Archive for March, 2013

CPX.PR.E Soft On Moderate Volume

Thursday, March 14th, 2013

Capital Power Corporation has announced:

that it has closed its previously announced offering of 8,000,000 Cumulative Rate Reset Preference Shares, Series 5 (the “Series 5 Shares”) at a price of $25 per Series 5 Share for aggregate gross proceeds of $200 million on a bought deal basis with a syndicate of underwriters, led by RBC Capital Markets and Scotiabank.

The Series 5 Shares will begin trading today on the TSX under the symbol CPX.PR.E.

CPX.PR.E is a FixedReset, 4.50%+315, announced March 5. It will be tracked by HIMIPref™ but relegated to the Scraps index on credit concerns.

The issue traded 287,695 shares today in a range of 24.84-95 before closing at 24.88-89, 38×4.

Vital statistics are:

CPX.PR.E FixedReset YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-03-14
Maturity Price : 23.10
Evaluated at bid price : 24.88
Bid-YTW : 4.41 %

RON.PR.A Hammered In Wake Of Downgrade

Wednesday, March 13th, 2013

Yesterday RON.PR.A closed at 25.61-71, with a YTW of 4.01%-3.98% to perpetuity.

After the close it was downgraded to Pfd-4(high) by DBRS.

Today it closed at 21.85-25, with a YTW of 4.77%-4.65% to perpetuity. It went ex-dividend for 0.328125, but this still represents a decline of 13.40%.

It is interesting to speculate as to whether this is all due to the normal reaction of retail to a downgrade, or whether it might reflect institutional players positioning themselves for the removal of this issue from the indices at the next rebalancing. There’s going to be an awful lot of forced selling – and for an issue rated Pfd-4(high) by DBRS, the field of potential buyers will be more restricted than is usually the case when issues are removed from the indices on grounds of volume.

ZPR is comprised 0.51% of RON.PR.A and is a $345.3-million fund, so that’s $1.76-million worth, or about 68,800 shares (at yesterday’s prices).

CPD is comprised 0.33% of RON.PR.A which the fund helpfully points out is worth $5,075,673, or 198,200 shares. (CPD is worth $1,453-million now. Wow!)

So that’s a total of 267,000 shares in these two funds alone and there are 6-million shares outstanding, so that’s about 4.5% of the entire issue. To put it another way, HIMIPref™ calculates that the Average Trading Value (which deprecates isolated block trades) is about $164,000 per day, or about 6,400 shares. In other words, over forty days worth of trading will hit the market on the next index rebalancing. Now, that’s what I call a flood!

It will be recalled that the Quebec government thinks RONA is a superb investment:

Pity the long-suffering Rona shareholder.

It’s been a rough descent for the stock from its $25 high nearly five years ago. And now the company’s board and the Quebec government have blocked investors’ quickest way out — a $14.50 per share non-binding bid by U.S.-based Lowe’s Companies Inc. [nb: RON closed today, 2013-3-13, at $11.04]

“It’s important that we build wealth in Quebec, that we reverse our poor standing in Canada,” CAQ leader François Legault said Tuesday, adding his party would support the PQ government agenda on a case by case basis.

During the campaign, [Parti Québécois leader] Ms. [Pauline] Marois proposed making the Caisse create a special $10-billion fund it would use to add to its existing stable of Quebec-based investments, which are worth some $43-billion. The PQ is taking as inspiration France’s Fonds stratégique d’investissement, a state sovereign fund created by former President Nicolas Sarkozy in 2008.

Mr. Legault wants the Caisse to invest $20-billion in 25 strategic Quebec companies with the goal of giving the pension fund a “blocking minority” stake sufficient to help counter any hostile takeover attempt.

Maybe the Caisse will buy the shares! Investing in declining companies sounds like a wonderful way to build wealth!

March 13, 2013

Wednesday, March 13th, 2013

Boyd Erman made some good points on mortgages yesterday:

Imagine the federal government lauding cellphone carriers for keeping rates high, or airlines for declining to match each other’s fare cuts. There would be an outcry. Yet Finance Minister Jim Flaherty congratulates banks for not competing to offer the best loan price on what will likely be the biggest purchase most Canadians’ ever make, their home, and nobody can gin up much outrage.

Mortgage debt seems to becoming one of those perceived ills, like booze and cigarettes, where the government not only regulates how they can be sold, but sets minimum prices aimed at preventing people from overindulging. If that’s the case, maybe the government ought to come right out and say it.

I don’t agree with everything he said, but by and large – well done, Mr. Erman!

I mentioned the Too-Big-To-Fail subsidy on March 11 and complained that the banks’ rebuttal of estimates of the subsidy’s size was not available. Well, it has finally been released:

the Financial Services Forum, the Financial Services Roundtable, The Clearing House, Securities Industry and Financial Markets Association, and the American Bankers Association, released the following policy brief in response to questionable assertions of a “taxpayer subsidy” to large banks. The following points should be kept in mind:
  • The recent estimation that large banking companies enjoy a subsidy worth $83 billion is based on a flawed methodology, and on the extrapolation of stale and unreliable financial market data collected before passage of the Dodd-Frank Act.
  • An IMF analysis completed in 2010 – before passage of Dodd-Frank – estimated the cost of funding advantage enjoyed by large banking companies to be only “about 20 basis points on average.”
  • Several more recent studies indicate that, since the passage of Dodd-Frank, any cost of funding advantage has been dramatically reduced or even eliminated. In fact, two recent studies conclude that markets are now imposing a cost of funding premium on large banks of up to 35 basis points.

Bloomberg’s editors continue the debate:

Finally, the two papers by Cyree and Balasubramnian represent good-faith efforts that the authors readily admit are far from ideal. They found that big banks’ borrowing costs increased relative to those of small banks in the second half of 2010, and attributed the change to Dodd-Frank’s elimination of the subsidy. They employed data on 30 banks, only 11 of which were not too big to fail, a small sample that might have skewed the estimated funding advantages of the bigger institutions. Also, their statistical controls could have missed important factors — such as the brewing European debt crisis — that might have had a differential effect on the borrowing costs of the biggest banks.

