Element Financial Corporation

TSX : EFN


Element Financial Corporation

June 02, 2014 16:49 ET

Element Financial to Raise $1.1 Billion of New Capital in Conjunction With Acquisition of PHH Corporation's North American Fleet Management Business

- Bought deal financing of $750 million subscription receipts, $250 million extendible convertible debentures and $100 million cumulative 5-year rate reset preferred shares

- Amended and restated revolving credit facility for aggregate commitment of $1 billion

- US$1.36 billion bridge financing commitment obtained

TORONTO, ONTARIO--(Marketwired - June 2, 2014) -

NOT FOR DISTRIBUTION TO U.S. NEWSWIRE SERVICES OR FOR DISSEMINATION IN THE UNITED STATES.

This news release does not constitute an offer to sell or a solicitation of an offer to buy any of the securities in the United States. The securities 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 or to U.S. Persons unless registered under the U.S. Securities Act and applicable state securities laws or an exemption from such registration is available.

Element Financial Corporation (TSX:EFN) ("Element" or the "Company"), one of North America's leading equipment finance companies, today announced that it plans to sell, on a "bought deal" basis, $750 million of subscription receipts ("Subscription Receipts"), $250 million of extendible convertible unsecured subordinated debentures ("Debentures") and $100 million cumulative 5-year rate reset preferred shares, Series E of Element ("Series E Preferred Shares"). The net proceeds from the Offerings (as defined below) will be used by Element to fund a portion of the purchase price of the acquisition of PHH Corporation's fleet management services business (the "Acquisition"). For further details on the Acquisition, see Element's press release dated June 2, 2014 entitled "Element Signs Definitive Agreement to Acquire PHH Corporation's North American Fleet Management Business". Element also announced today that it has obtained lender commitments to amend and restate the Company's revolving credit agreement ("Amended and Restated Revolving Credit Agreement"), effectively consolidating its existing commitments under the Company's current senior secured revolving credit facility and non-revolving bridge facility, and providing for an aggregate commitment of $1 billion (and including a further $500 million accordion feature). Element has also obtained a US$1.36 billion bridge financing commitment from Bank of Montreal to finance the Acquisition.

Subscription Receipts

Element has entered into an agreement to sell, on a bought deal basis, 58,825,000 Subscription Receipts at a price of $12.75 per Subscription Receipt for gross proceeds of $750 million (the "Subscription Receipt Offering"). Each Subscription Receipt will entitle the holder thereof to receive, upon the Acquisition closing, without payment of additional consideration or further action, one Element common share ("Common Share") in exchange for each Subscription Receipt.

The Subscription Receipts will be issued pursuant to a subscription receipt agreement (the "Subscription Receipt Agreement"). Pursuant to the Subscription Receipt Agreement, the proceeds of the Subscription Receipt Offering, net of 50% of the underwriters' fee payable in connection therewith, will be held in escrow pending delivery of notice of the closing of the Acquisition. If: (i) the Acquisition closing does not occur prior to 5:00 p.m. (Toronto time) on December 31, 2014; (ii) the Acquisition stock purchase agreement ("Stock Purchase Agreement") is terminated at an earlier time; or (iii) Element advises the subscription receipt agent and the lead underwriter, or announces to the public, that it does not intend to proceed with the Acquisition, the subscription receipt agent and Element will return to holders of Subscription Receipts an amount per Subscription Receipt equal to the offering price plus a pro rata share of the interest earned or deemed to be earned on the escrowed funds, net of any applicable withholding taxes.

The Subscription Receipt Offering is being led by BMO Nesbitt Burns Inc. and includes CIBC World Markets Inc., GMP Securities L.P., Barclays Capital Canada Inc., National Bank Financial Inc., TD Securities Inc., Credit Suisse Securities (Canada) Inc., RBC Dominion Securities Inc., Scotia Capital Inc., Cormark Securities Inc. and Manulife Securities Inc. (collectively, the "Subscription Receipt Underwriters").

Extendible Convertible Debentures

Element has entered into an agreement to sell, on a bought deal basis, $250 million aggregate principal amount of 5.125% Debentures (the "Debenture Offering"). Each Debenture will be convertible into freely tradeable Common Shares at the option of the holder of a Debenture at any time after the Acquisition closing and prior to 5:00 p.m. (Toronto time) on the Final Maturity Date (as defined below), at a conversion price of $17.85 per Common Share, representing a conversion rate of 56.0224 Common Shares per $1,000 principal amount of Debentures, subject to adjustment in accordance with the trust indenture governing the Debentures (the "Indenture"). The Debentures will have an interest rate of 5.125% per annum payable semi-annually in arrears on the last day of June and December in each year commencing December 31, 2014. The Debentures will be unsecured indebtedness of the Company and will be subject to, and governed by, the Indenture.

