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alstry (35.49)

In interesting legal dilema for SPF

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May 27, 2008 – Comments (11)

SPF annouced that they are raising more cash than many expected they needed.  In previous posts, I stated they needed at least $500 million.  The number that was announced was right about there.

The problem is that in order for the deal to go through, SPF's shareholders must agree to allowing the fund to convert $128 million of its debt about 90 million shares(currently SPF has less than 70 million shares outstanding). 

At the most, the fund would be paying less than $1.50 per share and if the fund purchased the debt at a discount, than the fund could effectively be getting the shares for less than $1.00 per share. 

SPF existing shareholders are NOT being extended this opportunity.  If SPF's existing shareholders want to acquire shares, they must pay $3.05.

Now here comes SPF's legal quagmire....if in fact SPF needs over $500 million due to its dire financial condition, was SPF's management being honest with shareholders in recent legal filings and public presentations about the company's liquidity and capital needs?

So which is it, does SPF really need the $500 million to remain solvent and that is why such a negatively dilutive deal to current shareholders was struck ....or was management's presentation of the company's financial condition and outlook fair and accurate in its recent legal filings and public presentations?

Only time will tell.

11 Comments – Post Your Own

#1) On May 27, 2008 at 2:58 PM, alstry (35.49) wrote:

Further, at this point, I really can't understand why this deal was struck?  Management, the board, and counsel have to believe that there will be a slew of shareholder lawsuits initiated as a result of the deal.

How can SPF only offer to its shareholders non dividend paying shares at $3.05 per share and shares to this fund through an interest paying convertible that is senior to the common and convertible at $3.05.  Not only that, before the above even gets offered, shareholder must agree to allowing the fund to exchange $128 million of debt into 90 million shares at below $1.50 per share.

It would be interesting to know what kind of thoughts were going through their heads to treat existing shareholders this way.

Why not let loyal existing shareholders to buy on the same terms as the fund?  This almost seems like a deal that was designed to fail....who knows without more info.

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#2) On May 27, 2008 at 3:18 PM, bobbyj0708 (< 20) wrote:

Maybe they think their shareholders are idiots...

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#3) On May 27, 2008 at 3:20 PM, EverydayInvestor (< 20) wrote:

whatever happened to a good old-fashioned rights offering? Pay a hedgie some good money to backstop it, but I have to imagine that would be less dilutive than this.

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#4) On May 27, 2008 at 3:48 PM, alstry (35.49) wrote:

What is amazing about this deal is that it seems like all parties went way out of their way to upset existing shareholders.

Why not make this a straight up convertible at $3.05 if both parties really wanted the deal to get done? 

I think I know the answer, but it is purely speculation at this point.

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#5) On May 27, 2008 at 4:57 PM, FourthAxis (< 20) wrote:

Claim ignorance like slimy Moz?

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#6) On May 27, 2008 at 5:26 PM, DemonDoug (98.85) wrote:

alstry, help me out here.  I'm trying to figure out what the specifics of this deal means.

MatlinPatterson will exchange roughly $128.5 million of the company's debt for warrants to acquire preferred stock representing 89.4 million shares of common stock at an exercise price of $4.10 a share, according to a press release.

-This statement doesn't make sense to me.  I understand what you have said, that if you exchange $128.5m in debt for 89.4 million shares, that means that MatlinPatterson is going to have a cost basis of $1.437 - is the exercise price what, where they can sell it?  Not getting it.

The deal calls for MatlinPatterson to buy about $382 million of a new series of senior convertible preferred stock representing 125 million shares at a conversion price of $3.05.

-Alstry, this one seems that it is your straight dilutive offering at 3.05/share.  If we average this with the debt-to-shares conversion, we get an average cost basis of 2.381 - which, if the market was actually paying attention, is right about where SPF was on Friday, making the deal neutral at the time, but of course, hey, home prices went down in march so it's time for all HB's to rally again eh?

But my main question is that debt-to-stock conversion.  I don't understand how an exercise price can be 4.10 if the debt is being converted to stock at 1.43. 

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#7) On May 27, 2008 at 5:29 PM, alstry (35.49) wrote:

"A white knight has appeared with $530 million in the nick of time to save Standard Pacific, just like in the movies," noted Vicki Bryan, senior high yield analyst at Gimme Credit, an independent research service on corporate bonds. "That's more than twice the market value of the company last week."

After factoring the debt converstion, they effectively paid 3X the TOTAL market value for only 80% of the company.....why would anyone pay 3X the Total value for 80% of the business and take subject to billions in debt when they could have bought the whole company for less than $200 million on Friday?????

Seems a little strange for an investment group few have ever heard of don't you think?

Further, with $700 million today.  Someone could go out and buy whole bunch of land free and clear and still have hundreds of millions to hire the best guys in the business and start a HB company.

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#8) On May 27, 2008 at 5:42 PM, alstry (35.49) wrote:

Demon,

Your point is well taken.  At this point, I am unable to determine what intertest rate the preferreds are being offered at.

First, your analysis is correct.  That $128 million of face debt is convertible into about 90 million shares.  For the fund, the conversion price would be $1.43 only if they paid face for the debt....which is highly unlikely for a fund entertaining an offer such as this.  So in all likelyhood, the effective conversion price for the fund is much less than a $1.43.

As far as the $4.10 number, I have not read the agreement fully yet, but in all likelyhood it may state that the fund can't convert its shares until SPF's stock rises above $4.10 per share.  Based on this dilutive offering, it seems like a very high hurdle to achieve so the fund will likely have to be content with the interest....the question is what?

Again, I find it strange that there has been very little commentary on this very dilutive feature of the offering....it almost seems like a deal breaker.....but who knows:)

Can you imagine shareholders are being forced to pay $3.05 if they want to participate but these guys come in at less than $1.50?  Almost like putting a target on yourself....no?

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#9) On May 27, 2008 at 5:52 PM, alstry (35.49) wrote:

"Everybody here feels great," said Jeffrey Peterson, who became Standard Pacific's chairman and chief executive earlier this year. "We feel awesome."

YOU THINK EXISTING SHAREHOLDERS THINK THE DEAL IS GREAT....YOU DO BECAUSE YOU, OTHER EXECUTIVES AND BOARD MEMBERS ARE GONIG TO GET THEIR OPTIONS PRICED AT THESE LEVELS OR REPRICED.  HOW DO YOU THINK SHAREHOLDERS FEEL?????

For the most part, analysts were also positive. JMP Securities, which reiterated its market outperform rating, said the deal "secures the company's long-term future and provides significant potential for long-term growth."  Standard & Poor's Equity Analyst Ken Leon noted "these actions should improve SPF's financial condition." He reiterated his hold opinion.

YOU GUYS HAD A $6 OR $7 VALUE A FEW WEEKS AGO WHEN THE STOCK WAS OVER $5?????

 

Demon,

It appears that the debt is convertible in warrants to buy preferred shares, not common shares, which are then convertible into 90 million common shares.

Crazy way to upset existing shareholders IMHO.

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#10) On May 27, 2008 at 6:59 PM, alstry (35.49) wrote:

Demon,

I am going to take a break from SPF for a while....it would be amazing if shareholders allowed this deal to go through.......

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#11) On May 27, 2008 at 7:42 PM, Varchild2008 (84.26) wrote:

Do Shareholders have a choice?  Deal or Bankruptcy?

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