West Energy, Transat Stuck With Notes After Canadian Debt Swap

Date: Monday, January 19, 2009
Author: Doug Alexander, Bloomberg.com

West Energy Ltd. and other firms that
will own about C$32 billion ($25.7 billion) in new notes
following a swap in Canada say they’ll hold on to the debt for as
long as eight years rather than sell it at “fire sale” prices
to hedge funds.
     West Energy is among more than 100 companies that expect to
receive the notes in the next week in exchange for insolvent 30-
to 90-day commercial paper that hasn’t traded since 2007.
     Unlike most individual investors, who are getting their
money back this month, corporate holders will have to wait until
the debt matures or try to sell it in the secondary market, where
bids may initially be less than 50 cents on the dollar.
     “The first guys to show up in any market are the vultures,
and there might be a few companies that absolutely need to have
liquidity at any cost,” said Ken McCagherty, chief executive
officer of Calgary-based West Energy, which has C$30 million of
the debt. “We’re certainly not one of them.”
     Canada’s biggest debt restructuring is set to close Jan. 21
after a group of institutional investors led by Toronto lawyer
Purdy Crawford spent more than 16 months drafting the debt swap.
The asset-backed commercial paper froze in August 2007 when the
U.S. subprime market collapsed.
     About 1,765 individual investors benefited from a cash
bailout by Vancouver-based brokerages Canaccord Capital Inc. and
Credential Securities Inc., which sold them about C$185 million
in commercial paper.
     Companies including Transat A.T. Inc., Sherritt
International Inc. and Sun-Times Media Group Inc., aren’t part of
any rescue from their banks, meaning they’ll get new notes, most
of which mature within eight years. Other institutional investors
include the Ontario and Yukon governments, the University of
Alberta and the Ontario Teachers’ Pension Plan.

                    Debt Haircut

     A market may develop for the notes, though investors will
take a haircut if they want to sell anytime soon, analysts who
follow the market said.
     “I don’t see an active secondary market in the first couple
of years and the corporates are going to be stuck with these
notes,” said Daryl Ching, who advised clients on commercial
paper last year for his Toronto firm, Clarity Financial Strategy.
“They’re in it for the long term, unless they sell at fire-sale
prices.”
     The lack of information on the makeup of the complicated
notes and the limited number of buyers means a market will be
slow to emerge, said Colin Kilgour, an independent consultant
advising firms on the debt. He said the notes may initially sell
for less than 50 cents on the dollar.
     “They will likely hold onto it for awhile, unless they need
the cash,” said Kilgour, 41.

                    Hold to Maturity

     The biggest investors, including Caisse de Depot et
Placement du Canada and National Bank of Canada, plan to hold the
debt under the restructuring agreement they helped negotiate.
These five companies hold about C$16.8 billion of the debt,
according to court filings, with Caisse owning almost three-
quarters of that.
     “All of us went in there knowing, expecting, that we’d hold
it to maturity,” said Brian Davis, executive vice president of
corporate development and governance at National Bank, the
country’s sixth-biggest lender. “We expect to be long-term
holders of this stuff.”
     Silver Standard Resources Inc., a Vancouver-based metals
explorer, may consider selling its C$57.1 million in notes if the
price is right.
     “That cash will allow us to continue with our development
plans and other projects,” CEO Robert Quartermain said in an
interview. “We’ll see what transpires when we finally get the
notes and see what the market looks like.”

                    Distressed Funds

     Hedge funds and banks with distressed debt units may be
interested in the notes. Potential buyers that considered the
paper a year ago may now be deterred due to eroding credit
markets, said Ching, vice-president of Canadian Hedge Watch.
     “The smaller hedge funds that had been looking at this
opportunity are certainly going to be lowering their bids in
light of this environment,” said Ching, 30. “A lot of people
have lost interest and started looking at other things.”
     National Bank’s Davis said he’s advising clients of his
Montreal-based bank to wait before selling.
     “Two weeks from now people will be able to find many buyers
at silly prices, and hopefully people have the financial
wherewithal to not have to sell too soon,” he said.