Tree Island Wire Income Fund
TSX : TIL.UN

Tree Island Wire Income Fund

August 13, 2009 22:31 ET

Tree Island Announces $19.75 Million Convertible Debenture Financing

VANCOUVER, BRITISH COLUMBIA--(Marketwire - Aug. 13, 2009) -

NOT FOR DISTRIBUTION THROUGH U.S. NEWS WIRE SERVICES OR DISSEMINATION IN
THE U.S.

Tree Island Wire Income Fund ("Tree Island" or the "Fund") (TSX:TIL.UN) announced today that it intends to raise up to $19.75 million by selling 10% second lien convertible debentures of the Fund (the "Debentures").

The proposed financing will consist of:

- a non-brokered private placement (the "Private Placement") of $9,750,000 principal amount of Debentures (the "Private Placement Debentures") and warrants to purchase 4,875,000 Units of the Fund (the "Warrants"); and

- a rights offering (the "Rights Offering") pursuant to which the Fund will distribute rights ("Rights") that will entitle existing holders of Units of the Fund ("Unitholders") to purchase up to $10,000,000 aggregate principal amount of Debentures (the "Rights Debentures").

In connection with the proposed financing, Tree Island has entered into an investment agreement (the "Investment Agreement") with The Futura Corporation ("Futura"), Marret Asset Management Inc. ("Marret") and Arbutus Distributors Ltd. ("Arbutus" and collectively with Futura and Marret, the "Purchasers") under which the Purchasers have collectively agreed to (i) purchase the Private Placement Debentures and the Warrants and (ii) purchase up to $3,250,000 principal amount of Rights Debentures under the Rights Offering (the "Rights Offering Commitment").

The net proceeds of the Private Placement and the Rights Offering will be used by Tree Island for working capital and general corporate purposes.

"Tree Island continues to experience very weak business conditions and this financing will allow the Fund to address current challenges and provide sufficient flexibility to execute its business plan through the current downturn," said Ted Leja, President and CEO.

Private Placement

Pursuant to the Investment Agreement, each of Futura and Marret have agreed to purchase $3,750,000 aggregate principal amount of Private Placement Debentures and 1,875,000 Warrants and Arbutus has agreed to purchase $2,250,000 aggregate principal amount of Private Placement Debentures and 1,125,000 Warrants.

Each Warrant will entitle the holder to purchase, for a period of five years from the closing of the Private Placement, one Unit at a price (the "Exercise Price") equal to the lower of (i) the volume weighted average trading price of the Units on the Toronto Stock Exchange ("TSX") over the five consecutive day trading period beginning on the day that the Rights commence trading on the TSX (or, if the Fund announces that it is terminating or not proceeding with the Rights Offering, on that day) and (ii) $0.75, provided that the Exercise Price shall not be less than $0.35 per Unit. The Exercise Price will be subject to adjustment in certain circumstances, including if the Fund subsequently issues Units in certain non-public offerings at a price that is less than 90% of the then current market price of the Units.

Under an investors' rights agreement to be entered into in connection with the Private Placement (the "Investors' Rights Agreement"), Tree Island will provide certain additional covenants to the Purchasers including the right to each nominate one (or, in the case of Futura, two) of Tree Island's trustees provided that it continues to hold at least 10% of the outstanding Units of the Fund (after giving effect to the conversion of all Debentures held by such Purchaser). The Investors' Rights Agreement will also provide the Purchasers with certain pre-emptive rights to participate in future issuances of Units by the Fund and registration rights with respect to the Units owned by the Purchasers.

The completion of the Investment Agreement is subject to various conditions, including, but not limited to, TSX approval of the Private Placement, the execution and delivery of the Investors' Rights Agreement, approval by the Fund's senior lenders, the Fund's senior lenders agreeing to certain amendments to the terms of the Fund's senior credit agreement and the terms of an intercreditor agreement with respect to the Debentures (the "Intercreditor Agreement"), the Fund entering into standstill agreements with certain of its trade creditors and commencement of the Rights Offering. Assuming satisfaction or waiver of all conditions, the Fund currently expects to complete the Private Placement in August 2009.

Rights Offering

Under the terms of the Rights Offering, Unitholders will receive one Right for each Unit held. For every 220.067 Rights held, the holder of such Rights will be entitled to subscribe for $100 principal amount of Rights Debentures. The Rights Offering will be made pursuant to a short form prospectus. The Rights will be issued to Unitholders of record in each of the Provinces of Canada. Further details of the distribution of Rights will be provided in the preliminary short form prospectus which is expected to be filed shortly.

The Rights are expected to be listed for trading on the TSX and will be exercisable for 21 days following the date of mailing to Unitholders of the final short form prospectus for the Rights Offering. Unitholders who fully exercise their Rights will be entitled to subscribe for additional Rights Debentures, if available, that were not subscribed for by other holders of Rights.

