Business Context and Reporting Period
Company: GrafTech International Ltd.
Filing Type: Form 8-K (Current Report)
Date of Report: August 11, 2015
Event: Closing of an investment agreement with BCP IV GrafTech Holdings LP, an affiliate of Brookfield Asset Management Inc., following the conclusion of a Committee on Foreign Investment in the United States (CFIUS) investigation with no unresolved national security concerns.
Key Financial Metrics and Transaction Details
- Capital Raised: $150,000,000 in cash proceeds from the issuance of Series A and Series B Convertible Preferred Stock.
- Debt Repayment: Proceeds, combined with existing credit facilities and cash on hand, will be used to prepay $200,000,000 in Senior Subordinated Notes due November 30, 2015.
- Transaction Fees: The Company reimbursed Brookfield $500,000 for out-of-pocket fees and expenses.
- Preferred Stock Terms:
- Series A: 136,616 shares issued (19.9% of pre-issuance common stock); immediately convertible at $5.00 per share.
- Series B: 13,384 shares issued; automatically converts to Series A upon stockholder approval.
- Dividends: 7.0% per annum (cumulative); increases to 8.0% if payments are missed.
- Liquidation Preference: $1,000 per share plus accrued dividends.
Material Changes and Governance
Board of Directors Changes:
- Brookfield designated J. Peter Gordon and Denis A. Turcotte for election to the Company's board of directors, effective August 11, 2015.
- Brookfield retains the right to designate two board members while owning at least 75% of the common stock issuable upon conversion of the Original Preferred Shares, and one member while owning between 25% and 75%.
- Board size cannot exceed 11 members without the consent of Preferred Stock holders (while 25% of Original Preferred Shares remain outstanding).
Debt Restructuring:
- The Company amended its $200 million Senior Subordinated Notes to exclude the Brookfield merger and tender offer transactions from the definition of "Change in Control."
- Prepayment of the Notes is scheduled for August 13, 2015.
Outlook, Risks, and Contingencies
- Stockholder Approval: The Company must seek stockholder approval for the conversion of Series B Preferred Stock at its 2015 annual meeting. If not obtained by a specified date, Series B holders have a mandatory redemption right.
- Preemptive Rights: Brookfield holds preemptive rights to maintain its proportionate equity ownership in future equity offerings (while owning 25% or more of Preferred Stock).
- Veto Rights: Holders of a majority of Preferred Stock (while 25% of Original Preferred Shares are outstanding) can veto issuances of senior or parity securities and adverse changes to the certificate of incorporation.
- Liquidity: The transaction significantly reduces near-term debt obligations ($200 million notes) but introduces a new equity instrument with a 7% dividend obligation.
Investor Verification Checklist
- Verify the successful prepayment of the $200 million Senior Subordinated Notes by August 13, 2015.
- Monitor the outcome of the 2015 annual stockholders meeting regarding the approval of Series B Preferred Stock conversion.
- Review the Certificate of Designations for Series A and Series B Preferred Stock (Exhibits 3.1 and 3.2) for full terms on redemption and anti-dilution adjustments.
- Assess the impact of the 7% cumulative dividend requirement on future cash flow and liquidity.
- Confirm the final composition of the Board of Directors and the appointment of new directors to specific committees.