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Business News/ Companies / News/  BlackBerry patents key to raising buyout debt
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BlackBerry patents key to raising buyout debt

According to a report, the debt-free company’s patents, licenses and a secure network may be valued at about $2.8 bn

The company’s patent portfolio includes trademarks on smartphone designs and engineering as well as a share of patents BlackBerry acquired from Nortel Networks Corp. Photo: Hindustan Times (Hindustan Times)Premium
The company’s patent portfolio includes trademarks on smartphone designs and engineering as well as a share of patents BlackBerry acquired from Nortel Networks Corp. Photo: Hindustan Times
(Hindustan Times)

New York: BlackBerry Ltd’s patents may hold the key to whether Fairfax Financial Holdings Ltd can raise enough debt to finance its $4.7 billion bid for the smartphone maker.

The debt-free company’s patents, licenses and a secure network may be valued at about $2.8 billion, according to a report on Tuesday from Raymond James Financial Inc. “The firm may seek borrowings of about $2 billion to fund the buyout," according to Nicholas Leach, a money manager at Canadian Imperial Bank of Commerce’s CIBC Global Asset Management unit.

BlackBerry, whose cash balance dwindled $500 million to $2.6 billion last quarter, will have a credit profile consistent with a junk-rated company more than three levels below investment grade, according to debt-research firm CreditSights Inc. “Investors are likely to purchase debt if it’s backed by the company’s most important assets, its patents, based on the value they could recover in a bankruptcy," according to Marc Gross, a money manager at RS Investments in New York.

“The banks would need to do a first-lien backed by the assets," Gross, who oversees about $4.5 billion in fixed-income products, said in a telephone interview from New York on Tuesday. “If that’s not enough, it has to come with a sweetener for the other portions, because the market is going to be very sceptical."

Debt financing

First-lien debt refers to borrowings where creditors have the highest claim on a company’s assets. Prem Watsa’s Fairfax, whose 10% stake makes it Waterloo, Ontario-based BlackBerry’s biggest shareholder, won’t be adding more capital, Watsa said in an interview on 23 September. The firm is seeking to obtain financing from Bank of America Corp. and BMO Capital Markets, according to a 23 September statement.

Other yet-to-be identified members of the buyout group will be able to finance the rest of the purchase through equity and debt, Watsa said in a telephone interview earlier this week.

Kerrie McHugh, a spokeswoman for Charlotte, North Carolina- based Bank of America and BMO Capital Markets spokesman Pav Jordan declined to comment about any potential financing.

Adam Emery, a spokesman for BlackBerry, also declined to comment.

The company can shop for better offers from other bidders during the diligence period, which is expected to be completed by 4 November, according to the 23 September statement.

RBC bonds

Elsewhere in credit markets, Royal Bank of Canada issued $2 billion of covered bonds due in October 2018 yielding 43 basis points more than the mid-swap rate.

TMX Group Ltd, owner of the Toronto Stock Exchange, sold C$1 billion of bonds in three parts, including five-year notes priced to yield 3.253% and 10-year securities with a yield of 4.461%.

The extra yield investors demand to own the debt of investment-grade corporations rather than government was unchanged at 126 basis points on Tuesday, according to the Bank of America Merrill Lynch Canada Corporate Index. Yields declined to 3.26% from 3.3%.

The premium investors demand for provincial debt compared to federal benchmarks was also steady at 72 basis points, according to the Bank of America Merrill Lynch Canadian Provincial & Municipal Index. Yields dropped to 3.05% from 3.1%.

Corporate debt has lost 3.34% this year compared with provincial debt’s 5.8% loss and a 4.3% decline for federal government debt.

Other buyers

Another serious buyer for BlackBerry is unlikely to emerge, CreditSights analyst Ping Zhao said in a 23 September report.

“The company only has a limited number of essential communication patents," Zhao wrote. “The value of their patents is lower than might appear at first glance."

BlackBerry’s assets include patents valued at about $1.6 billion, its network of servers that may fetch $825 million and $412 million of licenses, Raymond James analyst Steven Li, wrote in a report on Tuesday.

The company’s patent portfolio includes trademarks on smartphone designs and engineering as well as a share of patents BlackBerry acquired from Nortel Networks Corp.

The company was part of a consortium along with Apple Inc. and Microsoft Corp. that paid $4.5 billion in 2011 for 6,000 patents and applications for wireless and Internet technologies belonging to Nortel. The purchase took place after the Canadian telephone-equipment maker filed for bankruptcy in 2009 and was broken up and sold off in parts.

Diminishing share

BlackBerry has been suffering years of market share losses to Apple and Samsung Electronics Co. which have done a better job of luring consumers with a steady stream of innovative devices. The company’s share of the market it once dominated, tumbled to 2.9% in June from 12% two years earlier, according to research firm IDC. BlackBerry’s sales have tumbled 44% since 2011.

BlackBerry’s new range of phones, while earning good reviews, have struggled to catch on, leading the company to take a writedown for unsold inventory of as much as $960 million in the fiscal second quarter, the company said on 20 September. Three days later, the company said it reached an agreement with Fairfax on a plan to take the company private

Sales slumped to $11.1 billion in the year-ending 2 March, from $19.9 billion in its fiscal year 2011.

The firm is cutting 4,500 jobs, or about a third of its workforce, and narrowing its focus to corporate customers, it said in a statement last week.

‘Difficult’ financing

“There’s been nothing but negative news surrounding BlackBerry," CIBC’s Leach, who helps manage $2.7 billion in high-yield debt, said in a telephone interview. “They don’t have any bond investors at all that are familiar with the company. So for them to come to the high-yield market, it’s going to be very difficult."

“The company could look to do a mix of secured bank debt and high-yield notes, which will have to be mainly in US dollars," Leach said.

Investors are seeking yields of about 5.3% to take on the risk of offering loans to single-B rated firms this month, according to Standard and Poor’s Capital IQ Leveraged Commentary and Data. Similarly rated bonds in the US have yielded about 6.8% in September, Bank of America Merrill Lynch index data show.

Fed stimulus

The Federal Reserve’s extraordinary stimulus measures, have given firms an opportunity to tap the credit market at attractive rates to enable them to roll over debt and to finance buyouts.

The average borrowing rate for US corporate bonds of 3.8% this year, is at about the lowest ever, and compares with yields of about 6 percent that investors demanded to hold company bonds in the five years through 2007, Bank of America Merrill Lynch index data show.

“BlackBerry should consider adding incentives to its debt offering, such as options for creditors to purchase a stake at a specific price, which bondholders could benefit from if BlackBerry is able to execute a successful turnaround strategy," RS Investments’s Gross said.

“There is no interest rate high enough to get you the returns for the risk you are taking on," he said. “It’s a hard thing to pitch." BLOOMBERG

Cecile Gutscher and Doug Alexander in Toronto contributed to this story.

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Published: 25 Sep 2013, 11:47 AM IST
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