MEGA Brands to complete recapitalization under plan of arrangement

By Caroline Salls

Pittsburgh, Jan. 14 - MEGA Brands Inc. has agreed to a recapitalization transaction, according to a company news release.

"Once implemented, MEGA Brands will be repositioned for the future with a solid balance sheet and the financial flexibility to focus on profitable growth globally," president and chief executive officer Marc Bertrand said in the release.

"After a thorough review of numerous alternatives, we are convinced this is the best option for all stakeholders.

"This transaction demonstrates the commitment of our current major shareholders and investors through the injection of over $121 million in new capital."

Under the recapitalization transaction, the company will repay all of its outstanding senior secured debt in cash and with an equity component for a recovery of 70% to holders of $357.2 million of secured debt.

Holders of MEGA Brands' $1.7 million of senior unsecured convertible debentures have agreed to cancel their debentures for secured debentures, common shares and warrants in the amount of $15 million, for a recovery of 21%.

According to the release, the company will issue about 284.7 million new common shares at a price of C$0.50 per share and 234.6 million warrants exercisable into common shares at the same price.

After the recapitalization transaction is completed, roughly 321 million common shares will be issued and 556 million common shares will be outstanding on a fully diluted basis.

MEGA Brands said current shareholders will own 11.4% of the common shares issued at the closing of the recapitalization transaction and 6.6% on a fully diluted basis.

Key terms

Key terms of the recapitalization include:

• Immediate balance sheet improvement through debt reduction of $300 million, to $131 million from $430 million;

• Annual interest expenses to be reduced by over 65% to $13 million going forward from an estimated $43 million in 2009, excluding asset-based credit facility utilization;

• Elimination of all financial covenants;

• Commitment of a $50 million asset-based facility, with an availability block of $5 million, from Wachovia Capital Finance Corp. (Central) and Wachovia Capital Finance Corp. (Canada);

• Improved cash flow and liquidity to fund operations and investment in innovation; and

• Significant injection of new capital through a C$100 million bought deal financing led by GMP Securities and a $121 million private placement to Fairfax Financial Holdings Ltd., some Trimark mutual funds, MEGA Brands chairman Victor Bertrand Sr., chief executive officer Marc Bertrand and chief innovation officer Vic Bertrand.

The company said it plans to implement the recapitalization transaction under a Canada Business Corporations Act plan of arrangement.

The transaction is expected to close by the end of March.

Creditor support

As of Thursday, the recapitalization transaction had received the support of the holders of more than $246.6 million of the company's secured debt who have entered into a lock-up agreement, as well as the holders of 100% of the convertible debentures.

MEGA Brands is a Montreal-based manufacturer of construction toys, games & puzzles, arts & crafts and stationery.

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