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Item 1.01.
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Entry into a Material Definitive Agreement.
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Second Supplemental Indenture for 2029 Notes
On April 19, 2021, FedNat Holding Company (the “Company”) entered into a Second Supplemental Indenture (the “Second Supplemental Indenture”) dated April 19, 2021, between the Company and The Bank of New York Mellon (“BNYM”), which supplements that certain Indenture dated March 5, 2019 (the “Base Indenture”) between the Company and BNYM, in its capacities as Trustee, Paying Agent, and Registrar, as supplemented by the First Supplemental Indenture dated March 5, 2020 between the Company and BNYM (the “First Supplemental Indenture” and together with the Base Indenture, the “2019 Indenture”), which governs the Company’s Senior Unsecured Notes due 2029 (the “2029 Notes”).
The Second Supplemental Indenture modifies the 2019 Indenture by (i) increasing the maximum permitted debt-to-capital ratio resulting from the incurrence of additional indebtedness from 35% to 60%, (ii) amending the “Limitation on Restricted Payments” covenant in the 2019 Indenture to reduce the maximum debt-to-capital ratio to permit “Restricted Payments” (as defined in the 2019 Indenture) from 35% to 20%, and (iii) in lieu of a consent fee, increasing the interest rate payable on the 2029 Notes by 0.25% to 7.75% per annum, commencing on March 15, 2021, with the first such increased interest payment being made on the next regularly scheduled payment date.
The description of the Second Supplemental Indenture set forth above is only a summary of certain provisions and is qualified in its entirety by reference to the full text thereof, which is attached as Exhibit 4.1 to this Current Report on Form 8-K and incorporated by reference herein.
Convertible Senior Unsecured Notes due 2026
On April 20, 2021, the Company closed an offering of $21.0 million in aggregate principal amount of Convertible Senior Unsecured Notes due 2026 (the “Convertible Notes”). The Convertible Notes were issued pursuant to an Indenture dated as of April 19, 2021 (the “2021 Indenture”) between the Company and BNYM, as Trustee, Paying Agent, Registrar and Conversion Agent. The Convertible Notes were offered and sold pursuant to the exemption from registration set forth in Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), solely to institutional investors that are qualified institutional buyers (the “Note Purchasers”). This offering is part of an authorization by the Company’s Board of Directors to offer and issue from time to time up to $35.0 million of Convertible Notes under the 2021 Indenture.
The Company will use the net proceeds of this offering for general corporate purposes, including to provide additional liquidity in its holding company to be available for future capital contributions to its insurance company subsidiaries, if necessary.
The Convertible Notes mature on April 19, 2026 and bear interest at a fixed rate of 5.0% per year, payable in cash on April 15 and October 15.
The Convertible Notes are convertible into shares of the Company’s Common Stock at an initial conversion rate of 166.6667 shares per $1,000 principal amount of Convertible Notes, which is equivalent to an initial conversion price of $6.00 per share of Common Stock, an approximately 33% premium to the closing price of the Common Stock on April 19, 2021. The conversion rate is subject to adjustment upon the occurrence of certain pro rata capital events, such as stock splits or dividends. The Convertible Notes are convertible at the option of the holder at any time until the close of business on the second scheduled trading day immediately preceding the maturity date of the Convertible Notes.
The Convertible Notes are not redeemable at the option of the Company.
If a change in control of the Company, as defined in the 2021 Indenture, occurs, the holders of the Convertible Notes will have the right to require the Company to purchase all or a portion of their Convertible Notes at a price in cash equal to 101% of the principal amount thereof, plus any accrued but unpaid interest to, but excluding, the date of purchase.
The Convertible Notes are senior unsecured obligations of the Company and rank equally with the 2029 Notes and other future senior unsecured indebtedness of the Company. The 2021 Indenture includes customary covenants and events of default. Among other things, the covenants restrict the ability of the Company and its subsidiaries to incur additional indebtedness or make restricted payments, including dividends, require the Company to maintain certain levels of reinsurance coverage while the Convertible Notes remain outstanding, and maintain certain financial covenants. These covenants are subject to important exceptions and qualifications set forth in the 2021 Indenture. Principal and interest on the Convertible Notes are subject to acceleration in the event of certain events of default, including automatic acceleration upon certain bankruptcy-related events.