Category: Issue Comments

Scotia Managed Companies has announced:

R Split III Corp. (the “Company”) announced today that it has called 111,228 Preferred Shares for cash redemption on May 29, 2015 (in accordance with the Company’s Articles) representing approximately 18.652% of the outstanding Preferred Shares as a result of the annual retraction of 222,456 Capital Shares by the holders thereof. The Preferred Shares shall be redeemed on a pro rata basis, so that each holder of Preferred Shares of record on May 27, 2015 will have approximately 18.652% of their Preferred Shares redeemed. The redemption price for the Preferred Shares will be $13.60 per share.

In addition, holders of a further 23,400 Capital Shares and 11,700 Preferred Shares have deposited such shares concurrently for retraction on May 29, 2015. As a result, a total of 245,856 Capital Shares and 111,228 Preferred Shares, or approximately 20.217% of both classes of shares currently outstanding, will be redeemed.

Holders of Preferred Shares that are on record for dividends but have been called for redemption will be entitled to receive dividends thereon which have been declared but remain unpaid up to but not including May 29, 2015.

Payment of the amount due to holders of Preferred Shares will be made by the Company on May 29, 2015. From and after May 29, 2015 the holders of Preferred Shares that have been called for redemption will not be entitled to dividends or to exercise any rights in respect of such shares except to receive the amount due on redemption.

R Split III Corp. is a mutual fund corporation created to hold a portfolio of common shares of Royal Bank of Canada. Capital Shares and Preferred Shares of R Split III Corp. are listed for trading on The Toronto Stock Exchange under the symbols RBS and RBS.PR.B respectively.

RBS.PR.B was last mentioned on PrefBlog when there was a partial redemption in May 2014. It is not tracked by HIMIPref™ since, with only about 600,000 shares outstanding with a par value of $13.60, it’s too small – and now it’s getting smaller!

It will be recalled that FTS.PR.H will reset to 2.50% effective June 1 – a fact that was established with some difficulty!

Holders of FTS.PR.H have the option to convert to FloatingResets, FTS.PR.I, which will pay 3-month bills plus 145bp on its par value of $25.00. The deadline for notifying the company of the intent to convert is May 19; but note first that this is a company deadline and that brokers will generally set their deadlines a day or two in advance, so there’s not much time to lose if you’re planning to convert! Also, Monday 18 is a holiday in most of Canada and your brokerage will probably be closed. However, if you miss the brokerage deadline they’ll probably do it on a ‘best efforts’ basis if you grovel in a sufficiently entertaining fashion.

The most logical way to analyze the question of whether or not to convert is through the theory of Preferred Pairs, for which a calculator is available. Briefly, a Strong Pair is defined as a pair of securities that can be interconverted in the future (e.g., FTS.PR.H and the FloatingReset, FTS.PR.I, that will exist if enough holders convert). Since they will be interconvertible on this future date, it may be assumed that they will be priced identically on this date (if they aren’t then holders will simply convert en masse to the higher-priced issue). And since they will be priced identically on a given date in the future, any current difference in price must be offset by expectations of an equal and opposite value of dividends to be received in the interim. And since the dividend rate on one element of the pair is both fixed and known, the implied average rate of the other, floating rate, instrument can be determined. Finally, we say, we may compare these average rates and take a view regarding the actual future course of that rate relative to the implied rate, which will provide us with guidance on which element of the pair is likely to outperform the other until the next interconversion date, at which time the process will be repeated.

We can show the break-even rates for each FixedReset / FloatingReset Strong Pair graphically by plotting the implied average 3-month bill rate against the next Exchange Date (which is the date to which the average will be calculated).

Click for Big

The market appears to have a distaste at the moment for floating rate product; the implied rates until the next interconversion are all (except one!) lower than the current 3-month bill rate and one is significantly negative! Whatever might be the result of the next few Bank of Canada overnight rate decisions, I suggest that it is unlikely that the average rate over the next five years will be lower than current – but if you disagree, of course, you may interpret the data any way you like.

Since credit quality of each element of the pair is equal to the other element, it should not make any difference whether the pair examined is investment-grade or junk, although we might expect greater variation of implied rates between junk issues on grounds of lower liquidity. The average in the table above for the junk issues (except FFH.PR.E / FFH.PR.F at -0.85% and BRF.PR.A / BRF.PR.B at -1.05%) is about +0.30%; for the investment grade issues (except TRP.PR.A / TRP.PR.F) it is also about 0.30%. This is pretty good agreement.

