Tuesday, 24 November 2015

Corus Entertainment Inc., Danger Will Robinson (For equity anyway)

I often check the high yield offerings at TD, and it seems they've had an inventory in Corus' 4.25% bonds, due Feb 11, 2020 for a while.

Here's a snapshot of the inventory as at today's close:


















These yield 5.53% (at TD's offer), and are rated BBH by DBRS and BB+ by S&P.

For $.9525, you can get yourself a YTM of about 250 bps over comparable risk free GIC's maturing in 4 years.  My question, is it enough?  4 years is a long time, and as we all know in market land, anything can happen.

Here's the chart over the last year:














Pretty dismal.  If equity is down 50% this year alone, I'm wondering why the bonds are still priced at 95% of par.  I'd hazard a layman's guess that there is more uncertainty regarding the sustainability of the monthly dividend than there is over the bondholders being made whole in 2020, hence equity gets the short end of the stick.  Given the pounding the stock has taken thus far in 2015, I wonder if a dividend cut is already priced in (I'm in no way, shape or form advocating purchasing the stock).

As part of the company's loan agreement/s, Corus is subject to certain restrictive covenants. From reading their statement of interest coverage compliance for the fourth quarter ended August 31, 2015, it appeared that the company was in compliance.

Here's a snapshot of the balance sheet as at Augst 31, 2015:



























And here's the note disclosure on the long term debt from the same quarterly report:

























A cursory look at the composition of the debt shows about 50% of the total debt are bank loans, while the remainder are Senior Unsecured Guaranteed Notes, which incidentally, are the bonds TD has on offer.

Further, I note that the banking syndicate hold as collateral, a first ranking charge on all of the assets, so the TD bonds rank secondary to the banking syndicate.  If there was an adverse credit event, the banking syndicate will get first kick at the can, and the unsecured bondholders will get whatever is left.

Out of curiosity then, I wondered what Corus' assets would be worth in a liquidation.  I recast the balance sheet as follows:


First Attempt:


AssetsAs reportedAdjustmentReproduction cost
Cash37100%37
A/R16575%123
Income tax recoverable12100%12
Prepaid expenses1425%3
Total current228177
Tax credits receivable26100%26
Intangibles610%0
PPE13910%14
Program & film rights316100%316
Film investments370%0
Broadcast licenses957100%957
Goodwill8280%0
Deferred tax assets410%0
Total LT2,4041,313
Total assets2,6321,489
Total Liab's1,412100%1,412
Less:
Deferred tax -252100%-252
Total Liab's (Adjusted)1,1601,160
Excess / (deficiency)330


In the event of a liquidation, I've made the following simplifying assumptions (take one):


  • The assets will need to be adjusted to reflect likely liquidation value.  A/R is probably 75% to 85% collectable 
  • Taxes refundable are likely 100% collectable, I've made a simplifying assumption that tax credits receivable might be SR&ED or government broadcast credits
  • Prepaids are 25% collectible (deposits portion only)
  • PPE is probably specialized equipment and likely won't fetch much in a liquidation
  • Goodwill is written off
  • Intangibles are written off
  • Film investments are written off
  • Broadcast licenses and Program & film rights have value.  The key here is what these licenses & film rights would fetch in a liquidation.  If both categories are legally seperable and saleable, they well could be worth 100 cents on the dollar
  • I've adjusted deferred tax liabilities out of total liabilities, these are probably related to timing differences on tax depreciation taken

In the above case, there seems to be enough of an excess after the syndicate of banks is made whole to cover the unsecured bonds.

What if the Broadcast licenses and Program & film rights are only 50% recoverable in a liquidation, instead of 100% recoverable?

After all, in Canada recently, the CRTC changed the rules regarding pick and pay channels.  As Corus produces content which was bundled by the cable co's in the past, the ruling may very well directly impact Corus if there is insufficient viewer demand for their specialty content. 

So in a pick and pay world, do the broadcast licenses and program & film rights have the same value they had under the previous regime?

Second Attempt:


AssetsAs reportedAdjustmentReproduction cost
Cash37100%37
A/R16575%123
Income tax recoverable12100%12
Prepaid expenses1425%3
Total current228177
Tax credits receivable26100%26
Intangibles610%0
PPE13910%14
Program & film rights31650%158
Film investments370%0
Broadcast licenses95750%478
Goodwill8280%0
Deferred tax assets410%0
Total LT2,404676
Total assets2,632853
Total Liab's1,412100%1,412
Less:
Deferred tax -252100%-252
Total Liab's (Adjusted)1,1601,160
Excess / (deficiency)-307


Under the above scenario, there are insufficient proceeds to cover the unsecured bonds.  In this case, there are $.73 of assets to cover the adjusted liabilities (in theory), but remember, the unsecured bondholders rank second to the banking syndicate.  The banks will want 100 cents on the dollar (in theory), so after they're made whole and are repaid their $409M, there will be $444M left over to cover the unsecured bondholders and any other creditors. Out of a total of $750M of remaining liabilities, there is 444M in theoretical cash left over, or $.60 on the $1.

Concluding Thoughts

The above is purely hypothetical, but I do find it interesting that the unsecured bonds are priced at 95% of par.  It's entirely possible that none of the above will ever come to fruition, but for me, I'll stay away from the bonds as I don't believe they provide anywhere near a sufficient margin of safety in the event of the unthinkable.


No comments:

Post a Comment