Stuart: Alright. Well let's get started. Welcome everyone and good afternoon. Thank you for joining us for our webinar today on emergency capital raising for public companies. Now Gowling WLG has already hosted a number of webinars relating to the impact that COVID has had an M&A transactions. Here is a list of the past seminar/webinars as well as upcoming webinars on both M&A transactions and financing activities. If you've missed any of the past webinars these are available on demand on the Gowling WLG website. So a couple of housekeeping matters before we get started with today's presentation. First of all, to view the presentation and all of the speakers please click on the speaker view in the upper right hand corner of your screen. For questions throughout the session please use the Q&A buttons at the bottom of your screen and we'll try our best to answer your questions towards the end of the session. But if we don't get to any of them or we run out of time, please feel free to reach out to any of the team members after the webinar, or to your customary legal advisor at Gowlings. The presentation is being recorded and it will be posted on our website in a few days, in the event it's so riveting you that you want to watch it again. For those of you who are lawyers this program counts for 1 hour of Continuing Professional Development credit, in applicable jurisdictions, and details of these credits are set out in the invitation for this webinar. Because this presentation's being put on by lawyers we'd be remiss if we didn't include an appropriate legal disclaimer. Today's session is a high level overview for general information purposes and does not constitute and should not be considered as legal advice. The information has been summarized and paraphrased for presentation purposes and any examples are provided only for illustration. If anyone has any questions about specific circumstances, or any of the topics covered today, please feel free to reach out to the panelists or to your legal advisor. Please remember that every public company situation is different and specific advice should be sought on the topics herein. Information in this presentation reflects securities laws and other relevant standards that are in effect as of the date of the presentation.
My name again is Stuart Olley and I will be your moderator today. I am the head of our natural resources group in Canada and based in our Calgary office. Joining me on the panel Brett Kagetsu, head of our business law group in Vancouver. Peter Simeon, a partner in our Toronto office. Tim Ross, a partner in our Hamilton office and Gordon Chmilar, who practices with me in our Calgary office. The agenda we'll be covering today will be to look at a number of financing techniques that are suitable or useful in the current environment of COVID-19. As many of you, of course, appreciate companies currently are, many of them, very cash constrained and have seen falling revenues. So the ability to access markets for capital, either through equity or through debt, is top of the mind for many CEO's so we thought it was timely to talk about some of the techniques and some of the regulatory relief that's in effect, currently, that can make accessing equity or debt financing a little bit easier. First we thought we'd just give you an overview of some of the financings that are being conducted and some statistics on what's been happening in the last few months during the pandemic. So, Gord, over to you.
Gordon: Thanks, Stuart. As Stu mentioned we're going to discuss some of the technical and practical issues surrounding different ways to raise capital but to begin with some statistics and market information is useful. I wanted to start with rights offerings. You go back and look at the rights offerings completed over the last 12 months you see 17 such offerings raising about $8.2 billion dollars. That number is skewed, given that Katanga completed a 7.7. billion rights offering during that time period, so if you back out Katanga you have $540,000,000.00 being raised from 16 right offerings in the last 12 months. If we look at what has taken place since the COVID-19 outbreak, say since March 15, this year, then we see there've been 3 rights offerings announced proposing to raise a $124,000,000.00. The largest is for a $100,000,000.00 and the smallest for $2.4 million. Next, we looked at all equity financings completed year to date, to the end of April 2020, and compared that to the same time period in 2019. Here we're talking about all types of equity financings, not just exempt equity financing such as private placements but including prospectus offerings, etcetera. What we see is that during this period there's been no significant reduction in the amount of equity capital raised as compared to 2019, was $9.8 billion being raised in the time period in 2020 and $9.6 billion raised in 2019, during the same time period, and in fact the average size of such financings on each of the TSX and TSXV remain roughly the same. Next we looked specifically at exempt equity financings. So private placements. This first chart shows the total amount being raised by private placements, year to date to the end of April, by TSX listed companies. The red line is for 2020 and the blue is for 2019. You will note that approximately $475,000,000.00 in total has been raised in March and April of 2020 but for the total amount, year to date to the end of April, we were down about 49% as compared to the same period of time in 2019. This next slide is similar to the one we just discussed but this for TSX Venture Exchange listed issuers. Again, the red line is for 2020. The blue is for 2019. What you see is about the same total was raised by TSXV issuers through the end of March, as compared to 2019, there was about $285,000,000.00 raised in total over March and April of this year. But we were down about 16% in total to the end of April as compared to the same period of time in 2019. Next we have a table that breaks down total private placement financing by TSX and TSXV issuers, year to date until the end of April, but we break it down by industry. So you'll note that mining issuers have by far raised the most amount this year by private placement with just under $1 billion being raised. There've been a number of notable financings by mining issuers these past few months especially by gold companies. So we then looked at convertible debt financings. There've been a number of large such financings announced since the COVID-19 outbreak. For example, $550,000,000.00 in notes by Air Canada, $500,000,000.00 in notes by Shaw and $1.25 billion in notes by Suncor. When we looked at private placement convertible debt financings, announced just in May of this year, and we note 20 such financings proposing to raise $916,000,000.00. This includes the $550,000,000.00 by Air Canada and $317,000,000.00 by Collier, so if you back those two out, then we have May announcements for $49.5 million with an average offering size of $2.75 million. The smallest is for $481,000.00. We're seeing a variety of issuers issuing exempt convertible debt for mining companies to oil and gas, cannabis, tech, renewables and goods and services. So finally we wanted to take a look at who is taking advantage of the recent relief of the minimum pricing rules by the TSX Venture Exchange. On April 8, the TSXV issued a bulletin granting relief from the 5 cent per share minimum pricing requirement for private placements and shares for debt transactions. The minimum is now 1 cent per share but issuers stock must be trading at less than 5 cents per share to take advantage of this relief. In addition, you cannot issue more than 100% of your outstanding shares and the proceeds from such financings cannot be used for management fees or investor relations. So we see that 13 TSXV issuers have announced private placement financings that rely on the pricing relief. The average size of those private placements is about $460,000.00. The largest if $1.8 million and the smallest is about $57,000.00. Again, a variety of issuers have taken advantage of this relief from mining companies to tech to oil and gas and real estate issuers. So that's our summary of current market size. I'll send it back to you, Stuart.
