CALGARY, Aug. 26, 2016 /CNW/ -

Dear Debentureholder,

We are an informal committee of concerned debentureholders of Twin Butte Energy Ltd. ("Twin Butte") formed to oppose Twin Butte's proposed transaction (the "Arrangement") with Reignwood Resources Holding Pte. Ltd. ("Reignwood").  We previously outlined objections to the Arrangement in our August 24, 2016 press release.  In response to subsequent press releases from Twin Butte and media statements attributed to Twin Butte, we wish to make the following key points:

• [Allocation of Consideration]  The Arrangement was negotiated by Twin Butte and Reignwood without regard for the interests of debentureholders, who have priority claims, in relation to equity, on the assets of Twin Butte.
  
• [Negotiated Transaction]  Twin Butte has made public statements indicating that the allocation of consideration between debt and equity in the proposed Arrangement was dictated by Reignwood as non-negotiable.  This assertion is unsupported by the description of the background to the Arrangement included in Twin Butte's circular, which records no such ultimatum.  Instead, the circular says that "the Special Committee authorized Twin Butte to enter into discussions with the Purchaser and respond with a counterproposal" and "Between March 24, 2016 and April 27, 2016, Twin Butte and the Purchaser pursued further negotiations".  Contrary to recent public statements made by Twin Butte, Reignwood's advisors informed the committee that there was more than one offer made to Twin Butte that was subject to negotiation.
  
• [Issue of Fairness for Debentureholders]  Twin Butte did not procure a fairness opinion for the Debentures until after it realized that it had insufficient debentureholder support, and was forced to adjourn the security holder meetings called to approve the Arrangement.  We find it concerning that neither Peters & Co. nor National Bank were willing to provide a fairness opinion for the debentureholders, despite leading the December 2013 debenture offering and being intimately involved as advisors to Twin Butte throughout its self-described "fulsome strategic alternatives process".  Furthermore, Twin Butte's recently procured fairness opinion should not detract from the fact that Twin Butte did not seek to substantiate the fairness of the Arrangement in relation to debentureholders before it locked up to the Reignwood deal, a deal that Twin Butte now says it is contractually obliged to implement.
  
• [Twin Butte's Contractual Obligations]  We have repeatedly sought to constructively engage with both Twin Butte and Reignwood.  Each has stated that they are contractually obliged to support the Arrangement and therefore are unable to engage in constructive discussions regarding an alternative transaction.  Notwithstanding Twin Butte's August 25, 2016 press release, no formal proposal has been put forward by the committee.  Following a "NO" vote, the committee is confident that there are alternative paths capable of being approved and implemented by Twin Butte, other than the dire consequences currently being threatened by Twin Butte.
  
• [Insufficient Support]  Twin Butte's decision to extend the online proxy voting deadline to August 29, 2016 shows that Twin Butte does not have sufficient support to see the Arrangement approved.

We reiterate that, for the reasons identified above, we plan to vote "NO" to the Arrangement at the special meeting of Twin Butte securityholders which will now be held on August 29, 2016.  We also remain prepared to direct the indenture trustee to take formal enforcement steps to protect the rights of debentureholders.  We would welcome an opportunity to speak with you about these developments, and we would welcome your support.

Attached is a copy of the letter that Bennett Jones has delivered to the Board of Directors of Twin Butte on behalf of the Informal Committee of Debentureholders.

August 26, 2016

By Email:  [email protected]

Board of Directors of Twin Butte Energy Ltd.
c/o Burnett, Duckworth & Palmer LLP
Suite 2400
525 8th Ave SW
Calgary, AB T2P 1G1 

Attention: Fred Davidson|

Dear Sirs:

Re: Twin Butte Energy Ltd. ("Twin Butte") Proposed Arrangement

As you know, we represent an ad hoc committee (the "Ad Hoc Group") of unaffiliated senior debenture holders with very significant holdings of Twin Butte's 6.25% Convertible Unsecured Subordinated Debentures (the "Debentures").  We write concerning Twin Butte's proposed arrangement with Reignwood Resources Holding Pte. Ltd. ("Reignwood").  We request that this letter be provided to the Board of Directors of Twin Butte (the "Board").

As we believe you are aware, the Ad Hoc Group formed in August 2016 and engaged Macquarie Capital Markets Canada Ltd. and Bennett Jones LLP as their financial and legal advisors.  Through Murray Bockhold and the Ad Hoc Group's advisors, the Ad Hoc Group has had discussions with the Special Committee of Twin Butte's Board, with Twin Butte's financial and legal advisors and with Reignwood. 

As you know, Twin Butte has proposed an arrangement (the "Arrangement") which, if implemented, would result in the payment of $140 per $1,000 of principal value for Debenture holders or $11.9 million, while $22.4 million would be paid to out of the money equity.  As the Ad Hoc Group has repeatedly advised you, the proposed Arrangement runs directly contrary to a fundamental principle in Canadian law (expressly provided for in s. 6(8) of the Companies' Creditors Arrangement Act) that equity holders of an insolvent company should not be compensated on account of their equity until after debt has been paid in full.

