Category: Issue Comments

DBRS has announced that it:

has today confirmed Fairfax Financial Holdings Limited’s (Fairfax or the Company) ratings, including its Issuer Rating at BBB, its Senior Unsecured Debt rating at BBB and its Preferred Shares rating at Pfd-3. The trend has been changed to Positive from Stable. The rating of Fairfax (US) Inc.’s Senior Unsecured Notes, guaranteed by Fairfax, has also been confirmed at BBB. The trend has also changed to Positive, in line with Fairfax. At the same time, DBRS assigned a Financial Strength Rating (FSR) of A (low), with a Positive trend, to both Northbridge General Insurance Company (Northbridge) and Federated Insurance Company of Canada (Federated), the Canadian operating subsidiaries of Fairfax. All ratings actions are detailed in the table below. The rating actions taken today follow the publication of DBRS’s new methodology, “Global Methodology for Rating Life and P&C Insurance Companies and Insurance Organizations” (December 2015) (Global Insurance Methodology).

Under the Global Insurance Methodology, Fairfax’s Issuer Rating has been notched down two notches from the FSR of its operating companies. Among other factors, the notching reflects the structural subordination of the holding company’s creditors to the operating company’s creditors in an insolvency situation, and recognizes the reliance of the holding company on the upstreaming of earnings from its operating companies.

The change in the trend to Positive reflects the progress that Fairfax is making with its franchise and operations. The Company continues to develop its worldwide organization of insurance and reinsurance entities using a multi-brand strategy. The Canadian operations, through the Northbridge and Federated brands, hold a 5% market share of the Canadian commercial property and casualty (P&C) market, while through the Odyssey Re brand, Fairfax is ranked in the top 20 global P&C reinsurance writers. The Company has other brands from its successful acquisition activity that cater to particular risks, for example, workman’s compensation, pet insurance or marine. Fairfax has a strong focus on underwriting and pricing, and a willingness to avoid writing new business when it views market pricing as inadequate. The Company is noted for its expertise in active investment management, often taking controlling shares in portfolio investments, but also has a guiding principle to protect the Company from downside risks through both asset selection and hedging. Reflecting its strong liquidity position, the holding company maintains a liquid investment pool that helps to ensure that it can meet its capital servicing charges and has the mobility to move capital to recapitalize a subsidiary if required.

While Fairfax has good earnings ability, its earnings tend to be more volatile through its underwriting results and its investment portfolio because of market value changes in its bond and equity holdings. To manage its dispersed global operation, the Company maintains a lean head office based on its approach of providing a high degree of autonomy to its business units. However, Fairfax’s good risk profile reflects its centralized risk management function, which uses the risk management functions of each of the business operations to collect and monitor information regarding aggregate and emerging risks. The decentralized structure with specialized and diverse insurance risks is an operational challenge that is managed through an accounting system that provides performance information for numerous risk segments on both a local and aggregate basis.

The Positive trend considers the Company’s improving fundamentals, its recent acquisition of Brit PLC, a global Lloyd’s of London specialty insurer and reinsurer, and its ability to adapt to the current environment. Further positive ratings pressure could emerge if the Company reduces its leverage and improves its fixed charge coverage ratios, enhances its income stability and increases its market shares on a prudent basis. Negative ratings pressure could arise if the Company’s fundamentals weaken because of reduced liquidity levels and inadequate monitoring/oversight of risks.

The new methodology is discussed in the post DBRS Releases and Applies New Insurance Company Methodology.

Affected issues are: FFH.PR.C, FFH.PR.D, FFH.PR.E, FFH.PR.F, FFH.PR.G, FFH.PR.H, FFH.PR.I, FFH.PR.K and FFH.PR.M.

