Bob’s Perspectives, On The Hercules Lending… On Sunday Of Memorial Day

Bob writes:

…I don’t know how long it will take to sort out the projection documents issue, but to remind, the Hercules note (at current loan levels) requires MATR to pay back $8.3M in 2018, $9.2M in 2019, and $4.5M in 2020. When you add these amounts into the cash they’re going to burn, they’re going to have to raise a boatload of money.

I guess those “projections” are something that can only be viewed in a SCIF (sensitive compartmented information facility).

I always found the Hercules deal interesting. MATR had been doing stock financing for a while, but to go into a formal long-term debt agreement with a company that focuses on distressed companies didn’t seem to be a useful signal to send to the market. At the time, MATR management postured that “debt financing was cheaper than equity financing at that time”. Huh? Money you have to pay back is cheaper than money you don’t have to pay back? I guess they were finding out about the sort of discounts investors would want to buy the common and in their egos rejected this out of hand.

I wondered what Hercules was thinking when they extended this loan with a big up-front tranche with high rates (that I think should have been higher) to a company that hasn’t demonstrated any sort of ability to generate the cash-flow necessary to service AND retire such a loan. Yes, MATR can pay the interest charges, but they’re really doing it with borrowed money, not from positive cash flow. It’s as if they ran up the SVB credit card, then took out a Hercules credit card to pay off the SVB card, spend some more money and just make interest-only payments on the new card.

The way the loan is structured, all/most assets of the company are pledged as security for the loan and a failure to generate the cash to pay interest or to retire the loan at the end of the term, likely puts Hercules in control of the company in a re-organization. This is, of course how these things work. Hercules has priority on the first dollar out, vendors get the next, preferred holders are third and common holders are left to catch the crumbs, if any are left. I’m not sure where management’s golden parachutes fit in all of this, though I’m sure it’s ahead of the common holders. [Author’s comment: Yes — the executives, in either a consensual reorg, outside of the bankruptcy courts — but certainly inside them — would get all their bonus payments, if “earned“, in full. Treated as wage claims.]

Speculating on possible outcomes, what will Hercules do for a management team? Would they bring in a new crew (hopefully!) that could make something of it? Or would they keep the same crew, put some lipstick on the pig (PR, corp name change, product name changes, etc) and then float a new offering recouping their costs and allow Conway and company new life, after giving them an appropriate share of the ownership to properly align their interests with those of the shareholders? I guess that would depend on the sort of relationship that exists between the powers-that-be at Hercules and the MATR management team and board of directors. Who knows?

Back to “projections”. I suppose MATR and Hercules would say these are merely the projections MATR makes as part of their quarterly financial calls and that the Powerpoint deck they use serves as those “projections” supplied to Hercules, but the loan agreement definitely describes something being “provided” by MATR to Hercules. It seems that those documents need to be identified.

[Author’s Note: And I should note that Mr. Conway said on the Q1 2017 call that the company would NOT provide new guidance. So, that suggests there may NOT be a set of official projections, at the moment. It is unclear why Hercules would let this situation persist, for any length of time. Unless the plan has always been to go private (end the ’34 Act registration, in some form along the lines above) — and go “dark” — stop providing data to the investing public… by August of 2017, or so of course.]

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