Stuart: Perfect, Gord. Thank you very much. So now we're going to do a bit of deeper dive into some of these financing techniques. The first, as you'll see, is right offerings which seem quite popular at the moment. Brett, let me turn it over to you. I know you've had some experience in doing a few rights offerings recently.
Brett: Thank you, Stu. Rights offerings can be one of the fair ways for issuers to raise capital because they provide existing shareholders with an opportunity to protect themselves from dilution. What's involved is the issuer issues rights at no costs to shareholders and entitles the holders to purchase additional shares of the issuer. Essentially it's like a cash call to existing shareholders, and provides them with an opportunity to purchase a pro-rata portion of the additional shares at specified price per share, and it's typically it's priced below the market price. Rights are typically transferrable. So, if you don't want to exercise, you can transfer them through the exchange. Rights offerings typically cost less than a brokered financing because you're not hiring an agent or underwriter to help you with the financing and paying commissions and costs of other counsel. It relies on the existing shareholder base and allows major shareholders with vested interests to retain their proportionate share of the company. Now key factors to consider is the pricing. Oftentimes these rights to purchase shares are priced at a significant discount to market. In fact, you're looking at in excess of the allowable discounts allowed by the TSX Venture Exchange and the TSX, to entice shareholders to exercise the rights. As I say, the rights have to be transferable to be listed and CVS, in my experience, won't accept rights for deposit with them unless they are transferable. Now some rights offerings will have a standby commitment or a back stop. That ensures that the issuer will raise sort of the money that they require, to achieve what they want to acquire, that's set out in the rights offering documentation. You can then get guarantee that you're going to have a certain amount raised for the purposes that you need the money for. Now these standby commitments and back stops, there's often a fee that's paid to the person that's taking on the risk of standing behind the offering, and filling up any amount that hasn't yet been raised by the rights. Something to consider if you're going to have a person who's not an insider do a standby or a back stop, and if it would cause them to potentially cross the 10% threshold when you become an insider, you have to note that the TSX Venture Exchange will likely require the person who's controlling that entity to file a PIF, and to have it clear through the exchange before they'll allow the person to take up that back stop. So something to consider on a timing perspective is to make sure you try to find out if that could happen. If that's the case maybe have the personal information form submitted in advance and cleared before you launch your rights offering. Now, in Canada, you can do a rights offering either by filing a prospectus or relying on a prospectus exemption. Now filing a prospectus is quite costly. It's time consuming. Oftentimes rights offerings are not done by prospectus because of that. In the past rights offerings were done, and are currently done, mostly under a prospectus exemption. Now before 2015, the rights offering prospectus exemption was cumbersome. It wasn't very user friendly and consequently not often used. So in late 2015 the Canadian Securities Administrators, in Canada, introduced a change to the rights offering regime and streamlined to try to make it easier and let more cost effective, and more timely to be able to raise capital using rights offerings. Essentially here are the key elements of a rights offering through a prospectus exemption. You have to prepare a rights offering notice as well as a rights offering circular. Both documents are filed via SEDAR and sent to shareholders advising them about the details of the rights offering and how to participate. The rights offering circular is in a question and answer format and it's meant to be easier to prepare and more straightforward for investors to understand. The limits for dilution are now 100% so basically you can't issue more than 100% of your current issued and outstanding. Prior to this change, as I mentioned in 2015, the dilution limit was only 25%. So they're trying to make it more accessible so you could raise more capital. What it does provide is existing shareholders who participate, exercise their rights, they're given statutory secondary market liability. So if there's a misrepresentation in your publicly disclosed documents, certain of your core documents, it could give people who exercise their rights a right to sue you for the misrepresentation and the losses they've sustained. Now, if you have shareholders in Quebec, and many issuers of course will have shareholders in Quebec, you have to note that you'll have to translate your rights offering circular and rights offering notice into French. So that's something you've got to do before launch as well because when you file the circular, and you have shareholders in Quebec, you'll have to file in French and in English. On that note too, the rights offerings can allow for US participation as well. You have to talk to US counsel, but to my experience, my clients have been able to rely on a filing in the US to access some of the shareholders who reside in most of the US States. But, again, contact US counsel and they can help you make sure that you're rights could be exercised in the US, in as many jurisdictions as possible. Now, when the CSA introduced the rights offering exemption regime in 2015, a couple years later they did research to see how the uptake was on the new regime. They found that the average number of days from filing the rights offering notice to closing was 41 days. So not too long. On average issuers sought to raise 51% of the outstanding securities in the applicable class, the rights offering, and they actually issued 40% of the outstanding securities. Insiders typically raised 47% of the funds