Category: Issue Comments

There are rumours of restructuring jostling at YLO:

Yellow Media’s creditors want to take over the troubled phone directory company in a bid to salvage their investments.

The company’s senior-ranking bondholders organized a call last week to discuss a plan to encourage the company to restructure through the Canadian Business Corporations Act, according to a bondholder who participated in the call. The result would be a debt-for-equity swap that would give the bondholders ownership control.

There’s more colour in a later story:

“If, for some reason, we get paid in equity, it’s never optimal, but it’s probably acceptable because it’s got a value,” said Paul Gardner, a portfolio manager at Avenue Investment Management who participated in the bondholder discussions.

They also believe that it is better to put together a plan before the Montreal company hits a financial wall. “It’s much better to have everything in place in an orderly restructuring than putting a gun to the debt holders’ heads,” Mr. Gardner said, adding that it can get “nasty in court.”

Other investors, however, are skeptical. Glen Bradford, chief executive officer of ARM Holdings, which holds about 250,000 of the company’s preferred shares, said bondholders “purposefully” leaked news of their meetings to increase the value of their holdings.

“As an equity holder, I am still failing to see how the creditors have any say in the matter as long as the company continues to meet its debt obligations as they come due,” Mr. Bradford said.

After analyzing the company’s finances under several scenarios, RBC Dominion Securities analyst Andrew Calder determined that it would be able to pay its debts through 2013. By 2014, however, he said the company would likely need to refinance to meet its obligations.

There doesn’t seem to be much on the web about Glen Bradford or ARM Holdings by way of performance numbers, but I dug up his resume. Avenue Investment Management commented in their latest performance report:

Another reason for the relative underperformance of the Avenue Bond portfolio was our exposure to Yellow Media Bonds. However, we still believe that we will earn an enhanced rate of return between now and maturity in 2015. We believe that over the long term the $500-$600 million of earnings before interest and taxes (EBIT) they make per year will allow them to pay down debt more quickly which should result in a higher valuation for the bond.

Avenue Investment makes GIPS compliant composites available on request, which is a good sign, but are a bit shy regarding putting numbers on the web.

It’s way too early to draw any conclusions regarding the status of preferred shares in a restructuring, but the mention of using the Canadian Business Corporations Act implies a few things:

• They’re not thinking of a debt-for-equity swap alone (e.g., a tender) as that wouldn’t require judicial involvement
• the plans involve the rights of the preferred shareholders
• Preferred shareholders will get a vote

Norton Rose points out:

In Mega Brands, the company sought to restructure the company’s debt while injecting $225 million in new capital by public and private financing. In exchange for their consent, guaranteed creditors, debentureholders and shareholders were to receive a
combination of cash payments, shares in a new Mega Brands company and warrants.
…
In Mega Brands, the Court’s reasoning was twofold. First, it had no issue with the applicant utilizing a section 192 CBCA arrangement to transfer the quasi-totality of property from one company to another, as this is commonly done under CBCA plans of arrangement. Second, relying on a Policy Statement of Industry Canada” and on judicial precedents (including Abitibi), the Court concluded that section 192 of the CBCA was an appropriate way to restructure debt.

Second, the company seeking an arrangement must not be insolvent.
…
In Mega Brands, the Court found that the arrangement was fair and reasonable. Specifically, the Court pointed out the following factors as evidence that the arrangement was fair and reasonable:” a fair negotiation process took place; an independent committee of the I3oard of Directors was appointed; a fairness opinion was rendered by a reputable financial institution stating that the arrangement was fair, from a financial point of view,
to Mega and the shareholders, and that the holders of secured debt and convertible debentures and the shareholders would be in a better financial position under the recapitalization than if Mega were liquidated; the Board of Directors unanimously approved and recommended the arrangement; the full disclosure of the arrangement was set out in the circular; approval was given by the shareholders and lenders as required by the interim order; and finally, no one filed a Notice of Appearance or contestation with respect to the final order hearing.

I pointed out to a journalist today that YLO.PR.A and YLO.PR.B can be converted to common at the option of company without getting any permissions at all, judicial or otherwise – and if I was a debt-holder, I would make such a conversion a pre-condition of any arrangement. YLO.PR.C and YLO.PR.D holders are in a better position to negotiate.

And, of course, there is no guarantee that the company will even talk to the bondholder group, or that any proposal will be made to security holders if they do talk.

