Category: Issue Comments

Dividend 15 Split Corp. II has released its Semi-Annual Report to May 31, 2014.

Figures of interest are:

MER: 1.30% of the whole unit value, “to reflect the normal operating expenses of the Company excluding any one time secondary offering expenses.”.

Average Net Assets: We need this to calculate portfolio yield. The Total Assets of the fund at year end was $115.6-million, compared to $153.2-million on May 31, so call it an average of $134.4-million. Preferred share dividends of $1,997,813 were paid over the half year at 0.525 p.a., implying average units outstanding of 7.61-million, at an average NAVPU of about $16.7, implies $127.1-million. That’s reasonably good agreement! Say the Average Net Assets are $130.8-million.

Underlying Portfolio Yield: Income received of $1,969,925 divided by average net assets of $130.8-million, multiplied by two because it’s semiannual is 3.01%.

Income Coverage: Net investment income of $1,104,941 divided by preferred share dividends of $1,997,813 is 55%.

Note that both the calculated portfolio yield and the income coverage are less than what was calculated according to the 2013 Annual Report; there may have been a delay in investing the proceeds of their issuance. We will have to wait and see what the 2014 Annual Report brings.

Quadravest has announced:

Financial 15 Split Corp. II (the “Company”) is pleased to announce it has completed an overnight offering of 1,955,000 Preferred Shares and 1,955,000 Class A Shares. Total gross proceeds of the offering were $35.2 million, bringing the Company’s net assets to approximately $124.5 million. The shares will trade on the Toronto Stock Exchange under the existing symbols of FFN.PR.A (Preferred shares) and FFN (Class A shares).

The Preferred Shares were offered at a price of $10.00 per Preferred Share to yield 5.25% on the issue price, and the Class A Shares were offered at a price of $8.00 per Class A Share targeting to yield 15% annually based on the current distribution policy.

The offering was co-led by National Bank Financial Inc., CIBC, RBC Capital Markets and also included BMO Capital Markets, GMP Securities L.P., Canaccord Genuity Corp. and Raymond James.

The net proceeds of the secondary offering will be used by the Company to invest in a high quality portfolio consisting of 15 financial services companies made up of Canadian and U.S. issuers as follows:

Bank of Montreal	National Bank of Canada	Bank of America Corp.
The Bank of Nova Scotia	Manulife Financial Corporation	Citigroup Inc.
Canadian Imperial Bank of Commerce	Sun Life Financial Services of Canada	Goldman Sachs Group Inc.
Royal Bank of Canada	Great-West Lifeco Inc.	JP Morgan Chase & Co.
The Toronto-Dominion Bank	CI Financial Corp.	Wells Fargo & Co.

FFN.PR.A was last mentioned on PrefBlog when shareholders voted for a term extension last May.

Standard & Poor’s has announced:

Standard & Poor’s Ratings Services today said that it revised its outlooks to negative from stable on almost all Canadian banks to which we have ascribed ratings uplift for potential extraordinary government support in a crisis. We base this rating action on our view that the announcement of a proposed bail-in policy regime might lead us to lower ratings on the banks within two years. We are revising our outlooks on Royal Bank of Canada (RBC), Toronto-Dominion Bank (TD Bank), The Bank of Nova Scotia (Scotiabank), Bank of Montreal (BMO), Canadian Imperial Bank of Commerce (CIBC), and National Bank of Canada (NBC).

“The outlook revision reflects our expectation of reduced potential for extraordinary government support arising from implementation of the proposed new elements of the resolution framework for Canadian banks,” said Standard & Poor’s credit analyst Tom Connell.
…
We incorporate the potential for extraordinary government support in our ratings on the seven largest Canadian financial institutions. We evaluate the potential for extraordinary government support through an assessment of a bank’s systemic importance, in conjunction with our view of the government’s willingness and capacity to support one or more banks during a crisis. We assess seven Canadian financial institutions as having “high” or “moderate” systemic importance. We also assess Canada as being “supportive,” which is the middle of three categories in our framework for evaluating the tendency of a government to bail out a financial institution. The issuer credit ratings on the large Canadian financial institutions include either one notch (RBC, TD Bank, Scotiabank, NBC, and Caisse Centrale Desjardins) or two notches (BMO and CIBC) of uplift due to the potential for extraordinary government support.

