The Brick Group Income Fund
TSX : BRK.UN

May 07, 2009 08:21 ET

The Brick Announces Recapitalization Transaction Designed to Enhance Liquidity and Operating Flexibility, and Preliminary Financial Results for the First Quarter of 2009

EDMONTON, ALBERTA--(Marketwire - May 7, 2009) -

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The Brick Group Income Fund (the "Brick" or the "Fund") (TSX:BRK.UN) announced today its preliminary financial results for the first quarter of 2009 and a recapitalization transaction designed to enhance the Brick’s liquidity and operating flexibility.  The transaction includes:

  • a $110 million fully committed financing (the “Offering”) comprised of the sale of debt units (the “Debt Units”), each Debt Unit consisting of $1,000 principal amount of 12% senior secured debentures (the “Debentures”) and 1,000 Class A Unit purchase warrants (the “Warrants”);
  • a new asset-based credit facility (the “Asset-Based Credit Facility”) with available borrowings initially expected at $65 million; and
  • the repayment of all of the Brick’s outstanding senior indebtedness of approximately $140 million.

“Management and the board of trustees of the Brick believe that the recapitalization transaction provides the necessary financial flexibility and capital resources to manage the business in the current economic environment” said Kim Yost, President and CEO. “As expected, the continued deterioration of consumer confidence negatively affected our first quarter results.  However, we have taken action to provide the financial foundation to help weather the current economic storm.  Of key importance to us in entering into the recapitalization transaction was the repayment of our existing senior debt and the elimination of the financial covenants that currently exist.  As part of the recapitalization transaction we will replace our existing senior debt with the issuance of Debt Units and the Asset-Based Credit Facility, each of which contain no financial covenants.  The Asset-Based Credit Facility is well suited to our business and provides us with much needed flexibility in this difficult economic environment.”

“We thoroughly explored a number of financing options during the past few months,” said Nick Bobrow, Chief Financial Officer. “We believe this transaction effectively balances the long-term interests of our investors and the Fund’s capital needs during the current economic downturn.  In particular, the proposed recapitalization provides the Brick with an additional $24 million of immediate liquidity after repaying all of our existing senior debt.  As a result, the completion of the recapitalization transaction should satisfy the Brick’s liquidity requirements.”

The Offering will comprise a public offering of up to $25 million in each of the provinces of Canada pursuant to a short form prospectus (the “Public Offering”), and an $85 million private placement to accredited investors under an exemption from the prospectus requirements of applicable securities laws (the “Private Placement”).  The Fund has filed and received a receipt for a preliminary short form prospectus in connection with the Public Offering in each of the provinces of Canada.  The Public Offering is being led by RBC Capital Markets, together with a syndicate of agents that includes CIBC World Markets Inc. and GMP Securities L.P.

The Fund has received commitments from Fairfax Financial Holdings Limited (“Fairfax”) and William Comrie (“Comrie”), the Fund’s two largest existing unitholders, to invest $40 million and $20 million under the Private Placement, respectively, and from two other institutional investors to acquire an additional $25 million of the Private Placement. Fairfax has also agreed to provide a stand-by commitment to purchase all of the securities offered under the Public Offering that are not acquired by public investors for a fee of $500,000, payable upon the earlier of the closing of the recapitalization transaction (“Closing”) and June 3, 2009.  The commitments of Fairfax and Comrie are subject to certain conditions, including the completion of the recapitalization transaction.  RBC Capital Markets will act as the exclusive placement agent to the Fund in connection with $15 million of the Private Placement.  No agent or underwriter has acted on the remainder of the Private Placement, including the sales to Fairfax and Comrie. 

