Bond Default Could Wrest Control of Telegraph From Black

04 December 2003

These days it never rains but it pours for Lord Conrad Black of Crossharbour.

Not only has the peer's debt-beset Canadian holding company Hollinger Incorporated admitted in a filing that there could be a an interest payment default next March; but awkward questions are also being asked about Hollinger's investments in companies run by two of its highest profile independent directors -- former presidential aide Richard Perle and America's 56th Secretary of State, Henry Kissinger.

As to the former setback, Hollinger Inc has disclosed that there "can be no certainty … whether the company will have sufficient funds on hand to pay the $7.4 million of interest." The snag is that Hollinger's income, derived from share dividends, is insufficient to meet the 11.875% interest on the $120 million (€99.22m; £69.47m) bond.

In happier days this would have been met by fees paid to Hollinger Inc by its main trading unit Hollinger International. But last month the latter -- from which Black has stepped down as ceo -- said it would reduce the fees in January and end them altogether them by June.

Commented Rory Buchaltar of Dominion Bond Rating in Canada: "Our rating on the company is CCC, which means that there is a high probability of default in March.”

Such a default could result in the bondholder demanding full and immediate repayment -- achievable only by selling the company's assets -- among which is a 30% stake in Britain's Telegraph Group.

But (and harken to the sound of homebound roosting chickens): thanks to Hollinger Inc's preferential shares system, that thirty percent holding controls 73% of the votes, the mechanism by which Black exercised his rigid control of the UK publishing group and other assets.

• Meantime, it has come to light that publicly-owned Hollinger International invested in a venture-capital fund and a political right-of-center magazine linked to its independent directors Perle and Kissinger, a situation which -- to quote the Wall Street Journal -- "raises new questions about the [Hollinger] board's independence in the wake of a widening financial scandal".

According to company filings and insider revelations, Hollinger invested $2.5 million in a venture-capital firm jointly managed by Perle and which listed Kissinger as a board member. In addition, Hollinger also invested $14 million in a British technology company that includes Perle and his business partner as shareholders.

A bountiful Hollinger also gave $200,000 a year to The National Interest, a neo-conservative publication that numbers among its advisors …. Perle, Kissinger and Conrad Black.

There is, of course, nothing illegal or improper in any of these kindly acts. But (as the WSJ observes) "the payments highlight the subtle financial relationships between companies and otherwise independent directors".

Data sourced from: The Wall Street Journal Online and The Times (UK); additional content by WARC staff