This notching reflects our belief that the Canadian government, like other governments around the world, would face strong incentives to support a large institution in a crisis to preserve financial market stability. We base this on the size and interconnectedness of these banks, their importance to the economy, and the potential for the failure of one institution to destabilize the system as a whole. We believe there is a moderately high likelihood that the Canadian government would intervene to preempt a large bank’s failure.
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We might reclassify the Canadian government’s tendency to support a bank as “uncertain” from the current “supportive” category. We note that taxpayer protection is a primary goal of the bail-in policy, as the consultation document’s title reflects. We expect the Canadian government will take a pragmatic approach that balances policy goals and makes use of whatever options are available in the event of an impending bank failure. Canada has not prohibited capital injections to a distressed bank, but does include a capital injection from a federal or provincial government as a trigger event for the conversion of nonviability capital instruments and of bail-in debt. For jurisdictions we view as having an uncertain tendency to support banks, we do not apply any ratings uplift from a bank’s stand-alone credit profile, regardless of the bank’s systemic importance.

Alternatively, we could reduce our assessment of the systemic importance of some or all Canadian banks, to “moderate” or “low.” This could arise if we conclude that the array of resolution tools, including the bail-in option, would have the potential to materially reduce the potential for a bank failure to destabilize the financial system. For banks we view as having low systemic importance, we do not apply any uplift for extraordinary government support. For banks that we believe have moderate systemic importance, we would limit uplift of extraordinary support to one notch at most (assuming we view the government as supportive).

This announcement by S&P mirrors a a similar announcement by Moody’s last month.

Affected issues are
BNS.PR.A, BNS.PR.B, BNS.PR.C, BNS.PR.L, BNS.PR.M, BNS.PR.N, BNS.PR.O, BNS.PR.P, BNS.PR.Q, BNS.PR.R, BNS.PR.Y, BNS.PR.Z

BMO.PR.J, BMO.PR.K, BMO.PR.L, BMO.PR.M, BMO.PR.P, BMO.PR.Q, BMO.PR.R, BMO.PR.S, BMO.PR.T, BMO.PR.W

CM.PR.D, CM.PR.E, CM.PR.G, CM.PR.O

NA.PR.L, NA.PR.M, NA.PR.Q, NA.PR.S

RY.PR.A, RY.PR.B, RY.PR.C, RY.PR.D, RY.PR.E, RY.PR.F, RY.PR.G, RY.PR.H, RY.PR.I, RY.PR.K, RY.PR.L, RY.PR.T, RY.PR.W, RY.PR.X, RY.PR.Y, RY.PR.Z

TD.PR.O, TD.PR.P, TD.PR.Q, TD.PR.R, TD.PR.S, TD.PR.T, TD.PR.Y, TD.PR.Z, TD.PF.A, TD.PF.B

TD.PF.B, a FixedReset 3.80%+227, NVCC-compliant, announced July 22 settled today. It will be tracked by HIMIPref™ and has been assigned to the FixedReset subindex.

The issue traded 1,287,892 shares today (consolidated tape) in a range of 24.99-08 before closing at 25.07-08, 118×17.

Vital statistics are:

Implied Volatility indicates, as with BMO.PR.W, yesterday, the NVCC-compliant issues appear to be trading in-line with the non-compliant issues, at a very high Implied Volatility. Note that the two issues with the highest Issue Reset Spreads, TD.PR.I and TD.PR.K, were redeemed after the close.

Click for Big

Bank of Montreal has announced:

it has closed its domestic public offering of Non-Cumulative 5-Year Rate Reset Class B Preferred Shares Series 31 (the “Preferred Shares Series 31”). The offering was underwritten on a bought deal basis by a syndicate of underwriters led by BMO Capital Markets. Bank of Montreal issued 12 million Preferred Shares Series 31 at a price of $25 per share to raise gross proceeds of $300 million.

The Preferred Shares Series 31 were issued under a prospectus supplement dated July 23, 2014, to the Bank’s short form base shelf prospectus dated March 13, 2014. Such shares will commence trading on the Toronto Stock Exchange today under the ticker symbol BMO.PR.W.

BMO.PR.W is a FixedReset, 3.80%+222, announced July 22. It will be tracked by HIMIPref™ and has been assigned to the FixedReset subindex.

