Speakers The Canadian High Yield Market Tuesday, May 3, 2011; 6:30 – 7:45 AM • Moderator : – James Moglia Executive Managing Director, and Head of Leveraged Finance and Debt Capital Markets, BMO Capital Markets • Speakers : – Hanif Mamdani Head of Alternative Investments, RBC Global Asset Management – Geof Marshall Vice President, Portfolio Management, CI Investments – Sue Ridell Rose President and CEO, Perpetual Energy 1
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Speakers
The Canadian High Yield Market
Tuesday, May 3, 2011; 6:30 – 7:45 AM
• Moderator:
– James Moglia Executive Managing Director, and
Head of Leveraged Finance and Debt Capital Markets,
BMO Capital Markets
• Speakers:
– Hanif Mamdani Head of Alternative Investments,
RBC Global Asset Management
– Geof Marshall Vice President, Portfolio Management,
CI Investments
– Sue Ridell Rose President and CEO,
Perpetual Energy
1
Panel overview
• Historically, the Canadian debt market focused on investment grade offerings and
loans.
• Local companies desiring the advantages of high yield bonds turned to the U.S.
• Beginning in mid 2009, Canadian companies have had access to a nascent but
expanding Canadian-dollar high yield market.
• This has been applauded by Canadian investors and is attracting U.S. buyers.
• Key questions emerge:
– Will this market grow?
– Will it address requirements historically met by income trusts?
– Will it become attractive to U.S. investors?
– Will it contribute to Canadian industry and employment?
– Will it increase equity values?
– Will it seed other markets?2
What is high yield?
• High Yield Bond – High yielding corporate bond with a lower credit rating than investment-
grade bonds reflecting a higher risk of default. These bonds have served as a significant
financing tool.
• “High Yield” is a Theory, an Instrument, a Marketplace
– United States redeveloped high yield finance.
– Used to create U.S. Steel in 1901; tool to “democratize” capital in 1980‟s.
– High yield bonds provide financial structure stratification to lower cost of capital for below
investment grade issuers.
– US$1.2 trillion outstanding, 33% of U.S. corporates, issuance of $100 to $200 billion per year.
• High Yield Provides Attractive Financing Options
– Capital access for a range of issuer sizes and qualities.
– More flexible or accessible than loans or stock.
3
Development of the C$ high yield market
• Canadian high yield market inactive for two decades.
– Little speculative debt prior to 2009.
– Canada traditionally “imported” high yield debt from the U.S.
• Low investor appetite for high yield.
– Crowded out by high growth/yield of government debt.
– Favorable tax treatment of Canadian Income Trust structure.
• Income trusts were the most widely held “high yield” instruments.
– Forced conversion to Specified Investment Flow-Through Trusts in 2011.
• Recent strong Canadian market demand for high yield driven by quest for yield.
– Historically low interest rate environment.
– Taxation stripping yield from income trust investments.
• Canada has been an increasing user of high yield Finance.
– Canada now “manufactures” C$ high yield opportunities to finance domestic companies. 4
Canadian high yield investors
• Unlike the USD market, the C$ high yield market has fewer dedicated high yield
funds.
• Canadian high yield buyers are mostly Canadian institutional investors.
• C$ investor base a includes:
– Fixed income managers
– Balanced funds
– Pension funds
– High yield mutual funds
– Income trust funds
– Convertible bond funds
– High net worth retail
• Increasing demand from U.S. investors.
5
High yield capital structure philosophy
Capital Structure StratificationParticle Finance
Financial Structure Evolution
Bank Debt
Common Stock
Bank Debt
Common Stock
Financial Structure Evolution
Bank Debt
Common Stock
Bank Debt
Common Stock
Low
High
Basic
Risk/Reward
Debt
Like
Equity
Like
Debt/Equity
Continuum
HY
Traditional Finance
Revolver
Term Loan A
Term Loan B
Sr Sec Bonds
2nd Lien
Floating Rate Bonds
Sr Bonds
Sr Sub Bonds
Sub Bonds
PIK Bonds
Zero Coupon Bonds
Bonds & Warrants
Convertible Bonds
Preferred Stock
Common Stock
Combinations of risk & reward provide product options6
High yield provides capital structure stratification
• Standard Capital Structure
– Pricing at marginal risk expensive.
– Flexibility worked into loans only.
– Inefficient tranches.
• Stratified Capital Structure
– Efficient mixing of risk/reward.
– Liquidity through securitization.
– Tranches limited by minimum
size.
