GWO Seeks "Greater Flexibility To Manage Its Capital Structure"

Great-West Lifeco has announced:

that it will seek the consent of the holders of its 6.67% Debentures due March 21, 2033 (the “2033 Debentures”) to amend the trust indenture dated as of March 21, 2003, between Great-West Lifeco and Computershare Trust Company of Canada, as trustee, as amended and supplemented. The consent will eliminate the replacement capital covenants and related provisions applicable to certain of Great-West Lifeco’s preferred shares, the 5.691% Subordinated Debentures due June 21, 2067 issued by Great-West Lifeco Finance (Delaware) LP and the 7.127% Subordinated Debentures due June 26, 2068 issued by Great-West Lifeco Finance (Delaware) LP II.

Great-West Lifeco is seeking to remove the replacement capital covenants in order to have greater flexibility to manage its capital structure. Removal of the replacement capital covenants would provide Great-West Lifeco with the ability to be responsive to credit rating agency considerations and emerging regulatory capital developments. The proposed changes do not imply that Great-West Lifeco intends to take any future action with respect to the redemption of any of the securities currently subject to the replacement capital covenants.

Great-West Lifeco will solicit consents from holders of record of the 2033 Debentures as of 5:00 p.m., Toronto time, on October 11, 2013. The proposed amendments require the consent of holders of not less than 66 2/3% of the outstanding principal amount of the 2033 Debentures. The terms and conditions of the consent solicitation will be included in the consent solicitation statement and the accompanying form of consent.

Certain information regarding the 2033 Debentures and the terms of the offer and the consent solicitation is summarized in the table below:

Debentures CUSIP No. Principal Amount Outstanding Consent Fee (per $1,000
principal amount)
6.67% Debentures due March 21, 2033 39138CAD8 $400,000,000 $12.50

Great-West Lifeco will pay a consent fee of $12.50 in cash for each $1,000 in principal amount of 2033 Debentures for which Great-West Lifeco has received a valid (and unrevoked) consent prior to the expiration of the solicitation, subject to the conditions of the solicitation. Assuming receipt of the requisite 66 2/3% consent, payments of the consent fee are anticipated to be made to holders of the 2033 Debentures that provide valid (and unrevoked) consents on the third business day following the expiration of the solicitation. If the proposed amendments are approved, the amendments will bind all holders of the 2033 Debentures, including those that did not provide a consent.

The solicitation will expire at 5:00 p.m. (Toronto time) on October 30, 2013, unless extended by Great-West Lifeco at its discretion (such time on such date, as the same may be extended, the “Expiration Date”).

Great-West Lifeco will make an announcement by press release of any extension of the Expiration Date prior to 9:00 a.m. (Toronto time), on the next business day after the previously scheduled Expiration Date. Holders may deliver their consents with respect to the solicitation at any time prior to the Expiration Date. Holders may revoke their consents until the earlier of the Expiration Date and the date that the proposed amendment to the trust indenture is executed and becomes effective. Any holder who validly revokes a consent will not be eligible to receive the consent fee, unless such consent is redelivered and accepted by Great-West Lifeco prior to the Expiration Date.

Great-West Lifeco has retained RBC Dominion Securities Inc. to serve as the solicitation agent for the solicitation, Georgeson Shareholder Communications Canada Inc. to serve as the information agent and Computershare Trust Company of Canada to serve as the tabulation agent. Questions regarding the solicitation may be directed to RBC Dominion Securities Inc. at (416) 842-6311.

This is rather interesting – a vote to change a bond indenture doesn’t come up very often and the consent fee – of over a dollar a bond – is quite attractive.

According to the Consent Solicitation Statement:

The principal effect of the replacement capital covenant is to require that a specified portion of any funds used to repurchase, redeem or repay the Preferred Stock, GWL-LP Subordinated Debentures and GWL-LP II Subordinated Debentures must be obtained by the Corporation through the issuance of common shares or other equity or equity-like securities, in each case within a specified time period prior to the applicable repurchase, redemption or repayment.

