How many CFAs does it take to calculate the leverage on the BCE Inc. leveraged buyout? More than there are on Bay Street, apparently, but it seems clear that the once gold-plated BCE bonds are headed for the land of junk.
Nobody, not even the country's sharpest bond analysts and investors, is quite sure just exactly how much debt the Ontario Teachers Pension Plan-led buyout group will pile onto BCE if the planned leveraged buyout of the company comes to fruition. The best guesstimates seem to be between $26-billion and $29-billion of new borrowings on top of what's left outstanding when a few inconvenient maturities are redeemed (mostly the ones coming due during the four or five years the Teachers group is likely contemplating owning BCE before finding another buyer).
But both Fitch and DBRS, which rate bonds, said Tuesday that after the details are all clear they expect that BCE could end up with debt of six times its earnings before interest, taxes, depreciation and amortization. That's junk territory, and Fitch Tuesday cut its rating on BCE to 'BB-' from 'BBB+.' DBRS isn't ready to move yet, saying that it wants to see more information before deciding on a new rating, but analyst Paul Holman hinted on a conference call with investors Tuesday afternoon that it could end up shaking out even worse for BCE bondholders.
" I'd like to think they'd be in the BB range not the single B range, but it's not over," he said.
DBRS defines BB as "speculative and non-investment grade, where the degree of protection afforded interest and principal is uncertain, particularly during periods of economic recession."
If that sounds bad, here's B: "Long-term debt rated B is considered highly speculative and there is a reasonably high level of uncertainty as to the ability of the entity to pay interest and principal on a continuing basis in the future, especially in periods of economic recession or industry adversity."
With the drubbing from BCE fresh in many investors' minds, and likely to lead to calls for protection from LBOs and the ensuing ratings spirals, expect more issuers to follow the lead of Brookfield Asset Management and include a "put" option that enables investors to sell the bonds back to the company in the event of a change of control and a drop below investment grade.
The issuers won't like it, but with the wounds from BCE raw, investors are likely to stand firm.