Category: Issue Comments

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 Absent discussions with Guggenheim Partners, the ratings will be withdrawn.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.

The Toronto-Dominion Bank has announced:

that it does not intend to exercise its right to redeem all or any part of the currently outstanding 10 million Non-Cumulative 5-Year Rate Reset Preferred Shares, Series S (the “Series S Shares”) of TD on July 31, 2013. As a result and subject to certain conditions set out in the prospectus dated May 30, 2008 relating to the issuance of the Series S Shares, the holders of the Series S Shares have the right to convert all or part of their Series S Shares, on a one-for-one basis, into Non-Cumulative Floating Rate Preferred Shares, Series T (the “Series T Shares”) of TD on July 31, 2013. Holders who do not exercise their right to convert their Series S Shares into Series T Shares on such date will continue to hold their Series S Shares.

The foregoing conversion right is subject to the conditions that: (i) if TD determines that there would be less than 750,000 Series T Shares outstanding after July 31, 2013, then holders of Series S Shares will not be entitled to convert their shares into Series T Shares, and (ii) alternatively, if TD determines that there would remain outstanding less than 750,000 Series S Shares after July 31, 2013, then all remaining Series S Shares will automatically be converted into Series T Shares on a one-for-one basis on July 31, 2013. In either case, TD will give written notice to that effect to holders of Series S Shares no later than July 24, 2013.

The dividend rate applicable to the Series S Shares for the 5-year period from and including July 31, 2013 to but excluding July 31, 2018, and the dividend rate applicable to the Series T Shares for the 3-month period from and including July 31, 2013 to but excluding October 31, 2013, will be determined and announced by way of a press release on July 2, 2013.

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.

The default recommendation is to retain the five-year fixed rate; as of June 26, according to the Bank of Canada, the GOC-5 rate is 1.84% while Three Month CTBs are at 1.03%. This spread, although very generous by post-Crunch standards, is pretty skinny by longer term standards.

From a practical standpoint, however, it will be recalled that BNS.PR.P (FixedReset, +205bp) was partially converted into the Floating Reset BNS.PR.A on its Exchange Date in April. Given the GOC-5 rate at the time, BNS.PR.P reset to 3.35% while BNS.PR.A pays 3-month CTB+205.

Given the Canada yields mentioned above, TD.PR.S will reset to a shade higher than BNS.PR.P: 1.84%+160 = about 3.45%, while the new FloatingReset will pay 3-Month CTB+160, significantly less than BNS.PR.A. We are thus left with the rather odd situation that the FixedReset should trade higher and the FloatingReset should trade lower than the BNS comparable.

As always with this type of decision, we can look and see what kind of increase is required in the CTB rate to provide a break-even: given the Canada rates quoted above, a ballpark figure is a steady increase over the next five years to a CTB rate of about 265bp … i.e., if it pays 81bp less today, then an increase to 81bp more in five years will approximately break even (ignoring the time value of money: 81bp less today does quite offset 81bp more in five years. But considering the uncertainty of the prediction itself, that’s close enough for government work).

2.65% is certainly not an unreasonable prediction for three-month bills in five years time. However, there is another consideration: the market loves floating rating instruments. LOVES them. BNS.PR.A (FloatingReset +205) closed last night at 25.91-00, well above its current 25.50 call price, while BNS.PR.P (FixedReset, 3.35%+205) closed last night at 25.25-30.

While a decision should be put off until the new FixedReset rate has been announced (July 2, according to TD), it seems to me that a reasonable plan is to convert to the FloatingReset with the intent of selling them immediately.

Standard & Poor’s has announced:

• We are placing our ratings on Westcoast Energy Inc. on CreditWatch with negative implications.
• The CreditWatch placement reflects that on parent Spectra Energy Corp.
• The CreditWatch listing on Spectra reflects our expectation that we could lower the ratings following the sale of its U.S. gas transmission and storage asset to Spectra Energy Partners L.P. by the end of 2013.
• We will resolve the CreditWatch placement on Westcoast when we resolve the placement on Spectra.

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We have equalized our ratings on Westcoast with those on parent Spectra. We link the parent and operating company’s credit profiles based on our methodology for holding company structures. Accordingly, any rating action on Spectra would likely flow through to our ratings on Westcoast. In our view, there are no adequately robust regulatory or legal provisions that would constrain Spectra’s ability to extract economic value from Westcoast. However, we believe that Westcoast’s wholly owned subsidiary, Union Gas Ltd. (BBB+/Watch Neg/A-2), possesses some regulatory provisions that diminish the parent’s economic recourse to it. Union Gas makes up approximately 43% of the company’s consolidated debt. We have equalized Westcoast’s management and governance score with Spectra.

The action on UNG was previously reported on PrefBlog.

Westcoast is the proud issuer of two series of preferred shares, W.PR.H and W.PR.J, both Straight Perpetuals.

Dividend 15 Split Corp. II has released its Annual Report to November 30, 2012.

Using the S&P TSX 60 index rather than “Dividend Aristocrats” seems a little odd to me – but we’ll let them choose their benchmark!

Figures of interest are:

MER: 1.28% of the whole unit value

Average Net Assets: We need this to calculate portfolio yield. Not much change in Number of Units Outstanding, so the average of the beginning and end of year figures can be used: $77.8-million

Underlying Portfolio Yield: Dividends received of 3,208,211 divided by average net assets of 77.8-million is 4.1%

Income Coverage: Net Investment Income of 2,216,165 divided by Preferred Share Distributions of 2,663,184 is 83%.