Category: Issue Comments

Standard & Poor’s has announced:

• Following a review under our revised insurance criteria, we are affirming our ratings on Fairfax and its core subsidiaries.
• The ratings predominantly reflect our view of the group’s strong business and financial risk profiles, based on its strong competitive position and very strong capital and earnings.
• We have revised our outlook to stable from positive based on our view that Fairfax will gradually improve its underwriting results and fixed-charge coverage metrics but not enough to warrant an upgrade in the near term.

…
We assess Fairfax’s capital and earnings as very strong, which we expect to continue in our base-case economic scenario despite the current low interest rates. Its capital adequacy according to our proprietary capital model is currently at the lower end of the ‘AA’ category, which is somewhat lower than historically mainly because of the reduction in interest rates used to discount loss reserves. The group’s exposure to natural peril and man-made catastrophes and uncertainty related to its substantial casualty reserves (both ongoing and runoff) translate into a moderate risk position score, partially offsetting its very strong capital adequacy. Shareholders’ equity (including preferred shares) totaled $8.9 billion as of year-end 2012, up from $8.4 billion as of year-end 2011. We expect Fairfax to maintain its capital adequacy at an ‘AA’ level.
…
We regard Fairfax’s risk position as moderate. The group has minimal exposure to employee benefit liabilities. Although its exposure to high risk assets is at 70% of total adjusted capital, Fairfax carries substantial cash and liquid fixed-income securities to counterbalance the volatility of equities. About 75% of the portfolio is invested in cash and fixed-income securities with a weighted average rating of ‘A+’. But we are concerned about potential capital and earnings volatility due to its exposure to property catastrophe losses, its willingness to take significant concentrated investment positions to achieve above-average returns, and its asbestos and environmental exposure.

The now obsolete Positive Outlook was reported on PrefBlog when it came into effect …. nearly two years ago!

Fairfax has the following preferreds outstanding: FFH.PR.C, FFH.PR.E, FFH.PR.G, FFH.PR.I AND FFH.PR.K. All are FixedResets; all are relegated to the Scraps index on credit concerns.

Artis Real Estate Investment Trust has announced:

that it has closed its previously announced public offering (the “Financing”) of Cumulative Rate Reset Preferred Trust Units, Series G (the “Series G Units”) on a bought deal basis through a syndicate of underwriters led by RBC Capital Markets and CIBC (the “Underwriters”). Artis issued and sold an aggregate of 3,200,000 Series G Units (inclusive of 200,000 Series G Units issued pursuant to the partial exercise of the Underwriters’ option) at a price of $25.00 per Series G Unit for gross proceeds to Artis of $80,000,000.

DBRS Limited assigned a rating of Pfd-3 (low) to the Series G Units.

Artis intends to use the net proceeds from the Financing to repay indebtedness, fund future acquisitions, and for general trust purposes.

AX.PR.G is a FixedReset, 5.00%+313, announced July 18. Note that it is not strictly a “preferred share”, it is a trust unit, and that it pays interest and return of capital (see comments), not dividends. The issue will be tracked by HIMIPref™ but relegated to the Scraps index on credit concerns.

The DBRS rating of Pfd-3(low) is now official. As was the case with Friday’s closing of PPL.PR.A, I don’t believe the price decline has anything to do with the specifics of the issue, or should be taken as an indication that the underwriters got it wrong … it’s just a crummy environment right now for low-quality FixedResets.

AX.PR.G traded 219,520 shares today in a range of 24.24-70 before closing at 24.66-69, 18×50. Vital statistics are:

The Bank of Montreal has announced (although not yet on their website):

the applicable dividend rates for its Non-Cumulative 5-Year Rate Reset Class B Preferred Shares, Series 16 (the “Preferred Shares Series 16”) and Non-Cumulative Floating Rate Class B Preferred Shares, Series 17 (the “Preferred Shares Series 17”).

With respect to any Preferred Shares Series 16 that remain outstanding after August 26, 2013, commencing as of such date, holders thereof will be entitled to receive fixed rate non-cumulative preferential cash dividends on a quarterly basis, as and when declared by the Board of Directors of the Bank and subject to the provisions of the Bank Act (Canada). The dividend rate for the five-year period commencing on August 26, 2013, and ending on August 25, 2018, will be 3.390%, being equal to the sum of the five-year Government of Canada bond yield as at July 29, 2013, plus 1.65%, as determined in accordance with the terms of the Preferred Shares Series 16.

