Item 1.01 Entry into a Material Definitive Agreement
The information set forth below under Item 2.03 is hereby incorporated by reference into this item 1.01.
| Item 2.03 | | Creation of a Direct Financial Obligation or an Obligation Under an Off-Balance Sheet Arrangement of a Registrant |
On December 14, 2006, First Mercury Financial Corporation (the “Company”) completed a trust preferred securities transaction. In connection with the transaction, the Company established First Mercury Capital Trust III, a Delaware statutory trust, on December 8, 2006 (the “Trust”). The trust issued and sold $25.0 million aggregate principal amount of capital securities (the “Trust Preferred Securities”) in a private placement and issued $0.8 million in common securities (the “Common Securities”) to the Company. The Trust used the proceeds of these issuances to purchase $25.8 million of the Company’s Floating Rate Junior Subordinated Deferrable Interest Debentures due December 15, 2036 (the “Debentures”).
The sale of the Trust Preferred Securities was not registered under the Securities Act of 1933, as amended, and the Trust Preferred Securities were only offered and sold under an applicable exemption from registration requirements under the Securities Act of 1933. Keefe, Bruyette & Woods, Inc. and FTN Financial Capital Markets served as the placement agents for the Trust Preferred Securities.
The terms for the Trust Preferred Securities and the Debentures are essentially identical. Interest on the Debentures and distributions on the Trust Preferred Securities are payable quarterly in arrears on March 15, June 15, September 15, and December 15, commencing on March 15, 2007, at an annual rate equal to 8.35563% beginning on the date of original issuance and ending on March 15, 2007, and thereafter at an annual rate equal to LIBOR (as defined in the Indenture, dated as of December 14, 2006 (“Indenture”), between the Company and Wilmington Trust Company as debenture trustee) plus 3.00%, reset quarterly, and upon terms more fully set forth in the Indenture. The Debentures are the sole assets of the Trust and are subordinate to the Company’s senior obligations.
The Debentures mature on December 15, 2036, and are redeemable at the Company’s option on any March 15, June 15, September 15, or December 15, commencing in December 2011. If the Company redeems any amount of the Debentures, the Trust must redeem a like amount of the Trust Preferred Securities. Interest on the Debentures may be deferred at any time or from time-to-time for a period not exceeding 20 consecutive quarterly payments, provided there is no event of default and the deferral does not extend beyond maturity. If the Company elects to defer interest on the Debentures, or if an event of default occurs, the Company will generally not be able to declare or pay any dividends or distributions on, or redeem, purchase, acquire or make a liquidation payment with respect to, any of the Company’s common stock. The entire principal of the Debentures may become due and payable immediately if an event of default occurs.
Concurrently with the issuance of the Debentures and the Trust Preferred Securities, the Company entered into a Guarantee Agreement, dated December 14, 2006, between the Company and Wilmington Trust Company under which the Company guaranteed the payment of various obligations associated with the Trust Preferred Securities. The terms of the Trust Preferred Securities are governed by an Amended and Restated Declaration of Trust, dated December 14, 2006 (the “Declaration”), among the Company, as sponsor, and Wilmington Trust Company, as Institutional Trustee and Wilmington Trust Company, as Delaware Trustee.
The Company intends to use the net proceeds from the sale of Debentures to the Trust to support existing and future growth of the Company’s insurance operations by increasing the capital of the Company’s operating subsidiary, First Mercury Insurance Company.
The preceding discussion is qualified in its entirety by reference to the terms of the Indenture, the Declaration, the Debentures, and the Guarantee Agreement. Copies of the Indenture, the Declaration, the Debentures, and the Guarantee Agreement, which are attached as Exhibits 4.1, 4.2, 4.3, and 4.4, respectively, to this report and are incorporated herein by reference.
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