As Cyree put it: “I can’t tell you that this is strictly due to Dodd-Frank.”

Of course, no statistical study is perfect, particularly when dealing with something as difficult to estimate as the bank subsidy. That said, a paper by three economists — Viral Acharya of New York University, Deniz Anginer of Virginia Tech and A. Joseph Warburton of Syracuse University — looked at a larger sample of financial institutions and found that the too-big-to-fail subsidy amounted to almost $100 billion in 2010, the year Dodd-Frank was signed into law. The paper also included a separate test, which looked at bond yields immediately before and after the House and Senate reconciled their versions of the bill. It suggested that Dodd-Frank might have actually increased the subsidy.

One thing Bloomberg pointed out was a cheap-shot by the bank lobbyists:

Given these analytic shortcomings, it is not surprising that the title page of the paper bears a boxed disclaimer stating in bold font: “This working paper should not be reported as representing the views of the IMF.”

Bloomberg points out:

The disclaimer is standard boilerplate for IMF working papers.

I’m not aware of any central-bank-style research that does not carry such a disclaimer. The banks’ attempt to make it appear to be a deliberate distancing of the IMF from the research does nothing but harm their own credibility.

It would appear that there are now so many regulators they can’t all be hired by banks, so they’re widening the net:

A series of proposed rule changes from the country’s securities regulators would make hostile takeover bids harder to pull off, tightening a regime critics say has rendered corporate Canada easy hunting grounds for U.S. hedge funds.

On Wednesday, the Canadian Securities Administrators (CSA), which is the umbrella group for Canada’s provincial market watchdogs, officially unveiled its proposal to lower the “early warning” stock ownership threshold that forces would-be hostile takeover bidders to disclose their holdings in a target company. As previously reported in The Globe, bidders would have to go public after acquiring 5 per cent of a target company’s shares, down from 10 per cent. The CSA says the change would improve “market transparency.”

And on Thursday, the CSA will formally unveil a long-awaited proposal that would strengthen what are known as “poison pills”: tactics used by boards of directors to try to fend off hostile takeover bidders. The plan would see securities regulators allow companies to use poison pills indefinitely, provided they are approved by shareholders at the most recent annual meeting or at a special meeting held in the face of a hostile bid.

It was a mild day for the Canadian preferred share market (except for RON.PR.A!), with PerpetualPremiums flat, FixedResets off 4bp and DeemedRetractibles down 5bp. Volatility was muted. Volume was average.

PerpetualDiscounts now yield 4.82%, equivalent to 6.27% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.35%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 210bp, unchanged from the figure reported on March 6.

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices

Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)
Median
YTW
Median
Average
Trading
Value
Median
Mod Dur
(YTW)
Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 -0.0157 % 2,615.7
FixedFloater 4.09 % 3.43 % 28,979 18.42 1 0.0862 % 3,975.1
Floater 2.55 % 2.84 % 88,453 20.15 5 -0.0157 % 2,824.2
OpRet 4.82 % 3.31 % 55,311 0.46 5 -0.0618 % 2,597.9
SplitShare 4.29 % 4.11 % 720,756 4.22 4 0.0227 % 2,934.8
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0618 % 2,375.6
Perpetual-Premium 5.21 % 1.69 % 90,101 0.58 31 -0.0029 % 2,357.8
Perpetual-Discount 4.83 % 4.82 % 151,739 15.79 4 0.2565 % 2,666.3
FixedReset 4.89 % 2.55 % 291,039 3.31 80 -0.0374 % 2,514.9
Deemed-Retractible 4.87 % 2.86 % 137,140 0.62 44 -0.0492 % 2,445.2
Performance Highlights
Issue Index Change Notes
TRI.PR.B Floater -1.19 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-03-13
Maturity Price : 23.82
Evaluated at bid price : 24.07
Bid-YTW : 2.17 %
PWF.PR.P FixedReset -1.07 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-03-13
Maturity Price : 23.70
Evaluated at bid price : 25.97
Bid-YTW : 2.84 %
HSB.PR.D Deemed-Retractible 1.25 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-04-12
Maturity Price : 25.50
Evaluated at bid price : 25.90
Bid-YTW : -16.44 %
Volume Highlights
Issue Index Shares
Traded
Notes
TRP.PR.D FixedReset 105,804 Recent new issue.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-03-13
Maturity Price : 23.27
Evaluated at bid price : 25.55
Bid-YTW : 3.56 %
PWF.PR.S Perpetual-Discount 73,424 Recent new issue.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-03-13
Maturity Price : 24.61
Evaluated at bid price : 25.00
Bid-YTW : 4.82 %
TD.PR.G FixedReset 55,575 Scotia crossed 50,000 at 26.43.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-04-30
Maturity Price : 25.00
Evaluated at bid price : 26.45
Bid-YTW : 1.68 %
ENB.PR.F FixedReset 54,569 Nesbitt crossed 40,000 at 26.02.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2018-06-01
Maturity Price : 25.00
Evaluated at bid price : 25.87
Bid-YTW : 3.31 %
FTS.PR.C OpRet 36,755 Desjardins crossed 30,500 at 25.23.
YTW SCENARIO
Maturity Type : Soft Maturity
Maturity Date : 2013-08-31
Maturity Price : 25.00
Evaluated at bid price : 25.22
Bid-YTW : 3.93 %
RY.PR.P FixedReset 34,203 RBC crossed 25,000 at 26.05.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-02-24
Maturity Price : 25.00
Evaluated at bid price : 26.04
Bid-YTW : 2.16 %
There were 36 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
TCA.PR.X Perpetual-Premium Quote: 51.17 – 51.65
Spot Rate : 0.4800
Average : 0.3441

