Corus Pulls $221 Million Junk Bond Deal Backing Shaw Buyout

Corus Entertainment Inc. pulled a C$300 million ($221.4 million) junk-bond offering backing a takeover because of difficult market conditions.

The sale may be renewed if market conditions improve, Sally Tindal, a spokeswoman for the Canadian content provider said in an e-mail. Corus was planning to use the bonds to partially fund its C$2.65 billion takeover of Shaw Communications Inc.’s media business. The bid is backed by a commitment from Royal Bank of Canada, which means the company has financing for the purchase.

The Toronto-based company would have had to offer a minimum yield of 9 percent to convince investors to buy the offering, said Marc-Andre Gaudreau, lead portfolio manager who helps manage more than C$4 billion at 1832 Asset Management, a unit of Bank of Nova Scotia.

Yields on Canadian junk bonds rose to 9.83 percent on Feb. 17, a level not seen since 2012, according to the Bank of America Merrill Lynch bond index.

‘Quite Expensive’

“The outlook for the sector and the company is just very challenging," said Gaudreau. "It seems like the price that the company would have to pay to issue was becoming quite expensive." The firm doesn’t own Corus bonds but it does have some Shaw debt.

Market volatility has kept Canada’s high-yield issuers on the sidelines this year as the commodities-fueled turmoil spills over into the market for riskier corporate debt. Bond sales by Canadian high-yield companies plunged to C$625 million last year, down from C$3.7 billion in 2014, according to data compiled by Bloomberg.

Bond investors are concerned that the takeover will leave Corus with too much debt, Paul Tepsich, managing director of High Rock Capital Management Inc., said in an e-mail. His firm doesn’t own any Corus securities. It’s "insanity for them to take on more leverage in a declining sector," he said.

Financing for the takeover will include C$71 million in Class B shares, a C$2.3 billion loan, and C$560 million in temporary, or bridge, loans that Corus plans to eventually replace with new bonds and an offering of rights to buy its widely traded Class B shares. Corus currently has C$659 million in debt, according to data compiled by Bloomberg.

It’s unlikely that Corus would go to the U.S. bond market to raise the debt because the deal is too small, Gaudreau said. The bridge financing turns into a five-year unsecured term loan one year after the acquisition closes, Gaudreau said. The company will probably wait a year before trying to return the Canadian bond market, he said.

Corus will sit on its bridge loan and then "come to grips with the new reality" of paying the right coupon to assume so much more leverage in this market environment, said High Rock’s Tepsich.

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