What’s this about extending the deadline on BlackBerry convertibles?

By Chris Umiastowski on 13 Dec 2013 11:33 am EST
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Yesterday BlackBerry put out a little press release about its convertible debenture offering. We posted a quick blurb about it, however in reading through the comments, I can tell many of you want a simple explanation of what’s going on.

No prob --  that’s why I’m here.  Financial stuff can get a bit boring sometimes, and the people who write these releases sound like lawyers most of the time. They often have no clue how to just write in normal people speak.

Here’s the deal.  Yesterday’s press release title says, “BlackBerry Extends Purchase Option Deadline for Additional Convertible Debentures”.  Breaking this down, you need to understand only two things.  First I’ll remind you what the convertible debenture deal was all about.  Second, I’ll explain (in simple terms) what part of the offer is being extended.

Remember when Fairfax put together the offer to take BlackBerry Private?  They ended up pulling the plug on that offer.  Instead, they arranged a $1 billion financing for the company. 

Fairfax and other investors bought $1 billion worth of convertible debt. This means they wrote a check to BlackBerry and they get paid 6% interest on the loan. Fairfax and crew can either be repaid in cash or they can choose to be repaid in stock. If the stock climbs above $10 per share they are better off taking payment in stock. That’s what we are all hoping for.

So far nothing here is new.  If you’ve followed the details around this financing, you remember all this.  

But most money-getting transactions are structured to include something called an over-allotment option.  We see this with IPOs all the time. Brokers who handle public offerings of stock are usually allowed to sell 15% more shares than the base plan calls for. We saw this with Twitter’s IPO recently.  

In BlackBerry’s case, when they agreed to a $1 billion convertible financing they granted Fairfax an option to purchase up to another $250 million of convertible debt up until 30 days past the closing date of the initial transaction.  Since the deal closed on November 13th the over-allotment option would have expired yesterday.

So BlackBerry is extending the deadline for another month. Obviously Fairfax has not exercised its right to buy (or find buyers for) the additional $250 million in convertible debt. Since we’ll be seeing fresh financials in the next week, this will give convertible debt investors more recent data on which to make a decision.  

The SEC filing makes it clear that Fairfax is in control of this option, and they can use it to buy more convertibles for themselves, or allow new investors into the picture.

My take on this is simple. Over a decade of experience in the investment banking industry has pounded one simple concept into my head.  If you are offered money always say yes.  There are obvious exceptions for companies who have far more cash than they could ever spend.  But I’ve seen too many financings (that seemed unnecessary at the time) save a company from death later on once things turned sour.

If BlackBerry has a chance to grab another $250 million they should absolutely do it.  No question.

Reader comments

What’s this about extending the deadline on BlackBerry convertibles?

89 Comments

That's what I thought it meant - but now I'm sure.
Thanks, Chris!!

#IchooseBlackBerry10

Posted via CB10

greek version.......offer 1 billion more in bonds per month for 12 months,

take 1 billion of each month and "spend it" heheheh..

18 months later .....we need bailout or you lose all your lending....lenders who lent blindly and made killer bonuses now "cry" and use the new catch phrase of " contagion" enter the IMF...

yia sou

So to be clear, Fairfax get first dibs on the $250 mill? And if they pass on it, only then can it be sold to other investors?

Thank you for clearing this up. I would like to know your view on if this is negative or positive for Blackberry..

Play Starcraft? Join our Channel: C001242DE

It's negative that they want/need more money from outside sources.

It's positive for BlackBerry if they can get Fairfax to "risk" another 250M on them..... If Fairfax says no, that isn't a good indicator. The risk to them is pretty low as they would be the first to get paid on creditors.

Don't think anyone will rush on board after a bad earnings.

But Wall Street already EXPECTS the ER to be bad, so that has been accounted for

How do we get a piece of that 6%? If Fairfax decides it will offer that debenture to the public, will they make an announcement? Could you elaborate on that Chris? Thanks

Posted via CB10

Not likely, Blackberry is trying to get out of public hands to control public influence on validation of the company

Once again The Umi has spoken.....

BlackBerry needs to use this extra money to reduce the extra OS7 devices in circulation by doing a trade in programme on the Q5 or Z10.

Maybe create an ultra cheap device the Z5 with the reclaimed parts. A touch screen device the size of A Q5.

That's enough, no sliders. The rest on a revamped brand. Change the slogan.

This is mine . . BlackBerry...Get it done!!!!

Posted via CB10

The stock was roughly 8 convertible at 10 when the deal was priced so why would anyone buy more unless BlackBerry was trading closer to 8?

Posted via CB10

Thanks Chris.
One small point for possible expansion of what you have written.
Not that I had any trouble with the original but you forgot to mention the why? Isn't the why because these investors have no new information to go on (aside from the current stock price)? I.e. by extending the deadline past 20th of December, it gives them and all shareholders a clearer picture of exactly what they will be plunking their 250 million on? I think this was alluded to in yesterday's release as well. And yes, from BBRY's perspective no question. Why not take more cash?

