Category: Issue Comments

Brookfield Soundvest Capital Management Ltd. has announced:

Brookfield Soundvest Split Trust (TSX:BSD.UN)(TSX:BSD.PR.A) (referred to as the “Trust”) is pleased to announce that holders (the “Preferred Securityholders”) of preferred securities (the “Preferred Securities”) of the Trust and holders (the “Unitholders”) of trust units of the Trust (the “Units”) approved the extraordinary resolution relating to the Preferred Securities and the extraordinary resolution relating to the Units at a special meeting (the “Meeting”) of the Preferred Securityholders and the Unitholders held on March 27, 2015.

The extraordinary resolution relating to the Preferred Securities will allow the Trust to implement the following:

• •extend the term of the Preferred Securities for additional five-year renewal terms following the scheduled maturity date of March 31, 2015;
• •determine the interest rate on the Preferred Securities for each subsequent extended five-year renewal term of the Preferred Securities, and set the interest rate for the first renewal term at 6.0% per annum; and
• •provide the Preferred Securityholders with the right to retract and receive repayment of their Preferred Securities on March 31, 2015, and at the end of each subsequent renewal term of the Preferred Securities, if they so choose (the “Preferred Special Repayment Right”).

The extraordinary resolution relating to the Units will allow the Trust to implement the following:

• •provide the Unitholders with the right to retract, in the aggregate, a number of Units not exceeding the number of Preferred Securities tendered under the Preferred Special Repayment Right on March 31, 2015 and at the end of each subsequent renewal term of the Preferred Securities, if they so choose (the “Unit Special Retraction Right”), and receive redemption proceeds equal to the net asset value per Unit as of such dates, and to the extent that more Units are tendered for retraction under the Unit Special Retraction Right than Preferred Securities tendered for repayment under the Preferred Special Repayment Right, Units so tendered will be redeemed on a pro rata basis; and
• •in order to maintain the same number of the Units and the Preferred Securities outstanding, in the event that more Preferred Securities are tendered for repayment under the Preferred Special Repayment Right than Units tendered for retraction under the Unit Special Retraction Right, provide the Trust with the ability to consolidate the Units on or about March 31, 2015 and at the end of each subsequent renewal term of the Preferred Securities.

The Trust also announces today that holders of 1,988,024 Units have given notice to the Trust that they wish to exercise the Unit Special Retraction Right up to the number of Units not exceeding the number of Preferred Securities tendered pursuant to the right of Preferred Securityholders to retract and receive repayment of their Preferred Securities pursuant to the Preferred Special Repayment Right. As announced by the Trust on March 16, 2015, holders of 1,779,807 Preferred Securities have given notice to the Trust that they wish to exercise the Preferred Special Retraction Right.

In order to maintain an equal number of Units and Preferred Securities outstanding, 1,779,807 Units will be redeemed on March 31, 2015, on a pro rata basis, from the holdings of those Unitholders who have exercised the Unit Special Retraction Right. This means that 89.53% of the Units surrendered for redemption by Unitholders pursuant to the Unit Special Redemption Right will be retracted. As announced on March 16, 2015, the Trust is reinstituting the annual redemption right available to Unitholders and accordingly Unitholders will be able to redeem Units under the annual redemption right in November, 2015.

The manager, investment advisor and portfolio manager for the Fund is Brookfield Soundvest Capital Management Ltd. (the “Manager”), an established investment advisor, that provides investment management services to trusts, foundations, corporations and high net worth individuals.

So, in line with the manager’s general attitude towards its unitholders, the percentage voting in favour of this ridiculous plan was not disclosed. I had recommended against the proposal; but 44% of preferred shareholders voted with their feet.

So what have the remaining preferred shareholders let themselves in for? I’ve taken a look at the 14H1 Semi-Annual Report and figures of interest are:

MER: Fees and Expenses of $217,000 over six months on total assets of $40.07-million is 1.83% of the whole unit value, annualized. Note that the report states:

Fees and expenses for the six months ending June 30, 2014 totalled $217 thousand, compared to $258 thousand for the same period in 2013, representing an annualized management expense ratio (“MER”) of 2.47% as compared to 2.64% for the six months ending June 30, 2013. The MER is based on the total expenses of the Fund for the stated period (excluding brokerage commissions) and is expressed as an annualized percentage of the daily average net asset value for the period. The MER before interest expense for the six months ending June 30, 2014 and 2013 was 2.47% and 2.31%, respectively. Fees and expenses for the six months ending June 30, 2014 decreased as compared to the same period in 2013 in response to the decrease in net asset value for the six months ending June 30, 2014 relating to the September 2013 redemption of 609,675 units. The net asset value increased by 2.9% while expenses decreased by 15.9% for the six months ending June 30, 2014.