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-10-15
Maturity Price : 50.00
Evaluated at bid price : 51.17
Bid-YTW : 2.70 %

TRI.PR.B Floater Quote: 24.07 – 24.40
Spot Rate : 0.3300
Average : 0.2310

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-03-13
Maturity Price : 23.82
Evaluated at bid price : 24.07
Bid-YTW : 2.17 %

IAG.PR.A Deemed-Retractible Quote: 24.88 – 25.11
Spot Rate : 0.2300
Average : 0.1312

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.88
Bid-YTW : 4.66 %

ABK.PR.C SplitShare Quote: 32.00 – 32.24
Spot Rate : 0.2400
Average : 0.1474

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-03-10
Maturity Price : 31.64
Evaluated at bid price : 32.00
Bid-YTW : 2.86 %

FTS.PR.E OpRet Quote: 26.37 – 26.66
Spot Rate : 0.2900
Average : 0.2105

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-06-01
Maturity Price : 25.75
Evaluated at bid price : 26.37
Bid-YTW : -5.35 %

PWF.PR.P FixedReset Quote: 25.97 – 26.16
Spot Rate : 0.1900
Average : 0.1270

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-03-13
Maturity Price : 23.70
Evaluated at bid price : 25.97
Bid-YTW : 2.84 %

March 12, 2013

Tuesday, March 12th, 2013

The What-Debt? government has given more help to its buddies at Air Canada:

The federal government has approved Air Canada’s request for a reprieve from funding its pension deficit, but has imposed a host of conditions – including a freeze on executive pay and a ban on dividends or share repurchases.

The deal requires the airline to make contributions to the plan of at least $150-million a year totalling at least $1.4-billion over seven years. The special contributions would be on top of the current service payments required by the pension plan.

More micro-managing and more interference in labour relations! This follows a suspension of the right to strike and protection from competition.

It was a fine day for the Canadian preferred share market, with PerpetualPremiums up 9bp, FixedResets winning 20bp and DeemedRetractibles gaining 7bp. Volatility was minimal. Volume was high.

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices

Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)
Median
YTW
Median
Average
Trading
Value
Median
Mod Dur
(YTW)
Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 0.2523 % 2,616.1
FixedFloater 4.09 % 3.44 % 28,906 18.41 1 -0.4292 % 3,971.7
Floater 2.54 % 2.86 % 88,982 20.01 5 0.2523 % 2,824.7
OpRet 4.80 % 2.34 % 51,224 0.30 5 -0.0540 % 2,599.5
SplitShare 4.29 % 4.04 % 727,784 4.22 4 -0.0299 % 2,934.2
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0540 % 2,377.0
Perpetual-Premium 5.20 % -0.27 % 90,484 0.09 31 0.0949 % 2,357.9
Perpetual-Discount 4.81 % 4.85 % 150,511 15.63 4 0.0506 % 2,659.5
FixedReset 4.88 % 2.52 % 290,115 3.31 80 0.1955 % 2,515.8
Deemed-Retractible 4.86 % 3.31 % 139,108 0.62 44 0.0679 % 2,446.4
Performance Highlights
Issue Index Change Notes
TRI.PR.B Floater 1.04 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-03-12
Maturity Price : 24.10
Evaluated at bid price : 24.36
Bid-YTW : 2.15 %
SLF.PR.G FixedReset 1.34 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.69
Bid-YTW : 2.78 %
Volume Highlights
Issue Index Shares
Traded
Notes
TRP.PR.D FixedReset 116,365 Recent new issue.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-03-12
Maturity Price : 23.25
Evaluated at bid price : 25.47
Bid-YTW : 3.57 %
BNS.PR.T FixedReset 107,475 Nesbitt crossed blocks of 50,000 and 35,000, both at 26.40. TD crossed 15,000 at 26.43.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-04-25
Maturity Price : 25.00
Evaluated at bid price : 26.40
Bid-YTW : 1.80 %
BNS.PR.Q FixedReset 103,475 Desjardins crossed 45,500 at 25.40. RBC crossed 36,500 at the same price.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.39
Bid-YTW : 3.05 %
BNS.PR.P FixedReset 94,520 Desjardins crossed 50,000 at 25.15.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.17
Bid-YTW : 3.38 %
ENB.PR.P FixedReset 91,085 TD crossed 10,000 at 25.64; Scotia crossed 50,000 at 25.60.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-03-01
Maturity Price : 25.00
Evaluated at bid price : 25.68
Bid-YTW : 3.53 %
HSE.PR.A FixedReset 72,085 Nesbitt crossed blocks of 40,000 and 12,500, both at 26.85.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-03-31
Maturity Price : 25.00
Evaluated at bid price : 26.80
Bid-YTW : 1.94 %
There were 47 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
PWF.PR.A Floater Quote: 23.66 – 24.50
Spot Rate : 0.8400
Average : 0.7551

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-03-12
Maturity Price : 23.37
Evaluated at bid price : 23.66
Bid-YTW : 2.20 %

BMO.PR.N FixedReset Quote: 26.24 – 26.44
Spot Rate : 0.2000
Average : 0.1250

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-02-25
Maturity Price : 25.00
Evaluated at bid price : 26.24
Bid-YTW : 1.58 %

BAM.PR.R FixedReset Quote: 27.07 – 27.27
Spot Rate : 0.2000
Average : 0.1268

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-06-30
Maturity Price : 25.00
Evaluated at bid price : 27.07
Bid-YTW : 3.10 %

TCA.PR.X Perpetual-Premium Quote: 51.20 – 51.46
Spot Rate : 0.2600
Average : 0.1951

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-10-15
Maturity Price : 50.00
Evaluated at bid price : 51.20
Bid-YTW : 2.58 %

TCA.PR.Y Perpetual-Premium Quote: 52.10 – 52.30
Spot Rate : 0.2000
Average : 0.1400

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-03-05
Maturity Price : 50.00
Evaluated at bid price : 52.10
Bid-YTW : 1.89 %

HSB.PR.D Deemed-Retractible Quote: 25.89 – 26.47
Spot Rate : 0.5800
Average : 0.5231

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-04-11
Maturity Price : 25.50
Evaluated at bid price : 25.89
Bid-YTW : -2.04 %

RON.PR.A Downgraded to Pfd-4(high), Trend Negative by DBRS

Tuesday, March 12th, 2013

DBRS has announced that it:

downgraded the Issuer Rating and Senior Unsecured Debt rating of RONA inc. (RONA or the Company) to BB (high) from BBB (low) and the Preferred Shares rating to Pfd-4 (high) from Pfd-3 (low), maintaining the Negative trend. DBRS has also assigned a recovery rating of RR2 to the Company’s Senior Unsecured Debt.

