Nasdaq-halted Longfin (NASDAQ:LFIN) is now in an ‘Event of Default’ with respect to its $52.7M convertible notes purchased by Hudson Bay Capital Management on February 13th, 2018. According to the terms of the notes, LongFin’s shares must not be suspended from trading nor can there be a failure of the stock to be trading for five consecutive trading days, otherwise the failure to trade will be considered an ‘Event of Default’. While the terms of the convertible note don’t specify whether those five days are partial or full days, the end of today marks five full days of the trading halt and there’s no more ambiguity. As of the end of trading today, Friday April 13th, LongFin is in an ‘Event of Default’.
The ‘Event of Default’ gives Hudson Bay the right for at least a period of twenty days, to require all or part of the notes to be repaid at the higher of two formulae and to be repaid in cash or in common shares at Hudson’s Bay’s option. The first formula requires part or all of the $52.7M to be paid back at a 30% premium which equates to $68.5M for the entire amount. The second formula results in a likely lower amount but it’s not possible to calculate as there is no public information as to whether or not the conversion price was optionally lowered by LongFin. What can be definitively said is that Hudson Bay could require LongFin to immediately pay the notes in full for at least $68.5M—an amount of cash which LongFin likely doesn’t possess nor will likely be able to obtain. Hudson Bay effectively has the option to make LongFin insolvent.
What Hudson Bay will do, if anything, is certainly up for speculation but their incentive would be to require at least some of the note to be paid back given LongFin’s current legal issues and the increased threat of LongFin’s shares being delisted. Short of another agreement to have LongFin substantially lower the conversion price to well below the market price, a 30% guaranteed premium is likely better than hoping to gain by converting into shares at the conversion price or converting into shares at 88% of the market price and then selling those shares into the market.
If Hudson Bay demands a substantial payment, Hudson Bay’s best interests might not be to require payment in full as that could drive LongFin into bankruptcy. A bankruptcy would take whatever remains of the $52.7M minus 12% original issue discount paid for the note and that money would be first used to pay off other liabilities ranking senior to the note, rather than going exclusively to repay Hudson Bay. If Hudson Bay instead asks for a partial payment comprising most of the cash which LongFin has available, it would keep the share lockup agreements in place and rolls the dice on whether Hudson Bay can recover more money by selling shares to investors in the future.
Effect of the Potential Repayment on Shareholders
There’s no way to tell what decision Hudson Bay will ultimately make regarding the notes but their incentive would likely be to require LongFin to make a substantial partial repayment of the notes. From a ‘follow the value’ standpoint, the halt for five days activated Hudson Bay’s option to require repayment and the value of that option is value which is directly subtracted from other shareholders’ value.
For anyone who has followed LongFin’s stock and looked at their 10-K and previous financial statements, it’s probably already clear that LongFin Corp has little fundamental value so subtracting even more value from shareholders’ stake might not make much of difference. LongFin stock’s value appears to come entirely from its low float, share lock up agreements, short interest and available options which have made the stock ideally suited as a trading vehicle and potentially as a vehicle to game short sellers and option holders. However all stakeholders should be aware of the potential notes repayment as that can directly affect their position.
Disclaimer: The author has a short position in LFIN. The author is not receiving compensation for this article. This article is intended for informational and entertainment use only, and should not be construed as professional investment advice.