The saga continues for Capital Senior Living. Days after CSU announced that it had entered into an amended and restated agreement with Conversant Capital, a vocal opponent to the deal (and 12.7% stockholder of CSU) Ortelius Advisors, L.P. issued a letter to stockholders urging them to vote against the amended transactions at the October 22 special meeting. Ortelius made it clear that they thought the CSU Board’s deals with Conversant have been flawed from Day One. They called it exceedingly costly, highly dilutive, and only stood to benefit a few parties, including management, two large investors (Arbiter and Silk) and Conversant. Let’s get to the details.
First, Ortelius made clear that they did not think Capital Senior Living faced imminent financial ruin, which the Board emphasized if a deal was not made. They pointed to occupancy rates steadily improving throughout the year, and CSU’s August extension of its $40.5 million bridge loan with BBVA USA Bancshares, Inc. until year-end 2022 on similar terms. Ortelius also showed how the August 31 proxy statement omitted this extension, which was announced on August 12. Plus, Ortelius argued that CSU has less than $50 million of debt coming due in the next six months, the majority of its near-term debt was non-recourse, and that its debt maturities are overcollateralized by the value of its real estate.
Ortelius also stated that they believed CSU could raise up to $70 million in Q4:2021 through an equity rights offering that is decoupled from the Conversant deal, and that Ortelius and other investors would be interested in participating as a backstop for the rights offering. On the debt side, Ortelius received a non-binding (key word there) term sheet from an established, credit-focused manager with more than $10 billion in capital for an approximately $46 million bridge loan made to CSU with an interest rate and provisions that are supposedly less burdensome than the Conversant interim financing and could be closed quickly.
And on October 5, Invictus Global Management, which has a relationship with Corbin Capital Partners (a $9 billion investor based in New York) and is a shareholder of CSU, wrote to CEO Kim Lody to propose a $150 million capital infusion that could be used to substantially extend CSU’s debt maturities. Under the proposal, an immediate $25 million cash infusion in the form of a secured bridge loan would be provided to refinance the Conversant bridge loan upon termination of the Conversant transaction. No further diligence nor the need for a shareholder vote would be required, other than customary and acceptable definitive documentation, and interest would be payable in cash or in kind at 10% or 12%, respectively, with a one-year maturity date and a 3% structuring fee. As a side note, Conversant’s break-up fee would be equal to roughly 3% of the total amended deal value.
Next, Invictus would provide a $75 million senior secured term loan with a five-year maturity and floating rate of LIBOR plus 800 basis points for cash payments (LIBOR plus 1,000 bps for payments in kind) upon completion of property appraisals satisfactory to them and confirmation of a loan-to-value ratio no higher than 75%. There would also be a 3% structuring fee. Used to refinance CSU’s existing BBVA and Fifth Third Bank loans, this loan would be secured by a first lien on all unencumbered collateral and a junior lien on all encumbered collateral.
Finally, $75 million of junior lien convertible notes with a six-year maturity, 8% interest rate, and a conversion price of $40.00 per share would be made available at CSU’s option. The notes would be secured by a junior lien on all term loan collateral, and Invictus would backstop the entire issue of convertible notes (but would welcome other shareholders to participate in the backstop to earn a pro rata portion of the backstop fee). Every shareholder also has the right to buy at least its pro rata portion of the convertible notes on a pari passu basis. The full package, Invictus believes, should be able to be in place before January 31.
Back to Ortelius, in addition to offering solutions, they also outlined why the deal was detrimental to common shareholders. Namely, the amended offer from Conversant was further dilutive as it would sell additional shares of CSU to Conversant at lower prices and would give away majority control of the Board. The new agreement would sell CSU stock at $25/share via the PIPE (compared to the original deal’s $40/share Series A Conversion Price) and at $30/share as the backstop commitment (compared to $40/share). There are also backstop premium shares that provide a “break-up fee” equal to 6% of CSU to Conversant, and a “backstop fee” equal to 1% of the company to major shareholder Arbiter, which would be payable even if the amended transactions do not close.Conversant would be awarded 1.03 million shares via new warrants, and finally, control of the Board would go to major shareholder Silk and Conversant, with Silk getting two seats and Conversant getting four seats.
So, the total cash raised from the deal would increase modestly, the number of shares handed over to Conversant would jump significantly. The Series A Preferred Stock, Common Stock and Warrants to be sold to Conversant rose from convertible into between 2,062,500 and 3,750,000 of common stock to convertible into between 2,855,925 and 6,195,806 shares of common stock.
Ortelius pointed out that management would receive a cash retention bonus (despite overseeing CSU’s descent into this situation) and stock options that are immune from the deal’s equity dilution as a result of a deal. And they pointed out that the convertible preferred stock that would go to Conversant comes with an above-market dividend rate of 11% that would further dilute common stockholders’ equity interest.
Finally, Ortelius railed against the Board for not negotiating a go-shop period to entertain better financial alternatives while also not disclosing any break-up fees (132,175 shares representing 6% of the company to Conversant) in the original agreement.
Silk, Arbiter and CEO Kim Lody own a combined 32% of CSU’s outstanding shares, while Ortelius owns 12.7%. Ortelius has been a vocal critic of the Conversant deal since the beginning, and they could rally enough support to block it. What is increasingly clear is that there seems to be no good solution for CSU.
