BCE Bondholders

The Canadian Supreme Court ruled against Bell Canada Enterprise-BCE bondholders last Friday. It was greeted in the Business Press as a case that would make “capital market rules clear for all stakeholders”. And the vote was not close, 9-0. So bondholders were told in no uncertain terms, if you have not provided in the bonds covenants and limits against debt levels allowed while the bonds are in effect, don’t expect the courts or anybody else to do anything for you. Here in Canada its similar to the Hydro Quebec-Newfoundland deal that has sent $billions per year in Newfoundland Aid to Quebec.

So BCE bondholders should not be surprised that their bonds will be worth 75-85cents on the dollar as the Teachers Pension Fund/Provident dealmakers slosh on huge debt loads to the BCE balance sheet to pay for the $52B “deal”.. This BCE takeover is a classic example of the Hedge Fund/Private Equity Money Making Machine. Here is the drill:

1)Hit on a good company hit on hard times. “Good” is defined as $5-20B bsiness with  low debt to equity ratio, still profitable, one time or just still market leader suffering from declining profits  in midst of serious market changes.There are plenty of companies  in this turbulent and rapidly changing technology and globalization driven market.
2)Make double sure they have low or no debt to equity ratio to speak of;
3)Make sure they have management willing to cash out for a few $tens of millions;
4)Get debt at 2-3% + prime(and prime is at 2% in the US);
5)Buy them out at 20-30% above market and take company private;
6)Pay for it using Company’s Cash surplus including a whole variety of newly debt instruments that pushes up debt to equity big time;
7)Pay back investment banks debt as required;
8)Hire a $20-40 million dollar/year turn-around artist who fires, fires, fires; sells, sells, sells (assets); and has the company back in to higher profit territory at least for the short term;
9)Reissue stock and show how much better the P/E ratio is – and allow no discussion about the new debt load. Make $billions twice on minimum of your own capital invested.
This is a story replayed over and over as long as capital markets interest rates stay low. Our North American economy has changed from true Venture Capital to Capitalizing for Great Personal Gain.

The Fly in the Soup

As always “Greed sews the seeds of its own destruction”, a requote of Economist Joseph Schumpeter. Business capital markets, especially for bondholders, will take a very jaundiced look at the Supreme Court of Canada decision. This means that unless the original bondholders were able to get covenants in the bond agreements limiting the level of debt allowed – they can be taken to the cleaners by any rookie Private Equity fund over the life of their debt. Expect “unprotected debt” to start to take a dive in value. Also expect current and future bond deals to have just such covenants and constraints. Also expect capital markets to continue to work very poorly as mistrust+greed become the primary players in NewYork. There are some big bond names with egg on their faces given the BCE “deal”. Expect them to extract their pound of flesh at some future date. This leads to the comment immediately below.

But the biggest problem may involve step 6) above. Who is going to want to issue debt to BCE even in the relatively safe confines of private markets? And at what rates and terms? I means these SOBs cannot even spare the regular Bell dividend due to stockholders pre-takeover. Yes, dsupposedly BCE’s buyers already have the cash lined up … but are all the hatches battened ? Most crucially, trust on the capital markets has reached a new low. Since the sub-prime fiasco with tainted derivatives, tainted evaluations blessed by Moody’s plus Standard and Poors, and tainted resales/repackagings of those bad debt in derivatives of bad derivatives(sounds like a Ponzy scheme to me) you could measure financial players’ mutual trust in thimble-fulls. And with the FED returning to protecting against the greater economic gutter (not bubble blowing capital markets), inflation – the happy daze of 3% or less prime rate capital are going the way of the Dodo.

I wish there was a fifth more of attention to getting these professional capital market demolition teams and economy wreckers off the playing field. Greed is Good is going to destroy the North American economies.

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