Pursuant to the Indenture, if: (i) the Acquisition closing does not occur by 5:00 p.m. (Toronto time) on December 31, 2014; (ii) the Stock Purchase Agreement is terminated at an earlier time; or (iii) Element advises the lead underwriter, or announces to the public, that it does not intend to proceed with the Acquisition (the date on which such event occurs being the "Debenture Termination Date"), the Debentures will have an initial maturity date of the Debenture Termination Date, which will be automatically extended to June 30, 2019 (the "Final Maturity Date") upon the Acquisition closing.

The Debenture Offering is being led by BMO Nesbitt Burns Inc. and includes CIBC World Markets Inc., GMP Securities L.P., National Bank Financial Inc., TD Securities Inc., Barclays Capital Canada Inc., Credit Suisse Securities (Canada) Inc., RBC Dominion Securities Inc., Scotia Capital Inc., Cormark Securities Inc. and Manulife Securities Inc. (collectively, the "Debenture Underwriters").

Preferred Shares

Element has entered into an agreement to sell, on a bought deal basis, 4,000,000 Series E Preferred Shares at a price of $25.00 per Series E Preferred Share for gross proceeds of $100 million (the "Preferred Share Offering", and with the Subscription Receipt Offering and the Debenture Offering, the "Offerings"). Holders of the Series E Preferred Shares will be entitled, if, as and when declared by the Board of Directors of Element, to receive a cumulative quarterly fixed dividend for the initial five-year period ending September 30, 2019 of 6.4% per annum. Thereafter, the dividend rate will reset every five years to an annual dividend rate equal to the 5-Year Government of Canada Bond Yield as quoted on Bloomberg on the 30th day prior to the first day of the relevant subsequent five year fixed rate period plus 4.72%.

Holders of the Series E Preferred Shares will have the right to convert their shares into cumulative floating rate preferred shares, Series F of Element ("Series F Preferred Shares"), subject to certain conditions and Element's right to redeem the Series E Preferred Shares, on September 30, 2019 and on September 30 every five years thereafter. Holders of the Series F Preferred Shares will be entitled to receive a quarterly floating rate dividend, if, as and when declared by the Board of Directors of Element, equal to the then current three-month Government of Canada Treasury Bill plus 4.72%. Holders of the Series F Preferred Shares may convert their Series F Preferred Shares into Series E Preferred Shares, subject to certain conditions and Element's right to redeem the Series F Preferred Shares, on September 30, 2024 and on September 30 every five years thereafter. The Series E Preferred Shares will not be rated. If the Acquisition does not proceed, the net proceeds from the Preferred Share Offering will be used by Element for general corporate purposes.

The Preferred Share Offering is being led by BMO Nesbitt Burns Inc. and includes CIBC World Markets Inc., GMP Securities L.P., Barclays Capital Canada Inc., National Bank Financial Inc., TD Securities Inc., Credit Suisse Securities (Canada) Inc., RBC Dominion Securities Inc., Scotia Capital Inc., Cormark Securities Inc. and Manulife Securities Inc. (collectively, the "Preferred Share Underwriters").

Closing of Offerings

Element will file a short form prospectus qualifying the issuance of the Subscription Receipts, the Debentures, the underlying Common Shares to be issued under the terms of the Subscription Receipts and the Debentures, the Series E Preferred Shares and the Series F Preferred Shares. The Offerings are expected to close on or about June 18, 2014 and are subject to certain conditions including, but not limited to, the receipt of all necessary approvals including the approval of the Toronto Stock Exchange. The net proceeds of the Offerings will be used by Element to fund a portion of the purchase price of the Acquisition. Element's senior management team, together with the members of its board of directors, are purchasing more than $10 million worth of Subscription Receipts in the Offerings.

