Issue Comments

BCE / Teachers' Deal : Chattering Classes Humiliated

The Canadian Press has reported:

The purchase of BCE Inc. (TSX: BCE.TO) by a group led by the Ontario Teachers’ Pension Plan hit a snag Wednesday after the Quebec Court of Appeal overturned a lower court’s decision to allow the largest corporate takeover in Canadian history.

The appeal court sided with the company’s bondholders in reversing Quebec Superior Court Justice Joel Silcoff’s decision to allow the takeover of the company in a deal worth $52 billion.

The bondholders had sought to block the proposed leveraged buyout of Canada’s largest telecom company that they say treats them unfairly because it loads the telecom giant up with debt and makes their bonds a much riskier investment.

“BCE never attempted to justify the fairness and reasonableness of an arrangement that results in a significant adverse economic impact on the debentureholders while at that same time it accords a substantial premium to the shareholders,” the five-judge panel ruled.
…
Mark Meland, one of the lead lawyers for the bondholders, said his clients were pleased by the court’s decision that was widely expected to side with the company.

“The chattering classes were virtually unanimous in stating incorrectly that we had no chance in being successful, but our group, the bondholders that I represent, we always believed we had a good case,” Meland said.

Mea culpa, mea culpa, mea maxima culpa, and profound apologies to Mr. Meland!

But congratulations … the plot thickens!

The last report on this deal was regarding sabre rattling by the banks.

BCE has the following preferred shares outstanding: BCE.PR.A, BCE.PR.C, BCE.PR.D, BCE.PR.E, BCE.PR.F, BCE.PR.G, BCE.PR.H, BCE.PR.I, BCE.PR.R, BCE.PR.S, BCE.PR.T, BCE.PR.Y & BCE.PR.Z

I have no idea what’s going to happen … there are financing jitters and now some legal jitters … I have no expertise, special information or analytical advantage in either area. It’s all speculation.

Update: More on Bloomberg:

Today’s decision “rewrites Canadian law relating to the duty of Canadian boards of directors to maximize value for shareholders,” Martine Turcotte, BCE’s chief legal officer, said in the company’s statement.

Update: BCE is seeking leave to appeal to the Supreme Court.

Update: The Globe has published the court judgement. Kudos for them! What I’d really like to see is a decision by the relevant authorities that all paperwork filed in all court cases be made publicly available (via Internet) with no charge … but until that happy day, I’ll settle for the press occasionally publishing scraps.

Market Action

May 20, 2008

Sorry folks! Today was boring on the news front AND I was busy, so there’s no macro-level commentary. Accrued Interest wrote a good piece on How Safe are the GSEs?.

Strength in the Floating Rate sector continues to astound; they’re really coming back a lot from their extreme depths. I don’t think it has anything to do with the credit, because the BAM perpetuals are still bumping along without any huge gains. PerpetualDiscounts are doing well, but this is simply in line with long corporates, which have returned +1.44% in the month to 5/20.

