Report to: General Committee                                         Date Report Authored: June 17, 2009

 

 

SUBJECT:                          Subordination of Interest Owing to the Town of Markham from Markham District Energy Inc. in Favour of TD Bank

PREPARED BY:               Barb Cribbett, Treasurer

 

 

 

RECOMMENDATION:

1)      THAT Council approve the subordination of the interest accrued to the Town of Markham on the original loan of $7,200,000 to the Markham District Energy in favour of the TD Bank.   

 

2)      And that Staff be authorized and directed to do all things necessary to give effect to this resolution.

 

EXECUTIVE SUMMARY:

N/A

1. Purpose                     2. Background                      3. Discussion                        4. Financial        

 

5. Others (HR, Strategic, Affected Units)                                   6. Attachment(s)

 

PURPOSE:

The purpose of this report is to seek Council approval for the subordination of the interest accrued to the Town of Markham on the original loan of $7,200,000 to the Markham District Energy in favour of the TD Bank attached Resolution.

 

BACKGROUND:

In March 2006, the Markham District Energy Inc. (MDEI) obtained a revolving $3,000,000 credit facility with the TD Bank. The security required by TD Bank was a subordination of the Town of Markham’s loan of $7,200,000 to the Corporation in favour of TD Bank, which was provided,  and the guarantee of advances from the credit facility to a maximum of $3,000,000 from Markham Enterprises Corporation (MEC) and a subordination of MEC’s loan of $7,180,000 to the Corporation in favour of TD Bank, both of which were provided by MEC.

 

 

OPTIONS/ DISCUSSION:

The credit facility is renewed annually and the latest renewal dated July 31, 2008 has requested that additional security be provided as follows:

 

  • TD Bank has requested that the accrued interest on the Town of Markham $7,200,000 loan to MDEI be suboridnated in favour of the TD Bank.
  • TD Bank has requested that the additional MEC loan of $580,075 to MDEI plus accrued interest and the interest accrued on MEC $7,180,000 loan be subordinated in favour of the TD Bank.  

 

On May 11, 2009, the MEC Board approved a resolution for the subordination of MEC's loan of $580,075 plus accrued interest and the interest accrued on the original loan of $7,180,000 to MEC in favour of the TD Bank.

 

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The subordination of the above described debt including the accrued interest is treated as equity by TD Bank when the debt ratio calculation test is performed on a quarterly basis. The debt ratio target set by the bank is 65% debt to capital (debt + equity).

 

The table shows the debt ratio at December 31, 2008, under the old credit facility agreement vs. the new agreement which improves from 66% to 57% with the subordination of the accrued interest of $3,590,935 on the related party loan and the $580,075 MEC loan.

 

  

 

 

FINANCIAL CONSIDERATIONS AND TEMPLATE: (external link)

Subordination of debt and/or interest in favour of a lender (in this case, the TD bank), means that, in the circumstance of default, the primary lender would have first priority against the assets of the borrowing company.  Loans that are subordinate to the primary lender would be satisfied after the primary lender’s loan is satisfied.

 

HUMAN RESOURCES CONSIDERATIONS

N/A

 

 

ALIGNMENT WITH STRATEGIC PRIORITIES:

N/A

 

BUSINESS UNITS CONSULTED AND AFFECTED:

Legal Department

 

RECOMMENDED

                            BY:    ________________________          ________________________

                                      Barb Cribbett, Treasurer                     Andy Taylor, Commissioner, Corporate Services