Category: Issue Comments

Dividend Growth Split Corp. has released its Semi-Annual Report to June 30, 2013.

Figures of interest are:

MER: The MER per unit of the Fund, excluding the cost of leverage, was 1.03% as at June 30, 2013.

Average Net Assets: We need this figure to calculate portfolio yield. [(106.7-million (NAV, beginning of period) + 108.9-million (NAV, end of period)] / 2 = about $108-million.

Underlying Portfolio Yield: Total income of 2,347,802 times two (semi-annual) divided by average net assets of 108-million is 4.35%

Income Coverage: Net Investment Income of 1,789,415 divided by Preferred Share Distributions of 1,653,042 is 108%.

Standard & Poor’s has announced:

• We are raising our long-term corporate credit rating on Algonquin Power & Utilities Corp. (APUC) and subsidiaries Algonquin Power Co. (APCO) and Liberty Utilities Co. to ‘BBB’ from ‘BBB-‘.
• We are also raising our senior unsecured debt rating on APCO to ‘BBB’ from ‘BBB-‘.
• In addition, we are raising our global scale and Canada scale preferred stock ratings on APUC to ‘BB+’ and ‘P-3 (High)’ from ‘BB’ and ‘P-3’, respectively.
• We base the upgrade on the increase in regulated cash flow, which is currently at 40%-45% of consolidated cash flow and which we forecast will continue to increase in the medium term.
• The stable outlook reflects our assessment of relatively stable cash flows supported by regulated cash flow from Liberty’s regulated utility business and APCO’s largely contracted power asset portfolio.

…
The stable outlook reflects our assessment of relatively stable cash flows, supported by regulated cash flow from Liberty’s regulated utility business, and APCO’s largely contracted power asset portfolio.

We could take a negative rating action if APUC fails to execute its development projects and acquisitions with financing arrangements that allow it to maintain its key financial measures. We expect APUC to achieve AFFO-to-total debt of greater than 15% within the next 12 to 24 months, with at least 45% of its consolidated cash flows supported by regulated cash flows from Liberty. Failure to achieve this expectation could also result in a negative rating action.

We could raise the rating if APUC achieves sustained AFFO-to-debt of greater than 25%, with a higher proportion of cash flow contributions from Liberty, all else being equal.

Standard & Poor’s has announced:

• Brookfield Property Partners L.P. (BPY) announced a proposal to acquire Brookfield Office Properties (BPO) by way of tender offer for any or all of the common shares it does not presently own.
• We placed our ratings for BPO on CreditWatch with developing implications, including our ‘BBB-‘ corporate credit, ‘BB+’ unsecured debt, and ‘BB’ preferred stock ratings. The developing CreditWatch listing means the ratings could be raised, lowered, or affirmed.
• We do not currently rate BPY, a large, diversified, recently listed and globally focused real estate company, which is majority owned and externally managed by Brookfield Asset Management (BAM).
• To resolve the CreditWatch, we will seek to meet with BPY management in the coming month to ascertain the impact, if any, of the proposed acquisition on BPO’s credit profile.

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BPY’s proposal has stated that BPO’s rated unsecured debt securities would remain in place, but that some convertible preferred shares could be exchanged for equivalent shares of a BPY subsidiary. It is not clear to us whether the debt securities would be guaranteed by BPY and the extent to which BPO’s current operating and financial strategies as well as its legal structure could change once absorbed into the BPY platform.

We currently see downside risk to ratings as somewhat less likely, given the potential benefits of BPY’s larger, more diverse platform. However, the expected growth and financing strategies for BPY’s other operating platforms is at this time unknown to us. We will seek to meet with management of BPY in the coming month to gain clarity on these issues, so as to ascertain the impact, if any, of the proposed acquisition on BPO’s credit profile.

The bid was previously reported on PrefBlog.

BPO was downgraded to P-3 by S&P in July, 2013. I remain concerned about the knock-on effects on BAM’s credit rating if the flow of dividends from the subsidiaries to the parent should be considered less reliable as a result of increased leverage at the subsidiary level.

The ultimate parent, Brookfield Asset Management, has the following preferred shares outstanding:
FixedResets BAM.PF.A, BAM.PF.B, BAM.PR.P, BAM.PR.R, BAM.PR.T, BAM.PR.X, BAM.PR.Z
Floaters BAM.PR.B, BAM.PR.C, BAM.PR.K
RatchetRate BAM.PR.E
FixedFloater BAM.PR.G
OperatingRetractible BAM.PR.J
Straight Perpetual BAM.PR.M, BAM.PR.N, BAM.PF.C

BPO has the following preferred share issues outstanding:
OperatingRetractible BPO.PR.H, BPO.PR.J, BPO.PR.K,
FixedReset BPO.PR.L, BPO.PR.N, BPO.PR.P, BPO.PR.R, BPO.PR.T,
Floaters BPO.PR.W, BPO.PR.X, BPO.PR.Y

In the event of a successful bid, the BPO Operating Retractibles might be the object of an exchange offer.

