OPTI Canada's stock sale ugly

awillis@globeandmail.com

It was ugly, and existing shareholders have every reason to be furious, but OPTI Canada managed to get a troubled equity sale out the door yesterday.

OPTI was able to raise $150-million by selling shares at $1.75 each, a staggering 33-per-cent discount to the price of the stock last Tuesday, when the oil sands company first announced the financing. The company needs capital to develop the Long Lake heavy oil project in Northern Alberta with Nexen , and pay down debt.

While underwriters were able to sell the original offering last week at $1.70 a share, the discount was judged to be too steep by the Toronto Stock Exchange, which refused to let the financing go forward without the approval of OPTI's shareholders. That was seen as impractical. Instead, the underwriters tried again.

Perversely, they benefited from the sharp drop in OPTI's share price following news of the failed deal.

TD Securities, Credit Suisse and RBC Dominion Securities led a eight-dealer syndicate that finally managed to sell the OPTI shares.

OPTI stock closed at $1.99 on the TSX on Monday, which means the new shares came at a 12-per-cent discount. The TSX takes a dim view of transactions that are done at a discount of more than 20 per cent to the price of stock in the public market.

The new issue translates into 41-per-cent dilution for existing OPTI owners, as the number of shares outstanding jumps by 85.7 million to 288.9 million shares on a fully diluted basis.

Going into the second stage of this share sale, BMO Nesbitt Burns analyst Randy Ollenberger said in a report: "The initial offering price of $1.70 per share was well below our expectations. As a result, issuance at this price would be dilutive to our net asset value estimates."

"We believe that OPTI's shares could ultimately be worth more than $10 per share if the company is able to demonstrate the economic viability of the project," Mr. Ollenberger said.

"However, the shares will likely remain volatile as the market weighs financial and operational risk against takeover speculation."

There has long been a theory that Nexen or one of the global energy companies that want greater exposure to the oil sands will pick off OPTI. This troubled share sale makes the theory more credible.

Moody's moody about

Canada's banks

Moody's warned yesterday that it is likely to chop the rating on $65-billion of the Canadian banks' paper, a move that reflects lessons learned from foreign bailouts of troubled financial institutions.

New York-based Moody's said it is contemplating a two- or three-notch drop in ratings on subordinated debt, hybrid securities and preferred shares issued by the country's seven largest banks, a day after domestic rating agency DBRS cut the banks' ratings on the same securities.

"These potential rating actions do not reflect on the underlying financial strength of the Canadian banking system, which Moody's views as one of the soundest globally," said Moody's senior vice-president Peter Routledge.

"Rather, they would capture the risk that subordinated capital generally does not benefit from systemic support."

Moody's logic is that before the current financial meltdown, the rating agency and just about everyone else "assumed that any support provided by national governments and central banks to shore up a troubled bank and restore investor confidence would not just benefit the bank's senior creditors but, at least to some extent, investors in its subordinated capital."

In fact, when banks and insurers did hit the wall, and needed government support, subordinated creditors and owners of hybrid securities were cut out of rescue plans.

Moody's said: "In some cases, support packages have been contingent upon the banks' suspension of coupon payments on these instruments as a means to preserve capital."

"Moody's does not presently see compelling evidence to suggest that the Canadian government would take different decisions on supporting bank subordinated capital investors than those taken most recently by other G7 and OECD countries," Mr. Routledge says.

"In other words, the Canadian government would be likely to have bank subordinated capital investors share in the expense of recapitalizing a troubled Canadian bank in the future, in our opinion."

Moody's is now reviewing what this all means for seven Canadian banks that have collectively issued $33.3-billion in outstanding subordinated debt, $5.5-billion in Tier 2A instruments, $10.5-billion innovative Tier 1 instruments or hybrid capital, and $15.2-billion in non-cumulative perpetual preferred shares.

For those wondering just what a "hybrid" security looks like, we are talking those offerings with cute names that pay interest like debt, but get treated as equity by regulators. In the domestic hybrid market, BMO floats BOaTS, RBC rolls out TruCS, and Manulife serves MaCS.

The DBRS downgrades announced late Monday came after a review that started in April, and came as no surprise.

"We do not believe the changes announced by DBRS will have a material impact on hybrid spreads, as the market was already anticipating the downgrade," said BMO Nesbitt Burns analyst George Lazarevski.

He added: "We believe the recent underperformance of hybrid capital is due to increased selling by retail accounts and anticipation of increased supply with the recent filings in the bank and insurance sectors."