Tag: BBD

Dangers of investing in dual class structures

Apparently some institutional shareholders are feeling the political pressure of the company’s ridiculously high executive compensation schemes. They’re voting against the “say on pay” resolution on the upcoming AGM.

Major Bombardier Inc. shareholder and supporter Caisse de dépôt et placement du Québec is voting against the company’s executive pay practices at its coming shareholder meeting.

It’s one of a number of major North American pension plans that intend to rebuff Bombardier’s compensation program. Some, including the Caisse, have grown sufficiently discontented to oppose reappointing directors to the company’s board.

Bombardier, like most major Canadian companies, submits its compensation program to shareholders for a non-binding “say-on-pay” vote at its annual meeting. Canada Pension Plan Investment Board (CPPIB), British Columbia Investment Management Corp. (BCI), as well as two major pensions from California and one from Florida, also say they are voting “no” Thursday.

At issue this year is Bombardier paying former chief executive Alain Bellemare a severance package of US$12.35-million when he was terminated in March, as well as promised future special payments and potential severance packages to other top executives when a deal to sell the company’s train division closes in 2021.

This is purely political posturing to the public to justify holding Class B shares (2.1 billion outstanding) in the company. Bombardier’s Class A shares (309 million outstanding) have 10 votes each, which give its holders effective control of the company. Bombardier’s Class A shares are currently trading at about a 30% premium over the Class B shares, so the market does ascribe some value to the voting component.

There is little remedy for the subordinate shareholders other than to sell if they wish to voice their opinion. This happens in any dual-class share structure company, where typically the founders get the supervoting majority to stack the board. You have cases like Berkshire (NYSE: BRK.A) and Fairfax (TSX: FFH) where you are being a silent partner to Warren Buffett/Prem Watsa, but you also have cases like Dundee (TSX: DC.A), which have made disastrous capital allocation decisions in the past decade (will they get their act together for the next one? Insiders are at least buying now). There are also firms like Biglari Holdings (NYSE: BH), where the controlling shareholder basically has open contempt for its subordinate shareholders – don’t like me? Go ahead and sell! Zuckerberg at Facebook (Nasdaq: FB) also has expressed the same sentiment – my way or the highway.

In all of these cases, investors, especially institutional ones, should know what they have gotten into. This doesn’t mean they can’t complain, but when it comes to exercising power to compel the board of directors to tell management to change their practices, the influence is very weak since controlling shareholders will always be able to replace potentially dissenting directors with those that favour their interests. In the case of Bombardier, who wants to give up $150-$190k for being a human rubber stamp?

(By the way, this board is far too large).

The only way to get any sort of leverage on an entrenched board is to own enough of the debt in a distressed situation, and then you will be able to get enough attention of management by the time the maturity comes to extract better terms. But these situations are rare, and they more often end up with management engaging in asset stripping and other extraction activities to the detriment of both shareholders and debtholders alike before they finally lose control.

Bombardier

Aerospace-related entities today received a bit of a boost up on credit, especially Air Canada (TSX: AC) (they were able to get off a reasonable offering consisting of equity and 4%, 5-year convertible debt, both of which are now significantly doing better).

However, my focus is on Bombardier – their debt has been in the trash heap since Covid-19 and it is finally beginning to normalize – their 2022 issue spiked up 12 cents on the dollar today and the rest of their yield curve is flattening. While they are hardly out of the woods (they have a huge disposition of their Transportation division to finalize), it is looking seemingly apparent this is coming to fruition, which leaves their private jet division.

I believe the remaining private aviation industry will do better post-Covid-19 than most people anticipate.

They will also receive large business subsidies from the Canadian and Quebec governments. Bombardier is oddly reliable in this respect. I mean, just five years ago, I was doing the same thing.

The Alstom acquisition of Bombardier Transportation is the key trigger to the company’s solvency and all indications appear (unlike Cineplex and Air Transat!) that it will continue.

The Bombardier bailout

This is going to be good.

Our illustrious government has figured out a headline-free way to bail out Quebec firms, such as Bombardier, and do it in a ‘governmentally distant’ manner, shielded by a crown corporation business development corporation.

The name of this will be through the Large Employer Emergency Financing Facility (LEEFF).

Reassuringly, money to be loaned will be conditioned upon:

Companies seeking support must demonstrate how they intend to preserve employment and maintain investment activities. Recipients will need to commit to respect collective bargaining agreements and protect workers’ pensions. The LEEFF program will require strict limits to dividends, share buy-backs, and executive pay. In considering a company’s eligibility to assistance under the LEEFF program, an assessment may be made of its employment, tax, and economic activity in Canada, as well as its international organizational structure and financing arrangements. The program will not be available to companies that have been convicted of tax evasion. In addition, recipient companies would be required to commit to publish annual climate-related disclosure reports consistent with the Financial Stability Board’s Task Force on Climate-related Financial Disclosures, including how their future operations will support environmental sustainability and national climate goals.

Let the gravy train flow! Bombardier gets another low-interest rate loan of a billion dollars.

Lending Loop – Why even bother?