Pursuant to the Investment Agreement, the Purchasers have agreed to purchase up to $3,250,000 principal amount of Rights Debentures under the Rights Offering as follows: (i) Futura will purchase $1,250,000 aggregate principal amount of Rights Debentures; (ii) Marret will purchase an aggregate principal amount of Rights Debentures of $528,613 plus 49.4% of the difference between $3,250,000 and the aggregate principal amount of Rights Debentures purchased under the Rights Offering, up to a maximum of $1,250,000; and (iii) Arbutus will purchase an aggregate principal amount of Rights Debentures of $11,360 plus 50.6% of the difference between $3,250,000 and the aggregate principal amount of Rights Debentures purchased under the Rights Offering, up to a maximum of $750,000. Each of the Purchasers may, but shall not be required to, purchase Rights Debentures in excess of the Rights Offering Commitment to the extent such Rights Debentures are available.

The Debentures

The Private Placement Debentures and the Rights Debentures will be issued under the same trust indenture (the "Indenture"), bear interest at an annual rate of 10% payable quarterly in arrears and mature on or about the day that is five years after the issuance of the Debentures (the "Maturity Date"). The Debentures will be convertible at the option of holders into Units of the Fund at any time prior to the earlier of (i) the Maturity Date and (ii) the last business day immediately preceding the date fixed for redemption of the Debentures, if applicable, at a conversion price of $0.50 per Unit.

If, prior to the Maturity Date, a Change of Control of the Fund occurs (as defined in the Indenture), the Fund will be required to offer to repurchase all of the outstanding Debentures at a price equal to 110% of the outstanding principal amount of the Debentures plus accrued and unpaid interest thereon.

If the Fund is prohibited under its senior credit facilities or the Intercreditor Agreement from paying interest on the Debentures in cash in respect of any interest payment period, the Fund may, subject to regulatory approval, elect to satisfy its obligation to pay interest on the Debentures by issuing and delivering Debentures in lieu of cash (the "Additional Debentures"). The Additional Debentures will be subject to the same terms as the Debentures. In addition, if the Fund is prohibited under its credit facilities or the Intercreditor Agreement from paying interest on the Debentures in cash in respect of any interest payment period, the Fund may elect to defer interest payments on the Debentures for up to eight quarters, whether or not consecutive. Deferred interest will accrue interest at a rate of 10% per annum until paid in full. Assuming all of the Rights are exercised and the Fund elects to pay interest on the Debentures in the form of Additional Debentures in lieu of cash over the entire term of the Debentures, there would be 25,225,349 Units issuable upon conversion of such Additional Debentures representing a 115% increase compared to the 22,006,668 Units currently issued and outstanding.

All payments in respect of the Debentures will rank pari passu and will be subordinate in right of payment to all senior indebtedness of the Fund under its senior credit facilities in accordance with the terms of the Intercreditor Agreement. The Debentures will be fully and unconditionally guaranteed by the Fund's material subsidiaries on a joint and several basis and will be secured by a second priority lien on all of the present and after-acquired personal property of the Fund's material subsidiaries.

The Debentures will not be redeemable by the Fund on or before the third anniversary of their date of issuance. After such date and on or prior to the Maturity Date, the Debentures may be redeemed in whole or in part at the option of the Fund at a price equal to the principal amount plus accrued and unpaid interest, provided that the weighted average trading price for the Units on the TSX for the 30 consecutive trading days ending on a date that is no more than 10 business days prior to the date on which notice of redemption is given is at least 150% of the conversion price.

The closing of the Rights Offering is expected to occur in October 2009 and is subject to customary closing conditions and the receipt of necessary regulatory approvals, including the approval of the TSX. Further details regarding the Private Placement and the Rights Offering may be found in the preliminary short form prospectus of the Fund relating to the Rights Offering which will be filed on SEDAR at www.sedar.com.

The Fund has engaged Genuity Capital Markets to act as the sole dealer manager to organize and participate in the solicitation in Canada of the exercise of the Rights.

Pro Forma Ownership of the Fund

Amar S. Doman, Chairman and a trustee of the Fund, is also President, Chief Executive Officer and a shareholder of Futura and Harry Rosenfeld, a trustee of the Fund, is also Executive Vice President of Futura. Futura is an investment company specializing in the building materials industry based in Vancouver, British Columbia and is the largest Unitholder of the Fund. Currently, Futura owns 4,364,400 Units representing approximately 19.8% of the issued and outstanding Units.

David Gluskin, a trustee of the Fund, is also Vice President of Marret. Marret is an investment management corporation based in Toronto, Ontario. Marret currently owns 1,163,300 Units representing approximately 5.3% of the issued and outstanding Units.

Arbutus currently owns 25,000 Units.

