Trinity Merger Corp. Does a 180 Flip with their Warrants. Sticks the Landing.
by Kristi Marvin on 2019-09-20 at 9:13am

Trinity Merger Corp. (TMCX), which previously announced their combination with Broadmark real estate lending and management companies (“Broadmark”), filed a preliminary proxy/S-4 this morning with some significant changes to it’s proposed amendment to the warrant agreement.  Specifically, Trinity will be offering $1.60 cash to warrant holders and letting them keep a 1/4 warrant. However, in order to explain the new proposal, we need to first review what was previously going on here.

The Trinity combination with Broadmark will result in the company being a REIT post-closing and being a REIT means the company will need to issue a dividend to maintain REIT status.  However, as a result of that dividend, Trinity needs to remove certain anti-dilution provisions contained within the warrant agreement relating to the payment of cash dividends.  Specifically, this is because the current anti-dilution adjustment goes into effect when dividends are paid in an amount that exceeds $0.50 per share. So, if this waiver isn’t passed, what would happen is, every time Broadmark were to issue a dividend, the warrant would be re-struck.  And since that strike price would continually get adjusted downward, that results in a lot of continuous dilution to the common shareholders and consequently, you get a lower share price. Essentially, the anti-dilution provision makes a combination to becoming a REIT a bit of non-starter, so Broadmark made the waiver a condition to closing.

Previously, Trinity/Broadmark proposed a warrant amendment to remove this anti-dilution provision, but they would need 65% of the public warrant holders to vote “yes” on any amendments to the warrants. In order to “motivate” warrant holders to vote yes, Trinity/Broadmark was offering $0.30 to warrant holders that “EARLY” consented or $0.15 to warrant holders that “LATE” consented (You can read more about the previous proposal HERE).  However, Trinity has now decided to completely scrap that proposal.

Instead, Trinity is now proposing to offer warrant holders $1.60 per warrant in cash and letting warrant holders keep a 1/4 warrant if they vote yes on the amendment. This is very similar to what Thunder Bridge did, which offered $1.50 to warrant holders and also let warrant holders keep 1/4 warrant.  However, the extra $0.10 sweetener Trinity is offering is presumably because it will be more challenging for a REIT to move the share price above the strike price of $11.50.

If you recall, the Thunder Bridge warrant amendment was very well received, so this is a smart move by Trinity to use the same playbook. However, it should be noted that this is a big swing from what Trinity was previously proposing (which was….not great), so it would appear that this team is extremely motivated to close this deal, but it also indicates that the previous proposal was never going to pass, i.e., it was not well received.  Nevertheless, $1.60 cash per warrant could potentially be an expensive $55.2 million check if all 34,500,000 warrant holders vote yes.  But, this deal is a non-starter without that warrant amendment, so it’s a necessary check.

As a result of the proposal, the warrants should have a big pop today.  The Trinity warrants (TMCXW) closed yesterday at $0.6399, but are already trading near $1.40 in the pre-market.  This is great move on the part of the bankers and team since the warrant proposal is now sure to pass and this deal is a near lock to get done (barring any unforeseen disasters).

Still no word on a shareholder vote date, but Trinity’s clock runs out November 17th, so most likely the date will be right around then.

UPDATE:  Since someone just asked – yes, there is a condition to closing of having $100 million cash available, but Trinity has a PIPE for $75 million.  So really, TMCX only needs to have $25 million worth of shares not redeem. Given that Trinity’s cash in trust is expected to be ~$361 million at the vote, that means they only need ~7% to remain in trust.  It’s an extremely achievable number.



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