has a fiduciary duty to all securityholders, and for Arcan to consent to the lowering of the conversion price prior to maturity, a conversion would need to be in the best interests of all of the securityholders, not just the debentureholders,” the company said in the release.

No alternatives proposed

As for the possibility of an alternative form of transaction, the company said that no such proposal has emerged and that throughout its process to seek strategic alternatives, Aspenleaf is the only party that has put forward a “defined and viable” proposal.

When it announced the planned redemption, Arcan said there is uncertainty about whether it will have enough cash on hand to repay the convertibles at maturity from internally generated cash flow, and it called the prospects for obtaining external financing to repay the debentures at maturity “limited.”

As part of the transaction, each common share of Arcan will be exchanged for one common share of the new company and 0.1 warrant.

The transaction is subject to the receipt of court approval, approval by Arcan's shareholders and debentureholders and the receipt of all necessary regulatory approvals.

Arcan's securityholders will vote on the transaction at a special meeting on Aug. 20, and the completion of the transaction will require the approval of two-thirds of the votes cast in person or by proxy at the meeting by shareholders and holders of each series of convertibles.

Arcan Resources is an oil and natural gas exploration and production company based in Calgary, Alta.

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