Debentures

9 Months Ended

Nov. 30, 2023

DEBENTURES

On November 17, 2023, the Company issued $150 million aggregate principal amount of 1.75% extendible convertible unsecured debentures (the “Extension Debentures”) in a private placement to certain controlled affiliates of Fairfax Financial Holdings Limited (“Fairfax”). The Company used the net proceeds of the issuance of the Extension Debentures, together with cash on hand, to repay its outstanding $365 million aggregate principal amount of 1.75% unsecured convertible debentures (the “2020 Debentures” and, together with the Extension Debentures, the “Debentures”) at maturity on November 13, 2023. Aside from the maturity date, the terms of the Extension Debentures are substantially identical to those of the 2020 Debentures, except that the Extension Debentures will not be listed on any stock exchange and will not involve an indenture trustee.

The Extension Debentures are due on February 15, 2024 (the “Initial Maturity Date”), with an option for the parties to extend the maturity date to May 15, 2024 (the “Final Maturity Date” and, together with the Initial Maturity Date, each a “Maturity Date”) by mutual agreement. Each $1,000 principal amount of Extension Debentures is convertible at any time prior to the third business day prior to the Maturity Date into 166.67 common shares of the Company, for a total of 25 million common shares at a price of $6.00 per share, subject to adjustments. Covenants associated with the Extension Debentures include limitations on the Company’s total indebtedness. Interest on the Extension Debentures is payable on the Maturity Date in arrears at a rate of 1.75% per annum.

Under specified events of default, the outstanding principal and any accrued interest on the Extension Debentures become immediately due and payable upon request of holders holding not less than 25% of the principal amount of the Extension Debentures then outstanding. During an event of default, the interest rate increases to 5.75% per annum.

The Extension Debentures are subject to a change of control provision whereby the Company would be required to make an offer to repurchase the Extension Debentures at 115% of par value if a person or group (not affiliated with Fairfax) acquires 35% of the Company’s outstanding common shares, acquires all or substantially all of its assets, or if the Company merges with another entity and the Company’s existing shareholders hold less than 50% of the common shares of the surviving entity. Additionally, the Extension Debentures cannot be converted to the extent that, after giving effect to the conversion, the holder would beneficially own or exercise control or direction over more than 19.99% of the Company’s then issued and outstanding shares.

Due to the conversion option and other embedded derivatives within the Extension Debentures, and consistent with the Company’s accounting for the 2020 Debentures, the Company has elected to record the Extension Debentures, including the debt itself and all embedded derivatives, at fair value and present the Extension Debentures as a single hybrid financial instrument. No portion of the fair value of the Extension Debentures has been recorded as equity, nor would be if the embedded derivatives were bifurcated from the host debt contract.

Each period, the fair value of the Debentures is recalculated and resulting gains and losses from the change in fair value of the Debentures associated with non-credit components are recognized in income, while the change in fair value associated with credit components is recognized in accumulated other comprehensive loss (“AOCL”). The fair value of the Extension Debentures has been determined using observable interest rate curves, the market price and volatility of the Company’s listed common shares.

The following table summarizes the change in fair value of the 2020 Debentures for the nine months ended November 30, 2023, which also represents the total changes through earnings of items classified as Level 3 in the fair value hierarchy:



	November 30, 2023
Balance as at February 28, 2023	$	367
Change in fair value of the 2020 Debentures	(2)
Maturity of the 2020 Debentures on November 13, 2023	(365)
Balance as at November 30, 2023	$	—

The following table summarizes the change in fair value of the Extension Debentures from their date of issuance, which also represents the total changes through earnings of items classified as Level 2 in the fair value hierarchy:



	November 30, 2023
Principal received as of November 17, 2023	$	150
Change in fair value of the Extension Debentures	—
Balance as at November 30, 2023	$	150

The difference between the fair value of the Extension Debentures and the unpaid principal balance of $150 million is nil.

The following table shows the impact of the changes in fair value of the Debentures for the three and nine months ended November 30, 2023 and November 30, 2022:


	Three Months Ended				Nine Months Ended
	November 30, 2023		November 30, 2022		November 30, 2023		November 30, 2022







Income associated with the change in fair value from non-credit components recorded in the consolidated statements of operations	$	18	$	56	$	2	$	112
Income associated with the change in fair value from instrument-specific credit components recorded in AOCL	—		1		—		3
Realized losses associated with the change in fair value from credit components recorded in the consolidated statements of operations on maturity of the 2020 Debentures	(6)		—		(6)		—
Realized losses associated with the change in fair value from credit components released from AOCL on maturity of the 2020 Debentures	6		—		6		—
Total decrease in the fair value of the Debentures	$	18	$	57	$	2	$	115

For the three and nine months ended November 30, 2023, the Company recorded interest expense related to the Debentures of $1 million and $5 million, respectively, which has been included in investment income (loss), net on the Company’s consolidated statements of operations (three and nine months ended November 30, 2022 - $2 million and $5 million).

Fairfax, a related party under U.S. GAAP due to its beneficial ownership of common shares in the Company after taking into account potential conversion of the Extension Debentures, owned $330 million principal amount of the 2020 Debentures and now owns $150 million principal amount of the Extension Debentures. As such, the payment of interest on the Extension Debentures to Fairfax represents a related party transaction.