The maximum number of Units issuable to Futura, Marret and Arbutus under the Private Placement and Rights Offering, assuming the conversion in full of all Private Placement Debentures, Rights Offering Debentures and Warrants, is 11,875,000 Units, 11,875,000 Units and 7,125,000 Units, respectively, representing approximately 54.0%, 54.0% and 32.4%, respectively, of the Units currently issued and outstanding.

Following completion of the Private Placement but without giving effect to the purchase of additional Rights Debentures pursuant to the Rights Offering Commitment and assuming the conversion in full of all of the Private Placement Debentures and the exercise of all Warrants:

- Futura will own 13,739,400 Units or approximately 29.6% of the then issued and outstanding Units, representing a 9.8% increase over Futura's current ownership of Units;

- Marret will own 10,538,300 Units or approximately 22.7% of the then issued and outstanding Units, representing a 17.4% increase over Marret's current ownership of Units; and

- Arbutus will own 5,650,000 Units or approximately 12.2% of the then issued and outstanding Units representing a 12.1% increase over Arbutus' current ownership of Units.

Assuming the Purchasers purchase the maximum number of Rights Debentures that they are obligated to purchase under the Rights Offering Commitment, no Debentures are issued pursuant to the Rights Offering other than under the Rights Offering Commitment and the conversion in full of all of the Debentures and the exercise of all Warrants:

- Futura will own 16,239,400 Units or approximately 30.7% of the then issued and outstanding Units representing a 10.9% increase over Futura's current ownership of Units;

- Marret will own 13,038,300 Units or approximately 24.7% of the then issued and outstanding Units representing a 19.4% increase over Marret's current ownership of Units; and

- Arbutus will own 7,150,000 Units or approximately 13.5% of the then issued and outstanding Units representing a 13.4% increase over Arbutus' current ownership of Units.

Assuming that all of the Rights are exercised and that the maximum number of Additional Debentures is issued, and after giving effect to the conversion of the Private Placement Debentures (19,500,000 Units), the Rights Debentures (20,000,000 Units) and Additional Debentures (25,225,349 Units) and the exercise of the Warrants (4,875,000 Units), 91,607,017 Units would be outstanding on a fully diluted basis, representing a 316% increase compared to the currently issued and outstanding Units.

TSX Listing

The Fund will apply to list the Rights, the Units issuable upon conversion of the Debentures and Units issuable upon the exercise of the Warrants on the TSX. Under the applicable rules of the TSX, the Fund would ordinarily be required to obtain Unitholder approval (including on a disinterested basis with respect to item (iii) below) of the Private Placement for a number of reasons, including, but not limited to, the fact that (i) it materially affects the control of the Fund, which under TSX rules is defined to include, among other things, a transaction that results in a new holding of more than 20% of the voting securities by a single securityholder, (ii) it involves the private placement of securities convertible into Units representing more than 25% of the number of Units currently outstanding, (iii) it involves the private placement to an insider of securities convertible into Units representing more than 10% of the number of Units currently outstanding, (iv) the conversion price of the Debentures is below the maximum allowable discount to the current market price of the Units permitted by the TSX, and (v) the Exercise Price of the Warrants is less than the current market price of the Units on the TSX. However, the Fund intends to rely on the financial hardship exemption under section 604(e) of the TSX Company Manual in order to complete the transaction without Unitholder approval.

In addition, as the Private Placement is with "related parties", the Fund is relying upon the financial hardship exemption from the requirement for a formal valuation and minority approval contained in the Multilateral Instrument 61-101 - Protection of Minority Security Holders in Special Transactions.

A committee of trustees of the Fund free from interest in the transaction and unrelated to the Purchasers (the "Independent Committee") has recommended, and the board of trustees of the Fund has unanimously approved (with the Purchasers' nominees to the board of trustees abstaining due to a conflict of interest), entering into the Private Placement and Rights Offering and concluded that (i) the Fund is in serious financial difficulty, (ii) the Private Placement and the Rights Offering are designed to improve the Fund's financial condition and (iii) the terms of the Private Placement and Rights Offering are reasonable for the Fund in the circumstances.

The TSX has advised the Fund that reliance on the financial hardship exemption will automatically result in a TSX review to confirm that the Fund continues to meet TSX listing requirements. The Fund believes that it currently complies with applicable TSX listing requirements and expects to continue to comply with such requirements following the completion of the Private Placement and the Rights Offering.

The Fund's business has been materially adversely affected by extremely challenging economic business conditions and the global downturn that commenced in 2008. In January 2009, the Fund announced a significant write-down of inventories that resulted in it being out of compliance with its covenants under its credit facilities. In February 2009, the Fund received written notice of default from its lenders under its credit agreements. On February 27, 2009, the Fund announced that its lenders had waived its non-compliance and had entered into one-year amended and restated credit facilities that significantly reduced credit availability. On May 29, 2009, the Fund announced that it was again out of compliance with the covenants of its credit agreements and on June 8, 2009, the Fund announced that the lenders had provided written notice of default relating to such non-compliance.

