Barry Critchley was kind enough to quote me in his article TransAlta plays the Grinch with its preferred share holders:
James Hymas, who runs Hymas Investment Management and who also publishes the PrefBlog, wrote “all of this analysis leads to the conclusion that this is a rotten deal for the preferred shareholders, so rotten that we may call it a sleazy attempt by the company to pull the wool over the eyes of unsophisticated retail investors. As the company admits, they look forward to reducing the corporation’s notional capital balance of preferred shares by approximately $300 million.”
After noting that an analysis based on implied volatility would require an even higher dividend than the 6.50 per cent TransAlta is offering, Hymas said the $300-million “is money that currently can potentially be earned by the current shareholders.”
That $300 million could occur with price increases on the extant issues; from an increase in the five-year government of Canada yield, or “from straightforward spread narrowing. The company is giving up nothing – NOTHING! – in order to capture this entire amount for themselves,” he wrote.
Assiduous Readers will remember that my views on the proposed Exchange (which will be voted on as a Plan of Arrangement) were published in the post TA Proposes Sleazy Exchange Offer.
Update, 2016-12-24 I was perplexed by a comment on Financial Wisdom Forum:
More on the TransAlta exchange.
http://business.financialpost.com/news/ … picks=true
FWIW, I am quite satisfied with the offer because I’m a trader and am more than happy to bail on these PF-3 issues because I really believe that one would have to be wearing super sized rose coloured glasses to think that they would someday trade or be redeemed at par, especially with a company like TA that has slashed the dividend on the common to 4 cents/quarter.
The case for the “No” vote does not depend on the hope that the shares will “someday trade or be redeemed at par”, and demonstrating this should actually make the argument more clear for those who have difficulty with the concept of Implied Volatility.
Let us examine the specific case of TA.PR.D; the following analysis framework may be applied to the other series with changes in numbers.
TA.PR.D:
- pays $0.67725 p.a. until the next Exchange Date
- will reset to GOC-5 + 203bp (paid on par value of $25) on each Exchange Date
- This is equal to (25 * GOC-5) + (25 * 203bp)
- which is equal to (25 * GOC-5) + $0.5075
- may be redeemed at $25 on each Exchange Date
- Exchange Dates are 2021-3-31 and every five years thereafter
The company proposes to exchange each share of this for 0.503 of a New Preferred Share; each New Preferred Share will
- Pay 6.50% of $25.00 = 1.625 until the next Exchange Date
- will reset to GOC-5 + 529bp (paid on par value of $25) on each Exchange Date
- may be redeemed at $25 on each Exchange Date
- Exchange Dates are 2021-12-31 and every five years thereafter
The fact that holders will be getting only 0.503 New Preferred Shares for each share of TA.PR.D makes the changes a little more complex for many investors, so as a thought experiment, let’s design a Notional Share which we will assume will be offered 1 for 1 for TA.PR.D, with the new holdings, in total, having exactly the same characteristics as the proposed new holdings of the New Preferred Shares.
A Notional Preferred Share:
- pays $0.817375 until the next Exchange Date
- will reset to 0.503 (GOC-5 + 529bp) * 25 on each Exchange Date
- This is equal to (0.503 * 25 * GOC-5) + (0.503 * 25 * 529bp)
- which is equal to 12.575 * GOC-5 + $0.6652175
- subject to a minimum rate of $0.817375
- may be redeemed at $12.575 on each Exchange Date
- Exchange Dates are 2021-12-31 and every five years thereafter
So when we compare the currently held TA.PR.D to the Notional Share we see that:
- The Notional Share will pay an extra $0.14 annually for each of the next five years (approximately), for a total of $0.70.
- The redemption price will drop from $25 to $12.575
- The dividends after the next Exchange Date (if it is left outstanding) will depend on the GOC-5 yield, as indicated on the following chart
Click for Big
The big problem, of course, is the change in redemption price – holders lose out on a lot of potential capital gains if the market improves, either through increases in the GOC-5 yield (which should increase the trading price of the preferreds) or through a narrowing of spreads (which may occur because the market improves, or TA’s credit improves, or both). In addition, we see that increases in the GOC-5 rate greatly improve the dividend payout from TA.PR.D and the much higher redemption price means these potential increases will not be called away unless for a gigantic premium over the current price.
TransAlta cancels a planned preferred share swap because of investor push back
Friday, February 10th, 2017Barry Critchley was kind enough to quote me in his piece TransAlta cancels a planned preferred share swap because of investor push back:
There are also some amusing quotes from a portfolio manager who liked the deal so much, he’s willing to hide under his bed with the light turned off and say so anonymously:
I hadn’t actually heard anybody say the holders were being compromised because they were not being offered full value. Perhaps the fact that all this guy has is a straw-man argument explains his anonymity..
This follows previous posts on this topic:
Affected issues are TA.PR.D, TA.PR.E, TA.PR.F, TA.PR.H and TA.PR.J.
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