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.
Yet no matter how angry they are, there’s little that the convert holders can do. The deal has been deemed to be ‘fair’ by two investment banks, so provided that two-thirds of the banks and senior bond holders approve the recapitalization, it’s pretty much a done deal.
As part of the restructuring, the $1.8-billion in debt held by the banks and senior bondholders (banks are about $370-million of this total), will turn into $750-million of 9 per cent, 6-year senior secured notes; $100-million of 10-year subordinated unsecured exchangeable debentures, with interest payable in cash at 8 per cent and in additional debentures at 12 per cent; 82.5 per cent of outstanding common shares after the deal is approved; and $250-million in cash.
Presently, there are $200-million of convertible debentures outstanding.