Stornoway Portfolio Management rejects Arcan Resources' proposal to expropriate value from its Debentureholders

TORONTO, June 27, 2014 /CNW/ - On June 23, 2014, Arcan Resources Ltd. ("Arcan") issued a press release announcing that it had entered into a "strategic transaction" with Aspenleaf Energy Limited ("Aspenleaf") in which Aspenleaf would acquire 87.5% of Arcan's assets. The remaining 12.5% of Arcan's assets would be owned by a new company labelled "Spinco", that would be co-owned by Aspenleaf and Arcan's current shareholders (the "Aspenleaf Proposal").

Under the Aspenleaf Proposal, the holders of Arcan's Convertible Unsecured Subordinated Debentures (the "Debentures") would receive:

  • a cash payment of $141,281,250, representing approximately 82.5% of the aggregate principal amount of the Debentures plus accrued but unpaid interest as of the closing date; plus

  • 100 warrants per $1,000 principal amount of Debentures, with each warrant entitling the holder to acquire one common share of "Spinco" at an exercise price of $0.43 per share that will expire nine months after the closing date of the proposed Aspenleaf transaction.

The Ravensource Fund and the Stornoway Recovery Fund LP, managed by Stornoway Portfolio Management Inc. ("Stornoway"), have significant investments in the Debentures. As Debentureholders, Stornoway is deeply concerned with the actions of Arcan's management and board in recommending and approving a transaction that proposes that Debentureholders, as creditors of Arcan, take a 17.5% discount on their investment while Arcan allocates approximately $40 million of value (an estimate based on the price that Aspenleaf will pay for the shares of Spinco) to Arcan's lower ranking shareholders. Accordingly, Stornoway has initiated actions to ensure that Ravensource Fund and Stornoway Recovery Fund LP's investment is protected, including the retention of legal counsel and corresponding to Michael Laffin, the Chairman of Arcan's Board of Directors on June 26, 2014 to express its strong objection to the proposed transaction.

The Aspenleaf Proposal itself provides irrefutable proof that the market value of Arcan's assets is more than sufficient to allow Arcan to meet its obligation to its Debentureholders in full with value left over for shareholders. This confirms Stornoway's analysis completed prior to its investment that the value of Arcan's assets is more than adequate to cover its liabilities. 

The capacity to redeem Arcan debentures without a haircut is further affirmed by the various financial advisors retained by the parties on the Aspenleaf Proposal:

  • RBC Capital Markets, financial advisor to Arcan, valued Arcan's assets at $408 million in a research report dated May 12, 2014.

  • Scotiabank, who is acting as financial advisor to Arcan, and has provided the fairness opinion on the Aspenleaf Proposal, valued Arcan's assets at $370.9 million in a research report dated May 12, 2014.

  • TD Securities Inc., financial advisor to Aspenleaf, valued Arcan's assets to be $368.8 million in a research report dated on December 17, 2013.

Despite the overwhelming evidence that the value of Arcan's assets exceeds its liabilities, Arcan's Board of Directors has inexplicably entered into the Aspenleaf Proposal to the material detriment of the its Debentureholders. In its June 23 press release, Arcan noted that the cash payable to its Debentureholders under the Aspenleaf proposal would be a premium over the current trading prices of the Debentures. This is both irrelevant and an insult to its Debentureholders' intelligence. The current trading price of the Debentures cannot possibly serve as a justification to allocate millions of dollars of value to shareholders who, in a properly structured transaction, would receive nothing at all unless all of the Debentures were paid in full.  Stornoway attributes the depressed trading price of Arcan's Debentures to Debentureholders' anxiety about the corporate strategy that Arcan's board and management have pursued.  Arcan's board and management have a responsibility to ensure that Arcan meets its contractual obligations to its creditors; they should not rely on depressed market prices as a smokescreen to justify a scheme to expropriate value from its creditors in favour of its shareholders. 

Stornoway has advised Arcan that if it believes that a sale of Arcan now is in the best interests of all of its stakeholders, Stornoway would be prepared to support such a proposal as long as Arcan's Debentures are fully redeemed at par. Section 5.4 of the trust indenture under which the Debentures were issued describes Arcan's obligation to the Debentureholders, very clearly, as : "…the obligation of the Corporation, which is absolute and unconditional, to pay to the holders of the Debentures, the principal of, premium, if any, and interest on the Debentures, as and when the same shall become due." As noted above, the price inherent in the Aspenleaf transaction provides Arcan with the capacity to do that.

Stornoway will forcefully resist any attempt by Arcan to proceed with Arcan's deeply flawed proposal to induce the Debentureholders to abandon their rights in favour of Arcan's shareholders.

We strongly encourage other Debentureholders who share our concerns regarding this matter to communicate their concerns to the Board.

SOURCE: Stornoway Portfolio Management Inc.

For further information: Stornoway Portfolio Management Inc., Scott Reid, President, (416)250-2845, e-mail:

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