On May 30, 2012, DBRS confirmed RONA’s Senior Unsecured Debt and Preferred Shares ratings at BBB (low) and Pfd-3 (low), respectively, and maintained the Negative trend. Such rating actions considered the Company’s announced restructuring plans as well as the change in capital structure undertaken with the early repurchase of debentures, but also reflected continued uncertainty with respect to RONA’s ability to improve its operating performance in a challenging consumer and competitive environment. At that time (Q1 F2012), DBRS stated that should RONA not be successful in improving its credit metrics due to weakness in operating income and/or more aggressive-than-expected financial management, a downgrade would likely result.

Subsequent to that statement, RONA released year-end F2012 results, which delivered a net sales increase of 1.7%, flat same-store sales and a significant 40% decline in EBITDA to $171 million versus $285 million in 2011. EBITDA margins were negatively affected by weaker gross margins due to promotional activity in a highly competitive environment and higher selling, general and administrative costs. This marks the third consecutive year of declining EBITDA and EBITDA margins.

As such, combined with an increase in balance-sheet debt to approximately $328 million at year-end 2012 from $257 million the previous year (at least partially due to incremental debt used to complete $67 million of share repurchases in 2012), lease-adjusted debt-to-EBITDAR increased to approximately 3.77 times (x) versus 2.54x in 2011 and 2.80x in 2010 (the improvement in lease-adjusted debt-to-EBITDAR in 2011 was largely attributable to the Company’s repurchase of a portion of its outstanding debentures), while lease-adjusted EBIT coverage declined to 1.51x in 2012 versus 2.26x in 2011 and nearly 3.7x in 2010. Furthermore, the Company’s ability to deleverage over time has weakened considerably as indicated by its free cash flow as a percentage of debt (nearly 18% in 2012 versus approximately 42% in 2011 and 25% in 2010).

DBRS believes that the continued deterioration in operating performance, which has prevented the Company from delivering growth in sales (coupled with margin expansion and weakness in key credit metrics), has resulted in a credit risk profile that is no longer consistent with a BBB (low) Issuer Rating. DBRS believes that the consumer and competitive environment in Canada will remain difficult going forward as The Home Depot, Inc. (rated A (low), Stable) continues its strong performance (five consecutive quarters of positive comparable store sales in Canada) and Lowe’s Companies, Inc. examines continued expansion in Canada to gain necessary scale.

On February 21, 2013, RONA announced further restructuring efforts in the form of its Transformational Strategy, which is expected to span from 2013 to 2015. The plan builds on previous restructuring efforts and includes a rationalization of the Company’s administrative support model, which could ultimately benefit EBITDA by 15% in the near-to-medium term. In addition, RONA plans to enhance the customer experience by improving its merchandising, pricing strategy and in-store service. The Company also plans to optimize its stronger commercial and professional market division and rationalize its underperforming big-box network outside of Québec. Finally, the Company will seek to strengthen and better leverage core markets where profitability has been strong (i.e., distribution to dealers, proximity stores and banners in Québec).

In terms of outlook, DBRS has maintained the trend at Negative as we continue to believe meaningful recovery will remain challenging. RONA is expected to face intense competition in an environment that should remain highly promotional, with consumers facing significant challenges. Although DBRS recognized the merits of RONA’s Transformational Strategy and the cost savings that could result, DBRS expects that a significant improvement in performance will be difficult to realize over the near-to-medium term.

In order for the trend on its credit risk profile to stabilize, RONA would need to demonstrate signs of stabilizing and/or expanding same-store sales and margins leading to a recovery in operating income and return on invested capital, within the context of the Company’s consolidation efforts.

If the Company’s plans and performance lead to stabilization of same-store sales, operating income and key credit metrics, the ratings outlook could stabilize. Continued and meaningful deterioration in same-store sales and/or operating margins and key credit metrics (i.e., lease-adjusted EBIT coverage, free cash flow as a percentage of debt and lease-adjusted debt-to-EBITDAR over 4.0x) in the near-to-medium term could result in another downgrade to BB and Pfd-4.

RON.PR.A was last mentioned on PrefBlog when it was downgraded to Pfd-3(low) in November 2011. RON.PR.A is a FixedReset, 5.25%+265. It is tracked by HIMIPref™ but is relegated to the Scraps index on credit concerns. It closed on 2013-3-11 at 25.61-70 to yield 4.01%-3.99% to perpetuity.

It was also mentioned in the December, 2012, PrefLetter as being a rather peculiar issue for ZPR to be holding (0.51% of portfolio) since the TXPL methodology states:

Rating. Preferred shares must have a minimum rating of P-3 or its equivalent by Standard & Poor’s, Dominion Bank Ratings Service or Moody’s Investor Service.1 If more than one of the ratings agencies has issued a rating on the stock, the lowest rating is used to determine eligibility.