Note that the percentage figure has defined net assets as being the Capital Unitholders’ interest only and does not include preferreds. We may expect the MER to increase in the future, given the 44% cut in assets.

Average Net Assets: We need this to calculate portfolio yield. Since fees and expenses of $217,000 represented a MER of 2.74% on average net assets, we calculate Average Net Assets to be $7.92-million, but this is only the Capital Units. Add in 32,150,310 for the preferreds, and the total is $40.07-million.

Underlying Portfolio Yield: Distributions received of 400,044 divided by average net assets of 40.07-million is 2.00% annualized.

Income Coverage: Net Investment Income 400,044 gross income less expenses of 216,887 is 183,157 divided by Preferred Share Distributions of 385,804 is 47%.

These figures, together with the prospectus, the website and a guess a Capital Units dividend payout policy, allow us to estimate Split Share Credit Quality using the Split Share Credit Quality Calculator:

Note that the distributions on the preferreds are as interest, not dividends! And also note that while, in the interests of fairness, I have used 7% as the expected annual return on the underlying portfolio, the manager’s track record makes me dubious about their ability to match their benchmark.

BSD.PR.A will continue to be tracked by HIMIPref™. It is assigned to the Scraps index on credit concerns.

Brompton Group has announced:

Life & Banc Split Corp. (the “Company”) is pleased to announce it has filed a preliminary short form prospectus with respect to a treasury offering of class A shares and preferred shares. The class A and preferred share offering prices will be set at levels that ensure that existing unitholders are not diluted.

Life & Banc Split Corp. invests in a portfolio of common shares of the six largest Canadian banks (“Banks”) and the four major publicly traded Canadian life insurance companies (“Lifecos”). Currently, the portfolio consists of common shares of the following Banks and Lifecos:

The Bank of Nova Scotia	Royal Bank of Canada
National Bank of Canada	Industrial Alliance Insurance and Financial Services Inc.
The Toronto-Dominion Bank	Great-West Lifeco Inc.
Canadian Imperial Bank of Commerce	Manulife Financial Corporation
Bank of Montreal	Sun Life Financial Inc.

The investment objectives for the class A shares are to provide holders with regular monthly cash distributions targeted to be $0.10 per class A share and to provide the opportunity for growth in net asset value per class A share.
The investment objectives for the preferred shares are to provide holders with fixed cumulative preferential quarterly cash distributions in the amount of $0.11875 per preferred share ($0.475 per annum), representing a yield on the original issue price of 4.75% per annum, and to return the original issue price to holders of preferred shares on the maturity date of the Company, November 29, 2018.

The syndicate of agents for the offering is being led by RBC Capital Markets, CIBC, Scotiabank, and TD Securities Inc., and includes BMO Capital Markets, National Bank Financial Inc., GMP Securities L.P., Raymond James Ltd., Canaccord Genuity Corp., Desjardins Securities Inc., Dundee Securities Ltd., Haywood Securities Inc., Industrial Alliance Securities Inc. and Mackie Research Capital Corporation.

LBS.PR.A last got bigger in November 2013. LBS.PR.A is tracked by HIMIPref™ but is relegated to the Scraps index on credit concerns.

Update, 2015-3-27: Priced:

Life & Banc Split Corp. (the “Company”) is pleased to announce that the Company’s treasury offering of class A and preferred shares has been priced at $9.55 per class A share and $10.05 per preferred share. The final class A and preferred share offering prices were determined so as to be non-dilutive to the net asset value per unit of the Company on March 26, 2015, as adjusted for dividends accrued prior to or upon settlement of the offering.

That’s a pretty hefty premium to NAV which was 18.74 on March 26. However, the closing price on March 25 was 9.68 for the Capital Units and 10.17 for the preferreds (both are down today, pricing was made public at 11:27am), so it will probably go pretty well.

