Category: Issue Comments

Manulife Financial has announced:

that the Funds’ boards of directors have approved a proposal for each Fund to, among other things, grant securityholders an additional option to allow them to continue their investment in each Fund beyond the currently scheduled termination date of December 2, 2013.

By approving the proposal for each Fund, securityholders will have the opportunity to benefit from a recovering market backdrop. The proposal for each Fund will include, among other things, the following:

• The term of Copernican World Banks Split Inc. and Copernican International Financial Split Corp. may be extended for an additional term of five years. In addition, the termination date of the Funds may be extended further for successive terms of five years thereafter, as determined by the Board; and
• Current redemption rights of the Class A shareholders and Preferred shareholders will remain unchanged and securityholders will be provided with an additional special retraction right providing an option to retract either Preferred shares or Class A shares at the end of the term (and each successive term thereafter) 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 December 2nd, 2013.

A special meeting of securityholders of the Funds has been called and will be held on or about November 15, 2013 to consider and vote upon the proposal for each Fund and any ancillary matters (the “Special Meetings”). Securityholders of record of the Funds at the close of business on or about September 18, 2013 are entitled to receive notice of and vote at the Special Meetings, with respect to their Fund. Further details of the proposal for each Fund will be outlined in a management information circular that will be delivered to securityholders in connection with the Special Meetings.

The proposal for each Fund remains subject to review by the Funds independent review committee.

As of July 31, CIR had a NAVPU of $5.94 compare to the preferreds’ par value of $10.00. The latter link also notes:

Pursuant to the terms of the Management Agreement, the Manager is entitled to a fee of 1.95% per annum of the NAV calculated daily and payable monthly plus an amount calculated daily and payable quarterly the Company equal to the service fee (the “Service Fee”) payable to the registered dealers, plus applicable taxes, including Harmonized Sales Tax. The Manager is responsible for the payment of the Portfolio Advisor’s and the Sub-Advisor’s fees.
…
The Manager calculates and pays to registered dealers whose clients hold Class A Shares a Service Fee calculated daily and payable quarterly in arrears at an annual rate equal to 0.40% annually of the value of the Class A Shares held by clients of the sales representatives of such registered dealers, plus applicable taxes, if any. For these purposes, the value of a Class A Share on any given business day will be the NAV per Unit less $10.00 and less the amount of any accrued and unpaid distributions on a Preferred Share.

The former links notes:

MER: 2.60%

Expenses can be expensive for a small public fund!

I must, of course, reserve judgement on a voting recommendation until I have seen the proposal. But I cannot imagine anything the company could do to convince a rational investor to vote in favour of their proposal. Other than cut fees to the bone. Ha-ha.

However, at least Manulife is allowing a special retraction this time, so a positive vote can be effectively vetoed by individual holders.

CIR.PR.A is not tracked by HIMIPref™. The last mention of it on PrefBlog occurred when DBRS discontinued the rating in 2009.

Manulife Financial Corporation has announced:

that the Funds’ boards of directors have approved a proposal for each Fund to, among other things, grant securityholders an additional option to allow them to continue their investment in each Fund beyond the currently scheduled termination date of December 2, 2013.

By approving the proposal for each Fund, securityholders will have the opportunity to benefit from a recovering market backdrop. The proposal for each Fund will include, among other things, the following:

• The term of Copernican World Banks Split Inc. and Copernican International Financial Split Corp. may be extended for an additional term of five years. In addition, the termination date of the Funds may be extended further for successive terms of five years thereafter, as determined by the Board; and
• Current redemption rights of the Class A shareholders and Preferred shareholders will remain unchanged and securityholders will be provided with an additional special retraction right providing an option to retract either Preferred shares or Class A shares at the end of the term (and each successive term thereafter) 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 December 2nd, 2013.

A special meeting of securityholders of the Funds has been called and will be held on or about November 15, 2013 to consider and vote upon the proposal for each Fund and any ancillary matters (the “Special Meetings”). Securityholders of record of the Funds at the close of business on or about September 18, 2013 are entitled to receive notice of and vote at the Special Meetings, with respect to their Fund. Further details of the proposal for each Fund will be outlined in a management information circular that will be delivered to securityholders in connection with the Special Meetings.