DBRS has announced that it:

has today downgraded Power Corporation of Canada’s (POW or the Company) Senior Debt rating to “A” from A (high) and its Preferred Shares ratings to Pfd-2 from Pfd-2 (high) due to the application of the new insurance methodology. All trends are Stable. All the rating actions are detailed in the table below. The rating actions taken today follow the publication of DBRS’s new methodology, “Global Methodology for Rating Life and P&C Insurance Companies and Insurance Organizations” (December 2015) (Global Insurance Methodology).

The downgrade of POW’s ratings results from the application of the Global Insurance Methodology. POW’s main subsidiary is Power Financial Corporation (PWF), which in turn owns Great-West Lifeco Inc. (GWO), the greatest contributor to earnings and overall strength of PWF. Hence, the Global Insurance Methodology used to rate GWO is by extension the primary methodology for rating POW.

The ratings for POW are one notch below PWF’s ratings under the holding company criteria due to structural subordination. Additionally, PWF’s rating has been set at the same level as GWO’s Issuer Rating. See the press releases for Power Financial Corporation, “DBRS Downgrades Power Financial Corporation’s Issuer Rating to A (high) from AA (low); Confirms Great West Life Assurance Co at AA”, “DBRS Confirms The Great West Life Assurance Company Ratings at AA; Downgrades Great-West Lifeco’s Debentures to A (high) from AA (low)”, for more information.

POW is an investment holding company controlled by the Desmarais family with PWF as its major holding. Other interests include Square Victoria Communications Group, Power Energy, the Sagard investment funds and other investments. POW benefits from a strong capital position, high liquidity and prudent decision-making with an emphasis on conservativeness and integrated risk management. Negative ratings pressure may arise if the subsidiaries suffer extended declines in profitability or more unlikely, if the Company deviates significantly from its value-based approach to leadership and away from its successful operational track record. POW’s ratings could also be negatively impacted by evidence of governance issues. Conversely, an upgrade of PWF could potentially benefit POW’s rating.

The new methodology is discussed in the post DBRS Releases and Applies New Insurance Company Methodology.

Affected issues are: POW.PR.A, POW.PR.B, POW.PR.C, POW.PR.D, POW.PR.F and POW.PR.G.

DBRS has announced that it:

has today downgraded Great-West Lifeco Inc.’s (GWO or the Company) Debentures to A (high) from AA (low), its Non-Cumulative First Preferred Shares to Pfd-2 (high) from Pfd-1 (low), and has also assigned an Issuer Rating of A (high) to the Company. At the same time, DBRS assigned a Financial Strength Rating (FSR) of AA to GWO’s major operating subsidiaries: The Great-West Life Assurance Company, The Canada Life Assurance Company and London Life Insurance Company. The Great-West Life Assurance Company’s Issuer Rating was confirmed at AA, and its Preferred Shares were confirmed at Pfd-1. The Canada Life Assurance Company’s Subordinated Debentures were confirmed at AA (low). Lastly, DBRS has withdrawn the Claims Paying Ability ratings of the three operating subsidiaries, replacing them with the newly assigned FSRs. All trends are Stable. All rating actions are detailed in the table below. The rating actions taken today follow the publication of DBRS’s new methodology, “Global Methodology for Rating Life and P&C Insurance Companies and Insurance Organizations” (December 2015) (Global Insurance Methodology).

The downgrade of the holding company ratings results from the application of DBRS’s newly implemented Global Insurance Methodology, which favours a wider notch differential between holding and operating company ratings than in prior methodologies. Specifically, the senior debt of the holding company, GWO, is positioned two notches below the FSR of its major operating subsidiary, The Great-West Life Assurance Company. Among other factors, the notching reflects the structural subordination of the holding company’s creditors to the operating company’s creditors in an insolvency situation, and recognizes the reliance of the Company on the upstreaming of earnings from its operating companies.

In confirming the ratings of the operating subsidiaries, DBRS evaluated GWO’s fundamentals using the Global Insurance Methodology. GWO is the largest insurance company in Canada, with a dominant market position for both individual insurance and group benefits and savings. The Company also has extensive operations in the United States and Europe. The Company has strong financial metrics, including a decreasing financial leverage (debt, hybrids and preferreds to capital) ratio of 26.5% at Q3 2015, a minimum continuing capital and surplus requirement (MCCSR) ratio of 234% and an above-peer return on equity that has been in the mid-teens for the past several years.