Reset? Well, I couldn’t think of another word to use!

Brompton Funds announced in April that the term would be extended and the dividend changed on November 29; they announced the new rate on August 14:

At a special meeting held on April 11, 2013, shareholders of Life & Banc Split Corp. (“LBS” or the “Fund”) approved a special resolution to allow the Board of Directors to extend the term of the Class A Shares and the Preferred Shares for up to 5 years and to determine the distribution ratesfor the extended term. The Board of Directors is pleased to announce that it has approved a 5 year extension to the term of the Class A Shares and Preferred Shares to November 29, 2018. The Fund was originally scheduledto terminate on November 29, 2013. The distribution rate for the Fund’s Preferred Shares for this new 5 year term which commences on November 30, 2013 will be $0.475 per annum paid in equal quarterly amounts. The new Preferred Share distribution rate is based on current market rates for preferred shares with similar terms. The Preferred Share distribution for the quarter ended December 31, 2013 is expected to be $0.12690 per Preferred Share which takes into account the new distribution rate for December and the previous distribution rate for October and November. In addition, the Fund intends to maintain the targeted monthly Class A Share distribution at $0.10 per Class A Share.

LBS invests in a portfolio, on an approximately equal weight basis, of common shares of 6 Canadian Banks: Bank of Montreal, Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada, The Bank of Nova Scotia and The Toronto-Dominion Bank and 4 Canadian life insurance companies: Great-West Lifeco Inc., Industrial Alliance Insurance and Financial Services Inc., Manulife Financial Corporation and Sun Life Financial Inc. The extension of the term of the Fund is not a taxable event and enables shareholders to defer potential capital gains tax liability that would have otherwise been realized on the redemption of the Class A Shares or Preferred Shares until such time as such shares are disposed of by shareholders.

In connection with the extension, those shareholders who do not wish to continue their investment in the Fund and do not wish to sell their shares through the TSX, may retract their Preferred Shares or Class A Shares on November 29, 2013 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 29, 2013. Such retraction price will be approximately equal to the net asset value per share less certain costs including trading commissions. The notice expiry for the special retraction is October 31, 2013 at 5:00 p.m. (Toronto time). Shareholders are reminded that Class A Shares and Preferred Shares have traded at an average premium to net asset value of 8.7% and 1.2%,respectively, over the past 12 months to July 31.

The new rate of 4.75% represents a modest decline from the previous rate of 5.25%.

LBS.PR.A currently has asset coverage of 1.8-:1 and income coverage of 100%. The reduced dividend on the preferreds will move income coverage over the 100% mark.

I recommend that holders retain their shares.

Pembina Pipeline Corporation has announced:

that it has closed its previously announced public offering of 6,000,000 cumulative redeemable rate reset class A preferred shares, series 3 (the “Series 3 Preferred Shares”) for aggregate gross proceeds of $150 million (the “Offering”).

The Offering was first announced on September 23, 2013 when Pembina entered into an agreement with a syndicate of underwriters led by RBC Capital Markets and Scotiabank.

Proceeds from the Offering will be used to partially fund capital projects, to reduce short-term indebtedness and for other general corporate purposes of the Company and its affiliates.

The Series 3 Preferred Shares will begin trading on the Toronto Stock Exchange today under the symbol PPL.PR.C.

PPL.PR.C is a FixedReset, 4.70%+260 announced September 23. It will be tracked by HIMIPref™ but relegated to the Scraps index on credit concerns.

The issue traded 232,472 shares today in a range of 24.44-54 before closing at 24.45-50, 16×22. Vital statistics are:

The Toronto-Dominion Bank has announced:

the applicable dividend rates for its Non-Cumulative 5-Year Rate Reset Preferred Shares, Series Y (the “Series Y Shares”) and Non-Cumulative Floating Rate Preferred Shares, Series Z (the “Series Z Shares”).

With respect to any Series Y Shares that remain outstanding after October 31, 2013, holders of the Series Y Shares will be entitled to receive quarterly fixed non-cumulative preferential cash dividends, as and when declared by the Board of Directors of TD, subject to the provisions of the Bank Act (Canada). The dividend rate for the 5-year period from and including October 31, 2013 to but excluding October 31, 2018 will be 3.5595%, being equal to the 5-Year Government of Canada bond yield determined as at October 1, 2013 plus 1.68%, as determined in accordance with the terms of the Series Y Shares.