• “Integrated” Capital Structure
– Investor has custom product.
– Risk/reward efficiency.
– No liquidity, not practical.
Sub
NotesSr
NotesTerm
BRev
Term
ConvertCommon
Stock
Bank Loan
Common Stock
Standard Structure
Stratified Structure
“Integrated” Structure
Ris
kR
isk
Ris
k
Reward7
VC New Public Midlife Mature LBO
A B Industry A Industry B
Bank Debt 15 75 200 400 1,000 500 2,000
Sr Notes - - 200 300 500 500 1,000
Sub Notes - 50 - 200 300 - 500
Convert - 50 - - 200 - -
Pref Stock 10 - - - - - 300
Pub Common - 75 100 500 1,000 2,000 -
Priv Common 5 - - - - - 1,200
Book Capital 30 250 500 1,400 3,000 3,000 5,000
Enterprise Value 50 300 750 2,500 5,000 5,000 5,000
Rating NR B- B BB- BB BBB+ B
Evolution of Man & Tools
Evolution of Firm & Capital Structure
Product options are capital tools
Stratified balance sheets permit flexibility through financing life cycle8
0
100
200
300
400
500
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
0
200
400
600
800
1,000
1,200
1,400
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
High Yield Market Size
Source: J.P. Morgan; Bank of America Merrill Lynch.
High yield market continues to expand
High Yield Debt Offerings
Siz
e (
US
$ b
illi
on
s)
Vo
l. (
US
$ b
illi
on
s)
+ New Issues
+ Downgrades
- Defaults
- Redemptions
- Upgrades
+ Net Increase
Total Market Volume
Extrapolated Volume
9
Redevelopment of U.S. High Yield Market
0%
25%
50%
75%
100%
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
Outstanding Canadian Government Debt as a % of GDP
• During 1980s and 1990s Canada builds deficits while U.S. builds high yield.
– Government yields satisfied yield demands.
– Original high yield potential financed by banks.
Source: Bank of Canada (as of 2Q 2003).
Canadian market historically crowded out
10
Canadian Fixed Income Market Outstanding (Market Value)
Historical Canadian fixed income issuance
Source: Bank of Montreal; Bloomberg.
0
200
400
600
800
1,000
1,200
1,400
1,600
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
Am
ou
nt
Ou
tsta
nd
ing
(in
C$
billio
ns
)
C$ High Yield
Income Trust
C$ Investment Grade
Government
Siz
e (
C$ b
illi
on
s)
0
200
400
600
800
1,000
1,200
1,400
1,600
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
11
Annual New Issuance Volume
0
5
10
15
20
25
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Addressing Canadian appetite for yield
Source: Bank of America Merrill Lynch; Bloomberg.
Issu
an
ce V
olu
me (
C$ b
illi
on
s)
Income trusts have historically served as an alternative to high yield
C$ Volume
Extrapolated C$ Volume
Income Trust Volume
Extrapolated Income Trust Volume
12
0
3
6
9
12
15
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
YTD
0
10
20
30
40
Historic Canadian US$ and C$ HY Issuance Activity
Source: Bank of America Merrill Lynch
Canadian high yield market issuance
Issu
an
ce V
olu
me (
US
$ b
illi
on
s)
# o
f Issu
es
Canadian high yield market continues to gain momentum
CAN US$ Volume
Extrapolated CAN US$ Volume
C$ Volume
Extrapolated C$ Volume
5.67047619
2.03
3.93
2
1
6.0762
2.69
5.996
10.4956686
3.9355
6
3.62
4.501371
7.955
10.835
2.29
3.540952381
0
4
2
01
0
3 34
5 5
1
4
1111
24
11
4
17
9
25
37
11
16
9
1617
22
11
22.0
0
3
6
9
12
15
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
YTD
0
10
20
30
40
# CAN US$ Issues
# C$ Issues
13
0
1
2
3
4
5
6
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
YTD
0
4
8
12
16
20
C$ high yield market issuance
Historic C$ HY Issuance Activity
Source: Bank of America Merrill Lynch
Issu
an
ce V
olu
me (
US
$ b
illi
on
s)
# o
f Issu
es
C$ Volume
Extrapolated C$ Volume
5.67047619
2.03
3.93
2
1
6.0762
2.69
5.996
10.4956686
3.9355
6
3.62
4.501371
7.955
10.835
2.29
3.540952381
0
4
2
01
0
3 34
5 5
1
4
1111
24
11
4
17
9
25
37
11
16
9
1617
22
11
22.0
0
3
6
9
12
15
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
YTD
0
10
20
30
40
# CAN US$ Issues
# C$ Issues
14
Canadian Dedicated High Yield Fund Assets Under Management
0
3
6
9
12
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Increase in dedicated high yield capital
Source: Investment Funds Institute of Canada; Bank of Montreal.
