Bermuda-based Montpelier Re Holdings Ltd. has entered into two equity forward sale agreements under which it is entitled to sell common shares to an affiliate of Credit Suisse Securities (USA) LLC for around $180 million (or $205 million if the underwriter exercises its over allotment option).
The transaction is part of the Company’s efforts to restore its capital position in the wake of losses suffered by last fall’s hurricanes (See IJ Website April 28). Last week it announced that WL Ross & Co. LLC had agreed to make a $100 million investment in Montpelier through a private sale of 6,896,552 common shares at a price of $14.50 per common share (See IJ Website May 26). The Company’s shares closed at $15.40 yesterday on the NYSE.
CFO Kip Oberting commented: “The underwriting environment in our core lines of business is presently attractive. The investment of $100 million agreed to last week by WL Ross & Co. and the variable forwards agreed to today offer us a committed source of additional equity capital.”
“Pro forma for the notional amount of these two forward sale agreements, and third party capital in joint ventures, we now underwrite in respect of over $2 billion in capital. This is more than we have ever had and is consistent with our philosophy of right sizing our capital around our underwriting opportunities,” he continued.
Montpelier Re said: “The Company has entered into two forward sale agreements which provide the ability to access equity capital at any time over the respective terms of the agreements, while also allowing Montpelier to retain significant appreciation in the price of any shares issued at the forward sale maturities.”
It gave further details details of the forward sale agreements as follows: “The first forward sale agreement settles beginning in March 2007 and the second settles beginning in March 2008. Upon full physical settlement of the forward sale agreements, Montpelier will deliver to the forward counterparty a number of common shares based on the average market price of the common shares at that time, subject to the specified minimum and maximum number of shares. At higher stock prices the Company will issue a smaller number of shares and at lower stock prices the Company will issue a larger number of shares. This variability in number of shares delivered to the forward counterparty provides Montpelier with the right to retain upside in all of the shares at least up to a specified dollar threshold. In lieu of issuing common shares in full physical settlement of the forward sale agreements at maturity, the Company may elect to net share settle or cash settle the forward sale agreements. In connection with the forward sale agreements, Montpelier may make an aggregate payment to the forward counterparty of up to $5 million.
“In order to hedge its position under the forward sale agreements, the forward counterparty, through its affiliate, Credit Suisse Securities (USA) LLC, acting as sole book-runner of the offering, is initially selling the Company’s common shares in a public offering, and will sell additional shares in the future from time to time in connection with the forward sale agreements. These offerings will be made under the Company’s currently effective shelf registration statement. Credit Suisse Securities (USA) LLC has been granted an option to purchase additional common shares to cover over-allotments.
“The common shares to be sold by the forward counterparty will be borrowed from one or more third-party share lenders or will be acquired from the Company pursuant to a share issuance agreement that is separate from the forward agreements. Montpelier will receive from the forward counterparty the par value of the shares as proceeds from the sale under the share issuance agreement and will have the right to repurchase the shares back from the forward counterparty, subject to applicable law, for a nominal amount at any time.”
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