The Stable trend considers the Company’s resilient fundamentals and its ability to adapt to the current challenging operating environment. Negative ratings pressure could arise if the Company’s fundamentals weaken because of a reduction in earnings, with a deterioration in fixed-charge coverage ratios. Positive rating pressure could arise if there is a material reduction in financial leverage or improved profitability at Putnam.

The new methodology is discussed in the post DBRS Releases and Applies New Insurance Company Methodology.

Affected issues are: GWO.PR.F, GWO.PR.G, GWO.PR.H, GWO.PR.I, GWO.PR.L, GWO.PR.M, GWO.PR.N, GWO.PR.P, GWO.PR.Q, GWO.PR.R, and GWO.PR.S.

DBRS has announced that it:

DBRS Limited (DBRS) has today downgraded Power Financial Corporation’s (PWF or the Company) Issuer Rating and Senior Debentures to A (high) from AA (low) and its Preferred Shares ratings to Pfd-2 (high) from Pfd-1 (low) due to the application of the new insurance methodology. All trends are Stable. All the rating actions are detailed in the table below. The rating actions taken today follow the publication of DBRS’s new methodology, “Global Methodology for Rating Life and P&C Insurance Companies and Insurance Organizations” (December 2015) (Global Insurance Methodology).

The downgrade of PWF’s ratings results from the application of the Global Insurance Methodology and the assignment of an Issuer Rating of A (high) to Great-West Lifeco Inc. (GWO), PWF’s major operating subsidiary. Since PWF’s greatest contributor to earnings and overall strength is GWO, a large insurance organization contributing approximately 75% of YTD 2015 earnings, the primary methodology used to rate GWO is the Global Insurance Methodology, and by extension it is the primary methodology for rating PWF. As a parent holding company, GWO’s Issuer Rating of A (high) is positioned two notches below the Financial Strength Rating (FSR) of Great-West Life Assurance Company, its operating insurance company. Among other factors, the two notch differential reflects the structural subordination of the holding company’s creditors to the operating company’s creditors in an insolvency situation and recognizes the reliance of the Company on the upstreaming of earnings from its operating companies

The diversification and overall strength of PWF’s combined subsidiaries in addition to the assessment of financial strength of the PWF legal entity has resulted in DBRS concluding that the sum of the parts is sufficiently strong for the PWF rating to be at the same level as the GWO rating.

PWF is an investment holding company controlling two major Canadian financial services providers: GWO and IGM Financial Inc. Through a 50/50 partnership with Belgium’s Frère Group, PWF also shares a 55.5% equity interest in Pargesa Holding S.A., a Swiss holding company with indirect interests in a limited number of European-based industrial companies. PWF, in turn, is 65.6% owned by Power Corporation of Canada (POW). Similar to POW, PWF benefits from a strong capital position, high liquidity and prudent decision-making with an emphasis on conservativeness and integrated risk management. PWF’s credit ratings could come under pressure if the operating subsidiaries experience a deterioration in credit quality or an extended period of low profitability that results in declining financial metrics, or eroding market share. Negative ratings pressure may also arise from evidence of governance and control issues. Conversely, the Company may potentially benefit from any upgrades to the ratings of GWO.

The new methodology is discussed in the post DBRS Releases and Applies New Insurance Company Methodology.

Affected issues are: PWF.PR.A, PWF.PR.E, PWF.PR.F, PWF.PR.G, PWF.PR.H, PWF.PR.I, PWF.PR.K, PWF.PR.L, PWF.PR.O, PWF.PR.P, PWF.PR.R, PWF.PR.S and PWF.PR.T.