that were sought to be raised. Of 29 rights offerings with a standby commitment, 24 were provided, in whole or in part, by an insider or a related party. Now, when you're dealing with the Exchange, I'm just talking about the TSX and the Venture Exchange here, you have to ensure that all your rights offering materials are vetted and approved before you can launch. Both exchanges recommend a preliminary discussion with them in advance of undertaking a rights offering. Under the policies you have to file a draft news release regarding the offering, a drafts right offering circular and rights offering notice and a draft specimen rights certificate with a new ISIN and CUSIP number, which you have to order in advance. Again, as I mentioned, if it's possible for someone who's doing the back stop or standby for them to exceed 10%, then you have to file the PIF for that person as well. You've got to clear all the comments on the documentation at least 5 days in advance of the record date for the rights offering. You need to set a record date which says as of that date people who are shareholders, registered shareholders, can participate in the rights offering. As I say, you have a set up rights offering record date and clear all the comments at least 5 trading days in advance. At that point you can then launch the rights offering by disseminating the news release announcing the rights offering and filing your rights offering documentation on SEDAR. The rights offering must be open for not less than 21 days following the date the rights offering circular is sent or made available to shareholders. The TSXV has said that if a certain amount of funds is to be raised for a specific use, the issuer must determine a minimum subscription which must be guaranteed by a person that has a financial ability to satisfy the standby commitment. So that's what I said earlier about ensuring that you have that standby person if you have to raise a minimum amount of money for your specific use. Rights can be issued to purchase units as well. Now the exercise price of any warrant that's forming part of unit must not be less than the market price prior to the news release announcing the rights offering and not less than 5 cents. The total number of shares issued on exercise of warrants must not exceed the total number of listed shares issued on excessive rights. So like on a one for one basis would be the maximum. Stu, back to you.
Stuart: Perfect, Brett. Thank you. Very helpful. So, is it fair to say that rights offerings with a back stop in this current market gives issuers an opportunity to ensure that their shareholders can participate. So if their shares are depressed shareholders have a chance to buy while at the same time giving the issuers the guarantee that we will raise funds through the back stop. However, some issuers obviously will not want to go through that period of time or don't think there'll be significant uptake by their shareholders, so in those circumstances exempt equity financing might be a better route to go. So, Peter, I think you've had some experience recently doing this during the pandemic.
Peter: Thanks, Stu. In Canada issuers can raise equity through prospectus offering or prospectus exempt offering. I'll be speaking about prospectus exempt offerings, or private placements, as we like to call them. Initially after the COVID-19 lockdown began there was a reduction financings. As we think everyone just wanted to see what the new normal was like and stock markets generally were trading down. A lot of stocks have since recovered since that initial impact and we've recently seen both prospectus offerings and private placements getting done. In terms of the process, in order to complete a private placement in Canada, initially you'll need to rely on one of the prospectus exemptions available under Securities laws. Private placements can be brokered or non-brokered. In Ontario we typically rely on the credit investor exemption. Each investor must satisfy that they are accredited, or in the eyes of the Securities regulators, they have enough financial resources or be sophisticated enough to qualify. For example, if an individual makes more than $200,000.00 annually, or more than $300,000.00 annually with their spouse, they'd be deemed to be a credit. There are also a number of other exemptions available in Ontario, such as the friends and family exemption, the close business associate's exemption or offering memorandum exemption. Other Provinces have other exemptions as well. I'll just turn it over to Brett to walk through a few of those other Provincial exemptions.
Brett: Thanks, Peter. Yes, there is the investment dealer exemption, as well as the existing security holder exemption, which are well used especially at this time. They're not available for issuers based in Ontario but several other Provinces are have this exemption available. What it does entail is a few things. Your subscription agreement has to have a contractual right of action where the investor was able to basically have a right of action to sue the company if there's a misrepresentation of their continuous disclosure. There's a news release that needs to be issued that announces that you're going to rely on these exemptions and the use of proceeds to which that you're going to be applying the funds. For the case of the existing security holder exemption you need to disclose the record date, where you have to be a shareholder to be able to participate, as well as the number of maximum number of shares you're going to issue under that exemption and if there's excess demand, how are you going to apportion the excess subscription amongst all the people who want to participate. The existing security holder exemption, all you have to be is an existing security holder as of the record date. You don't need to be an accredited investor or qualify under any other exemption. An investment dealer exemption, to participate, all you have to do is to actually get some suitability advice from an investment dealer. Once you certify you got that advice then you can participate and you don't have to be an accredited investor. So these are very helpful exemptions.