TransAlta Corporation has announced:

entered into an investment agreement with TransAlta Renewables Inc. (“TransAlta Renewables”) (TSX: RNW) pursuant to which TransAlta Renewables has agreed to invest in TransAlta’s Australian power generation and gas pipeline portfolio (the “Portfolio”) and fund the remaining project costs for the South Hedland gas-fired project for a combined value of approximately $1.78 billion (the “Transaction”). The Portfolio consists of 575 MW of power generation from six operating assets and the South Hedland project currently under construction, as well as the recently commissioned 270 km gas pipeline. TransAlta Renewables’ investment will consist of the acquisition of securities which track the cash flows of the Portfolio.

“TransAlta created TransAlta Renewables in 2013 to unlock the underlying value in our contracted assets and to fund our growth” said Dawn Farrell, President and CEO. “This transaction highlights the value of our Australian investment strategy, finances the South Hedland plant, generates cash to strengthen our balance sheet and provides greater financial flexibility. The transaction significantly benefits both companies as TransAlta remains the majority shareholder and sponsor of TransAlta Renewables.”

DBRS comments:

Initially, the Transaction is expected to have a minimal impact on the credit quality of TAC as the Transaction is to be funded with all equity at OpCo. In the medium term, the ratings of TAC will likely be influenced by OpCo’s funding strategy related to the South Hedland gas-fired project under construction which requires a substantial investment of approximately $570 million (approximately $70 million spent in 2014). OpCo is contemplating funding alternatives associated with the South Hedland project. In the interim, the intercompany credit facility increase from TAC gives OpCo time to assess alternatives. DBRS will treat the funding alternative review as an event and assess OpCo’s actions and the resulting impact on TAC’s ratings when the funding plan is finalized.
…
DBRS acknowledges that the new OpCo structure creates another source of equity and could serve as a lower cost of capital for future growth opportunities; however, as TAC’s ownership in OpCo decreases and OpCo’s asset portfolio grows, the integration between TAC and OpCo could weaken. In this case, DBRS will increasingly weigh in on deconsolidated analysis for both TAC and CHD, which could ultimately result in a rating differential between TAC and CHD. TAC’s rating could be pressured if it significantly increases its exposure to construction and development risk as well as merchant risk of greenfield projects, and funds new projects with debt. This may not have a material impact on CHD if OpCo continues to fully hedge power production through PPAs with investment-grade counterparties and maintains reasonable financial metrics. Construction cost overrun risk associated with the South Hedland project is manageable given that the majority of the budgeted investment is either under fixed- price engineering, procurement and construction contracts or fixed fee to the off-taker, Horizon Power, a state government-owned corporation for existing assets.

Finally, since the lower-risk assets of TAC have been transferred to OpCo and this trend is expected to continue, holders of TAC’s direct external debt are facing structural subordination risk should OpCo raise a material amount of third-party debt in the future. OpCo has not raised any new external recourse debt since its inception in 2013 as TAC has provided virtually all necessary funding requirements to date. As such, TAC’s rating has not taken meaningful structural subordination effects into account, except outstanding debt related to CHD (which was grandfathered to OpCo at its inception in 2013). TAC’s ratings will likely be affected negatively should OpCo issue a material amount of third-party debt in the future as this will create structural subordination challenges for TAC’s bondholders.

TransAlta has four series of preferreds outstanding, all FixedResets: TA.PR.D, TA.PR.F, TA.PR.H and TA.PR.J.

Implied Volatility gives a murky picture. The Implied Volatility (which is of the Market Reset Spread, remember) is extremely low, but it could be simply that the highest spread issue, TA.PR.J, resetting at +380bp on 2019-9-30, is simply ridiculously expensive and is throwing everything off.

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Brookfield Soundvest Capital Management Ltd. has announced (although not yet on their website):

that holders of 1,779,807 Preferred Securities have given notice to the Trust that they wish to exercise the Preferred Special Retraction Right in the event that the extraordinary resolution to extend the term of the Preferred Securities for additional five year renewal terms following the scheduled maturity date of March 31, 2015 is approved at the upcoming meeting of holders of Preferred Securities and holders of trust units on March 27, 2015. Holders of trust units (the “Units”) have until 5:00pm (Toronto time) on March 20, 2015 to give notice to the Trust if they wish to exercise the Unit Special Retraction Right in order to provide the Trust with the ability to maintain an equal number of Units and Preferred Securities outstanding (if the extraordinary resolutions are approved). To vote at the meeting, securityholders must ensure that their voting instruction forms are received no later than 5:00pm (Toronto time) on March 25, 2015.

