For a good understanding of the 2034 notes problemCIBC give the best picture of the problem (published feb 02)::
2034 Notes Saga Continues Key Takeaway: Certain holders of the 2034 Notes have reiterated the claims they made back in April 2021 that BBD was in breach of certain covenants as it sold off non-core assets. BBD has noted it believes these allegations are without merit. We view this as a modest setback for BBD in the event it is required to pay the Make Whole payment.
On February 1, BBD announced that it has received a letter dated January 31 from counsel to certain holders (Antara Capital Master Fund LP, Corbin ERISA Opportunity Fund, Ltd., and Corbin Opportunity Fund, L.P.) of the 7.450% Senior Notes due 2034 reiterating claims made in April 2021 which stated that the company's divestitures of non-core assets, including its transportation business, regional jet program and aerostructures division constitute a breach of certain covenants under the indenture governing the 2034 Notes and further alleging that the actions of the Corporation in May 2021, addressing the matters raised in the April 2021 letter, breached the rights of such holders. BBD has stated that it believes these allegations are without merit. The plaintiffs allege the following: 1. The 2034 Notes contained a covenant that during the 30-year term of the Notes, BBD will not sell, transfer, lease out, lend or otherwise dispose of the whole or substantially the whole of its undertaking or assets. With the sale of its commercial aircraft, aerostructures and engineering services, and transportation segments, the company disposed of almost 80% of its total revenue. On April 22, 2021, shortly after the last of the transactions closed, counsel for plaintiffs provided written notice to BBD that it was in material breach and default under the Indenture, which would require the company to redeem the Notes prior to their maturity and pay the contractual redemption price. At that time, the Make Whole totaled ~$398MM.
2. The plaintiffs state that BBD's subsequent actions were an abuse of bondholder rights with the company launching a Consent Solicitation on May 3, 2021. Further, with BBD failing to get consent from the majority of the noteholders to waive any default or event of default from the asset sales, it issued $260MM of new 2034 Notes, had the indenture trustee authenticate these new notes, and sold them to an institutional investor. With the face value of the existing 2034 Notes at $250MM, the new notes were issued to manufacture an ex post majority to waive the defaults. The plaintiffs argue this disenfranchised the existing 2034 Note holders. As well, they point out that these new notes were sold at par, even though the existing 2034 Notes were trading ~5 percentage points higher in the market. In other words, BBD was giving away ~$13MM in exchange for the waiver from the institutional investor
3. The plaintiffs argue that: i) BBD did not have the right to issue new notes while in material breach of the indenture. ii) Even if the new notes were valid, holders of those new notes do not have contractual right under the indenture to waive past defaults. Only the majority of the notes outstanding at the time of the breach are entitled to waive such a breach. iii) The issuance of the new notes serviced no legitimate business purpose and was in breach of the implied covenant of good faith and fair dealing.
4. The plaintiffs are seeking damages in an amount to be determined at trial against the institutional investor for its tortious interference with its contract rights.
Net-net, we view this as a modest setback for BBD in the event it is required to pay the Make Whole payment. With the company's pro-forma liquidity sitting at $1.9B at the end of Q3 ($1.4B in cash), its FCF inflecting positively, and access to the debt markets, we believe it can absorb a ~$400MM payment. And given business jet trends are positive, the company should have some buffer here as it continues to target a leverage ratio of 3x by 2025. We are currently modelling BBD exiting 2025 with a ~2.8x-2.9x leverage ratio My opinion (LB1): I think that the opponents have serious reasons to contest given the points 2 and 3. They have the majority of votes when the default occurs.
But the center of the cause is the scope of the words: ''
dispose of the whole or substantially the whole of its undertaking or assets'' Bombardier had 3 core assets ; the C series program, the rail and the business planes.
Whatever if operations representing 80% of revenues has been sold, the only profitable one was the business aircraft. The Alstom problems with the former Bombardier rail division and the actual 0$ net value of the C series program are easy facts to explain. On a value basis, the core assets has been kept. Whatsoever, ''the
whole and the substantially the whole''
are strong words and 50% to 80% is certainly not the whole. The opponents only have a nuisance power. We have to live with it.