Peter: Thanks, Brett. In terms of pricing there are also specific stock exchange rules around private placement. For example, on the Toronto Venture Exchange you can only issue shares within a permitted discount to the market price. Which ranges from 15 to 25% depending on the current share price issuer. If you were doing a unit offering, warrants also have a limit on the exercise price, which must have a premium also ranging from 15 to 50% of the market price of shares. Again, depending on the exact share price where you'll fall within that range. Other exchanges such as the CSE also have similar rules. Because of the COVID-19 pandemic certain stock exchanges have issued revised rules for minimum pricing product placements. As was noted earlier, the TSXV has provided temporary relief from certain requirements of its corporate finance manual to reduce the minimum price of which listed shares may be issued. Private placements, public offerings, shares for debt transactions and as bonuses for loans or guarantees. Under this temporary relief, were the market price of an issuers listed shares is not greater than 5 cents, the minimum price at which those issue of shares may be issued will be the market price, subject to minimum price of 1 cent. In order to complete a private placement, an issuer will need to either announce the placement in a press release, or file a price reservation form. Technically, issuers can wait until closing to press release but that introduces pricing risks, and most issuers either file the price reservation form initially, or announce the placement in order to walk in the pricing. Under TSXV rules if insiders of the issuer will be subscribing for greater than 25% of the private placement, the proposed offering price must be reserved by the issuance of a press release, and can't be done through the filing of a price reservation form. Where the issuer has reserved the proposed offering price using a price reservation form, and insider participation in the placement will be greater than 25% of the placement, a price reservation will not apply to that insider participation that is exceeding 25% of the placement. Whether a proposed offering price reserved by way of a news release, or price reservation form, such price reservation will lapse if the issuer has not filed or the Exchange accepts the proposed terms of placement within 30 days of a price reservation date. So because of the COVID-19 pandemic a number of regulators have issued temporary relief from certain securities rules. Some of that relief is particularly important in the private placement context. The first exemption worth noting is the CSA blanket order allowing delays in filing certain continuous disclosure documents. The CSA has published blanket orders that grant temporary relief to market participants, in connection with the filing of certain continuous disclosure documents, and other documents due before June 1, 2020. This was recently extended to August 31, 2020. The temporary relief extends the filing deadline for certain continuous disclosure of filings and other exempt market filings by 45 days, subject to meeting certain conditions. A particular note, this relief applies to filing interim annual financial statements. So it's important to distinguish the relationship between the initial March 23 relief and the recent May 20 relief. It's important to note that these set of orders, the first set dated March 23 provides a 45 day exemption for documents required to be filed on or before June 1, and the second set dated May 20 provides an exemption for documents be filed between June 2 and August 31. There are two critical takeaways in relation to these two sets of orders. First, issuers have to compile their requirements of each set of orders to one of them, and second, the May 20 orders do not extend the filing deadlines for documents required to be filed on or before June 1. For example, an issuer relying on the March 23 order to extend the filing date for its Q1 financial statements, from May 30 to July 14, could not use the May 20 orders to further extend its Q1 filing deadline. However, the issuer might rely on the May 20 orders to extend its Q2 filing deadline from August 29 to October 13. So in essence you can't use additional orders for an additional 45 days for the filings that fell within the first period. It's got to be for new filings that fall within the second period. You get another second 45 days. ... to the temporary relief, including a prohibition on filing prospectus until all documents are delayed in reliance on the temporary relief are filed, and require that the issuers confirm that management, and other insiders, are subject to an issuer imposed insider trading blackout, and they provide updates with respect to other material business developments. Among other things, material change reports, early warning reports and, if applicable, insider reports are not subject to any relief. In order to rely on the temporary relief in connection with these filings, the issuer must issue a news release both before and after the applicable filing deadlines. So there are two releases. There's a pre-deadline news release. This must be filed prior to the applicable filing date. The press release must disclose the relief being relied upon, the estimated filing date that is relevant to disclosure document and update on any material information that is made and also that management is subject to an insider trading blackout until the filings have been made. There is also other post-deadline news releases. This one's to be filed within 30 days of the filing deadline, providing an update to the market as well as every 30 days thereafter, until the filings have actually been made. Importantly, as noted earlier, issuers relying on the temporary relief may not file a prospectus, a preliminary or filed prospectus, for an offering of securities until all the documents for which the temporary relief is relied upon have actually been filed. For this reason we initially saw a lot more private placements as issuers relied on the first 45 day relief and now that some of those filings can be made we're starting to see prospectus offerings. The temporary relief also extends the deadline for the filing, sending or delivering of certain other exempt market filings by 45 days. So such filings include annual financial statements required to be filed in connection with an offering memorandum exemption, as well as the related notice of use of proceeds on form 45-106F16, also annual financial statements and any disclosure of use of proceeds required under the crowd funding rules exemption. In these cases the temporary relief is also condition on the filing of an applicable new release in advance of the filing deadline. Other documents such as a filing of change of auditors, notice of change of year end, business acquisition reports, notice of change of in corporate structure, that fall before August 31 will also get the benefit of the 45 day extension. Again, provided the issuer disseminates the applicable news release. Further, the expiry day for a final base shelf prospectus, that is set to lapse before August 31, may also be extended by an additional 45 days, provided that the issuer issues and files on SEDAR a news release in advance of the lapse date, and provided that the issuer is not relying on the temporary relief in connection with its annual financial and interim financial statements. In respect of the capital pool companies, I know we have spoken with TSXV and asked if they're issuing any specific relief for delaying capital pool companies, and specifically the requirement that they complete their qualifying transactions within 24 months of listing. Although we've been told that the exchange will not be issuing formal relief we do understand that they will be more accommodating with specific relief on a case by case basis. If you have a CPC that's getting near to its Q2 deadline we suggest you contact the Exchange, or contact us, to help deal with that specific relief. Stu, any thoughts about specific practice points related to this private company spending relief?
