Test
Back to all publications
Nov 9, 2021

Will 100-Year Old Debentures Derail the Canadian Pacific Acquisition of Kansas City Southern?

By John D. Andrew

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:

  1. 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.
  2.  
  3. 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.
  4.  
  5. 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.
  6.  
  7. The ongoing costs of maintaining and supporting a small, obsolete class of securities are an unnecessary expense. 
  8.  

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.

To learn more about this fascinating issue, read our full CP information and discussion paper.

Areas of Expertise

Related Publications

Publications Article
Election Time in Ontario and Employee Voting Rights By Daria (Dasha) Peregoudova and Bardia Jalayer May 12, 2022 On June 2, 2022, Ontarians will head to the polls to elect the members of the 43rd Parliament of ... On June 2, 2022, Ontarians will head to the polls to elect the members of the 43rd Parliament of Ontario. With the election taking place on a weekday, employers and employees alike will be asking what obligations and rights they may have when it comes to voting.
Publications Article
British Columbia High-Cost Credit Rules Come Into Effect on May 1, 2022 By David Stevens Apr 28, 2022 On May 1, 2022, British Columbia will become the fourth Canadian province to regulate high-cost c... On May 1, 2022, British Columbia will become the fourth Canadian province to regulate high-cost credit products. After that date, there will be additional disclosure requirements and consumer rights for consumer credit products with interest rates above 32%, along with licensing requir...
Publications Article
Growth Funding Tools: Analyzing Toronto’s Draft Materials By Sidonia J. Tomasella, Maggie Bassani, Ajay Gajaria, Meaghan Barrett and Matthew Helfand Apr 25, 2022 Bill 108 and Bill 197 made amendments to the Planning Act and the Development Charges Act, 1997 i... Bill 108 and Bill 197 made amendments to the Planning Act and the Development Charges Act, 1997 in Ontario, with respect to how municipalities generate funding from development in respect of three primary growth funding tools: Development Charges, Community Benefits Charges and Alternative Parkla...