New Flyer Industries, Inc. (“NFI”) and New Flyer Industries Canada ULC (“NFI ULC”) (together,“New Flyer”) (TSX: NFI.UN) today announced NFI has filed a preliminary prospectus with the securities regulatory authorities in each of the provinces and territories of Canada in connection with a proposed non-cash rights offering (the “Offering”) to convert New Flyer from its current income deposit securities (“IDS”) structure to a traditional common share structure.
Pursuant to the Offering, NFI will issue to holders of its common shares (“Shares”), substantially all of which are represented by IDSs, rights (“Rights”) to subscribe for and purchase additional Shares. Each IDS consists of one Share and C$5.53 principal amount of 14% subordinated notes of NFI ULC (the “Subordinated Notes”). The subscription price to exercise each Right may only be satisfied by delivery of Subordinated Notes. The Rights may not be exercised for cash or any other consideration. NFI has applied to have its Shares listed and posted for trading on the Toronto Stock Exchange (the “TSX”) immediately following the closing of the Offering.
Paul Soubry, New Flyer’s President and Chief Executive Officer commented,“As we previously stated in our June 13, 2011 press release, we believe a conversion to a traditional common share structure, along with an appropriate dividend policy, is in the best interest of New Flyer, its investors and other stakeholders. Management believes a non-cash rights offering is the best alternative to facilitate our conversion and are pleased to bring this transaction to our shareholders. We believe this conversion transaction, together with the leadership position our company enjoys in the heavy-duty transit bus market and the strong order book that we have, will provide New Flyer with a stronger platform and the flexibility we need to pursue strategic opportunities for continued long-term growth and diversification.”
Reasons for the Offering and Common Share Conversion
During 2010 and 2011, the Board of NFI (the “Board”) identified the following challenges with New Flyer’s existing IDS structure that have restricted its operating flexibility and its ability to execute its strategic plan:
• Structure premised on high cash payout – not supportive of shift to growth and diversification strategy;
• Limited ability to reinvest in the business and pursue growth and diversification opportunities;
• High financial leverage and constrained financial flexibility;
• Impact of exchange rate fluctuations on the value of debt obligations and senior credit financial covenant calculations;
• Mismatch between predominantly US$ operating cash flows and CDN$ denominated debt and financing costs;
• Costly and inefficient to maintain current IDS structure; and
• Capital market constraints for IDS issuers – New Flyer is the only remaining Canadian IDS issuer.
New Flyer Chairman of the Board, the Honourable Brian V. Tobin, explained “In addition to identifying the issues referred to above, New Flyer has shifted the focus of its strategic plan to a revenue diversification and growth strategy, in order to further develop New Flyer’s business and take advantage of strategic opportunities to strengthen New Flyer’s competitive market position and mitigate risks in the overall business environment. The Board has determined that New Flyer’s capital structure must be aligned with its strategic plan in order to provide sufficient flexibility to implement its strategic initiatives”.
Benefits for New Flyer
The Offering is intended to facilitate a change to a traditional common share structure from New Flyer’s current IDS structure. The benefits are expected to include:
• Enhanced financial flexibility to pursue strategic growth and revenue diversification opportunities;
• Materially reduces total third party indebtedness;
• Reduces risks associated with CDN$ appreciation against US$;
• Enhances access to capital and broadens investor base;
• Lowers cost of capital; and
• Facilitates comparison of New Flyer to other publicly-traded companies.
Benefits of Participation for IDS Holders
The Board recommends that holders of Shares (including holders of IDSs) exercise the Rights and believes that Rights should be exercised on the basis that:
• Existing holders of Shares (including holders of IDS) who participate fully in the Offering will not experience any ownership or equity value dilution;
• Taxable Canadian resident IDS holders who exercise their Rights can expect higher after-tax dividend income, during the period in which the Special Distribution (defined below) is paid, compared to after-tax combined interest and dividend income to IDS holders who fail to exercise their Rights;
• The exercise of Rights does not require a cash payment; and
• Holders who exercise Rights and are residents of Canada for tax purposes and hold their IDSs as capital property may obtain a full or partial tax-deferred rollover for Canadian income tax purposes in respect of any capital gain.
IDS holders should consult their own tax advisors regarding the income tax considerations applicable to them.
Consequences of Failure to Exercise Rights for IDS Holders
IDS holders who fail to exercise Rights should be aware of the following consequences:
• If a holder does not exercise all of its Rights, then the holder will experience material ownership dilution and an immediate loss of equity value as a result of the exercise of Rights by others. Rights not exercised prior to the expiry time on the expiry date will be void and have no value;
• After the completion of the Offering, the IDSs will be delisted from the TSX if the IDSs fail to meet the TSX's minimum listing requirements or if New Flyer determines that such delisting is advisable. As a result, there may not be a market through which holders of IDSs that did not exercise all or any portion of their Rights can trade their IDSs; and
• Taxable Canadian resident IDS holders who fail to exercise Rights can expect to receive, during the period in which the Special Distribution is paid, lower after-tax combined interest and dividend income compared to after-tax dividend income to IDS holders who exercise their Rights.
