Category: Issue Comments

Partners Value Split Corp. has released its Semi-Annual Report to June 30, 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 $213,000 (regular expenses) + $710,000 (amortization) = $923,000 for six months on assets of $2.348-billion (see below) or 8bp 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: [(1.501-billion + 0.690-billion) + (1.816-billion + 0.690-billon)]/2 = $2.348-billion

Underlying Portfolio Yield: Total Income of $21.0-million divided by average net assets of $2,348-million is 1.79% p.a..

Income Coverage: Net income of $20.846-million less amortization of $0.710-million is $20.136-million to cover senior preferred dividends of $12.993-million is 155%. However, I consider it prudent to include the $5-million stated entitlement of the Junior preferreds, even though less than half of this was actually paid in 2013 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 112%.

This is late … really late! But better late than never.

On August 22, TD Bank announced:

TD Sponsored Companies Inc. (“TDSCI”) is pleased to announce that shareholders of TD Split Inc. (TSX:TDS), 5Banc Split Inc. (TSX:FBS) and Big 8 Split Inc. (TSX:BIG) (collectively, the “Funds”) today approved the proposed change in the administrator and investment manager of the Funds to Timbercreek Asset Management Ltd. (“Timbercreek”) from TDSCI, as more fully described in the Funds’ management information circular dated July 3, 2014.

The Transaction is expected to close in the middle of September 2014, subject to, among other conditions, obtaining all required regulatory approvals, at which time Timbercreek will become the administrator and investment fund manager of each Fund.

On September 19 it was further announced:

TD Sponsored Companies Inc. (“TDSCI”) and Timbercreek Asset Management Ltd. (“Timbercreek”) announced today the completion of the previously announced transaction pursuant to which Timbercreek has acquired the rights to administer and manage TD Split Inc., 5Banc Split Inc. and Big 8 Split Inc. (collectively, the “Funds”).

As a result of the transaction, Timbercreek now acts as administrator and investment fund manager of the Funds.

According to information on SEDAR, to which I am not permitted to link directly because I am a member of the public and the Canadian Securities Administrators have determined that scumbag members of the public are not permitted to link to public documents, but one of which is referenced as “TD Split Inc. Aug 1 2014 10:50:29 ET Management information circular – English PDF 91 K”:

Recently, TDSCI determined that acting as administrator for closed-end funds does not represent a core business focus going forward and is therefore seeking to exit the closed-end fund business at this time. On June 24, 2014, TDSCI and Timbercreek announced that they had entered into a definitive agreement (the ‘‘Transaction’’) pursuant to which Timbercreek agreed to acquire the rights to act as administrator and investment fund manager to the Funds under (i) the administration agreement dated November 15, 2010 between TD Split Inc. and TDSCI, (ii) the administration agreement dated December 15, 2011 between 5Banc Split Inc. and TDSCI and (iii) the administration agreement dated December 15, 2013 between Big 8 Split Inc. and TDSCI (collectively, the ‘‘Administration Agreements’’ and each, an ‘‘Administration Agreement’’).
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Timbercreek Asset Management Ltd. has a value oriented investment philosophy, and specializes in providing conservatively managed, risk averse alternative asset class investment opportunities to institutions, trusts and endowment funds, discretionary investment advisors and qualified individuals. Timbercreek, a wholly owned subsidiary of Timbercreek Asset Management Inc., is an investment management company that employs a conservative and risk averse approach to real estate based investments. Timbercreek Asset Management Inc. is principally owned by 2314716 Ontario Limited, which in turn is principally owned, directly or indirectly, by R. Blair Tamblyn, Ugo Bizzarri and Tye Bousada. Its head office is located at 1000 Yonge Street, Suite 500, Toronto, Ontario, M4W 2K2.

The preferred shares affected, with links to their new websites, are:

• TD Split Inc : TDS.PR.C
  • Tracked by HIMIPref™ but relegated to Scraps index on volume concerns, last mentioned on PrefBlog when upgraded to Pfd-2 by DBRS
• 5Banc Split Inc : FBS.PR.C
  • Tracked by HIMIPref™ but relegated to Scraps index on volume concerns; last mentioned on PrefBlog when upgraded to Pfd-2 by DBRS
• Big 8 Split Inc : BIG.PR.D
  • Not tracked by HIMIPref™, market capitalization of preferreds about $18.5-million according to TMXMoney, last mentioned on PrefBlog when issued to refund BIG.PR.B and BIG.PR.C

DBRS has announced that it:

has today discontinued the Issuer Rating and Preferred Shares rating for Innergex Renewable Energy Inc. (the Company). DBRS notes that this action is unrelated to the credit profile of the Company.
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This is an unsolicited rating. This rating was not initiated at the request of the issuer or rated entity and did not include participation by the issuer or any related third party.