If we plug in the current bid price of the FTS.PR.H FixedReset, we may construct the following table showing consistent prices for the soon-to-be-issued FTS.PR.I FloatingReset given a variety of Implied Breakeven yields consistent with issues currently trading:

Based on current market conditions, I suggest that the FloatingReset that will result from conversion of FTS.PR.H will be cheap and trading a little below the price of FTS.PR.H. Therefore, I recommend that holders of FTS.PR.H continue to hold this issue and not to convert. I will note that, given the apparent cheapness of the FloatingResets, it may be a good trade to swap the FixedReset for the FloatingReset in the market once both elements of each pair are trading and you can – presumably, according to this analysis – do it with a reasonably good take-out in price, rather than doing it through the company on a 1:1 basis. But that, of course, will depend on the prices at that time. There are no guarantees – my recommendation is based on the assumption that current market conditions with respect to the pairs will continue until the FTS.PR.I commences trading and that the relative pricing of FTS.PR.H / FTS.PR.I will reflect these conditions.

Note as well that conversion rights are dependent upon at least one million shares of each series being outstanding after giving effect to holders’ instructions; e.g., if only 100,000 shares of FTS.PR.H are tendered for conversion, then no conversions will be allowed; but if only 100,000 shares of FTS.PR.H will remain after the rest are all tendered, then conversion will be mandatory. However, this is relatively rare: all 26 Strong Pairs currently extant have some version of this condition and all but two have both series outstanding.

Quadravest has announced:

Dividend 15 Split Corp. (the “Company”) is pleased to announce it has filed a preliminary short form prospectus in each of the provinces of Canada with respect to an offering of Preferred Shares and Class A Shares of the Company. The offering will be co-led by National Bank Financial Inc., CIBC, RBC Capital Markets and will also include Scotia Capital Inc., TD Securities Inc., BMO Capital Markets, GMP Securities L.P., Canaccord Genuity Corp., Dundee Securities, Raymond James, Desjardins Securities Inc., Mackie Research Capital Corporation and Manulife Securities Incorporated.

The Preferred Shares will be offered at a price of $10.00 per Preferred Share to yield 5.25% on the issue price and the Class A Shares will be offered at a price of $11.90 per Class A Share to yield 10.08% on the issue price. The closing price on the TSX of each of the Preferred Shares and the Class A Shares on May 12, 2015 was $10.35 and $12.23, respectively.

Since inception of the Company, the aggregate dividends paid on the Preferred Shares have been $5.84 per share and the aggregate dividends paid on the Class A Shares have been $16.80 per share (including five special distributions of $0.25 per share, one special distribution of $0.50 per share and one special stock dividend of $1.75 per share), for a combined total of $22.64 per unit. All distributions to date have been made in tax advantage eligible Canadian dividends or capital gains dividends.

The net proceeds of the offering will be used by the Company to invest in an actively managed portfolio of dividend yielding common shares which includes each of the 15 Canadian companies listed below:

The Bank of Nova Scotia	Manulife Financial Corp.	Thomson-Reuters Corporation
BCE Inc.	National Bank of Canada	The Toronto-Dominion Bank
Canadian Imperial Bank of Commerce	Royal Bank of Canada	TransAlta Corporation
CI Financial Corp.	Sun Life Financial Inc.	TransCanada Corporation

The Company’s investment objectives are:
Preferred Shares:
i. to provide holders of the Preferred Shares with fixed, cumulative preferential monthly cash dividends in the amount of $0.04375 per Preferred Share to yield 5.25% per annum on the original issue price; and
ii. on or about December 1, 2019, to pay the holders of the Preferred Shares the original issue price of those shares.

Class A Shares:
i. to provide holders of the Class A Shares with regular monthly cash dividends currently targeted to be $0.10 per Class A; and
ii. on or about December 1, 2019, to pay the holders of Class A Shares at least the original issue price of those shares.

The sales period of this overnight offering will end at 9:00 a.m. (EST) on May 14, 2015.

The NAVPU of the Dividend 15 Corp. Whole Units is 20.06 as of May 12 … and these whole units are being sold for 21.90. Nice work if you can get it!

Update, 2015-5-15: This was extremely successful:

Dividend 15 Split Corp. (the “Company”) is pleased to announce it has completed the overnight marketing of up to 4,300,000 Preferred Shares and up to 4,300,000 Class A Shares of the Company. Total proceeds of the offering are expected to be approximately $94.2 million.

Manulife Financial Corporation has announced:

its intention to redeem all of its outstanding 14,000,000 Non-cumulative Class A Shares, Series 1 (“Series 1 Preferred Shares”) for cash on June 19, 2015. The Series 1 Preferred Shares (TSX: MFC.PR.A) are redeemable at Manulife’s option on June 19, 2015, at a redemption price per Series 1 Preferred Share equal to C$25.00 for an aggregate total of C$350 million. Formal notice will be delivered to holders of Series 1 Preferred Shares in accordance with the terms outlined in the share provisions for the Series 1 Preferred Shares.

