North American Palladium (TSX: PDL; US-OTC: PALDF) is facing the consequences of a potential loan default, which could transfer 98% of the company and ownership of the Lac des Îles (LDI) palladium mine, near Thunder Bay, Ont., to its lenders.
N.A. Palladium recently signed a recapitalization agreement with Brookfield Capital Partners — a private equity group of Brookfield Asset Management — to fix its capital structure by reducing its debt and enhancing liquidity. It also kept CIBC World Markets as its financial advisor to start a review process to find a buyer for the company. If no superior proposal to the recapitalization emerges by the end of June 2015, N.A. Palladium will go ahead with the Brookfield transaction.
Under that agreement, N.A. Palladium will repay the debt it owes Brookfield through equity, after which the lender will hold 92% of the shares outstanding on a fully diluted basis. It will also convert the 2012 and 2014 convertible debentures into equity, resulting in debenture holders owning 6% of the firm, leaving N.A. Palladium’s existing shareholders with only 2% of the shares outstanding, post-recapitalization.
After this April 15 announcement N.A. Palladium investors dumped shares, pushing the stock down 73% over two days to close April 16 at 7¢. The stock is undergoing a delisting process in New York due to its “abnormally low” share price.
Mackie Research analyst Barry Allan says the junior ended up in this predicament by taking on more debt than it could handle. This began with N.A. Palladium closing a financing with Brookfield in June 2013 to fund the first phase of LDI’s mine expansion. That financing included a US$130-million term loan that carried a 15% interest, due in June 2017.
“PDL accepted an ill-advised financial package from Brookfield, which was beyond what the assets could support — that seemed obvious from the start. From that point on, PDL’s financial flexibility was seriously impaired, affecting management’s ability to fully implement necessary operational changes. In other words, the capital structure of the company was set up wrong (with too much debt), and held back mine development,” Allan said in an emailed response.
Looking at the firm’s capital structure at the end of 2014, N.A. Palladium had around $300 million in liabilities and $224.4 million in shareholders’ equity. Of the liabilities, it had $200.9 million outstanding on the Brookfield loan, a combined $44.8 million outstanding on the 2012 and 2014 convertible debentures, part of a $36.8-million credit facility and $18.8 million in capital leases.
Allan believes it is unlikely that the firm could attract a potential suitor before the June deadline. “Given the existing capital structure, I doubt an equity buyer will be found near-term until this [capital structure] is dealt with,” he says.
Meanwhile, N.A. Palladium has lined up a US$25-million interim loan with Brookfield to operate its LDI mine. Despite producing 45,600 oz. payable palladium in the first quarter of 2015, it has obtained covenant relief from its senior secured lenders and other lenders until mid-August, because its minimum shareholders’ equity and leverage ratio covenants were affected by the weakness in palladium prices and the Canadian dollar, coupled by lower production volumes in March and higher expenses.