DBRS had downgraded the preferreds to Pfd-4(high) in March, 2013.

Innergex has two issues outstanding, INE.PR.A, a FixedReset 5.00%+279 that commenced trading in September 2010 and INE.PR.C, a Straight Perpetual, 5.75%, that commenced trading in December 2012.

The two issues continue to be rated P-3 by S&P.

Standard & Poor’s has announced:

• •We expect Talisman Energy Inc.’s operating performance, specifically its production and cost profile, to show limited improvement in the next 18-24 months, constraining any significant cash-flow growth.
• •At the same time, we expect Talisman to significantly outspend internally generated cash flow through 2015. Even if the company meets its US$2 billion asset sale target in the next 12-18 months, we do not think its credit profile is commensurate with that of its ‘BBB’ rated peers.
• •As a result, we are lowering our long-term corporate credit and senior unsecured debt ratings on Talisman to ‘BBB-‘ from ‘BBB’.
• •We are also lowering our global scale rating on its preferred stock to ‘BB’ from ‘BB+’ and its Canada scale rating on the preferred stock to ‘P-3’ from ‘P-3 (High)’.
• •The stable outlook reflects our view that Talisman’s cash flow from its increasing liquids production combined with any asset sales will allow the company to maintain its funds from operations-to-debt at more than 30% through 2015.

Standard & Poor’s Ratings Services today said it lowered its long-term corporate credit rating on Calgary, Alta.-based Talisman Energy Inc., and its senior unsecured debt rating ‘BBB-‘ from ‘BBB’. At the same time, Standard & Poor’s lowered its global scale rating on its preferred stock to ‘BB’ from ‘BB+’ and its Canada scale rating on the stock to ‘P-3’ from ‘P-3 (High)’. Standard & Poor’s also affirmed its ‘A-3’ short-term and commercial paper ratings on Talisman. The outlook is
stable.
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The stable outlook reflects Standard & Poor’s view that Talisman will continue to focus on improving its high-netback liquids production, focus on operational performance, and maintain balance-sheet strength at current levels. The outlook also reflects our expectation that the company’s FFO-to-net debt will remain in the 30%-40% range.

For us to revise the outlook to positive, we would expect Talisman’s business risk profile to improve substantially — for example, if it were to improve its operating costs in line with those of other higher rated E&P peers and production netbacks sustainably. We may also consider a positive action if we expect the company to improve its FFO-to-net adjusted debt to above 40% due to improving operating performance. Better credit metrics due to significant asset sales alone would not be sufficient for a positive rating action.

If Talisman’s capital expenditures accelerate without a clear path for production growth, such that credit measures rise above 3.0x for debt to EBITDA and fall below 30% for FFO to debt, we would consider a negative rating action. Also, material declines in production, realized commodity prices, or deterioration in operating efficiency could lead to a downgrade.

TLM.PR.A is a FixedReset 4.20%+277, announced 2011-12-5 and closing 2011-12-14 to market disdain. The underwriters needed to slash prices to clear their inventory. It was downgraded to Pfd-3 [Trend Negative] by DBRS last September.

The issue is tracked by HIMIPref™ but relegated to the Scraps index on credit concerns.

Update, 2014-10-14: Talisman has also been downgraded by Moody’s, but they don’t rate the preferreds:

The Baa3 senior unsecured rating reflects Talisman’s sizable reserves, production and valuable other assets, tempered by the execution risks of an ongoing major shift in strategy and capital spending and dividends that outstrip internal cash flow generation. While production has declined due largely to asset sales, we expect modest production growth in 2015 from existing assets given the use of development capital in Southeast Asia, the Eagle Ford and Columbia. However, we expect an overall decline in reserves and production, cash flow, debt and negative free cash flow over the next 12 to 18 months as asset sales take place. When the strategic re-positioning is complete, we believe that Talisman will be positioned as a Baa3-rated company, with internally generated cash flow that can largely fund its negative free cash flow in the North Sea and an asset base that can provide growth opportunities and improvements in Talisman’s very high finding and development costs and very weak leveraged full-cycle ratio.