New Issue: AX FixedReset 4.75%+330

Tuesday, March 12th, 2013

Artis Real Estate Investment Trust has announced:

that it has entered into an agreement to sell to a syndicate of underwriters led by RBC Capital Markets and CIBC (the “Underwriters”), on a bought deal basis, 2,000,000 Cumulative Rate Reset Preferred Trust Units, Series E (“Series E Units”) at a price of $25.00 per Series E Unit for gross proceeds to Artis of $50,000,000 (the “Financing”). Artis has also granted the Underwriters an option, exercisable at any time up to 48 hours prior to the closing of the Financing, to purchase a further 300,000 Series E Units at the issue price which, if fully exercised, would result in additional gross proceeds of $7,500,000.

The Series E Units will pay fixed cumulative preferential distributions of $1.1875 per Series E Unit per annum, yielding 4.75% per annum, payable on the last day of March, June, September and December of each year, as and when declared by the board of trustees of Artis, for the initial period ending September 30, 2018. The first quarterly distribution, if declared, shall be payable on June 30, 2013 and shall be $0.3286 per Series E Unit, based on the anticipated closing of the offering of Series E Units of March 21, 2013. The distribution rate will be reset on September 30, 2018 and every five years thereafter at a rate equal to the sum of the then five-year Government of Canada bond yield and 3.30%. The Series E Units are redeemable by Artis, at its option, on September 30, 2018 and on September 30 of every fifth year thereafter.

Holders of Series E Units will have the right to reclassify all or any part of their Series E Units as Cumulative Floating Rate Preferred Trust Units, Series F (the “Series F Units”), subject to certain conditions, on September 30, 2018 and on September 30 of every fifth year thereafter. Such reclassification privilege may be subject to certain tax considerations (to be disclosed in the prospectus supplement). Holders of Series F Units will be entitled to receive a floating cumulative preferential distribution, payable on the last day of March, June, September and December of each year, as and when declared by the board of trustees of Artis, at a rate equal to the sum of the then 90-day Government of Canada Treasury Bill yield plus a spread of 3.30%.

DBRS Limited (“DBRS”) has assigned a provisional rating of Pfd-3 (low) to the Series E Units.

The Financing is being made pursuant to the REIT’s base shelf prospectus dated June 15, 2012. The terms of the offering will be described in a prospectus supplement to be filed with Canadian securities regulators. The Financing is expected to close on or about March 21, 2013 and is subject to regulatory approval.

Artis intends to use the net proceeds from the Financing to repay indebtedness, fund future acquisitions, and for general trust purposes.

This issue joins AX.PR.A, a 5.25%+406 FixedReset which was recently added to HIMIPref™ and which closed yesterday at 26.05-15, for a YTW of 4.50%-4.40% to its next Exchange Date.

There will probably be funny taxation of the distributions – see the last paragraph of the first post about AX.PR.A.

Update: As noted by Assiduous Reader adrian2 in the comments the deal has been super-sized to $100-million.

Update, 2013-3-13: Rated Pfd-3(low) by DBRS.

March 11, 2013

Monday, March 11th, 2013

Moody’s points out that the stock of US investment grade corporate bonds is heavily weighted towards lesser credits:

It would be remiss not to add that the risk profile of the US investment-grade corporate bond market also has risen considerably. Given how the share of investment-grade bonds outstanding rated either A3 or Baa has soared from year-end 2007’s 31% to year-end 2012’s record 62%, it’s unlikely that the investment-grade bond yield spread might quickly return to its medians of the two previous recoveries of 103 bp for industrial companies and of 78 bp for financial companies. According to Barclays Capital, these spreads were recently at 135 bp for the industrials and 138 bp for the financials. (Figure 8.)

In conclusion, this very much remains a subpar recovery of above-average risk. What happens to business sales and profits will not only determine the durability of the latest equity rally, it will also have much to say about whether or not Treasury bond yields rise and credit spreads narrow.


Click for Big

The Too-Big-To-Fail Banks, not surprisingly, claim there is no Too-Big-To-Fail subsidy:

Lobby groups for the largest U.S. banks pushed back against claims that they remain too big to fail, rebutting assertions by lawmakers and regulators that they enjoy a “taxpayer subsidy” because of their size.

The Dodd-Frank Act, passed by Congress in response to the 2008 credit crisis, greatly diminished whatever advantage the biggest lenders held over smaller rivals, five industry groups wrote today in a brief on the issue. Senator Elizabeth Warren, a Massachusetts Democrat, used outdated information when she raised the matter at a hearing last month, the groups said.

“There is substantial evidence that the market recognizes the impact Dodd-Frank has had on investor expectations,” the Clearing House, Financial Services Forum, Financial Services Roundtable, Securities Industry and Financial Markets Association and American Bankers Association said in their brief. “Given the sizable costs associated with new regulations, together with the new orderly liquidation framework, any purported TBTF-related funding advantage has clearly been reduced or even eliminated.”

I can’t find the actual brief, even when looking at tweets from the Financial Services Roundtable – the links don’t work. Perhaps they’re waiting for the recipients to publish it before making it public.

Bloomberg published a good article on complexity:

A highly unusual collaboration between economists and scientists offers an important insight for those who want to fix the world’s crisis-prone financial system: There’s no simple way to understand a complex network.

This month’s issue of the research journal Nature Physics features a handful of papers in which physicists, other natural scientists and leading experts in economics and finance — including prominent banking regulators and Nobel Prize-winning economist Joseph Stiglitz — put their minds together to figure out finance. What the scientists bring to the table is experience in studying networks, bewildering tangles of interlinked and interdependent things such as an ecological food web or the Internet.

Fifty years ago, ecologists interested in the stability of food webs at first mistakenly concluded that more complexity — more species and a greater density of links among them — would tend to make an ecosystem more stable. This turned out to be wrong. Later work by noted ecologist Robert May demonstrated that while healthy ecological networks are rich and diverse, too much complexity tends to make them unstable and prone to collapse. Loosely speaking, networks with too much complexity can go wrong in too many ways.