Separately from the redemption price, the final quarterly dividend of C$0.25625 per Series 1 Preferred Share will be paid in the usual manner on June 19, 2015 to shareholders of record on May 20, 2015. After the Series 1 Preferred Shares are redeemed, holders of Series 1 Preferred Shares will cease to be entitled to distributions of dividends and will not be entitled to exercise any rights as holders other than to receive the redemption price.

This is one of the last Operating Retractibles still around – most were redeemed when accounting changes turned them into debt and this was reinforced by being disallowed as Tier 1 Capital by OSFI, although extant issues were grandfathered.

Many thanks to Assiduous Readers WT and GA for separately bringing this to my attention.

Dividend 15 Split Corp. II has released its Annual Report to November 30, 2014.

Using the S&P TSX 60 index rather than “Dividend Aristocrats” seems a little odd to me – but we’ll let them choose their benchmark!

Figures of interest are:

MER: It is reported as 2.72% of the whole unit value (“excluding any one time secondary offering expenses. Management expense ratio is based on total expenses for the stated period and is expressed as an annualized percentage of average net asset value during the period”), but I don’t believe this number. Expenses before agent fees on the secondary offering were $2.038-million on average assets of $155-million (see below) so I’ll call the MER 1.31%, which is in good agreement with prior years’ figures.

Average Net Assets: We need this to calculate portfolio yield. Distributions to preferred shareholders amounted to $4,693,481 which, at $0.525/share, means an average 8.940-million shares outstanding on the distribution dates. These were valued at 16.61 at the beginning of the year and 17.33 at the end, so say average net assets were 151.7-million. Total assets at the end and beginning of the year were $198.6-million and $115.6-million, respectively, so that average is $157.1-million. That’s good agreement! Call the average figure $155-million.

Underlying Portfolio Yield: Dividends received of 4,875,060 divided by average net assets of 155-million is 3.14%

Income Coverage: Net Investment Income of 2.837-million (before issuance costs) divided by Preferred Share Distributions of 4.693-million is 60.4%.

Partners Value Split Corp. has released its Annual Report to December 31, 2014.

The company has the following issues outstanding: PVS.PR.A, PVS.PR.B, PVS.PR.C and PVS.PR.D.

Figures of interest are:

MER: I suggest it is best to include the amortization of share issue costs in MER – after all, this is a charge against the stated value of the company. Therefore, expenses were $382,000 (regular expenses) + $1,443,000 (amortization) = $1,825,000 for the on assets of $2.650-billion (see below) or 7bp p.a..

Average Net Assets: We need this to calculate portfolio yield and MER. There were negligible capital transactions, so we’ll just take the average of the beginning and end of period assets (including preferred shares) so: (3.108-billion + 2.191-billion)/2 = 2.650-billion

Underlying Portfolio Yield: Total Income of $40.1-million divided by average net assets of $2,650-million is 1.51% p.a..

Income Coverage: Net income of $39.760-million less amortization of $1.443-million is $38.317-million to cover senior preferred dividends of $26.097-million is 147%. However, I consider it prudent to include the $10-million stated entitlement of the Junior preferreds, even though none of this was actually paid in 2014 because the Juniors can be retracted at any time, which could prove embarrassing in times of extreme stress. So I’d say income coverage is 106%.

Talisman Energy Inc. has announced:

that the completion of the acquisition of Talisman by Repsol S.A. is scheduled to occur on May 8, 2015. Regulatory approvals required under the arrangement agreement with Repsol have been obtained. The completion of the transaction remains subject to the satisfaction of customary closing deliverables.

The deal was announced in December and approved by shareholders in February.

TLM.PR.A is a FixedReset, 4.20%+277, that commenced trading 2011-12-13 after being announced 2011-12-5.

Update, 2015-5-9: Done:

Talisman Energy Inc. (TSX:TLM) (NYSE:TLM) announces that the acquisition of Talisman by Repsol S.A. by way of an arrangement under the Canada Business Corporations Act has been completed.

Under the arrangement, a wholly-owned subsidiary of Repsol has acquired all of the outstanding common shares of Talisman at a price of US $8.00 per share and all of the outstanding preferred shares of Talisman at a price of CDN $25.1093 (representing CDN $25.00 plus accrued and unpaid dividends) per share.

With the completion of the arrangement, the common shares will be delisted from the Toronto Stock Exchange and the New York Stock Exchange, and the preferred shares will be delisted from the Toronto Stock Exchange.