PrefBlog

Yellow Media Inc. has announced:

a recapitalization transaction (the “Recapitalization”) aimed at significantly reducing the Company’s debt and improving its maturity profile, with debt first coming due in 2018. The Recapitalization will allow the Company to pursue its business transformation.

Closing of the Recapitalization is anticipated by the end of September 2012.

The key components of the Recapitalization are as follows:

– Exchange of its credit facilities and medium term notes (the “Senior Unsecured Debt”), representing $1.8 billion of the Company’s debt, for a combination of:
$750 million of 9% Senior Secured Notes due in 2018;
$100 million of Subordinated Unsecured Exchangeable Debentures due in 2022, with interest payable in cash at 8.0% or in additional debentures at 12%;
82.5% of the New Common Shares; and
$250 million of cash;

– Holders of existing convertible debentures, preferred shares and common shares of the Company to receive in exchange for their securities a combination of:
17.5% of the New Common Shares; and
Warrants, representing in the aggregate 10% of the New Common Shares;

– Noteholders holding 30.0% of the medium term notes, and representing 23.7% of the Company’s Senior Unsecured Debt, have executed support agreements committing them to vote in favour of the Recapitalization;

– The Recapitalization will not impact customers, suppliers and other business partners of Yellow Media Inc.

The Company proposed this Recapitalization initiative to align its capital structure with its operating strategy. The Recapitalization will ensure the necessary financial flexibility to pursue the Company’s ongoing transformation in order to enhance long-term value for stakeholders. Upon completion of the Recapitalization, the Company will have debt of approximately $850 million consisting of $750 million of Senior Secured Notes and $100 million of Subordinated Unsecured Exchangeable Debentures. Annual interest expense will also be reduced by approximately $45 million.

…
The Company intends to implement the Recapitalization pursuant to a plan of arrangement under the Canada Business Corporations Act. The implementation of the Recapitalization is subject to a number of conditions and other risks and uncertainties including the receipt of the final approval of the court and all necessary regulatory and stock exchange approvals, as well as to other conditions. Implementation of the Recapitalization is expected to occur by the end of September 2012.
…
Noteholders holding 30.0% of the Company’s outstanding medium term notes, and representing 23.7% of the Company’s Senior Unsecured Debt, have executed a support agreement with, among others, Yellow Media whereby they have agreed, subject to certain conditions, to vote in favour of and support the Recapitalization. Noteholders are represented by Moelis & Company as financial advisors and Bennett Jones LLP as legal advisors.

The Company will solicit additional support from credit facility lenders and noteholders for the Recapitalization.

The attached Powerpoint page has the following pro-forma table:

Note that since this is a plan of arrangement the preferred shareholders will have a vote.

It is interesting that the YLO.PR.A and YLO.PR.B are not being forcibly converted into equity prior to the changes.

I eagerly look forward to seeing the proposed detailed exchange ratios!

Update: As noted in the comments, the exchange ratios are on the press release, but way, way down at the bottom, below all the regulatory cautions and contact names.

There are a few angry holders of convertible debs:

The money managers who hold Yellow Media’s convertible debentures are furious, arguing they have been grossly mistreated under the company’s recapitalization plans.

The tip of this frustration came out on a conference call Monday, during which management explained the decision to extend its bond maturities, in exchange for handing senior debt holders an overwhelming majority of equity. Even though convertible debentures are technically debt instruments, their holders aren’t getting much.

Even worse, they’ve been offered less than preferred share holders, which are technically lower down in the capital structure. For every 100 preferred shares owned, the holders will receive 1.875 of the company’s common shares and 1.07143 warrants. Convert holders, however, will only get 0.62500 common shares and 0.35714 warrants for each $1,000 in principal.

Enraged money managers asked about this on the call, and for a while they didn’t really get an answer as to how this could be. But then it became clear: The financial advisers assumed that convertible debenture holders would convert to common shares before the recap is finalized, even though doing so would offer them much fewer common shares.

Under the plan, 100 YLO.PR.A will convert to 6.25 Common Shares and 3.57143 Warrants.

However, YLO has the ability to convert YLO.PR.A into common at $2 / share, based on par value ($25) and unpaid dividends (about $0.50, to make the numbers easier). So for 100 shares of YLO.PR.A, you would get 1,275 Old Common Shares.

For 100 Old Common, you get 0.5 New Common; so if we assume forcible conversion of YLO.PR.A prior to the reorganization, then 100 YLO.PR.A would become 6.375 New Common … basically equal, although the warrants could – possibly – make the actual reorganization more valuable.

But … holders of YLO.PR.C and YLO.PR.D are being treated in the same way! Why?

This entry was posted on Monday, July 23rd, 2012 at 1:04 pm and is filed under Issue Comments. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.