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CanWest's equity holders in for a rough ride

Jim Cramer at CNBC was taking questions from Mad Money viewers last month, and was asked why General Motors, which had already filed for bankruptcy, was still trading for a few cents on the New York Stock Exchange.

Mr. Cramer explained that short covering might explain some of the buying, but added that GM shares no longer had any value, should not be purchased and should really be delisted.

The same situation exists at CanWest Global Communications, which is in the midst of a painful recapitalization and continues to trade on the Toronto Stock Exchange.

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CanWest's bond holders hold the power at this media company. By month end, lenders and the company are expected to announce the framework of a debt-for-equity swap. That transaction promises to wipe out existing equity holders.

With shares closing at 14 cents yesterday on the TSX, CanWest still has an equity value of $28-million. That last slice of equity is all but certain to vanish as the final stages in recapitalization play out. The company's dual share structure will be rendered meaningless; the Asper family stands to lose its entire equity stake alongside the rest of the remaining shareholders.

There will also likely be a new leader at the company - a chief restructuring officer - with a mandate to realize the maximum value from the company's collection of newspaper and television properties. That process will be fascinating to watch, as iconic assets will likely be sold to a variety of buyers: Witness virtually unknown cable broadcaster Channel Zero stepping up last week to buy CanWest TV stations in Montreal and Hamilton with deep local roots. Astral Media and Corus Entertainment are just waiting for the dust to settle so they can take a run at CanWest's prized specialty television assets.

But, again, these sales will benefit CanWest lenders who are owed a total of more than $3-billion - not equity holders. Restructurings are cruel, as shareholders at GM and Nortel Networks already know. The same tough love is coming CanWest's way.

Recovery rates dropping

The recovery rate from corporate restructurings has plunged this year, a nasty development for bond holders, banks and other lenders.

As the recession forces an increasing number of companies into creditor protection, experts at Fitch Ratings put out a study on this week showing that the recovery rate on U.S. bonds that go into default was 21.8 cents on the dollar through the first six months of the year. Over the course of 2008, the recovery rate was 45.8 cents on the dollar.

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The recovery rate on U.S. loans fell to 57.5 cents on the dollar through the first half of the year. In 2008, recovery rates on loans were 68 cents on the dollar, and in the now-distant boom that was 2007, loan recoveries were 96.3 per cent. Loans tend to rank higher than bonds in the corporate credit hierarchy.

These grim statistics come at a time when some of North America's largest industrial companies - Nortel, General Motors and Chrysler - have defaulted on their debts and sought creditor protection.

Selling Ontario

There's no such thing as summer holidays for the civil servants financing Ontario's deficits, as the province continued an aggressive bond sale program on Tuesday by moving $600-million of debt.

The Ontario Financing Authority (OFA), a government agency that must keep the cash flowing in the most populous province, sold 30-year bonds with a 4.6-per-cent interest rate, or 87 basis points over the comparable Government of Canada debt. RBC Dominion Securities led this transaction.

In a sign of the times, the bureaucrat who runs the OFA has a terrific multimedia website to explain the province's books, with chief executive officer Gadi Maymen posting regular video updates.

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The latest instalment of must-see TV for bond types, done before the $600-million debt sale, shows that Ontario must raise an estimated $39.2-billion during fiscal 2009-10. This is up from the $34.8-billion deficit forecast in Ontario's 2009 budget, released before the GM bailout.

"Despite the increase in our borrowing program, we've already completed 41 per cent of the program, or $16-billion, to date," Mr. Maymen said. "This puts us far ahead of an even-paced borrowing plan, as we are just under a quarter of the way through the fiscal year."

Ontario has raised $9.2-billion in bond sales outside Canada so far this year, or 58 per cent of its long-term borrowing needs. That's well above OFA's target of borrowing 35 to 50 per cent of what it requires outside the domestic market.

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About the Author
Business Columnist

Andrew Willis is a business columnist for the Report on Business at The Globe and Mail, based in Toronto.He has been in business communications and journalism for three decades. More

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