Note: Assets under management represent funds available for all Canadian domiciled transactions irrespective of currency.
AU
M (
C$ b
illi
on
s)
Dedicated high yield capital has doubled in Canada over last 2 years15
5%
10%
15%
20%
25%
30%
Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10
Current Performance
5%
10%
15%
20%
Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10
High yield market performance
Source: Merrill Lynch, Bloomberg.
Note: The Merrill Lynch High Yield Bond Index for Canadian domiciled companies represent C$ transactions only.
C$ BB IssuesUS$ BB Issues
C$ B IssuesUS$ B Issues
6.5%
7.0%
7.5%
8.0%
8.5%
Jan-11 Mar-11
Historic Performance
5.5%
6.0%
6.5%
7.0%
Jan-11 Mar-11
BB
Eff
ec
tiv
e Y
ield
B E
ffecti
ve Y
ield
16
4%
6%
8%
10%
12%
14%
16%
Jan-97 Sep-99 Jun-02 Mar-05 Dec-07 Sep-10
YT
W
Canadian high yield issues
Source: Bank of America Merrill Lynch.
<$150MM
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
Jan-97 Sep-99 Jun-02 Mar-05 Dec-07 Sep-10
YT
W
$250MM - $500MM
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
Jan-97 Sep-99 Jun-02 Mar-05 Dec-07 Sep-10
YT
W
$500MM - $1,000MM
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
Jan-97 Sep-99 Jun-02 Mar-05 Dec-07 Sep-10
YT
W
>$1,000MM
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
Jan-97 Sep-99 Jun-02 Mar-05 Dec-07 Sep-10
YT
W
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
Jan-97 Sep-99 Jun-02 Mar-05 Dec-07 Sep-10
YT
W
$150MM - $250MM
CAN US$
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
Jan-97 Sep-99 Jun-02 Mar-05 Dec-07 Sep-10
YT
W
US$ C$C$
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
Jan-00 Sep-00 Jun-01 Mar-02 Dec-02 Sep-03 Jun-04 Mar-05 Nov-05 Aug-06 May-07 Feb-08 Nov-08 Aug-09 May-10 Feb-11
US CAD
Income Trust Era Emergence of HYCredit Crisis
17
Canadian use of the high yield market
Bold indicates firms which have issued in the C$ high yield market.
AbitibiBowater Coalcorp Mining Great Canadian Gaming Norske Skog Canada Shaw Communications
Acetex Cogeco Cable GT Group Telecom Nortel Networks Sherritt International
Ainsworth Lumber Compton Petroleum Harvest Operations North American Energy Sino-Forest
Air Canada Connacher Oil & Gas Hollinger NOVA Chemicals Skylink Aviation
Algoma Acquisition Corus Entertainment Hudson's Bay Novamerican Steel Finco Standard Aero
Alliance Atlantis Cott Beverages Hurricane Hydrocarbons Novelis Stone Container Finance
Angiotech Pharma Couche-Tard IMAX OPTI Canada Stratos Global
Axcan Intermediate CW Media Holdings Intertape Polymer US Paramount Resources Sun Media
Baytex Energy Dollarama Group Intrawest Perpetual Energy Superior Plus
Biovail Domtar IPSCO Pet Valu/Pet Valu Cda Teck Resources
Bombardier Essar Steel Algoma Katanga Mining Petaquilla Minerala Telesat Canada and Telesat
Cable Satisfaction Extendicare Health Services Laidlaw Intl Plazacorp Retail Prop. Tembec Industries
Calfrac Holdings Fairfax Financial Livingston Intl Postmedia Network The Hockey Company
Calpine Canada Energy First Metals Luscar Coal Precision Drilling The Jean Coutu
Canadian Satellite Radio Ford Credit Canada Maax Quebecor Media TimberWest Forest
CanWest Media Fraser Paper MDC Partners Reliance Intermediate Trinidad Drilling
Cara Operations Frontera Copper MEG Energy Russel Metals Valeant Pharma
Cascades Garda World Security Millar Western Forest Prod. Saskatch. Wheat Pool Vermilion Energy
Catalyst Paper Gastar Exploration USA New Gold Secunda International Videotron
CCS Gateway Casinos & Ent. Newalta Riverside Forest Products Viterra
Cedar Fair Gerdau Ameristeel Niska Gas Rogers Waste Services
Celestica Gibson Energy Norampac RTL Westcan Western Oil Sands
Source: Bank of America Merrill Lynch; Bank of Montreal.