The Board intends to establish a common share dividend policy that is consistent with New Flyer’s long-term financial performance and the need to retain cash flows to support the ongoing requirements of the business and to provide the financial flexibility to pursue revenue diversification and growth opportunities. Accordingly, New Flyer currently anticipates establishing, for dividends to be paid after August 2012, an annualized dividend equal to approximately 50% of the previous annual IDS distribution level of C$1.17 per IDS (based on the aggregate number of Shares held by an IDS holder immediately following the exercise of one Right).
Compared to other common share issuers listed on the TSX, the Board believes this level of dividend will provide investors with an attractive level of current income. This new dividend policy reflects a shift from the previous distribution policy, pursuant to which substantially all of New Flyer’s available cash flow was distributed to IDS holders. The Board believes that this new dividend level will enhance the financial flexibility of New Flyer to fund growth capital expenditures, acquisitions and other internal financing needs.
New Flyer intends to decrease IDS distributions from C$1.17 per annum, effective with the July 2011 distribution, payable on or about August 15, 2011 to IDS holders of record on July 29, 2011 (the “Special Distribution”). The amount of the Special Distribution will be announced upon filing of the final short form prospectus and is expected to be consistent with the guidelines announced by New Flyer on June 13, 2011. If the Minimum Condition (defined below) is satisfied, the Board expects to maintain this Special Distribution on a monthly basis until no later than August 2012, the month during which NFI ULC first has the option to redeem the Subordinated Notes, although such distributions are not assured. Exercise of Rights will not change the aggregate amount of pre-tax distributions that a current holder of an IDS can expect to receive (based on the aggregate number of Shares held by such holder immediately following such exercise for the period during which the Special Distribution is paid), relative to an IDS holder that does not exercise Rights.
For holders of Shares following the conversion, all dividends paid are expected to consist entirely of eligible dividend income. For Canadian residents,“eligible dividends” are entitled to the enhanced gross-up and dividend tax credit under Canadian income tax legislation which should result in a more favourable rate of taxation relative to the pre-conversion IDS distribution which consists of a combination of interest and dividend income.
Mechanics of the Offering
Pursuant to the Offering, each holder of Shares at the close of business on the record date will be entitled to receive one Right for each Share held. The record date and the number of Shares that the Rights will entitle holders to purchase will be determined at the time of the filing of the final prospectus. The Rights may not be exercised for cash or any consideration other than the Subordinated Notes and subscriptions for Shares will be irrevocable. The Rights will not be independently listed or posted for trading on the TSX.
The Offering is conditional upon a minimum of 50% of the total number of Rights issued being exercised (the “Minimum Condition”). In the event the Minimum Condition is not satisfied, or the Offering is otherwise not completed on the basis that the Board determines prior to the expiry of the Offering that such a course of action is in the best interest of NFI, the subscription price will be returned to each exercising holder of Rights. NFI reserves the right to waive the Minimum Condition. If the Minimum Condition is not satisfied or waived, NFI intends to suspend the declaration and payment of dividends on the Shares effective with the August 2011 distribution which would be payable on or about September 15, 2011, resulting in an annualized distribution of C$0.774 per IDS (representing only the interest payment on the Subordinated Notes).
New Flyer anticipates closing the Offering and completing the conversion to a common share structure by the end of August 2011. Following completion of the Offering, should New Flyer deem the market for IDSs to not have sufficient liquidity or should the IDSs not meet the TSX listing requirements, the IDSs will be delisted from the TSX. Furthermore, following the completion of the Offering, New Flyer intends to propose a consolidation of the Shares at a meeting of shareholders.
Lender Commitments Received to Extend and Amend Senior Credit Agreement
New Flyer also announced that it has secured commitments from a syndicate of lenders in excess of US$195 million to extend and amend New Flyer’s existing US$180 million senior credit facility maturing in April 2012.
The amended senior credit facility is expected to be for an additional two-year term and comprised of a US$105 million term loan (US$15 million of which is available to finance certain capital projects) and a US$90 million revolver, which includes a letter of credit sub-facility of US$55 million. Certain financial covenants will be loosened in the amended credit facility as compared to the existing facility. The parties are currently in the process of concluding definitive documentation with respect to the amended credit facility. New Flyer has sought certain amendments to the provisions of the existing credit facility pending entry into the amended credit facility.