The Fund has been endeavouring to work with its lenders in order to address both the covenant non-compliance and the availability of its credit facilities. In doing so, it became apparent that the Fund would need to raise capital from an alternative source of financing in order to obtain amendments to the covenants thereunder necessary to avoid future potential events of default and increase access to working capital. Since the initial announcement of the Fund's inventory write-down and non-compliance in January, the Fund's operations have been working with very limited access to working capital, which has limited the Fund's ability to purchase raw materials and other items required for the operation of its business. This lack of working capital has and is impairing Tree Island's ability to conduct its business and carry out its business plan.

By enabling the Fund to fulfill the principal conditions of its credit facilities and enhance working capital, the Private Placement and the Rights Offering will significantly improve Tree Island's financial position and ability to execute its business plan.

Amar S. Doman, Chairman of the Board of Tree Island, said "I am pleased to announce this financing. This is a very important step in our overall plan to rebuild Tree Island. The availability of additional working capital will provide Tree Island with greater flexibility and position it to take advantage of improvements in markets as they occur."

Fund Profile

The Fund was launched on November 12, 2002, with the completion of an Initial Public Offering. There are 22,006,668 units of the Fund outstanding, representing a 100% ownership interest in Tree Island Industries Ltd. (the "Company"). The Fund's performance depends entirely on the performance of the Company.

Tree Island Profile

Headquartered in Richmond, British Columbia, Tree Island Industries Ltd. produces wire products for a diverse range of construction, agricultural, manufacturing and industrial applications. Its products include bright wire, stainless steel wire and galvanized wire; a broad array of fasteners, including packaged, collated and bulk nails; stucco reinforcing products, engineered structural mesh, fencing and other fabricated wire products. The Company markets these products under the Tree Island, TI Imports and HK Universe brand names. Tree Island also owns and operates a Hong Kong-based trading company that provides internationally sourced products to the Company and its customers worldwide.

Forward-Looking Statements

Certain statements contained in this press release constitute "forward looking statements". These statements relate to future events or future performance and include, but are not limited to, statements regarding: (i) business and economic conditions, (ii) the Fund's business prospects and opportunities, (iii) the process to be followed and timing to complete the proposed financing including the Fund's intention to rely on the financial hardship exemption from certain TSX requirements and applicable securities law, (iv) the ability of the Fund to renegotiate its credit facilities, (v) the expected actions of third parties named in this press release, and (vi) the outcome of the proposed financing and related transactions and agreements including the expected use of proceeds. The words "may", "would", "could", "will", "intend", "plan", "anticipate", "believe", "estimate", "expect", and similar expressions are often used to identify forward looking statements.

By their very nature, forward looking statements involve inherent risks and uncertainties, both general and specific. In evaluating these statements, readers should specifically consider risks which may cause actual results to differ materially from any forward looking statement. These risks include, but are not limited to, risks relating to: (i) that the proposed financing may not be successful or improve the Fund's financial condition, (ii) that the amendments to the Fund's credit facilities will not become effective, (iii) that the Private Placement and/or the Rights Offering may not be completed, (iv) the securities offered under the Private Placement and the Rights Offering, and (v) the participation of insiders in the proposed financing and dilution of existing Unitholders.

The forward looking statements contained herein are based upon certain assumptions considered reasonable at the time they were prepared. Such assumptions include, but are not limited to, assumptions regarding: (i) general economic conditions, (ii) the expected actions of third parties, (iii) the Fund's future business prospects and opportunities, (iv) the outcome of the proposed financing and related transactions and agreements including the expected use of proceeds, and (v) that the Fund will be able to renegotiate its credit facilities. Should one or more of the risks or uncertainties identified herein materialize, or should the assumptions underlying the forward looking statements prove to be incorrect, then actual results may vary materially from those described herein. Readers are cautioned not to place undue reliance on forward looking statements. Except as required by applicable securities laws, the Fund does not assume any obligation to update the forward looking statements contained herein.

This press release is not an offer to sell securities in the United States. The Debentures and Warrants have not been and will not be registered under the United States Securities Act of 1933, as amended, (the "U.S. Securities Act") or any state securities laws, and may not be offered or sold within the United States except in transactions which are exempt from the registration requirements of the U.S. Securities Act.

Contact Information

  • Tree Island Wire Income Fund
    Ted Leja
    President and Chief Executive Officer
    (604) 524-3744
    tleja@treeisland.com
    or
    Tree Island Wire Income Fund
    Amar Doman
    Chairman of the Board
    (604) 608-6600
    www.treeisland.com