POW & PWF To Combine, Redeem $350-million Preferreds; S&P Upgrades POW to P-1(low)

Standard & Poor’s has announced:

  • Power Corp. of Canada (PCC) announced its intent to reorganize simplifying its organizational hierarchy by acquiring the remaining public shares of Power Financial Corp. (PFC) that it does not currently own.
  • We are raising our ratings on PCC by one notch, including our long-term issuer credit rating to ‘A+’ from ‘A’, and affirming our ratings on PFC.
  • The stable outlook reflects our expectation that PCC will maintain its robust earnings and very strong financial risk profile.

S&P Global Ratings said today it raised its long-term issuer credit rating on Power Corp. of Canada (PCC) to ‘A+’ from ‘A’, its preferred stock rating to ‘A-‘ from BBB+’, and its preferred stock Canada national scale rating to ‘P-1 (Low)’ from P-2 (High). At the same time, we affirmed our ‘A+’ ratings on Power Financial Corp. (PFC). The outlook is stable.

The upgrade of PCC and alignment with the ratings on PFC reflects our favorable view that the proposal to acquire the remaining 35.9% of common shares of PFC that it does not currently own will remove structural subordination and enable greater capital fungibility between the two companies. Our issuer credit ratings on PCC and PFC are aligned with that on Great-West Lifeco (the ultimate holding company of the insurance operation). We believe PCC has less regulatory restriction and a more reliable earnings stream from the additional unregulated cash flows through dividends from IGM and Pargesa that are available to support its obligations.

The stable outlook reflects our expectation that PCC will continue to generate robust earnings, as well as maintain solid capitalization without meaningfully increasing financial leverage. Great-West Lifeco Inc.’s dominant market position (PFC owns a total of 70.8% of Great-West Lifeco, including cross-ownership through IGM Financial Inc.) in multiple life insurance product lines, along with its vast geographic presence, should continue to translate into a stable source of earnings and dividends for PCC. IGM, which provides an additional source of earnings for the group, will continue to augment the group’s funds.

However, higher financial leverage (compared with ‘AA’ rated life insurance groups, which we consider peers of Great-West Lifeco) somewhat offsets these strengths. In our base-case scenario, we expect total financial leverage will remain between 35%-40%.

We could lower the ratings over the next 18-24 months if we believe the company’s financial risk profile will deteriorate, either as a result of the funding structure posing a risk because of significantly elevated leverage or weak fixed-charge coverage on a sustained basis, or materially declining capital adequacy.

At this time, we believe an upgrade is unlikely given PCC’s acquisitive nature, which precludes us from having certainty in forecasting capital at the extremely strong level.

Power Corporation and Power Financial have announced:

  • Power Financial Minority Shareholders to receive 1.05 Power Corporation Subordinate Voting Shares and nominal cash consideration in exchange for each Power Financial Common Share.
  • Power Financial Minority Shareholders to receive Power Corporation shares with Net Asset Value that is $4.50 higher than the Net Asset Value of each Power Financial Common Share, an increase of 11% (calculated without accounting for any exercise of Pre-Emptive Rights (as defined herein)).
  • Power Corporation to undertake further initiatives to benefit shareholders in conjunction with the Reorganization, including implementation of a significant near-term operating cost reduction plan, reduced financing costs and a dividend increase.
  • Paul Desmarais, Jr. and André Desmarais to retire as Co-Chief Executive Officers of Power Corporation after 23 years in the roles and to continue to serve as Chairman and Deputy Chairman, respectively, of Power Corporation’s Board of Directors. R. Jeffrey Orr, President and Chief Executive Officer of Power Financial, to become President and Chief Executive Officer of Power Corporation.

Upon completion of the Reorganization, PCC will own all of the PFC Common Shares, while PFC preferred shares and debt securities will remain outstanding.

Financing Expense Reduction – PCC and PFC intend to redeem an aggregate of $350 million of First Preferred Shares with available cash, resulting in reduced annual financing costs of approximately $15 million per year.

As a result of such securities remaining outstanding, PFC currently anticipates that it will remain a reporting issuer in each of the provinces and territories of Canada.