Canadian Issuers of High Yield Bonds
18
3%
4%
5%
6%
7%
8%
9%
10%
11%
12%
13%
Jun-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11
YT
W
ParamountCaa2/B+
Yield to Worst Over Time
*Data contains C$ high yield issues from 2009 through 04/15/2011.
Pricing as of April 20, 2011.
Existing C$ high yield transactions
GardaB3/B
ParamountCaa2/B+
SkylinkNR/B
RTLNR/B+
LivingstonNR/NR
NewaltaB1/BB
Precision
DrillingBa2/BB+
PerpetualB3/B-
Gateway
CasinosB3/BB-
TridentNR/B
North
American
EnergyNR/NR
VermilionNR/BB-
Videotron Ba2/BB-
QuebecorB1/B+
Air
CanadaB2/B+
Ford
CreditBa2/BB-
Viterra Ba1/BB+
Baytex B3/B
Cascades Ba3/B+
Superior
Plus NR/BB-
Ford
CreditBa3/B+
ArmtecNR/B
Cara Ops.NR/BB-
Bonds Trading Up
Bonds Trading Down
Original Pricing
Transaction Size = $200MM
3%
4%
5%
6%
7%
8%
9%
10%
11%
12%
13%
Jun-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11
YT
W
19
Comparison of US & Canadian HY markets
U.S. Canada
Size Generally $200MM or larger, up to billions Generally between $100MM - $300MM
Ratings Caa3 to Ba1 Caa1 to Ba1
Term 5 - 10 year (7 and 10 year most common) 5 - 10 year (7 year most common)
Non-Call PeriodStandard Call Periods
5NC3, 7NC4, 10NC5
More Accommodating Call Periods;
5NC2/3, 7NC3/4, 10NC5
Make-Whole Premium Treasuries + 50 bps Government of Canada's +100 bps
Covenants Standardized Incurrence Tests Greater Flexibility
Use of Proceeds Wide range – including LBO‟s and dividendsRefinancing, Acquisitions & Capital Expenditures
(little for LBO‟s or dividends)
OtherSponsor transactions are well understood and
easily executed
Less familiar with risks & benefits of sponsor
deals or dividend recaps
20
US$ CAN US$ C$US$ CAN US$ C$US$ CAN US$ C$
Issue Rating Issue Size Issue Sector
High yield issuance spectrum: (2008 – 11)
NR, 103
NR, 8Caa3, 9
Caa3, 1
Caa2, 47
Caa2, 2
Caa1, 136
Caa1, 6
B3, 264
B3, 13
B3, 4
B2, 223
B2, 10
B2, 1B1, 231B1, 7
B1, 2
Ba3, 156Ba3, 6 Ba3, 1
Ba2, 84 Ba2, 7
Ba2, 3
Ba1, 57Ba1, 1
Ba1, 1
NR, 9
Services, 39 Services, 2
Services, 3Consr & RE, 67
Retail, 81
Fin, 61Fin, 1
Food & Ag, 73
Food & Ag, 1
Food & Ag, 2
Health, 93
Health, 3
Leisure, 72
Leisure, 1
Leisure, 1
Manu., 248
Manu., 5
Media/Tele/Tech, 206
Media/Tele/Tech, 11
Media/Tele/Tech, 3
Met & Min, 56
Met & Min, 9
Energy, 219
Energy, 15
Energy, 9
Trans, 2
Trans, 3
Forest, 1
Forest, 10
Forest, 20
Trans, 37
Source: Bank of America Merrill Lynch. Note: Data represented on an LTM basis, (2008 Data begins after April 15, 2008).
>$1,000MM, 72 >$1,000MM, 4
$500 - $1,000MM, 267$500 - $1,000MM, 13
$500 - $1,000MM, 1
$250 - $500MM, 523$250 - $500MM, 17
$250 - $500MM, 5
$150 - $250MM, 279
$150 - $250MM, 12
$150 - $250MM, 8
<$150MM, 169
<$150MM, 13
<$150MM, 9
21
2007 Total Mkt US$ CAN US$ C$
Issue Seniority Use of Proceeds
High yield issuance spectrum: (2008 – 11)
2007 Total Mkt US$ CAN US$ C$
, Dividend , 56
Dividend , 2
Acq., 123
Acq., 3
LBO, 62
GCP, 153
GCP, 11
GCP, 4
Refi, 892Refi, 43
Refi, 19
Undisc., 24Undisc., 27
Acq., 57
LBO, 101
GCP, 60
Refi, 201
Source: Bank of America Merrill Lynch. Note: Data represented on an LTM basis, (2008 Data begins after April 15, 2008).
