Securities Commission calls Dorchester recapitalisation plan biased

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The Securities Commission has panned parts of Dorchester Pacific's recapitalisation plan, saying the comparison between the offer and receivership has "significant bias."

Tuesday, June 15th 2010, 11:12PM 1 Comment

by Paul McBeth

The regulator said the comparison between the recapitalisation plan and a potential receivership contained "significant bias," and suggested Dorchester's forecasts assumed an improvement in the financial markets and demand for the firm's products, while the receivership's assessment was based on "rapid sales of assets at fire sale prices" and a deterioration in the market.

 Dorchester outlined, what it called, the regulator's principal concerns in an appendix to chairman Barry Graham's letter to debenture holders, and offered a rebuttal to the commission's issues.

Dorchester said its own forecasts were based on "no material change in economic conditions" and that its receivership scenario assumed the same market conditions as those under its offer. Still, it said "the board believes that a sale of distressed assets which occurs in a receivership is likely to result in lower sale prices than would be achieved in a situation where there is a willing seller."

The financier and insurer is trying to exit its moratorium through an offer that will take total cash repayments to debentureholders to 50%, give them ownership and control of Dorchester-owned hotels including the proceeds of any sale with operating returns, and offer them a three-year interest bearing note. The firm will also look to raise as much as $11 million through a share issue, of which $7 million has been underwritten by its two major stakeholders, Bakery Business and Hugh Green Investment, with an option for them to take another $1 million.

The Securities Commission also flagged concerns around the aggregate of estimated returns to stockholders, saying it was "misleading without reference to the present value of the securities."

The regulator declined to confirm whether Dorchester's summation was a fair representation of its comments, saying "now that the final documents have been published we are reviewing these for compliance with the law, and it would not be appropriate to make further comment while this is underway."

An independent report by PricewaterhouseCoopers said the proposal has "merit" and should be put forward to investors, though it the board's assessment under a receivership scenario was "conservative" and that recoveries could be higher. It also considered the share issue seem low and should be higher, and that an underwriting agreement on any operating losses for the properties should cover a three-year period rather than the one-year term in the offer, and that the 5% interest rate on the note issued to stockholders seemed low.

Under the recapitalisation plan, Dorchester's board estimates stockholders will receive between 85.4 cents and 90.7 cents in the dollar, excluding any value from an increase in share price, while noteholders will receive either 25 cents in the dollar if they accept the cash option, or between 33 cents and 44 cents if they take the share option. If the company is sent to the receivers, the board estimates stockholders will recover between 66 cents and 76 cents in the dollar, and noteholders will not receive any additional payments to the 10 cents in the dollar that they have already received.

The plan needs more than half of all noteholders and debenture stockholders to vote, and will succeed if three-quarters of each group accepts the offer. It also needs approval from the firm's shareholders, and has to raise at least $8 million of new equity.

If the offer is turned down by investors the board said it is of the "opinion that the only realistic alternative to the CRP is to invite the trustees to appoint a receiver."

Paul is a staff writer for Good Returns based in Wellington.

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