Why did you let TECH off easy on the TCB2C step-up?

A couple of days ago I wrote about how Cirtek [TECH 1.27, down 3.8%; 288% avgVol] failed to redeem its TCB2C preferred shares in time and was forced to begin paying a ~14.1% dividend rate rather than the original ~6.6%. In the write-up, I said that TECH’s failure to redeem (by itself) ”wasn’t a huge deal”, but I also said that not many companies would allow this to happen and that it’s a signal (not guarantee) of potential trouble. A few readers wrote in privately to say that I let TECH off easy with that characterization, because the inferences that can be drawn from a company willingly accepting a 14.1% dividend rate are all remarkably bad, such as: (1) they lack the money to redeem, (2) they were unable to refinance with banks, and (3) they didn’t plan the situation out well enough to avoid “eating a bad rate”. Another said that the step-up rate is generally thought of as this “imaginary worst-case scenario” that never comes to pass, because any competent company would be able to avoid paying the hilariously expensive “punishment rate” that is there only to serve as an exaggerated incentive to encourage refinancing and redemption.

MB bottom-line: I agree with both takes. Long-time readers will know I don’t mess with TECH because I feel the management team is disingenuous. They shamelessly hype the smallest obscure things and completely ignore talking about the plainly visible fires burning all around the business. This time is no different. The disclosure announcing their failure to redeem was framed as though the “Corporation’s management has decided to adjust the dividend rate of [TCB2C] shares to Step Up Rate” like it’s some kind of benevolent action. Those were the words they used, which is (to me) a wild way to talk about complying with the obligations of your own prospectus. So, why did I take it easy on TECH? The truth is that I was distracted. It takes a lot of effort and context to criticize. I don’t do it lightly. At the time, I had not done the reading and research needed to feel comfortable going hard at TECH. Perhaps there was a disclosure out there where the management team talked about how they’ve knowingly triggered the step-up because there’s some huge opportunity that they’re trying to take advantage of? Maybe they spoke openly about this negative event in a constructive and transparent way that I just missed because I wasn’t paying attention? Well, now that I’ve done the reading, I can say that there are no such disclosures, and the management team had no such discussions. This is really bad. Not as bad as Phoenix [PNX suspended] simply deciding to not pay dividends, but it’s important to say that allowing a pref series to trigger the step-up is a significant event that should prompt a lot more communication from TECH’s management team than we’ve seen to date.

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