The proposal for each Fund remains subject to review by the Funds independent review committee.

As of July 31, 2013, CBW had a NAVPU of $4.55 compared to its par value of $10. The latter link also notes:

Pursuant to the terms of the Management Agreement, the Manager is entitled to a fee of 1.95% per annum of the NAV calculated daily and payable monthly plus an amount calculated daily and payable quarterly by the Company equal to the service fee (the “Service Fee”) payable to the registered dealers, plus applicable taxes, including Harmonized Sales Tax. The Manager is responsible for the payment of the Portfolio Advisor’s and the Sub-Advisor’s fees.
…
The Manager calculates and pays to registered dealers whose clients hold Class A Shares a Service Fee calculated daily and payable quarterly in arrears at an annual rate equal to 0.40% annually of the value of the Class A Shares held by clients of the sales representatives of such registered dealers, plus applicable taxes, if any. For these purposes, the value of a Class A Share on any given business day will be the NAV per Unit less $10.00 and less the amount of any accrued and unpaid distributions on a Preferred
Share.

On the other hand, the former link notes:

MER: 2.76%

Expenses can be expensive for a small public fund!

I must, of course, reserve judgement on a voting recommendation until I have seen the proposal. But I cannot imagine anything the company could do to convince a rational investor to vote in favour of their proposal. Other than cut fees to the bone. Ha-ha.

However, at least Manulife is allowing a special retraction this time, so a positive vote can be effectively vetoed by individual holders.

CBW.PR.A is not tracked by HIMIPref™. The last mention of it on PrefBlog occurred when DBRS discontinued the rating in 2009.

DBRS has announced:

Since DBRS’s latest report on Bell Canada, Industry Canada has restated its intention of establishing four wireless carriers in each region of the country. DBRS notes that a viable fourth competitor with strong financial backing could cause the competitive environment to intensify. DBRS believes the potential implications of increased competition for the Company’s operating performance and equity valuations could make less-conservative financial management more compelling for Bell Canada. In DBRS’s view, the addition of a strong fourth bidder in the 700 MHz wireless spectrum auction could materially increase the price for spectrum. These factors could make it more difficult for Bell Canada to reach its intended leverage target within DBRS’s stated 24-month timeframe. DBRS notes that failure by Bell Canada to deleverage as expected could result in a negative rating action.

Furthermore, DBRS feels that a strong fourth industry player could heighten competition such that even more conservative financial management may be required for BCE Inc./Bell Canada’s credit risk profile to remain commensurate with its current rating categories. DBRS will continue to carefully monitor the operating performance and financial management of Bell Canada, particularly in the context of an evolving competitive environment.

BCE has a large number of preferred share issues outstanding:
Ratchet Rate: BCE.PR.B, BCE.PR.D, BCE.PR.E, BCE.PR.H, BCE.PR.J, BCE.PR.S and BCE.PR.Y
FixedFloater: BCE.PR.A, BCE.PR.C, BCE.PR.F, BCE.PR.G, BCE.PR.I, BCE.PR.R, BCE.PR.T and BCE.PR.Z
FixedReset: BCE.PR.K

All are tracked by HIMIPref™; all are consigned to the Scraps index on credit concerns.

DBRS has announced that it:

has today downgraded the Issuer Rating and the Senior Unsecured Debt & Medium-Term Notes of Atlantic Power Limited Partnership (APLP) to B (high) from BB, and the rating of Atlantic Power Preferred Equity Ltd.’s Cumulative Preferred Shares to Pfd-5 (high) from Pfd-4. The trends on all ratings are now Negative. The ratings of APLP are based on the credit quality of Atlantic Power Corporation (ATP or the Company; not rated by DBRS) given that APLP guarantees the majority of ATP’s debt at the holding company level (22% of consolidated debt as at June 30, 2013).
…
The Negative trend reflects DBRS’s view that the Company’s key ratios could weaken further as a meaningful recovery of the wholesale power market will be challenging. The wholesale electricity market outlook remains weak and creates uncertainties associated with the renewal of certain long-term contracts, such as Selkirk (expires in August 2014), Tunis (December 2014) and Greeley (August 2013). In the absence of business environment improvement, ATP will likely have to execute a combination of the following to improve its financial profile: (1) capital and operating expense spending curtailment, (2) dividend reduction and (3) further asset sales. If ATP is successful in implementing a sustainable recovery, which would be largely influenced by the timing of the electricity price recovery, DBRS could consider changing the trend to Stable. However, should ongoing weak business fundamentals remain and key financial metrics deteriorate further, DBRS will likely take a further negative rating action.