In addition, the Trust also announced today that the annual redemption right available to holders of Units (whether alone or together with an equal number of Preferred Securities) in November of each year will no longer be suspended in circumstances where the asset coverage on the Preferred Securities is less than 1.4 times. Although quarterly distributions on the Capital Units will remain suspended if the asset coverage continues to be below 1.4 times, recent changes in applicable securities laws have resulted in the Trust terminating the suspension of the annual redemption right in these circumstances (for the upcoming November redemption).

According to TMXMoney there are currently 4,030,225 shares outstanding, so 1,779,807 is a little over 44%.

The directors of the manager, Kevin Charlebois, George Myhal, Gail Cecil, Audrey Charlebois and Gabrielle Lenz, approved a term extension proposal for the fund that was pretty sleazy. It’s a pleasure to note that 44% of the preferred shareholders have managed to jump through their ridiculous hoops and tender to an offer that does not yet exist.

And perhaps there will be another whack of retraction attempts submitted to the company by Friday, in connection with the equally hypothetical Unit Special Retraction Right.

And with a bit of luck the term extension proposal will fail and the trust dissolved. We can hope. This manager should lose all its business.

BSD.PR.A is tracked by HIMIPref™ but is relegated to the Scraps index on credit concerns.

Financial 15 Split Inc. has released its Annual Report to November 30, 2014.

Figures of interest are:

MER: 1.48% of the whole unit value, excluding one time initial offering expenses.

Average Net Assets: We need this to calculate portfolio yield. MER of 1.48% Total Expenses of 3,284,849 implies $222-million net assets. Preferred Share distributions of 6,781,917 @ 0.525 / share implies 12.9-million shares out on average. Average Unit Value (beginning & end of year) = (17.76 + 17.14) / 2 = 17.45. Therefore 12.9-million @ 17.45 = 225-million average net assets. Good agreement between these two methods! Call it 224-million average.

Underlying Portfolio Yield: Dividends received (net of withholding) of 5,526,373 divided by average net assets of 224-million is 2.47%

Income Coverage: Net Investment Income of 2,242,511 divided by Preferred Share Distributions of 6,781,917 is 33%.

Royal Bank of Canada has announced:

it has closed its domestic public offering of Non-Cumulative, 5-Year Rate Reset Preferred Shares Series BF. Royal Bank of Canada issued 12 million Preferred Shares Series BF at a price of $25 per share to raise gross proceeds of $300 million.

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

The Preferred Shares Series BF were issued under a prospectus supplement dated March 9, 2015 to the bank’s short form base shelf prospectus dated December 20, 2013.

RY.PR.M is a FixedReset, 3.60%+262, NVCC-compliant, announced March 5. It will be tracked by HIMIPref™ and has been assigned to the FixedReset subindex.

The issue traded 223,152 shares today (consolidated exchanges) in a range of 23.75-67 (which would be rather breathtaking even if the issuer was not a major bank or Canada’s largest company) before closing at 24.25-49 (which is an equally breathtaking spread). Vital statistics are:

The Implied Volatility calculation is not particularly informative:

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According to the calculation, the two NVCC non-compliant issues, RY.PR.I and RY.PR.L, resetting at +193 and +267, respectively, are quite expensive: this is as it should be, due to the greater certainty that these issues have of being called at the next opportunity.

However, it seems clear that the NVCC-compliant issues, RY.PR.Z, RY.PR.H, RY.PR.J and RY.PR.M are reasonably well aligned with an implied volatility of greater than 40%, which shows continued market confidence that anything issued by a bank will always be worth somewhere close to par value.

Update, 2015-3-19: They had to have an inventory blow-out sale:

Yet RBC’s most recent $300-million deal struggled to find buyers, according to people familiar with the offering, prompting the bank to re-price it. Preferred shares are always sold for $25 each, but RBC’s deal had to be ‘cleaned up,’ or re-priced, at $24.35.

Investors apparently balked because of the coupon RBC tried to offer them. A week before the offering was announced, Toronto-Dominion Bank launched its own preferred share sale, and promised to pay a 3.6 per cent annual coupon. RBC told investors it would pay the same rate – the problem is that underlying bond yields moved between the dates when the deals were offered.