With respect to any Series Z Shares that may be issued on October 31, 2013, holders of the Series Z Shares will be entitled to receive quarterly floating rate non-cumulative preferential cash dividends, calculated on the basis of the actual number of days elapsed in such quarterly period divided by 365, as and when declared by the Board of Directors of TD, subject to the provisions of the Bank Act (Canada). The dividend rate for the floating rate period from and including October 31, 2013 to but excluding January 31, 2014 will be 2.666%, being equal to the 90-day Government of Canada Treasury Bill yield determined as of October 1, 2013 plus 1.68%, as determined in accordance with the terms of the Series Z Shares.

Beneficial owners of Series Y Shares who wish to exercise their conversion right should communicate as soon as possible with their broker or other nominee to obtain instructions for exercising such right on or prior to the deadline for exercise, which is 5:00 p.m. (Toronto time) on October 16, 2013.

The new rate of 3.5595%, is $0.889875 p.a. This represents a steep decline from the original rate of 5.10% (or $1.275 p.a.), so my mailbox will be filling up shortly with outraged queries from casual investors.

We can examine the comparables with the help of the Pairs Equivalency Calculator:

The closing bid for TD.PR.Y yesterday was 25.06; assuming this holds after the conversion privilege is no longer available then the average implied three-month bill rate of 2.36% calculated above in turn implies a bid on the new issue of 25.58.

So, as of right now, it looks like conversion is recommended. Naturally, investors will want to wait until the last moment before making a decision.

Additionally, it will be noted that although the deadline for notifying the company is October 16, intermediary brokers will almost always have earlier internal deadlines. Also, it is normal that trades must be settled before notice can be given … so for most brokers, I suggest that the last day for trading the issue in the hopes of reaping enormous profits on conversion will be Wednesday October 9 (remember there is a skip-day for Thanksgiving). This strategy didn’t work very well for the BMO.PR.M / BMO.PR.R conversion, when the price of BMO.PR.M was supported by the conversion privilege and promptly sank after the last trading day to settle prior to the notification date.

On the other hand, the current bid of 25.06 for TD.PR.Y gives a current yield of 3.55% (calculated from the new 3.5595% coupon rate), compared to an average Current Yield of 3.42% for the FixedResets noted above. On that basis – without looking at anything else – TD.PR.Y looks cheap.

On the other hand, the FloatingReset resulting from TD.PR.Y conversion will pay three-month bills +168. BMO.PR.R pays +165 and is bid at 25.11; TD.PR.S pays +160 and is bid at 25.38; both are above today’s bid on TD.PR.Y, but certainly nothing to run around mortgaging the farm for.

So … some might wish to speculate, on the basis that TD.PR.Y should be priced higher than it is and the FloatingReset issue that results from conversion should be higher still. Just remember it’s a speculation!

Brompton Group has announced:

Dividend Growth 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 and preferred shares. The class A and preferred share offering prices will be set at levels that ensure that existing unitholders are not diluted.

Dividend Growth Split Corp. invests in a 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

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 currently in the amount of $0.13125 per preferred share, representing a yield on the original issue price of 5.25% per annum, and to return the original issue price to holders of preferred shares on the original November 30, 2014 maturity date.

The Company is also pleased to announce that the board of directors has approved an extension of the maturity date of the class A and preferred shares of the Company for an additional 5 year term to November 28, 2019. The preferred share dividend rate for the extended term will be announced at least 60 days prior to the original November 30, 2014 maturity date. The new dividend rate will be determined based on then-current market yields for preferred shares with similar terms.

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

Brookfield Property Partners has announced:

that it proposes to acquire Brookfield Office Properties Inc. (NYSE: BPO; TSX: BPO) (“BPO”) through a tender offer for “any or all” of the common shares of BPO that it does not currently own (the “Offer”) for consideration value of $19.34 per common share of BPO. Each BPO shareholder can elect to receive consideration per BPO common share of either 1.0 limited partnership unit of Brookfield Property Partners or $19.34 in cash, subject in each case to pro-ration based on a maximum of 174 million BPY limited partnership units (67% of the total value of shares tendered to the Offer) and a maximum cash consideration of $1.7 billion (33% of the total value of shares tendered to the Offer). BPO shareholders who receive limited partnership units will be able to do so on a tax-deferred basis.
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The Offer price represents a premium of 17% to the 30-day volume weighted average price of BPO shares on the New York Stock Exchange and 16% to the 30-day volume weighted average price of BPO shares on the Toronto Stock Exchange, and a 15% premium to the closing price of BPO shares on September 27, 2013 on each of those exchanges.

