Canadian Pacific Railway Company – 4% Perpetual Consolidated Debenture Stock

In the course of its long corporate history, and particularly in the early days of acquiring and building the transcontinental railway network, the Canadian Pacific Railway Company ("CPRC") issued or assumed a variety of debt and equity securities. Notable among these were its 4% Preference Shares, Perpetual 4% Consolidated Debenture Stock ("CDS"), the Toronto, Grey & Bruce Railway Company ("TG&BR") First Mortgage Bonds and the Ontario & Quebec Railway Company ("O&Q") Permanent Debenture Stock and O&Q shares. None of these instruments had the full set of terms commonly found in more modern corporate securities and consequently each has been the subject of controversy and litigation at one time or another. In the 1990's Canadian Pacific Limited ("CPL"), of which CPRC was then a division, undertook a series of arrangements under the Canada Business Corporations Act ("CBCA"), through which it successfully retired or exchanged the 4% Preference Shares, the O&Q minority shares and Permanent Debenture Stock, the TG&BR First Mortgage Bonds and about two-thirds of the CDS. However the continuing existence of a small number of the CDS constitutes a significant anomaly in CPRC's capital structure which limits its financing alternatives and impairs its flexibility in major restructuring or merger initiatives. History of the CDS The perpetual 4% Consolidated Debenture Stock was originally authorized by an Act of Parliament in 1889, and issued in several public offerings between 1893 and 1937 to consolidate debts incurred or assumed in connection with the construction and expansion of the transcontinental railway network. The CDS constitutes a first charge upon and over the whole of the undertaking, railways, works, rolling stock, plant, property and effects of CPRC, with certain exceptions. (see CP 2009 Annual Report, p. 76, Note 18 to Financial Statements) The CDS was issued in U.S. dollars and pounds Sterling. The U.S. dollar certificates specify that interest is payable in gold coin of the United States of America. The Sterling version of the CDS does not have a similar "gold" feature. The U.S. interest payments have been made in paper currency since a Joint Resolution of the U.S. Congress outlawed gold payment clauses in 1933, although this prohibition was repealed in October 1977. In 1996, CPL undertook a Plan of Arrangement designed to establish the railway operations as a separate subsidiary. The common and preference shareholders of CPL received equivalent shares of the restructured parent company ("New CPL") and the railway assets remained in CPRC which became a wholly-owned subsidiary and readopted the Canadian Pacific Railway Company name. In essence New CPL was a parent company which was spun out of its subsidiary. An offer was made to the CDS holders to pay 80% of the face value of each bond in cash or new CPL stock. Most of the Sterling CDS and approximately half of the U.S. CDS was tendered to this offer, effectively eliminating two-thirds of the amount outstanding. The significant difference in acceptance between the Sterling and U.S. holders was attributed to the existence of the "gold clause" in the U.S. CDS. The remaining CDS became a liability of CPRC. To compensate for the assets which had been spun into New CPL, CPRC agreed to maintain a letter of credit issued by a Canadian chartered bank for the principal amount of CDS outstanding plus one year's interest. Aside from the addition of the LC, the features of the CDS were not changed or modernized and it is therefore the last 19th century "antiquated" security remaining in CPRC's capital structure. In the course of the court hearings on the Plan of Arrangement in 1996, Mr. Justice Robert Blair observed "a feature of the U.S. CDS here is that they are stated to be payable in gold coin, a feature which – if enforceable – makes them worth perhaps 21 times their value as expressed in dollar terms." This was at a time when the price of gold was around US$400. At CPRC's 2009 year end, there was (expressed in Canadian dollars) $32 million of U.S. denominated and $6.4 million of Sterling denominated CDS outstanding. The Problem There is currently no mechanism in the terms of the CDS itself or under the Canada Business Corporations Act which permits CPRC to unilaterally retire any or all of the CDS. While market purchases or private offers from time to time can reduce the number of CDS outstanding, many of the original instruments have undoubtedly been lost and therefore, any transaction short of a plan of arrangement will not result in the retraction of a whole class and the first charge over CPRC's assets will remain, as will the "gold payment" provision. While the CDS is outstanding, CPRC is unable to offer a secured first charge over its assets in connection with its senior debt offerings. Financial analysts estimate that this may have an impact of up to 100 or 150 BPS. The uncertainty regarding the gold payment obligation, and potentially the value, of the CDS constitutes a significant obstacle in the event of any restructuring, merger, acquisition or other business combination involving CPRC. The current low interest rate environment offers CPRC a unique opportunity to bring forward a comprehensive plan of arrangement which would eliminate the CDS and complete the modernization of its capital structure.

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2 Responses to Canadian Pacific Railway Company – 4% Perpetual Consolidated Debenture Stock

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