Element has granted (i) the Subscription Receipt Underwriters an option to purchase on the same terms up to an additional 8,823,750 Subscription Receipts, (ii) the Debenture Underwriters an option to purchase on the same terms up to an additional $37,500,000 aggregate principal amount of Debentures, and (iii) the Preferred Share Underwriters an option to purchase on the same terms up to an additional 600,000 Series E Preferred Shares (each option, an "Over-Allotment Option"). The Subscription Receipt Over-Allotment Option and the Debenture Over-Allotment Option are exercisable at any time until the earlier of the date that is 30 days following the date of the closing of the Offerings and the occurrence of a termination event under the underwriting agreement. The Series E Preferred Share Over-Allotment Option is exercisable at any time for a period of 30 days following the date of the closing of the Preferred Share Offering. If each of the Subscription Receipt Over-Allotment Option, the Debenture Over-Allotment Option and the Series E Preferred Share Over-Allotment Option is exercised in full, Element will receive further proceeds from the Offerings of $165 million, for aggregate proceeds from the Offerings of $1.265 billion.

"The acquisition of PHH Corporation's fleet management business adds more than US$4.6 billion in assets and US$1.7 billion in annual origination volumes to our current operations making Element Financial Corporation one of the leading equipment finance companies in North America" said Steven K. Hudson, Element's Chairman and Chief Executive Officer. "More importantly, the transaction achieves all of the strategic and financial objectives that we had established when we set out to expand our domestic fleet management business into the U.S. market. It is expected to deliver EPS accretion of more than 10% in 2015 and 2016 on an adjusted operating and cash EPS basis and it immediately improves our capital efficiency by increasing our balance sheet leverage to approximately four to one on closing," added Mr. Hudson.

Consolidated Debt Facilities

In conjunction with the Acquisition, Element has received lender commitments to amend and restate its revolving credit agreement for an aggregate commitment of $1 billion (and including a further $500 million accordion feature). The amended and restated facility will effectively consolidate Element's current senior secured revolving credit facility having an initial commitment of up to $585 million and Element's non-revolving bridge facility having a commitment of up to US$600 million. The borrowing base under the Amended and Restated Revolving Credit Agreement will reflect an expansion of the borrowing base under the current senior secured revolving credit agreement so as to include Element's railcar assets and related contract balances (the railcar assets constitute the borrowing base under Element's existing bridge facility). The security provided under the current senior secured revolving credit agreement will be confirmed and will constitute the security under the Amended and Restated Revolving Credit Agreement. The new facility provides Element with the ability to release security upon the satisfaction of certain conditions, such as receipt by Element of an investment grade credit rating. The Amended and Restated Revolving Credit Agreement will be entered into by, among others, Element as borrower, the financial institutions identified therein as lenders and Bank of Montreal as agent.

Bridge Credit Commitment

To finance the Acquisition, Element has obtained a commitment letter for a syndicated secured bridge non-revolving credit facility of up to US$1.36 billion pursuant to a non-revolving bridge credit agreement between Element as borrower, the financial institutions identified therein as lenders and Bank of Montreal as agent (the "Bridge Agreement"). The security under the Bridge Agreement will consist of a first-ranking charge over the assets acquired by Element pursuant to the Acquisition and a second-ranking charge over other assets and interests of Element. The completion of the Offerings will result in a reduction in amounts available under the Bridge Agreement to finance the Acquisition.

About Element Financial Corporation

With total assets in excess of $4.2 billion, Element Financial Corporation is one of North America's leading equipment finance companies. Element operates across North America in four verticals of the equipment finance market - Commercial & Vendor Finance, Aviation Finance, Railcar Finance and Fleet Management.

Forward-Looking Statements

This release includes forward-looking statements regarding Element and its business. Such statements are based on the current expectations and views of future events of Element's management. In some cases the forward-looking statements can be identified by words or phrases such as "may", "will", "expect", "plan", "anticipate", "intend", "potential", "estimate", "believe" or the negative of these terms, or other similar expressions intended to identify forward-looking statements. Forward-looking statements in this release include those related to the acquisition by Element of PHH Corporation's North American Fleet Management Services business, the proposed financing of the acquisition (including the public equity and debt offerings and the entry into of the amended and restated credit agreement and the bridge facility commitment), the achievement of strategic and financial objectives in connection with the acquisition, the impact of the acquisition on Element's financial metrics (including accretion to Element shareholders and Element's anticipated level of leverage), the attainment of growth opportunities and the integration of the Fleet Management Services business. The forward-looking events and circumstances discussed in this release may not occur and could differ materially as a result of known and unknown risk factors and uncertainties affecting Element, including risks regarding the equipment finance industry, economic factors and many other factors beyond the control of Element. No forward-looking statement can be guaranteed. Forward-looking statements and information by their nature are based on assumptions and involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statement or information. Accordingly, readers should not place undue reliance on any forward-looking statements or information. Except as required by applicable securities laws, forward-looking statements speak only as of the date on which they are made and Element undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise.

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