Business Context and Reporting Period
Company: Compass Diversified Holdings (the "Trust") and Compass Group Diversified Holdings LLC (the "Company")
Filing Type: Form 8-K (Current Report)
Date of Report: March 13, 2018
Event: The registrants closed an underwritten public offering of 4,000,000 Series B Fixed-to-Floating Rate Cumulative Preferred Shares. This filing details the entry into material definitive agreements and the modification of rights for security holders associated with this issuance.
Key Financial Metrics and Capital Structure
Capital Raised: The filing does not explicitly state the total gross proceeds, but the issuance consisted of 4,000,000 shares with a liquidation preference of $25.00 per share.
Instrument Details:
- Security: 7.875% Series B Fixed-to-Floating Rate Cumulative Preferred Shares.
- Initial Distribution Rate: 7.875% per annum (fixed) until April 30, 2028.
- Floating Rate: Three-month LIBOR plus 4.985% per annum, effective from April 30, 2028.
- Redemption Price: $25.00 per share (plus accrued distributions) on or after April 30, 2028.
Operating Metrics: The filing text does not provide revenue, profit, cash flow, margins, or general debt levels for the reporting period.
Material Changes
The primary material change is the expansion of the company's capital structure through the issuance of the Series B Preferred Shares. This issuance:
- Establishes a new class of senior securities with cumulative cash distribution rights.
- Imposes restrictions on the payment of distributions on common shares or junior shares until all cumulative distributions on the Series B Preferred Shares are paid (except during the initial distribution period ending July 30, 2018).
- Restricts the repurchase or redemption of common shares under the same conditions.
Outlook, Risks, and Contingencies
Redemption and Repurchase Provisions:
- Optional Redemption: The Company may redeem shares on or after April 30, 2028, at $25.00 per share.
- Tax Redemption Event: If a Tax Redemption Event occurs prior to April 30, 2028, the Company may redeem shares at $25.25 per share.
- Fundamental Change: If a Fundamental Change occurs, the Company must offer to repurchase shares at $25.25 per share. If the Company fails to provide notice to repurchase or redeem within 31 days of such an event, the distribution rate increases by 5.00% per annum.
Risks: The filing highlights the risk of increased distribution costs (5.00% penalty rate) in the event of a Fundamental Change if the Company does not exercise its repurchase option. Additionally, the floating rate mechanism post-2028 introduces interest rate risk.
Investor Verification Checklist
- Verify the total gross proceeds from the sale of 4,000,000 Series B Preferred Shares by reviewing the prospectus supplement dated March 6, 2018.
- Confirm the specific definitions of "Tax Redemption Event" and "Fundamental Change" in the Share Designation and Trust Interest Designation (Exhibits 3.1 and 3.2).
- Review the impact of the new preferred shares on the company's overall leverage and debt covenants.
- Monitor the company's ability to meet cumulative distribution obligations, as failure to do so restricts common share dividends and buybacks.