Category: Issue Comments

Standard & Poor’s has announced:

• We are placing our ratings on Loblaw Cos. Ltd., Shoppers Drug Mart Corp., George Weston Ltd., and Choice Properties REIT on CreditWatch with negative implications after Loblaw announced its intention to acquire Shoppers for C$12.4 billion.
• We believe this could strengthen Loblaw’s business risk profile by combining Canada’s largest supermarket and pharmacy chains.
• On the other hand, we expect that new debt to fund the acquisition would strain Loblaw’s “intermediate” financial risk profile.
• Pro forma fully adjusted debt to EBITDA of 3.5x-4.0x would be high for the investment-grade rating, but we expect that free operating cash flow will be available for debt reduction in the next few years.

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In resolving this CreditWatch, we will assess the following key factors:

• Capital structure. We estimate that high fully adjusted pro forma 2013 debt to EBITDA of 3.5x-4.0x would necessitate almost C$2 billion of debt reduction within our two-year rating horizon to return adjusted leverage to the 3x that would be consistent with the intermediate financial risk
  profile;

• Business risk profile. The addition of Shoppers’ “strong” business risk profile should improve Loblaw’s satisfactory score, adding faster-growing and higher-margin pharmacy and cosmetics sales to its mature and competitive food revenue. We expect that realizing the estimated C$300 million of annual synergies would support improved profitability and cash flow, which should further contribute to deleveraging; and
• Group links. We will review the parent-subsidiary links between the four companies, particularly considering that this transaction would reduce George Weston’s Loblaw ownership to below 50%. That said, we believe the four companies’ credit profiles would remain strongly linked by virtue of their strategic integration, further supported by George Weston’s continuing “strong” liquidity and good financial flexibility.

This move follows the moves by DBRS to place both WN and L on Review-Developing.

Loblaws has a single preferred share issue outstanding, L.PR.A, an OperatingRetractible.

Weston has four preferred share issues outstanding, WN.PR.A, WN.PR.C, WN.PR.D and WN.PR.E, all Straight Perpetuals.

DBRS has announced that it:

has today placed the ratings of George Weston Limited (GWL or the Company) Under Review with Developing Implications.

The action on GWL’s ratings is directly related to DBRS’s review of the ratings of Loblaw Companies Limited (Loblaw; see separate press release), which follows Loblaw’s announcement of an offer to acquire the shares of Shoppers Drug Mart Corporation (Shoppers) for $12.4 billion and the assumption of approximately $1 billion of debt (the Transaction).

The proposed financing, including GWL’s $500 million investment in Loblaw, would effectively reduce GWL’s voting ownership of Loblaw to approximately 46% from 63% at the end of F2012. That said, GWL intends to subsequently increase its ownership in Loblaw going forward.

GWL’s ratings reflect its holding in Loblaw and the Company’s own strong bakery brands and efficient operations, balanced by a continuing volatile input cost environment and the mature nature of the bakery industry.

DBRS will resolve its review of GWL at the same time as its review on Loblaw’s ratings. Should Loblaw’s ratings be confirmed or downgraded, similar rating action would likely follow for GWL. Any positive rating action for Loblaw in the medium to longer term would not necessarily result in the same for GWL.

The bid for Shoppers was reported this morning.

Weston has four preferred share issues outstanding, WN.PR.A, WN.PR.C, WN.PR.D and WN.PR.E, all Straight Perpetuals.

DBRS has announced that it:

has today placed all ratings of Loblaw Companies Limited (Loblaw or the Company) Under Review with Developing Implications following the Company’s announcement of an offer to acquire the shares of Shoppers Drug Mart Corporation (Shoppers; see separate press release) for $12.4 billion and the assumption of approximately $1 billion of debt (the Transaction). The closing of the Transaction is subject to the approval of the shareholders of Shoppers and Loblaw, which is expected in September 2013.

The consideration offered for the equity consists of up to $6.7 billion in cash and up to 119.9 million Loblaw shares. The Transaction is expected to be financed through the combination of: (1) approximately $1.6 billion of cash, (2) $5.1 billion of fully committed bank facilities (including a $1.6 billion bridge loan), and (3) a subscription of $500 million additional Loblaw common shares from George Weston Limited (Weston).

On a pro forma basis, the combined company generated over $42 billion in revenue, $3 billion in EBITDA, and $1 billion in free cash flow. DBRS expects Loblaw to realize significant synergies by leveraging the strengths of both organizations, including the private label and loyalty programs, supply chain, and marketing. The Company believes it can achieve annual cost synergies of $300 million by year three. DBRS notes that these synergies are not dependent on any store closings.