National Bank of Canada has announced:

that it has closed its domestic public offering of non-cumulative 5-year rate reset first preferred shares series 32 (the “Series 32 Preferred Shares”). National Bank issued 12 million Series 32 Preferred Shares at a price of $25.00 per share to raise gross proceeds of $300 million.

The offering was underwritten by a syndicate led by National Bank Financial Inc.

The Series 32 Preferred Shares will commence trading on the Toronto Stock Exchange today under the ticker symbol NA.PR.W.

The Series 32 Preferred Shares were issued under a prospectus supplement dated October 2, 2014 to National Bank’s short form base shelf prospectus dated October 5, 2012.

NA.PR.W will be tracked by HIMIPref™. It is still rated Pfd-2(low) by DBRS, as confirmed on July 7, so despite being considered junk by S&P, it will be added to the FixedResets subindex.

The issue traded 740,000 shares today (consolidated exchanges) in a range of 24.76-97 before closing at 24.78-82, 1×12. Vital statistics are:

Update, 2014-10-11: NA.PR.W is a FixedReset, 3.90%+225, announced September 30.

Brookfield Asset Management Inc. has announced:

the completion of its previously announced Class A Preference Shares, Series 42 issue in the amount of C$300,000,000. The offering was underwritten by a syndicate led by TD Securities Inc., RBC Capital Markets, CIBC and Scotiabank.

Brookfield issued 12,000,000 Series 42 Shares at a price of C$25.00 per share, for total gross proceeds of C$300,000,000. Holders of the Series 42 Shares will be entitled to receive a cumulative quarterly fixed dividend yielding 4.50% annually for the initial period ending June 30, 2020. Thereafter, the dividend rate will be reset every five years at a rate equal to the 5-year Government of Canada bond yield plus 2.84%. The Series 42 Shares will commence trading on the Toronto Stock Exchange this morning under the ticker symbol BAM.PF.G.

BAM.PF.G is a FixedReset, 4.50%+284, announced October 1. It will be tracked by HIMIPref™ and has been assigned to the FixedResets subindex.

The issue traded 1,056,420 shares today (consolidated exchanges) in a range of 24.95-05 before closing at what TMX Money claims to be a locked market at 25.00, 6×10, with the bid on the TSX and the offer on Pure. Vital statistics are:

The Implied Volatility calculation for the BAM FixedResets is interesting, partly because of the very high level of Implied Volatility, but mainly because it highlights a huge gap that has opened up between BAM.PR.R (FixedReset 5.40%+230, commenced trading January, 2010) and BAM.PR.T (FixedReset 4.50%+231, commenced trading October, 2010). These are now bid at 25.4 and 24.55, respectively, despite having virtually identical Issue Reset Spreads. The next Exchange Dates for these issues differ by only nine months, which is really to short a time to introduce complicated arguments about the expected path of interest rates which would be wrong anyway. There should be some pricing difference due to the difference in the dividends currently paid, but the BAM.PR.R has only 7 payments to go until reset – the total dividend advantage is just under forty cents; one might reasonably expect the price difference to be a little under forty cents (given discounting of the dividend stream and the effect of price on post-reset expected dividend yield). But it ain’t.

Standard & Poor’s has announced:

• •On Sept. 18, 2014, we published our global criteria for rating bank hybrid capital instruments (see “Bank Hybrid Capital And Nondeferrable Subordinated Debt Methodology And Assumptions”).
• •Following the criteria publication, we are lowering our issue credit ratings on 68 Canadian bank hybrid capital instruments and removing the “Under Criteria Observation” designation from the ratings.
• •We believe that banking regulators are adopting a tougher “bail-in” stance (where investors share in the cost of a government’s rescue of a failing bank) toward hybrid capital instruments compared with our expectations in late 2011.
• •This increases the possibility that banks might have to use hybrid capital instruments to a greater extent to absorb losses, and that regulators would be prepared to see such instruments absorb losses as a response to a bank stress.

Standard & Poor’s Ratings Services today said it lowered its issue credit ratings on 68 bank hybrid capital instruments issued by Canadian banks, and affirmed the ratings on 60 instruments. In addition, we removed the “Under Criteria Observation” (UCO) designation from the ratings, which we had labeled as UCO following the release of our new bank hybrid criteria on Sept. 18 (for more information, see “Bank Hybrid Capital And Nondeferrable Subordinated Debt Methodology And Assumptions” published Sept. 18, 2014, on RatingsDirect).