One of the papers referenced was by Caccioli, Marsili and Vivo, titled Eroding market stability by proliferation of financial instruments:

We contrast Arbitrage Pricing Theory (APT), the theoretical basis for the development of financial instruments, with a dynamical picture of an interacting market, in a simple setting. The proliferation of financial instruments apparently provides more means for risk diversification, making the market more efficient and complete. In the simple market of interacting traders discussed here, the proliferation of financial instruments erodes systemic stability and it drives the market to a critical state characterized by large susceptibility, strong fluctuations and enhanced correlations among risks. This suggests that the hypothesis of APT may not be compatible with a stable market dynamics. In this perspective, market stability acquires the properties of a common good, which suggests that appropriate measures should be introduced in derivative markets, to preserve stability.

This basic thesis has been known for some time. One of the reasons the US long bond futures contract was designed the way it was – with Cheapest To Deliver options for the seller, as well as a certain amount of leeway in delivery times – was to make it more complex. More complexity makes it harder to analyze, which encourages liquidity since there will be a range of views regarding the fair price of the instrument given the same data from the physical market.

In practice, markets are never perfectly liquid. The very fact that information can be aggregated into prices, requires that prices respond to trading (see e.g. [6] for evidence on FX markets or [5] for equity markets). In other words, it is because markets are illiquid that they can aggregate information into prices. Liquidity indeed is a matter of time scale and volume size [4, 5]. This calls for a view of financial markets as interacting systems. In this view, trading strategies can affect the market in important ways. Both theoretical models and empirical research, show that trading activity implied by derivatives affects the underlying market in non-trivial ways [10].

The aim of this paper is to contrast, within a simple framework, the picture of APT with a dynamical picture of a market as an interacting system. We show that while the introduction of derivatives makes the market more efficient, competition between financial institutions naturally drives the market to a critical state characterized by a sharp singularity. Close to the singularity the market exhibits the three properties alluded to above: 1) a strong susceptibility to small perturbations and 2) strong fluctuations in the underlying stock market. Furthermore 3) while correlations across different derivatives is largely negligible in normal times, correlations in the derivative market are strongly enhanced in stress times, when the market is close to the critical state. In brief, this suggests that the hypothesis of APT may not be compatible with the requirement of a stable market.

But it is precisely because these models are simple that one is able to point out why theoretical concepts such as efficient or complete markets and competitive equilibria have non-trivial implications. The reason being that these conditions hold only in special points of the phase diagram where singularity occurs (phase transitions). It is precisely when markets approach these ideal conditions that instabilities and strong
fluctuations appear [13, 14]. Loosely speaking, this arises from the fact that the market equilibrium becomes degenerate along some directions in the phase space. In a complete, arbitrage-free market, the introduction of a derivative contract creates a symmetry, as it introduces perfectly equivalent ways of realizing the same payoffs. Fluctuations along the direction of phase space identified by symmetries can grow unbounded. Loosely speaking, the financial industry is a factory of symmetries, which is why the proliferation of financial instruments can cause strong fluctuations and instabilities. In this respect, the study of competitive equilibria alone can be misleading. What is mostly important is their stability with respect to adaptive behavior of agents and the dynamical fluctuations they support and generate.

It has been recently suggested that market stability appears to have the properties of a public good [22]. A public good is a good i) whose consumption by one individual does not reduce its availability for consumption by others (non-rivalry) and ii) such that no one can be e ectively excluded from using the good (non-excludability). At the level of the present stylized description, the expansion in the repertoire of traded assets introduces an externality which drives the market to unstable states. This suggests that systemic instability may be prevented by the introduction of a tax on derivative markets, such as that advocated long ago for foreign exchange markets by Tobin [23], or by the introduction of “trading permits”, similar to those adopted to limit Carbon emissions [25]. The stabilizing effect of a Tobin tax has already been shown within a model of a dynamic market which is mathematically equivalent to the one presented here [24].

The proliferation of financial instruments makes the market look more and more similar to an ideal arbitrage-free, efficient and complete market. But this occurs at the expense of market stability. This is reminiscent of the instability discussed long ago by Sir Robert May [20] which develops in ecosystems upon increasing bio-diversity13. For ecologies this result is only apparently paradoxical. Indeed the species which populate an ecosystem can hardly be thought of as being drawn at random, but are rather subject to natural selection. Indeed, on evolutionary time scales stability can be reconciled with bio-diversity, as shown e.g. in Ref. [21]. The diversity in the ecosystem of financial instruments has, by contrast, been increasing at a rate much faster than that at which selective forces likely operate.

While I suspect that a Tobin Tax might indeed work, it’s rather a blunt instrument. Far better to allow selective forces to operate, by allowing bankruptcies and firing incompetents. But nobody ever lost his job in the financial industry for incompetence.

Closer to home, Moody’s is taking care to be cautious:

A severe economic shock, such as the kind that hit Japan in the early 1990s and California and Nevada in 2006, could knock Canadian housing prices down by 44%, according to a formula devised by Moody’s Investors Service to rate securities linked to mortgages.

Such a decline would be driven primarily by the phenomenal upswing in Canadian home prices over the past decade, Moody’s said.

While house prices in Spain could plummet by a more severe 52%, Canada joins Spain, as well as the United Kingdom and Australia, in the ratings agency’s assessment of countries where growth in housing prices over the past 10 years has driven their values away from sustainable market fundamentals and into “overheated” territory.

but TD emphasizes the central distribution of probabilities:

Canada’s real estate bonanza of the past decade has come to end and the long-term trend as one of the most profitable places to invest is also not encouraging, a new research paper from the TD Bank argues.

The “special report” from one of Canada’s largest banks makes the case that gains in housing prices have been exceptionally strong over the last 10 years, even when accounting for a sharp drop during the 2008-09 recession. But now is the time for a bit of a payback.

The report does not predict a collapse in house prices as some analysts have suggested. In fact, it sees prices rebounding after a few years of a correction to as high as eight per cent.