Stuart: Yeah. One of the areas that I'm getting a lot of questions is the interplay between the blanket orders to provide temporary hardship relief on filing of financial statements and accessing the market. You noted correctly that those blanket orders provide limitations on the rights of insiders to trade in the stock while there has not been disclosure of financial statements or other material information. This is an important point for people to think about if you're accessing the market because, as Brett pointed out in his comment on rights offerings, very often we see that it's insiders who provide back stops or participate in that rights offering. Or if you're doing an exempt financing, and you're having insiders participate, you really need to give some thought as to what material information those insiders might be aware of that may not have been disclosed to the market place, and in such circumstances there'll be limitations on the rights of those insiders to participate. So that's an important interplay if people are taking the benefit of the temporary relief on filing financial information. For example, where insiders might have some colour on what the financial information is. I think, as you mentioned, people now sort of having 3 months into the pandemic are getting used to practicing remotely, or working remotely, and they're getting caught up on filing the financial information. So as the public disclosure record comes current that will be less of a challenge for issuers. But certainly something to think about if you're relying on the blanket orders.
Brett: Stu, I have a comment on that as well. If an insider or an officer subscribes for shares under a prospectus exemption, then the 4 month hold expired, then you'd be prevented from selling the shares as well because one of the requirements on the re-sale rule is that the selling security holder, if they're an insider or officer, has no reasonable grounds to believe the issuer is in default of securities legislation. So if they're in default because they're relying on this exemption, then they may not be able to trade their stock, even if the 4 month hold period has expired.
Stuart: Right.
Peter: Those are all great points. Going forward we expect to see issuers accessing the capital markets, both through prospectus and exempt offerings.
Stuart: Certainly with the statistics that Gord was putting up earlier I was a bit surprise, frankly, that the drop off in offerings is not more significant than the numbers are showing. So I agree. I think that people are sort of getting on with business as usual and recognizing that we have to make things work and access capital markets as appropriate. As I mentioned many issuers are facing significantly depressed share prices. None perhaps more so than in my home jurisdiction of Calgary, where many of the oil and gas companies are dealing with not only COVID-19, but also the meltdown in commodity prices in the oil and gas sector. In those circumstances issuers may decide that neither a rights offering nor an exempt equity financing. or prospectus financing. is appropriate simply because of the dilution occasioned by their equity prices. So in such circumstances debt offerings, either convertible or straight debt, might be more appropriate. So, Tim, maybe you can take us through some of the rules and what you're seeing in the debt markets right now.