The issue traded 1,727,555 shares today (consolidated exchanges) in a range of 24.89-99 before closing at 24.96-98, 30×131. Vital statistics are:

The Implied Volatility chart is:

Click for Big

So, overall, it would appear that Implied Volatility continues to be 40%+ (which I interpret as being due to a high level of expected directionality in prices, i.e., towards $25) and the NVCC-compliant issues continue to trade in line with the non-compliant issues. Regrettably, there isn’t much of a range in the Issue Reset Spreads of the compliant issues.

Equitable Group Inc. has announced:

The Company likewise intends to redeem its currently outstanding Non-cumulative 5-year Rate Reset Preferred Shares Series 1 on September 30, 2014 in accordance with the terms of such shares.

EQB.PR.A was originally issued as ETC.PR.A, a FixedReset, 7.25%+453, announced 2009-8-17. It has not been tracked by HIMIPref™ as it does not have a credit rating.

BCE Inc. has announced:

that BCE will privatize Bell Aliant by acquiring the interest of its affiliate’s public minority shareholders, while supporting Bell Aliant’s ongoing growth and competitiveness with significant investments in Atlantic Canada infrastructure and employment.
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BCE expects the privatization transaction to be completed by November 30, 2014, subject to more than 50% of Bell Aliant common shares held by public minority shareholders being tendered to the offer, notification under the Competition Act, and other conditions set forth in the support agreement, a copy of which is available under Bell Aliant’s SEDAR profile at www.sedar.com. CRTC and Industry Canada approvals are not required because there is no change in control of Bell Aliant, and no transfers of wireless spectrum licences.

BCE will also offer holders of preferred shares of Bell Aliant Preferred Equity Inc. (Prefco) the opportunity to exchange their Prefco preferred shares for BCE preferred shares with the same financial terms as the existing Prefco preferred shares, subject to terms and conditions of the offer. Completion of the Bell Aliant privatization is not conditional upon completion of the preferred share exchange.

The Special Committee of the independent directors of Prefco has unanimously determined that the preferred share offer is fair to preferred shareholders and, on the Special Committee’s recommendation, the Board of Directors of Prefco is recommending that shareholders accept the offer and tender their preferred shares. The Special Committee has received an opinion from Scotia Capital that, subject to the assumptions, limitations and qualifications set out in such opinion, the consideration to be received pursuant to the BCE preferred shares offer is fair from a financial point of view to the preferred shareholders. Completion of the preferred share exchange offer is conditional upon completion of the common share offer, holders of at least two-thirds of the outstanding preferred shares tendering their preferred shares to the offer, and the other conditions set forth in the support agreement.

The offers are expected to be commenced in mid-August and to expire in the second half of September. Tender offer circulars containing the full details of the common share offer and the preferred share offer (together with directors’ circulars for each offer) and other related documents setting forth full details of the terms and conditions of the offers will be mailed to shareholders.

It is not clear to me just what the position of untendered BAF preferred shares will be, in terms of the corporate structure, but will await shareholder documents.

Affected issues are:

• BAF.PR.A, FixedReset, 4.85%+209, commenced trading 2011-3-15
• BAF.PR.C, FixedReset, 4.55%+309, commenced trading 2011-12-7
• BAF.PR.E, FixedReset, 4.25%+264, commenced trading 2013-2-14

These issues will be nicely complementary to BCE.PR.K, A FixedReset, 4.15%+188, which commenced trading July 5, 2011 with a ridiculous re-opening 2011-12-12.

DBRS has confirmed BCE at Pfd-3(high):

Following the transaction, DBRS expects Bell Aliant to be transferred to Bell Canada from BCE. As such, DBRS expects Bell Canada’s 2014 year-end gross debt-to-EBITDA to be approximately 2.35 times (x) versus DBRS’s previous expectation of approximately 2.10x. In its rating report dated April 7, 2014, DBRS stated that it expects Bell Canada to reduce its gross debt-to-EBITDA ratio to below 2.0x by mid-2015 and that failure by the Company to deleverage as expected could result in a negative rating action. DBRS is now more comfortable with a gross debt-to-EBITDA ratio of slightly above 2.0x over the medium term given the benefits to the business risk profile of the combined entity, the Company’s strong coverage ratios and its solid operating performance.

Going forward, the Company intends to deleverage through growth in operating income and the application of free cash flow toward debt reduction toward 2.0x over the next two to three years. This could be accelerated with the use of a dividend reinvestment plan funded by treasury stock issuance. Weaker-than-expected operating performance and/or failure to deleverage in the expected time frame could result in pressure on the ratings.