Note that these indices are experimental; the absolute and relative daily values are expected to change in the final version. In this version, index values are based at 1,000.0 on 2006-6-30
Index Mean Current Yield (at bid) Mean YTW Mean Average Trading Value Mean Mod Dur (YTW) Issues Day’s Perf. Index Value
Ratchet 4.75% 4.78% 47,734 15.94 1 -0.2820% 1,080.6
Fixed-Floater 4.69% 4.58% 65,517 16.13 7 -0.6110% 1,069.5
Floater 4.07% 4.11% 61,380 17.14 2 +0.8898% 927.8
Op. Retract 4.83% 2.61% 89,192 2.53 15 -0.0766% 1,056.0
Split-Share 5.25% 5.44% 69,956 4.17 13 +0.2382% 1,059.2
Interest Bearing 6.10% 5.99% 53,940 3.81 3 +0.4044% 1,111.9
Perpetual-Premium 5.89% 5.71% 136,790 5.80 9 +0.0573% 1,021.8
Perpetual-Discount 5.65% 5.69% 298,053 14.03 63 +0.0898% 927.9
Major Price Changes
Issue Index Change Notes
BCE.PR.Z FixFloat -1.4517%  
BNS.PR.J PerpetualDiscount -1.3878% Now with a pre-tax bid-YTW of 5.42% based on a bid of 24.16 and a limitMaturity.
BSD.PR.A InterestBearing +1.0309% Asset coverage of just under 1.8:1 as of May 16, according to Brookfield Funds. Now with a pre-tax bid-YTW of 6.62% (mostly as interest) based on a bid of 9.80 and a hardMaturity 2015-3-31 at 10.00.
ELF.PR.G PerpetualDiscount +1.1543% Now with a pre-tax bid-YTW of 6.25% based on a bid of 19.28 and a limitMaturity.
BAM.PR.B Floater +1.2309%  
Volume Highlights
Issue Index Volume Notes
PWF.PR.K PerpetualDiscount 79,425 Nesbitt crossed 75,000 at 22.24. Now with a pre-tax bid-YTW of 5.66% based on a bid of 22.09 and a limitMaturity.
RY.PR.H PerpetualDiscount 75,110 CIBC crossed 50,000 at 24.95. Now with a pre-tax bid-YTW of 5.71% based on a bid of 24.95 and a limitMaturity.
TD.PR.R PerpetualDiscount (for now!) 60,650 Now with a pre-tax bid-YTW of 5.69% based on a bid of 25.05 and a limitMaturity.
PWF.PR.I PerpetualPremium 52,550 Nesbitt crossed 50,000 at 25.30. Now with a pre-tax bid-YTW of 5.80% based on a bid of 25.30 and a call 2012-5-30 at 25.00.
PWF.PR.G PerpetualDiscount 51,800 Nesbitt crossed 50,000 at 25.25. Now with a pre-tax bid-YTW of 5.71% based on a bid of 25.25 and a limitMaturity.

There were twenty-two other index-included $25-pv-equivalent issues trading over 10,000 shares today.

Issue Comments

RBT.PR.A Partial Call For Redemption

R Split II Corporation has announced:

that it has called 23,250 Preferred Shares for cash redemption on May 30, 2008 (in accordance with the Company’s Articles) representing approximately 5.351% of the outstanding Preferred Shares as a result of the special annual retraction of 134,500 Capital Shares by the holders thereof. The Preferred Shares shall be redeemed on a pro rata basis, so that each holder of Preferred Shares of record on May 29, 2008 will have approximately 5.351% of their Preferred Shares redeemed. The redemption price for the Preferred Shares will be $30.50 per share.

The last RBT.PR.A partial call was noted by PrefBlog last year.

RBT.PR.A is not tracked by HIMIPref™

Issue Comments

BXN.PR.B Partial Call for Redemption

B Split 2 Corporation has announced:

that it has called 84,808 Preferred Shares for cash redemption on May 30, 2008 (in accordance with the Company’s Articles) representing approximately 8.920% of the outstanding Preferred Shares as a result of the special annual retraction of 177,808 Capital Shares by the holders thereof. The Preferred Shares shall be redeemed on a pro rata basis, so that each holder of Preferred Shares of record on May 29, 2008 will have approximately 8.920% of their Preferred Shares redeemed. The redemption price for the Preferred Shares will be $9.75 per share.

The last partial redemption of BXN.PR.B was noted by PrefBlog last May.

BXN.PR.B is not tracked by HIMIPref™

Issue Comments

SNP.PR.V Partial Call for Redemption

SNP Split Corp has announced:

that it has called 220,819 Preferred Shares for cash redemption on June 4, 2008 (in accordance with the Company’s Articles) representing approximately 12.091% of the outstanding Preferred Shares as a result of the special annual retraction of 578,638 Capital Shares by the holders thereof. The Preferred Shares shall be redeemed on a pro rata basis, so that each holder of Preferred Shares of record on June 3, 2008 will have approximately 12.091% of their Preferred Shares redeemed. The redemption price for the Preferred Shares will be US$10.25 per share.