The replacement capital covenants were provided by the Corporation voluntarily. For that reason, consent of the Holders of the 2033 Debentures was not required under the Indenture. The replacement capital covenants afforded Great-West Lifeco enhanced credit rating agency capital treatment. Subsequent changes to credit rating methodology means this benefit is no longer available to Great-West Lifeco. Accordingly, Great-West Lifeco is seeking to remove the replacement capital covenants in order to have greater flexibility to manage its capital structure without being subject to the restrictions and constraints of the replacement capital covenants.

So why don’t they just redeem these sub-debs, with their enormous (by current standards) coupon? A look at the prospectus (available on SEDAR, dated March 14, 2003; I am not allowed to link to this prospectus due to the bank-owned CDS’ abuse of the monopoly granted to it by the regulators) reveals:

The Corporation may, at its option, redeem Debentures on not less than 30 nor more than 60 days’ prior notice to the registered holder, in whole at any time or in part from time to time, at a redemption price equal to the greater of the Canada Yield Price and par, together in each case with accrued and unpaid interest to the date fixed for redemption. In cases of partial redemption of Debentures issued under a Trust Indenture, the Debentures to be redeemed will be selected by the Trustee pro rata or in such manner as it shall deem equitable. Any Debentures that are redeemed by the Corporation will be cancelled and will not be reissued.

‘‘Canada Yield Price’’, shall mean a price which, if the Debentures were to be issued at such price on the redemption date, would provide a yield thereon from the redemption date to March 21, 2018 in the case of 2018 Debentures and March 21, 2033 in the case of 2033 Debentures, equal to the Government of Canada Yield, plus 24 basis points for the 2018 Debentures and 30 basis points for the 2033 Debentures, compounded semi-annually and calculated on the day that is three business days prior to the date of redemption.

So say that 20-year Canadas are now at 3.00% (approximately) then the Canada Yield is 3.30% and the Canada Price is around $148 per $100 bond – a pretty fat premium and illustrative of just how wonderful Canada Calls are, as opposed to regular calls. Paying a premium of $1.25 (plus expenses) to change the indenture is a lot cheaper.

But just why they are doing this is a little mysterious. Given that 400-million par value of these things is outstanding, GWO is prepared to spend $5-million (plus expenses of … what? half a million?) to get this flexibility. While this is hardly crippling to a company the size of GWO, it’s not pocket change either. While they say The proposed changes do not imply that Great-West Lifeco intends to take any future action with respect to the redemption of any of the securities currently subject to the replacement capital covenants that’s a little bit of a fuzzy statement, if you look at it carefully … and besides, a contingency plan with a 99.999% chance of being executed is still only a contingency.

They have a few Straight Perpetuals with fat coupons outstanding, led by GWO.PR.F at 5.9% which is currently callable at par. Of more immediate interest is GWO.PR.J, a FixedReset, 6.00%+307, which has its first Exchange Date on 2013-12-31. This certainly looks like it should be called on economic grounds, but they may not wish to issue new securities to replace the capital; and it may be worth $5.5-million to them to avoid the necessity. In addition:

The Canada Life Assurance Company has one subordinated debenture outstanding with a face amount of $100 million. Great-West Lifeco Finance (Delaware) LP has one subordinated debenture outstanding with a face amount of $1 billion. Great-West Lifeco Finance (Delaware) LP II has one subordinated debenture outstanding with a face amount of $500 million. Great-West Life & Annuity Insurance Capital, LP has one subordinated debenture outstanding with a face amount of US$175 million, and Great-West Life & Annuity Insurance Capital, LP II has one subordinated debenture outstanding with a face amount of US$300 million.

From the 2012 Annual Report:

The Company regards the Series F, G, H, I, L, M, P, Q and R preferred shares as part of its core or permanent capital. The Series F, G, H, I, L and M preferred shares have a replacement capital covenant, the Company only intends to redeem these shares with proceeds raised from new capital instruments representing equal or greater benefit than the shares currently outstanding. The Series P, Q and R preferred shares do not have a replacement capital covenant. The Company regards the two series of subordinated debentures totaling $1,500 million issued by two subsidiary companies, Great-West Lifeco Finance (Delaware) LP and LPII, as comprising part of its core or permanent capital. As such the Company only intends to redeem the subordinated debentures prior to maturity with new capital instruments with a similar or more junior ranking security. The terms and conditions of the $1,000 million subordinated debentures due June 21, 2067 bear interest at a rate of 5.691% until 2017 and, thereafter at a rate equal to the Canadian 90-day Bankers’ Acceptance rate plus 1.49%, unsecured. The terms of the $500 million subordinated debentures due June 26, 2068 bear interest at a rate of 7.127% until 2018 and, thereafter, at a rate equal to the Canadian 90-day Bankers’ Acceptance rate plus 3.78%, unsecured.