DBRS has announced that it:

has today downgraded Sun Life Financial Inc.’s (SLF or the Company) Senior Unsecured Debentures to “A” from A (high), its Subordinated Unsecured Debentures to A (low) from “A” and its Preferred Shares to Pfd-2 from Pfd-2 (high). DBRS has also assigned an Issuer Rating of “A” to the Company. At the same time, DBRS assigned a Financial Strength Rating (FSR) of AA (low) to Sun Life Assurance Company of Canada (Sun Life Assurance) and confirmed its Issuer Rating at AA (low) and its Subordinated Debt rating at A (high). DBRS withdrew the Claims Paying Ability rating of Sun Life Assurance, replacing it with the newly assigned FSR. All trends are Stable. All the rating actions are detailed in the table below. The rating actions taken today follow the publication of DBRS’s new methodology, “Global Methodology for Rating Life and P&C Insurance Companies and Insurance Organizations” (December 2015) (Global Insurance Methodology).

The downgrade of the holding company ratings results from the application of the Global Insurance Methodology under which there is typically a wider notch differential between holding company and operating company ratings than in prior methodologies.
…
The Stable trend considers the Company’s resilient fundamentals and its ability to adapt to the current challenging operating environment. Negative ratings pressure could arise if the Company’s fundamentals weaken, which may include a sustained decline in equity markets or significant deviations of experience from actuarial assumptions. A deterioration in regulatory capital ratios and loss of market share may also negatively affect ratings. Positive rating pressure could arise if the Company experiences solid earnings and growth resulting in increased market share, or displays consistently improved financial metrics and asset quality coupled with income stability.

The new methodology is discussed in the post DBRS Releases and Applies New Insurance Company Methodology.

Affected issues are: SLF.PR.A, SLF.PR.B, SLF.PR.C, SLF.PR.D, SLF.PR.E, SLF.PR.G, SLF.PR.H, SLF.PR.I and SLF.PR.J.

Royal Bank of Canada has announced:

it has closed its domestic public offering of Non-Cumulative, 5-Year Rate Reset Preferred Shares Series BK. Royal Bank of Canada issued 27 million Preferred Shares Series BK at a price of $25 per share to raise gross proceeds of $675 million.

The offering was underwritten by a syndicate led by RBC Capital Markets. The Preferred Shares Series BK will commence trading on the Toronto Stock Exchange today under the ticker symbol RY.PR.Q.

The bank has granted the underwriters’ an option, exercisable in whole or in part, to purchase up to an additional 2 million Preferred Shares Series BK at the same offering price. The underwriters have 30 days from the closing of the preferred share offering to exercise the option.

The Preferred Shares Series BK were issued under a prospectus supplement dated December 10, 2015 to the bank’s short form base shelf prospectus dated December 20, 2013.

RY.PR.Q is a FixedReset 5.50%+453, announced December 8. It will be tracked by HIMIPref™ and has been assigned to the FixedReset subindex.

The issue traded 1,558,368 shares today (consolidated exchanges) in a range of 24.95-30 before closing at 25.10-20, 4×15. Vital statistics are:

Implied Volatility analysis must be interpreted with caution, as the fact that RY.PR.Q has such a greatly different Issue Reset Spread from the other NVCC issues (RY.PR.Z, RY.PR.H, RY.PR.J and RY.PR.M) gives it a disproportionate influence over the calculated overall slope of the relationship curve. Be that as it may, the calculation results in Implied Volatility consistent with that of other series of issues:

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Standard and Poor’s has announced:

• •We are revising our outlook on AltaGas Ltd. to negative from stable.
• •We are also affirming our ratings, including our ‘BBB’ long-term corporate credit rating, on the company.
• •We base the outlook revision on weaker forecast financial metrics at the lower end of the “significant” financial risk profile.
• •The negative outlook reflects our view of the company’s weaker financial metrics, given the low commodity environment and high leverage due to ongoing capital programs and recent acquisitions.

