PrefBlog

DBRS announced on November 8 that they will be reviewing the ratings of Income-trust based split shares:

This recent announcement has placed downward pressure on the net-asset value of portfolios containing income trusts and consequently the downside protection available to the Split Shares. Income trusts that plan to reduce the level of distributions to unitholders to reflect the additional tax burden may influence the ability for static and managed portfolios to generate sufficient yields to meet distributions to the Split Shares. In addition to the risk that this announcement may represent for distributions from any single trusts, the risk of a number of income trusts reverting back to corporate status may limit the number of eligible names for certain portfolios with a defined investment criteria and thereby increasing concentration risk.

Issues affected by this announcement are:

Two Income-trust-based split share corporations tracked by HIMIPref™ and included in the “InterestBearing” index are BSD.PR.A and MST.PR.A. Presumably their omission from the review list is a simple oversight.

BSD.PR.A is interesting: according to the manager the NAV of BSD.UN was $8.061 on November 10 (compared with $11.479 on October 31! Ouch!). It is currently quoted at $7.66-99 on the TSX – some have traded as low as $7.62 today (the 52-week low is $6.71! We can assume that’s recent!). According to their prospectus (available on the manager’s site! Good for them!):

Concurrent Annual Redemption. A Unitholder who surrenders Capital Units together with Preferred Securities for redemption in the month of November of each year at least 15 Business Days prior to a Redemption Date will receive payment for each Combined Security equal to the Combined Value determined as of the Redemption Date, less redemption costs.

Annual Redemption of Capital Units. A Unitholder who surrenders Capital Units alone for redemption at least 15 Business Days prior to a Redemption Date will receive an amount equal to Combined Value determined as of the Redemption Date, less redemption costs and the costs incurred by the Trust in purchasing a Preferred Security either in the market or pursuant to the Call Right.

 The interesting part comes when we look at the BSD.PR.A redemption schedule:

There were spikes in BSD.PR.A volume on November 1 (wonder why!) and yesterday, November 16. BSD.PR.A is currently quoted at $9.60-80 3×5 with no shares traded today. It will be most (most, most!) interesting to see if there’s a price spike towards month-end, as the manager seeks to match capital units submitted bare for redemption, scrambling to purchase the prefs in order to avoid the punitive redemption price.

Yes, yes, I know that we are now 15 days prior to the Redemption Date and all capital unit redemption requests have been made. But the November 16 volume spike was only 50,000 shares, out of 6,842,341 outstanding. Somehow, I suspect that there were more redemption requests than that … but we will see!

This entry was posted on Friday, November 17th, 2006 at 1:34 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.