I consider it rather odd that the Series J preferreds are not regarded as core capital, but this – contrary to my initial expectations – is not a new thing: they are omitted from the list in each of the past four Annual Reports. None of the words “permanent”, “replacement” or “indenture” occurs anywhere in the Series J prospectus, dated Nov 13 2008, but there’s nothing of interest in the Series M prospectus dated February 24, 2010, either, so that doesn’t mean much.

So anyway, I will admit that I am perplexed by this solicitation. The most facile answer is that they want to redeem GWO.PR.F (with its 5.9% coupon) and don’t want to issue replacement capital (or want to have the option to do this), but I wouldn’t place any large bets on that possibility.

Another possibility is that the covenant somehow violates OSFI rules and they have to get rid of it in order to qualify the preferreds, or perhaps even the sub-debs themselves, as quality – or consider that there is a high enough probability of this being a requirement that they want to get it out of the way.

Any opinions on possible motivations for this action will be most welcome!

GWO has the following preferred shares outstanding: GWO.PR.F, GWO.PR.G, GWO.PR.H, GWO.PR.I, GWO.PR.J, GWO.PR.L, GWO.PR.M, GWO.PR.N, GWO.PR.P, GWO.PR.Q and GWO.PR.R.

Update, 2013-11-7: GWO increased the consent fee

Great-West Lifeco Inc. is amending the terms of its consent solicitation of the holders of its 6.67% Debentures due March 21, 2033 (the “2033 Debentures”) to eliminate the replacement capital covenants and related provisions applicable to certain of Great-West Lifeco’s preferred shares, the 5.691% Subordinated Debentures due June 21, 2067 issued by Great-West Lifeco Finance (Delaware) LP and the 7.127% Subordinated Debentures due June 26, 2068 issued by Great-West Lifeco Finance (Delaware) LP II.

The consent solicitation is amended to provide that Great-West Lifeco will pay a consent fee of $17.50 in cash for each $1,000 in principal amount of 2033 Debentures to all holders of 2033 Debentures provided that it has received the requisite consent from 66 2/3% of the holders of the 2033 Debentures. If the proposed amendments are approved, the amendments will bind all holders of the 2033 Debentures, including those that did not provide a consent.

All other terms of the solicitation remain in effect unamended including the expiration of the solicitation at 5:00 p.m. (Toronto time) on Wednesday, October 30, 2013.

… and obtained consent:

Great-West Lifeco Inc. successfully completed its consent solicitation of the holders of its 6.67% Debentures due March 21, 2033 (the “2033 Debentures”). The holders of the 2033 Debentures approved the elimination of the replacement capital covenants and related provisions applicable to certain of Great-West Lifeco’s preferred shares, the 5.691% Subordinated Debentures due June 21, 2067 issued by Great-West Lifeco Finance (Delaware) LP and the 7.127% Subordinated Debentures due June 26, 2068 issued by Great-West Lifeco Finance (Delaware) LP II.

13 Responses to “GWO Seeks "Greater Flexibility To Manage Its Capital Structure"”

  1. prefQC says:

    Hi James,
    I very recently purchased the above-mentioned (effectively perpetual) 2067 bond via my discount broker at the sub-par price of 98.25, which corresponds to about 5.8% YTM. It seems almost too good to be true to obtain such a good yield at a price below par on an investment grade bond. (As well, its “retail” liquidity is remains good.)

    Notwithstanding your comments above, I still do not fully understand what exactly GWO means by “eliminat[ing] the replacement capital convenants” and hence remain a little uneasy as to what risks I might be exposed to as a holder of this 2067 bond (w.r.t. purchasing other investment-grade corporate bonds, for instance) .

