Toronto-based Royal Group Technologies has negotiated a new $312.5 million credit facility despite terminating two top executives during the time it was negotiating with banks. The company's loan agreement with a syndicate of Canadian banks was set to expire at the end of April and the previous management had begun negotiations even as the board and management were advised that the Ontario Securities Commission and the Royal Canadian Mounted Police were investigating the company.
In late November, the company terminated CEO Douglas Dunsmuir and CFO Ron Goegan and dismissed Vic De Zen, chairman of the board, because of a questionable 1998 land deal. A release from Royal Group says a company owned by De Zen and others, including Dunsmuir, purchased 185 acres of land for $20 million and immediately after closing sold the land to Royal Group for $27 million. The fact that the sale to Royal Group was a related-party transaction was not disclosed to the board. The board also was unaware of the profit the seller stood to make and it did not authorize the purchase, according to the release. Goegan did not return a call to his home. Dunsmuir and De Zen could not be reached for comment and company officials could not provide contact information for anyone who might speak on their behalf.
A new interim management team met with the previous six-bank syndicate only days after being installed. "They put us through a bunch of questions. They seemed prepared to deal with it," said Robert Lamoureux, interim cfo, who was drafted in November 2003 as an independent director. "They obviously were because we then continued for the next few weeks to negotiate the deal and they gave us a formal offer back in December and we accepted the offer."
But the new deal does not come without strings. The new syndicate--comprised of The Bank of Nova Scotia, Royal Bank of Canada and Deutsche Bank of Canada--can call the loan if there is not a majority of independent directors on the board. "The former chairman and ceo has 15% of the equity and 80% of the votes and he was one of the people implicated. They wanted to make sure that he wouldn't be able to change the board," Lamoureux explained. A fourth lender may sign to provide an additional $27.5 million but it has an additional condition it wants. Lamoureux declined to name the bank or the condition. Two major Canadian banks dropped out of the syndicate, he added, but he also declined name them.
The new credit is secured, while the previous line was unsecured. "The banks required it to go secured," Lamoureux said. "They will be doing their due diligence during the month of January to put the security in place." In addition to the added security, the spread is increasing by 50 basis points from the old facility. "We understand it," he noted.
The company still faces challenges. Royal Group makes polymer-based building and construction products. In addition to the cloud left by the investigation, prices of resin, the company's main raw material, have continued to rise, Lamoureux said. The company sells 60% into the U.S. and the strengthening of the Canadian dollar has negatively impacted earnings, he added.