Based on the current trading price of Brookfield Property Partners’ limited partnership units, the transaction is valued at $5 billion. If Brookfield Property Partners increases its 51% ownership in BPO to 100%, it will be one of the largest global commercial real estate companies, with $45 billion of assets and ownership comprising over 330 million sq. ft. of office, retail, industrial and multi-family assets in key global gateway markets on four continents.

If sufficient BPO common shares are tendered, Brookfield Property Partners intends to acquire any common shares which remain outstanding following the tender offer through a compulsory acquisition or other statutory transaction on the same basis as the Offer. In this event, BPO public shareholders would own approximately 27% of the outstanding limited partnership units of Brookfield Property Partners (including Brookfield Asset Management’s (“Brookfield”) redeemable partnership units on a fully-exchanged basis).

Brookfield Property Partners intends to finance the cash portion of the Offer through an acquisition facility with a syndicate of banks. In order to refinance the facility, Brookfield Property Partners will consider a number of alternatives, including asset sales, asset level debt financings and issuances of corporate debt, preferred stock and/or equity. To support the transaction, Brookfield and its affiliates have agreed to forego any Equity Enhancement Fee in respect of the acquisition facility which would otherwise by contract be payable to it.

The Offer will be subject to customary conditions including, among other things, that Brookfield Property Partners has determined, acting reasonably, that no material adverse effect exists or has occurred. The Offer will not include a minimum condition with respect to the number of common shares tendered, and Brookfield Property Partners will acquire any or all of the common shares that are tendered to the Offer.

There is some resistance to the bid:

Macquarie Group analyst Rob Stevenson called the offer too low, “especially given [Brookfield Property’s] ownership interest, as well as the fact that 33 per cent of the total consideration will be paid in cash.” He said Brookfield Property’s 51-per-cent stake in the target could block an approach by another bidder.

“A perceived ‘low-ball’ offer by [Brookfield Property] or the parent entity, Brookfield Asset Management, has long been a fear of U.S. real estate investors when it comes to [Brookfield Office Properties],” Mr. Stevenson wrote in a research note on Monday.

Another Macquarie analyst, Michael Smith, agrees the offer is too low but said there is a chance Brookfield Property could raise it to $20.53 to reflect Brookfield Office’s net asset value.

DBRS comments:

BPP currently has a controlling interest in BPO through its 51% ownership. Any change in the level of ownership in and of itself would not change the credit risk profile of BPO as DBRS expects the Offer will not result in any material changes in BPO’s business operations or financial policy.

In addition, DBRS notes that BPP intends to keep all of the corporate debt and preferred shares of BPO outstanding regardless of its ownership level in BPO. BPO currently has $330 million of senior unsecured notes and $2.2 billion of preferred shares outstanding.

However, if BPP acquires 100% of the common shares of BPO, BPP may consider making an offer to the holders of BPO’s outstanding Class AAA, Series G, H, J and K preferred shares that are convertible into common shares to exchange their shares for equivalent shares of another subsidiary of BPP which would be exchangeable for units of BPP under certain conditions.

Additionally, they are sanguine about the effect on the ultimate parent, Brookfield Asset Management (BAM):

DBRS noted that the offer, if accepted by BPO’s shareholders, is expected to close in the first half of 2014. The proposed transaction is consistent with BAM’s ongoing corporate restructuring by designating BPY as the flagship listed holding company for its equity interests in the properties segment, and is not expected to affect BAM’s corporate level debt, as the transaction is intended to be funded at the BPY level. Should there be any future change in the details of the transaction and its financing, DBRS will assess the impact of such change on BAM’s rating.

I find this a little difficult to understand, because BPY.UN will be laying out cash as part of the purchase and has not ruled out financing this layout with debt. This should have some effect on BPY.UN’s credit quality and hence on the certainty of dividends that can flow upstream to BAM.

S&P hasn’t yet commented, but in their recent downgrade of BPO, they noted:

“The downgrade reflects our view that the company’s financial profile will remain weak over the next two years due to the pending large vacancy at Brookfield Place New York and uncertainty regarding the company’s commitment to strengthening fixed-charge coverage and debt-to-EBITDA metrics longer term, given the potential for meaningful development pursuits and/or other largely debt-financed growth,” said credit analyst Elizabeth Campbell.
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We don’t expect further downside pressure to the rating over the next two years. However, our credit perspective could change if BAM’s or BPY’s strategic evolution materially alters the operating platform or legal structure of Brookfield Office or fixed-charge coverage falls below 1.3x.