DBRS has announced that it:

has today confirmed Emera Inc.’s (Emera or Holdco) Medium-Term Notes rating and Cumulative Preferred Shares rating at BBB (high) and Pfd-3 (high), respectively, and changed the trends on both to Negative from Stable. Emera’s ratings continue to be supported by strong and stable operating cash flows generated by its relatively low-risk regulated subsidiaries. Dividends and interest income flowing up from its operating subsidiaries continue to cover Emera’s interest and operating costs.

However, the Negative trend reflects DBRS’s concern regarding the ongoing high degree of non-consolidated leverage at the Holdco level for the current rating. On a non-consolidated basis, the debt-to-capital ratio has continued to deteriorate since 2008 and remains at approximately 40% as at December 31, 2011. DBRS acknowledges that a significant portion of the debt at the Holdco level was used to fund acquisitions of contracted/regulated assets that add diversification to Emera’s business profile. Going forward, the balance sheet could be further pressured by funding requirements for other regulated capital expenditures, the proposed Maritime Link Transmission Project, a subsea transmission link from Newfoundland to Nova Scotia that is 100% owned by Emera, and Emera’s 29% interest in the transmission link between the island of Newfoundland and Labrador.

Resolution of the Negative trend in the coming months will follow a full assessment of Emera’s plans to reduce its non-consolidated debt to levels commensurate with its current rating and its overall financing strategy on proposed projects in the next five years.

This follows a similar announcement from S&P.

E-L Financial Corporation Limited has announced:

the completion of its previously-announced sale to a syndicate of underwriters, co-led by Scotia Capital Inc. and TD Securities Inc., of 4,000,000 Non-Cumulative Redeemable First Preference Shares, Series 3 for sale to the public at a price of $25.00 per share and paying fixed non-cumulative quarterly dividends that will yield 5.50% per annum. The gross proceeds of $100,000,000, less the expenses of the offering, will be added to the Corporation’s capital base to supplement the Corporation’s financial resources and used for general corporate purposes. The First Preference Shares, Series 3 will be posted for trading on the Toronto Stock Exchange (“TSX”) under the symbol ELF.PR.H.

The First Preference Shares, Series 3 will rank in priority to the common shares and the Series A Preference Shares of the Corporation, with respect to the payment of dividends and with respect to the distribution of assets on the dissolution, liquidation or winding up of the Corporation. On and after April 17, 2017, the Corporation may, subject to TSX approval, convert all or any part of the outstanding First Preference Shares, Series 3 into freely tradeable common shares of the Corporation. The First Preference Shares, Series 3 are also redeemable at the option of the Corporation on and after April 17, 2017.

ELF.PR.H is a Straight Perpetual, 5.50%, announced March 9. It will be assigned to the PerpetualDiscounts index – although issued by an Insurance Holding Company, it is exchangeable for common at the option of the company, a feature which CIBC has used to achieve NVCC status for three of its issues.

ELF.PR.H traded 426,481 shares today in a range of 24.94-09 before closing at 24.98-00, 10×30. Vital statistics are:

DBRS has announced that it:

has today downgraded Yellow Media Inc.’s (Yellow Media or the Company) Issuer Rating to B (low) from B (high); its Medium-Term Notes rating to B (low) from B (high), with an RR4 recovery rating; and its Exchangeable Subordinated Debentures to CCC from B (low), with an RR6 recovery rating. The trend on all ratings remains Negative.

DBRS notes that Yellow Media’s unsecured debt continues to have average recovery prospects (RR4; 30% to 50% expected recovery), while its subordinated debt has poor recovery prospects (RR6; 0% to 10% expected recovery) under a base case default/recovery scenario.

Today’s downgrade reflects the fact that the Company has made no progress in improving its liquidity position throughout the remainder of Q1 2012. The window for refinancing activities continues to diminish as the Company’s first debt maturity (of its roughly $2 billion of total gross debt) approaches in February 2013, which marks the beginning of a period of sizable and relatively steady debt maturities over the 2013 to 2016 time frame. As such, we believe that the likelihood that the Company’s financing activities in 2012 will involve some form of compromise for existing creditors has increased to a level that is no longer consistent with the previous B (high) ratings.

The Negative trend reflects the possibility that Yellow Media’s ratings could be further downgraded with the passage of time or in the event that the Company pursues some form of recapitalization.

YLO has four issues of preferred shares outstanding: YLO.PR.A & YLO.PR.B (Operating Retractible) and YLO.PR.C & YLO.PR.D (FixedReset). All are tracked by HIMIPref™; all are relegated to the Scraps index on credit concerns.