With respect to any Preferred Shares Series 17 that may be issued on August 26, 2013, holders thereof will be entitled to receive floating rate non-cumulative preferential cash dividends on a quarterly basis, calculated on the basis of actual number of days elapsed in each quarterly floating rate period divided by 365, as and when declared by the Board of Directors of the Bank and subject to the provisions of the Bank Act (Canada). The dividend rate for the three-month period commencing on August 26, 2013, and ending on November 25, 2013, will be 2.669%, being equal to the sum of the three-month Government of Canada Treasury bill yield as at July 29, 2013, plus 1.65%, as determined in accordance with the terms of the Preferred Shares Series 17.

Beneficial owners of Preferred Shares Series 16 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. (EDT) on August 12, 2013.

Conversion inquiries should be directed to BMO’s Registrar and Transfer Agent, Computershare Trust Company of Canada, at 1-800-340-5021.

BMO’s intent to allow the issue to reset was reported on PrefBlog.

I recommend holders of BMO.PR.M (series 16) convert to the FloatingReset (series 17).

This recommendation is based on several factors:

• The two series will be interconvertible again in five years, thus they will have identical values in five years (even if they do not have an identical price!)
• Therefore, any difference in value must be due to the dividends paid in the interim.
• For the amounts paid to be equal, three-month T-Bills must average 1.74% throughout the period, 75bp above their current level. This implies that the ending three-month rate for break-even is about 2.50% (assuming rate hikes are evenly spaced). This is not an unreasonable projection.
• In addition, the FloatingReset offers some insurance against short-term government rates skyrocketting, a scenario which I consider to be of low probability, but of higher probability of short-term rates diving.
• The market loves FloatingResets and I expect the new series to trade above the old one.

The last point deserves a bit more explanation: the FixedReset BNS.PR.P is bid today at 24.59, while the FloatingReset BNS.PR.A (the only FloatingReset currently trading) is bid at 26.12. Given an interconversion date of 2018-4-26 and a fixed yield of 3.35% on BNS.PR.P, it is trivial to calculate that the average required coupon on BNS.PR.A must be 4.85% for break-even. Given the Issue Reset Spread of 205bp, this implies that the break-even three-month bill rate is 2.80%, which is very, very high compared to the current rate of 1.00%. Assuming equal spacing of hikes, this means and end-rate of 4.60%; readers may take their own views on the likelihood of that.

If we set the price of the FixedReset BMO.PR.M at 25.00 and perform a similar calculation, we find that in order for the break-even three-month bill rate to be 2.80%, the price of the new FloatingReset will have to be 26.15.

So, according to me conversion is recommended. Note that the above analysis ignores the fact that FloatingResets are callable at any time at 25.50, a risk that does not apply to the FixedResets. I do not consider this to have a material effect on the analysis, but views may differ.

I have updated the Pair Equivalency Calculator to include data for the three FixedReset / FloatingReset strong pairs currently outstanding or announced.

Pembina Pipeline Corporation has announced:

that it has closed its previously announced public offering of 10,000,000 cumulative redeemable rate reset class A preferred shares, series 1 (the “Series 1 Preferred Shares”) at a price of $25.00 per Series 1 Preferred Share (the “Offering”) for aggregate gross proceeds of $250 million. This includes the previously announced underwriters’ option to purchase an additional 2,000,000 Series 1 Preferred Shares at a price of $25.00 per share, which was exercised in full.

The Offering was first announced on July 17, 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 1 Preferred Shares will begin trading on the Toronto Stock Exchange today under the symbol PPL.PR.A.

PPL.PR.A is a FixedReset, 4.25%+247, announced July 17.

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

PPL.PR.A traded 207,284 shares today in a wide range of 24.27-73 before closing at 24.61-64, 10×1. I don’t think there’s anything particularly wrong with this issue, or the underwriters’ pricing: it simply got caught up in a very weak market for junk FixedResets.

Vital statistics are:

TD Bank has announced:

that 4,612,509 of its 10 million Non-Cumulative 5-Year Rate Reset Preferred Shares, Series S (the “Series S Shares”) will be converted on July 31, 2013, on a one-for-one basis, into Non-Cumulative Floating Rate Preferred Shares, Series T (the “Series T Shares”) of TD. As a result, on July 31, 2013, TD will have 5,387,491 Series S Shares and 4,612,509 Series T Shares issued and outstanding. The Series S Shares and the Series T Shares will be listed on the Toronto Stock Exchange under the symbols TD.PR.S and TD.PR.T, respectively.