Loblaw intends to operate Shoppers as a separate operating division. The Acquisition will increase Loblaw’s scale and improve its position in the growing health and wellness space in Canada.

The Developing Implications of the Under Review status reflects DBRS’s view that Loblaw’s business profile should benefit from increased scale, more diverse product offering, and potential synergies, which combined with the Company’s intended deleveraging plan, should largely offset the risks associated with the initial increase in financial leverage.

In its review, DBRS will focus on: (1) assessing the business risk profile of the combined entity as well as the risks associated with integration and realization of synergy potential, (2) Loblaw’s financial risk profile on a pro forma basis, including free cash flow generating capacity of the combined entity, a key indicator in the Company’s ability to reduce financial leverage within a reasonable time frame, and (3) the Company’s longer-term business strategy and financial management intentions.

Should the transaction close according to the proposed terms and provided that DBRS gains comfort with the Company’s ability and willingness to de-lever such that lease-adjusted debt-to-EBITDAR is below 3.50 times within 18 to 24 months, the ratings would likely be confirmed. DBRS will proceed with its review as more information becomes available and aims to resolve the Under Review status by the closing of the transaction.

The bid for Shoppers was announced this morning.

Loblaws has a single preferred share issue outstanding, L.PR.A, an OperatingRetractible.

Update, 2013-7-17: DBRS has announced a correction:

In terms of placing the ratings of Loblaw Companies Limited Under Review with Developing Implications yesterday, DBRS would like to clarify that the calculation of the lease-adjusted debt-to-EBITDAR ratio excludes Loblaw’s Financial Services division; that is, it would be adjusted to exclude PC Bank securitization and GICs. The complete text of the revised press release follows.

Fitch Ratings has announced (on July 2):

The Negative Outlook reflects the historical volatility in SLF’s earnings and the possibility it may continue at run-rate operating earnings and debt service that is not supportive of the current rating level.

Fitch believes SLF’s ability to improve its run-rate operating earnings will depend in part on how the company deploys the proceeds from the pending sale of Sun Life Assurance Company of Canada (U.S.) and Sun Life Insurance & Annuity Co. of New York to Delaware Life Holdings, a company owned by shareholders of Guggenheim Partners. The two Sun Life companies contain SLF’s U.S. variable annuity (VA) and certain life insurance businesses which have in recent history been a drag on overall earnings and a significant consumer of capital. The sale has been delayed due to regulatory review but Fitch expects it will be successfully completed.
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The IFS ratings of SLF’s U.S. life subsidiaries remain on Rating Watch Negative. Resolution of the Rating Watch will occur following further discussions with management and completion of the sale, and will likely result in a downgrade of the IFS ratings by at least one notch. Absent discussions with Guggenheim Partners, the ratings will be withdrawn. Assuming no material changes to the credit of the entities involved Fitch may not comment further until completion of the sale.

The key rating triggers that could result in a downgrade include:
–Failure to complete the sale of the company’s run-off U.S. operations;
–A decline in adjusted fixed-charge coverage, excluding equity market and interest rate impacts below 6x;
–A sustained drop in the company’s risk-adjusted capital position with no plans or ability to rectify; this would include the MCCSR ratio falling below 200%;
–An increase in financial leverage to over 25%;
–A large acquisition that involves execution and integration risk or impacts the company’s leverage and capitalization.

The key rating triggers that could result in a return to a Stable Outlook include:
–Completion of the sale of run-off U.S. operations;
–Consistent maintenance of adjusted fixed-charge coverage, excluding equity market and interest rate impacts, of over 6x.

SLF has numerous preferred share issues outstanding: SLF.PR.A, SLF.PR.B, SLF.PR.C, SLF.PR.D and SLF.PR.E (all DeemedRetractible) and SLF.PR.F, SLF.PR.G, SLF.PR.H and SLF.PR.I (all FixedReset).

Dividend Growth Split Corp. has released its Annual Report to December 31, 2012.

I think a dividend-tilting index would have been a more appropriate benchmark for this fund than the Composite, but we’ll let that go.

Figures of interest are:

MER: 1.06% of the whole unit value

Average Net Assets: The Net Asset Value at year end was $106.7-million, compared to $104.7-million a year prior, so call it an average of $105.7-million.

