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Have you ever messed up?
Avid Biosciences, a small pharmaceutical company based in California, screwed it up.
In 2021, Avid issued nearly $144 million of convertible notes with a 1.25 percent coupon due in March 2026.
The notes were issued pursuant to Rule 144A of the Securities and Exchange Commission, which prevents purchasers of securities issued in a private placement from reselling those securities into the public markets. In the bond indentures, Avid said it would remove the restriction by March 17, 2022.
As Matt Sweeney, managing partner of Laughing Water Capital, a New York-based private equity partnership, said in his Q1 LP letter published in April:
There was nothing unusual about this arrangement at all – many securities come to market under 144A restrictions and removing the legend is usually as easy as the company emailing the transfer agent and asking for the 144A legend to be removed.
So far so good. It was enough for Avid to contact the transfer agent for the money twelve months later and get the 144a restriction lifted.
Readers, they didn’t. Sweeney:
However, in the case of Avid, they forgot to send this email and the legend was not removed.
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LexisNexis:
On February 29, 2024, Avid Bioservices Inc. received notice of acceleration from a holder of 1.25% convertible senior notes due 2026. Such occurrence resulted in a cross default under the credit agreement with Bank of America NA. On March 12, 2024, Avid entered into an amendment waiving events of default under the credit agreement. On March 12, 2024, Avid completed a private offering of 7% convertible senior notes due 2029. The reclassification of the 2026 notes to a current liability resulted in negative working capital and raised significant doubt about the company’s ability to continue as a going concern. The fundamental doubt was resolved by the subsequent issuance of the 2029 bonds.
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Sweeney:
The market, the company’s CFO, the company’s banker, the company’s legal counsel and, unfortunately, yours truly, were all blissfully unaware of this oversight until early last month when someone who bought more than 25% of the bond (probably around 80 cents on the dollar) notified the company , that their failure to remove the 144A legend constitutes an event of default under the bond agreement and demand immediate repayment.
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Avid was forced to raise emergency financing by issuing a new 7% convertible of $160 million due in 2029. At least one law firm is now circling the company.
On April 24, Avid released an addendum to its annual report for the year ending April 2024. There were… several changes: current liabilities were adjusted from $71 million to $215 million, and its net income was adjusted from $11 million to a profit 6 million USD. loss.
All told, not a great episode for Avid. So – aside from the benefits of using scheduled email sending or calendar alerts – what are the lessons to be learned here? Sweeney, who called the incident “one of the worst ‘own goals’ I’ve ever seen in the public markets,” says:
There’s a lot to unpack there, and none of it is good, and there’s a lot of blame for how it could have happened. From my perspective, removing the 144A legend is so routine that it’s not something I’ve ever seen on an investor checklist (although I’ve added it to mine). Before this event, I would no more ask a CFO if he scrubbed his company’s bonds than I would ask him if he washes his hands when he goes to the bathroom, or if he looks both ways before crossing the street. These are things that are simply expected to be done, especially when there is a CFO, in-house lawyers, outside lawyers and all the bankers involved who structured and sold the bonds. Not to mention I was told that for the original convert, Avid used documents that were “off the shelf” from Morgan Stanley, and those documents did not allow for cure time. If a cure period had been specified, Avid could have simply scrubbed the bonds when they realized their mistake and paid some kind of penalty rather than having to resort to emergency financing. I assure you that Morgan Stanley has since updated its standard in this regard.
We’ve reached out to Avid for comment and will update if they respond.
“[You] you will be more disappointed by the things you didn’t do than by the things you did,” goes one of the many, many quotes probably wrongly attributed to Mark Twain. Avid would certainly agree.
Further reading
— $92 million Norwegian sovereign wealth fund Excel error