Tuesday, September 16, 2008

Anyone can bemoan negative outcomes in retrospect, few are those who can foretell them

This subprime mortgage meltdown was a house of cards waiting to happen. The extent of the abuses that underlay and the myriad ways in which financial products were designed to leverage the returns, and more insidiously the risks, makes the whole thing a disgrace and a sad commentary on the world’s financial system that became enormously dependent on people being able to service debt that they had no hope of servicing in the first place.

Such is the case with leveraged buyout loans and the needless and reckless introduction of debt into Canada’s economy.. Such is clearly the case with BCE. The LBO of BCE is a totally absurd transaction that is fueled by greed and the need for Investment Banking Fees and Employee Stock Options gains with zero commensurate accomplishments to justify those gains......and the hubris of Teachers’ management. It is no coincidence that Maple Leaf Foods is the source of the lysteriosis outbreak. Maple Leaf Foods is another company whose goals and strategies and priorities were being laid down by the “stock jockey” mindset of people who run a pension fund, and for whom ROE means everything and food safety took a back seat.

It is for reasons like this that the Federal Pension Regulations PROHIBIT pension funds from owning more than 30% of the votes of a Canadian company. So what do the “stock jockeys” at Teachers do? They break the very spirit of that law, by creating some bogus arrangement with an ex employee, Morgan Mccague, to circumvent these rules.

Circumvent these rules? Sound like the very thing that caused the subprime fiasco.

Meanwhile the circumventing of these rules by Teachers in the case of BCE is having vastly negative consequences on Canada’s economy, such as:

Loss of $800 million per year in tax revenue
Loss of 2,500 high paying jobs (expected to rise to 4000)
Massive debt being introduced into Canadian economy at the worst point in the economic cycle ($44 billion in total for BCE, and increase of $32 billion from current debt levels)
Vastly diminished capital investment plan for Canada’s so called leading telco
Increased service costs to consumers
Reduced to a junk bond issuer at the cost to existing bondholders of $1 billion and vastly increasing BCE’s cost of capital
Displacement of average investors. BCE used to be Canada’s most widely held company, now it will have 4 owners, 3 of them US.
Former investors were taxable Canadians, new owners are not
Reneging on $1 billion in dividends payable to shareholders and promised to shareholders

Teachers’ should not be allowed to break its pension rules in such a blatant , crude and manipulative way. That’s how sub-prime mortgage meltdowns have their start. The Chairman of the CRTC was completely unimpressed by this phony arrangement devised by Teachers’ . As you know, I expressed that view before the CRTC.

Where is Ottawa? Where is Jim Prentice and Stephen Harper? They approved this transaction with the full knowledge of all the abuses that it represented and the negative consequences that it entailed I know, since I sent Prentice these very observations is letter dated February 26, 2008. It was hand delivered to him by the Chief of Staff of a former Prime Minister.


Dr Mike said...

Why do the pair of Harper & Prentice not seem to care about the BCE deal??

Was bolstering Pension Funds the only thing that mattered??

Was this all part of the deal to kill income trusts??

These people must be held accountable.

Dr Mike Popovich.

Robert Gibbs said...

Canadians Paid A High Price For Flaherty's Income Trust Reversal

The Record.com
September 16, 2008
Al Coates

Remember the income-trust Alamo, the Halloween-night massacre of October 2006? Sure you do, and you got slaughtered.

The capital value of any income trusts is, almost assuredly, well down from 23 months ago when Finance Minister Jim Flaherty shocked the nation with his declaration to have the trust structure killed off by 2011.

Your trust-related income may be well down, too, because many trusts have either died, or cut their distributions or killed distributions outright.

You will recall the Flaherty rationale: Hundreds of millions of dollars, he said, were subject to "tax leakage" because the trusts paid no corporate tax. Instead, the profit/free cash doled out by trusts fell directly into the hands of investors.

Those investors who held trusts outside registered pension plans did pay tax -- at the income level -- on the proceeds; those who held them inside registered plans (such as RRSPs) paid tax on trust proceeds only as they chose to take income from their plans.

So, here we are, nearly two years later -- and smack in the middle of an election campaign -- and what hath Flaherty wrought?

Well, for starters, he continues to have older Canadian investors in a lather because he has hurt them badly. These are not necessarily wealthy people we're talking about here, although, of course, there are wealthy individuals (and wealthy institutions) heavily invested in trusts.

But these folk are, by and large, ordinary Canadians, people who invest to supplement their pensions, people who use the trusts' high payouts to offset low bank interest rates, such as those paid out in GICs and the like.