SNP.PR.V is not tracked by HIMIPref™.

Miscellaneous News

Critchley of Financial Post: Fixed-Resets Good!

Barry Critchley of the Financial Post had a piece in today’s Financial Post – Ruggins a Master of Tier 1, in which he comes out in favour of the currently fashionable fixed-reset structure:

If a bank was interested in raising Tier 1 capital and wanted to demonstrate that it was investor friendly, a useful starting point would be to call Len Ruggins, the former executive in charge of capital market funding for BCE and Bell Canada.

During his career, Ruggins raised more than $30-billion of capital, or more than any other non-bank executive in the country. Ruggins, now based in Calgary, had a rule: Don’t bag investors. He interpreted that rule by opting never to issue fixedrate perpetual preferred shares. The reason: They aren’t in the best interests of investors. Instead, they serve the interests of issuers that have all the power to let the prefs stay out there forever — and forever is a long time.
…
In five years when the so-called subsequent fixed-rate period comes around, investors have a choice: They can opt to receive other fixedrate pref shares that have a yield equal to the rate on five-year Canada bonds plus 205 basis points. In this way, the spread becomes a permanent part of the formula and means investors won’t be harmed by any improvement in Scotiabank’s credit spread over the period. If in five years the yield on Canada bonds is above 2.95%, then investors will receive a higher nominal yield; if the yield is lower, investors will receive a lower nominal yield.

In five years, investors have another choice: They can opt to convert to non-cumulative floating-rate preferred shares. The floating-rate pref shares will pay a dividend equal to the three-month T-bill rate plus 2.05%. However, the floating-rate pref is available only if there is a minimum-sized float.

From Scotia’s perspective, the issue was attractive: It gets Tier 1 capital, given that OSFI, the federal regulator, signed off on the transaction, and it still gets to control most of the shots. As well, the structure allowed the bank to raise more capital — at a lower yield — than a traditional perpetual.

Since Scotia’s deal — on which it’s understood Desjardins Securities played a key structuring role — Fortis raised $200-million via a similar offering.

The Fortis new issue and the Scotia new issue have both been previously discussed.

There are some critical flaws in Mr. Critchley’s analysis:

  • Credit risk has a high degree of importance in fixed income investing … particularly with instruments that won’t ever just run off the books. Due to the risk that bad times may come, investors must increase their expected returns in the event that good times continue.
  • Contrary to If in five years the yield on Canada bonds is above 2.95%, then investors will receive a higher nominal yield, there is no assurance that the bonds will not be called at such a time.
  • There is an inherent contradiction within As well, the structure allowed the bank to raise more capital — at a lower yield — than a traditional perpetual. Issuers and investors are at war with each other. A lower yield – good for the issuer – can be justified only to the extent that risk is transferred … in this case, there is some show of transferring interest rate risk. The fact that these issues are callable in five years at par means that the transfer inherent in these prefs is minimal.

Incidentally … the portfolio strategy of one major dealer advises investors to retain cash for investment in new, “defensive”, fixed-reset issues … so I suspect that there are a lot of deals in the pipeline waiting for an opportune moment.

Issue Comments

BCE / Teachers' Deal: Banks Rattle Their Sabres

The New York Times has reported:

The $51.8 billion takeover of Bell Canada, the largest leveraged buyout ever proposed, appeared to be in trouble over the weekend as the Wall Street banks that committed to finance the deal sought to renegotiate the lending terms, people on both sides of the transaction said on Sunday.
…
The negotiations over the Bell Canada buyout began to fray late Friday, said people on both sides of the deal, who were in closed-door discussions all weekend.