Underlying Portfolio Yield: Dividends and interest received of $4.77-million divided by average net assets of $105.7-million is 4.5%.

Income Coverage: Dividends and Securities Lending Income of $4.77-million less expenses of $1.11-million is $3.66-million, to cover preferred dividends of $3.35-million is 109%.

Standard and Poor’s has announced:

• While the company recently repaid debt to bolster its balance sheet before a large lease expiry, we expect fixed-charge coverage measures to remain low and debt-to-EBITDA to remain high for the next two years.
• As a result, we lowered our corporate credit rating on the company to ‘BBB-‘ from ‘BBB’, the senior unsecured issue-level rating to ‘BB+’ from ‘BBB-‘, and the preferred stock rating to ‘BB/P-3’ from ‘BB+/P-3(High)’.
• The stable outlook reflects our view that the pending vacancy in Brookfield Place New York will eventually be re-tenanted, which will support a recovery in portfolio operating cash flow and fixed charge coverage by 2016.

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“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 see any potential for upgrade despite Brookfield Office’s “strong” business risk profile, unless the company meaningfully deleverages its balance sheet to strengthen its currently “significant” financial risk profile, such that fixed-charge coverage rises to the high 1x area and debt-to-EBITDA declines below 9.0x.

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.

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

Of greater concern is the potential for knock-on effects from BPO’s parent, Brookfield Asset Management (BAM), which has the following preferreds outstanding: BAM.PF.A, BAM.PF.B, BAM.PF.C, BAM.PF.D, BAM.PR.B, BAM.PR.C, BAM.PR.E, BAM.PR.G, BAM.PR.J, BAM.PR.K, BAM.PR.M, BAM.PR.N, BAM.PR.P, BAM.PR.R, BAM.PR.T, BAM.PR.X and BAM.PR.Z.

Standard & Poor’s has announced:

• U.S. electric power developer Atlantic Power Corp.’s key credit measures have deteriorated due to the sale of a number of assets, the timing and return of investment capital, slower growth assumptions, and lower expectations for EBITDA contributions at a number of the company’s power plants. We expect that the 2013 debt service coverage ratio (DSCR) will be about 1.3x to 1.4x.
• We are lowering the corporate credit rating on Atlantic Power to ‘B’ from ‘BB-‘. We are also lowering our issue ratings for the debt and preferred stock of the company and its various subsidiaries and revising the recovery ratings.. We are removing the ratings from CreditWatch, where we placed them with negative implications on May 16, 2013.
• The stable outlook reflects our belief that Atlantic Power will obtain a waiver to potential covenant violations by amending the credit facility. The company has cash-on-hand to manage its operations for about a year even under a hypothetical termination of its revolving credit facility. It also reflects Atlantic Power’s mostly contracted portfolio, and our expectations that cash available for debt service (CFADs) to debt and CFADs to interest coverage will be about 10% to 12% and 1.5x, respectively, and liquidity will be adequate.

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The financial risk profile has increased to “highly leveraged” from “significant” to reflect an increase in consolidated leverage per kilowatt, lower expected project economics at a number of Atlantic Power’s plants and credit measures in line with the ‘B’ rating.
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The stable outlook reflects our belief that Atlantic Power will resolve its financial covenant issue in a reasonable manner in the coming weeks. It also reflects Atlantic Power’s mostly contracted portfolio, and our expectations that CFADs to debt and CFADs to interest coverage will be about 10% to 12% and 1.5x, respectively, and liquidity will be adequate. We could raise the rating if growth projects increase EBITDA significantly or CFADS to debt and CFADS to interest ratios improve to around 15% and 2.0 to 2.2x. We could lower the rating if generation is lower than expected, maintenance costs are higher, or if growth targets are not met. We could also lower the rating if we determine that there is risk in the refinancing of Atlantic Power’s Curtis Palmer notes.

PrefBlog previously reported the S&P CreditWatch Negative. The company is also under Review-Negative by DBRS, which has not yet been resolved.

Faircourt Asset Management has announced (although not yet on their website) that in its role as:

the Manager of Faircourt Split Trust (the “Trust”) (TSX: FCS.UN; FCS.PR.B), announced today that 53,892 Combined Units (consisting of one Trust Unit and one Preferred Security) and 899,037 Trust Units (without matching Preferred Securities) were submitted for redemption on May 31, 2013. Securityholders who tendered Combined Units for redemption will be entitled to receive $14.1890 per Combined Unit, which is equal to $4.1822, being the Net Asset Value per Trust Unit calculated using a three day volume weighted average price for exchange-traded securities held by the Trust, determined as of June 28, 2013 less costs of funding the redemption, including commissions, plus the $10.00 principal amount of the Preferred Security, plus all accrued and unpaid interest thereon to but excluding July 4, 2013 (the “Payment Date”). Securityholders who submitted unmatched Trust Units will receive $4.1822 per Trust Unit. Payment in respect of the redemptions of Combined Units and unmatched Trust Units will be made in full on the Payment Date.

