With an eye toward staving off a potential Chapter 11 bankruptcy, noted real estate investor Tony Thompson's real estate management company, Thompson National Properties, is soliciting investors to exchange dead-in-the-water high-yield notes for stock in his real estate venture.
Thompson National Properties, known as TNP, first pitched investors the exchange last month as part of a plan to restructure $50 million of debt in the form of five separate TNP-backed note programs sold to investors by independent broker-dealers. TNP followed that offer with a supplemental offer dated Aug. 19.
The notes in question were sold from 2008 to 2012. In 2008, Mr. Thompson — who made his mark in the independent broker-dealer industry last decade as a leading packager and seller of real estate deals known as tenant-in-common exchanges, or TICs — launched TNP.
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The note restructuring and the fate of TNP are intertwined, according to a confidential offering memorandum. TNP “has determined that it does not have the capacity to remain in business under its significant current debt load and believes it is in the best interest” of TNP and the note holders to restructure the debt to exchange the notes for preferred equity, according to the memorandum.
“The good news is this gives people a chance of getting money back,” said TNP's executive vice president, Tim O'Brien. Swapping the notes for common or preferred shares will give the company a fighting chance, he said.
If enough investors approve, “there's a good chance of TNP staying in business and growing the business,” Mr. O'Brien said. If all goes well, TNP could use a growing revenue stream to buy the investors new preferred shares in five years, he said.
TNP's losses from 2008 through 2013 of $51.4 million practically match the amount raised by the three note programs in default, which have a total principal balance outstanding of $50 million, according to the memorandum.
If the exchange of the moribund notes for equity units is not successful, TNP “intends to explore all other restructuring alternatives available to it at that time,” according to the memorandum.
Those “may include an alternative out-of-court restructuring or the commencement of Chapter 11 proceeding with or without a prearranged plan of reorganization in the United States Bankruptcy Court.”
In an e-mail, Mr. Thompson, CEO of TNP, did not comment about the proposed debt-for-equity swap. Instead, he wrote: “Publishing an article on an ongoing private offering is interesting from a legal standpoint.”
TNP's failed note program is at the heart of ongoing complaints by the Financial Industry Regulatory Authority Inc. against Mr. Thompson and the defunct broker-dealer he formerly controlled, TNP Securities Inc.
Finra alleged in July 2013 that Mr. Thompson deceived and defrauded investors who bought $50 million in high-yield promissory notes sponsored by TNP.
Thompson National Properties had provided a purported guarantee of principal and interest for the notes when they were sold.
Mr. Thompson's former broker-dealer, TNP Securities, was also named in the complaint, which is dated July 30.
TNP Securities and Mr. Thompson “engaged in transactions, practices or courses of business which operated as a fraud or deceit upon the purchaser” of the note securities, according to Mr. Thompson's profile on Finra's BrokerCheck system.
Mr. Thompson and TNP Securities are allegedly in violation of the Securities and Exchange Act of 1934, as well as Finra's Rule 2020, which prohibits the use of manipulative, deceptive or other fraudulent devices by registered representatives and broker-dealers. They also are allegedly in violation of Finra Rule 2010, which requires registered reps and broker-dealers to adhere to high standard of commercial honor and trade.
TNP this week again solicited investors to sign off on the exchange of debt for equity units. According to a letter to investors and advisers from TNP's executive vice president, Mr. O'Brien, note holders and owners of convertible preferred stock who hold 68% of the outstanding notes have accepted the exchange offer. TNP, however, needs owners of 95% of the outstanding notes to accept the offer to meet the required minimum tender condition for a successful exchange, according to this week's supplemental memorandum.
TNP's offer raises several questions for investors, noted one plaintiff's attorney.
“The impact that such a conversion from debt to equity would have in the event of a bankruptcy is not disclosed to investors in the initial July exchange offer,” said Alan Rosca, who currently represents clients suing a broker-dealer that sold TNP notes in a potential class action. “And it's barely mentioned in the supplemental offer from this week, which in any case comes after most of the investors reportedly agreed to the exchange, even though TNP acknowledges that it may be forced to file for bankruptcy.
“Glaringly, there is no indication how much the new shares would be worth,” he said.
“Generally, debt holders have a higher priority to recover from a bankruptcy than equity holders,” Mr. Rosca added. “The exchange offer required the investors to give up their right to sue TNP, Tony Thompson, and TNP's principals, lawyers, accountants, agents, among others, in connection with their losses.”
The swap is in the best interest of the note holders, Mr. O'Brien said.
“Debt is not very good for a bankruptcy,” he said. “We've spoken to hundreds of investors and advisers. They all get it.”