It is taking BC Ferries a little while to learn that it is not like any private company. The Campbell government exempted it from scrutiny by the Auditor General, from obligations under the Freedom of Information and Protection of Privacy Act, and from examination in legislative debate during estimates and the budget. Nevertheless it is learning; its Chief Financial Officer phoned me to discuss its bonds that bear a nominal 25% per year interest rate.

As noted by the Honourable Madam Justice Allan in her recent decision refusing to grant an injunction to BC Ferries against the park-and-ride operator, "…B.C. Ferries is simply not in the same position as a private homeowner or businessperson, regardless of the fact it is a private company rather than a Crown corporation. The public aspect of both the premises and the defendant's purpose for entering them is overwhelming. B.C. Ferries' website indicates that the B.C. Ferry Authority owns B.C. Ferries' common shares and appoints its Board of Directors and the B.C. Government owns its preferred shares, a debenture and the terminals."

Some of the Justice's advice may be getting through to BC Ferries. As a result of the article posted on StrategicThoughts on September 20th, with respect to British Columbia Ferry Services Inc.'s series 04-2 bonds, Second Supplemental Indenture, the Chief Financial Officer for BC Ferries, Mr. Rob Clarke answered my questions with respect to the series 04-2 bonds which bear a nominal interest rate of 25%. Clarke conducted himself with the highest degree of professionalism, answering questions in an objective manner with no spin, no ego, and no attitude. He should conduct seminars in public relations for some of his colleagues.

BC Ferries was required to pay off debt of $427,701,000 owed to the province. It did that and provided the basis for future capital spending by constructing a "Capital Markets Platform" which will spread its debt over a number of terms from 365 days to 30 years. That is a prudent decision that puts its debt in the same type of time structure that the Ministry of Finance uses to manage provincial debt. Funds were raised through a $250 million bond issue, and a "credit facility". The credit facility consists of three parts: 1) a 364 day revolving debt of up to $77,500,000, 2) a three year revolving debt of up to $77,500,000, and 3) a term debt of $200,000,000. The $710 million in Series 04-2 bonds with interest provisions of 25% per year are used as collateral against the credit facility. If BC Ferries defaults on the debt owed to the banks through the credit facility, then the banks will take possession of the Series 04-2 bonds.

The reason for offering the 25% Series 04-2 bonds as collateral for the credit facility is to put all lenders to BC Ferries on equal terms. Rather than having some lenders have preferential treatment in the event of a default, the technique of offering bonds as collateral for the "ordinary" loans puts all lenders in an equal position. Clarke assures me that in such a case, the nominal 25% is nothing but a technicality since the actual rate would be determined by the market. I am not capable of confirming or refuting his assertion, and have asked for further details on how that would work. Hopefully it is an academic question since it only becomes relevant in the event of a default on the company's bank loans.

The very technical and detailed legal maneuverings behind the refinancing of BC Ferries raises some interesting public policy concerns. No one should criticize BC Ferries for doing what it must do in order to continue to operate given the decisions of the Campbell government, but everyone should question whether the Campbell government made the correct policy decisions. Elaborate legal constructs for configuring debt would not be necessary if BC Ferries enjoyed the status of a crown corporation and participated in financing organized through the office of the Comptroller General. Everyone knows that ferry fares are higher because the Campbell government made the company subject to GST. It is a little harder to get the details on how much more ferry fares will have to increase because borrowing costs are higher for a "private corporation" than they are for the government.

Mr. Clarke confirmed that there is only one voting share in BC Ferries. It has a par value of just $1,000 and is held by the BC Ferry Authority; the Authority and BC Ferries have the same board of directors. The Authority is a creation of provincial statute which can be changed by a stroke of the legislative pen. The province holds a further 75,477 non-voting shares with a par value of $1,000 each; that $75 million in shares provide 8% interest payments. My advice to BC Ferries is to ask Mr. Clarke to help in drafting a plain language description of BC Ferries' corporate structure and capital platform for posting on its website. In the absence of legislative scrutiny and coverage by freedom of information, confusion is bound to occur when critics have to form their own opinions from legal documents filed with the securities regulators. It is true that BC Ferries is more "arms-length" from government than a crown corporation, but in less time than it takes to legislate an end to an industrial dispute, the government can change the composition of its board of directors. That's a very short arm.