We have lowered the ratings one notch on Tier 1 preferred shares issued by Bank of Montreal, The Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Laurentian Bank of Canada, National Bank of Canada, Royal Bank of Canada, and The Toronto-Dominion Bank. We have affirmed the ratings on subordinated debt issues of the same issuers that had been placed under criteria observation. We have lowered the ratings on HSBC Bank Canada’s preferred shares and subordinated debt by two and one notches, respectively, based on our group rating methodology and the parent-level ratings on HSBC.

The downgrades reflect our view that regulators in Canada and elsewhere are adopting a tougher “bail-in” stance (where investors share in the cost of a government’s rescue of a failing bank) toward hybrid capital instruments compared with our expectations in late 2011. This increases the possibility that banks might have to use hybrid capital instruments to a greater extent to absorb losses, for example, through coupon nonpayment or conversion to common equity. We believe new regulations position regulators to stop banks from making their payments to hybrid capital investors at what we consider to be earlier-than-before points in the deterioration of a bank’s financial strength. (For details, see “Increasing Bail-In Risks For Bank Hybrid Capital Instruments Are Behind Our Proposed Criteria Change,” published Feb. 6, 2014.
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In our view, the risks for hybrid capital instruments are higher in jurisdictions such as Canada that are adopting the Basel III framework. The updated criteria provide a consistent basis for applying notches to reflect heightened risks of coupon nonpayment due to the Basel III capital conservation buffer mechanism, and to reflect the risk associated with a contractual or statutory conversion or write-down mechanism. The changes to Tier 1 hybrid instrument ratings in Canada reflect the application of an additional notch for coupon nonpayment risk arising from implementation of the Basel III framework.
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COMPANIES WITH AFFECTED OUTSTANDING ISSUES (PARENTS ONLY LISTED)
Bank of Montreal
The Bank of Nova Scotia
Caisse centrale Desjardins
Central 1 Credit Union
Canadian Imperial Bank of Commerce
HSBC Bank Canada
Laurentian Bank of Canada
National Bank of Canada
Royal Bank of Canada
Toronto-Dominion Bank (The)

Affected issues are:

All this follows the S&P announcement discussed on PrefBlog in the post S&P Sets Outlook-Negative on Canadian Banks.

The “tougher ‘bail-in’ stance” referred to in the S&P release was discussed on PrefBlog in the post Feds Consulting on Bank Recapitalization Regime.

A full year ago, DGS.PR.A extended term from 2014-11-30 to 2019-11-28, but did not announce a dividend rate for the coming period – this was fine for preferred shareholders since part of the deal was a retraction at par, exercisable for the original maturity date.

Since then, DGS.PR.A has gotten bigger three times – in October 2013, January 2014 and July 2014 – as, clearly, the sponsor is prepared to put some money into marketing a Split Share Corp as long as it has a decent time to run. I haven’t been recommending it, though, pending notification of the new rate.

Brompton Group announced the new rate on September 23:

Dividend Growth Split Corp. (the “Fund”) announced today that the distribution rate for the Preferred Shares for the 5 year term from December 1, 2014 to November 28, 2019 will be $0.525 per annum (5.25% on the original issue price of $10) payable quarterly. This rate is unchanged from the rate for the previous term. The Preferred Share distribution rate is based on current market rates for preferred shares with similar terms. In addition, the Fund intends to maintain the targeted monthly Class A Share distribution at $0.10 per Class A Share.

The Fund previously announced on October 1, 2013 the extension of the term of the Class A Shares and the Preferred Shares to November 28, 2019 from November 30, 2014. The extension allows shareholders to continue to enjoy the benefit of the Funds’ portfolio of common shares of high quality, large capitalization companies, which have among the highest dividend growth rates of those companies included in the S&P/TSX Composite Index. Currently, the portfolio consists of common shares of the following 20 companies:

Great-West Lifeco Inc.	The Bank of Nova Scotia	AGF Management Limited	Shaw Communications Inc.
Industrial Alliance Insurance and Financial Services Inc.	Canadian Imperial Bank of Commerce	IGM Financial Inc.	TELUS Corporation
Manulife Financial Corporation	National Bank of Canada	Power Corporation of Canada	Canadian Utilities Limited
Sun Life Financial Inc.	Royal Bank of Canada	Manitoba Telecom Services	Enbridge Inc.
Bank of Montreal	The Toronto-Dominion Bank	Rogers Communications Inc.	TransCanada Corporation

