Would you buy a BlackBerry Ltd. bond, taking the risk that the company won't be there to repay you in three or five or 10 years?
Just who exactly would be willing to strap on that trade is the chief question facing the banks who are being asked to lend money to Fairfax Financial Holdings and its "consortium" of unknowns in their attempt to maybe buy BlackBerry Ltd.
Fairfax says it has approached the securities subsidiaries of Bank of Montreal and Bank of America in hopes of arranging financing. At the currently mooted price of $4.7-billion for BlackBerry (based on a $9 a share bid), any lenders would be looking at putting up a number in the billions of dollars.
There's not much likelihood that the banks would like a billion dollars each of exposure to BlackBerry on their balance sheets, so they need to consider just who they could offload that risk to and at what price. The options would include going to the bond market, or trying to syndicate the loans to buyers in the high-yield term loan market.
What would interest rate would BlackBerry have to pay to get such a deal done?
BlackBerry doesn't have a credit rating and comparable bonds are not easy to come by. That said, here's one.
A year ago, there was a cellphone company that was burning cash as it got set to launch a new smartphone family in hopes of cracking the iPhone-Android duopoly. In the meantime, the company was fast cutting jobs to try to chase the decline in its revenue. Bond rating agencies were dropping the company's ratings further into junk territory.
The company was Nokia Corp., and at the point last summer when things looked the worst for the Finnish company, its $1-billion (U.S.) bond due in 2019 reached a yield that briefly topped 11 per cent. For much of 2012, investors demanded a yield of more than 8 per cent to own a Nokia bond. These days, after some operational improvements, some modest signs of success from its new Lumia phones and then the sale of the Lumia phone division to Microsoft, the bond yields about 5 per cent.
Given where BlackBerry is, drawing a line to the Nokia yields of last year does not seem unduly unfair. Nokia circa 2012 and BlackBerry today both needed to slash jobs and faced cash burn rates that were troubling. Nokia probably looked a little better in that there was still some hope for its Lumia line, while BlackBerry's Z10s have already proven a flop. BlackBerry probably looks a bit better than Nokia of 2012 given BlackBerry has no debt while Nokia had a significant load.
Now add the fact that all things being equal, a long-term bond from a company like Nokia circa 2012 would be trading at an even higher yield today thanks to shifts in the bond market. Nokia was rated BB– after a cut in August 2012 from Standard & Poor's. According to Bloomberg, the long end of the BB-rated corporate curve for U.S. bonds has bumped higher by about 25-basis points for a seven-year issue and 40 basis points at the 10-year mark.
Net it all out and it seems reasonable to suggest that on this analysis, if you subscribe to it, BlackBerry would be facing high single digit yields at the very least.
Fairfax could probably lower the cost of debt by guaranteeing some of the exposure. However, on Tuesday Moody's declared the BlackBerry situation "credit negative" for Fairfax just based on its equity exposure, and raters probably would not like to see Fairfax taking on debt obligations on top. In the insurance business, ratings matter. It's hard to see Fairfax going down that road. Ditto for any pension funds or private equity partners, who like to put private equity acquisitions all by themselves in "bankruptcy remote" entities that they are not required to support (though they sometimes choose to do so).
That means that somebody has to figure out how to make a company that's already burning cash with a clean balance sheet able to shoulder a debt load that generates hundreds of millions of dollars a year in interest payments. Even if Fairfax finds enough partners to fund half the purchase price of $4.7-billion with equity, it still means $2.35-billion in new debt. At a 9 per cent interest rate, that's $212-million a year in interest costs. And BlackBerry not only has to pay that, but somehow find a way to reward its equity shareholders through debt principal paydown, dividends or an increase in enterprise value driven by equity appreciation.
That's a tough one to get your head around.
(Boyd Erman is a Globe and Mail Reporter & Streetwise Columnist.)
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