Lending Loop is one of those peer-to-peer financing companies where you can allow yourself to be the recipient of future defaulted loans in the name of some business cause or another spending it without any real accountability. When you sign up, on top it states “Start investing today and earn a projected return of 5-8% per year*”

The “*” leads to a link with a model that uses words like “projected”, “estimated”, and other such mumbo-jumbo that is nearly as good as a COVID-19 mortality prediction.

Why the heck would anybody want to lend some random small business money at 5% when you can pick a brain-dead debenture (e.g. Rogers Sugar RSI.DB.F, 6.25% YTM) of a publicly traded company that has a billion more layers of accountability, and actual consequences (i.e. owners lose equity) if there is a default?

Finally, during this COVID-19 crisis, we have the following:

We have implemented a temporary hardship program for borrowers that are currently distressed as a result of impacts of COVID-19. This program will allow Lending Loop clients that meet certain criteria to make interest-only payments on their loans for a period of 3 months to accommodate this unexpected event.

I am guessing they are not doing this with the consent of the lenders. If the terms and conditions of the loans are so malleable, why would anybody ever bother putting their money in Lending Loop or other peer-to-peer lending services? This never made sense to me.

This is also why companies like Alaris (TSX: AD) never made sense to me. Companies have to be pretty desperate to lend money at double-digit coupons, and if you’re willing to sell royalties on revenues, you’re likely to destroy the margins that are required to keep your business competitive. It might make sense in specific scenarios (e.g. gold mining streams can make economic sense at times, e.g. “some percent of something versus 100% of nothing”) but gold miners are not like widget manufacturing where you have to squeeze out 200 basis points of margin in order to make a living. (Very abstractly, the less competitive the industry is, the more possibility that royalty selling makes sense).

And finally, if you want your double digit yields on questionable debt of corporations, there’s always gems like Bombardier unsecured, which when I last checked would net you 20% YTM if you feel brave. Less riskier than most stuff on Lending Loop and higher potential return, in addition with the likely possibility of getting a few morsels of recovery if they defaulted!

Counting on the Federal government to do exactly the wrong thing, Part 2

The amount of incompetence exhibited by the current federal government is mind-blowing, but that’s what you get when political correctness is a dominant social consideration than taking proactive action. However, our incompetent government does have the legislative authority to blow over a hundred billion in borrowed money on their supporting constituencies, in addition to the levers of the Bank of Canada and others that tilt monetary policy and loan guarantees towards favoured sectors.

So let’s start with Bombardier, the poster child for government handouts. They will get a loan guarantee to ensure continuity of their operations as corporate business jets is an essential service (can’t catch Covid-19 when you’re in a private jet 35,000 feet above the skies).

Bombardier debt was selling at nearly 25% YTM, and unlike their common shares and preferred shares (where there is a good chance they will suspend dividends), they can’t suspend interest payments on their senior debt. They’ll find a way to kick the can ahead in time, even if their proposed sale of the Transportation division with Alstom fails. Alstom is still trading at 37 Euro per share and part of the BBD sale valued $550 million of Alstom stock at 47.50 Euro, so it’ll be interesting to see how this goes.

Needless to say, the Caa1 rating by Moody’s is well warranted and it is trading like a default is imminent.

Their floating rate preferred shares (BBD.PR.B) give out a yield that is the equivalent of prime, and at their current trading price, that equates to a 13% eligible dividend. So this is a rare situation where the lower risk asset, the debt, is yielding more than and is ultimately cheaper than the preferred shares. Go figure.

I’ll point out that the super-voting shares (BBD.A) are trading exceptionally higher than the small-vote (BBD.B) shares, which should be an indication that there is some sort of value in controlling the corporation. If everything was going to crap, I’d expect the A’s to trade much closer to the B’s.

I got some of Bombardier’s unsecured senior debt at nearly 25% YTM. Not a huge position, but enough of a position where when I start hearing about the inevitable bailout via loan guarantees, I can at least feel I didn’t get robbed, because the rest of the Canadian taxpayers certainly are. Keeping to my short duration policy (regarding inflation), it was the March 2022s that caught my attention. In my nominal scenario, Bombardier will put out a tender offer to repurchase these at some modest premium sometime in 2021.

I know this makes me a hypocrite since I generally suggest not having to do anything with aviation during this CoronaPanic. However, this is more of a political call than a financial one (although financially, Bombardier is not in catastrophic shape).

Since I’m talking about bonds, I’ll throw out another idea I’ve looked at but declined simply because it was beyond my horizon to evaluate but others out there might have some perspective. Taseko Mines (TSX: TKO) is financed mostly by a senior secured bond that matures on June 15, 2022. Taseko’s main producing operation is a copper mine (75% ownership) and the commodity is currently trading ever so slightly above their all-in cost to produce it (about US$2/pound while copper is hovering around US$2.20 post Covid-19). If you anticipate spot copper improving, TKO is well leveraged and they would be able to renew the debt which is secured by their operating mine. The last trade on the June 2022 debt (8.5% coupon) was 45 cents on the dollar, which needless to say is a 55% YTM. High risk, very high return. Even in the event of a CCAA or recapitalization process, I’d suspect you’d get some sort of recovery in line with the price. I don’t know much about copper, so I’m throwing this out here for you.