Yellow Media Inc.'s proposed debt restructuring is headed for a court challenge after the company's bankers and a vocal group of debt holders voiced their opposition to the plan.
The Montreal company, which has been caught between falling revenues and a crushing $2-billion debt load, put forward a plan on July 23 that would see creditors gain control of most of the equity, while current shareholders are nearly wiped out. But there have been rumblings of anger from some creditor groups about the way the spoils are being divided, and the company's bankers and convertible debenture holders – who own bonds that can be converted into common shares – escalated frustrations last week by separately hiring lawyers and going public with their grievances.
On Monday, the banking group, which is made up of the Big Six banks and Caisse Centrale Desjardins, and which is owed $369-million by Yellow Media, will appear in Quebec court to voice its arguments. Under the current plan, the banks would receive a package of bonds, shares and cash in exchange for their debt.
The aim is to cut Yellow Media's debt by more than half, to $850-million. That would chop its interest payments by about $45-million a year and give it more room to try to change its business and find new sources of revenue.
The company relies heavily on sales of advertising in printed Yellow Pages books that are declining in popularity; in the first quarter, Yellow's revenue fell 17.3 per cent.
Banks and convertible debenture holders both argue they were treated unfairly by Yellow Media because they were not consulted before the restructuring plans were made public. The banks accuse the company of using "a divide and conquer strategy" by negotiating only with a small group of bondholders, and they want the process to start over.
The convertible debenture owners, who collectively hold $200-million worth of securities, have a slightly different complaint: they argue that the current deal would give them even 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.
At the moment, it is unclear how receptive the court will be to both groups' complaints because their legal rights are murky. The debt restructuring has already been deemed to be fair by financial advisers BMO Nesbitt Burns and Canaccord Genuity.
But that hasn't stopped the groups from putting forth their arguments. In a motion filed in Quebec court, the banking group, represented by McMillan LLP, states that "creditors are the parties with the primary economic interest in an insolvent entity, and they are, and must be, involved in shaping the terms of a plan that will govern any compromise or arrangement of their debt."
The convertible debenture holders are also upset at "having been excluded completely from the consultative process" said lawyer Avram Fishman at Fishman Flanz Meland Paquin LLP, and they can't understand why "they were not asked whether they agreed with [the proposed arrangement] or what provisions could be changed to induce them to accept it."
Convertible debenture holders say they are being given too little under the current plan, which dictates that for every $1,000 of convertible debentures, the holder will receive approximately 0.625 common shares and 0.35714 warrants. This amounts to less than what preferred shareholders get. The hierarchy of capital structure dictates the order in which investors are paid back in a bankruptcy. Senior debt ranks highest, followed by convertible debt, then preferred shares, then common shares.
The current plan "virtually puts [convertible holders] at the very bottom of the food chain," Mr. Fishman said.
Yellow Media's advisers have admitted the current treatment stems from the assumption that these debt holders would convert their debentures into common shares – though the conversion price is $8 per share and the stock is trading at 7 cents.
Within the investment community, there are some fears the Yellow Media situation will set a precedent, affecting the value of convertible debentures at other companies. Many people who buy these securities – typically retail investors looking for interest income and a safer investment than common shares – do so assuming they rank higher in the event of financial trouble or restructuring. Should that change, the convertible debt outstanding at other companies will likely drop in value.