The banks backing the deal, led by Citigroup, Deutsche Bank and the Royal Bank of Scotland, sent revised terms to the consortium of buyers. The new terms included higher interest rates, tighter loan restrictions and stronger protections for the banks, far exceeding the original terms, these people said.

Members of the buyers’ group — the Ontario Teachers Pension Plan; the buyout firms Providence Equity Partners, Madison Dearborn Partners and Merrill Lynch Global Private Equity; and Toronto-Dominion Bank — held several conference calls over the weekend to discuss their options. Among the possibilities is filing a lawsuit against the banks to force them to complete the deal on its original terms, these people said.

“It’s patently obvious that the banks have no intention of closing the deal,” one executive who read the revised terms said.

The story was picked up by the Globe & Mail and discussed on Financial Webring Forum.

In the day’s most predictable story:

The Ontario Teachers’ Pension Plan said Monday it expects its lenders to honour their commitments to finance the $35-billion takeover of BCE Inc. after the company’s share price tumbled almost 6 per cent on reports the lending group is pushing for new financing terms.
…
BCE spokesman Bill Fox would not comment on whether BCE has been informed about any talks between the company’s buyers and their lenders.

“We have an agreement,” Mr. Fox said. “And we have been working since the deal was signed on all aspects of getting the transaction closed, on the basis of the terms set out in the agreement.”

Desjardins has predicted a repricing of the deal five to 8.16% lower, as reported on PrefBlog May 14. Syndication of the deal has started; the last major development was the loss in court by bondholders challenging the deal.

I simply have no idea what is going to happen here. The Clear Channel precedent is sometimes cited as evidence that the deal will succeed (albeit at a lower price) but in that case, the buyers could threaten the financers with a Texas jury – notorious for awarding crippling damages against whoever has the deepest pockets in the courtroom. I will opine, however, that the deal no longer makes any sense for either the buyers or the financiers … for all their confident, lawsuit-avoiding words, they must be rather eager to pass the billion-dollar-break-fee hot potato to the banks and have done with it.

I don’t have a clue what the implications for BCE’s preferred shares are. It’s possible that the deal could be proceed with the common repriced and the preferred shareholders taken out at the original price; it’s possible that the preferreds could be marked down proportionately to the common; it’s possible that the deal could proceed as a friendly takeover of the common only, leaving the preferred shares outstanding; it’s possible that the deal could collapse completely.

It’s all speculation, not investing, and I doubt whether any of the participants has any better idea than I do at this time.

BCE has the following preferred shares outstanding: BCE.PR.A, BCE.PR.C, BCE.PR.D, BCE.PR.E, BCE.PR.F, BCE.PR.G, BCE.PR.H, BCE.PR.I, BCE.PR.R, BCE.PR.S, BCE.PR.T, BCE.PR.Y & BCE.PR.Z

Update: There’s some calming commentary from the WSJ Deal Blog:

For weeks, chatter has held that, as goes the Clear Channel buyout, so will go the BCE deal. Insofar as both involve banks and money, that may be true.

But, now that some press outlets are reporting that the BCE deal is “in peril” because the banks are fighting on the lending terms, maybe we are all older and wiser enough to realize that asking for new terms — albeit tough terms — does not constitute the death of a deal. It may be time to look at key issues that will distinguish how BCE is different from Clear Channel.
…
It’s quite possible– and even probable — that BCE will play out just like Clear Channel, with a lot of huffing and puffing ending in a deal everyone can live with.

Market Action

May 16, 2008

Not much today, folks!

Naked Capitalism republishes some of a piece by Gillian Tett of the Financial Times regarding the advisability of managers talking to each other; her recommendations echo those of the International Report on Risk Management Supervision and provide a little bit of psychological colour.

Iceland is in trouble! Their Central Bank has had to borrow EUR 1.5-billion to prop up the currency:

The krona has dropped as much as 26 percent against the euro this year on concern Iceland’s commercial banks have taken on too much foreign debt, prompting speculation the central bank may have to step in.