Sr Sub, 72 Sr Sub, 3
Sr PIK, 30 Sr PIK, 1
Sr Notes, 824
Sr Notes, 32
Sr Notes, 17
Sr Secured, 376Sr Secured, 6
Sr Discount, 8
Sr Secured, 23
Sr Sub, 70
Sr PIK, 43
Sr Notes , 265
Sr Secured, 68
22
What’s next?
• We anticipate that the C$ high yield market will continue to grow.
– Desire for high yields in low rate environment.
– Canadian companies no longer accessing income trust market.
• We anticipate Canadian funds to increase in size.
– More familiarity and access to customer inflows with strong posted returns.
• We expect increasing U.S. cross border interest in C$ deals.
– Increasing and interesting new issue availability, liquidity and size.
– Currency diversification.
• Increasing leverage of C$ issuers and acceptance for leverage in C$ equity markets.
• Increased access to capital and, therefore, greater growth of Canadian industry and employment.
• Increased use of acquisition finance and leveraged buyouts.
• Maturity of the C$ market may promote related markets, including C$ term loan B, high yield CDS
market and esoterics such as participation notes or commodity-linked securities.
23
Canadian High Yield Bond MarketMay 3, 2011
Presented by: Hanif Mamdani
Head of Alternative Investments - RBC Global Asset Management
Lead Manager - PH&N High Yield Bond Fund
24
25
PH&N High Yield Bond Fund AUM as of Year End (in millions C$)
*The fund was “soft-closed” in November 2010
* * As of April 20, 2011
238336 393 444
595691
790696 666
1,432
2,5752,775
0
500
1,000
1,500
2,000
2,500
3,000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010* 2011**
In C$ MM
High yield–A growing asset class in Canada
from our perspectiveSteady growth over 10+ years with accelerated fund flows in 2009-2010
25
26
• Middle of the credit spectrum provides good risk-adjusted returns over
time
• PH&N HYBF holds up well during bear markets (e.g. 2008) but can lag HY
index and pure HY peers in strong bull markets (by design)
• Over an entire cycle, this approach serves our conservative clients well
PH&N’s unique approach to high-yield bonds
26
27
PH&N High Yield Bond FundPerformance and risk measures as of March 31, 2011
PH&N High Yield Bond Fund 11.24 9.07 9.36 5.1 -7.0
ML HY Master II Index 12.69 9.03 8.40 11.1 -33.2
Annualized Returns to 3 Yrs 5 Yrs 10 Yrs 10-year Std. Dev. Maximum
March 31, 2011 (Series O) (%) (%) (%) (%) “Drawdown” %
Fund Achievements / Awards
Canadian Investment Awards (Morningstar) – High Yield Bond Fund of the Year 2006
Canadian Investment Awards (Morningstar) – High Yield Bond Fund of the Year 2007
Canadian Investment Awards (Morningstar) – High Yield Bond Fund of the Year 2008
Canadian Investment Awards (Morningstar) – High Yield Bond Fund of the Year 2009
Lipper Fund Awards – Canadian High Yield Fixed Income Award 2009 (1-, 3-, 5-year)
Lipper Fund Awards – Canadian High Yield Fixed Income Award 2010 (3-, 5-year)
Lipper Fund Awards – Canadian High Yield Fixed Income Award 2011 (5-, 10-year)27
28
Canadian high yield market todayGrowing in size but needs greater diversity
C$6.9 Billion par value outstanding
Energy Largest Sector in Index
Large single names like Ford Credit Canada and Sherritt International skew issuer
profile
Former “blue-chip” high yield names like Rogers, Shaw, Cogeco Cable have been
upgraded to Investment Grade
Need better representation from Media, Telecom, Capital Goods, etc. over time
Energy23.8%
Media16.3%
Auto loans15.2%
Capital goods13.3%
Services12.1%
Banking11.5%
Other7.9%
Merrill Lynch Canadian HY index, April 2011 by par value
28
Canadian High Yield Bond Market – May 3, 2011
Disclaimer & Disclosures
Before investing, you should carefully consider a fund’s investment objectives, risks, charges and expenses. This and other information is included
in the prospectus, which you can request by visiting http://us.rbcgam.com/literature/order/money-market-funds/default.fs or calling 800.422.2766.
