Emera, which has its headquarters in Halifax, sold $1.9-billion worth of receipts to finance its acquisition of TECO Energy.Lee Brown/The Canadian Press
Before anyone on Bay Street gets too giddy about selling instalment receipts all over again, something that's plausible following Emera Inc.'s big financing this week, we ought to remember what happened the last time these securities were in vogue.
After their spectacular run in the late 1990s, the instalment receipt flame-out was such a spectacle – and some investors were so badly burned – that investment bankers didn't dare pitch them for nearly a decade.
These securities, which were once commonplace in Canada, take their name from the payment plans they offer investors. People who buy them as part of a new corporate financing can pay for their purchase in stages – sometimes half upfront and the second half a year later, or maybe one-third upfront and the remainder at a later date.
The offerings are enticing for investors because issuers pay interest until the final payments are due. Emera just sold $1.9-billion worth of receipts to help finance its acquisition of TECO Energy Inc. and investors will receive 4-per-cent annual interest until the takeover closes. Because the buyers were asked to shell out only one-third of their total payment upfront, they earn an effective interest rate of 12 per cent – 4 per cent divided by one-third.
These benefits made instalment receipts popular in Britain during the country's privatization boom decades ago, and this demand eventually helped them take off in Canada. During the 1990s, they were particularly common for income trust issuers here.
But the market turned as the century came to a close, and that spelled big trouble for Bay Street. Even though investors are obligated to make good on their final payments, by 1998 there were serious questions as to whether they would do so. In August of that year, $1.7-billion worth of receipts had to be paid for over the next quarter, yet the trusts that had sold them were trading so poorly that investors had good reason to try to walk away.
Two deals all but killed the instalment receipt market. After raising $437-million in 1997 by selling these securities, zinc and copper miner Boliden ran into trouble. First the metals and mining market started to tank, and then there was a toxic-waste leak at one of its tailings ponds. By the time investors had to pay the remaining money they owed, they were forced to spend more than the Boliden shares were worth, so they refused.
A similar situation played out with drilling company Fracmaster Ltd., which bet on the resurgence of Russia's oil and gas industry.
The Fracmaster drama was dragged out in a courtroom battle until 2004, and for almost a decade after instalment receipts were all but unheard of.
Now there's a bit of a resurgence. In 2013, Fortis Inc. decided to sell $1.8-billion worth of these securities to help finance its acquisition of UNS Energy Corp.; less than two years later, Emera has adopted virtually the same structure for its own deal.
Undeniably, there's a big difference between selling instalment receipts for rather stable utility companies and selling them for risky commodity producers. And two issues hardly make a trend.
Yet Bay Street has a habit of hopping on bandwagons. Before we know it, instalment receipts could be all the rage again.