A majority of Yellow Media Inc. 's creditors have begun to hash out a blueprint to take over the troubled phone-directory company, a plan that would wipe out the shares that thousands of Canadians once bought for their rich dividends.
The company's senior bondholders met on a conference call last week to discuss a plan to encourage management to restructure the balance sheet by swapping debt for equity, ultimately giving the bondholders control.
The plan is still in early its stages, and a formal letter to be sent to Yellow Media is being drafted.
Yellow Media shares, once the darling of income-seeking retail investors, have already been rendered nearly worthless by the company's debt woes.
Some institutional investors are now focusing on buying the company's bonds – often at discounts of about 50 cents on the dollar – in the belief that they can make a return on the restructuring of its $1.8-billion debt load.
The bondholders' decision to try to force the issue is controversial. Yellow Media's cash flow is strong enough to maintain interest payments, and it doesn't have any debt due until 2013, except a small amount of bank debt.
For those reasons, some shareholders argue that the bondholders are simply hatching a plan to get rich at their expense.
Bondholders, however, note that print revenues drop with each quarter and, in a year's time, the company's financial situation may well be worse than it is today.
For now, bondholders say they are not trying to change Yellow Media's management team; they simply hope to extract some value on their investments.
"If, for some reason, we get paid in equity, it's never optimal, but it's probably acceptable because it's got a value," said Paul Gardner, a portfolio manager at Avenue Investment Management who participated in the bondholder discussions.
They also believe that it is better to put together a plan before the Montreal company hits a financial wall. "It's much better to have everything in place in an orderly restructuring than putting a gun to the debt holders' heads," Mr. Gardner said, adding that it can get "nasty in court."
Other investors, however, are skeptical. Glen Bradford, chief executive officer of ARM Holdings, which holds about 250,000 of the company's preferred shares, said bondholders "purposefully" leaked news of their meetings to increase the value of their holdings.
"As an equity holder, I am still failing to see how the creditors have any say in the matter as long as the company continues to meet its debt obligations as they come due," Mr. Bradford said.
After analyzing the company's finances under several scenarios, RBC Dominion Securities analyst Andrew Calder determined that it would be able to pay its debts through 2013. By 2014, however, he said the company would likely need to refinance to meet its obligations.
"The lack of [earnings]visibility has left investors to struggle with the direction and magnitude of underlying trends in the business," he said.
Yellow Media is undergoing a review to determine what to refinance, saying "every option" is on the table. In the past year, as its stock has fallen 98 per cent, the company revamped its operations, reducing the number of books it publishes, closing offices across the country and laying off a employees as it shuttered its Canpages division. Yellow Media could not be reached for comment Wednesday.
"It may involve the issuance of secured or unsecured debt," chief executive officer Marc Tellier said in a conference call at the end of its last quarter. "It may involve equity. It may involve other securities or other transactions. But I think it would be irresponsible at this time to speculate beyond that. I mean, we are really looking now at evaluating all of our alternatives to refinance our maturities."
Yellow Media recently added three new board members, including Bruce Robertson, a restructuring expert who formerly worked for Brookfield Asset Management Inc., and David Leith, the former head of investment banking at CIBC World Markets.
DBRS analyst Chris Diceman also issued a report last week in which he downgraded the company's debt, saying it looked increasingly likely that to meet its obligations, Yellow Media would need to come to some sort of agreement with debt holders, and pegging the chances of repaying senior debt at 30 per cent to 50 per cent.
"We believe that the likelihood that the company's financing activities will involve some form of compromise for existing creditors has increased to a level that is no longer consistent with the previous ratings," he wrote.
Equity analysts have long held that the company's shares were worthless, with several issuing $0 price targets for the units. Their main concern has been the company's difficulty duplicating its former print success in the digital world.
The expectation is that bondholders will turn up the heat over the next few months as the company's 2013 debt maturity approaches.
"The clock is ticking," said John O'Connell, head of investment management firm Davis Rea Ltd., who bought Yellow Media bonds below 40 cents on the dollar. "By the end of 2012, something has to happen."
With files from reporters Sean Silcoff and Boyd Erman