Please read the prospectus carefully before investing.
An investment in a Money Market Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although
Money Market Funds seek to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in them. These risks are more
fully described in the prospectus.
RBC Global Asset Management (U.S.) Inc. serves as investment adviser for RBC Funds. The RBC Funds are distributed by Quasar Distributors, LLC, an
affiliate of U.S. Bancorp Fund Services, LLC.
NOT FDIC INSURED. NO BANK GUARANTEE. MAY LOSE VALUE.
The RBC Global Asset Management™ brand comprises RBC Global Asset Management Inc. (RBC GAM), RBC Global Asset Management (U.S.) Inc. (RBC
GAM (US)), and RBC Alternative Asset Management Inc. (RBC AAM), which are separate but affiliated corporate entities.
® Registered trademark of Royal Bank of Canada. RBC Global Asset Management is a trademark of Royal Bank of Canada. Used under license .
© 2011 RBC Global Asset Management (U.S.) Inc.
29
Canadian High Yield Bond Market – May 3, 2011
Disclaimer & Disclosures
This document (the “Presentation”) is being provided by RBC Global Asset Management to the party named on the cover page. Accordingly, this Presentation may not be
reproduced in whole or part, and may not be delivered to any other person without the consent of RBC Global Asset Management. This Presentation is not a solicitation of any offer
to buy or sell any security or other financial instrument or to participate in any investment strategy.
RBC Global Asset Management is the name used in the United States for certain investment advisory subsidiaries of the Royal Bank of Canada. RBC Global Asset Management
(U.S.) Inc. (RBC GAM (US)) is registered with the United States Securities and Exchange Commission (SEC). The strategy described in this Presentation will be managed by RBC
GAM (US), utilizing the processes and strategies developed by RBC Global Asset Management Inc. References to historical strategy experience and processes are references to
RBC Global Asset Management Inc., are for informational purposes only, and are solely intended to describe the resources available to RBC GAM (US).
Past performance is not indicative of future results. There can be no guarantee that any investment strategy discussed in this Presentation will achieve its investment objectives. As
with all investment strategies, there is a risk of loss of all or a portion of the amount invested. No chart, graph, or formula can by itself determine which securities an investor should
buy or sell or which strategies should be pursued.
This Presentation contains the current opinions of RBC Global Asset Management and is not intended to be, and should not be interpreted as, a recommendation of any particular
security, strategy or investment product. Not all products, services or investments described herein are available in all jurisdictions and some are available on a limited basis only,
due to local regulatory and legal requirements. Unless otherwise indicated, all information and opinions herein are as of December 31, 2010 and are subject to change without
notice.
The RBC Global Asset Management™ brand comprises RBC Global Asset Management Inc. (RBC GAM), RBC Global Asset Management (U.S.) Inc. (RBC GAM (US)), and RBC
Alternative Asset Management Inc. (RBC AAM), which are separate but affiliated corporate entities. ® Registered trademark of Royal Bank of Canada. RBC Global Asset
Management is a trademark of Royal Bank of Canada. Used under license. © 2011 RBC Global Asset Management (U.S.) Inc.
30
Perpetual Energy Inc.
