F-10: South Bow Canadian Infrastructure Holdings Files to Exchange $1.1 Billion in Junior Subordinated Notes for Enhanced Marketability

South Bow Canadian Infrastructure Holdings Ltd. and its guarantors have filed a registration statement with the SEC to offer an exchange of $1.1 billion in previously issued junior subordinated notes for new, registered notes, aiming to improve their transferability and liquidity in the market.

Summary

• South Bow Canadian Infrastructure Holdings Ltd. (the 'Company') and its guarantors (South Bow Corporation, South Bow Infrastructure Holdings Ltd., and South Bow USA Infrastructure Holdings LLC) are undertaking an exchange offer for two series of junior subordinated notes totaling U.S.$1.1 billion.
• The exchange offer involves U.S.$450,000,000 of 7.625% Fixed-to-Fixed Reset Rate Junior Subordinated Notes due 2055 and U.S.$650,000,000 of 7.500% Fixed-to-Fixed Reset Rate Junior Subordinated Notes due 2055.
• The new notes ('New Notes') will have substantially identical terms to the original notes ('Initial Notes'), except they will be registered under the U.S. Securities Act, will not be subject to transfer restrictions, will not contain certain additional interest provisions, and will bear different CUSIP numbers.
• The exchange offer is not intended to raise new capital; the Company will not receive any proceeds from the exchange.
• The Initial Notes were originally sold on August 28, 2024, in a private placement exempt from U.S. Securities Act registration.
• The New Notes will be fully and unconditionally guaranteed on a junior unsecured subordinated basis by South Bow Corporation, South Bow Infrastructure Holdings Ltd., and South Bow USA Infrastructure Holdings LLC.
• South Bow commenced independent operations on October 1, 2024, following the spin-off of TC Energy Corporation's Liquids Pipelines business segment.
• As of March 31, 2025, South Bow had total consolidated Senior Indebtedness of U.S.$4.632 billion and total consolidated junior subordinated debt of U.S.$1.087 billion.
• South Bow's earnings coverage ratio was 2.1x for the twelve-month period ended December 31, 2024, and 2.0x for the twelve-month period ended March 31, 2025.
• The Company has the option to defer interest payments on the New Notes for up to 20 consecutive semi-annual periods (10 years), during which certain restrictions on dividends, distributions, and payments on pari passu or junior indebtedness would apply.

Sentiment

Score: 6

Explanation: The document is primarily a technical filing for a debt exchange, which is a neutral event in itself. The financial metrics provided show stable, albeit slightly declining, revenue and net income in the most recent quarter compared to the prior year, but the earnings coverage ratio remains healthy. The extensive list of risks, particularly those related to the subordinated nature of the notes and the issuer's ability to defer interest, introduces some negative sentiment for noteholders, but this is balanced by the improved marketability of the notes post-exchange. Overall, the sentiment is moderately positive due to the proactive step to enhance note liquidity and the company's stable financial position, despite inherent risks.

Positives

• The exchange offer aims to improve the liquidity and transferability of the notes by registering them under the U.S. Securities Act, which benefits existing noteholders.
• The New Notes will evidence the same continuing indebtedness as the Initial Notes, indicating no change in the company's overall debt burden from this transaction.
• The company's earnings coverage ratios of 2.1x (2024) and 2.0x (Q1 2025) suggest a reasonable ability to cover borrowing costs.

Negatives

• The Company retains the option to defer interest payments on the New Notes for up to 10 years, which could negatively impact noteholders' cash flow and the market price of the notes.
• The New Notes will not be listed on any securities exchange or trading facility, meaning an active trading market may not develop or be maintained, potentially affecting liquidity.
• The notes are junior subordinated and structurally subordinated to all existing and future indebtedness of subsidiaries that do not guarantee the notes, increasing risk for noteholders in case of insolvency.

Risks

• **Substantial Indebtedness**: The Company and Guarantors have significant debt, which could hinder their ability to meet obligations and obtain additional financing, making them vulnerable to economic downturns or interest rate increases.
• **Subordination**: The New Notes rank junior and subordinate to existing and future Senior Indebtedness, and are effectively subordinated to all indebtedness and liabilities of non-guaranteeing subsidiaries.
• **Lack of Restrictions on Additional Indebtedness**: The Indenture does not limit the amount of additional debt or liabilities the Company, Guarantors, or their subsidiaries may incur, potentially increasing subordination risk.
• **Limited Rights of Acceleration**: Noteholders can only accelerate payment under specific, limited events of default, and not for all covenant breaches.
• **Interest Rate Reset Risk**: The interest rate on the New Notes will reset periodically, and future rates may be lower than the initial fixed rate, impacting investor returns.
• **Optional Interest Deferral**: The Issuer can defer interest payments for up to 10 years, which could lead to a lower trading price for the notes and affect investor returns if notes are sold during a deferral period.
• **Holding Company Structure**: The Company and Guarantors rely on distributions from subsidiaries to meet debt obligations, and these distributions may be limited by contractual provisions, laws, or subsidiary financial health.
• **Lack of Active Trading Market**: No established trading market for the New Notes is intended, which could adversely affect their market price and liquidity.
• **Redemption Risk**: The Issuer has the right to redeem notes prior to maturity, potentially at times of low interest rates, leading to reinvestment risk for holders.
• **Credit Ratings**: Any future lowering or withdrawal of credit ratings could make it more difficult or expensive to obtain debt financing and may negatively impact the notes' resale value.
• **Canadian Tax Legislation**: Recent amendments to the Canadian Tax Act, such as the Equity Repurchase Tax and EIFEL Provisions, could adversely affect South Bow's business, financial condition, and results of operations.
• **Fraudulent Transfer Laws**: The issuance and payments under the New Notes and Guarantees could be challenged and potentially voided or subordinated under fraudulent transfer laws if the company is deemed insolvent or receives less than reasonably equivalent value.
• **Canadian Bankruptcy, Insolvency, and Restructuring Laws**: Enforcement of remedies under the Indenture could be delayed or unavailable due to Canadian insolvency legislation, potentially affecting payments to noteholders.
• **Enforcement of Civil Liabilities**: It may be difficult for U.S. holders to enforce U.S. judgments against Canadian entities or individuals due to differences in legal jurisdictions and asset locations.
• **Transfer Restrictions on Initial Notes**: Initial Notes not tendered in the exchange offer will remain subject to transfer restrictions, limiting their liquidity.
• **Lack of Liquidity for Initial Notes Following Exchange Offer**: The market for Initial Notes is expected to become substantially limited after the exchange offer, adversely affecting their market price and volatility.