Standard & Poor’s has announced:

• We are revising our outlook on Emera Inc. to negative from stable
• At the same time, we are affirming our ratings, including our ‘BBB+’ long-term corporate credit rating, on the company.
• We base the outlook revision on our view of Emera’s weak cash flow strength that is not likely to improve, but could worsen.
• This expectation reflects a meaningful capital expenditure program due to energy policies at both the federal and provincial level.
• This will likely drive the need for numerous rate increases that we believe heightens regulatory risk in the Nova Scotia market.
• The ratings reflect our opinion of the company’s strong business risk profile and significant financial risk profile.

…
The negative outlooks on both Emera and NSPI reflect our expectation of the heightened regulatory risk due to the potential upward pressure on rates due to expected development projects that the company is pursuing and the impact on cash flow. We believe it is possible that the company could suffer near-to-medium-term deterioration in its credit metrics. This will depend in part on the regulatory response to the capital projects, the timing of the projects’ capital deployment, and the capital structure management uses. We expect Emera to maintain an [funds-from-operations]-to-total debt of more than 12% and debt-to-EBITDA equal to or less than 6x. We could take a negative rating action if we expect the company to breach this target on a sustained basis or invest in assets with greater earnings variability or business risk; or if it does not continue to exhibit stable operating performance. Conversely, although we do not expect it during our two-year outlook horizon, we could take a positive rating action if the company adopts a more conservative financial policy.

EMA.PR.A was deleted from TXPR in July, 2011.

EMA.PR.A is tracked by HIMIPref™ but is relegated to the Scraps index on credit concerns.

Enbridge Inc. has announced:

it has closed its previously announced public offering of cumulative redeemable preference shares, Series H (the “Series H Preferred Shares”) by a syndicate of underwriters co-led by RBC Capital Markets, Scotia Capital Inc. and TD Securities Inc. Enbridge issued 14 million Series H Preferred Shares for gross proceeds of $350 million. The Series H Preferred Shares will begin trading on the TSX today under the symbol ENB.PR.H. The proceeds will be used to partially fund capital projects, to reduce existing indebtedness and for other general corporate purposes.

ENB.PR.H is a FixedReset, 4.00%+212, announced March 20. It seems to have gone well, as the greenshoe was fully exercised. The issue will be tracked by HIMIPref™ and assigned to the FixedReset index.

ENB.PR.H traded 1,068,421 shares today in a range of 24.80-00 before closing at 24.98-10, 8×20. Sorry about the bid price of 24.90 reported below – my error! Vital statistics are:

Brompton Split Banc Corp. has announced:

At a special meeting of preferred and class A shareholders (“Shareholders”) of Brompton Split Banc Corp. (“SBC”) held today, Shareholders approved a special resolution to extend the term of SBC for up to 5 years beyond the scheduled termination date of November 30, 2012 and thereafter for successive terms of up to 5 years as determined by the SBC board of directors. The extension allows Shareholders to continue to enjoy the benefit of SBC’s portfolio of common shares of six Canadian banks (Bank of Montreal, Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada, The Bank of Nova Scotia and The Toronto-Dominion Bank). Canadian banks have stood out amongst their global peers as examples of stability over the long term and through the credit crisis and continue to maintain attractive dividend yields and return on equity. Shareholders will continue to have monthly and annual retraction rights except that the annual retraction date will be advanced forward from the second last business day of December to the second last business day of November commencing in 2013.

In addition to the daily liquidity provided by the TSX listings, shareholders who do not wish to continue their investment may redeem either their preferred shares or class A shares on November 30, 2012 and each extension of the term thereafter on the same terms that currently exist. SBC will announce the term of the initial extension by news release no later than October 1, 2012. Further details are available in the management information circular dated March 1, 2012.

PrefBlog previously reported the proposal to extend term.

SBC.PR.A is tracked by HIMIPref™, but is relegated to the Scraps index on both credit and volume concerns.

Fairfax Financial Holdings Ltd. has announced that it:

has completed its previously announced public offering of Preferred Shares, Series K (the “Series K Shares”) in Canada. As a result of the underwriters’ exercising their option to purchase an additional 1,500,000 Series K Shares, Fairfax has issued 9,500,000 Series K Shares for gross proceeds of $237.5 million. Net proceeds of the issue, after commissions and expenses, are approximately $230 million.

