A small but vocal group of Yellow Media bondholders is crying foul about the company’s proposal to restructure its overwhelming debt load.
Investors who hold convertible debentures – bonds that can be converted into common shares – argue that the deal would give them less than those who own preferred and common shares, even though both classes of shares rank lower in the firm’s hierarchy of debt and equity.
This hierarchy – called the capital structure – dictates the order in which investors are paid back in a bankruptcy. Senior debt holders and bank loans are repaid first, followed by convertible debentures, then preferred shares, then common shares.
Because every tier carries a different chance of repayment, the investors in each are paid different yields. Senior debt is considered to be safest, so it pays the lowest interest rate. Common shares are riskiest, but have the potential for the biggest gains if the stock price shoots higher.
Despite the well-known hierarchy that puts debt before equity, Yellow Media’s restructuring is using different rules, infuriating the holders of $200-million in convertible debentures, many of whom are retail investors. Investment bankers worry this will create a precedent and could have a drastic effect on the value of convertible debentures at a time when this class of debt is a hot commodity in a yield-thirsty market.
“It’s beyond belief,” said David Juniper, a retail broker with Worldsource Securities. “They’re basically just wiping the convertible bondholders off the map.”
The current plan dictates that for every $1,000 of convertible debentures, the holder will receive approximately 0.625 common shares and 0.35714 warrants, which give the owners the option to buy shares at a pre-set price in the future.
Preferred shareholders, however, receive 6.25 common shares and 3.57143 warrants for every 100 preferred shares owned. While the math is complicated, for the same amount of money invested, the preferred shareholders will be getting far more than the convertible debenture holders.
Mr. Juniper argued that the deal breaks the assumption of safety that retail advisers have always taken for granted when investing in convertible debentures, relative to shares. “My clients don’t buy convertibles to make money,” he said, adding that they buy them for the steady yield and safety.
A Yellow Media spokesperson said Tuesday that the company won’t be providing any additional comment.
However, during a conference call on Monday, Yellow Media’s restructuring advisers, BMO Nesbitt Burns and Canaccord Genuity, explained the rationale for treating convertible holders in this manner.
They said that Yellow Media assumed that convertible debenture holders would convert their bonds to common shares, despite an $8 conversion price when the stock was trading around eight cents.
According to lawyers not involved in the deal, the presiding court for this restructuring will likely rely on case law to approve the deal, and case law dictates that debt holders and shareholders must vote on the transaction as separate classes of owners. To make sure shareholders approve, the company must give them reason to vote, and that could be why they’re getting something extra.
Convertible debenture holders, however, have been grouped with holders of the senior debt. Their $200-million pales in comparison to the $1.8-billion owed to senior holders and the banks, so their votes are not going to sway the result.
Mr. Juniper said there is already talk of fighting the restructuring.