TD.PR.S will reset at 3.371%. I had recommended conversion into the FloatingResets.

The Bank of Montreal has announced:

that it does not intend to exercise its right to redeem the currently outstanding Non-Cumulative 5-Year Rate Reset Class B Preferred Shares, Series 16 of the Bank (the “Preferred Shares Series 16”) on August 25, 2013 and, as a result, subject to certain conditions, the holders of Preferred Shares Series 16 have the right, at their option, to convert all or part of their Preferred Shares Series 16 on a one-for-one basis into Non-Cumulative Floating Rate Class B Preferred Shares, Series 17 of the Bank (the “Preferred Shares Series 17”) on August 26, 2013. This date is the first business day following the conversion date of August 25, 2013, identified in the Preferred Shares Series 16 prospectus, which falls on a Sunday. Holders who do not exercise their right to convert their Preferred Shares Series 16 into Preferred Shares Series 17 on such date will retain their Preferred Shares Series 16, unless automatically converted in accordance with the conditions below.

The foregoing conversions are subject to the conditions that: (i) if, after August 12, 2013, the Bank determines that there would be less than 1,000,000 Preferred Shares Series 16 outstanding on August 26, 2013, then all remaining Preferred Shares Series 16 will automatically be converted into an equal number of Preferred Shares Series 17 on August 26, 2013, and (ii) alternatively, if the Bank determines that there would be less than 1,000,000 Preferred Shares Series 17 outstanding on August 26, 2013, no Preferred Shares Series 16 will be converted into Preferred Shares Series 17. In either case, the Bank will give written notice to that effect to any registered holders of Preferred Shares Series 16 affected by the preceding minimums on or before August 19, 2013.

The dividend rate applicable to the Preferred Shares Series 16 for the 5-year period commencing on August 26, 2013, and ending on August 25, 2018, and the dividend rate applicable to the Preferred Shares Series 17 for the 3-month period commencing on August 26, 2013, and ending on November 25, 2013, will be determined and announced by way of a news release on July 29, 2013. The Bank will also give written notice of these dividend rates to the registered holders of Preferred Shares Series 16.

Beneficial owners of Preferred Shares Series 16 who wish to exercise their right of conversion should instruct their broker or other nominee to exercise such right before 5:00 p.m. (EDT) on August 12, 2013.

Conversion inquiries should be directed to BMO’s Registrar and Transfer Agent, Computershare Trust Company of Canada, at 1-800-340-5021.

BMO.PR.M is a FixedReset, 5.20%+165, announced June 12, 2008 which settled June 23, 2008.

Fortis Inc. has announced:

that it has closed its public offering (the “Offering”) of Cumulative Redeemable Fixed Rate Reset First Preference Shares, Series K (“Series K First Preference Shares”) underwritten by a syndicate of underwriters led by TD Securities Inc., CIBC World Markets Inc. and Scotia Capital Inc. Fortis issued 10,000,000 Series K First Preference Shares at a price of $25.00 per share for aggregate gross proceeds to the Corporation of $250,000,000.

The net proceeds of the offering will be used to repay a portion of borrowings under the Corporation’s $1 billion committed corporate credit facility, including amounts borrowed in connection with the redemption of the Corporation’s First Preference Shares, Series C, the construction of the Waneta Expansion and equity injections into certain of the Corporation’s subsidiaries, and for general corporate purposes.

The Series K First Preference Shares were offered by way of prospectus supplement under the short form base shelf prospectus of Fortis dated May 10, 2012 and will commence trading today on the Toronto Stock Exchange under the symbol FTS.PR.K.

The Board of Directors of Fortis has declared a dividend of $0.1233 per share on the Series K First Preference Shares, payable on September 1, 2013 to the holders of record at the close of business on August 16, 2013. Fortis has designated the preference share dividend as an eligible dividend for federal and provincial dividend tax credit purposes.

FTS.PR.K is a FixedReset, 4.00%+205, announced July 9.

The issue will be tracked by HIMIPref™ and assigned to the FixedReset subindex.

FTS.PR.K traded 334,167 shares today in a range of 24.90-15 before closing at 25.03-10, 8×10. Vital statistics are:

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.

…
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.