Preferred shares are priced off the five-year Government of Canada bond yield, and this yield climbed roughly 15 basis points higher between the RBC and TD deals. Instead of boosting its preferred share coupon by the same amount, RBC apparently hoped investors wouldn’t notice the shift.

Quadravest has announced:

Financial 15 Split Corp. II (the “Company”) announces a name change to North American Financial 15 Split Corp. Trading on the Toronto Stock Exchange under the new name is expected to commence on Wednesday, March 18, 2015. The Preferred Shares and Class A Shares will continue to trade under the symbols FFN.PR.A and FFN, respectively.

There is no indication of a change in investment policy, which would have to be voted on by shareholders as it’s specified in the prospectus. It may be that Quadravest intends to reposition the fund to take over the space currently occupied by US Financial 15 Split Corp., which was very badly whacked in the Credit Crunch and has a Net Asset Value Per Unit of only $7.24, far below their $10 obligation to FTU.PR.B. The US fund is scheduled for wind-up 2018-12-1.

Husky Energy has announced that it:

has completed its recently announced public offering of 8,000,000 Cumulative Redeemable Preferred Shares, Series 5 (the “Series 5 Shares”) with a syndicate of underwriters led by TD Securities Inc. and RBC Capital Markets.

The aggregate gross proceeds to Husky from the completed upsized offering are $200 million.

The net proceeds of the offering will be used for the partial repayment of short term debt incurred in connection with the Company’s U.S. refining operations.

The Series 5 Shares were offered by way of prospectus supplement to the short form base shelf prospectus of Husky Energy dated February 23, 2015.

Holders of the Series 5 Shares are entitled to receive a cumulative quarterly fixed dividend yielding 4.50 percent annually for the initial period ending March 31, 2020. Thereafter, the dividend rate will be reset every five years at a rate equal to the five-year Government of Canada bond yield plus 3.57 percent.

Holders of Series 5 Shares will have the right, at their option, to convert their shares into Cumulative Redeemable Preferred Shares, Series 6 (the “Series 6 Shares”), subject to certain conditions, on March 31, 2020 and on March 31 every five years thereafter. Holders of the Series 6 Shares will be entitled to receive cumulative quarterly floating dividends at a rate equal to the 90-day Government of Canada Treasury Bill rate plus 3.57 percent.

The Series 5 Shares are listed on the Toronto Stock Exchange under the symbol HSE.PR.E.

HSE.PR.E is a FixedReset, 4.50%+357, announced March 4. It will be tracked by HIMIPref™ and has been assigned to the FixedReset subindex.

The issue traded 743,664 shares today in a range of 24.85-99 before closing at 24.95-97. Vital statistics are:

I am as astonished as I was in the post announcing the issue at the lack of pricing differential between HSE.PR.C, which resets at +313bp on 2019-12-31, and this issue, which resets at +357bp on 2020-3-31, three months later. The former issue closed today at 24.55-60 to yield 4.14-13% to perpetuity, while HSE.PR.E closed at 24.95-97 to yield 4.42%-41 to perpetuity. That is one heck of a lot of yield difference.

DBRS has announced that it:

has today removed Emera Inc.’s (Emera or the Company) Issuer Rating and the ratings of its Medium-Term Notes and Cumulative Preferred Shares from Under Review with Developing Implications. DBRS has also confirmed Emera’s Issuer Rating and Medium-Term Notes rating at BBB (high) and the Cumulative Preferred Shares rating at Pfd-3 (high), all with Stable trends. The rating actions follow DBRS’s review of Emera’s funding strategy for its medium-term growth plans, the repayment of the USD 350 million non-revolving credit facility used to partially finance the acquisition of the merchant New England Gas Generation assets, and the closing of a $250 million non-revolving credit facility by Emera Brunswick Pipeline Company (Emera Brunswick) in February 2015. Pro forma these transactions, Emera’s non-consolidated debt-to-capital has now decreased to below 30%. The rating actions also reflect the Company’s reasonable business risk profile for the current rating category and DBRS’s expectation that Emera will maintain its deconsolidated debt-to-capital metric below the 30% threshold.

It’s been quite a while! The imposition of the Review was reported on PrefBlog in August 2013.

EMA has three preferred share issues outstanding: EMA.PR.A, EMA.PR.C and EMA.PR.F (FixedResetS) and EMA.PR.E (PerpetualDiscount). All are tracked by HIMIPref™; all are relegated to the Scraps index on credit concerns.