Did you miss this part? " Since we’ll be seeing fresh financials in the next week, this will give convertible debt investors more recent data on which to make a decision. "

Thanks for the breakdown for us layman Chris, but you didn't weight in on if this is a good sign or a bad sign.

Is it good because BlackBerry knows their upcoming ER will be good and so they extended the deadline so that FF will indeed buy more debt?

Or bad because FF didn't buy the first time and this is just a move of desperation?

PS. Also I think your Nov 13 date should be Dec 13

Fired from my Z10

I meant is this a good omen or bad sign? I guess I was looking for a prediction for the ER. Why would BBRY extend the deadline for? What are the reasons for this?

good or bad for whom? every point of view can have different points of view. Faifax, the other investors, shareholders, employees , all have differnt interests , some coincide. Chen and Watsa seem to indicate a direction where all will benefit and that is possible but it doesn;t need to be. There are a lot of short sellers still who do not share the same interst as Fairfax and a little shareholder like me.

I was wondering this myself. I feel like they potentially made the extension knowing there would be positive (or at least not as negative as is expected) news, so the convertible debt would be snapped up right away.

Maybe a well received earnings report plus the news that an investor is going in on the extended deal here will give the SP a nice year end pop!

Posted while peeking and flowing on my incredible BBQ10!

I see this as mildly positive... Fairfax hasn't been able to line up buyers for the $250M so far, and likely the reason is that they are not allowed to see this quarter's results until Dec. 20th. If it is going to be another bloodbath like last quarter with no near term signs of hope which would only scare off investors, then unlikely BBRY would take the effort to extend this deal beyond the quarter - only to be publicly embarrassed when there are no takers in another couple weeks.

Hopefully this means the financials don't hold any more big surprises and show signs of stabilizing, making this a more attractive investment with turnaround potential, maybe with an announcement or two which points to a new revenue stream on the horizon.

Watsa is on the board again and in fact leads the board. He can know whatever he wants to know. He also should not be able to benefit from insider info. .... Is he saying don't say no until you see the ER? Looks that way but the current debenture holders will have to wait.

Canso Financial probably one of the best bond managers holding over $300M made money with Nortel going under and Canso holding the Bonds ! So this is going to start looking interesting after the December earnings report !! Chris Question : will BlackBerry after the financing, tax rebate etc... have $4.250B in cash ?

Pure speculation but assuming what you said about the extension is a means for fairfax/someone else to have better or more recent data on which to base their assumptions on, then blackberry may have some news come next week they are banking on that might entice someone to use that $250 million option via fairfax. Then again this might just be blackberry exercising diligence in hopes that the actual financials aren't quite as grim as expected and someone gives them more money with that realization.

Either way should be interesting come next week. Being a blackberry fan I'm hoping for the former rather than the latter situation.

Posted via CB10

Speculation too , Could it be that Fairfax and co-investor of the 1B debenture (who just a few weeks ago were in the books) had the 250M lined up,but decide to use it to buy shares on the open market (we saw vol and SP pickup), after seeing the Sp drop in the 5.50-6$ hoping or expecting a not so grim ER, sell those share after ER and exercise the option by the 16th ?

Umi - 3 "Things"

Is there any "reading between the lines" that BlackBerry would not "extend this offer to Fairfax if the earnings were going to be horrible" ???

Should BlackBerry be "pre warning by today" if the numbers, next week, are horrible???

Lastly, I saw Kevin on a carton of Egg Nog..... when did he "Offficially" disappear?

Thanks for any feedback you can give on these... and "Berry Christmas"... I enjoy your "financial take on BlackBerry"...

Yeah, I cant' see any point in extending the deadline if the numbers are just going to be horrible.  I've been thinking the same.  We shall see. As for a warning, they haven't been giving much specific guidance lately so chance of a warning are slim, i think.  I don't get the Egg Nog reference, sorry.Thanks!

Umi - In the United States - when someone goes "missing" they, sometimes, put their picture on a milk carton so that people will "keep an eye out for them"...

Must be a "USA Thing"... have a good weekend and "thanks" for the response...

I agree that it wouldn't make sense to offer the extension if the financials were going to be horrible. I'm grossing my fingers for some genuine good news once they make the announcement.

About the egg nog, I believe he's referencing how they used to put missing persons on milk cartons. Of course, it's the holiday season now, and rather than drinking milk out of cartons, he's sippin' on egg nog like a boss. The mention of Kevin in the whole ordeal is perhaps a sideways way of saying he hasn't been posting very much. Ergo he's "missing". Ergo his face is on the back of the carton. And I've used the word ergo entirely too much here. I'm going home now.

Posted while peeking and flowing on my incredible BBQ10!

There is a warning coming and it's going to be on Monday or Tuesday,DAH!! and as far as the extension goes they are giving Kevin time to sell some T Shirts and stuff.HA HA!!!

I am wondering about this also, as far as if they would extend this if earnings were going to be bad.

But then I think, no matter how bad they were, they wouldn't turn down an investment, right?

But, why would they bother on all this unless there were investors who weren't sure back in November and something has happened to increase confidence. But, I don't know if I am reading between the lines or imagining between the lines.