So, that's the start of it, but it is not the end. Prior to Flaherty's announcement, a number of giant corporate concerns, such as BCE and Telus and Manulife and Power Financial began to muse publicly about the prospect of converting from corporately-structured entities to trust-styled ones.

That, ultimately, is why Flaherty made his decision; he didn't want corporate Canada to go the way of the dodo via wholesale trust conversion. He feared two things: a growing "tax leakage" and the so-called "hollowing-out'' of corporate Canada.

That is fair enough, but look what has happened since as the unanticipated consequences of his decision -- many of those trusts have become takeover targets by giant private-equity players. They are being taken off the map and the radar, folded internally into big pension plans, never again to be seen as income-producing opportunities for Canadians.

I'll cite just two of many, many examples in an attempt to make the point. I will also note this, to be fair and clear: Our family owns the entities we are about to discuss here; and I will vote Conservative in the forthcoming election, as I typically do, Flaherty's actions notwithstanding.

The examples are these: BCE, the giant telecom outfit that once contemplated trust conversion, is soon to be purchased by a group of private-equity players fronted by the Ontario Teachers Pension Plan. At a $52-billion buyout price, $42.75 per share, it's the largest leveraged (debt-financed) takeout in global corporate history.

The buyout will be financed through borrowing and BCE will be taken private, dismantled, chopped into pieces and perhaps sold off in parts. Already, thousands of BCE mid-level jobs have been whacked and there will be more to come.

BCE is a cash-flow machine and its free cash will be used to finance the debt. The new owners of BCE -- teachers and its American partners -- will pay no corporate tax because, in the first place, pension plans don't pay tax, and for the other buyout partners, there also are offsetting cash-flow and debt-service factors at work. Ottawa will be lucky to see a wooden nickel in ongoing corporate tax proceeds.

The deal should close in December -- and Canadians will have lost a huge corporate entity, an investment staple, a giant, dividend-producing icon. Ontario's teachers, meanwhile, will benefit long-term because their pension operator is smart, rich and opportunistic.

Now, on to Teranet, an Ontario-based, real-estate-related trust that electronically records the details of every real-estate transaction in Ontario. Teranet has a locked-in contract with Queen's Park that runs through 2017 and it makes its money by taking a small slice from those transaction proceeds.

Teranet, until recently, was trading under $9 per unit, more than a dollar beneath its initial-offering price of $10 a unit. It, like so many other trusts, had been hurt by Flaherty's Halloween-night scare.

A few weeks back, a company called Borealis Infrastructure Management stepped up with an offer of $1.75 billion ($11 per unit) to take Teranet private, just like BCE. Borealis is an investment arm of OMERS, the pension operator of Ontario's civic employees, and its biggest recent move, until the Teranet bid, had been its buyout/privatization of the Golf Town Income Fund.

Before the Teranet deal is done, we may see three or four other bidders for the company, such is its stability and appeal. One potential bidder, announced just last week, is HOOPP, the pension fund that looks after the interests of Ontario's hospital workers.

Here's what I believe to be an interesting irony, a thread that runs through so much of this: The federal government kills a business/investment structure known as income trusts. Canadian investors, dependent upon them as income supplements, are taken by surprise and get whacked in the wallet.

Some trusts die as a result. Some lose huge chunks of their value. Some reduce their distributions. Some kill their distributions. Income trusts, faced with a 2011 guillotine, become, to a large degree, investment pariahs. And their holders get hurt.

And now, in the case of BCE and Teranet, and others past and yet to come, enter the opportunists -- the powerful, wealthy pension arms of public-service employees, to take advantage of a moment in time, to buy the companies, take them out of play, and reap the anticipated rewards no longer available to the rest of us.

There is no criticism intended here of those civil-service pension funds. They are doing exactly as they should: buying great assets at great prices. You cannot fault them for being smart, rich and ready.

Flaherty is a different story. When he knee-jerked on the trust decision, he clearly had no idea where his decision might ultimately lead. In his zeal to protect Canada's corporate structure -- and Ottawa's hefty tax take from same -- he forgot to look into the future; he failed to envision the private-equity-takeout tsunami that is now washing over the shores of the Canadian public markets.

Flaherty created this climate. His decision to kill trusts has hurt ordinary Canadians -- and hasn't done a thing to protect either corporate Canada or Ottawa's taxation interests. The nation and its citizens are paying a price for his haste and his myopia.