Friday, February 29, 2008

The crazy glue that binds the uneconomic to the unethical: Teachers’ $587 million reverse break fee

By: Brent Fullard, Catalyst Asset Management Inc.

Since when did pension plans start playing Russian Roulette with their plan assets?

Here we have Ontario Teachers’ placing itself in a position where they and their partners have to pay $1 billion "reverse break fee" if they are unable to raise $32 billion in junk bond financing for the largest leveraged buyout in one of the worst debt markets in history.

What may have been a remote possibility back in June 2007, has become a very real possibility in March 2008. Even though there is still only one chamber that contains a bullett, the 1000 chamber gun of June 2007 has been replaced with a four chamber gun of 2008.

Which makes one wonder, where in the mandate governing Teachers’ is the provision that allows it to play Russian Roulette by taking on large lumpy risks that it has no ability to syndicate, hedge or even manage? Afterall, Teachers’ disproportionate share of this risk is $587 million. I wonder how much of that money is coming from Morgan McCague, the straw horse individual who were are asked to believe holds two thirds of the votes of BCE’s new owner, Holdco.

Maybe the downside to Morgan McCague is that he forgoes the $10,000 a year he gets to participate in this artifice of ownership that allows Teachers’ to do indirectly what Teachers’ is precluded from law doing directly, namely own more than 30% of BCE. Too bad the law also prohibits Teachers’ from doing so indirectly as well.

Perhaps it was premature of me to say that Teachers’ is unable to manage the $587 million risk they have exposed themselves to. By that I mean, Teachers; has no ability whatsoever to affect the state of the global leveraged loan marketplace. However Teachers is probably using moral suasion to the max with its lending syndicate to proceed with a deal that is inherently uneconomic.

On Monday of this week, I made that observation to the Chairman and Commissioners of the CRTC, when I stated:

“Yes. And the risk about this debt financing is not some abstract arcane ‑‑ just read the headlines. I mean any number of leverage buyouts are not getting financed. And so to the extent to which the providers, the brokers; the syndicate of banks is willing to pony up for their risk, they are not the long term holders. Their ultimate goal is to find people who are. And presently this deal from the standpoint of many third parties is an uneconomic transaction that's unlikely to attract long term debt investors.”

That was perhaps more of a bold statement on Monday of this week than it is on Friday of this week, since yesterday TD Bank as one of the members of the Bank syndicate finally admitted the truth and dropped their bold bravado by admitting that they have already taken right downs on this loan amounting to between $165 - $330 million, despite comments by their CEO as recently as two weeks ago that they would do this deal again. Yeah, right. Banking can be this “easy”.

So no doubt Teachers' is running around trying to use all the moral suasion it has to force its syndicate of banks to do what is inherently uneconomic, Lend $1.00 against something that is worth $0.90 or less. Meanwhile, elsewhere in the world, banks are pulllng their loans from similar deals, which is the correct economic thing to do.

Meanwhile, Teachers wants them to press on doing what is inherently uneconomic. By blindly pressing on, Teachers is also calling upon these banks to do a deal that is also inherently unethical. Unethical on at least two fronts, the aforementioned artifice of ownership involving Morgan McCague, whose sole intent is to skirt the regulations of the Pension Benefits Standards Act, as well as fundamental Disclosure 101 rules, which a recent ruling by the OSC, provides that a Bid Circular must contain:

“Information should be disclosed if there is a substantial likelihood that a reasonable shareholder would consider it important.”

BCE failed to disclose the Catalyst Proposal even though it was a fundamentally different choice from the $42.75 cash offer, since it provided the following unique benefits:

Increases dividend by 74%
Market value of between $42.50 and $52.00
70% tax free rollover
Preserves all the upside in BCE
Avoids reinvestment risk
No deal risk, since deal is self financing, requires no CRTC approval and preserves bondholders rights

It's no wonder then, that comments like the following have appeared in the comment sections of recent Globe and Mail articles:

“I sure hope Catalyst’s Plan is still available for shareholder approval. That Plan should have been presented for Shareholder consideration at a minimum - the fact that IT wasn't should be enough to scuttle this outrageous deal.”

“ This whole screw up was the making of Sabia and Flaherty, hidden behind the Income Trust Tax Leakage smokescreen. It's borderline criminal that the catalyst proposal was not presented as an option for shareholders to vote on.”

So here we have Ontario Teachers’ playing Russian roulette with the plan assets they manage which will very likely see them have to pay a $587 million reverse break fee. Alternatively they can proceed with a deal that is inherently uneconomic and thereby ask a syndicate of banks to take their own respective right downs in order that, what?

