The NexGen Energy [XG 2.43, up 3.0%; 0% avgVol] [link] board of directors approved a plan to convert 100 million unissued common shares to 100 million unissued preferred shares. The preferred shares will be redeemable, on-voting, convertible, non-participating, cumulative, and have no preemptive rights. The board left the issue price, dividend rate, and other terms for it to decide on when it actually attempts to sell the shares. XG said that the move is intended to “meet its funding needs for its pipeline of projects and other capital requirements without unduly impacting its debt/equity structure and adversely diminishing the existing stockholders’ equity structure and voting rights.”
MB bottom-line: Preferred shares are kind of like a “best of both worlds” thing between selling debt and selling shares. They don’t show up on the balance sheet as a liability, so they don’t harm any debt-to-equity ratios that lenders look at when assessing a company’s borrowing capacity. They also don’t count as a typical common share, so their issuance doesn’t dilute existing shareholders. The quarterly payments made on preferred shares are actually dividends, and those are at the discretion of the board. Preferred shares give the board a greater degree of control, since they can (if they want to) simply elect to suspend payments to the preferred shares if another priority comes up. Don’t get me wrong, non-payment of preferred shares is an atrocious situation that sends all kinds of terrible messages about the financial health of the company, so prefs aren’t like some free money hack. I think of them as the corporate analog to a personal friends and family loan. It operates like debt. It feels like debt. But if you miss a payment, you just disappoint your parents and invite questions about your life decisions like why you thought it was a good idea to get a degree in Political Science.
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