PrefBlog

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.

This entry was posted on Wednesday, April 4th, 2012 at 11:25 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.