    Should I be concerned about including this bond as part of my fixed-income portfolio allocation?

  2. brian says:

    A 5.8% investment grade bond does sound almost too good to be true. I had a look at that 2067 bond and I read that the interest rate is 5.691% until June 21, 2017 and then it RESETS to 90 day banker’s acceptance + 1.49%. Using today’s rates I think that would be something like 0.88% + 1.49% = 2.37%. I could be wrong about this so you should check it out!

  3. jiHymas says:

    Where can I find the prospectus or term sheet for this issue?

  4. jiHymas says:

    sub-par price of 98.25, which corresponds to about 5.8% YTM.

    That would be the YTM only if the rate continued at 5.691%. As noted by brian the rate will reset to somewhere in the neighborhood of 2.37% in 2017. So the YTM, assuming a constant 90-day BA yield, will be a little under 2.50%.

    I still do not fully understand what exactly GWO means by “eliminat[ing] the replacement capital convenants” and hence remain a little uneasy as to what risks I might be exposed to as a holder of this 2067 bond (w.r.t. purchasing other investment-grade corporate bonds, for instance) .

    It’s not clear to me from the consent solicitation form whether the 2067 bonds actually had that feature at any time; I suspect that it may have just been directly applicable to the 2033 maturity to give the holders of that issue some assurance that equivalent issues would not be redeemed out of cash reserves (this assurance would improve the credit quality of the 2033 issue).

    However, I would not want to say anything firm on this until somebody tells me where to find a prospectus!

    The removal of the provision with respect to the 2067 bond (if it exists) would have no effect on you. If they redeem the 2067 issue out of cash, then the credit quality of sub-debt will go down to some extent (because they’ll have less capital) but you won’t care – you’ll be redeemed! However, the fact that other issues are affected by this change does have a slightly bad effect on you, because other issues might be redeemed out of cash, reducing the firm’s capital, and therefore increasing your credit risk marginally because capital will have been reduced.

    I’ve never seen the prospectus but it is mentioned here…

    Thank you!

  5. chusan says:

    Hi, im new to fixed income investment, and correct me if im wrong but as this is a FIXED INCOME bond with a coupon of 5.691% per 1000$ face value, the coupon rate cannot be changed. You would still receive 56.91$ annually for each 1k bond you own of this debenture.

    If GW want to refinance the bond for a lower yield rate they must either call it (redeem you at the full face value, 1k plus interests so far by 1k bond)

    Or, they could lower the yield, yes, but the bond value would raise accordingly: Exemple 98% to 148% because the coupon is not detachable or modifiable and the yield is a direct relation between the current price and the coupon rate. GW would do that out of cash (raising it’s debt to lower it’s interest payment) Tough, you could sell it with a premium price to reinvest it anywhere it offers better rate.

    Am I wrong in my understanding?

  6. jiHymas says:

    chusan, your understanding is not correct.

    As noted above, I haven’t been able to find a prospectus for this issue. I would not buy a bond issue without reading its prospectus.

    However, there is a brief discussion of this bond in the Great-West Lifeco Annual Report for 2015:

    Great-West Lifeco Finance (Delaware) LP
    Subordinated Debentures due June 21, 2067 bearing an interest rate of 5.691% until June 21, 2017 and, thereafter, at a rate equal to the Canadian 90-Day Bankers’ Acceptance rate plus 1.49%, unsecured

    Given that 90-Day BAs now yield about 0.85%, this indicates that the rate will reset to about 2.35%, or $23.50 per $1000 par value, in June. I presume that the rate will be reset quarterly after that, but it might be semi-annually. It might be just about any damn thing, which is an illustration of why I would not buy anything at all without having a prospectus available.

  7. chusan says:

    jiHymas, To reset the rate without calling the bond, it must be a Reset bond. There is nothing specifying that it is a reset bond, but if it is the case, to reset, it must change de face value. That’s the rules of reset bond. So the current (today 12-13) value of this bond is 99.07 reflecting the YTM that is higher than the coupon. Otherwise, the reset would cut the debt of the company substantially.
    I have not been able to find a prospectus for this issue either, but I checked and my broker sell this bond as a bond that mature 21 june 2017. Are they wrong in their data?

