‘One of the worst own goals that I’ve ever seen in public markets’

You ever messed up?

Avid Bioservices, a small-cap, California-based pharmaceutical company, messed up.

In 2021, Avid issued a nearly $144mn worth of convertible bonds with a 1.25 per cent coupon, with a maturity date in March 2026.

The bonds were issued under Securities and Exchange Commission Rule 144A, which prevents buyers of securities issued in a private placement from reselling those securities into the public markets. In the bond contracts, Avid said it would remove this restriction by March 17, 2022.

As Matt Sweeney, managing partner at Laughing Water Capital, a New York-based private investment partnership, put it in its Q1 letter to LPs, published in April:

There was nothing unusual about this arrangement at all – many securities come to market under 144A restrictions, and removing the legend is typically as easy as the company sending an email to the transfer agent and asking that the 144A legend be removed.

So far, so good. Money raised, all Avid had to do was remember to contact the transfer agent twelve months later and get the 144a restriction lifted.

Reader, they did not. Sweeney:

However, in the case of Avid, they forgot to send that email, and the legend was not removed.

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LexisNexis:

On Feb. 29, 2024, Avid Bioservices Inc. received an acceleration notice from a holder of 1.25% exchangeable senior notes due 2026. Such occurrence resulted in a cross-default under a credit agreement with Bank of America NA. On March 12, 2024, Avid entered into amendment which waived the events of default under the credit agreement. On March 12, 2024, Avid completed a private offering of 7% convertible senior notes due 2029. The re-classification of the 2026 Notes to a current liability resulted in negative working capital and created a substantial doubt regarding the company’s ability to continue as a going concern. The substantial doubt has been resolved through the subsequent issuance of the 2029 notes.

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Sweeney:

The market, the company’s CFO, the company’s banker, the company’s legal advisor, and unfortunately yours truly were all blissfully unaware of this oversight until early last month when someone who had purchased more than 25% of the bond (probably around 80 cents on the dollar) notified the company that their failure to remove the 144A legend constituted an event of default under the bond’s indenture, and they were demanding immediate repayment.

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Avid was forced to acquire emergency funding by issuing a new $160mn 7 per cent convert, which will mature in 2029. At least one law firm is now snuffing around the company.

On April 24, Avid issued an amendment to its annual report for the year ending April 2024. There were… some changes: current liabilities were adjusted from $71mn to $215mn, and its net income amended from a $11mn profit to a $6mn loss.

All told, not a great episode for Avid. So — other than the benefits of using scheduled send on you emails, or calendar alerts — what lessons are there to learn here? Sweeney, who called the incident “one of the worst ‘own goals’ that I have ever seen in public markets” says:

There is a lot to unpack there, and none of it is good, and there is plenty of blame to go around on how this could have happened. From my perspective, removing a 144A legend is so routine that it is not something I have ever seen on any investor’s diligence check list (although I have added it to mine). Before this event I would have no sooner asked a CFO if he had scrubbed his company’s bonds than I would have asked him if he washes his hands after going to the bathroom, or if he looks both ways before crossing the street. These are things that one just expects to be done, especially when there is a CFO, internal legal, external legal, and the bankers who structured and sold the bond all involved. Not to mention that I have been told that for the original convert Avid used documents that were “off the shelf” from Morgan Stanley, and these documents did not allow for a cure period. If a cure period would have been specified, Avid could have simply scrubbed the bonds when they realized their mistake, and paid some sort of penalty rather than having to resort to an emergency financing. I assure you that Morgan Stanley has since updated their boilerplate in this regard.

We’ve contacted Avid for comment, and will update if they respond.

“[You] will be more disappointed by the things that you didn’t do than by the ones you did do,” goes one of the many, many quotes likely misattributed to Mark Twain. Avid would surely agree.

Further reading
— The Norwegian sovereign wealth fund’s $92mn Excel error