Canada's largest newspaper publisher is proposing a restructuring plan that would wipe out nearly half its debt and slash its annual interest payments, easing immediate financial pressure that threatened to turn the company insolvent.
Postmedia Network Canada Corp. outlined a planned recapitalization on Thursday that would eliminate more than $268-million (U.S.) in debt. In exchange, those creditors would receive 98 per cent of the company's equity, all but eliminating the stake owned by existing shareholders.
Postmedia would pay some $50-million (Canadian) less in interest each year and raise new money from lenders. But the deal still leaves the publisher of titles such as the National Post and Vancouver Sun with a $225-million debt payment in five years, supported by a business that is in sharp decline. The company reported a loss for the 14th quarter in a row as revenue fell 12.9 per cent year-over-year, largely as a result of a 19.4-per-cent plunge in print advertising revenue. The figures exclude revenue from last year's $316-million acquisition of newspapers and digital properties from Sun Media.
The deal, drawn up as a plan of arrangement, already has support from more than 80 per cent of Postmedia's debt holders, three-quarters of its shareholders and the board of directors, and the company expects to complete the plan by the end of September. That would give it a badly needed lifeline as it tries to turn around its sagging fortunes, but is hardly a cure-all solution, and Postmedia chief executive officer Paul Godfrey acknowledged "there remains a lot of work to do."
"We're going to have the ability to invest more," he said on a conference call. "It'll probably be in the area of the digital world."
But as to specific investments, he added: "Everything at this time is hypothetical because the crystal ball that all of us have is not totally clear."
Postmedia reported its third-quarter earnings on Thursday, posting a $23.7-million loss for the three months ended May 31. Mr. Godfrey said that revenue declines have shown no sign of letting up, but that if the company hadn't bought the Sun assets, "I think we would have been facing a brick wall much earlier."
The plan won't affect obligations to staff, customers and suppliers, according to Postmedia, which also owns several local dailies such as the Calgary Herald, Ottawa Citizen and Montreal Gazette, and digital sites such as Canoe.com andCanada.com. But it stands to dramatically change the influence the company's creditors hold.
Postmedia's current $648-million in debt – an albatross that has made an already difficult period for newspapers much harder – is divided in two tranches.
Holders of $303-million in first-lien notes, which are first in line to be repaid in the event of a default, emerge relatively unscathed. Canso Investment Counsel Ltd., a fund in Richmond Hill, Ont., owns 82 per cent of these notes, which pay 8.25-per-cent interest. Under the proposal, Postmedia would repay $78-million in principal, but the notes would not come due until 2021, rather than in 2017.
Canso president John Carswell declined to comment, citing company policy.
Second-lien notes worth $268.8-million (U.S.) at 12.5-per-cent interest would be exchanged for shares, relieving Postmedia of hefty interest payments. Note holders would then own 98 per cent of the company's total shares, leaving existing shareholders with a combined 2-per-cent stake. But the company is maintaining a dual-class share structure that is designed to stay onside with Canadian tax rules, which penalize foreign ownership, meaning actual voting control will remain in the hands of a tiny fraction of Canadian shareholders.
Postmedia will then raise $110-million (Canadian) in new cash by offering new second-lien notes, available first to existing second-lien debt holders and backstopped by a select group for a $5.5-million fee. Those notes will pay 10.25-per-cent interest and mature in 2023.
"What we looked for at the beginning of this whole process was stability and certainty," Mr. Godfrey said. "I think we've achieved that."
Postmedia also plans to sell up to $50-million in real estate and use the proceeds to further pay down first-lien debt. Mr. Godfrey said other asset sales – including the company's newspapers – are "not on the table."
The proposal still needs approval from debt holders, shareholders and the Ontario courts. Postmedia's shares closed at 3 cents a share on the Toronto Stock Exchange Thursday, up from 1.5 cents prior to the announcement.
New York-based distressed debt investor GoldenTree Asset Management, which had long held sway in Postmedia's financial affairs, appears to be taking a back seat. GoldenTree is Postmedia's largest current shareholder, with 52 per cent of 280 million limited-voting shares, but as early as March it had begun shopping its stake in the newspaper company. One of the GoldenTree's partners, Ted Lodge, resigned his seat on Postmedia's board in April.
GoldenTree is among the shareholders supporting the proposal, but is not part of an ad hoc committee of second-lien debt holders backing the transaction, nor will it participate in the offering of new shares. GoldenTree is "not involved at all," Mr. Godfrey said.
Reached by phone, Mr. Lodge declined to comment.
Instead, a new potential power broker has emerged in the form of Chatham Asset Management, a New Jersey-based investment firm that Mr. Godfrey said was "the main [second-lien note holder] that we dealt with" in crafting the plan. Calls to Chatham Asset Management were not answered. But other Postmedia debt holders are believed to include Allianz Asset Management, High Rock Capital Management and Riverpark Advisors.
The plan of arrangement allows Postmedia to avoid the prospect of declaring insolvency and filing for creditor protection under the weight of interest payments, at least for the foreseeable future. It can also be a less expensive and less revealing process.
"It's usually much shorter. It involves less parties," said David Ullmann, a lawyer and restructuring expert at Blaney McMurtry LLP. "Most of the work for these plans is generally done behind closed doors, and by the time it's unveiled to the public, it's mostly done."
The newspaper company's board chair, Rod Phillips, said directors unanimously approved the plan as "the best available option" to forge "a stronger company better able to focus on the future." Mr. Godfrey said it gives Postmedia "more runway to continue to pursue our business strategy and explore and leverage new revenue streams."
But precisely where that revenue might come from after a years of punishing revenue declines and relentless cost cutting is less clear.
"It does have the [benefit] of reducing their interest costs. The problem is that it doesn't address the more fundamental question, which is the ongoing decline in advertising revenue, in circulation and in readership," said Christopher Waddell, an associate professor at Carleton University who teaches business journalism. "Nothing is growing."
By the numbers
Postmedia expects to pay $50-million less in annual interest under the proposed plan.
12.5 per cent: Interest rate on current second-lien debt
10.25 per cent: Interest rate on proposed new second-lien debt
September, 2016: Expected time frame to complete the plan
$23.7-million: Postmedia's net loss for the third quarter of the 2016 fiscal year
3 cents: Postmedia's share price at Thursday's close of trading, up from 1.5 cents before the proposal was announced