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Tim Hortons Bondholder Burn Forgotten Amid Frenzy

Doughnuts Sit for Sale at a Tim Hortons Inc. Restaurant
Doughnuts sit on display for sale at a Tim Hortons Inc. restaurant in Oakville, Ontario. Photographer: Brent Lewin/Bloomberg

March 26 (Bloomberg) -- Tim Hortons Inc.’s move to reward shareholders at bondholders’ expense was forgotten yesterday as supply-starved investors lapped up the latest issue from the Canadian coffee-and-doughnut chain.

Tim Hortons sold C$450 million ($403 million) of five-year notes to yield 115 basis points more than equivalent government benchmarks, according to a person familiar with the deal who declined to be identified because the terms aren’t public. That was less than the average 145 basis-points spread in the Bank of America Merrill Lynch BBB Canada Non-Financial Index.

Corporate bond issuance is the slowest in four years after record sales last year, sparking increased competition among investors for new supply. The Tim Hortons deal was the second part of a C$900 million offering to fund a share buyback which arose after a campaign last year by activist investors to reward shareholders.

Though the latest bonds included covenants to protect bondholders losing out in a boardroom battle, that wasn’t why Derek Brown, who oversees C$5.6 billion as a senior portfolio manager at Fiera Capital Corp., bought the bonds.

“It didn’t matter what we thought about the covenant -- the deal was going to get done -- it was massively oversubscribed,” he said by phone from Toronto. “Lack of supply is playing into every new deal.”

Tim Hortons drew nearly C$2 billion in bids for the sale of the notes maturing in April 2019, allowing it to shave 0.05 percentage point off the borrowing costs it originally sought, according to two people with direct knowledge of the deal.

DBRS Downgrade

Companies stepped up borrowing last year to beat a forecast rise in interest rates. Issuance so far this year has been about C$20.5 billion, the slowest pace for the first three months of the year since 2010, according to data compiled by Bloomberg.

DBRS Ltd. downgraded the Oakville, Ontario-based company’s credit rating two levels to BBB from A (low) in August after Tim Hortons announced plans for a debt-financed share buyback. That sparked a drop in the company’s bond maturing in 2017, its sole existing bond at the time, to fall as low as C$103.80 on Sept. 10, from a high of C$108.91 four months earlier. The notes traded at C$106.27 yesterday.

CBIA Pushback

Tim Hortons’ move helped push the Canadian Bond Investors Association to launch a campaign to boost legal protections in bond contracts. The group, which represents 32 of the nation’s biggest fixed-income investors including TD Asset Management, released a discussion paper last month which called for increased protections if control of a company changes hands and increases interest payments to borrow money to pay shareholders.

“As far as I’m aware, Tims is the one offering that’s out there that’s included some of the features we have set out in our white paper,” said Mark Rasile, co-author of the paper for the CBIA, and co-head of financial services at Toronto law firm Bennett Jones LLP.

The two Tim Hortons bonds meant to fund the share buyback each include a covenant that guarantees investors their money back if a rating downgrade results from the majority of board members being replaced, a possible outcome of a proxy fight by activist investors.

The covenant wouldn’t have helped investors who saw their bonds downgraded last year during the activist campaign by Highfields Capital Management LP and Scout Capital Management, which didn’t involve a proxy fight or a change in board members.

“This type of clause has become increasingly common in debt offerings, as bondholders are looking for additional protection in transactions,” said Olga Petrycki, a spokeswoman for Tim Hortons.

Bondholders Sacrificed

Tim Hortons has no plans for further offerings but the company regularly reviews its capital structure, Petrycki said in an e-mail.

The extra debt doubled leverage at the doughnut chain last year, with the ratio of lease-adjusted debt to earnings before interest, taxes, depreciation, amortization and rent costs rising to 3.06 times, from 1.69 times, DBRS said when it lowered Tim Hortons’ ratings.

“What’s to stop them from doing it again?” Scott DiMaggio, director of Canada fixed income at AllianceBernstein LP in New York, said of the company’s decision to sacrifice its credit quality to please shareholders. “I like timbits just fine, just don’t see why a coffee chain is putting so much debt on its balance sheet.”

Brown said pressure from activist shareholders has subsided for the foreseeable future. “It could be a target for hedge funds down the road,” he said. “I don’t see it happening at this point.”

“If we had much more supply out there in the market place and people were being more discerning, there would have been a wider spread, more of a concession,” said John Braive, who helps manage about C$50 billion of fixed-income assets as vice chairman at Canadian Imperial Bank of Commerce’s CIBC Global Asset Management unit. “There’s just been a lack of supply.”

To contact the reporters on this story: Ari Altstedter in Toronto at aaltstedter@bloomberg.net; Cecile Gutscher in Toronto at cgutscher@bloomberg.net

To contact the editors responsible for this story: Dave Liedtka at dliedtka@bloomberg.net David Scanlan

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