The income trust juggernaut is grinding to a halt.
Ottawa's decision last week to step into the trust sector debate is damaging big-name initial public offerings and crippling high-profile conversions. Yesterday, the uncertainty moved Standard & Poor's Corp. to revisit its decision to put trusts in the benchmark index.
The biggest trust debut in five years, a proposed $700-million offering from CanWest Global Communications Corp., is encountering strong investor resistance. Potential institutional buyers and financiers working on the transaction say the possibility of changes to the sector's favourable tax treatment means the newspaper chain will have to offer higher returns in order to sell units, which means less money for the media company.
There is also speculation that CanWest will shrink the offering, or even pull it. Terms of the deal are expected to be set on Oct. 6.
"There has been no change in the CanWest strategy with respect to the income trust and our program of marketing the trust continues as before," spokesman Geoffrey Elliott said.
Others are growing cautious. Bill Holland, chief executive officer at CI Fund Management Inc., said conversion plans are on hold.
"The income trust environment has changed," he said. "It appears the Finance Minister is trying to make a clear point that companies interested in converting should bide their time until a new policy is announced. Without some guidance, it becomes less likely that we would blindly march forward."
CI's trust strategy will be the subject of a board meeting this afternoon, although the outcome of the discussions is all but certain: CI would be foolish to convert ahead of changes, Mr. Holland said, "where the outcome is unknown."
The trust market has been roiled since the Finance Department moved on Sept. 19 to stop granting advance tax rulings to companies considering trust conversions.
The Finance Department's move is part of a larger examination of the rules governing trusts, including the way they are taxed. The worst-case scenario is that Ottawa will eliminate the favourable tax status that has created a $150-billion sector and transformed the country's capital markets.
Frustrations began to boil over yesterday after Standard & Poor's said it might delay the introduction of trusts in the benchmark S&P/TSX composite index.
"What next?" said Christian Paupe, chief financial officer of Yellow Pages Group, one of Canada's largest income trusts. "I am quite disappointed today . . . this is just more uncertainty for investors."
S&P announced plans in the spring to put trusts into the equity benchmark, starting with a 50-per-cent weighting in December before moving to full representation in March.
"S&P is facing massive pension fund lobbying to wait until Ottawa moves," said one brokerage house executive. "The pension funds don't want to buy into trusts just as the sector gets whacked by a tax change."
S&P has asked its 25-member advisory board to submit its view on trust inclusion by Friday. The tight deadline had some analysts speculating that the matter could be settled as early as next week. However, the panel's submissions must be reviewed by S&P's index committee in New York, leaving hopes of a quick resolution uncertain. S&P would only say that it would decide before a scheduled panel meeting Oct. 20.
"We didn't want to wait until then," said Steve Rive, vice-president of Canadian index services at Standard & Poor's, which manages the TSX indexes. "We thought that this was sufficiently important that we should get it solved sooner than later."
Both retail and institutional investor interest has cooled in the past week, as the sector lost $9-billion in market capitalization. That has prompted investment dealers to advise wannabe trusts to hold off on filing for an IPO or conversion until market sentiment improves.
But those in the middle of a transaction face a nightmare scenario.
"You've got one hour of a road show meeting, and you're spending 40 minutes of it with each side speculating on something that nobody has any clarity on," said one investment banker working on the CanWest offering. "It's not exactly productive."
Two U.S. companies missed deadlines for setting the price on their trust IPOs offerings last Thursday, and are now widely expected to pull their proposed deals. The pair are Polar North America Income Fund, a plastic cup maker, and Tube City IMS Ltd., which does outsourcing for the steel industry. The Polar offering is for $208-million, while Tube City was asking investors for $220-million. Another IPO, from Legacy Pharma Income Fund, was iced last week.
Other potential trusts never got off the ground. According to investment banking sources, clothing retailer Aritzia, based in Vancouver, stepped back from a planned $120-million offering, as did another national clothing chain, while a Calgary-based energy infrastructure company dropped plans for a $50-million IPO.
Another conversion candidate, GMP Securities Ltd., is still pushing ahead. CEO Kevin Sullivan said yesterday: "We intend to proceed. We know there's uncertainty in the market, but that uncertainty is reflected in our stock price."
Trusts have been the hot story in corporate finance circles for the past five years, and were on pace for a record year of underwriting. The first six months of 2005 saw a total of $11.2-billion raised in financings, including 49 IPOs that pulled in $5.5-billion, according to the Investment Dealers Association. Common stock IPOs over the same period raised $1.5-billion in 79 underwritings.
The federal government has estimated that it stands to lose $300-million of corporate tax revenue to trusts next year, and Finance Minister Ralph Goodale has also indicated that he fears the trust structure may stifle economic growth.
Trust triage
The federal government's decision to take a close look at tax reform in the income trust sector has triggered a breakdown in the chain of financings working their way through Canada's investment banks.
THE DEAD
Polar Income Fund
The plastic cup maker wanted $208-million to pay down debt. Scheduled to be done last week, the initial public offering is now expected to be pulled.
Tube city IMS
Was offered a chance to put $220-million into an outsourcer for steel companies. Turmoil in trust and steel markets meant it missed an IPO pricing deadline last week.
Aritzia Holdings Inc.
B.C.-based fashion chain opted to wait till the smoke clears before moving on a $120-million IPO. One of several clothing retailers now in a holding pattern over the trust issue.
Legacy Pharma Income Fund
Pulled a $150-million IPO last week as the market fell apart and investor questioned buying a drug manufacturer that didn't yet own the rights to produce any drugs.
THE DYING
CI Financial
Trail-blazing mutual fund company is cooling on a planned $6-billion trust conversion. The board meets today and will likely ditch the concept.
THE WOUNDED
CanWest Global
AT $700-million, the Winnipeg-based media giant planned the biggest trust IPO in years. Now it may have to pay more and cut the size of an offering of its newspaper stable.
GMP Securities
Toronto brokerage company pressing ahead with conversion, but its CEO acknowledges that the company is facing new uncertainty since Ottawa waded in.
RALPH GOODALE
'It is important to have a rational discussion about the future of business organization in this country.'
© The Globe and Mail
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