Future Outlook

Forward-looking statements include expectations regarding the market for the notes post-exchange, estimated exchange offer expenses, financial and operational performance, strategies for optimization, growth and expansion, capital allocation priorities, financial outlook for 2025 and beyond (including normalized EBITDA, interest expenses, distributable cash flow, and capital expenditures), expected dividends and shareholder returns, cash flows and financing options, demand for uncommitted capacity, access to and cost of capital, project costs and schedules (e.g., Blackrod Connection), regulatory processes, legal proceedings outcomes, and industry/market conditions.

Management Comments

• The Company and Guarantors agreed to use reasonable best efforts to have the registration statement declared effective by the SEC no later than 360 days after the Issue Date (August 28, 2024).
• The Company and Guarantors agreed to use reasonable best efforts to consummate the exchange offer on the earliest practicable date after the registration statement is effective, but in any event within 60 days after the 360-day period.
• The Company does not currently intend to extend the expiration date of the exchange offer.
• The Company and Guarantors believe that the New Notes issued pursuant to the exchange offer may be offered for resale, resold and otherwise transferred by any holder (other than broker-dealers or affiliates) without compliance with registration and prospectus delivery requirements, provided certain conditions are met.

Industry Context

This filing is a technical debt exchange related to South Bow's establishment as an independent energy infrastructure company following its spin-off from TC Energy Corporation. South Bow operates critical liquids pipelines and facilities across Canada and the U.S., transporting crude oil. The exchange offer is a standard procedure to convert privately placed, unregistered debt into publicly registered, freely tradable debt, which is common for newly independent entities or those seeking to enhance bond liquidity. The company's financial performance metrics reflect its operations in the liquids pipelines sector, a mature but essential part of the energy industry.

Comparison to Industry Standards

• The earnings coverage ratios of 2.1x (2024) and 2.0x (Q1 2025) for South Bow indicate that its earnings are approximately 2 times its borrowing costs. While the document does not provide specific industry benchmarks, a ratio above 1.0x generally indicates the company can meet its interest obligations. For energy infrastructure companies, stable cash flows often support higher coverage ratios, but direct comparison requires specific peer data.
• The debt structure, including junior subordinated notes and substantial senior indebtedness, is typical for capital-intensive infrastructure companies. The subordination and optional interest deferral features are common in hybrid securities designed to provide equity-like credit treatment from rating agencies, though specific comparisons to other pipeline operators' hybrid debt would require detailed analysis of their terms.

Management Changes

Corporate Governance

Legal Proceedings

• The document mentions 'expected outcomes with respect to legal proceedings, including arbitration and insurance claims' as a forward-looking statement, but does not detail any specific ongoing litigation or regulatory matters.

Related Party Transactions

• The document details the spin-off transaction where South Bow became an independent entity from TC Energy Corporation, involving the transfer of assets and liabilities. This is a significant related-party transaction that has already been completed.
• The Initial Notes and Guarantor Party Notes proceeds were placed into escrow pending the completion of the Spinoff Transaction and used to repay indebtedness owed by South Bow and its subsidiaries to TC Energy and its subsidiaries upon completion.

Stakeholder Impact

• **Noteholders**: Will benefit from increased liquidity and transferability of their notes due to SEC registration. However, they face risks from the notes' subordinated ranking, the issuer's optional interest deferral rights, and the lack of an active trading market.
• **Shareholders**: Indirectly impacted by the company's debt structure and financial resilience, which can be influenced by the terms of its debt obligations and ability to manage interest expenses.
• **Management/Directors**: Subject to indemnification provisions, which protect them from certain liabilities arising from their roles.
• **Regulatory Authorities**: The filing ensures compliance with SEC and Canadian securities regulations for the exchange offer.

Next Steps

• The Company and Guarantors will use reasonable best efforts to have the Exchange Offer Registration Statement declared effective by the SEC no later than 360 days after August 28, 2024.
• The Company and Guarantors will use reasonable best efforts to consummate the exchange offer within 60 days after the 360-day period following August 28, 2024.
• The exchange offer will remain open for at least 30 days after the notice is sent to holders.
• Broker-dealers receiving New Notes for their own account from market-making activities must deliver a prospectus in connection with any resales of such New Notes.

Key Dates

Keywords

Junior Subordinated Notes, Exchange Offer, SEC Filing, Debt Securities, Fixed-to-Fixed Reset Rate, Corporate Finance, Liquidity, Transferability, Guarantees, South Bow Corporation, TC Energy Spinoff, Energy Infrastructure, Financial Reporting, Risk Factors, Corporate Governance, Tax Considerations