Westar Mining restructures debt

Perhaps the mysterious trading activity on the preferred shares of Westar Mining (TSE) can be explained by the company’s recent announcement of a debt restructuring. The restructuring does not, however, include the preferred shareholders, dashing speculation that a better deal was in the cards.

The restructuring provides for a rescheduling of the principal payments on the long debt as well as a reduction in interest payments. The long-term debt, which was in default and therefore payable on demand, has been rescheduled for repayment of principal over a 9-year period. In addition, interest will be allowed to accrue at a reduced rate tied to the price of coal on approximately $95 million. Servicing costs on a further $220 million will be reduced to 50% of prime plus 1.75% for four years. In return for these concessions, the banks’ loans have been elevated to a secured basis, thereby ranking ahead of all other debt. As a result of the agreement, cash interest costs are expected to decrease by $25 million in 1990. However , before preferred shareholders get visions of dividends dancing in their heads, the company notes that excess cash flow, after making approved capital expenditures, is committed to servicing and reducing indebtedness during the 9-year term of the agreement.

Vice-President and chief financial officer Robert Chase indicated that given the current price of metallurgical coal and the present level of interest rates and the Canadian dollar, there will be no excess funds available for preferred shareholders in the foreseeable future.

Trading has been relatively active in the preferred shares during December and January, the issue rising from the $7.50 level to the $13 level prior to the announcement. Trading volume during the period was typically much higher than 2,000 shares per day during the summer. The Toronto Stock Exchange indicates that it is investigating what it calls the unusually high trading volume prior to the company’s announcement.

Trading in the preferred shares was halted on Jan. 12 prior to the announcement with the last trade at $13. Although the shares dropped $2 following the opening, the issue retraced most of that drop by the close of trading on Jan. 15, finishing at $12.50.

Considering the market’s reaction, it would appear that preferred shareholders are either expecting further corporate developments or a drastic change in exchange rates and the price of coal.