Business Context and Reporting Period
Company: HC2 Holdings, Inc. (Note: Metadata listed "INNOVATE Corp." but filing identifies HC2 Holdings, Inc.)
Filing Type: Form 8-K (Current Report)
Event Date: May 29, 2014
Report Date: June 4, 2014
Summary: The Company completed a private placement of equity, entered into a senior secured credit facility, and acquired a controlling interest in Schuff International, Inc.
Key Financial Metrics and Capital Structure
- Private Placement Proceeds: $36 million aggregate gross proceeds.
- Equity Issuance:
- 30,000 shares of Series A Convertible Participating Preferred Stock at $1,000/share.
- 1,500,000 shares of Common Stock at $4.00/share.
- Debt Financing: $80 million senior secured term loan (matures 18 months post-closing).
- Acquisition Cost: Approximately $79 million for ~60% of Schuff International, Inc. (with an additional $6 million agreement for 5% in June 2014).
- Preferred Stock Dividend: Cumulative quarterly cash dividend at 7.50% annualized; accretion rate of 4% (subject to reduction based on growth targets).
- Debt Interest: Floating rate (Base Rate + 7.50% or LIBOR + 8.50%), increasing by 25 basis points every three months.
Material Changes and Transactions
The filing details three simultaneous material events on May 29, 2014:
- Capital Raise: Execution of a Securities Purchase Agreement with affiliates of Hudson Bay Capital, Benefit Street Partners, and DG Capital Management.
- Debt Facility: Establishment of a new $80 million credit facility secured by substantially all assets of the Loan Parties.
- Acquisition: Completion of the purchase of approximately 60% of Schuff International, Inc. from SAS Venture LLC, funded by the new equity and debt proceeds.
Outlook, Risks, and Governance Changes
- Use of Proceeds: Net proceeds from the private placement and term loan are designated for the Schuff acquisition and general corporate purposes.
- Financial Covenants: The Credit Agreement requires a total collateral coverage ratio of not less than 1.50 to 1.00 and imposes minimum EBITDA requirements on Schuff International, Inc.
- Board Rights: Purchasers gain the right to appoint directors (up to 5% less than their as-converted equity percentage, minimum one director) and board observers, contingent on maintaining a 15% ownership interest.
- Consent Rights: Holders of 75% of Preferred Stock must consent to material actions, including additional debt incurrence, equity issuances ranking senior/pari passu, and voluntary bankruptcy.
- Liquidity Risks: The Preferred Stock includes redemption rights for holders after seven years and forced conversion provisions if the Common Stock VWAP exceeds 150% of the conversion price.
- Default Penalties: Interest rates on the term loan increase by 2.00% per annum upon an event of default.
Investor Verification Checklist
- Verify the pro forma financial impact of the $80 million debt load and the 7.50%+ interest rate on future earnings.
- Confirm the specific EBITDA thresholds and collateral valuation methodologies required to maintain the 1.50:1.00 coverage ratio.
- Review the "Certificate of Designation" (Exhibit 4.1) for specific triggers that reduce the Preferred Stock accretion rate from 4% to 2% or 0%.
- Assess the dilution impact of the 30,000 Preferred Shares (convertible at $4.25) and 1.5 million Common Shares on existing shareholders.
- Monitor the timeline for the filing of pro forma financial statements, which are due within 71 days of the report date.