Suncrete, Inc. Issues Certificate of Designation for Series A Convertible Perpetual Preferred Stock

Key Highlights for Investors

• New Series A Convertible Perpetual Preferred Stock Created: Suncrete, Inc. has established a new class of preferred shares—Series A Convertible Perpetual Preferred Stock—with a total issuance of up to 26,000 shares at a par value of \$0.0001 per share and a stated value of \$1,000 per share. These shares are perpetual, with no stated maturity date.
• Attractive Cumulative Dividend: The Series A Preferred Stock will accrue cumulative dividends at an initial rate of 9% per annum, compounded quarterly. This rate may increase by 0.5% per quarter (up to a maximum of 15% per annum) if any shares remain outstanding six years after the Seed Preferred Issuance Date (July 29, 2024) and have not been redeemed in full. Importantly, dividends accrue whether or not declared and regardless of available funds or corporate earnings. Dividend payments are also subject to the terms of the company’s Credit Agreement.
• Priority in Liquidation: In the event of a liquidation, dissolution, or winding up of the company, Series A Preferred Stockholders will have senior rights to receive the “Liquidation Preference” (the stated value plus all accrued and unpaid dividends) before any distribution is made to common shareholders or holders of other junior stock. If available assets are insufficient, payments are made pro rata among preferred stockholders.
• Conversion Rights: Holders have the right to convert shares into Suncrete, Inc. Common Stock at any time, based on a formula tied to the “Conversion Price,” which is the greater of \$18.00 per share or the five-day VWAP prior to conversion. Upon conversion, any accrued but unpaid dividends are payable in cash or, at the company’s discretion, in additional common shares.
• Optional Redemption by Company: Suncrete, Inc. can redeem Series A Preferred Stock in whole or in part at any time for cash equal to the Liquidation Preference. However, upon receipt of a redemption notice, holders may choose to convert their shares into common stock instead of being redeemed for cash.
• Voting Rights and Minority Protections: Series A holders generally do not vote on routine matters but must approve any amendments, issuances, or actions that adversely affect their rights, or any issuance of parity or senior stock. A majority vote of Series A holders is required for approval of such changes.
• Anti-Dilution and Adjustment Features: The conversion rate will be adjusted for stock splits, combinations, dividends paid in stock, and certain reorganizations or mergers, ensuring that holders are not disadvantaged by corporate actions.
• Transfer Restrictions: All transfers are subject to compliance with securities laws, company agreements, and the execution of a Preferred Equity Subordination Agreement in favor of the company’s senior lender.

Key Issues for Shareholders and Potential Price Sensitivity

• Potential Dilution: If Series A Preferred shares are converted into common equity, this could lead to substantial dilution for existing common shareholders, especially if the company’s stock price is near or below the \$18 floor price.
• Dividend Accrual and Payment Priority: The high fixed dividend rate and seniority in liquidation mean that Series A holders have substantial claims on company profits and assets ahead of common shareholders. Failure to pay dividends could also restrict management compensation, further signaling the importance of these preferred shares to the company’s capital structure.
• Trigger for Dividend Rate Increases: If Suncrete does not redeem all Series A Preferred Stock within six years, the escalating dividend rate could significantly increase the company’s financing costs, possibly impacting net income and cash flows.
• Restrictions on Corporate Actions: The company is limited in issuing new parity or senior securities and making changes to preferred stock terms without Series A holder approval. This could limit flexibility in future capital raises or restructurings.
• Change of Control/Strategic Transactions: Certain mergers or consolidations can be elected by Series A holders to be treated as a liquidation event, potentially accelerating payment of the Liquidation Preference. However, not all business combinations (notably, the initial combination with Haymaker Acquisition Corp. 4) are considered liquidation events unless Series A holders choose so.

Detailed Terms for Investors

• Dividend Details: Quarterly payable, cumulative, compounding, subject to increases if not redeemed timely. Payment is subject to funds legally available and Credit Agreement restrictions.
• Liquidation Preference: Paid before junior and parity stock. Shares the distribution pro rata if assets are insufficient for full payment.
• Conversion Mechanics: Holder-initiated at any time; company must keep sufficient common shares reserved for conversion. Fractional shares paid in cash.
• Redemption Rights: Company may redeem at any time; holders may opt to convert upon redemption notice. No sinking fund required.
• Voting and Consent Rights: Series A holders must approve changes to their terms, creation of parity/senior stock, or adverse amendments. No general voting rights.
• Transfer and Subordination: Shares are transferable but subject to securities law, company agreement restrictions, and lender subordination requirements. Holders must execute a Preferred Equity Subordination Agreement.
• Tax Withholding: The company may withhold taxes as required by law, but must notify holders and allow them to provide exemption certificates in advance.

Potential Market Impact

The issuance of a high-yield, convertible, perpetual preferred stock is a significant capital structure event for Suncrete, Inc. The terms offer strong protections and upside for preferred investors but may increase the company’s long-term cost of capital and lead to dilution for common shareholders if converted. The dividend escalation feature is particularly noteworthy, as it creates a growing financial obligation if the shares are not redeemed within a defined period. The approval rights for Series A holders over future financings and amendments may also impact strategic flexibility.

Investors should monitor the company’s ability to service and redeem these preferred shares, the potential for conversion events, and any future capital raising plans that could be affected by these terms. The interplay of the Credit Agreement restrictions and preferred stockholder rights may also be price sensitive, especially if the company faces financial distress or pursues M&A activity.

Disclaimer

This article is provided for informational purposes only and does not constitute investment advice. Investors should conduct their own due diligence and consult with professional advisors before making investment decisions. The terms summarized above are based on the Certificate of Designation filed by Suncrete, Inc. and may be subject to change or interpretation. The company’s actual performance, financial condition, and future actions may differ materially from the information presented herein.

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