A low-key Canadian portfolio manager with a nose for distressed bonds snuck up on the Postmedia deal, becoming a central player after the company realized one of its major bondholders was right in its backyard.
That would be Toronto-based Canso Investment Counsel, a firm with about $10-billion of assets that is so low profile it did not even get a mention in the press release that unveiled the Postmedia purchase of 175 newspapers from Quebecor Inc. for $316-million. All that release said is one bondholder who already owned a huge chunk of debt would take down the entire $140-million of additional bonds that the transaction required.
That means Canso will own at least $240-million and probably more of Postmedia paper, making it one of the biggest bondholders. It's no longer just a New York hedge fund play. Canso's suburban offices are just 25 kilometres up the freeway from Postmedia's. (That's only half an hour in good traffic on the Don Valley Parkway, which of course doesn't actually ever happen.)
Yet Canso flew so far beneath the radar that sources said even Postmedia didn't know that it had become a major bondholder until pretty recently. Sure, Canso was known to own some Postmedia debt. The firm likes beat-up businesses, finding value where it can. It was one of the investors alongside Fairfax Financial Holdings in the BlackBerry turnaround. And it is a big owner of Yellow Media securities.
Postmedia didn't know that Canso had been buying up bonds in the secondary market and had amassed more than half the $205-million of first-lien notes outstanding.
It was not until Postmedia started talking to existing debt holders to see if they would buy more that it became clear that Canso owned at least half of the outstanding first-lien bonds. That means at least $100-million or so as a starting point. Canso then agreed to buy the whole $140-million of new debt. And Canso had leverage to ask for all of it – it owned so much that its consent would be needed to allow the financing. Selling all the bonds to Canso also made it simple for Postmedia, which could deal with one creditor who was supportive.
Quebecor was keenly watching the financing come together. The seller wanted no risk that the deal would fall through because of a lack of financing, so it wanted to know for sure that the debt was placed. That said, debt was never going to be the hard part. With a de-leveraged Postmedia producing cash flow of three times annual interest payments, three-year first-lien paper with a coupon of 8.25 per cent would be pretty popular with high-yield investors.
The harder part would always be the equity side, but that problem was solved when existing Postmedia investor GoldenTree agreed to backstop the rights offering that is slated to raise as much as $186-million.
The result is that two investors – one a well-known backer of Postmedia and one that was until now almost unknown – are putting up almost all the money.
Editor's note: A previously-published version of this article referred to Canso Investment Counsel as a hedge fund. It is a portfolio manager.