As of the date hereof, Fairfax and Comrie own 8,380,200 and 21,561,983 class A trust units (“Class A Units”), respectively, representing approximately 15% and 40% of the outstanding Class A Units, respectively, on a fully diluted basis. Following Closing, Fairfax and Comrie will own $40 million and $20 million principal amount of Debentures, respectively, representing approximately 36% and 18% of the outstanding principal amount of Debentures, respectively, and assuming the exercise of all Warrants (but not the exercise of the stand-by commitment of Fairfax), will own 48,380,200 and 41,561,983 Class A Units, respectively, representing approximately 29% and 25% of the outstanding Class A Units, respectively, on a fully diluted basis. Fairfax’s ownership position could be substantially higher in the event of the exercise of all or a portion of its stand-by commitment. Assuming the exercise of the stand-by commitment of Fairfax in full, Fairfax will own $65 million principal amount of Debentures, representing approximately 59% of the outstanding principal amount of Debentures and Fairfax will own, assuming the exercise of all Warrants, 73,380,200 Class A Units, representing approximately 45% of the outstanding Class A Units on a fully diluted basis. Accordingly, assuming the exercise of all Warrants (particularly upon the exercise of the stand-by commitment of Fairfax in full), Fairfax may be in a position to materially impact control of the Brick. Following the Closing, if insiders were to act together, including Fairfax and Comrie, or Fairfax alone, they may be in a position to either pass or block votes of holders of Debentures, Warrants and Class A Units.

The Debentures will mature on May 30, 2014 and will bear interest at a rate of 12% per annum, payable in cash semi-annually in arrears on December 31st and June 30th of each year commencing on December 31, 2009.  The Debentures will not be redeemable by the Fund prior to the maturity date.  However, upon a change of control of the Fund (which is deemed to occur upon a change in ownership of 662/3% of the Fund’s Class A Units), the Fund will be required to make an offer to purchase the Debentures, in whole or in part, at a price equal to 110% of the principal amount of the Debentures plus accrued and unpaid interest. The Debentures will be secured by a first charge on all of the real estate and equipment owned indirectly by the Brick, and a security interest, ranking subordinate to the security for the Asset-Based Credit Facility, which covers all other assets, including inventory and accounts receivable.

Each Warrant will entitle the holder to purchase one Class A Unit, at any time prior to 5:00 p.m. (Eastern time) on May 27, 2014 at a price of $1.00 per Class A Unit, subject to certain anti-dilution adjustments (including, without limitation, in the event of: (i) a rights offering completed at a price that is less than 95% of the market price of the Class A Units at the time of the rights offering; (ii) if the Brick conducts an issuer bid that is not conducted pursuant to an exemption from the issuer bid requirements of applicable securities legislation and the fair market value of the consideration offered for a Class A Unit under such issuer bid exceeds the closing price of a Class A Unit on the next trading day following the last date deposits could have been made pursuant to such issuer bid; or (iii) if the Brick issues Class A Units (or securities convertible into or exchangeable for Class A Units) pursuant to a non-public offering at a price that is less than 95% of the market price of the Class A Units at the time of such offering).

Closing of the Offering is subject to certain conditions, including the receipt of all necessary approvals including regulatory approvals and the approval for listing on the TSX of the Class A Units issuable on exercise of the Warrants.  Although the Fund has agreed to use its commercially reasonable efforts to obtain approval from the TSX to list the Debentures and Warrants, closing of the Offering is not conditional on the listing of the Debentures and Warrants.  There can be no assurance that a listing of the Debentures and Warrants will be obtained.

The Asset-Based Credit Facility provides for maximum borrowings of up to $130 million (of which approximately $65 million is expected by management to be available at Closing to partially fund the repayment of the Brick’s outstanding indebtedness and to provide the Brick with enhanced financial flexibility), will have a term of 36 months and is subject to the satisfaction of certain conditions, including completion of GE Capital’s due diligence, the negotiation, execution and delivery of definitive loan documentation, and the Fund raising at least $60 million under the Offering.  The amount available to be drawn under the Asset-Based Credit Facility will vary from time to time based on the level of the Brick’s inventory and accounts receivable.

It is anticipated that the Closing will occur on or about May 28, 2009.  The closing of each of the components of the recapitalization transaction is conditional on the closing of the others.  RBC Capital Markets is acting as financial advisor to the Fund in connection with the recapitalization transaction.