DBRS comments:

While the announced preferred share redemption will decrease the cash held at POW and PWF, the companies will continue to benefit from significant cash balances and other liquid assets. The decline in cash is offset by lower annual preferred dividend payments and operating costs resulting in a pro forma fixed charge coverage for POW of 16.0 times (x) and PWF of 16.3x, an improvement from 14.2x and 15.0x as at Q3 2019, respectively. The redemption of preferred shares and issuance of new Subordinated Voting Shares will also result in improved financial leverage for both companies, with a decrease to 7.1% from 11.1% for POW and 14.2% from 15.1% for PWF. This improves capitalization assessments for both companies. Other than the redemption of preferred shares, large cash outlays are not expected in the foreseeable future as the earliest debt maturity is in 2033 for PWF and 2039 for POW. These actions are viewed as management’s effective cash utilization during a calmer period for the organization and reflects the strong credit profile of the companies.

Affected issues are (deep breath): POW.PR.A, POW.PR.B, POW.PR.C, POW.PR.D, POW.PR.F, POW.PR.G


As noted by Assiduous Reader skeptical in the comments to an unrelated post, it seems likely that PWF.PR.I (Straight Perpetual, 6%, issued 2003-3-11, 8-million shares) and PWF.PR.G (Straight Perpetual, 5.9%, issued 2002-7-16, 6-million shares) will be redeemed. Both were down significantly on the day on much higher than normal volume.

11 Responses to “POW & PWF To Combine, Redeem $350-million Preferreds; S&P Upgrades POW to P-1(low)”

  1. Tim says:

    PWF.PR.I closed yesterday at $25.69, down $0.47 for the day.

    PWF.PR.G closed yesterday at $25.60, down $0.34 for the day.

    Is the expected risk here that PCC and PFC will (in the near future) force a redemption of these shares for a fixed $25.00 per unit, thus handing owners a unit price loss compared to current market value plus the loss of all their expected future dividends?

  2. jiHymas says:

    Is the expected risk here that PCC and PFC will (in the near future) force a redemption of these shares for a fixed $25.00 per unit

    Yes. They have announced that they’ll be redeeming $350-million worth of preferreds, these are the most logical choices due to their high dividend rates and their issue sizes add up to $350-million.

  3. mbarbon says:

    Sold some of PWF.PR.P on the strength..
    I just don’t see them redeeming these (based on the comments already about $350m), but it would be nice !!!

  4. jiHymas says:

    Sold some of PWF.PR.P on the strength..

    I must admit, I don’t understand Friday’s gain for PWF.PR.P at all!

  5. brian says:

    I was happy to see my PWF.pr.P and PWF.pr.Q going up but I can’t really explain it either. My best guess is that they were both significantly undervalued prior to this recent attention – when more people took a closer look at them they rose to a more reasonable valuation.

  6. RAV4guy says:

    Is it proper for PWF to not announce the exact issues they will redeem? They must have plan, why not tell the investors? We care about this too.

  7. RAV4guy says:

    I called Power Financial, Corporate Information. Two business days later I received a call back. The gentleman explained that no decision has been made yet as to which shares will be redeemed as part of the $350M redemption announced. At present any preferred shares of PWF or POW in any amount could be chosen. This decision will happen only after approval of their plan and may take some time to enact.

  8. prefQC says:

    Hi James,
    Is it confirmed that PWF.PR.I and PWF.PR.G will be redeemed? I have looked on the Power Financial Investors Relations site but can find no information.
    I notice that in this month’s PrefLetter you assign a (presumably provisional) EndDate of 15-Mar-2020 for these issues. Is that based on concrete information or is it just your YTW scenario based on a minimum 30-day redemption notice?

  9. baffled says:

    hello ,prefQC says: , well , they are both trading a bit above $25 . i would expect they would be trading at $25 if it was confirmed

  10. prefQC says:

    @baffled. The actual redemption date is important in order to calculate what fraction of the final (quarterly) dividend will be given out upon redemption. Of course, you don’t get rich trading for pennies, but if your transaction expenses are very low (at National Bank I pay a flat rate of 0.95 per transaction), you may be able to safely park cash for several weeks for more than money market rates (with no transaction fees upon redemption).

  11. baffled says:

    prefQC says: ., in the case of the pr.i , the quarterly payment would be .375 then take off the small premium you pay to buy , it seems like a very hard way to make a very little . but on another note , i am at t.d. waterhouse , so i am going to look into national bank i would be saving $9.04 per trade . thanks for that .

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