High Yield Debt - A New Form of Capital in Canada

Posted on February 14, 2011 by James Lurie

Michael Innes and James Lurie have published the article "High Yield Debt - A New Form of Capital in Canada" in Osler's recent Capital Markets Review.

Here is an excerpt (you can read the full article here):

Prior to 2010, the United States market was virtually the only alternative for Canadian high yield debt issuers, but due to various factors, it appears a nascent high yield market has taken hold in Canada.

Much like the income trust wave of years past, some Canadian issuers are now finding they have access to capital in ways that did not previously exist. This has taken the form of high yield debt. Prior to 2010, the United States market was virtually the only alternative for Canadian high yield debt issuers. Due to various factors, it appears a nascent high yield market has taken hold in Canada. According to one source, 2010 saw $3.5 billion of supply across 14 transactions, a significant increase compared to the $800 million of supply across four transactions in 2009.

High yield debt is essentially non-bank debt that does not carry an investment grade rating and that typically bears interest at a higher rate as compared to investment grade issues (i.e., it is “high yield”). The minimum rating for long term debt to be considered “investment grade” is BBB - for debt rated by S&P, Baa3 for debt rated by Moody’s and BBB (low) for debt rated by DBRS.

In addition to the rating, there are also many features of high yield debt that are typically not associated with investment grade issues. The most significant difference is in the nature of the covenant pattern. Depending on the particular industry of the issuer and the issuer's individual circumstances, investment grade debt typically carries with it very few covenants beyond the covenant to pay back the money borrowed with interest. High yield debt is much different in this regard.  Thus far in the emerging Canadian high yield market, covenant patterns for some issuers have resembled those used in the U.S. high yield market

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Cleaning Up Their Act: Other Ontario PPSA Amendments Made in 2010

Posted on February 8, 2011 by Simon Wormwell

At Banking and Financial Services Law, we have posted a couple of entries regarding recent amendments to the Personal Property Security Act (Ontario) (PPSA). One related to the effect of collateral classifications on a financing statement. The other related to an extension of the time period for perfecting a purchase-money security interest ("PMSI") in collateral that is not inventory.

There are two other amendments to the PPSA that were made in 2011. They propose to correct inadvertent repeals of two portions of the PPSA.

The first is a correction to the definition of “purchase-money security interest” (PMSI) in section 1(1).  When the Act was amended on January 1, 2007 to reflect changes required by the Securities Transfer Act, 2006 (Ontario), the exclusion of transactions by sale and lease back to the seller was accidentally dropped.  It has now been reinserted.  Sale-lease backs are excluded from the PMSI definition because, typically, sale-lease backs do not involve the debtor acquiring new assets, which is the objective of a PMSI. This amendment is deemed to have come into force as of January 1, 2007.

The other amendment relates to two subsections that were repealed under the former Bill 152 on August 1, 2007.  Under the current PPSA, a secured party must select at least one “check-the-box” collateral classification when registering a financing statement.  Collateral descriptions are optional.  Eventually, we expect the collateral classification system will be dropped from the Ontario PPSA and collateral descriptions will be mandatory. This will reflect the approach in other Canadian provinces. The repealed sections addressed situations where the secured party failed to use a description to limit the scope of a collateral classification where the collateral did not constitute all of the debtor’s assets in the particular class. Those sections won’t be necessary if collateral classifications are no longer used, but the repeal was made too soon. New PPSA subsections 56(2.2) and (2.3) provide the means for a debtor to require a secured party to remove or limit a collateral classification where applicable. They are deemed to be in force as of August 1, 2007.
 

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