Canadian High Yield Debt:A Recent Issuer’s Perspective
Presented by: Sue Riddell RosePresident and CEO
May 3, 2011
32
Market Profile (TSX: PMT)
Corporate Conversion from Paramount Energy Trust completed July 1, 2010
Common shares outstanding 148.3 million
Management ownership 21%
Share price $ 4.20 per share
Market capitalization $ 615 million
Convertible debentures $ 235 million
Senior unsecured notes $ 150 million
Net bank debt $ 90 million
Enterprise value $ 1.1 billion
Current dividend (monthly) $ 0.03 per share
Current annualized yield 9 %
Average daily trading volume 500,000 shares
33Targeting Sustainable Cash Flow Distributing Growth Model
Sustainable Income Plus Growth Strategy
BASE CASH FLOW GENERATORS:
Target to Minimize Production Declines
and Maximize Free Cash Flow HIGH IMPACT RESOURCE PLAYS :
Target Growth
And Cash Flow Diversification
DIVIDENDS:
Target a
Sustainable Dividend
SYNERGISTIC ENTREPRENEURIAL IDEAS:
Target Value And Cash Flow Diversification
34Diverse Portfolio of High Impact Opportunities Supported by Cash Flow Generators
Conventional Assets – Cash Flow Generators
Conventional Shallow Gas
Conventional Heavy Oil
Eastern DistrictConventional Shallow GasWest Central DistrictDeep basin Liquids Rich GasWarwick GasStorage FacilityElmworthMontneyHeavyOilEdsonWilrich
Oil SandsProjectsPembinaCardiumVikingColorado
Resource Plays – Growth, Diversification & Value
Deep Basin Liquids-Rich Tight Gas
Pembina Cardium Light Oil
Edson Wilrich Liquids-Rich Gas
Elmworth Montney
NE Alberta Bitumen
Viking and Colorado Shallow Shale Gas
Option Value - Synergistic High Impact Value Ideas
Warwick Gas Storage
NE AB Thermal Bitumen Extraction
Gas over Bitumen Technical Solutions and Reserve Sales
Tight Oil and Gas Exploration
TriOil Resources
Assets and Operations
35
Independent Reserve Report <1/3 of Potential
With Capital, De-risk and Convert Prospect Inventory to Value
2010 Year End P + P Reserves = 488 Bcfe
Net Asset Value $5.23/share (PV 8%)
Unrisked Additional Reserve Potential = 1,367 BcfeProspect InventoryReserve Report (NI 51-101 Compliant)
+
+
Gas Storage
•NE AB Bitumen
•Tight Oil and Gas Exploration
•GOB Technical Solutions
•TriOil Exploration
Option Value
Opportunity Inventory - Unrisked
Proved +
Probable Developed
Proved +
Probable UnDeveloped
Gas Over
BitumenConventional
Recompletions
Conventional Shallow Gas Drills
UnConventional Tight Gas Resource Plays (Rock Creek
Notikewin)
UnConventional Tight Gas Resource
Plays (Montney)
UnConventional Tight Gas Resource
Plays (Wilrich)
UnConventional Tight Shallow Gas Resource Plays
(Viking, Colorado)
Unconventional Tight Oil (Cardium)
East Central Heavy Oil
Bitumen In-Situ
36
Sum of the Parts – Risked Value
Significant Unrecognized Value From Multiple Assets
Further Leverage to Gas Price Recovery Upside
Asset Measure Valuation Range ($MM)
Conventional Projects
Reserve Report PV10% $480
Prospect Inventory 1,485 net locations and recompletions 175 - 270
Resource Projects
Reserve Report PV10% $145
Deep Basin 57 net locations 30 – 40
Wilrich 36 net locations 65 – 160
Cardium 69 net locations 20 – 75
Montney 111 net locations 80 – 325
Viking / Colorado 822 net locations 60 – 90
Bitumen 120 MMbbls contingent resource 20 - 40
Gas Storage 17 – 22 Bcf working gas @ $10 MM / Bcf $170 – $220
Investment in TriOil 1.3 MM shares $5 - $10
TOTAL ASSETS $1, 250 – $1,855
Net Debt March 31, 2011 $(475)
TOTAL NET VALUE $775 – $1,380
Per Share $5.23 - $9.31Source: Company Estimates $4/Mcf AECO gas price
3737
37
Natural Gas Market
Managing Through High Supply/Low Demand Trough in Gas Price Cycle
38
Balance Sheet – Debt Reduction
Total Debt Reduced 24% Since Q2 2007
39
>65% of Total Net Debt has Term of 4 Years or Greater
Balance Sheet
• Current Net Bank Debt : ~$90 million
− Borrowing base on credit facility - $250 million (confirmed to May 10, 2011)
• Senior Unsecured Notes: $150 million
− Coupon Rate - 8.75%; Maturity date - March 2018; Rating - Moody‟s B3 / S&P B-
• Convertible Debentures: $235 million
– Effectively represents long term debt with the maturities from 2012 to 2015
TSX SymbolAmount
OutstandingCoupon
RateConversion Price Maturity
Date
10 Day Weighted Avg. Trading Price
PMT.DB.C $ 74.9 million 6.50% $ 14.20 June 30, 2012 $ 102
PMT.DB.D $ 100.0 million 7.25% $ 7.50 January 31, 2015 $ 102
PMT.DB.E $ 60.0 million 7.00% $ 7.00 Dec. 31, 2015 $ 103
• Total Net Debt: ~$475 million
• Gas Storage Financing Arrangement: $42 million equivalent
− Delivery obligation for 8 Bcf of cushion gas in Q1 2015
40
3.50 4.50 5.00 5.50 6.50
70 120 161 182 202 243
80 135 176 196 217 258
90 149 190 211 231 272
100 163 205 225 246 287
110 178 219 239 260 301
3.50 4.50 5.00 5.50 6.50
70 92 137 160 183 228
80 101 146 169 191 236
90 109 155 177 200 245
100 118 163 186 208 254
110 127 172 195 217 262
3.50 4.50 5.00 5.50 6.50
70 72 122 145 169 216
80 81 128 151 175 222
90 87 134 157 181 228
100 93 140 164 187 234
110 99 146 170 193 240
Commodity Diversification2011 Funds Flow (92% Gas, 8% Oil; Test Cycle to 17 Bcf)
Key Assumptions:
Production: Maintain 148 MMcfe/d flat
• 20% base decline
• $90 million capital program
• $3MM/MMcfe production addition costs
Gas Storage Cash Flow
• 2011 $14 MM (7.8 to 17 Bcf working gas)
• 2012 $20 MM (20 Bcf working gas)
• 2013 $22 MM (22 Bcf working gas)
WTI
($/bbl)
Note: Assumes 50 Bcf (137 MMcf/d) of gas and 750 Mbbls (2,000 bbls/d) of oil production (92%: 8%).