DBRS expects the transaction to be completed in November 2014. DBRS notes that the CRTC and Industry Canada approvals are not required because there is no change in control of Bell Aliant and no transfers of wireless spectrum licenses. DBRS will re-evaluate its ratings confirmation if there is an increase in BCE’s offer price and/or a change in the terms of financing.

DBRS has placed BAF Under Review with Positive Implications:

DBRS has today placed the ratings of Bell Aliant Regional Communications, Limited Partnership’s (Bell Aliant) Under Review with Positive Implications following BCE Inc.’s tender offer to acquire the minority interest in Bell Aliant for $3.95 billion (BCE Inc./Bell Canada currently own 44.1% of Bell Aliant).

As part of the transaction, BCE Inc. will assume Bell Aliant’s $2.89 billion net debt and $618 million preferred shares. The Positive Implications of the Under Review status reflect the stronger credit profile of BCE Inc./Bell Canada. DBRS will proceed with its review as more information about the form and final structure of the transaction becomes available.

Similarly, S&P’s rating of BCE is unaffected at P-2(low):

Standard & Poor’s Ratings Services today said that its ratings and outlook on Montreal-based diversified telecom and media service provider BCE Inc. (BBB+/Stable/–) and its related entities are not affected by the company’s tender offer to acquire the remaining (55.9%) minority interest float in Bell Aliant Inc. for approximately C$3.95 billion. BCE plans to fund the transaction with about C$2.95 billion of BCE Inc. common shares and about C$1 billion of debt.

And S&P’s rating of BAF is on CreditWatch Positive:

• •Montreal-based BCE Inc. has announced a tender offer to acquire the remaining minority interest float in Atlantic-Canada based Bell Aliant Inc.
• •BCE will fund the C$3.95 billion purchase with about C$2.95 billion of
  equity and about C$1 billion of debt.

• •As a result, we are placing our long-term ratings on Bell Aliant and its related entities, including our ‘BBB’ corporate credit rating on the company, on CreditWatch with positive implications.

…
We expect to rate any Bell Aliant debt that remains after the acquisition on a consolidated basis with BCE — the ratings on which are unchanged following this announcement …. The transaction is subject to support from more than 50% of Bell Aliant’s minority shareholders as well as approval from the Competition Bureau of Canada, and we expect it to close in fourth-quarter 2014 following these approvals.

Update, 2014-8-15: DBRS has assigned a provisional rating of Pfd-3(high) to the proposed new preferreds:

DBRS has today assigned a provisional rating of Pfd-3 (high) to BCE Inc.’s (BCE) proposed Series AM, Series AO and Series AQ Preferred Share Issuance. As part of BCE’s tender offer to acquire the minority interest in Bell Aliant Inc., BCE has offered to exchange all of the issued and outstanding Series A Preferred Shares, Series C Preferred Shares and Series E Preferred Shares at Bell Aliant Preferred Equity Inc. (Bell Aliant) on the basis of (a) one BCE Series AM Preferred Share for each Series A Preferred Share, (b) one BCE Series AO Preferred Share for each Series C Preferred Share and (c) one BCE Series AQ Preferred Share for each Series E Preferred Share. The assignment of final ratings is subject to the completion of the preferred share exchange as indicated above.

The following ratings are based on BCE’s Take Over Bid Circular and Offer and information provided to DBRS as of August 14, 2014.
— Series AM Preferred Shares rated Pfd-3 (high), Stable trend
— Series AO Preferred Shares rated Pfd-3 (high), Stable trend
— Series AQ Preferred Shares rated Pfd-3 (high), Stable trend

BCE expects to issue 11,500,000 Offeror Series AM Preferred Shares, 4,600,000 Offeror Series AO Preferred Shares and 9,200,000 Offeror Series AQ Preferred Shares, assuming that all of the Bell Aliant Preferred Shares are acquired upon completion of the offer and any compulsory acquisition or subsequent acquisition transaction.

The newly issued BCE Preferred Shares will have the same financial terms (including, without limitation, the dividend rate) as Bell Aliant’s existing Preferred Shares. These newly issued BCE Preferred Shares will rank equally with other BCE First Preferred Shares that may be outstanding in the event of an insolvency or winding up of BCE. If BCE becomes insolvent or is wound up, BCE’s assets must be used to pay debt, including inter-company debt, before payments may be made on BCE Preferred Shares, BCE Converted Preferred Shares and other preferred shares. Please refer to BCE’s Take Over Bid Circular and Offer for further details.