Tim: Sure thing, Stu. Thanks very much and good afternoon everybody. We're going to talk about straight debt in just a few minutes and we've come through the rights offerings and equity discussion. Right now we're going to talk about the hybrid instrument that falls in the middle and that's a convertible debt instrument. They're very flexible instruments. There are a bunch of different features. We'll touch on a couple of those today. That flexibility allows for them to be ... different situations. One of those situations is times of economic uncertainty either generally or for one particular company, issuer. Of course, that's where we find ourselves today, and as you saw in the data on the slides earlier in this presentation, that uptick in convertible debt issuance is already apparent. I think we expect that to continue. As Stuart says, one of the drivers there is dilution risk. If your stock is trading a low price, and you're looking at equity, you've got dilution on your mind. Another key constraint is debt capacity. Every company has its own characteristics which imply how much debt it can carry. That can be determined by its asset base or by its cash flows but whatever it is, sometimes we bump up against a debt ... constraints and enter the convertible debt instrument. Some of the benefits to an issuer are pretty straightforward. First and foremost, you can often get a lower coupon, a lower borrowing rate on the convertible instrument then you would get on a straight debt piece. That's because the conversion option is a sweetener for the holder that will allow the holder to give up the coupon. You can also raise more debt, and again perhaps at a lower price, than you may otherwise be able to. This is of course the point on debt capacity, and again, it's the conversion feature that allows for that to happen. We've touched on how a convertible debt avoids, to an extent, the dilution in the equity and that's very real and convertible debt is less than diluted, typically, than a rights offering although it depends on where the stock is price is set. But it certainly can be less diluted. It's also important to remember dilution in voting. In a convertible instrument there's less dilution in the voting, really in two respects. One of them is in time. The dilution would only happen later and isn't certain to happen. It's only if the instrument gets converted and, again, depending the strike price the dilution is lower. The main benefit for an issuer is really the marketability of these instruments. The hybrid debt and equity feature is attractive in the market place and, if you think about, from a holder's perspective it certainly may feel like you're getting the best of both worlds. Where you have the certainty of a debt obligation, with a fixed amount and a fixed time period, and yet at the same time you retain exposure to the upside. The blue sky if the stock trades up. A couple of risks that should be highlighted along the way. The main one, which is true of any debt instrument not just convertible debt, is a refinancing ... Depending on the time period for which this money's going to be borrowed, or up to a conversion date, the issuer has to figure out a way of paying that money back. A lot of what we're seeing these days has a bit of the air of the temporary. Stop gap measures to help companies move forward with their business plans. But it's important to keep an on eye on what's going to happen at the end of these timelines and fully assess that refinancing risk. There's one way to get rid of that refinancing risk completely which is to use a particular type of convertible debt instrument which is a mandatorily convertible instrument. That means the holder has to convert into equity either absolutely or under defined circumstances. Now that's an interesting feature, however, it's of course less attractive to the holder and therefore some of the benefits I've mentioned just a few minutes ago are not a feature in mandatory convertibles, particularly the coupon tends to be higher in those instruments. There's another thing to consider for any issuer of a convertible bond, convertible debt instrument of any kind, and that's the possibility of market arbitrage So if people are keeping on eye on their stock price and there may be some downward pressure on that stock price these days, the thought of short selling may not be welcome. There is an arbitration strategy, an arbitrage excuse me, strategy that's very common for the holder of the convertible debt instrument you are long in the equity through the conversion feature, and so oftentimes that is hedged by an individual holder by shorting the underlying stock. It's common strategy. In terms of the process for issuing one of these instruments it's not terribly different from issuing either equity or debt. You've heard the prospectus requirements and prospectus exemptions is the same story, broadly. The one thing to keep in mind is that it takes a little bit longer to structure a document, these things, just because of the dual feature, the hybrid nature of them. As a consequence the transaction costs go up incrementally. But beyond that it's not materially different. To be sure, sometimes we look at convertible instruments that are listed and traded, and sometimes not. Sometimes these are private transactions. The conversion terms are a very important feature of these instruments and ... takes quite a ... to get them right. There are myriad options for how you can set up a convertible instrument. For instance, you could a forced conversion if the equity appreciates through a certain threshold. I guess it's important to mention also that market practice varies jurisdiction to jurisdiction. What's common in ..., for instance, ... from what's more common in North America. In North American, there's two features that there quite common that we would highlight. The first is a protection for the holder. It's called ratchet provision and this protects a holder ... intervening transaction at the issuer, such as change in control. There are different formulation. Number one is a make whole provision, where essentially the holder is made whole, notwithstanding the change of control. Second common feature that we'll mention is contingent conversion rights or so called CoCo's. What that means is that the holder will have some limits around when they can convert. For example, there could be a rule specified in the bond terms that says you can only convert if the stock is trading at 125% of the conversion price, and perhaps, persisting for a period of time. Now, very interesting instruments we would encourage issuers to consider them. We would also strongly encourage them to work with their financial and other advisors on them. I think it's very important to get these right. They do kick out a number of disputes on the occasions where they're not done right. And, Brett, of course the Exchanges have some requirements for issuers of convertible instruments as it comes to the conversion rights. I'm wondering if I could turn to you to share a few thoughts on that.
Brett: Sure, Tim. Yes, the convertible debentures, convertible instruments, are a private placement under both TSX Venture and TSX rules. You can also make a filing, of course, for the CSE too because it's potentially instruments of shares when they convert. Now the pricing rules for the TSX Venture Exchange are that the conversion price cannot be less than the market price. The market price is the closing price on the day before you announce the financing. There's no discount applied to that. Beware of that. That's for the first year. Now if your convertible debenture is for a term of more than one year than your second year has to be at a minimum convertible price of 10 cents. That's TSX Venture Exchange. On the TSX, by itself, there is some limits. You could either price the conversion at either the discount to the market price, which is a 5 day VWAP at the time of issuance or a discount to the 5 day VWAP at the time of conversion, but it's not the lower of, it's either. Or you could do the lower of the market price, which is the 5 day VWAP, at the time you price the convertible debenture conversion price, or the market price at the time of conversion. As I mentioned earlier, if you have a convertible security that could result in a new insider, then you have to have a PIF filed with the TSX Venture Exchange and cleared to ensure that the new insider will be acceptable to the exchange. So that could provide a bit of a delay, or I've seen where you could kind of maybe not that have that requirement, if you put a limitation in your convertible debenture that the person cannot convert the debt into shares to cause that person to be 10% or more holder of the shares. So then the PIF won't be required in that case because they'll never be able to go above 10%. The TSX has the 25% limitation on dilution as well so you have to be aware of if the convertible security could convert into more than 25% of dilution outstanding. In which case that could trigger shareholder approval. So you've got to be aware of that requirement. Now, on this topic, if you issue a convertible security on your TSX issuer, and it could be more than 25% dilution, then you can rely on the financial hardship exemption from shareholder approval requirements. But note, that if you do rely on the financial hardship exemption from getting shareholder approval under TSX policies, that will trigger a deal listing review. So beware of that. It's available. Also, if you're dealing with a related party, you've got to consider the related party rule which is Multilateral Instrument 61-1010, which deals with special transactions involving related parties. What this bumps up into sometimes is the requirement to get the majority and minority shareholder approval. So you've got to be careful if you're dealing with a related party or an insider and your issuing them convertible security to make sure you address those requirements and find out if you need to get the majority and minority shareholder approval.
