Oppression is not normally a word one associates with finance. With Cuba, si. But with finance, no.
Deutsche Bank Canada, however, filed suit against Sherritt International Corp., charging "oppression." The reason: Sherritt proposed to begin paying a dividend on its stock. DBC stands to lose a lot of money invested in a convertible hedging strategy because events haven't developed according to its assumptions.
The DBC complaint, filed in court in Saint John, New Brunswick, where Sherritt is incorporated, dates the dispute to 1996. That year Sherritt raised $675 million in a public sale of debentures, stating in its prospectus the proceeds would be used for growth purposes, principally business activity in Cuba.
Between 1996 and 1998, DBC, a Toronto-based unit of Deutsche Bank AG in Frankfurt, bought $61 million of the debentures "in reliance upon the promised growth strategy and the promise not to pay dividends," according to the complaint. In addition, DBC engaged in three swap contracts, enabling it to enjoy the economic benefits "attaching to debentures with a face value of $145 million," while also being "subject to some of the economic risks." Now those risks from having in effect a $206 million, or 30%, position in the debentures loom large.
In an affidavit, Gregory D. Sullivan, senior vice president and managing director of the Deutsche unit, refers to Ian W. Delaney, Sherritt's chairman and its controlling shareholder, as "Sherritt's directing mind." Mr. Sullivan might truly be called a rocket scientist, having a bachelor's degree in engineering science from the University of Toronto and a master's degree in aeronautics science from the California Institute of Technology.
As Mr. Sullivan states in the filing, starting last January, Sherritt instigated a substantial withdrawal of shares from borrow and lend programs (which) would make Sherritt debentures a less attractive investment."
Then last February, "Sherritt announced its intention to commence payment of quarterly dividends. In April, Sherritt completed a Dutch auction repurchase of debentures, buying $25 million of them at a discount of 71 cents on the dollar, the first of what will be a quarterly buyback program.
"Sherritt is proposing to dividend out to holders (of the shares) monies raised from debenture holders," Mr. Sullivan states.
The actions show Sherritt has abandoned its growth strategy and moved to benefit holders of the shares at the expense of debenture holders, Mr. Sullivan states.
At Sherritt's annual meeting last May, Mr. Delaney noted Sherritt, as the complaint states, "had few ripe investment opportunities" and "could not deploy the cash and short-term investments on its balance sheet in `anything exciting'."
"Rather than favoring holders of restricted voting shares . . . Sherritt should be required to employ the monies attributable to debenture holders to redeem DBC's debentures at par," Mr. Sullivan states in the filing. Deutsche representatives didn't return calls for comment. Sherritt rejects the charges.
A cynic might note Sherritt, charged with "oppression," focuses its business activity in Cuba, which has been under the dictatorial rule of Fidel Castro for more than 40 years. That's oppression. But in investing, a hedge arbitrage hasn't worked out for DBC. "Oppression" trumped a capitalist, i.e., DBC, so far in this case. Now DBC wants the court to compel Sherritt to pay up for DBC's soured investment involving the company Mr. Delaney has called the Canadian Pacific of Cuba. !Vive dividend libre!