Hey Chris, you are wrong devaluing lawyers' writings. They write words that are meant to be exact and readable by machines. You write words only comprehensible by humans. And I would argue machine-to-machine interaction is the future. Or so has new CEO Chen spoken.

"If you are writing for people, then write for people!"

See, a machine would never like to have anything to do with that 'if A, then A' logic, and the exclamation in the end would only put a dangerous high voltage through its central processor.

Just kidding too. :)

As my kid who is a lawyer says '[insert name of particularly high ranking lawyer here] is so highly paid because he can confuse the Supreme Court as to what the law says'.
Lawyers are paid to turn apparently obvious things into a legal gray area, and to turn apparent negatives into apparent positives. Philosophers look for truth; lawyers look for it so they can bury it.

I hope that's just what less than half of them do, or less than half of what they do.
The rest deals with expert communication in machine languages. :)

Hey Chris, would you be able to provide some insight as to how this would dilute current share holders when they convert to common equity?

Chris U ,

some have posted that the convertible debenture holders are secured or preferred debtors. Is this true? Do they get paid first in case of some flavour of bankruptcy? Others seem to think they will be issued a kind of preferred share. I didn't see anything like that in any of the info.

Also .... my feeling is this acceptance of debt actually makes break-up less likley as now there is debt to be paid and potentially many more shares. Different than a company with cash and property , a few going concerns and struggling hardware division that could be closed down in need be. What do you think?

Thanks for the clarity.

Chris what will be the cash position of BlackBerry after this financing including all tax rebates etc... ?

So basically Fairfax keep writing BlackBerry a "blank cheque" and cross their fingers BlackBerry can recover?

Once stocks drop below 6 dollars, it's highly unlikely they'll rise again (not impossible though).

I seriously believe BlackBerry won't exist this time next year. Hope I'm wrong, Chris.

I hope so too, CJH. Don't they have a three-year obligation to the carriers? Or is that just support? I hope the money comes through.

You really think they're going to blow through their billions of dollars they have in cash and financing by this time next year? Whether or not they will be profitable by this time next year is debatable, but I think it's highly unlikely they burn through that much cash in a year considering the measures both Thor and Chen have taken to lower expenses IMO.

Posted while peeking and flowing on my incredible BBQ10!

Why pay 6% interest and also sell shares at $10. BB has real estate and so much cash earning 2%. Is this deal just so that Watsa can make BB declare bankruptcy and he takes the whole company along with other dent holders?
Give away tens of millions to people like Heins who destroyed this company while dilute shareholders and take debt. Excellent Chris, I am glad you support this stupid board's decision.

Well explained.
There were a few threads way back (probably a year or more ) where I kept questioning why BB wouldn't look into some extra financing back then. They still got a good deal now at only 6% as I've seen worse in better situations however maybe if Prem was in control earlier this may have happened. Just review the history of FFH through the heavy hurricane years and you will see how he used this keep the company alive.

So many variables in play. Weaker Canadian dollar. Extension of debenture offer. What I can't understand is why Blackberry doest take their pending billion dollar tax rebate and some cash to buy back a third or even half the share float. This will make the shirts run for cover and make the stock explode north of the space station. Then Fairfax et.al. can get these 20 dollar plus shares back at 50 cents on the dollar.

Posted via CB10

6% is border line Junk bonds,sometimes you win sometimes you loose.If I had the opportunity I would take it.I believe something innovative is around the corner for BB.

Chris, thank you. Clearly explained as always,

I love your lesson - when offered money take it. This presumes that you have an intelligent plan for its use.

Posted via CB10

Thanks Chris. Question. Is there any hope they're doing this because the earnings call will be better then expected? Or is it the opposite?

Posted via CB10

I agree, but as FF have to take up the extension and actually *offer* the money, it's not actually BB's choice to make.

Unless I've misunderstood?

It is negative that fairfax won't exercise it's option now. Bbry is extending to hope they will be enticed soon. But it will take some good news at the earnings release to get more money to come in at these terms.

Posted via CB10

Right JonCBK. It means that they were not willing and bbry is hoping that they will be encouraged by a decent report. This does not mean that the report will be good. Maybe slightly more likely.

I have a bit of another take. Would they do this if the news was going to be as bad as some have predicted or worse. I think it points to stronger results. Thoughts?

Posted via CB10

The strategy for FairFax is

1. BlackBerry releases weak results (as expected) but with positives (sold more Z10)
2. Layoffs push earnings down. Chen offers compelling turnaround plan.
3. FairFax shows support by exercising option to purchase the additional $250 million

Can the strike price on the conversion option be restructured for the overallotment? In other words, if the stock gets hammered after the ER, the $250 overallotment could still be exercised (given it is debt, one would think that $1.25 Billion is a floor for the patents and real estate alone to recover in the event of a 'distressed' situation) but the $10 strike would be lowered to some more reasonable figure (say 25 or 40 percent above last trading price).

Posted via CB10

Finally Chris pulls his finger out! ;-). Nah really, that was grand. Crystal clear now. (I think I did veer towards this explanation in my reply to the original post, though with a pitiful lack if elaboration, so it doesn't count.) Chris de money man.

Posted by the inimitable Z10 handheld system