Fairfax intends to use the net proceeds of the offering to augment its cash position, to increase short term investments and marketable securities held at the holding company level, to retire outstanding debt and other corporate obligations from time to time, and for general corporate purposes.

The Series K Shares were sold through a syndicate of Canadian underwriters led by BMO Capital Markets, CIBC, RBC Capital Markets Inc. and Scotia Capital Inc. and that also included TD Securities Inc., Cormark Securities Inc., Desjardins Securities Inc., GMP Securities L.P. and National Bank Financial Inc.

FFH.PR.K is a FixedReset, 5.00%+351, announced March 12. The greenshoe was for 2-million shares, so the option was not completely exercised. FFH.PR.K will be tracked by HIMIPref™, but assigned to the Scraps index on credit concerns.

FFH.PR.K traded 433,256 shares today in a range of 24.63-80 before closing at 24.68-69, 8×45. Vital statistics are:

Canadian Life Companies Split Corp. has finally announced the details of its reorganization:

The purpose of the meeting is to consider and vote upon a special resolution to reorganize the Company, including a capital reorganization of the Preferred Shares of the Company and an extension of the termination date of the Company as described in the Management Information Circular. Extending the life of the Company would allow Shareholders to participate in any strengthening in the Canadian life insurance sector:
• Preferred Shareholders will receive an increased dividend and the opportunity to participate in increases in the net asset value as a result of the issuance of two classes of warrants; and
• Class A Shareholders could benefit from any market appreciation or dividend increase over the extended time period;

If the capital reorganization is approved Preferred Shareholders would receive an increased dividend payment of 6.25% per annum and the following securities for each Preferred share held on or about June 28, 2012 (the “Conversion Date”):

• One 2012 Preferred Share – paying fixed cumulative preferential monthly dividends to yield 6.25% per annum on the $10.00 nominal issue price and having a repayment objective on the termination date of $10.00;
• One 2013 Warrant – each 2013 Warrant can be exercised to purchase one 2012 Preferred Share and one Class A Share (together a “Unit”) for an exercise price of the lesser of $13.25 and 103% of the net asset value of the Company on the Conversion Date (the “2013 Warrant Subscription Price”) on any business day during the period commencing at market open (Eastern time) on the day following the Conversion Date and ending at 5:00 p.m. (Eastern time) on June 3, 2013; and
• One 2014 Warrant – each 2014 Warrant can be exercised to purchase one Unit for an exercise price of 105% of the 2013 Warrant Subscription Price on any business day during the period commencing at market open (Eastern time) on the day following the Conversion Date and ending at 5:00 p.m. (Eastern time) on June 2, 2014.

  In addition, if the capital reorganization is approved, Class A Shareholders and Preferred Shareholders will be provided with a Special Retraction Right as described in the Management Information Circular which is designed to provide Shareholders with an opportunity to retract their Shares, if they so wish, and receive a retraction price that is calculated in the same way that such price would be calculated if the Company were to terminate on December 1, 2012 as originally contemplated.

A look at the Information Circular shows the motion has an excellent chance of passing:

The Company will also pay dealers whose clients hold Shares of the Company a fee of $0.05 in respect of each Preferred Share and $0.03 in respect of each Class A Share voted in favour of the matters to be considered at the Meeting, such payments to be due and owing only if the special resolution in respect of such matters is approved and implemented, and provided the Shareholder does not exercise the 2012 Special Retraction Right discussed below.

The warrants are interesting:

amend the Articles of the Company to permit the Company to create warrants (the “Warrants”) of two series, one series designated as the “2013 Warrants” and providing the holders thereof with the right to acquire one 2012 Preferred Share and one Class A Share on any business day during the period commencing at market open (Eastern time) on the day following the Conversion Date (as defined below) and ending at 5:00 p.m. (Eastern time) on June 3, 2013, for an exercise price of the lesser of $13.25 and 103% of the net asset value of the Company on the Conversion Date (the “2013 Warrant Subscription Price”), and one series designated as the “2014 Warrants” and providing the holders thereof with the right to acquire one 2012 Preferred Share and one Class A Share on any business day during the period commencing at market open (Eastern time) on the day following the Conversion Date and ending at 5:00 p.m. (Eastern time) on June 2, 2014, for an exercise price of 105% of 2013 Warrant Subscription Price, all as more particularly described herein;

The definition of the Conversion Date should be noted carefully:

On the date the capital reorganization is implemented, which if the special resolution is approved is expected to be on or about June 28, 2012 (the “Conversion Date”),

So the exercise price of the warrants will be set sometime around the end of June and will not be more than 13.25.