However, the longer term trend is for home price gains to average about two per cent over the next 10 years — flat once inflation is taken into account, says TD chief economist Craig Alexander.

The problem with the housing collapse scenario, says Alexander, is that typically a sharp correction needs a trigger in terms of a steep increase in interest rates or unemployment, both of which appear unlikely at this point.

Somewhat surprisingly, the report predicts Vancouver and Toronto, along with Victoria, Edmonton and Calgary will continue to outpace the national average in terms of home prices over the next 10 years.

Vancouver and Toronto are regarded as cities with the most inflated prices — despite recent corrections — but TD argues that the two cities will realize the biggest influx of immigrants, so demand will remain higher. The Alberta cities will do well because of both population growth and higher than average income growth.

Alexander says the two biggest factors in trend home prices are population growth and housing formation, which both favour Toronto and Vancouver.

CU Inc., proud issuer of CIU.PR.A, CIU.PR.B and CIU.PR.C was confirmed at Pfd-2(high) by DBRS:

DBRS has today confirmed the Issuer Rating, Commercial Paper, Unsecured Debentures & Medium-Term Notes and Cumulative Preferred Shares of CU Inc. (CUI or the Company) at A (high), R-1 (low), A (high) and Pfd-2 (high), respectively, all with Stable trends. The rating confirmations are based on CUI’s low business risk, which stems from the regulated nature of its operations supported by a reasonable regulatory environment; strong portfolio of diversified regulated businesses; and solid financial profile.

The Company’s business risk profile is viewed as strong as all of its earnings are generated from regulated electricity and gas businesses, which operate under a relatively stable, albeit evolving, regulatory framework.

CUI is the highest rated publically owned utility and continues to grow through its investments in low risk assets. The Company has a conservative strategy of funding a significant portion of its capex with internally generated cash flows, conservative dividend payouts and equity injections from its parent (Canadian Utilities Limited; rated “A”). CUI has a proven track record of funding equity in a timely manner to remain in line with its regulatory capital structure. DBRS expects the parent to continue to provide support to CUI, if needed.

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums off 4bp, FixedResets up 10bp and DeemedRetractibles down 8bp. Volatility was below average. Volume was average.

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices

Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)
Median
YTW
Median
Average
Trading
Value
Median
Mod Dur
(YTW)
Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 -0.6267 % 2,609.5
FixedFloater 4.08 % 3.42 % 28,945 18.45 1 0.4310 % 3,988.8
Floater 2.55 % 2.86 % 90,891 20.01 5 -0.6267 % 2,817.6
OpRet 4.79 % 2.52 % 49,779 0.30 5 0.2165 % 2,600.9
SplitShare 4.29 % 4.51 % 117,336 4.23 4 0.1540 % 2,935.1
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.2165 % 2,378.3
Perpetual-Premium 5.21 % 1.58 % 90,152 0.14 31 -0.0431 % 2,355.7
Perpetual-Discount 4.82 % 4.86 % 139,343 15.63 4 0.0202 % 2,658.1
FixedReset 4.89 % 2.61 % 290,650 3.33 80 0.0980 % 2,510.9
Deemed-Retractible 4.87 % 3.37 % 139,025 0.55 44 -0.0810 % 2,444.8
Performance Highlights
Issue Index Change Notes
PWF.PR.A Floater -1.51 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-03-11
Maturity Price : 23.25
Evaluated at bid price : 23.55
Bid-YTW : 2.21 %
TRI.PR.B Floater -1.15 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-03-11
Maturity Price : 23.86
Evaluated at bid price : 24.11
Bid-YTW : 2.17 %
FTS.PR.J Perpetual-Premium -1.12 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2021-12-01
Maturity Price : 25.00
Evaluated at bid price : 25.70
Bid-YTW : 4.40 %
Volume Highlights
Issue Index Shares
Traded
Notes
TRP.PR.D FixedReset 232,131 Recent new issue.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-03-11
Maturity Price : 23.25
Evaluated at bid price : 25.46
Bid-YTW : 3.58 %
BNS.PR.Y FixedReset 94,712 RBC crossed blocks of 33,800 and 50,000, both at 24.80.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.88
Bid-YTW : 2.84 %
BMO.PR.O FixedReset 63,757 RBC crossed 37,400 at 26.40.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-05-25
Maturity Price : 25.00
Evaluated at bid price : 26.40
Bid-YTW : 2.00 %
TD.PR.Q Deemed-Retractible 55,060 TD crossed 50,000 at 26.68.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-04-10
Maturity Price : 26.00
Evaluated at bid price : 26.53
Bid-YTW : -12.05 %
TD.PR.C FixedReset 41,054 Desjardins crossed 10,000 at 25.92 and 24,800 at 26.05.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.87
Bid-YTW : 2.33 %
PWF.PR.S Perpetual-Discount 30,706 Recent new issue.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-03-11
Maturity Price : 24.59
Evaluated at bid price : 24.98
Bid-YTW : 4.82 %
There were 33 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
PWF.PR.A Floater Quote: 23.55 – 24.50
Spot Rate : 0.9500
Average : 0.6620

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-03-11
Maturity Price : 23.25
Evaluated at bid price : 23.55
Bid-YTW : 2.21 %

HSB.PR.D Deemed-Retractible Quote: 25.76 – 26.38
Spot Rate : 0.6200
Average : 0.4608

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-12-31
Maturity Price : 25.25
Evaluated at bid price : 25.76
Bid-YTW : 3.61 %

GWO.PR.H Deemed-Retractible Quote: 25.34 – 25.66
Spot Rate : 0.3200
Average : 0.2218

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-09-30
Maturity Price : 25.25
Evaluated at bid price : 25.34
Bid-YTW : 3.67 %

TD.PR.I FixedReset Quote: 26.62 – 26.85
Spot Rate : 0.2300
Average : 0.1496

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-07-31
Maturity Price : 25.00
Evaluated at bid price : 26.62
Bid-YTW : 2.02 %

TRI.PR.B Floater Quote: 24.11 – 24.40
Spot Rate : 0.2900
Average : 0.2129

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-03-11
Maturity Price : 23.86
Evaluated at bid price : 24.11
Bid-YTW : 2.17 %

W.PR.J Perpetual-Premium Quote: 25.43 – 25.76
Spot Rate : 0.3300
Average : 0.2530

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-04-10
Maturity Price : 25.00
Evaluated at bid price : 25.43
Bid-YTW : -4.94 %

March PrefLetter Released!