Stuart: Thanks, Brett. Tim, one of the questions I get from time to time is whether people who are issuing convertible debentures need to be mindful of their existing debt obligations. In other words, whether they have a bank line that requires consent for further indebtedness or if they have financial covenant ratios. Do we consider convertible debentures the same way when we think about those? Even though they could ultimately be converted to equity?
Tim: Yes. In a nutshell. And in fact you have to consider both. The debt characteristics and the equity characteristics and the number of different circumstances that Brett has just described for us. These are very real. There's a lot of things to work through. But, Stu, on introducing a new layer of debt into a capital structure, absolutely, you need to review your existing loan terms and you've got to watch out, not just for express covenants, limits on debt, limits on granting security, but you also have to work your way through the financial covenants to make sure that the incurrence of a convertible debt obligation wouldn't put you off-side one of those covenants.
Stuart: Great. Maybe now, Tim, you can turn and just talk about if convertible debt is not an option, what are you seeing in the market for conventional or straight debt financings?
Tim: I'm not sure that there's a huge amount of credit being extended by banks these days and I think that when people go out to try to place debt in the market they are looking to enhance it one way or another. So that could be either a credit enhancement by providing more security than they may typically have done in the past. It could be a pricing enhancement where they would pay more for the debt. There's one particular feature that we've seen a little bit of which is on the topic of prepayment. Again, some stuff that we're seeing these days has the air of the temporary about it. So could this please be a temporary solution that gets us through our current challenges and that's a very normal and practical thing to try and do. But people also want to give themselves as back door to get out of it as circumstances may change. If you're borrowing debt you may want to have the ability to pay it back early if you're able to refinance one way or the other. Now that's typically not a huge problem but oftentimes the market will demand a prepayment fee. So we get into the prepayment premiums and non-call features. A non-call feature is one that says you simply are not allowed to payback the debt for a certain period of time unless you compensate the holders of that debt for their losses. The theory behind this is really straightforward. If you have a 10 year term in an instrument it's riskier at the beginning and it's less risky at the end because time is risk. If you have a fixed coupon instrument, like a mez note, say it's at 10%, it seems unfair to ask the holder to whether those riskier years and then pay them out before they get to enjoy the less risky years, when it's a fixed coupon throughout. So that's why a non-call feature makes sense. That's why make whole provisions and prepayment premium make good sense. The anecdotal observation is that those seem to be really high these days. People want very high prepayment premiums including for debts that are not long dated. That's just one thing that we've noticed that we encourage people to keep an eye on.
Stuart: Interesting. ... the three or four clearest ways that we're seeing people accessing emergency cash in a moment but there a couple of other novel ways that we just thought we might touch on briefly. As I mentioned I'm based in Calgary so the oil and gas we see quite a lot of royalties as a way of financing oil and gas development. It's also common in the mining sector to see off takes or stream financing transactions. So, Brett, I know you do a lot of mining work out there in Vancouver, if you could comment briefly on what you're seeing in off takes and streams or royalty transactions as a way of accessing financing for resource issuers.
Brett: Thanks, Stu. Yeah, I've had several clients access sale of royalties as a way of raising capital because obviously it's good because you don't have to dilute your shareholders. You do sell a percentage of the value of the production when the property goes into commercial production. You have to be very careful because if you saddle the property with too much in royalties they can make it uneconomic so you've got to be very careful if you're going to sell a royalty. You see all types of different royalty documents and sometimes it's tacked on, on an option agreement where there's a royalty granted to the holder of the property as part of the consideration for optioning the property to the mining company. Sometimes these royalties aren't very well described so I would encourage people to make sure that these royalty provisions are well described. It just makes it more clear, and makes it for when you get into the situation where you have to pay the royalty, that you have clarity on the terms. As for streams, I think streams are used generally by issuers that are further along in their life cycle in the mining stage, who are looking to raise a big amount of money for mine construction, for the development and that's when streams are often used. These things take a lot of time and they're often very complicated. It's not something you can put together in a quick way. But royalties, I entered one today to one of my clients to sell a royalty on their property, so it is something that is more commonplace.