A committee of trustees of the Fund free from interest in the recapitalization transaction and unrelated to the parties involved in the recapitalization transaction has recommended, and the board of trustees of the Fund has unanimously approved (with one of Comrie’s appointed nominees to the board of trustees abstaining due to a conflict of interest), entering into the recapitalization transaction and concluded that (i) the Fund is in serious financial difficulty; (ii) the recapitalization transaction is designed to improve the Brick’s financial condition; and (iii) the terms of the recapitalization transaction are reasonable for the Brick in the circumstances.

The Fund has applied to the TSX for an exemption from the requirement to seek unitholder approval for the Public Offering and the Private Placement (which would otherwise be required due to (i) the number of Class A Units potentially issuable pursuant to the exercise of the Warrants; (ii) the exercise price of the Warrants is at a discount to the market price of the Class A Units; (iii) insiders of the Brick are acquiring Warrants exercisable for Class A Units representing greater than 10% of the issued and outstanding Class A Units; and (iv) the recapitalization transaction could materially affect  control of the Brick)  pursuant to Section 604(e) of the TSX Company Manual on the basis of the Fund’s financial hardship.  Closing of the recapitalization transaction is conditional on receipt of an exemption from the TSX from the requirement to obtain unitholder approval. The TSX has advised the Brick that reliance on this exemption will automatically result in a TSX de-listing review to confirm that the Brick continues to meet TSX continued listing requirements. Management believes that the de-listing review is a routine procedure when using this exemption and the Fund currently complies with  applicable TSX listing requirements and expects to continue to comply with  such  requirements following completion of the recapitalization transaction. After giving effect to the Public Offering and the Private Placement, 164.2 million Class A Units will be outstanding on a fully diluted basis, representing a 203% increase over the current 54.2 million Class A Units outstanding.

The Brick is also relying on the financial hardship exemption from the requirement for a formal valuation and minority approval contained in Multilateral Instrument 61-101 – Protection of Minority Security Holders in Special Transactions in connection with a related party transaction.

Unfortunately, despite previously announced proactive measures (such as reducing, and then suspending, distributions and revising the financial covenants of the Brick’s senior secured credit facilities and senior secured notes), the continued deterioration of economic conditions and the resulting impact on the Brick’s financial results over the first quarter of 2009 has severely constrained the Brick’s liquidity.  On the basis of these difficulties and the limited prospects for any near-term improvement in economic conditions, the Fund determined that the recapitalization transaction was necessary and advisable to provide confidence to the Fund’s customers and suppliers and allow the Brick to continue operating for the foreseeable future.

PRELIMINARY FINANCIAL RESULTS FOR THE FIRST QUARTER OF 2009

The Brick also announced its preliminary financial results for the first quarter of 2009, which were negatively impacted by the weakening Canadian economy and declining consumer confidence. While the unaudited interim consolidated financial statements for the three months ended March 31, 2009 have not yet been finalized, and therefore the following figures should be considered preliminary and subject to change, the Brick advises that:

  • consolidated sales and operating revenue are expected to be approximately $271 million, representing a decrease of approximately 17% compared to the same quarter of 2008;
  • consolidated EBITDA is expected to be approximately negative $2 million, representing a decrease of approximately $15 million from the $13 million positive EBITDA reported in the same quarter of 2008;
  • consolidated net loss (prior to any impairment charge as described below) is expected to be approximately $9 million compared to net income of $4 million in the same quarter of 2008, representing a decrease of approximately $13 million;
  • sales and operating revenue is expected to increase by approximately 21% in the financial services segment to approximately $17 million, and to decrease by approximately 19% in the retail segment to approximately $254 million; and
  • same store sales growth is expected to be approximately negative 21%, compared to negative 2% in the same quarter of 2008.