In connection with the extension, shareholders who do not wish to continue their investment in the Fund, may retract their Preferred Shares or Class A Shares on November 28, 2014 pursuant to a special retraction right and receive a retraction price that is calculated in the same way that such price would be calculated if the Fund were to terminate on November 30, 2014. Notice must be given by November 14, 2014 at 5:00 p.m. (Toronto time) in order to exercise this right.

I received an eMail about this:

I am one of your newsletter subscribers and I purchased DGS.PR.A on your advice last year (thank-you!).

You are probably aware that it is maturing soon with the option to extend for another five years at the same rate (see below). If you had any advice about whether I should bail out or stay in I would be very appreciative.

Also, I have never been in this situation before… do I contact Dividend Growth Split Corp directly or do I contact my stock broker and ask them to inform Dividend Growth Split Corp if I want to retract?

Flattery will get you everywhere! Well, I know nothing of this client’s financial situation or what else he has in his portfolio, but I will say that the reset of 5.25% is very good for holders; if the position made sense for him a year ago, it almost certainly makes sense for him today. Barring unusual portfolio goals and issuer concentration issues, I say hold on to it.

At today’s bid of 10.13, the issue yields 5.05% to maturity 2019-11-28, which is quite good considering that the issue has quite good credit quality, given a NAV of $18.75 as of September 25 to back up each $10 preferred share.

And if you do want to get rid of it, don’t retract! Unless you have very high transaction costs, you’ll get more money selling in the market, given the current bid of $10.13.

DGS.PR.A is tracked by HIMIPref™ but is relegated to the Scraps index on credit concerns; note that these credit concerns relate only to the Probability of Default and completely ignore the prospects for Recovery Given Default – and this latter figure will be quite substantial, particularly when compared with that of Operating Companies, which is expected to be zero.

Assiduous Reader prefQC gently reminds me that DC.PR.D, the FloatingReset recently converted from DC.PR.B has commenced trading – and I forgot all about it!

At any rate, it has started on a strong note, closing at 24.91-15 today vs. DC.PR.B’s 24.56-68, a very nice premium for the exchange. Vital statistics are:

Assiduous Readers might be a little upset that they missed this, particularly since I said:

It is difficult to formulate a recommendation regarding whether holders of DC.PR.B should convert. The two issues resulting after partial conversion will, of course, form a Strong Pair and may be analyzed with the Pairs Equivalency Calculator. Performing an analysis of all current FixedReset/FloatingReset pairs results in the following chart:

Click for Big

This chart was created with the assumed price of the new DC FloatingReset set to 25.22, the same as the price of DC.PR.B. According to this, the DC FloatingReset looks a little bit cheap … but not much. To get to the average Breakeven 3-Month Bill Yield of 1.67%, the price would only need to increase by $0.08, to 25.30.

Mind you, I also said:

Those with a taste for speculation, however, will find the conversion to the FloatingReset attractive, since there’s not much downside and potentially quite a bit of upside.

However, look at the current chart of break-even T-bill yields:

Click for Big

That’s the implied rate for the DC.PR.B / DC.PR.D pair way over on the right, the only member so far of the “Junk” group – I remain very interested regarding whether the implied rates for junk and investment-grade will diverge. They shouldn’t … but you never know!

Anyway, the implied break-even three-month T-bill rate until the next exchange in September 2019 for this pair is 1.95%, just a hair over the 1.88% average for investment-grade and clearly inside the range. The interesting part of this, however, is what has happened to the average break-even rate since my recommendation as of September 2: the investment-grade average has increased from 1.67% to 1.88%. That’s a big move and has resulted in the big gap between the prices of DC.PR.B and DC.PR.D. What has happened, more or less, is that FixedResets have moved down in price, while FloatingResets are largely unchanged.

I will note that, assuming the three-month bill rate increases uniformly over the five years until the next exchange, this is predicting a yield in September 2019 of about 3%. Fancier expectations should be higher, since most pundits expect policy rates to be kept on hold for the next year, maybe two.

DC.PR.D will be tracked by HIMIPref™, but relegated to the Scraps index on credit concerns.