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We are forecasting lower cash flows and higher leverage due to ongoing capital programs and recent acquisitions. Our forecast financial metrics have fallen as a result, with funds from operations (FFO)-to-debt in the low end of the “significant” category (12%-15%) over the next two years. However, we still expect the financial metrics to improve as new gas gathering and processing facilities are brought into service and the GWF Energy Holdings LLC (GWF) acquisition starts contributing cash flow for a full year in 2016.

We view AltaGas’ business risk profile as “strong.” We expect about one-third of cash flow from very low-risk regulated utility subsidiaries, a third from midstream gathering and processing, and the rest from highly contracted unregulated power.
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We view the financial risk profile as “significant” based on the medial volatility cash flow leverage table. Although we expect credit metrics to improve as contracted projects come online to contribute full-year cash flows and capital expenditures start to decline in 2017, the company has little cushion to absorb weaker-than-expected cash flows over the next two years.

The negative outlook reflects Standard & Poor’s view that AltaGas’ financial metrics are at the lower end of the “significant” category and has little cushion to absorb weaker-than-expected cash flows over the next two years. We are expecting metrics to continue to improve in 2016 and 2017 as the company realizes full-year cash flows from completed projects and the GWF acquisition.

AltaGas is the proud issuer of ALA.PR.A, ALA.PR.B, ALA.PR.E, ALA.PR.G and ALA.PR.I. DBRS continues to rate the issues Pfd-3 with a stable trend following a confirmation 2015-10-12.

TransCanada Corporation has announced:

that it does not intend to exercise its right to redeem its Cumulative Redeemable First Preferred Shares, Series 5 (Series 5 Shares) on January 30, 2016. As a result, subject to certain conditions, the holders of Series 5 Shares have the right to choose one of the following options with regard to their shares:
1.To retain any or all of their Series 5 Shares and continue to receive a fixed rate quarterly dividend; or
2.To convert, on a one-for-one basis, any or all of their Series 5 Shares into Cumulative Redeemable First Preferred Shares, Series 6 (Series 6 Shares) of TransCanada and receive a floating rate quarterly dividend.

The dividend rate applicable to the Series 5 Shares for the five-year period commencing on January 30, 2016 to, but excluding, January 30, 2021 will equal the Government of Canada five-year bond yield on December 31, 2015 plus 1.54 per cent. The dividend rate applicable to the Series 6 Shares for the three-month period commencing on January 30, 2016 to, but excluding, April 30, 2016 will equal the Government of Canada 90-day treasury bill rate on December 31, 2015 plus 1.54 per cent. Both rates will be calculated according to the terms of the prospectus supplement dated June 17, 2010, and announced by way of a news release on December 31, 2015.

Beneficial owners of Series 5 Shares who wish to exercise their right of conversion should communicate as soon as possible with their broker or other nominee and ensure that they follow their instructions in order to meet the deadline to exercise such right, which is 5 p.m. (EDT) on January 15, 2016. Any notices received after this deadline will not be valid. As such, it is recommended that this be done well in advance of the deadline in order to provide the broker or other intermediary with time to complete the necessary steps.

The foregoing conversions are subject to the conditions that: (i) if TransCanada determines that there would be less than one million Series 5 Shares outstanding after January 30, 2016, then all remaining Series 5 Shares will automatically be converted into Series 6 Shares on a one-for-one basis on January 30, 2016, and (ii) alternatively, if TransCanada determines that there would be less than one million Series 6 Shares outstanding after January 30, 2016, no Series 5 Shares will be converted into Series 6 Shares. In either case, TransCanada will issue a news release to that effect no later than January 22, 2016.

Holders of the Series 5 Shares and the Series 6 Shares will have the opportunity to convert their shares again on January 30, 2021, and every five years thereafter as long as the shares remain outstanding.

TRP.PR.C is a FixedReset, 4.40%+154, that commenced trading 2010-6-29 after being announced 2010-6-17.

I will report the reset rate when it is announced and recommend whether or not to convert closer to the company’s deadline.

