PrefBlog

DBRS has announced that it:

DBRS has today downgraded Yellow Media Inc.’s (Yellow Media or the Company) Issuer Rating to C (high) from CCC; its Medium-Term Notes rating to C (high) from CCC, with an RR4 recovery rating; and its Exchangeable Subordinated Debentures rating to C (low) from CC (high), with a recovery rating of RR6. DBRS has also placed these ratings and Yellow Media’s Cumulative Preferred Shares rating of Pfd-5 (low) (already at the lowest rating on the scale) Under Review with Negative Implications.

The downgrade follows the Company’s announcement of a recapitalization plan (the Recapitalization), which is intended to restructure the balance sheet in a manner that would better enable Yellow Media to focus on the transformation of its business from print to digital. DBRS notes the recapitalization proposal (see key components below) would result in a default, based on the fact that lenders would receive less than originally intended interest and principal repayment if the offer is approved in a vote on September 6, 2012.

The revised ratings have been placed Under Review with Negative Implications in consideration of the pending stakeholder vote on September 6, 2012. Should the proposal be approved, Yellow Media’s exchanged securities would be placed in default status in accordance with DBRS policy.

S&P has announced:

• Montreal-based classified directory publisher Yellow Media Inc. announced an offer to exchange its existing unsecured debt (credit facilities and medium-term notes) for new senior secured notes and subordinated unsecured exchangeable debentures, as well as cash and common shares.
• The company has also offered holders of existing convertible subordinated debentures, preferred shares, and common shares an exchange for 17.5% of the new common shares as well as warrants representing 10% of the new shares.
• We view the offer as a distressed exchange under our criteria and have therefore lowered our long-term corporate credit rating on Yellow Media to ‘CC’ from ‘CCC’.
• At the same, we lowered our issue-level rating on the company’s senior unsecured debt to ‘CC’ from ‘CCC’ and lowered the issue-level rating on its convertible subordinated debentures to ‘C’ from ‘CC’. The recovery ratings on these securities are unchanged at ‘4’ and ‘6’, respectively.
• We are removing the ratings from CreditWatch.
• Should the company complete the exchange as proposed, we would lower all ratings to ‘D’.

YLO has the following preferred shares outstanding: YLO.PR.A, YLO.PR.B, YLO.PR.C and YLO.PR.D. The proposed recapitalization has been discussed on 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.

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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.
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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?

A DBRS headline states that DBRS Places HSBC Bank Canada Under Review with Negative Implications but details are Top Secret and available for subscribers only.

DBRS simultaneously placed HSBC USA Inc. and HSBC Bank USA, NA under review negative:

The ratings action follows DBRS’s placement of its ratings for HSBC Holdings plc (HSBC or the Group – rated AA (high)), HUSI’s and HBUS’s ultimate parent, Under Review with Negative Implications. Separately, DBRS has withdrawn its ratings on HUSI’s FDIC-guaranteed debt as this debt has been repaid.

The placement of HSBC’s ratings Under Review was driven by the combination of more detailed revelations of the Group’s historic missteps in relation to certain regulatory and legal issues, as well as the changed environment that poses greater challenges to HSBC’s franchise and credit fundamentals.
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The review will focus on HSBC Holdings plc’s prospects for ensuring that it delivers on improved controls to prevent future missteps. The review will also consider the evolving LIBOR/EURIBOR investigations and the more negative environment for large banking organizations. Among the consequences, HSBC’s organization and credit fundamentals could be impacted through increased compliance costs, added fees, limits on pay, increased capital requirements and ring-fencing that could disrupt the efficient operation of a global universal bank.

The missteps referred to are almost certainly the results of the US Senate probe:

HSBC’s U.S. unit “offers a gateway for terrorists to gain access to U.S. dollars and the U.S. financial system,” according to the subcommittee’s report.

The lender ignored links to terrorist financing among its customer banks, including Riyadh, Saudi Arabia-based Al Rajhi Bank (RJHI), which had ties to terror groups through its owners, the report said.
…
The report also cited HSBC’s violations of Treasury Department sanctions on dealings with Iran.
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An outside audit by Deloitte LLP showed that 25,000 transactions totaling more than $19.4 billion involved Iran, according to the report. Of those, as many as 90 percent passed through the bank’s U.S. accounts with no disclosure of ties to Iran, the report shows. Senate investigators documented similar transactions involving North Korea, Cuba, Sudan and Burma.

Bank documents also showed HSBC’s U.S. unit cleared transactions through at least six Iranian banks.

HSBC Bank Canada is the issuer of HSB.PR.C, HSB.PR.D (both DeemedRetractibles) and HSB.PR.E (FixedReset). All are tracked by HIMIPref™ and assigned to the indicated subindices.

Dominion Bond Rating Service has announced that it:

has today placed Transcontinental Inc.’s (Transcontinental or the Company) Senior Unsecured Debt rating of BBB (high) and Preferred Share rating of Pfd-3 (high) Under Review with Negative Implications. Those ratings were previously on Negative trend. The Under Review action follows DBRS’ update of the methodology Rating the Printing Industry, which involved lowering the Industry Business Risk Rating (BRR). The BRR was reduced to the BB (high)/BB range from BB (high). (See separate PR released earlier today.)

The rationale for the methodology change was based on DBRS’ view that the highly competitive industry is being increasingly affected by the structural transition toward digital-based mediums and is applying pressure to traditional printing revenue.

In its review of Transcontinental, DBRS will focus on the Company’s potential to adapt to the changing environment and will assess the Company’s prospects going forward.

Transcontinental’s current rating reflects the Company’s sound financial profile and established position as the largest printer in Canada. The rating also considers the highly competitive and cyclical nature of the printing industry. The earnings profile of Transcontinental is being challenged as customers shift to digital forms of media and the Company struggles to sustain revenues and profitability. In terms of financial profile, Transcontinental remains reasonably sound despite pressure on operating cash flow and higher dividends due to the Company’s modest level of debt.

Transcontinental is the issuer of TCL.PR.D, currently rated Pfd-3(high) by DBRS and P-3(high) by S&P.