Canwest’s quiet coup

A group of mostly U.S. ’vultures’ is in control, and foreign ownership rules will be key

Canwest’s quiet coupIt’s the company that just won’t die. After teetering on the edge of bankruptcy for months, Canwest won another extension from its major bondholders last week, preserving the debt-laden company in a state of limbo until at least Aug. 14. Insiders tell Maclean’s that a resolution is getting close, however, and despite the outward calm, intense negotiations are progressing that will see Canwest changed forever.

For the last few months, what was once one of Canada’s largest and most influential media companies has been at the mercy of bondholders who are owed more than $760 million. Sources familiar with the negotiations confirm that the key players include two U.S. hedge funds—GoldenTree Asset Management and Beach Point Capital Management—and one Canadian firm, West Face Capital, names first reported in the Globe and Mail. Since Canwest has missed several interest payments, this small cadre of bondholders could pull the plug and demand full payment at any time—which would almost surely force Canwest into bankruptcy. So far they’ve resisted, instead granting nearly a dozen extensions.

Industry watchers agree that the bond-holders have been so patient because forcing Canwest into bankruptcy would benefit no one. Given the low appetite for media companies in the current market, it’s unlikely that the bondholders would recover all of their funds if Canwest held a fire sale of its properties, which include Global TV, a slew of specialty channels, major daily newspapers and Ten Network Holdings, an Australian media company. Going into bankruptcy would also wipe out any remaining shareholder value, including the voting shares held by Canwest CEO Leonard Asper and his family. Analysts say that the family will likely lose control of the company regardless of what happens, but if bankruptcy is avoided, those shares remain valuable. “Clearly the family has something that’s worth bargaining for—to be specific, that’s likely some kind of voting control,” says Chris Diceman, a senior vice- president at the credit rating agency DBRS.

The strategy the debt holders—which also include CIT Business Credit Canada—appear to be following is to convert their debt into an ownership stake in the company without a messy trip through bankruptcy. This would at least give them the ability to sell assets at their leisure, rather than in court-governed auctions, as happened recently with Nortel. Observers say that an ownership position for the debt holders is already virtually assured, since Canwest currently has no means of paying them back. Whether Canwest files for bankruptcy or not, “it’s fair to say those bonds are equity,” says one of the smaller bondholders who spoke on the condition of anonymity.

This is standard operating procedure for the distressed debt funds, or “vultures,” which are now calling the shots. All have histories of buying up a company’s distressed debt for pennies on the dollar from larger institutions, then turning the company in question around to make a profit. Los Angeles-based Beach Point, for instance, which manages more than $3 billion in assets, recently invested in DigitalGlobe, a company that provides satellite imagery to companies like Google and Garmin. After filing for bankruptcy, DigitalGlobe successfully came back and went public in June. New York’s GoldenTree, the largest of the vulture firms, with 200 employees and $10 billion in assets, recently invested in Chemtura Corp., a chemicals company that filed for bankruptcy in March after it ran out of cash to pay its debt obligations (not unlike the situation at Canwest). The last big bond- holder is Toronto-based West Face Capital, which is headed by Greg Boland, best known for his profitable role in the steelmaker Stelco’s restructuring in 2005. West Face is now one of the largest shareholders of ACE Aviation Holdings Inc.

For this trio of firms, Canwest would have seemed a good fit—a company desperate for a bailout, but still with potentially lucrative assets. So in May, the bondholders upped their stake by giving Canwest $100 million to keep it afloat and help it pay off bank debt. But their strategy is complicated by the fact that foreign ownership rules prevent the two U.S. bondholders from owning more than a 20 per cent stake in Canwest—another reason the negotiations have been so drawn out, according to one Canwest bondholder. That means that Canada’s West Face Capital could end up playing a pivotal role, as the firms navigate Byzantine CRTC rules. As well, Canwest is made up of a number of different subsidiaries, each with their own bonds, which adds layers of complexity to the negotiations. “It’s not cut and dried,” says a source who has been following the company.

All of this makes predicting Canwest’s fate difficult. The company is obviously still trying to raise cash—it announced just this week that it will sell $123 million worth of shares in Ten Network Holdings to raise money. And there remains the chance of a last minute rescue by a deep-pocketed investor such as Fairfax Financial, Brookfield Asset Management or Onex Corp. But one thing is clear: a deal is nearing, the smaller bondholder says about the restructuring efforts. “It’s probably sooner rather than later that we’ll have a resolution.”