On Christmas Eve after the market closed Aurora quietly dropped their amended bank agreement on SEDAR, despite it being dated December 17, 2020.  It is never a good sign when the late night before long weekend drop happens, and this is no different.

Last Rundown I said:

• To think that they can go from Sept 2020 decline in sales to an amount of sales required to hit their newly minted >$4 million EBITDA covenant with the bank at Dec/20 is fantasy.  Expect another amendment, likely with a significant paydown of bank debt before they declare +EBITDA flag plant 4.0.

Well, I was kind of wrong on the “significant paydown” but the bank reduced their risk a ton and were it not for “Aurora trying to keep up appearances” there would have been at least a $50 million paydown.

Let us recap:

Facility A: a revolving operating line of lesser of $15 million or borrowing base calculation. (I never expect them to use this as they are in a cash balance and are forced to be in a cash balance).

Facility B: Term Loan, fully advanced at $101 million with $6.25 P payments quarterly (Dec 31, 2020) maturing September 30, 2022.

Total Credit Facilities $116 million.

Increased rates by 0.25% to CAD Prime + 3.00% (Present all in 5.45% pa).

They dropped the EBITDA covenant and replaced it with CASH and then added some more CASH!

We will start with 8.03

8.03 Specific Pledge of Cash Collateral

The Borrower shall establish a bank account with the Agent and shall deposit and subject to section 3.06(c) maintain funds in such account (the “Cash Collateral”) in the amount of Fifty Million Dollars ($50,000,000). Except as set out in section 3.06(c), in accordance with section 11.01(a), the release of all or any portion of the Cash Collateral shall require the unanimous consent of the Lenders. The Borrower and Guarantors each acknowledge and agree as follows: (a) it is the mutual intention of the Borrower, the Guarantors and the Lenders that from and after the occurrence of an Event of Default (whether or not an Insolvency Event has occurred) the Cash Collateral is to be used solely for the prompt repayment of the Outstanding Principal Amount under Facility B and is not to be used or available for use by the Borrower for any other purpose, (b) from and after the occurrence of an Event of Default (whether or not an Insolvency Event has occurred) the Borrower shall not (i) use the Cash Collateral for any purpose other than the prompt repayment of the Outstanding Principal Amount under Facility B, or (ii) seek to defeat, delay or hinder the application of such amounts by any party in repayment of the Outstanding Principal Amount under Facility B, and (c) the Lenders are relying upon the foregoing in entering into this Agreement.

Last Q ACB had no restricted cash.  This $50 million reduces the bank exposure to $66 Million.  Why ACB is willing to pay interest on $50 million loan supported by their cash is nonsensical for a company trying to reduce expenses.

Moving on to the MOAR CASH section…   

7.03 Financial Covenants

The Borrower shall maintain at all times Unrestricted Cash in a minimum amount equal to the lesser of:

(i) $75,000,000; and (should be “or”, sloppy)

(ii) Two Hundred and Twenty‐Five Percent (225%) of (X) the Outstanding Principal Amount under Facility B; less (Y) the Cash Collateral.  

Essentially, until Facility B is less than $55 million that limit is $75 million.  And that does not include Restricted Cash of $50 million.

The $75 million is a “covenant” versus “security” but banks enjoy “Set Off Rights” and in this case they spelled them out:

10.04 Combining Accounts, Set‐Off  

Upon the occurrence and during the continuation of an Event of Default, in addition to and not in limitation of any rights now or hereafter granted under Applicable Law, each Lender may at any time and from time to time:  

(a) combine, consolidate or merge any or all of the deposits or other accounts maintained with such Lender by a Secured Company (whether term, notice, demand or otherwise and whether matured or unmatured) and such Company’s obligations to such Lender hereunder; and  

(b) set off, apply or transfer any or all sums standing to the credit of any such deposits or accounts in or towards the satisfaction of such obligations.

Each Lender may exercise any rights pursuant to this section 10.04 without prior notice to the Borrower or such Company, but agrees to provide written notice to the Agent and the Borrower promptly after exercising any such rights.

So, this allows the banks, in Event of Default, to scoop any monies ACB has on deposit (and they are limited to depositing only with the bank group) and then tell ACB they scooped it.

Banks have a minimum $75 million on deposit against the non-cash secured exposure of $66 million in loans. The entire credit facility is cash secured or locked down under a cash covenant.

Maybe you are thinking: Blue, this doesn’t make sense, maybe the banks required the cash and Aurora had to provide it.

3.06 Repayment

(c) At any time after the date of this Agreement and notwithstanding any other section herein, the Borrower may instruct the Agent to apply all or any portion of the Cash Collateral as a Repayment under Facility B and the Cash Collateral shall be reduced by the amount of such Repayment. 

The above makes the Cash Collateral totally ACB decision.

Why wouldn’t ACB just pay off the loans and avoid the interest payment? Good question. 

The only reason I can see is they think they will get back into the banks good graces and be able to drop the cash support.  Do I think that will happen?  When you have moved covenants +4 times the bank has a long memory. So… not likely.

The bank group has worked themselves out of a hole at the cost of shareholder dilution.  AND they get a Risk Adjusted Return on Capital that would make them blush, as the risk is $0.

The preceding is the opinion of the author and is in no way intended to be a recommendation to buy or sell any security or derivative. The author does not have a position in ACB and will not start one in the next five days.