Avid Bioservices Inc (CDMO)

[jbainseky]

Long post, but pay attention….. things are not as bad as they appear. So what happened?

It is all due to Article 2 (specifically 2.05.c)) of the Indenture between AVID and the trustee, U.S. Bank National Association.

AVID sold the 2026 notes back in 2021. The U.S. Bank National Association was the Trustee and tracked who owned the notes. Initial issuance are “Global” notes defined in 2.05.(b).

So long as the Notes are eligible for book-entry settlement with the Depositary, unless otherwise required by law, subject to the fourth paragraph from the end of ??Section 2.05(c) all Notes shall be represented by one or more Notes in global form (each, a “Global Note”) registered in the name of the Depositary or the nominee of the Depositary. The transfer and exchange of beneficial interests in a Global Note that does not involve the issuance of a Physical Note shall be effected through the Depositary (but not the Trustee or the Custodian) in accordance with this Indenture (including the restrictions on transfer set forth herein) and the procedures of the Depositary therefor.

These notes restricted resale/transfer of the notes for one year after issuance (Resale Restriction Termination Date). All notes prior to the end of the restriction carried the Restrictive Legend.

Any Note (or security issued in exchange or substitution therefor) (i) as to which such restrictions on transfer shall have expired in accordance with their terms, (ii) that has been transferred pursuant to a registration statement that has become effective or been declared effective under the Securities Act and that continues to be effective at the time of such transfer or (iii) that has been sold pursuant to the exemption from registration provided by Rule 144 or any similar provision then in force under the Securities Act, may, upon surrender of such Note for exchange to the Note Registrar in accordance with the provisions of this ??Section 2.05, be exchanged for a new Note or Notes, of like tenor and aggregate principal amount, which shall not bear the restrictive legend required by this ??Section 2.05(c) and shall not be assigned a restricted CUSIP number. The Company shall be entitled to instruct the Custodian in writing to so surrender any Global Note as to which any of the conditions set forth in clause (i) through (iii) of the immediately preceding sentence have been satisfied, and, upon such instruction, the Custodian shall so surrender such Global Note for exchange; and any new Global Note so exchanged therefor shall not bear the restrictive legend specified in this ??Section 2.05(c) and shall not be assigned a restricted CUSIP number. The Company shall promptly notify the Trustee upon the occurrence of the Resale Restriction Termination Date and promptly after a registration statement, if any, with respect to the Notes or any Common Stock issued upon exchange of the Notes has been declared effective under the Securities Act.

Note, the Company is entitled to, but that doesn’t mean it HAS to instruct the Custodian to surrender the notes so new ones without the restrictive legend can be issued, But the company does have to notify the Trustee the restricted period is over.

So, on March 17, 2022, either notes were presented to the trustee for sale/transfer/re-issue and the new notes continued to carry the restrictive legend, OR the holder is claiming it was the company’s responsibility to request the global note(s) be surrendered for exchange and new notes without the restrictive legend be issued.

If it was very clear the company was at fault, there is no doubt the previous financials would have to be restated, and since the company is still investigating, and explicitly said they had received no notifications of the issue prior to the acceleration notice, I think it is questionable whether AVID owes the additional interest. My guess is the note holder invested with the expectation there would be a buy-out, or the PPS increased substantially for an exchange etc. In fact, if you go back to the 2026 notes PR regarding the covered calls, it says

“In connection with the pricing of the notes, the company expects to enter into privately negotiated capped call transactions with one or more of the initial purchasers and/or their respective affiliates or other financial institutions (the “option counterparties”).”

So the cost of the covered calls went back to the note purchaser immediately as profit! The calls capped the company's exposure, but at the same time made it worse for the bond holder if the PPS went higher than the call value as they would have to cover the calls. As I’ve said before, no one invests in 1.25% notes without knowing they are going to make money some other way on the deal. I imagine they expected a buyout by now, and when it didn't happen, asked their lawyers "how can we get out of this 1.25% deal. Waaalaaa! Then they start shorting CDMO and drop the restrictive legend bomb, issue the acceleration and cover the shorts.

Again, WORST CASE is CDMO owes an additional $1.5M in interest, and the new notes will cost them higher interest for the next 5 years. I wouldn’t at all be surprised if it is the same entity buying the 2029 notes that owned the 2026 notes. AND it sure would be good to know who the initial buyer was of the 2026 notes and if they were sold etc. That would tell who triggered this event.

FFTT
JBAIN