As I alluded to in an earlier post, catching plunging knives (in this case, catching plunging share prices) will leave your hands bloodied, and indeed this has been the case with Yellow Media.
They announced this morning that they will be suspending their common share dividend and also will be reducing the size of their credit facility to $500M, of which $250M will be paid off at $25M/year from the beginning of 2012 onwards.
This caused their common stock to plummet, but oddly enough, caused their preferred shares to drop equivalently, to the tune of 50%.
PR.C shares are down to $3/share, while PR.D shares are down to $3.08/share.
By slashing the common dividend, they will save about $77M/year in cash flow.
With the common share dividend gone, it will remain an interesting decision whether the company will decide to cut preferred share dividends. PR.A will cost the company $10.7M/year, but this will be alleviated when they convert them to shares in April 2012. PR.B will cost $7.6M/year, but this will also be alleviated when the company force converts them in July 2012.
PR.C is the next drain on cashflow – $13.2M/year, and PR.D is $8.5M/year. Both of these series are cumulative and can only be called by the company at par ($25) which is obviously not going to be happening with them trading at $3 over the open market.
The debentures are trading at 32 cents and represents a $13M/year interest expense for the company – these interest payments must be maintained otherwise it will constitute a default – a 20% current yield, but how long will you see those coupon payments being paid?
The real question is: how quickly is the company’s cash flow diminishing? This “decay rate” is the critical variable in determining how financially viable the company is going forward.
The company’s preferred shares are obviously a very high risk and high reward type situation if your assumption is that they are not going bankrupt and they will be able to level off their cash flows at a positive amount.
Yikes, sorry to hear that this one didn’t work out.
I’ve got a similar gamble going on Royal Bank of Scotland Preferred Series T’s for the speculative/casino portion of my portfolio.
At least RBS has a market cap over a billion at this point!
The odd thing is when you look at YLO’s financial statements it does show a company that is in decline, somewhat over-leveraged (although if you adjust for the Trader sale this is somewhat alleviated), but trading at bankruptcy valuations? Obviously if their operating cash flow goes to zero then they’ve got problems.
Thanks YLO for the devastating loss in my daughter’s RESP….so much for University…..b**tards….
reading their credit agreement seems they will stay pay the prefs dividends but no buybacks.
Prefs A and B are 100% to convert to equity in 2012. so I will buy C and D and get 50% yield and I will take the risk of the cash flow decline.
With regards to the C and D issues, are you implying that YLO could simply stop declaring dividends and not call them, thus leaving shareholders in limbo?
yes they can stop paying the Dividends. also C and D are perpetual so they will not be called. they are not like A and B where the holder have the option to redeem and the company can retract them.
However the dividends on C and D are cumulative meaning if they stop paying them then they will owe you that dividend to be paid later.
Sami, my understanding was that only “declared” dividends are cumulative. As such, there is no right to declaration as it is, and can only be, the sole privilege/discretion of the board.
What about ylo.db.a, in the case of priority in bankruptcy??
yes it is when declared by the board.
what I do not understand is the market reaction to the pref . the modified credit agreement only prohibits buybacks on all capital issues and dividends to the common; the company is allowed to pay the prefs. eliminating common dividends is good for the preferreds. yes the availability of credit has been cut by half but that is expected with their Trader sale. the market believes that the board will voluntary stops paying the prefs , which I put at low probability.
christian,
The debentures are unsecured. so in CCAA or proposal you can get something however YLO is not a business with any assets most of the business is generated from services. if it YLO gets to bankruptcy, I trust there will be no business left or any recovery even for the secured creditors .
the bet here is whether the decline in revenue is less or as severe than the market is anticipating,
The existing share prices are getting to be ridiculously low – at $2/pref share, the market appears to be betting that the preferred dividends will last no longer than a year. An amazing meltdown.