As of December 31, 2012, there 3,253,623 Trust Units (FCS.UN) and 5,290,665 preferred shares (FCS.PR.B) outstanding. Assuming that there have been no intervening changes in these figures, the numbers are now 2,300,694 and 5,236,773, respectively.

Given that the June 26 NAV was $4.20 for FCS.UN and $10.00 for FCS.PR.B, this implies that the Asset Coverage Ratio is a pretty awful 1.2-:1. Faircourt has in the past occasionally reacted to low Asset Coverage by redeeming Preferred Shares, but there is no guarantee that will happen again.

FCS.PR.B was last mentioned on PrefBlog when DBRS confirmed it at Pfd-3(low) in September 2012 when the Asset Coverage ratio was 1.4-:1.

Toronto-Dominion Bank has announced:

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

With respect to any Series S Shares that remain outstanding after July 31, 2013, holders of the Series S 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 July 31, 2013 to but excluding July 31, 2018 will be 3.371%, being equal to the 5-Year Government of Canada bond yield determined as at July 2, 2013 plus 1.60%, as determined in accordance with the terms of the Series S Shares.

With respect to any Series T Shares that may be issued on July 31, 2013, holders of the Series T 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 July 31, 2013 to but excluding October 31, 2013 will be 2.624%, being equal to the 90-day Government of Canada Treasury Bill yield determined as of July 2, 2013 plus 1.60%, as determined in accordance with the terms of the Series T Shares.

Beneficial owners of Series S 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 July 16, 2013.

A rate of 3.371% implies that the break-even rate on 3-month bills (the average bill yield that will result in total dividends over the next five years being equal for both series) is 1.771%, about 75bp over current levels. If we assume that hikes in the Bank of Canada overnight rate are transmitted 1:1 to the 3-month bills market (a very reasonable assumption) this means that there must be six hikes evenly spaced over the next five years in order for the break-even rate to be achieved. This strikes me as a reasonably good bet.

In addition, I suggest that surprises to the upside over the next five years are more likely than surprises to the downside; the Floaters will provide insurance against such a contingency.

Finally, as discussed in the post TD.PR.S To Remain Outstanding, the market seems to have some kind of love affair going on with the only FloatingReset issue outstanding so far, BNS.PR.A, which is currently bid at 25.95, compared to 24.85 for BNS.PR.P, its “Strong Pair” counterpart. If these numbers are input into the Pairs Equivalency Calculator, we find that the break-even three-month bill rate for the BNS P/A Strong Pair is 2.36%. If we then put in the current price of TD.PR.S of 25.11 and jiggle the presumed price of TD.PR.T until we reach the same figure (note that the increments are different!) we solve for a projected price of TD.PR.T of 25.75.

For these reasons I recommend conversion from the extant TD.PR.S to the new Series T.

Equitable Trust Company has announced:

that it has received approval from the Minister of Finance to continue its wholly owned subsidiary, The Equitable Trust Company, as a Schedule I bank called Equitable Bank in English and Banque Équitable in French, effective July 1, 2013.

Converting The Equitable Trust Company into Equitable Bank is part of a strategy to strengthen the Equitable brand, established in 1970, to appeal to a new generation of financial services customers.

“Equitable’s conversion to a Schedule I bank will elevate our standing with Canadian depositors, deposit brokers, borrowers and mortgage brokers,” said Andrew Moor, President and Chief Executive Officer. “While the conversion does not alter our business model, market focus, required capital levels, risk tolerance or proven economics, it does represent an important evolution that should improve our long-term competitiveness and growth prospects in the Canadian financial services industry.”

Equitable announced its intention to apply to the Office of the Superintendent of Financial Institutions Canada (“OSFI”) and to the Minister of Finance, Canada for consent to make this change in February 2013.

Equitable Trust is the proud issuer of ETC.PR.A a 7.25%+453 FixedReset announced in August, 2009. This issue is not tracked by HIMIPref™ because it is not rated.