Canadian Pacific's ("CP") pending acquisition of Kansas City Southern ("KCS") again raises the last remaining historic anomaly and unresolved issue in CP's capital structure which negatively impacts or constrains CP's financing and corporate actions and could become an impediment to completing the transaction.
CP's 4% perpetual consolidated debenture stock ("CDS") is an antiquated security issued between 1893 and 1932. The CDS constitutes a first charge over all of CP's railway assets. The USD denominated CDS features a gold payment clause (based on a gold price of $20/ounce) that, if enforceable now or in the future, makes the CDS worth exponentially more than its principal value.
Although there is only about C$40M outstanding, the CDS adversely affects the KCS acquisition in a number of ways:
- The first charge on the all the rail assets prevents CP from offering senior security for both its current debt and the estimated $8.3B in additional funding necessary to complete the KCS transaction.
- The gold payment clause represents a significant unquantified liability and risk which is likely unacceptable to KCS shareholders and which they should not be asked to assume.
- The CDS limits CP's ability to undertake certain corporate restructurings it would otherwise implement to fully integrate and take maximum advantage of the KCS acquisition.
- The ongoing costs of maintaining and supporting a small, obsolete class of securities are an unnecessary expense.
The continuing existence of the CDS and the risks/disadvantages it represents to CP's financing and corporate objectives can be eliminated if the CDS is fully retracted through a Plan of Arrangement pursuant to Section 192 of the Canada Business Corporations Act. CP needs to take this step to modernize its balance sheet and remove these legacy issues in advance of the KCS transaction.
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