In addition, as the Brick’s first quarter sales and EBITDA were significantly below management’s expectations, under Canadian generally accepted accounting principles this shortfall, as well as other factors, triggered an interim review of the Brick’s goodwill and indefinite life intangible assets to determine whether an impairment charge was necessary.  This interim review is currently underway.  The amount of impairment, if any, will be announced when the Brick releases its 2009 first quarter results and unaudited interim consolidated financial statements. If an impairment charge is determined to be necessary, the Brick will be in default of the adjusted Debt/EBITDAR covenant under its senior operating credit facility when its trustees approve the Fund’s financial statements for the three-months ended March 31, 2009 (which is expected to occur on or about May 12, 2009), unless it obtains the consent of all of the lenders in its senior operating credit facility to exclude this charge in the covenant calculation.  If this default occurs, a cross default will be triggered under the Brick’s senior secured notes. The Brick is currently seeking the consent of the lenders to exclude any potential charge in the covenant calculation.  It has received a similar consent in conjunction with its December 31, 2008 year end impairment charge.  The covenant breach does not prohibit the entering into of the recapitalization transaction and, upon Closing, the Brick will no longer be subject to this financial covenant.

Management expects that final unaudited interim consolidated financial statements for the three months ended March 31, 2009 will be released on or about May 12, 2009.

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.

About the Brick

The Brick, together with its subsidiaries, is one of Canada’s largest volume retailers of household furniture, mattresses, appliances and home electronics, operating under five banners: The Brick, United Furniture Warehouse, The Brick Superstore, The Brick Mattress Store, and Urban Brick. In addition, through its corporate sales division, the Brick services the subdivision, condominium, and high-rise builder market.  The Brick’s retail operations are located in British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Québec, Prince Edward Island, Nova Scotia, New Brunswick, and the Yukon Territory.

Forward-Looking Statements

This news release contains “forward-looking statements” within the meaning of applicable Canadian securities laws, including (but not limited to) statements about the Brick’s consolidated sales and operating revenue, consolidated EBITDA, consolidated net loss, sales and operating revenue in the financial services and retail segments, same store sales growth and goodwill and indefinite life intangible asset impairment charges for the first quarter of 2009, the anticipated impact of the recapitalization transaction on the Brick, the financial flexibility and capital resources necessary to manage the business in the current economic environment, and similar statements concerning anticipated future events, results, circumstances, performance or expectations, that reflect management’s current expectations and are based on information currently available to management of the Brick and its subsidiaries. The words “may”, “will”, “should”, “believe”, “expect”, “plan”, “anticipate”, “intend”, “estimate”, “predict”, “potential”, “continue” or the negative of these terms, or other expressions which are predictions of or indicate future events and trends and which do not relate to historical matters, identify forward-looking matters.

Reliance should not be placed on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievements of the Brick to differ materially from anticipated future results, performance or achievement expressed or implied by such forward-looking statements. Factors that could cause actual results to differ materially from those set forth in the forward-looking statements include, but are not limited to, the risk that relationships with suppliers (including the availability and terms of supplier credit) fail to improve or deteriorate further, that costs may be difficult to manage and that availability under the Asset-Based Credit Facility may be less than expected and those risks and uncertainties detailed in the section entitled “Risk Factors” in the Brick’s Management’s Discussion and Analysis, Annual Information Form, preliminary short form prospectus dated May 6, 2009 filed in connection with the Public Offering and in other filings on www.sedar.com.  Additionally, the preliminary financial results for the three-month period ended March 31, 2009, as set forth herein, are preliminary and unaudited and subject to change. The preceding list is not an exhaustive list of possible factors. These and other factors should be considered carefully and readers are cautioned not to place undue reliance on these forward-looking statements. The Brick undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, other than as required by applicable law.

Non-GAAP Financial Measures

EBITDA is not an earnings measure recognized by GAAP and does not have a standardized meaning prescribed by GAAP. Therefore, EBITDA may not be comparable to similar measures presented by other issuers. Investors are cautioned that EBITDA should not be construed as an alternative to net income as determined in accordance with GAAP, as an indicator of performance or of cash flows from operating, investing and financing activities, or as a measure of liquidity and cash flows. References to “EBITDA” are to earnings before interest, income taxes, amortization and non-cash asset impairment charges. Management of the Brick believes that EBITDA is a useful financial measure as it represents a starting point in the determination of cash available for distribution to unitholders.

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