Update on HPF.PR.B

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:


Assets (thousands, CAD)  
Pledged Portfolio 24,643
Other Assets 27,442
Total Assets 52,085
Liabilities (thousands, CAD)  
Misc. 779
Senior Pfd 33,068
Junior Pfd 18,237 (!!!)
Equity Nil, Nada, Zip, Zilch
Total Liabilities and Equity 54,085

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:

Item Gain (Loss)
Investment Income 783
Management Fee (561)
Other Expenses (533)
Net Investment Gain (Loss) (311)
Distributions (3,344)
Reduction in Carrying Value of Junior Prefs 1,208
Realized & Unrealized Gain on Investments 36
Net Gain (Loss) (2,412)

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.


 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.

2 Responses to “Update on HPF.PR.B”

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

  2. […] Lawrence Asset Management has released its Dec. 31/06 Financials for this split-share. This is a small-ish split-share corporation in which I take an inordinate amount of interest, which I can only attempt to justify by its unusual structure and my feeling that DBRS has got the credit rating on it wrong. Really wrong, as I argued in my previous post on the topic. So .. let’s have a quick look at some simplified financials: […]

Leave a Reply

You must be logged in to post a comment.