Monday, March 11th, 2013

The March, 2013, edition of PrefLetter has been released and is now available for purchase as the “Previous edition”. Those who subscribe for a full year receive the “Previous edition” as a bonus.

The February edition has no special appendix, but contains the usual detailed updates of the DeemedRetractible and FixedReset segments of the market.

PrefLetter may now be purchased by all Canadian residents.

Until further notice, the “Previous Edition” will refer to the March, 2013, issue, while the “Next Edition” will be the April, 2013, issue, scheduled to be prepared as of the close April 12 and eMailed to subscribers prior to market-opening on April 15.

PrefLetter is intended for long term investors seeking issues to buy-and-hold. At least one recommendation from each of the major preferred share sectors is included and discussed.

Note: My verbosity has grown by such leaps and bounds that it is no longer possible to deliver PrefLetter as an eMail attachment – it’s just too big for my software! Instead, I have sent passwords – click on the link in your eMail and your copy will download.

Note: The PrefLetter website has a Subscriber Download Feature. If you have not received your copy, try it!

Note: PrefLetter eMails sometimes runs afoul of spam filters. If you have not received your copy within fifteen minutes of a release notice such as this one, please double check your (company’s) spam filtering policy and your spam repository – there are some hints in the post Sympatico Spam Filters out of Control. If it’s not there, contact me and I’ll get you your copy … somehow!

Note: There have been scattered complaints regarding inability to open PrefLetter in Acrobat Reader, despite my practice of including myself on the subscription list and immediately checking the copy received. I have had the occasional difficulty reading US Government documents, which I was able to resolve by downloading and installing the latest version of Adobe Reader. Also, note that so far, all complaints have been from users of Yahoo Mail. Try saving it to disk first, before attempting to open it.

Note: There have been other scattered complaints that double-clicking on the links in the “PrefLetter Download” email results in a message that the password has already been used. I have been able to reproduce this problem in my own eMail software … the problem is double-clicking. What happens is the first click opens the link and the second click finds that the password has already been used and refuses to work properly. So the moral of the story is: Don’t be a dick! Single Click!

FTN Annual Report 2012

Sunday, March 10th, 2013

Financial 15 Split Corp. has released its Annual Report to November 30, 2012.

FTN / FTN.PR.A Performance
Instrument One
Year
Three
Years
Five
Years
Since
Inception
Whole Unit +14.66% +1.99% -3.12% +2.24%
FTN.PR.A +5.38% +5.38% +5.38% +5.37%
FTN +44.61% -4.85% -12.28% -2.19%
S&P/TSX Financial Index +17.82% +8.12% +1.69% +8.20%
S&P 500 Financial Index +21.90% +1.89% -10.88% -6.35%
2/3 Canada
+1/3 US
[JH Calc]
+19.18% +6.04% -2.50% +3.35%

Figures of interest are:

MER: 0.99%

Average Net Assets: We need this to calculate portfolio yield. Use the Average of the beginning and end of year figures: ($133.2-million + $120.8-million)/2 = $127.0-million.

Underlying Portfolio Yield: Dividends received (net of withholding) of 4,385,579 divided by average net assets of 127.0-million is 3.45%

Income Coverage: Net Investment Income of 3,100,744, divided by Preferred Share Distributions of 4,857,410 is 64%.

These figures are close to the previously reported and calculated semi-annual figures.

LFE.PR.B 2012 Annual Report

Sunday, March 10th, 2013

Canadian Life Companies Split Corp. has released its Annual Report to November 30, 2012.

LFE / LFE.PR.B* Performance
Instrument One
Year
Three
Years
Five
Years
Since
Inception
Whole Unit +16.82% -1.11% -9.39% -2.29%
LFE.PR.B* +5.82% +5.83% +5.47% +5.43%
LFE +110.82% -25.04% -32.07% -17.87%
S&P/TSX Financial Index +17.82% +8.12% +1.69% +6.26%
* LFE.PR.B performance includes pre-reorganization LFE.PR.A. It is not clear whether there is an allowance for value of the warrants received on reorganization

It will be noted that LFE invests in insurance companies, which have had performance far worse than indicated by the S&P/TSX Financial Index, which is dominated by banks.

Figures of interest are:

MER: Calculation of the MER is complicated by the reorganization. Management reports a base figure of 1.59% “excluding any one time secondary offering expenses”, but significant expenses were incurred due to the reorganization which are included in this figure. As an approximation, I have assumed expenses going forward will be the same as in 2012 except that “Shareholder Reporting Costs” will be equal to the 2011 figure of $48,952, not the 2012 figure of $504,603. This results in total adjusted expenses of $1,323,904, divided by average net assets (see below) of $109.9-million = 1.20%. This figure is nicely in the range defined by the MER for the years 2008 – 2011, inclusive.

Average Net Assets: We need this to calculate portfolio yield. Use the Average of the beginning and end of year figures: $103.7-million + $116.1-million = $109.9-million. Note that warrant exercise and retractions will make this figure a nightmare calculation for the next two years.

Underlying Portfolio Yield: Dividends received of 4,536,584 divided by average net assets of 109.9-million is 4.13%

Income Coverage: Net Investment Income of 2,757,029, adjusted for excess reporting costs (see MER, above) of 455,651 is $3,212,680 divided by Preferred Share Distributions of 5,195,633 is 62%.

The reorganization of LFE was discussed on PrefBlog.