On June 24, 2016, Twin Butte announced that it had entered into a definitive arrangement agreement with Reignwood on the terms set out above.  According to Twin Butte's June 24, 2016 press release, the proposed Arrangement arose out of a strategic process led by the Special Committee of the Board, supported by management and financial co-advisors Peters & Co. Limited and National Bank Financial Inc., expressly for the purpose of reviewing "alternatives to enhance shareholder value" (emphasis added).  As Twin Butte was insolvent at the time the arrangement agreement was entered into, and equity was out of the money, the strategic process proceeded on an impermissible premise:  that the Board was obliged to protect the interests of equity holders of an insolvent company in seeking the sale or restructuring of the company. 

Twin Butte's July 11, 2016 Management Information Circular in relation to the Arrangement is similarly telling.  In voting to approve the Arrangement, and recommend the Arrangement to Twin Butte's security holders, the Board chose to obtain a fairness opinion only in relation to Twin Butte's equity securities.  In issuing the Circular, Twin Butte chose not to obtain (or was perhaps unable to obtain) a fairness opinion in relation to Twin Butte's debentures. 

Similarly, the words "fair" and "fairness" appear dozens of time in the Circular.  Nowhere does the Circular address the substantive fairness of the arrangement in relation to Debenture holders. 

As you know, after TBE obtained insufficient Debenture holder support, and was forced to adjourn security holder meetings to August 29, 2016, Twin Butte procured a fairness opinion in relation to the Debentures from Canaccord Genuity.  The Canaccord Genuity opinion is purely conclusory.  Moreover, the Canaccord Genuity fairness opinion does not detract from the fact that, according to Twin Butte's own Circular, the Board did not consider the fairness of the arrangement in relation to debenture holders before entering into a definitive arrangement agreement with Reignwood, that Twin Butte now says it is obliged to implement. 

We wish to remind the Board that, as a matter of Canadian corporate law, the Board owes its fiduciary and other duties to Twin Butte.  Our client is alert to the fact that some Board members have significant equity interests in Twin Butte.  The Ad Hoc Group expects all members of the Board to fulfil their fiduciary duties, and avoid placing themselves in a position where they favour the interest of equity holders over their fiduciary duties to Twin Butte.

The Board will be judged by the outcome of its decisions in light of available options, as well as the interests of stakeholders and their legal interests.  Among other things, this means that, at a minimum, the Board should not jeopardize viable recapitalization options that will result in substantial recovery to creditors in order to secure a recovery for out of the money equity interests.

Twin Butte has made public statements indicating that the allocation of consideration between debt and equity in the proposed Arrangement was dictated to it by Reignwood, as a "take it or leave it", non-negotiable, proposal from Reignwood.  This assertion is unsupported by the narrative describing the background to the arrangement in Twin Butte's Circular, and is equally unsupported in the recommendations that follow in the Circular.  If Twin Butte was presented with a "take it or leave it" proposal, that would have been a material fact that should have been disclosed in the narrative and identified as a basis for the Board's recommendations.  Furthermore, Reignwood has advised the Ad Hoc Group that the debt/equity allocation in the proposed Arrangement was the subject of negotiation, and that Reignwood did not dictate this allocation to Twin Butte.  It is contrary to common sense for Reignwood to have imposed a debt/equity allocation on Twin Butte that is contrary to established priorities and was certain to draw substantial opposition from Twin Butte's Debenture holders, jeopardizing the implementation of the proposed Arrangement. 

Twin Butte's tactics directed at Debenture holders, including threatening to passively accept enforcement steps by the banks if the Arrangement is not approved, are inappropriate in light of the Board's duties.  If the Arrangement is not approved by security holders, the Board has a continuing obligation to maximize value for Twin Butte's stakeholders, and in a manner that properly reflects legal priorities. 

Although the Ad Hoc Group strongly disagrees with the conduct and tactics of the Board, the Ad Hoc Group believes that Twin Butte has valuable assets and a management group capable of developing those assets.  If the Arrangement fails to achieve sufficient security holder support and is voted down, the Ad Hoc Group is prepared to step forward and provide tangible support for  alternative paths forward that properly reflect legal priorities and that optimize the recovery for all stakeholders. 

Finally, our client reserves all of its rights, and will hold the members of the Board responsible, in the event that any steps are taken by the Board to the detriment of Twin Butte.

The Ad Hoc Group and its advisors would be pleased to discuss these issues and the Ad Hoc Group's concerns with you and with your advisors at your earliest convenience.

Yours truly,

"R.W. Staley"

Robert W. Staley|

RWS:bp

cc: The Ad Hoc Group
Macquarie Capital Markets Canada Ltd.
Kevin Zych, Bennett Jones LLP
Will Osler, Bennett Jones LLP

SOURCE Informal Committee of Concerned Debentureholders of Twin Butte