Thursday, February 21, 2008

What assurances are there that BCE’s economics won’t end up in the hands of a sovereign wealth fund?

Photo caption: Minister of Finance, Jim Flaherty, met in Dubai with Sheik Hamdan bin Rashid Al Maktoum, Deputy Ruler and Minister of Finance and Industry of the United Arab Emirates, on January 23, 2008. Minister Flaherty is in the Middle East promoting investment in Canada.

What with the pandemic known as the sub prime mortgage meltdown, and the daily speculation that BCE’s new buyers, Teachers’ and three US private equity firms, will have a difficult time raising the 85% of the "purchase price" that takes the form of $28 billion of junk bond debt being raised by the company itself, the question becomes:

What assurances are there that BCE’s economics won’t end up in the hands of a sovereign wealth fund?

By all press accounts, the BCE leveraged buyout is presently being held together with bailing wire, chewing gum and no shortage of hubris.

Apparently great reputations are at stake. So too, the economics of Canada’s largest telecommunications carrier. With 85% of the purchase price taking the form of new debt to be incurred by the company and only 15% of the purchase price being provided by the “buyers”, the economics of who owns BCE resides with the debt holders, and less so the equity holders.

So who are these new debt holders?

Truth is no one knows. Not even the banks whose job it is to source these debt buyers know. The $28 billion of new debt that BCE needs to raise, as distinct from the $12 billion it already has outstanding, will be provided by a syndicate of banks consisting of Citibank, Deutsche Bank, Royal Bank of Scotland and TD Bank.

Citibank itself has gone through an extremely rough patch as a result of the sub prime mess that it played a central role in and which resulted in Citibank writing off $9.8 billion in bad loans. This major hit to Citibank’s capital required an immediate equity injection. So who did Citibank turn to at a time of distress?

You guessed it. Sovereign wealth funds, , namely $6.8 billion from the Singapore government investment agency GIC, and the Kuwait Investment Authority, who bought a $3 billion stake in Citibank.

So where do you suppose this syndicate of foreign banks is going to go to, once they find themselves “long” about $28 billion of BCE debt that traditional junk debt buyers don’t want to own, or the banks want to hold on their books?

Chances are that the sovereign wealth funds will find themselves faced with the distressed opportunity of a lifetime and will buy this BCE paper at a discount to its face value.

Do you actually think Citibank is going to turn down an offer from the Kuwait Investment Authority to off load its share of $28 billion of BCE junk bond debt at 85-95 cents on the dollar, just because such a sale would contravene the intent of legislation enforced by the CRTC. Give your head a shake. Or sheik, as the case may be.

What does Citibank or the Kuwait Investment Office care about the Bell Canada Act policy objective which reads: “The works of Bell Canada are to be for the general advantage of Canada” or the policy goal of the Telecommunication Act, which is "to promote the ownership of Canadian telecommunications carriers by Canadians?"

It certainly didn’t stop the Kuwait Investment Office back in 1988, when they picked up the largest slice of BCE’s IPO of Bell Mobility, after Wood Gundy failed in underwriting that issue. After Wood Gundy (today CIBC World Markets and an advisor to BCE in its proposed leveraged buyout) failed to complete that IPO. Merrill Lynch swooped in with a "bought deal".

IPOs are never done by way of a “bought deal”. Except however when the dealer has a firm lead order form a sovereign wealth fund like the Kuwait Investment Office, which is exactly what happened with Bell Mobility (then called BCE Mobile) and Merrill Lynch, courtesy of the Kuwait Investment Office back in 1988.

Two closing observations:

Merrill Lynch is one of the three US equity investors alongside Teachers. Merrill Lynch also took a bath on their subprime lending involvement. And like Citibank, they also took an equity infusion from the Kuwait Investment Office.

Is this sounding just a little too incestuous already?

Maybe that’s why the CEO of Teachers’, Jim Leech, recently observed:

“I look forward to the day when [BCE] is out of the public eye.''

Out of sight, out of mind?


Out of sight, out of Canadian control?

CRTC to the rescue?

Afterall, there is a Canadian solution that BCE failed to disclose to its shareholders and is making every attempt at not disclosing to the CRTC.

And yet, everybody wins with the Catalyst Plan?.

What gives? Who's on first? Or has Teachers' become a mini sovereign wealth fund? Sort of like Quebec. A nation within a nation. A sovereign wealth fund within a once sovereign nation?

By Brent Fullard
Catalyst Asset Management Inc.


1 comment:

Anonymous said...

Iran says Gulf shields its banks from U.S. pressure
Tue Feb 5, 2008 1:32pm EST

By Daliah Merzaban
MANAMA (Reuters) - U.S. allies such as Bahrain and the United Arab Emirates are helping shield Iran's banking system from Washington's "financial terrorism", the governor of Iran's central bank said on Tuesday.
The United States has been trying to cut Iran's access to the global financial system, including by putting pressure on Gulf Arab governments to isolate Iran, which it accuses of seeking nuclear weapons.
The pressure is not working because cultural, political and economic ties between Gulf oil producers were too strong, Tahmasb Mazaheri told the Reuters Islamic Finance Summit.
"Neither us nor our neighbors will sacrifice our long-term interests because of the unilateral pressures," Mazaheri said.
"Particularly in the region, Bahrain and the Emirates and other neighbors all around Iran's borders, we have a lot of partners who are working with us in the long term," he said.
He did not explain what form their assistance took.
Iran, which denies the nuclear charges, has long had close economic ties with Gulf states, especially in the UAE and Bahrain, Arab allies of Washington and home to the Middle East's biggest financial centers.
Even so, banks in the world's top oil-exporting region have bowed to pressure from the United States to make doing business with the Islamic Republic more difficult.
Bahrain's largest lender by market value, Ahli United Bank AUBB.BH, had "frozen" banking activity with Iran, where it operates an affiliate Future Bank with two Iranian partners, two sources familiar with the matter said last month.
Lenders in the UAE, meanwhile, have been holding off on issuing letters of credit to Iranian companies, bankers in the second-largest Arab economy said last month.[ So that it doesn't look so bleeding obvious that they support Iran economically? GL]

Foreign banks have been yielding to pressure, too. France's BNP Paribas (BNPP.PA: Quote, Profile, Research) and Calyon, the investment banking arm of Credit Agricole (CAGR.PA: Quote, Profile, Research), stopped offering Letters of Credit on Iranian fuel imports because of pressure from Washington.
"The pressure is a unilateral pressure," Mazaheri said.
"I call it kind of financial terrorism in the financial industry ... and it cannot be tolerated by the global financial system," he said.
"The central bank assists Iranian private and state-owned banks to do their commitments regardless of the pressure on them," he said.
The U.S., which has a naval base in Bahrain, is pressing the United Nations to tighten sanctions on Iran, the second-largest oil producer in the Organization of Petroleum Exporting Countries.
Iran, also holder of the world's second-largest reserves of natural gas, was retaliating by diversifying its more than $72 billion of reserves away from the weak U.S. currency, Mazaheri said.
"We have tried to avoid keeping dollars and giving the dollar the benefit (of demand from our reserves)," he said, declining to give a breakdown of the reserves.
The central bank's motivations for diversifying its reserves were both "political and also because of the trend of the weakening dollar", Mazaheri said. The dollar fell to record lows against the euro and a basket of major currencies last year.
(Reporting by Daliah Merzaban, editing by Will Waterman)
© Reuters 2008 All rights reserved