2012 Funds Flow (88% gas, 12% Oil; 20 Bcf Cycle)
Note: Assumes 47 Bcf (129 MMcf/d) of gas and 1.0 MMbbls (2,740 bbls/d) of oil production (88% : 12%).
2013 Funds Flow (80% gas, 20% Oil; 22 Bcf Cycle)
Note: Assumes 42 Bcf (115 MMcf/d) of gas production and 1.8 MMbbls (4,900 bbls/d) of oil production (80% : 20%).
AECO($/GJ)
AECO($/GJ)
WTI
($/bbl)
AECO($/GJ)
WTI
($/bbl)
Free cash flow over and above current $53 million
dividend and $90 million capital programCurrent forward commodity price (April 30, 2011)
41
Flexibility Required in Current Challenging Gas Markets
Short Term Goals
Maintain capital programs for asset base evolution
Diversify cash flow with increased oil weighting
Grow resource-style prospect inventory
Continue to reduce overall debt levels with „optimal value‟ dispositions
Reduce exposure to borrowing base reductions related to lower lender gas price decks
Flexibility to make dividend decisions with better clarity
Longer term gas prices
Risked growth potential of evolving asset base
Maintain flexibility for optimal business decisions
Hedge decisions consistent with our view of markets
Ability to finance small acquisition transactions not necessarily lined up with offsetting asset dispositions
Firm up repayment plan for convertible debentures maturing in 2012
42
Role for Term Debt in Long Term Capital Structure
Reduce overall indebtedness to 1 times cash flow
Increased cash flow with commodity diversification and growth
Non-core, dry gas-focused asset sales with gas price recovery
Material growth project disposition - Eventually choose „keepers‟ and „funders‟
Increase diversified cash flow to 60/40 ; gas/other split
Continue to pay dividend to retain income investors pending expansion of growth potential with
continued asset base evolution
Target low base payout ratio <20% with expanded cash flow
Reduce reliance on bank syndicates‟ 365 day revolver with semi-annual review
Reduce permission requirement on share buy backs, debenture purchases etc.
Maintain credit capacity for hedging with bank counterparties
Base interest rate protection
Long Term Capital Structure Goals
43
Senior Unsecured Notes Financing
• Perpetual closed offering of $150MM Senior Unsecured Notes on March 15, 2011
• Proceeds initially used to reduce bank debt
• Will be used to manage repayment of 6.50% debentures due June 2012
• Provides significant flexibility and term to PMT‟s debt (>65% due after 2014)
• Not intended to expand overall leverage
• Provides time to:
• Enhance value of „game changer‟s and understand which assets are long term
„keepers‟ in Perpetual‟s asset mix and which will be „funders‟
• Manage through gas price cycle low with decisions focused on value not liquidity
• Transition asset base to higher oil and NGL commodity mix
Term Debt Provides Time and Flexibility in Current Challenging Gas Markets
44
3200, 605 – 5 Avenue SW
Calgary, Alberta CANADA T2P 3H5
800.811.5522 TOLL FREE
403.269.4400 PHONE
403.269.4444 FAX
[email protected] EMAIL
www.perpetualenergyinc.com WEB
FOR ADDITIONAL INFORMATION:
Susan L. Riddell Rose
President & CEO
Cameron R. Sebastian
Vice President, Finance & CFO
45
The Canadian High Yield Market
Global Conference 2011
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