In order to take Canada’s most widely held public company private and transform Canada’s largest telecom into a debt ridden, crack cocaine equivalent junk bond issuer. The result of which will be to increase phone costs, lessen competitiveness, lay off workers in a knowledge sector and reduce Ottawa’s annual tax collection by $729 million a year?

Where is the sense in all of this? There is none.

Ottawa should pull the plug. Disconnect Teachers’ phone service. They have two ways to do it. The CRTC, acting independently, or Industry Canada. Let’s see if Canada’s New Government can at least get one thing right. Meanwhile, if Teachers had any sense, they would be down on bended knee asking for the same thing instead of sniffing their own crazy glue in a desperate attempt to look like they're "smart money".

Meanwhile Teachers' ignored Catalyst's letter of February 4, 2008, outlining a prudent way out of this train wreck in the making (available at


Dr Mike said...

This convoluted , inept , & wasteful set of events with the BCE/Teacher`s deal is just one more example of the contempt & disdain that big Business & gov`ts have for society today.

All we can see if we look at the facts , is that somewhere along the way , the little guy investor gets screwed again.

Why is it that the little guy is always on the wrong end of the stick when it comes to money issues & to governments.

I guess it s because we . as individuals , do not have the clout--being stepped-on only results in a tiny squeak.

People need to crab & complain about deals such as this that will benefit no-one that matters.

Maybe pop into your TD bank branch & complain about them wasting the money you have lent to them (at almost inconsequential interest rates)

Ask them why the Catalyst proposal was not even considered--Maybe you can get an answer since it was your money they are playing with.


zien said...

What Ontario Teachers' Plan Pension risk?

Individual teachers need not fear. The taxpayer who does not get a kickback by working in the Public Sector should.

If you download the PDF. file at
you will find in the "Public Accounts 2006-2007: Consolidated Financial Statements" of the Auditor General of Ontario, that for 2006-2007, in addition to the matching $320 Million Taxpayers, as employers, gave to the contributions made by teachers to the Ontario Teachers' Pension Plan, an additional $797 Million was added by Taxpayers alone to shore up the current shortfall ($740 Million for 2005-2006) in meeting the obligations of future funding.

Quoting the Auditor General's Report:

The Province sponsors several pension plans. It is the sole sponsor of the Public Service Pension Plan (PSPP) and joint sponsor of the Ontario Public Service Employees Union (OPSEU) Pension Plan and the Ontario Teachers’ Pension Plan (OTPP).

These three plans are contributory defined benefit plans that provide Ontario government employees and elementary and secondary school teachers and administrators with a guaranteed amount of retirement income. Benefits are based primarily on the best five-year average salary of members and their length of service, and are indexed to changes in the Consumer Price Index to provide protection against inflation. Plan members normally contribute seven to nine per cent of their salary to these plans. The Province matches these contributions.

Funding of these plans is based on statutory actuarial funding valuations undertaken at least every three years. The Province contributed $797 million to OTPP in 2006–07 (2005–06, $740 million), $218 million (including $75 million special payment) to PSPP (2005–06, $136 million) and $143 million to OPSEU Pension Plan (2005–06, $143 million). During calendar year 2006, OTPP paid benefits, including transfers to other plans of $3.8 billion (2005, $3.6 billion), PSPP paid $822 million (2005, $793 million) and OPSEU Pension Plan paid $529 million (2005, $524 million). Under agreements between the Province and OPSEU, and between the Province and the Ontario Teachers’ Federation (OTF), gains and losses arising from statutory actuarial funding valuations are shared by the co-sponsors.

The government’s best estimate of the future annual inflation rate used in the pension and other employee future benefits calculations disclosed in these financial statements is 2.5 per cent; the salary escalation rate is 3.5 per cent; and the discount rate and expected rate of return on pension plan assets are 6.75 per cent for OTPP, 6.5 per cent for PSPP and 6.75 per cent for OPSEU Pension Plan. Actuarial gains or losses are amortized over periods of 10 to 14 years.

End Of Quote

These extra payments are because:
"Despite strong investment performance, the pension plan has experienced shortfalls in recent years, requiring contribution increases for working teachers. The plan reported a $17.4 billion funding shortfall as at January 1, 2007 in its most recent annual report."'_Pension_Plan

I present the above as circumstantial evidence that the Trusts' "Theft by Conversion" was initiated to help cover the shortfall which overly generous Public Sector Pension Plans suggest would result in even more alarming Tax increases falling on the shoulders of the Private Sector which would incite a Revolution, once the truth was apparent.