DBRS:
has today downgraded two series of Preferred Shares issued by High Income Preferred Shares Corporation (the Company). The Series 1 Shares have been downgraded from Pfd-1 (low) to Pfd-2 with a Negative trend, and the Series 2 Shares have been downgraded from Pfd-2 (low) to Pfd-3 with a Negative trend.
…
The termination date for each series of shares is June 29, 2012 (the Redemption Date).
Approximately 33% of the gross proceeds from the initial offering were used to enter into a forward agreement with the Canadian Imperial Bank of Commerce (the Counterparty) to provide for the full repayment of the Series 1 Shares principal on the Redemption Date. The remaining net proceeds from the initial offering were invested in a portfolio of common shares (the Managed Portfolio), which initially provided asset coverage to the Series 2 Shares of about 1.8 (downside protection of 44%). In addition to providing coverage to the Series 2 Shares principal, the Managed Portfolio is used to pay annual fees and expenses, as well as monthly distributions to the Series 1 and Series 2 Shares (5.85% and 7.25% per annum, respectively).
Since inception, the Managed Portfolio’s net asset value (NAV) has declined 28% from about $27 to $19.38 per share (as of October 19, 2007), providing downside protection of 24% to the Series 2 Shareholders. It is the Company’s intention to suspend both Series 1 and Series 2 dividend payments if the Managed Portfolio’s NAV drops below $14.70 per share. On the Redemption Date, the holders of the Series 1 and Series 2 Shares will be entitled to receive all cumulative dividends in arrears before the principal repayment to the Series 2 Shareholders. As a result, the ultimate payment of cumulative dividends to the Series 1 and 2 Shareholders is likely, but the timing of those payments is uncertain.
The downgrade of the Series 1 Shares is based on the risk that not all Series 1 dividends will be paid in a timely manner. The downgrade of the Series 2 Shares is based on the risk that dividends will not all be paid in a timely manner, as well as the eroding asset coverage available to cover the repayment of the Series 2 principal.
What can I say? I’ve complained about these issues’ ratings in the past. The vehicle has performed extremely well over the past year, with the Managed Portfolio providing returns of over 10% (which is not really such a wonderful accomplishment, given that the S&P/TSX 60 Index benchmark returned 22.5%) … so … one has to wonder … if it’s being downgraded now, after a year of great (absolute) performance, why wasn’t it downgraded earlier?
I haven’t pulled the numbers apart yet, but the rating on HPF.PR.B still looks pretty high to me. Yes, asset coverage is about 1.32:1, which in and of itself isn’t the worst ratio in the world. But, as DBRS points out: In addition to providing coverage to the Series 2 Shares principal, the Managed Portfolio is used to pay annual fees and expenses, as well as monthly distributions to the Series 1 and Series 2 Shares (5.85% and 7.25% per annum, respectively).
Distributions & Expenses come to a little over $4.4-million annually, including a doubtlessly richly deserved management fee of over half a million. This is $3.33 per Series 2 share. So the $19.38 per share assets are being eroded by $3.33 fees/expenses/distributions (FED). Five years until termination. Total FED $16.65, after which you’ve got to pay $14.70 principal on the Series 2 shares. So … that $19.38 has to grow to $14.70 + $16.65 = $31.35 in five years if default is to be avoided. That’s a total return of 61% over the five years; that’s 10% p.a. portfolio return just to avoid default by a penny.
Pfd-3 is way too high for these turkeys.
HPF.PR.A & HPF.PR.B are both tracked by HIMIPref™ with the security codes A46300 and A46301, respectively. Entries have been made to the creditRatings table to reflect today’s change.
This entry was posted on Wednesday, October 24th, 2007 at 7:10 pm and is filed under Issue Comments. You can follow any responses to this entry through the RSS 2.0 feed.
You can leave a response, or trackback from your own site.
HPF.PR.A & HPF.PR.B Downgraded by DBRS (finally!)
DBRS:
What can I say? I’ve complained about these issues’ ratings in the past. The vehicle has performed extremely well over the past year, with the Managed Portfolio providing returns of over 10% (which is not really such a wonderful accomplishment, given that the S&P/TSX 60 Index benchmark returned 22.5%) … so … one has to wonder … if it’s being downgraded now, after a year of great (absolute) performance, why wasn’t it downgraded earlier?
I haven’t pulled the numbers apart yet, but the rating on HPF.PR.B still looks pretty high to me. Yes, asset coverage is about 1.32:1, which in and of itself isn’t the worst ratio in the world. But, as DBRS points out: In addition to providing coverage to the Series 2 Shares principal, the Managed Portfolio is used to pay annual fees and expenses, as well as monthly distributions to the Series 1 and Series 2 Shares (5.85% and 7.25% per annum, respectively).
Distributions & Expenses come to a little over $4.4-million annually, including a doubtlessly richly deserved management fee of over half a million. This is $3.33 per Series 2 share. So the $19.38 per share assets are being eroded by $3.33 fees/expenses/distributions (FED). Five years until termination. Total FED $16.65, after which you’ve got to pay $14.70 principal on the Series 2 shares. So … that $19.38 has to grow to $14.70 + $16.65 = $31.35 in five years if default is to be avoided. That’s a total return of 61% over the five years; that’s 10% p.a. portfolio return just to avoid default by a penny.
Pfd-3 is way too high for these turkeys.
HPF.PR.A & HPF.PR.B are both tracked by HIMIPref™ with the security codes A46300 and A46301, respectively. Entries have been made to the creditRatings table to reflect today’s change.
This entry was posted on Wednesday, October 24th, 2007 at 7:10 pm and is filed under Issue Comments. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.