Business Context and Reporting Period
Company: Targa Resources Corp.
Filing Type: Form 8-K (Current Report)
Date of Report: February 18, 2016
Event: Entry into a Material Definitive Agreement for a private placement of Series A Preferred Stock with Stonepeak Target Holdings LP.
Key Financial Metrics and Transaction Details
- Preferred Stock Issuance: 500,000 shares of Series A Preferred Stock.
- Purchase Price: $1,030.00 per share (gross), less a $30.00 per share transaction fee to a Stonepeak affiliate.
- Estimated Gross Proceeds: Approximately $515 million (500,000 shares x $1,030).
- Use of Proceeds: Repayment of indebtedness and general corporate purposes.
- Dividend Rate: 9.5% annualized ($95.00 per share) on a $1,000 liquidation preference.
- Warrants Issued:
- Series A Warrants: 7,020,000 shares of Common Stock at $18.88 exercise price.
- Series B Warrants: 3,385,000 shares of Common Stock at $25.11 exercise price.
- Closing Date: Expected in March 2016.
Material Changes and Structural Terms
This filing represents a significant capital structure change involving the creation of a new senior equity class. Key structural terms include:
- Seniority: Preferred Shares rank senior to Common Stock regarding distributions and liquidation rights.
- Dividend Restrictions: No dividends may be paid on Common Stock or Parity Stock unless all accumulated Preferred dividends are paid, unless paid pro rata.
- Dividend Deferral: The Company may elect to add unpaid distributions to the Liquidation Preference (PIK) for quarters ending on or prior to December 31, 2017, granting additional warrants in exchange.
- Conversion: Convertible after the 12th anniversary at a price of $20.77 per share (subject to adjustments). Company may force conversion if the stock price exceeds 120% of the conversion price.
- Redemption: Company may redeem after the 5th anniversary at 110% of the Liquidation Preference (prior to 6th anniversary) or 105% thereafter.
- Change of Control: Triggers redemption premiums ranging from 125% to 105% of the Liquidation Preference depending on the timing relative to the Closing Date.
Management Commentary, Risks, and Governance
- Board Representation: Stonepeak receives a Board Observer right. This converts to a full Board seat if the Company misses two full quarters of distributions ("Dividend Trigger") or defaults on financial covenants ("Default Trigger").
- Voting Rights: Upon a Dividend or Default Trigger, Holders gain voting rights equivalent to the Common Stock they would receive upon conversion.
- Protective Provisions: Holders have veto rights over the issuance of senior stock, certain indebtedness (above $2.75 billion aggregate), and amendments adversely affecting their rights.
- Stockholder Approval Risk: If the Company cannot obtain stockholder approval for share issuance limits by the 7th anniversary, it must pay Stonepeak $50,000 per day until approval is obtained.
- Liquidity Restrictions: Stonepeak is restricted from transferring shares for 120 days post-closing and is prohibited from short sales or hedging for two years.
Investor Verification Checklist
- Verify the final closing date and actual net proceeds received after transaction fees.
- Confirm the impact of the $515 million gross proceeds on the Company's existing debt load and leverage ratios.
- Monitor the Company's ability to pay the 9.5% quarterly cash distributions to avoid dividend accumulation and potential Board seat conversion for Stonepeak.
- Assess the dilution impact of the 10.4 million total warrants and potential future conversion of Preferred Shares.
- Review the Company's credit agreement to understand the specific financial covenants that could trigger a "Default Trigger" event.