The ultimate parent, Brookfield Asset Management, has the following preferred shares outstanding:
FixedResets BAM.PF.A, BAM.PF.B, BAM.PR.P, BAM.PR.R, BAM.PR.T, BAM.PR.X, BAM.PR.Z
Floaters BAM.PR.B, BAM.PR.C, BAM.PR.K
RatchetRate BAM.PR.E
FixedFloater BAM.PR.G
OperatingRetractible BAM.PR.J
Straight Perpetual BAM.PR.M, BAM.PR.N, BAM.PF.C

BPO has the following preferred share issues outstanding:
OperatingRetractible BPO.PR.H, BPO.PR.J, BPO.PR.K,
FixedReset BPO.PR.L, BPO.PR.N, BPO.PR.P, BPO.PR.R, BPO.PR.T,
Floaters BPO.PR.W, BPO.PR.X, BPO.PR.Y

It is the BPO OperatingRetractibles that DBRS thinks might be the subject of an exchange offer.

The Bank of Nova Scotia has announced:

the applicable dividend rates for its Non-cumulative 5-Year Rate Reset Preferred Shares Series 20 of Scotiabank (the “Preferred Shares Series 20”) and Non-cumulative Floating Rate Preferred Shares Series 21 of Scotiabank (the “Preferred Shares Series 21”).

With respect to any Preferred Shares Series 20 that remain outstanding after October 26, 2013, commencing as of such date, holders thereof will be entitled to receive non-cumulative preferential cash dividends on a quarterly basis, as and when declared by the Board of Directors of Scotiabank and subject to the Bank Act (Canada). The dividend rate for the five-year period commencing on October 26, 2013 and ending on October 25, 2018 will be 3.610%, being equal to the 5-Year Government of Canada bond yield determined as at September 26, 2013 plus 1.70%, as determined in accordance with the terms of the Preferred Shares Series 20.

With respect to any Preferred Shares Series 21 that may be issued on October 26, 2013, holders thereof will be entitled to receive floating rate non-cumulative preferential cash dividends on a quarterly basis, as and when declared by the Board of Directors of Scotiabank and subject to the Bank Act (Canada), based on a dividend rate equal the 90-day Canadian Treasury Bill plus 1.70%, on an actual/365 day count basis, subject to certain adjustments in accordance with the terms of the Preferred Shares Series 21. The dividend rate for the period commencing on October 26, 2013 and ending on January 25, 2014 will be equal to 2.686%, as determined in accordance with the terms of the Preferred Shares Series 21.

Beneficial owners of Preferred Shares Series 20 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 ensure that they meet the deadline to exercise such right, which is 5:00 p.m. (Toronto time) on October 11, 2013.

The announcement that BNS.PR.Q would be extended previously reported on PrefBlog.

At 3.61%, the new dividend is $0.9025 p.a., a steep decline from the original rate of 5.00% (or $1.25 p.a.). My mailbox will be filling up shortly with outraged queries from casual investors!

We can examine the comparables with the help of the Pairs Equivalency Calculator:

The contemporary bid for BNS.PR.Q was 24.89; assuming this holds after the conversion privilege is no longer available then the average implied three-month bill rate of 2.34% calculated above in turn implies a bid on the new issue of 25.35.

So, as of right now, it looks like conversion is recommended. Naturally, investors will want to wait until the last moment before making a decision since things could, conceivably, change dramatically prior to the conversion notification deadline.

Additionally, it will be noted that although the deadline for notifying the company is October 11, intermediary brokers will almost always have earlier internal deadlines. Also, it is normal that trades must be settled before notice can be given … so for most brokers, I suggest that the last day for trading the issue in the hopes of reaping enormous profits on conversion will be Monday October 7.

Such a strategy didn’t work very well for the BMO.PR.M / BMO.PR.R conversion, when the price of BMO.PR.M was supported by the conversion privilege and promptly sank after the last trading day to settle prior to the notification date.

On the other hand, the current bid of 24.89 for BNS.PR.Q gives a current yield of 3.63% (calculated from the new 3.61% coupon rate), compared to an average Current Yield of 3.42% for the FixedResets noted above. On that basis – without looking at anything else – BNS.PR.Q looks cheap. So … some might wish to speculate, on the basis that BNS.PR.Q should be priced higher than it is and the FloatingReset issue that results from conversion should be higher still. Just remember it’s a speculation!