Canadian bondholder activism
30 March 2007
That’s not the kind of headline that usually reels them in, which might explain why so little ink has been spilled telling the bondholders’ story in this potential KKR/BCE buyout. I have written about covenants before and think this is a story worth looking at and that we may hear more about. If Sears Canada was strike one for bondholders then BCE is sure to be strike two and we might see some bondholder action to prevent strike three.
The Toronto CFA Society held a panel discussion on Wednesday: “Degradation of Covenants for Public Bonds.” The next day, the Globe breaks the news that BCE has been in talks with KKR. The stock is up about 10% so far with the company denying any ongoing discussions. Shareholders are at the bar drinking to celebrate. Bondholders are at the bar too, but they’re drinking to forget.
A quick look at BCE’s trust indentures shows the kind of covenant package that the panelists were talking about. If a private equity deal goes through here, we might see a lot less of this kind of covenant structure in the future.
How can bondholders change this? A few thoughts from the panel. Bennett Jones partner Raj Sahni spoke about the importance of bondholders working together as evidenced by the Stelco case.
HSBC’s Rodolphe Ranouil, CFA gave a European view citing the ISS leveraged buyout as a watershed event in the Sterling and Euro bond markets. Within a week of the LBO announcement, bondholders started demanding better covenant protections:
• About 18% of the bonds issued before the ISS LBO announcement in the GBP and EUR markets had at least one of the following covenant: change of control put, a strong negative pledge (inclusion of bank debt) or restrictions against asset disposals.
• The proportion jumped to 40% post the ISS LBO but 50% of the covenanted bonds had a Change of Control put in their documentation
• Latest bond issues show a more widespread use of step up coupon language linked to a change of control related rating downgrade (Telstra, Belgacom) or not (ITV). Will the trend set continue with a more widespread inclusion of material business change language in the events of default?
Back to BCE, the shareholders might be thrilled but bondholders have no reason to celebrate. As discussed here BCE is a prime target for more leverage. When you’re a bondholder and your upside is getting your money back plus a modest coupon, more leverage is exactly what you don’t want.
Granted KKR won’t be able to put anywhere near the >95% leverage that they were reportedly able to apply in their Safeway buyout from 1986. But they can probably slide another $8 – $12 Billion of debt onto the company which has about $2.5 Billion of EBIT. The swing here would be capex. If the DA is lower than the capex needed to, say, build out fibre to your street then the leverage would be at the lower end of that range. Either way the cash won’t be there to give any extra cushion on the existing bonds’ interest.
Shareholders will continue to get the lion’s share of the press on this story but with $12 Billion of bonds outstanding we might start to see some activism from that quieter group futher up the balance sheet.
CWN
No comments yet