These issues were recently downgraded to P-5 by S&P.

Standard & Poor’s has announced:

• We are revising our outlook on Montreal-based Bombardier Inc. to negative from stable.
• The outlook revision follows two recently announced delays to the first flight of Bombardier’s CSeries plane. We believe these delays create a heightened risk of further capital costs for the CSeries program, as well
  as a possible delay in our expected timeline for the recovery of Bombardier’s credit metrics.

• The negative outlook reflects our opinion that Bombardier will be challenged in the next 24 months to improve its credit metrics to be commensurate with a ‘BB’ rating.
• We are also affirming our ‘BB’ long-term corporate credit rating on the company.

…
As of June 30, 2013, the company’s adjusted debt-to-EBITDA leverage ratio was 9x, which we view as very weak for a ‘BB’ rating. The negative outlook also reflects our opinion that Bombardier could be challenged in the next 24 months to improve its credit metrics to be commensurate with a ‘BB’ rating.
…
We could downgrade the company if it is unable to achieve an adjusted debt-to-EBITDA leverage ratio of 8x or lower at year-end 2013. In addition, we could lower our rating on Bombardier if there are further delays in the CSeries program, resulting in increased capital expenditures that would ultimately delay improvement in the adjusted leverage ratio from our current expectations in the next two years and weaken our assessment of the company’s financial risk profile. Furthermore, should Bombardier’s liquidity deteriorate to a point where we believe it will need additional funds over the next two years, we could downgrade the company.

A return to a stable outlook would require Bombardier to be on a definitive path to successfully placing the CSeries into service, which in our view, would support the recovery of its credit metrics, including a funds from operations-to-debt ratio of about 12% or higher by year-end 2014.

This follows the Review-Negative from DBRS.

Bombardier has three series of preferreds outstanding: BBD.PR.B (Ratchet Rate); BBD.PR.C (PerpetualDiscount) and BBD.PR.D (FixedFloater). All are tracked by HIMIPref™; all are assigned to the Scraps index on Credit concerns.

Financial 15 Split Corp. has released its Semi-Annual Report to May 31, 2013.

Figures of interest are:

MER: 1.19%

Average Net Assets: We need this to calculate portfolio yield. The Total Assets of the fund at year end was $133.2-million, compared to $147.0-million on May 31, so call it an average of $140.1-million. Total Preferred Share Distribution for the six months was $2.427-million, at $0.525/share p.a. implies an average of 9.25-million units, at an average NAV of ((15.89 + 14.37) / 2 = 15.13, so call it $140.0-million. Pretty close! Call the average net assets $140-million

Underlying Portfolio Yield: Semi-annual dividends received (net of withholding) of 2,066,050 divided by average net assets of 140-million is 2.95%

Income Coverage: Net Investment Income of 1,218,283, divided by Preferred Share Distributions of 2,426,598 is 50.2%.

Dividend 15 Split Corp. has released its Semi-Annual Report to May 31, 2013.

Figures of interest are:

MER: 1.29% of the whole unit value, excluding one time initial offering expenses.

Average Net Assets: We need this to calculate portfolio yield. The Total Assets of the fund at year end was $307.8-million, compared to $320.1-million on May 31, so call it an average of $314-million. Total Preferred Share Distribution for the six months was $4.363-million, at $0.525/share p.a. implies an average of 16.62-million units, at an average NAV of ((19.22 + 18.45) / 2 = 18.84, so call it $313.1-million. Pretty close! Call the average net assets $314-million

Underlying Portfolio Yield: Dividends received of $5.779-million divided by average net assets of $314-million, multiplied by two because it’s semiannual is 3.68%.

Income Coverage: Dividends of 5.779-million less expenses before issuance fees of 2.055-million is 3.72-million, to cover preferred dividends of 4.36-million is 85%.