New Flyer will hold a conference call on June 28, 2011 at 9:00 am. (EDT) for analysts and investors to discuss the Offering. Paul Soubry, President and Chief Executive Officer and Glenn Asham, Chief Financial Officer, will be available to answer questions during the call.
To participate in the conference call, please dial 888-231-8191 or 647-427-7450. A live audio webcast of the conference call will be available online.
A replay of the call will be available from 12:00 pm. (ET) on June 28th until 11:59 pm. (ET) on July 6th. To access the replay, call 416-849-0833 or 800-642-1687 and then enter pass code number 79542190. The replay will also be available on New Flyer’s website.
New Flyer has engaged BMO Capital Markets to act as financial advisor in respect of the Offering and the conversion and as dealer manager to solicit the exercise of Rights. Enquiries can be addressed to BMO Capital Markets via the New Flyer non-cash offering enquiries line at 1-855-666-4355.
About New Flyer
New Flyer (newflyer.com) is the leading manufacturer of heavy-duty transit buses in Canada and the United States. The Company’s three manufacturing facilities – in Winnipeg, MB; St. Cloud, MN; and Crookston, MN – are all ISO 9001, ISO 14001 and OHSAS 18001 certified. The Company currently operates a parts fabrication facility in Elkhart, IN and three parts distribution centers in Winnipeg, MB; Erlanger, KY; and Fresno, CA. A fourth PDC is expected to open in Ontario in 2011.
With a skilled workforce of over 2,000 employees, New Flyer is a technology leader, offering the broadest product line in the industry, including drive systems powered by clean diesel, LNG, CNG and electric trolley as well as energy-efficient diesel-electric hybrid vehicles. All products are supported with an industry-leading, comprehensive parts and service network. The Company’s income deposit securities are traded on the TSX under the symbol NFI.UN. Further information is available on New Flyer’s website.
Certain statements in this press release are “forward looking statements”, which reflect the expectations of management regarding New Flyer's future growth, results of operations, performance and business prospects and opportunities. The words “believes”,“anticipates”,“plans”,“expects”,“intends”,“projects”,“estimates” and similar expressions are intended to identify forward looking statements. These forward looking statements reflect management's current expectations regarding future events and operating performance and speak only as of the date of this press release. Forward-looking statements involve significant risks and uncertainties, should not be read as guarantees of future performance or results, and will not necessarily be accurate indications of whether or not or the times at or by which such performance or results will be achieved. A number of factors could cause actual results to differ materially from the results discussed in the forward-looking statements. Such differences may be caused by factors which include, but are not limited to, the ability to complete the conversion to a common share structure, competition in the heavy-duty transit bus industry, availability of funding to New Flyer's customers to purchase buses, parts or services at current levels or at all, competition and aggressive and reduced pricing in the industry, material losses and costs may be incurred as a result of product warranty issues, material losses and costs may be incurred as a result of product liability claims, changes in Canadian or United States tax legislation, reliance on a limited number of key executives who New Flyer may not be able to adequately replace in the event that they leave New Flyer, the absence of fixed term customer contracts and the termination of contracts by customers for convenience, the current "Buy-America" legislation and the Ontario government’s Canadian content purchasing policy may change and/or become more onerous, production delays may result in liquidated damages under New Flyer's contracts with its customers, New Flyer’s ability to execute its planned production targets as required for current business and operational needs, New Flyer’s ability to generate cash from the planned reduction in excess work in process, currency fluctuations could adversely affect New Flyer's financial results or competitive position in the industry, New Flyer may not be able to maintain performance bonds or letters of credit required by its existing contracts or obtain performance bonds and letters of credit required for new contracts, third party debt service obligations may have important consequences to New Flyer, the covenants contained in NFI ULC’s senior credit facility and subordinated note indenture could impact the ability of New Flyer to continue to fund distributions and take certain other actions, interest rates could change substantially and materially impact New Flyer's profitability, the dependence on limited sources of supply, the timely supply of materials from suppliers, the possibility of fluctuations in the market prices of the pension plan investments and discount rates used in the actuarial calculations will impact pension expense and funding requirements, New Flyer's profitability and performance can be adversely affected by increases in raw material and component costs, the availability of labour could have an impact on production levels, the ability of New Flyer to successfully execute strategic plans and maintain profitability and risks related to acquisitions. The New Flyer cautions that this list of factors is not exhaustive. These factors and other risks and uncertainties are discussed in New Flyer’s press releases and materials filed with the Canadian securities regulatory authorities (including the preliminary prospectus discussed in this press release) and are available on SEDAR at sedar.com/.
Although the forward looking statements contained in this press release are based upon what management believes to be reasonable assumptions, investors cannot be assured that actual results will be consistent with these forward looking statements, and the differences may be material. These forward looking statements are made as of the date of this press release and New Flyer assume no obligation to update or revise them to reflect new events or circumstances, except as required by applicable securities laws.