On an unrelated thread, Assiduous Reader DaveJ asks:
I have a question about buying back preferred shares. A company has sold non-cumulative perpetual preferred shares at say 7% yield and $20 par value with an option on the company’s part to redeem them at say $25 after 5 years. The shares are now trading as 1/2 par ($10 and 14% yield). Can the company just announce a buy-back and buy these back on the open market as they would for common shares? Or do they have to redeem that at the agreed upon price of $25? Thanks.
I have never surveyed the universe for this little nugget of information, so I can’t respond in general. However, I had a look at the prospectus for CM.PR.J and found the following language:
Subject to the provisions of the Bank Act, and, if required, the prior consent of the Superintendent, and to the provisions described under ‘‘Bank Act Restrictions and Approvals’’ and ‘‘Restrictions on Dividends and Retirement of Series 32 Shares’’ below, CIBC may at any time purchase for cancellation Series 32 Shares at the lowest price or prices at which in the opinion of CIBC such shares are obtainable.
The latter restrictions are that they can’t do it:
unless all dividends up to and including the dividend payment date for the last completed period for which dividends shall be payable shall have been declared and paid or set apart for payment in respect of each series of cumulative Class A Preferred Shares then issued and outstanding and on all other cumulative shares ranking prior to or pari passu with the Class A Preferred Shares and there shall have been paid or set apart for payment all declared dividends in respect of each series of non-cumulative Class A Preferred Shares (including the Series 32 Shares) then issued and outstanding and on all other shares ranking prior to or pari passu with the Class A Preferred Shares. See also ‘‘Bank Act Restrictions and Approvals’’.
So they can’t play funny little games like cancelling the dividends and buying the share back after they’ve cratered.
The Bank Act restriction is:
CIBC is prohibited under the Bank Act from paying or declaring a dividend if there are reasonable grounds for believing that CIBC is, or the payment would cause CIBC to be, in contravention of any regulation made under the Bank Act respecting the maintenance by banks of adequate capital and adequate and appropriate forms of liquidity, or any direction to CIBC made by the Superintendent pursuant to subsection 485(3) of the Bank Act regarding its capital or its liquidity. As of the date hereof, this limitation would not restrict a payment of dividends on the Series 32 Shares, and no such direction to CIBC has been made. In addition to the foregoing restriction, subsection 79(5) of the Bank Act prohibits CIBC from paying a dividend in any financial year without the approval of the Superintendent if on the day the dividend is declared, the total of all dividends declared by CIBC in that year would exceed the aggregate of: (i) CIBC’s net income up to that day in that year; and (ii) its retained net income for the preceding two financial years.
Update, 2008-10-11: See The Bank Act, Section 79(5):
[Repealed, 2007, c. 6, s. 11]
1991, c. 46, s. 79; 2001, c. 9, s. 61; 2007, c. 6, s. 11.
So, as far as that randomly selected issue is concerned, the answer is “yes”, as long as they get permission from OSFI.
Great-West Lifeco. had a formal issuer bid for its retractibles (GWO.PR.E & GWO.PR.X) which did see some repurchases made.
For other issues … well, until I add that information to my database (and I have no such plans), you’ll have to examine the prospectuses for yourself!
An interesting note from the bank act: The banks can’t pay dividends if the sum of retained net income for the past 2-3 financial years isn’t positive. Given that payout ratios are roughly 50%, that means a writeoff of 1-1.5 years of net income might be enough to prevent banks from paying dividends — AND pref dividends are not cumulative.
Do I understand this correctly? It seems to me that it is quite possible that this credit crunch will cause at least some bank writeoffs to approximate a year or two of net income –causing common and pref dividends to cease until profits have been re-established FOR SEVERAL YEARS.
An additional point I don’t understand is: if governments are going to invest in bank equity, will common dividends have to be suspended? pref dividends? sub debt interest payments? are the situations in Canada and the US the same or different?
It seems to me that the credit crisis will land spectacularly in Canada if/as/when bank common dividends have to be or are, cut. Based on everything else so far, CIBC would be first.
Upon checking, I find that the relevant section of the Bank Act has been repealed. I have updated the post.
[…] issue of issuer repurchases was last discussed on PrefBlog last fall, in the post Repurchase of Preferred Shares by Issuer, in which I mentioned one of the rare non-split-share issuer bids, Great-West bidding for GWO.PR.E […]
[…] Update, which in turn has been mentioned every time somebody asks me about buy-backs (for instance, Repurchase of Preferred Shares by Issuer and Potential for Buy-backs and Unscheduled […]