Fortis Inc. has announced:

the applicable annual fixed dividend rate for its Cumulative Redeemable Five-Year Fixed-Rate Reset First Preference Shares, Series G (the “Series G Shares”).

Holders of the Series G Shares will be entitled to receive quarterly fixed cumulative preferential cash dividends, if, as and when declared by the Board of Directors of Fortis. The annual fixed dividend rate for the five-year period from and including September 1, 2013 to but excluding September 1, 2018 will be 3.883%, being equal to the Five-Year Government of Canada bond yield determined as at August 2, 2013 plus 2.13%, as determined in accordance with the terms of the Series G Shares.

Fortis has designated the preference share dividends as eligible dividends for federal and provincial dividend tax credit purposes.

Fortis is the largest investor-owned distribution utility in Canada, with total assets exceeding $17 billion and fiscal 2012 revenue totalling approximately $3.7 billion. Its regulated utilities account for 90% of total assets and serve approximately 2.4 million gas and electricity customers across Canada and in New York State and the Caribbean. Fortis owns non-regulated hydroelectric generation assets in Canada, Belize and Upstate New York. The Corporation’s non-utility investments are comprised of hotels and commercial real estate in Canada and petroleum supply operations in the mid-Atlantic region of the United States.

The Common Shares; First Preference Shares, Series E; First Preference Shares, Series F; First Preference Shares, Series G; First Preference Shares, Series H; First Preference Shares, Series J; and First Preference Shares, Series K are listed on the Toronto Stock Exchange and trade under the ticker symbols FTS, FTS.PR.E, FTS.PR.F, FTS.PR.G, FTS.PR.H, FTS.PR.J and FTS.PR.K, respectively.

Fortis information can be accessed on the Corporation’s website at www.fortisinc.com and on SEDAR at www.sedar.com.

Note that this issue does not have an option to convert into FloatingResets – the structure was very new at the time of issue and provisions had not yet standardized although, of course, there is nothing stopping a new issuer from coming out with an equivalent issue.

The prospectus for this issue is available on SEDAR, dated May 15, 2008. I am, of course, unable to link directly to this prospectus because the bank-owned CDS has been granted a monopoly by the regulators and abuses this monopoly by prohibiting links and access to its API. The regulators, many of whom will be employed by banks in the future, think this is just a dandy way to run a public service.

The new rate of 3.883% is quite a come-down from the issue rate of 5.25% or, to put it another way, from $1.3125 p.a. to $0.97075.

DBRS has announced that it:

has today placed the Issuer Rating, Preferred Shares and Senior Unsecured Debentures of Bombardier Inc. (BBD or the Company) Under Review with Negative Implications. The rating action mainly reflects the recent deterioration in the financial profile, caused by rising debt levels. This is largely due to the elevated capital outlays associated with the C-series aircraft program, resulting in large negative free cash flows, further borrowing and higher leverage as evident during the most recent earnings release. The C-series program is being pushed further out, as delays in the overall systems integration of the flight test vehicle have caused the Company to postpone first test flight and entry-into-service dates.

DBRS will likely remove the rating from Under Review with Negative Implications and downgrade Bombardier if the financial profile metrics do not show improvement from current levels or if they deteriorate further by the end of the third quarter of this fiscal year. Additionally, DBRS would downgrade the rating should the Company announce further program delays, or continue to have similar levels of capital outlays, negative free cash flows and leverage during the same time frame.

Bombardier has three series of preferreds outstanding: BBD.PR.B (Ratchet Rate); BBD.PR.C (PerpetualDiscount) and BBD.PR.D (FixedFloater). All are tracked by HIMIPref™; all are assigned to the Scraps index on Credit concerns.

On July 8, Quadravest announced:

Canadian Life Companies Split Corp. (the “Company”) is providing the following update to its shareholders. The net asset value (NAV) of the Company has grown over the past number of months due to increasing valuations of its underlying portfolio of life insurance companies. The Company invests primarily in the common shares of Manulife Financial, Sun Life Financial, Great-West Lifeco, and Industrial Alliance. The NAV of the Company today is approximately $14.50 ($13.68 fully diluted). This provides an intrinsic value for the Class A shareholder (LFE) of approximately $4.50 ($3.68 fully diluted). The Company would also like to take this opportunity to re-iterate its dividend policy on its Class A shares. The Company is restricted from paying dividends on its Class A shares until the undiluted NAV reaches $15.00. When, and if, the undiluted NAV exceeds $15.00, dividends will be re-instated.