DBRS has announced that it:

has today upgraded the rating of the Preferred Shares issued by Prime Dividend Corp (the Company) to Pfd-3 (high) from Pfd-3.

In November 2005, the Company issued 2.2 million Preferred Shares (at $10 each) and an equal number of Class A Shares (at $15 each). The redemption date for both classes of shares issued was originally December 1, 2012, but was extended to December 1, 2018, after holders of 96.1% of Class A Shares and 90.2% of Preferred Shares voted in favour of the extension in November 2011.
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On July 19, 2013, DBRS confirmed the rating of the Preferred Shares at Pfd-3 mainly based on the sufficient downside protection available to holders of the Preferred Shares. Since then, the NAV of the Company has increased, with downside protection increasing from 40% to 45% and remaining stable at that level over the past few months. The current dividend coverage ratio is approximately 0.8 times. As a result, the rating of the Preferred Shares has been upgraded to Pfd-3 (high) from Pfd-3.

Separately, the company has announced a change in Capital Unit dividend policy:

Prime Dividend Corp. (the “Company”) is pleased to announce a change in the distribution policy to the Class A shares that will result in an immediate increase to the July monthly dividend. Under the new policy the annualized rate will increase to 10% based on the current trading price. The Company believes the new policy will better reflect actual returns of the Company’s underlying portfolio and will allow further dividend increases as the Company’s trading price increases.

Under the new distribution policy, the monthly dividend payable on the Class A shares will be determined by applying a 10% annualized rate on the volume weighted average market price (VWAP) of the Class A shares over the last 5 trading days of the preceding month. As a result, Class A shareholders of record on July 31, 2014 will receive a dividend of $0.06458 per share based on the VWAP of $7.75 over the last 5 trading days in June, payable on August 8, 2014. Effectively, the actual amount of monthly distributions paid will vary with the market price, but the current yield will remain stable at 10% (based on the VWAP) under this new distribution policy.

In making this change, the Manager and the Board have considered the following in their analysis:
1. The net asset value per unit ($18.76 as at July 15, 2014) and the range over the previous years.
2. The amount of dividend income and additional income earned from the covered call writing program.
3. The resumption of dividend increases in many of the companies held in the portfolio, resulting in an increase in the average dividend rate.
4. The historically unprecedented low rate environment which has caused the distribution rate on the Class A shares to remain at the minimum level over the last 5 years under the previous floating rate distribution policy.
5. The net asset value attributable to the Class A shares which is approximately 10% higher than the trading price (as at July 15, 2014).

There will be no changes to the Preferred Share dividend policy or the Class A dividend threshold policy. Preferred shares will continue to receive prime plus 0.75% with a minimum rate of 5% annually.

This issue was last mentioned on PrefBlog when DBRS downgraded it to Pfd-3. PDV.PR.A is not tracked by HIMIPref™ as there are only about 1.4-million units outstanding … but I’ll bet a nickel the dividend policy change was made with an eye towards increasing that number!

Royal Bank of Canada has announced:

its intention to redeem all of its issued and outstanding Non-Cumulative 5-Year Rate Reset First Preferred Shares Series AT (the “Series AT shares”) and AV (the “Series AV shares”) on August 24, 2014, for cash at a redemption price of $25.00 per share to be paid on August 25, 2014.

There are 11,000,000 Series AT shares outstanding, representing $275 million of capital and 16,000,000 Series AV shares outstanding, representing $400 million of capital. The redemption of the Series AT and AV shares will be financed out of the general corporate funds of Royal Bank of Canada.

Separately from the redemption price, the final quarterly dividend of $0.390625 for each of the Series AT and AV shares will be paid in the usual manner on August 22, 2014 to shareholders of record on July 24, 2014. After such dividend payment, the Series AT and Series AV shares will cease to be entitled to dividends.

There are no surprises here, due to the high Issue Reset Spreads on these two issues.

RY.PR.T is a FixedReset, 6.25%+406 which commenced trading 2009-3-9 after being announced 2009-2-26.

RY.PR.X is a FixedReset, 6.25%+442, which commenced trading 2009-4-1 after being announced 2009-3-24.