The proposed Plan of Arrangement involving DC.PR.C has been covered on PrefBlog in the posts DC.PR.C: Coercive Exchange Offer, DC.PR.C: Coercive Offer Attracts Wider Notice and DC.PR.C: Consider Exercising Dissent Rights To Defeat Management’s Coercive Plan.

This morning, Dundee blinked:

Dundee Corporation (TSX:DC.A)(TSX:DC.PR.C) is today announcing that it continues to seek a collaborative dialogue with its Series 4 Preferred Shareholders in respect of its proposed plan of arrangement. Since the mailing of its Circular, the Corporation has heard from a broader group of beneficial shareholders, including large institutional holders, who have expressed concerns.

The Corporation continues to engage in dialogue with known beneficial shareholders, in order to achieve a favourable result. However there can be no assurance that this dialogue will result in the support necessary for the proposed transaction to become effective. Accordingly, it is possible that, among other things, the proposed transaction terms may be amended or withdrawn.

But the shares plunged anyway, down a stunning 14.50% (close / close) on heavy volume of 68,201 shares:

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They’ve been going in one direction ever since the announcement:

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I have no idea how sincere they are or with whom they are negotiating, but the “known beneficial shareholders” will, I’m sure, appreciate a bit of support to strengthen their hand. Don’t delay – vote “No” now and seriously consider exercising your right of dissent. The objective is to obtain a “Special Retraction Right”, as is standard when the maturities of Split Shares are extended, that will allow shareholders to opt to receive the original deal. That’s the main thing. But those who are interested in extending term should demand that the company renew and maintain a public credit rating from two major credit rating agencies – it was almost three years ago that the company cancelled this service which, while being of controversial intrinsic value, serves admirably to focus management’s and directors’ attention during bad times – which is particularly important in the fragmented, retail preferred share market.

Westcoast Energy Inc. has announced:

that it has closed its previously announced public offering (the “Offering”) of Cumulative 5-Year Minimum Rate Reset Redeemable First Preferred Shares, Series 10 (the “Series 10 First Preferred Shares”). The Offering was conducted through a syndicate of underwriters co-led by BMO Capital Markets and Scotiabank (collectively, the “Underwriters”).

In connection with closing, the Underwriters exercised the previously granted option (the “Over-Allotment Option”) to purchase an additional 15% of the Series 10 First Preferred Shares at the offering price. As a result of the exercise in full of the Over-Allotment Option, the Corporation issued 4,600,000 Series 10 First Preferred Shares at a price of $25.00 per share for total gross proceeds of $115,000,000. The Series 10 First Preferred Shares will begin trading on the TSX today under the symbol W.PR.K. The proceeds are expected to be used to refinance upcoming debt maturities and for general corporate purposes.

The Series 10 First Preferred Shares were offered only in the provinces of Canada by means of a short form prospectus of the Corporation dated December 7, 2015.

This news release does not constitute an offer to sell securities, nor is it a solicitation of an offer to buy securities, in any jurisdiction. All sales will be made through registered securities dealers in jurisdictions where the offering has been qualified for distribution.

Westcoast Energy Inc. is an indirect subsidiary of Spectra Energy Corp.

W.PR.K is a FixedReset, 5.25%+426M525, announced November 24. At the close on November 24, the TXPL Total Return Index Value was 802.86; at the close December 15, this index stood at 746.11, a decline of about 7.1%. By that standard, the decline of less than 4% in W.PR.K from issue price looks pretty good! Purists will object that TXPL contains a lot of junk and W.PR.K is investment grade (at least, according to DBRS); purists will also object that W.PR.K has a floor on reset and is therefore even less comparable with the index. Purists can suck eggs.

The issue will be tracked by HIMIPref™ and has been assigned to the FixedReset subindex.

The issue traded 241,305 shares in a range of 23.75-37 before closing at 24.10-15, 19×9. Vital statistics are: