CALGARY — The Alberta government is back in the business of investing in private enterprise.
An Alberta government crown corporation is taking a 15 per cent stake in Precision Drilling Trust (TSX:PD.UN), through $380-million in financing, paving the way for the oilfield services company to restructure its heavy debt load.
Precision Drilling said Monday it will make a number of issues to Alberta Investment Management Corp. (AIMCo), including $175 million in 10 per cent senior unsecured notes, $105 million in stock and 15 million stock-purchase warrants.
“We’d been effectively beating the bush since Dec. 23. AIMCo has been the only investor to approach Precision with a comprehensive package on the order of magnitude of $300 million and I believe we’ve done the right thing,” said president and CEO Kevin Neveu in a conference call with analysts. “We looked at the size of the deal and the debt components and frankly removing all of this covenant noise, we see our company being investment grade in a couple of years now instead of dealing with high-yield paper for the next eight years,” he said.
The trust, Canada’s largest oil and gas driller, has taken several steps to solidify financing for its Dec. 23 takeover of Houston-based Grey Wolf Inc., which it bought after a hard-fought bidding war before energy prices plunged in the second half of 2008
In February, Precision completed a US$172-million offering of 46 million trust units.
“We closed under the most challenging credit markets in the past few years. The potential risks for Precision not closing the deal were extreme to say the least,” Neveu explained.
“The survival of Precision has never been in question. Our debt levels were significantly higher than we desired and reducing debt was our prime objective for 2009.”
The financing transactions are expected to reduce Precision’s interest rate on unsecured bridge facility loans of $296 million from 17 per cent down to 10 per cent while the blended interest rate should drop to 8.4 per cent from 10.8 per cent and reduce the firms cash interest expense by $70 million a year.
An investment analyst said the deal is terrific for AIMCo but not so good for Precision drilling investors.
“It’s far more dilutive than what their other options would have been if they had waited until today. They’re issuing stock at about a 39 per cent discount to what the closing price was on Friday,” said Mike Mazar from BMO Capital Markets.
Trust units, trading in which had earlier been halted on the Toronto Stock Exchange, fell 63 cents or 13 per cent to $4.29 on resumption.
“When you’re at an absolute trough valuation, why should the management team be in such a hurry to refinance the debt? By doing it then instead of waiting you save your seven per cent on the debt but you cost yourself 15 per cent on the stock price,” he added.
“In the last year it’s about the third mistake in timing this company has made. I thought buying Grey Wolf was a good idea strategically but they timed it wrong. They basically bought at the peak and financed at the bottom and now here they are financing at the bottom again.”
AIMCo, a government crown corporation which operates independent of the Alberta government, invests more than $70 billion on behalf of public sector pension, endowment and special purpose funds.
Even though AIMCo is an independent body, the issue dominated question period at the Alberta legislature on Monday.
Opposition members were seeking assurances that there was no contact between any government representatives or cabinet ministers with either AIMCo or Precision Drilling prior to the deal being signed last Friday.