The offer of aid from neighbors “will help stabilize the financial markets, but not the basic imbalances of the Icelandic economy,” said Lars Christensen, senior emerging markets strategist at Danske Bank A/S in Copenhagen.
…
The country’s three biggest banks have combined assets of 11.4 trillion kronur, or nine times the size of the economy. At the biggest lender, Kaupthing Bank Hf, foreign currency holdings make up 87 percent of assets.

Meanwhile, the lines between “private equity funds” and “vulture funds” seem to be getting a little blurred:

McGoldrick, 49, was co-head of the Goldman group that buys corporate debt that is near default, lends to financially struggling businesses and trades shares of companies emerging from bankruptcy. His new firm, Mount Kellett Capital Management LP, will do transactions around the globe, said the people, who asked not to be identified because the venture is private.

Private-equity firms raised $163.5 billion in the first three months of 2008, the second-biggest quarter since London- based Private Equity Intelligence Ltd. started tracking the data in 2003. The money is coming from pension funds, endowments and sovereign wealth funds even as a shortage of credit has stopped most deal-making.

“There’s an appetite for serious distressed investors and he has a track record of having done a good job on those deals, so there will be some receptivity,” said Steven Kaplan, a finance professor at the University of Chicago’s business school.

“Private Equity” has a much nicer ring to it, doesn’t it?

Bloomberg has a good piece on the collapse of the Auction Rate Securities Markets. Amusingly – in a sick sort of way – is that the front-page link is “Auction-Rate Market Loses $1.7 Billion for Taxpayers Misled by Governments”, while the actual story headline is “Auction-Rate Collapse Costs Taxpayers $1.65 Billion”. There’s nothing that I can see in the story that would justify a charge that taxpayers were misled by governments … but in these days of heroic investor advocacy, it’s very fashionable to claim that anything not to one’s liking is unethical.

The story suggests:

Many issuers are getting out of auction-rate debt and say they will never use it again. State and local governments have already replaced or announced plans to replace at least $66 billion of the securities, according to Bloomberg data. Many are switching to variable-rate demand bonds, whose 2.25 percent average in the past month is about half the 4.56 percent for auction-rate bonds. Others are stuck, unable to issue new debt. Some investment banks, including Citigroup, say the market will never come back.

“It’s a damaged product, and I can’t imagine issuers using it again,” said Wisconsin’s Hoadley. “A lot of people will have to die and institutional memory go away before people will come back to it.”
…
Gallatin, the father of auction-rate securities, doesn’t hold out much hope. He expects auction-rate bonds will be replaced by other debt because too many investors and issuers lack confidence.

“The back of the market is broken,” he said. “I think the market’s problem started with credit, but now credit isn’t the problem.”

Who knows? The doomsayers may well be right, and I must be very cautious when questioning Citigroup’s opinion regarding what they can sell … but it seems to me that the market could be resurrected in the same manner as Canadian (Bank Sponsored) ABCP … slap a global liquidity guarantee on the stuff and away you go! In other words, Citigroup could underwrite such an issue, with a guarantee that it will put in a permanent bid for the entire issue at, say BAs + 500 (guaranteeing a fixed rate for 40 years might be a little dicey!).

Again, who knows? Let’s wait for things to calm down and revisit the issue in, say, five years. The basic issuers’ Holy Grail of financing long term assets at short term rates, and the basic investors’ Holy Grail of getting an extra 20bp on pretend-short-term paper will never go out of style!

The drive to get authority for the Fed to pay interest on reserve balances (discussed on May 7 and April 29) continues with Bernanke writing Pelosi:

Federal Reserve Chairman Ben S. Bernanke asked Congress to immediately give the central bank authority to pay interest on commercial-bank reserves, according to a letter from the Fed chief to House Speaker Nancy Pelosi.

