PrefBlog

This issue was specifically queried on Financial Webring, which prompted my update of HPF.PR.B.

PAY.PR.A had a listingDate of 2002-3-19 and were quoted at the close 2006-11-22 at 25.57-84. They continue to be rated at their initial level of Pfd-1(low) by DBRS. The intent of the company is that they will be redeemed 2008-7-31 … about 20 months from now.

The balance sheet is reasonably solid:

As far as I can make out from the prospectus, the “Preferred Repayment Portfolio” will be delivered in its entirety to CIBC on the termination date in exchange for the amount due on maturity of the prefs. This is a bit of bad new for the Capital Unit Holders (because it means the current excess value of $3,901,000 will be lost), but the pref holders don’t care!

The guarantee of the principal on PAY.PR.A means we don’t really have to worry about Asset Coverage: our major concern is whether the company will be able to pay the dividends in the intervening period. The revenue statement dated 2006-3-31 looked like this (simplified from the annual report):

It should also be noted that the company, after achieving this loss, went on to distribute $3,211 (thousand) to Equity & Subordinate shareholders as a return of capital.

A mess! The equity shares had a NAV of $11.59 as of 2006-3-31 and currently, according to the manager (on a table that doesn’t tie in to the Annual report, just like with the HPF.PR.B), as of 2006-11-17, are down to $10.71. Not all that hot compared to the issue price of $20.00 … but the distributions have been nice! The whole thing just goes to show what happens when salesmen try to play Investment Manager … the biographies in the prospectus make the backgrounds of the principals pretty clear!

But what do we care? Split share corporations are a complicated way for greedy investors (who buy the capital units) to transfer money to conservative investors (who buy the prefs) and salesmen (who are generally the big winners in these things), and the company is serving its purpose admirably.

Since return of the preferred share principal is guaranteed (well, almost … there’s a few weasel words in the prospectus regarding possible cancellation of the agreement) the major issue is the dividends due between now and maturity in 20 months. Twenty payments of $0.1146 is $2.29 and this is covered reasonably well by the balance sheet since the capital units haven’t had any distributions since October 2005. Ha ha!

This issue is too short term to make a calculation of curvePrice meaningful, so don’t look to this post for advice on buying or selling the prefs! PAY.PR.A has a pre-tax bid-YTW of 4.05%, based on the 2006-11-22 closing bid of $25.57 and a maturity at $25.00 2008-7-31.

Assiduous readers of this blog may remember my my previous post on this issue and be having trouble sleeping at night due to curiosity regarding my current views.

For the benefit of these readers, and of a FWF member who asked about forward rate agreements in general, let’s have another look.

The June 30, 2006 Annual Report isn’t on the manager’s website yet, so you have to get it from SEDAR. Once you do, the previously shown simplified balance sheet can be revised to:

Note the balance sheet value of the Junior Prefs. 18,237 (thousand). This has been reduced from the 2005-12-31 value of 19,445 BECAUSE THEY DON’T HAVE THE MONEY.

The reason they don’t have the money is best understood through the Statement of Operations, which may be simplified as:

The net loss wiped out the share-holders equity.

Now, maybe to you and me this looks appalling. The Junior Prefs are supposed to mature  2012-06-29  and pay holders $14.70. There are 1,322,726 outstanding, so that’s a total amount due on maturity of $19,444,072 and the company only has about $18,237,000 in the kitty. To you and me, maybe, that means the asset coverage ratio is about 0.94:1 and it’s time to exit, stage left.

But!

 On the most recent fact sheet the manager trumpets asset coverage on the Juniors of 1.29:1.

On their listing of NAVs the manager says the $14.70 is covered by the “managed portfolio”, which has a value of $20.16 as of June 30, and the coverage is 1.37:1.

Mind you, though, they also say the NAV of the Juniors is $13.74, not $14.70, so that should at least ring some alarm bells for some holders.

The difference between $20.16 & $13.74, when multiplied by 1,322,726 shares is $8,491,900.90, and the difference between the Series 1 Repayment Portfolio and the redemption value of the Series 1 Shares is … $8,425,407. However, their “Coverage ratio” publication shows a June 30 NAV of $13.77 for the Junior prefs, which is not in agreement with their financials, so let’s assume that we’ve found the explanation – their published coverage ratio includes an allowance for the forward contract.

As I asserted in my prior post, this is absurd. If you want to defease the principal for coverage calculation purposes, you’ve also got to defease the related payments, and this hasn’t been done. Let’s not count too much on investment gains in the future … in the year prior to 2006-6-30, the S&P/TSX 60 Index was up 17.6% and the company did not cover its dividends.

 Even more excitingly, the Managed Portfolio was about 1/3 invested in income trusts at June 30, 2006. The manager claims a Series 2 (Junior Pref) NAV of $13.66 on November 3, 2006, so we’ll just have to see how that goes.

I would dearly love to see an explicit calculation of how the company calculates a coverage ratio of 1.29:1 on 2006-11-3. I would also dearly love to see an explanation of how the company intends to maintain distributions of $3.3-Million p.a. from gross Dividends and Interest of $782,538 (which basically, in 2006, covered the Management Fee and the Forward Agreement Fee, full stop.).

In the meantime, though, I’ll just concentrate on being grateful I don’t own any of these things … and wondering why DBRS still has them at Pfd-2(low).

The HPF.PR.B closed today on the TSX at $15.00-69, 17×4. We’ll just have to see how long that lasts.