Ortelius Advisors is moving forward with its plans to block Capital Senior Living’s (NYSE: CSU) private placement agreement with investment firm Conversant Capital.
The New York City-based firm on Tuesday filed a proxy with the Securities and Exchange Commission that provides new insight on how the Capital-Conversant agreement came together, as well as its own attempts to assist Capital with its looming near-term debt issues.
Ortelius and Capital had phone calls on Feb. 5, 2021 and May 7, 2021, to discuss the company’s existing debt and opportunities to extend payment due dates and/or refinance the debt. Capital announced the Conversant agreement on July 22, 2021.
One week later, on July 29, 2021, Ortelius discussed the Conversant agreement with Capital CEO Kim Lody and COO Brandon Ribar, which touched on potential uses of proceeds including paying down a portion of the debt.
Ortelius sent its letter to Capital Senior Living’s board of directors on Aug. 9, objecting to the deal, and offered to meet with the board to discuss alternatives to address the company’s financial struggles, including providing short-term capital.
Ortelius Managing Partner Peter DeSorcy argued that Capital did not have an immediate need for the money to be raised in the Conversant agreement, and that conversations with investment banks indicated that other options were available to address capital requirements.
Ortelius now owns approximately 12.7% of Capital Senior Living common stock, according to the filing.
Among the terms of the agreement with Boston-based Conversant, Capital would provide a Conversant affiliate with an $82.5 million private placement of newly designated Class A convertible preferred stock. The stock will accrue dividends, to be paid in cash or in kind at Capital’s option, at a to-be-determined rate between 11% and 15%, based on the participation in the rights offering.
Capital would also receive a $17.3 million promissory note as interim debt, which the company can access for working capital between the signing and closing of the preferred stock private placement, at a 15% interest rate. Existing shareholders would be offered nearly $70 million in common stock, at a price of $32 per share. Conversant will backstop the offering by buying up to $42.5 million in additional preferred stock, ensuring Capital will receive at least $125 million in proceeds at closing, and up to $152.5 million if the offering is fully subscribed.
Finally, Conversant would provide Capital with a $25 million accordion, funded through the issuance of additional preferred stock shares to Conversant.
DeSorcy argues that the agreement significantly undervalues Capital while turning control of the company to Conversant, which likely would also gain the right to appoint members to the provider’s board.
“We find it alarming that the board would effectively seek to sell control of [Capital] by way of these damaging transactions that demonstrably fail to maximize the value of the company,” the filing read.
Capital CEO Kim Lody acknowledged the company has been operating in a “constrained cash environment” over the past 15 months during a call reviewing its Q2 2021 earnings, and its status as a going concern was the driving factor in the Conversant deal.
The operator has $72 million of maturing mortgage debt with recourse provisions due in December 2021, and another $37 million of non-recourse mortgage debt maturing in April and May of 2022.
An Aug. 16 SEC filing by Capital highlights the company’s economic straits.
As of the end of Q1 2021, Capital defaulted on $31.5 million in partial recourse mortgage debt held by Fifth Third Bank. The bank issued a notice of default letter, indicating the loan is callable, and the two sides have been in discussions to resolve its matter.
Meanwhile, Capital and BBVA agreed to a one-year extension of a $40.5 million bridge loan, set to mature on Dec. 10, 2021. The agreement waived noncompliance with certain financial metrics, and eliminated those benchmarks moving forward.
The terms also require incremental principal payments of $150,000 per month retroactive to June 2021, a principal payment of $1 million in Dec. 2021, and continuing quarterly principal payments of $500,000 beginning in March 2022 unless a certain financial ratio is attained. If Capital meets these criteria, another six months may be added to the extension.
On the recent earnings call, Lody said the Conversant agreement already proved beneficial, and shows that the company can deploy capital responsibly and strategically to maximize shareholder value.
Capital stock fell 48% following its announcement of the Conversant transactions. The stock has rebounded slightly since the earnings call, and currently is valued at $33.18 per share.
Companies featured in this article:
Capital Senior Living, Conversant Capital, Ortelius Advisors