“Congress recognized that payment of interest on reserves would contribute to the efficiency of the financial system,” Bernanke, 54, said in a letter sent to Pelosi, a California Democrat. The central bank isn’t authorized by Congress to begin making such payments until October 2011.

“We recommend that the date be changed to make the legislation effective immediately,” Bernanke wrote in a letter dated May 13.

Performance was again nicely positive today, but volume was awful.

Note that these indices are experimental; the absolute and relative daily values are expected to change in the final version. In this version, index values are based at 1,000.0 on 2006-6-30
Index Mean Current Yield (at bid) Mean YTW Mean Average Trading Value Mean Mod Dur (YTW) Issues Day’s Perf. Index Value
Ratchet 4.78% 4.81% 48,108 15.90 1 +0.1614% 1,083.7
Fixed-Floater 4.65% 4.56% 63,598 16.15 7 +0.6011% 1,076.0
Floater 4.10% 4.15% 61,758 17.08 2 +0.8720% 919.6
Op. Retract 4.82% 2.49% 88,473 2.40 15 +0.1049% 1,056.8
Split-Share 5.25% 5.50% 70,409 4.16 13 +0.3483% 1,056.7
Interest Bearing 6.12% 6.12% 53,109 3.82 3 +0.1686% 1,107.4
Perpetual-Premium 5.89% 5.71% 135,944 4.51 9 -0.1700% 1,021.2
Perpetual-Discount 5.65% 5.69% 300,213 14.10 63 +0.1146% 927.1
Major Price Changes
Issue Index Change Notes
RY.PR.A PerpetualDiscount -1.6409% Now with a pre-tax bid-YTW of 5.49% based on a bid of 20.38 and a limitMaturity.
POW.PR.C PerpetualDiscount (for now!) -1.1444% Now with a pre-tax bid-YTW of 5.85% based on a bid of 25.05 and a limitMaturity.
IAG.PR.A PerpetualDiscount +1.0165% Now with a pre-tax bid-YTW of 5.60% based on a bid of 20.87 and a limitMaturity.
CM.PR.E PerpetualDiscount +1.0526% Now with a pre-tax bid-YTW of 5.89% based on a bid of 24.00 and a limitMaturity.
BAM.PR.B Floater +1.0951%  
BNS.PR.L PerpetualDiscount +1.2077% Now with a pre-tax bid-YTW of 5.42% based on a bid of 20.95 and a limitMaturity.
SLF.PR.C PerpetualDiscount +1.2585% Now with a pre-tax bid-YTW of 5.42% based on a bid of 20.49 and a limitMaturity.
FFN.PR.A SplitShare +1.4851% Asset coverage of 2.0+:1 as of April 30, according to the company. Now with a pre-tax bid-YTW of 4.87% based on a bid of 10.25 and a hardMaturity 2014-12-1 at 10.00.
BCE.PR.A FixFloat +1.8025%  
Volume Highlights
Issue Index Volume Notes
POW.PR.D PerpetualDiscount 133,020 Now with a pre-tax bid-YTW of 5.76% based on a bid of 21.97 and a limitMaturity.
BMO.PR.L PerpetualDiscount (for now!) 61,850 RBC crossed 10,000 at 25.10. Now with a pre-tax bid-YTW of 5.86% based on a bid of 25.10 and a limitMaturity.
TD.PR.R PerpetualDiscount (for now!) 53,100 Nesbitt crossed 50,000 at 25.08. Now with a pre-tax bid-YTW of 5.68% based on a bid of 25.08 and a limitMaturity.
BMO.PR.H PerpetualDiscount 38,140 Now with a pre-tax bid-YTW of 5.45% based on a bid of 24.12 and a limitMaturity.
RY.PR.H PerpetualDiscount 17,800 Now with a pre-tax bid-YTW of 5.70% based on a bid of 25.00 and a limitMaturity.

There were seven other index-included $25-pv-equivalent issues trading over 10,000 shares today.