However, before you whip out your financial calculator and start plugging in Black-Scholes, remember that there are income effects involved. The underlying portfolio yield is about 4.50%, which currently covers only 76% of the preferred share distribution. Once the preferred dividend has been hiked, the coverage will be more like 64% of the distribution. So the drag on the NAV for the first year will be a little over twenty cents, so the exercise price should be adjusted to more like 13.45. You can put your own price on the value of that option.

If the extension of the termination date is approved, a Shareholder who retracts a Class A Share under the 2012 Special Retraction Right will receive a retraction price per Class A Share equal to the net asset value per Unit calculated on May 31, 2012, less $10.00. A Shareholder who retracts a Preferred Share under the 2012 Special Retraction Right will receive a retraction price per Preferred Share equal to the lesser of (i) $10.00 and (ii) the net asset value per Unit calculated on May 31, 2012. Shareholders wishing to take advantage of the 2012 Special Retraction Right must surrender their Shares for retraction no later than the close of business on May 17, 2012 (the “2012 Special Retraction Right Notice Date”). Payment for the Class A Shares or Preferred Shares so tendered for retraction pursuant to the 2012 Special Retraction Right will be made no later than June 19, 2012.

It’s an interesting attempt to transfer value from the Capital Unitholders to the preferred shareholders, but it should be remembered that there are a lot of warrants outstanding! Say, for instance, that the NAV in June 2013 is 14.25. The warrants are in the money, so they all get exercised. And hey, presto, that dilutes the NAV to 13.75! So the other thing option analysts should consider is that the warrants shouldn’t be treated as an entire option, but only half an option.

All in all, this is a lot more interesting proposition than it would have appeared on the announcement date, when the most recent NAV was only 11.64 – the NAV is up more than $1 since then. There’s more asset coverage, and there’s transfer of more value from the Capital Unitholders than there was with the lower NAV, for the simple reason that they have more value to transfer. Naturally, this plan gets better and better as the NAV gets higher – but this also works in reverse!

Voting in favour of the plan is actually a way to reduce risk for preferred shareholders, since there is a Special Retraction Right:

If the extension of the termination date to December 1, 2018 is approved at the Meeting, the Company will also amend the Articles to provide Shareholders with a special retraction right (the “2012 Special Retraction Right”) which is designed to provide Shareholders with an opportunity to retract their Shares and receive a retraction price that is calculated in the same way that such price would be calculated if the Company were to terminate on December 1, 2012 as originally contemplated. Shareholders would be provided with notice of the 2012 Special Retraction Right, through the issuance of a press release and through the CDS Participant through which the Shares are held, and would have until the close of business on May 17, 2012 to provide the Company with notice if they wish to have their Shares redeemed pursuant to the 2012 Special Retraction Right.

If the extension of the termination date is approved, a Shareholder who retracts a Class A Share under the 2012 Special Retraction Right will receive a retraction price per Class A Share equal to the net asset value per Unit calculated on May 31, 2012, less $10.00.

This is a six-month shortening of term from the expected 2012-12-1 termination date.

Therefore, I recommend:

• Vote in favour of the reorganization
• Be prepared to tender for the Special Retraction in mid-May, effective May month-end, depending on the NAV in mid-May

LFE.PR.A was last mentioned on PrefBlog when I reviewed the 2011 Annual Report. LFE.PR.A is tracked by HIMIPref™, but is relegated to the Scraps index on credit concerns.

Canadian Life Companies Split Inc. has released its Annual Report to November 30, 2011.

The S&P/TSX Financial Index is not a particularly well-matched index, as it will be dominated by banks, but we do what we can! Canadian Banc Corp. has the opposite problem. Note that at year-end, the portfolio was about 18.6% banks and 6.6% cash.

Figures of interest are:

MER: 1.14% of thw whole unit value, excluding one time initial offering expenses.

Average Net Assets: We need this to calculate portfolio yield. The number of units changed only very slightly over the year, so the average of the beginning and end of year’s net assets will be close enough: ($116.1-million + $150.4-million) / 2 = $133.2-million.

Underlying Portfolio Yield: Dividends received (net of withholding) of 5,995,631 divided by average net assets of 133.2-million is 4.50%

Income Coverage: Net Investment Income of 4,290,246 divided by Preferred Share Distributions of 5,614,485 is 76%.