  8. jiHymas says:

    There is nothing specifying that it is a reset bond, but if it is the case, to reset, it must change de face value. That’s the rules of reset bond.

    chusan, this is wrong. In the first place, we have the note from the GWO Annual Report that it resets. In the second place, bonds – and preferred shares – can reset quite frequently without changing their face value; the mechanism for this will be set out in the prospectus. In the third place, neither of us has a prospectus.

    I suggest you eMail GWO Investor Relations and ask them for a copy of the prospectus, or a link to the prospectus if it is already on-line. Failing this, you can ask them to explain to you how the coupon rate will change in the future – and you can also ask them if the face value will change!

    I checked and my broker sell this bond as a bond that mature 21 june 2017. Are they wrong in their data?

    Their data is fine. But they’re lying to you. This lie is very common in the financial industry and I often refer to such given dates as a ‘pretend-maturity’.

    I suggest you read my article A Vale of Tiers, which discusses bank debt; this note has many similar characteristics, especially:

    Investors tend to trade sub-debt as if it will definitely mature on their step-up date – dealer quotations will often reflect a spread to a Canada bond maturing on the step-up date. However, while one may count on them being called, as expected in good times, this will not necessarily be the case in times of trouble. In times of trouble, three-month BAs + 100bp might look awfully skimpy! Investors should tread very carefully when purchasing debt of this nature.

    Never EVER buy a bond without reading the prospectus!

  9. chusan says:

    Wow Thanks jiHymas. This is quite useful information you give there. I never tought Disnat would deliberately lie on that kind of information. I will not buy from this platform and put my money elsewhere.
    Im still not sure what are their advantage there if it’s not to make a comission upon re-selling the bond when investors notice the maturity is not a maturity but something they decided to call a maturity because they wanted it.
    Anyway, I will be prudent. I tought bonds were easier. Well, lending money to company in exchange of a percentage. They call this investment a fixed income, but it seems to change all the time at their will.

  10. chusan says:

    I was curious, so I asked Disnat what was this particuliar bond maturity date and what it meant if I bought this bond (the 2067 bond)
    Their answer:

    “This bond has a maturity of 6 month, so if you buy it, it will be automaticly bought back in 6 months”

    If you confront them, they insist to lie. It’s very interesting.

  11. jiHymas says:

    This is quite useful information you give there. I never tought Disnat would deliberately lie on that kind of information.

    It’s a shitty system, connived at by the regulators and by the independent ha-ha index constructors. Every now and then the pretend-maturity bites them in the ass and they all pretend to be shocked.

    They can’t change things “at will” but they can (and do!) take advantage of everything that is permitted to them in the prospectus so I will again repeat myself: never EVER buy a bond without reading the prospectus!

    Remember that the GWO bond in question can be called at par in June. I will even go so far as to say it will be normal if the bond is called in June! But that is a far cry from saying it will definitely be called in June and that it is therefore correct to perform yield and duration calculations as if this will definitely be the case.

    Well, lending money to company in exchange of a percentage. They call this investment a fixed income, but it seems to change all the time at their will.

    I hope you have not lost all confidence in corporate debt as a result of this discussion – corporates can be, and usually are, a fine investment that is better suited for retail investors than government debt. But you have to know the risks and what to look for.

    I have no idea of your financial situation but you should be aware that I recommend only millionaires buy individual bonds; everybody else should stick to funds … after reviewing the myths and facts about bond ETFs. BMO has a series of good corporate bond ETFs, with the ticker symbols ZCS, ZCM and ZCL.

  12. chusan says:

    I have’nt lost all confidence in corporate debt. but I will definitively follow your recommendations and READ THE PROSPECTUS and invest with the worst scenario possible in mind. This seems a great way to keep being in reality, which are : everyone wants the biggest piece of the cake 🙂
    As for my personal finance, I just started to invest and wanted to diversify in bonds. The money I was looking to invest in that bond is money “waiting” to be invested in stocks. Just wanted it to make some % for 6 month to 1 year and this one bond looked attractive.

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