Bond Issues and Solvency

Commission’s Questions to BC Ferries:

Since Series 04–1 Bond issue was a $250 million public offering and Series 04–2 was the $710 million private bond offering being held in abeyance unless default of the credit facility occurs, and Series 04-4 is a $250 million public offering, the following questions occur:

  1. Is there a Series 04–3 document? If so, please outline its contents.BC Ferries’ Response
    The Series 04-3 is a Supplemental indenture that creates and issues under the Indenture a series of bonds to be pledged to counterparties to Swap Agreements. The purpose is to support BC Ferries derivatives in the provision of our fuel, interest and foreign exchange hedging programs.
  2. The Series 04–4 $250 million bond will be used to pay off the outstanding $200 million credit facility debt (Tranche C). Does this mean that the Series 04–2 $710 million bond written to protect against default on the credit facility is no longer a valid document? Or does it remain in effect to cover default on Tranches A & B remaining in the credit facility after payoff of Tranche C?BC Ferries’ Response
    The Series 04-2 $710 million bond remains a valid document, and is in effect to cover default on Tranches A & B remaining in the credit facility.

Solvency Question:

Pro Forma Interest coverage on page 44 of the Final Long Form Prospectus: As at June 30/04, interest on long term debt stood at $31 million and earnings before deductions of interest and income taxes stood at $50 million. This means earnings after interest deductions would be in $29 million. Is the stated 1.6 times interest payments ($31m/$50m) a standard valuation of solvency in the business world? If so, how does BCFSI relate to other public transportation systems in this regard? Please comment on the ratio and whether the net income used in the ratio is as reported or whether adjustments are made for depreciation etc.

BC Ferries’ Response:

The pro forma interest coverage ratio calculation is a disclosure requirement of Canadian securities laws. The law includes specific instructions on how to calculate the pro forma interest coverage ratio. The calculation allows a reader to judge the company’s ability to meet future debt service requirements.

Any company filing a prospectus within Canadian jurisdiction is required to disclose a pro forma interest coverage ratio. Companies that are not filing a prospectus therefore, do not disclose this information. Since many companies do not file a prospectus, it would be very difficult to compare BCFSI to other companies, including other public transportation systems.

The pro forma earnings coverage ratio is calculated on a twelve month period. It is calculated by dividing the consolidated net income before interest and income taxes for the relevant period by interest expense determined in accordance with Canadian generally accepted accounting principles after giving effect to the distribution and any retirement of obligations plus the amount of interest that as been capitalized during the period.

Question concerning Pledge Bond:

The $710M Second Supplemental Indenture was put in place so that the banks are assured interest and principal repayment on the credit facility. Is it the case that the credit facility amount has been doubled by this second bond series document? If so, does the doubling reflect concerns about the financial stability of the company on the part of the banks?

BC Ferries’ Response:

The Second Supplemental Indenture is a pledge bond and are typically issued to a creditor pursuant to a pledge which secures fluctuating amounts. Series 04-2 secures revolving credit lines which have a fluctuating principal amount and a fluctuating interest rate. Section 2.9 of the Master Trust Indenture, which governs all pledge bonds, provides that a pledge bond secures only the amount of the underlying obligation for which it is pledged as security.

The pledge bond remains adequate to secure the credit lines that exist.