Stuart: Great. Thank you. The other sort of novel thing that we sometimes see in ways to find emergency financing is factoring of receivables. This is more typically seen in manufacturing companies or sales organizations where they might accrue a significant receivable portfolio and then find a way to access that as security. So, Tim, I'm sure you see a lot of that in your practice.
Tim: Absolutely, Stu. It's a very important aspect of financing for these companies and particularly the working capital that's necessary for them to deliver the industrial goods that they produce. A receivable is a receivable, that's when the customer of an industrial company, for instance, it owes that industrial company some money but maybe it won't pay it just yet. That's an asset and that asset can be financed. The big banks provide financing for lots of Canadian industrial companies. These are a borrowing base approach to this. Typically the receivables are a big part of the borrowing base. Sometimes inventory is also included in there. That's great but oftentimes it's not every receivable that counts for that type of a facility and they put a haircut on it. Maybe only 75% of your eligible receivables, for instance, would provide that borrowing base against which you could borrow. In addition to the bank providers, we'll just quickly, Stu mentioned that there are a bunch of specialty providers out there who really focus on this stuff and get much closer to the story. So that 75% number I mentioned a moment ago can go up higher to 90%. The roundtrip might be a little more costly with the specialty providers but at least you get more financing. Indeed there's some hyper specific examples for this. So really big customers out there, such as Amazon, the various suppliers to Amazon can take an Amazon receivable to a dedicated finance shop that all they do is factor Amazon receivables. It's a very useful space, especially these days, ... is everything and trying to keep your business running and keep product running through your shop floor. That working capital financing through factor receivables is really important.
Stuart: Perfect. Thank you. We have a few minutes left so I'm just going to turn to some of the questions that we've received from our attendees today. The first one is a question relating to the comment we made on reliance on the blanket order for delaying filing the financial or other corporate information. I think the comment we made, that you have to be cautious because insiders in that circumstance may be subject to insider trading restrictions. So the question is what if an insider is not a board member or staff or an agent but holds more than 10%? What are their limitations for purchasing in the open market? So the answer to that is that the blanket order relief indicates that you need to have a insider trading policy that is enumerated in one of the National Instruments. Typically, what that will provide is a policy that insiders not trade when they're in position of material, undisclosed information. Under Canadian Securities law, people who hold more than 10% of an issuer are considered to be insiders. But they're in a somewhat different class than officers or directors in that their informational situation may be different. On occasion, insider shareholders, 10% shareholders, may have representation on the board of directors in which case they'll typically have the same information as officers or directors. But where they don't have that access to information then under the blanket order they would not appear to be subject to the same trading restrictions that officers and directors would be subject to. So again, I think this comes back to the comment that really needs to be analyzed on a case by case basis. But obviously where an insider has accumulated shares in the market place, and doesn't have a seat on the board of the issuer or other access to information, there's very little an issuer can do to prevent them acquiring more shares. It should be pointed out, however, that the blanket relief from filing of information does not provide extensions for filing insider trading reports or early warning reports. So to the extent people are active in the market and they're insiders, they still must file those reports on time, and if they're 10 percenters and go over the additional 2% thresholds they need to file their early warning reports on time.
We do have another question, Tim, on whether or not we have any information on withholding tax obligations for cross border interest payments, assuming no treaty benefit. I think that's a fairly specific question. It's going to depend on the jurisdictions and relevant tax codes. I'm not sure there's a general answer for that.
Tim: That's right. Stu, as we made clear off the top we can't advise on any particular situation, obviously. Canada does have withholding tax regime which means that if you're paying interest over the border, outside of the country, you need to deduct and remit to Revenue Canada, or the CRA, a portion of that. The headline rate is 25% and that rate can come down under treaties, typically, double tax treaties. There are many different approaches in, I'm not an expert in double tax treaties but I have worked with people who are and I've seen a bunch of them, it tends to come down to 15%, 10%, 5% and sometimes can be eliminated completely. However, as soon as you get into looking at these things you have to really watch out for related party transactions. If there's anything involving related parties then you get into transfer pricing analysis pretty quickly and there's a lot of focus on back to back loans. It's important topic area but it's not one that can be easily summarized.
Stuart: Probably not something we can deal with in a 1 hour webinar. There was one supplemental question on the insider filing obligations querying whether early warning reports must be filed on SEDAR or whether insider reports on SEDI are sufficient. You in fact have an obligation to file both. Early warning reports are filed by SEDAR and insider reports are filed by SEDI. If you blow through the early warning obligation, as in insider, by acquiring additional securities you have to file them in both places. You have to file both reports. One is not sufficient.
I think that runs through the questions we've been asked and it also runs through our allotted time. I would like to thank all of the attendees for joining us today for this webinar. I hope it was helpful and if you have any further questions please feel free to reach out to any of the panelists or myself or your legal advisor at Gowlings. Thank you to all our panelists for what was a very helpful and informative webinar. I wish everyone a very happy afternoon and thank you very much for joining us.