On July 23, Quadravest announced:

– As stated in a previously disseminated press release on July 8, 2013, Canadian Life Companies Split Corp. (“the Company”) intends to reinstate dividends on its Class A share (TSX: LFE) when the undiluted net asset value (NAV) per unit of the Company exceeds $15. The NAV as of July 23, 2013 is above $14.75.

The Board of Directors indicates that the initial dividend, if and when reinstated, will be in the amount of $0.05 per month ($0.60 per annum). This dividend once reinstated will provide a current dividend yield of 17% based on the latest closing price of LFE on the Toronto Stock Exchange. The directors have taken into account the cash flow and sustainability of the dividend in determining the amount of the dividend. Due to the Company’s unique structure, the additional return to fund this payment is equivalent to a 4% return on the underlying portfolio. Future market value increases and cash flow increases will be used to increase this dividend up to $0.10 per month ($1.20 per annum) as circumstances warrant.

The Company invests primarily in the common shares of Manulife Financial, Sun Life Financial, Great-West Lifeco, and Industrial Alliance. As stated above, the current NAV of the Company today exceeds $14.75 ($13.88 fully diluted). This provides an intrinsic value for the Class A shareholder (LFE) of approximately $4.75 ($3.88 fully diluted).

According to the company, the undiluted NAV was 14.33 on July 31, and 13.69 fully diluted.

They have also released the 13H1 Financials for LFE, whence the following information can be extracted:

MER: The “Base Management Expense Ratio”, which excludes issuance costs and dividends paid on preferreds, is 1.05%.

Average Net Assets: Calculation of this figure is complicated by the exercise of warrants. Assets were 148.3-million at May 31 and 103.7-million at November 30. Giving the latter figure double weight (as the big warrant exercise was at the end of March) provides an average of 118.6-million. Considering dividends paid on the preferreds were $3.342-million and the preferreds pay 0.625 p.a., this implies an average of 10.69-million units outstanding, with an average NAVPU of (13.56 + 12.48) / 2 = 13.02, for a total of 13.02 x 10.69-million = 139.2-million. Taking the average of these two estimates provides a guess of Average Net Assets = 128.9-million.

Underlying Portfolio Yield: Dividends received of 2.178-million time 2 (semi-annual) divided by average net assets of 128.9-million is 3.38%. The main holdings of the fund are the Big Four Insurers:

The agreement is astonishing (there have to be compensating errors in there somewhere) and justifies the use of 3.36% portfolio yield.

Income Coverage: Net Investment Income of 1,424,271 divided by Preferred Share Distributions of 3,342,072 is 42%. This figure is undoubtedly brought down by delays in investing the proceeds of the warrant exercise, and therefore of earning dividend income. If we say that the fully diluted NAV is 13.69 (as at 7/31) and the portfolio earns 3.36% (calculated above), that’s $0.4600 p.a. before about 0.10 expenses to pay 0.625 preferred dividends, is about 58%, which sounds like a better guess.

Given all this computation, we can now take a stab at estimated credit quality:

Note that there are some problems with the above calculation, beyond all the estimates discussed above: Capital Unit dividends will be paid based on the undiluted NAV and hence will generally be more than estimated by the credit quality calculator, which is based on diluted NAV.

Update: Assiduous Reader prefhound asks in the comments about the sensitivity of the Expected Default Loss to the expected total return. Actually it’s surprisingly little:

Click for Big

The above chart is taken from the December, 2010, edition of PrefLetter, in which the model is discussed in detail. This is part of the PrefLetter 2010 Collection, sold on the PrefLetter website for the low, low price of only $50. That’s right, only $50! Click on PrefLetter right now to purchase the 2010 Collection for only $50! My server is standing by!

Since there is a cash drag, the big problem is sensitivity to return distribution assumptions; see Split Share Credit Quality; as might be expected, sensitivity to everything increases as the NAV declines; see It’s All About Sequence.