Category: Issue Comments

Scotiabank has announced:

that it does not intend to exercise its right to redeem the currently outstanding Non-cumulative 5-Year Rate Reset Preferred Shares Series 18 of Scotiabank (the “Preferred Shares Series 18′) on April 26, 2013 and, as a result, subject to certain conditions, the holders of Preferred Shares Series 18 have the right to convert all or part of their Preferred Shares Series 18 on a one-for-one basis into Non-cumulative Floating Rate Preferred Shares Series 19 of Scotiabank (the “Preferred Shares Series 19”) on April 26, 2013. Holders who do not exercise their right to convert their Preferred Shares Series 18 into Preferred Shares Series 19 on such date will retain their Preferred Shares Series 18.

The foregoing conversions are subject to the conditions that: (i) if, after April 15, 2013, Scotiabank determines that there would be less than one million Preferred Shares Series 18 outstanding after April 26, 2013, then all remaining Preferred Shares Series 18 will automatically be converted into Preferred Shares Series 19 on a one-for-one basis on April 26, 2013, and (ii) alternatively, if Scotiabank determines that there would be less than one million Preferred Share Series 19 outstanding after April 26, 2013, no Preferred Shares Series 18 will be converted into Preferred Shares Series 19. In either case, Scotiabank shall give a written notice to that effect to holders of Series 18 Preferred Shares no later than April 19, 2013.

With respect to any Preferred Shares Series 18 that remain outstanding after April 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 April 26, 2013 and ending on April 25, 2018 will be 3.350%, being equal to the 5-Year Government of Canada bond yield determined as at March 27, 2013 plus 2.05%, as determined in accordance with the terms of the Preferred Shares Series 18.

With respect to any Preferred Shares Series 19 that may be issued on April 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 2.05%, on an actual/365 day count basis, subject to certain adjustments in accordance with the terms of the Preferred Shares Series 19. The dividend rate for the period commencing on April 26, 2013 and ending on July 25, 2013 will be equal to 3.028%, as determined in accordance with the terms of the Preferred Shares Series 19.

Beneficial owners of Preferred Shares Series 18 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 April 11, 2013.

The initial rate on this issue (BNS.PR.P) was 5.00%, so the reset will come as quite a shock to those who haven’t been paying attention.

Update: Assiduous Reader PL writes in and says:

I checked the level 2 quotes on BNS.PR.P and it looks like there are only a handful of bids. I wonder what type of stink bid you would put on it? I mean with an interest rate of just above 3.3 percent I wonder if the price will drop into the teens ? even at 20 the yield will be less then 4 percent? Will these be even mentioned in the Globe or Financial Post ?

The market seems to tolerate Current Yields in the 3.75% range for the low-coupon, high-quality FixedResets; given a reset to $0.8375, this implies a price of 22.33.

Another way of looking at is to focus on the FloatingReset issue that will arise from conversion (which I assume will attract enough interest to be allowed). The issue will pay Bills + 205, which is pretty close to Canada Prime given historic relationships; BCE RatchetRate issues that currently pay 100% of Canada Prime trade at about 23.25 now. BNS.PR.P should trade higher than this because (a) there’s no risk of the dividend ratcheting down to only 50% of Canada prime, and (b) BNS is a better name than BCE. Presumably the FixedReset issue will not trade too far from wherever its Strong Pair trades.

A wild card is the effect of dealer inventories. IIROC Rule 100.2 states:

100.2. For the purpose of Rule 17.13 and this Rule 100 the following margin requirements are hereby prescribed:
…
(f) Stocks
(i) Listed on an exchange in Canada or the United States
For positions in securities listed (other than bonds and debentures but including rights and warrants other than Canadian bank warrants) on any recognized stock exchange in Canada or the United States:
Long Positions – Margin Required
Securities selling at $2.00 or more – 50% of market value …

and Rule 100.12 states:

Notwithstanding Rule 100.2, margin on securities owned or sold short by a Dealer Member shall be provided at the following rates:
…
(c) Floating rate preferred shares
(i) 50% of the margin rate that applies to the related junior security of the issuer multiplied by the market value of the floating rate preferred shares;
(ii) If the floating rate preferred shares are selling over par and are convertible into other securities of the issuer, the margin required shall be the lesser of:
(A) the sum of:
(I) the effective rate determined in Rule 100.12(c)(i) multiplied by par value; and
(II) the excess of market value over par value;
and
(B) the maximum margin requirement for a convertible security calculated pursuant to Rule 100.21.
(iii) 50%, if the issuer of the shares is in default of the payment of any dividend on the shares, in which case the foregoing clauses shall not apply.

For the purposes of this Rule 100.12(c), the term “floating rate preferred share” means a special or preferred share described in paragraphs (i), (ii) and (iii) of Rule 100.2(f), by the terms of which the rate of dividend fluctuates at least quarterly in tandem with a prescribed short term interest rate.

… and Rule 100.12 earlier states:

100.12. Notwithstanding Rule 100.2, margin on securities owned or sold short by a Dealer Member shall be provided at the following rates:
(a) Securities eligible for reduced margin
25% of the market value if such securities are:

…
(v) securities whose original issuance generated Tier 1 capital for a financial institution any of whose securities qualify under item (i) and the financial institution is under the regulatory oversight of the Office of the Superintendent of Financial Institutions of Canada.

I believe that this means that a position in the FloatingReset counterpart to BNS.PR.P (whatever its ticker symbol turns out to be) can be margined at only 12.5%. So for a dealer to finance $100 worth of BNS.PR.?, he’s got to put up $12.50 capital, for which we will assume he pays 15%, or $1.875 p.a., but may borrow the remainder, $87.50, at the overnight rate, which we will assume is 1%, for a payment of $0.875 p.a.. Total financing charge is 2.75%, implying that there’s a positive carry even if BNS.PR.? is trading at par.

Note that this possibility embodies what I think was one of the great regulatory failings that led to the credit crunch: traders’ inventories were not subjected to a surcharge for aging. I claim that as the age of the inventory increases, it’s becomes a lot less like a trading position and a lot more like a corporate loan and should attract a capital charge according to that book.

On the other hand, there are now charges against bank Tier 1 capital based on ownership of Tier 1 capital investments. So maybe the bank will charge its traders more than 15% for the capital required for the position; maybe significant ownership will simply be prohibited. And the bank owned dealers, of course, comprise a very hefty chunk of the market. So maybe dealer inventories will not have a great effect.

So …

Take your choice! I suggest that somewhere in the $24.00-99 range is most likely.

DBRS has announced that it:

has today downgraded the Issuer Rating of Innergex Renewable Energy Inc. (Innergex or the Company) to BB (high) from BBB (low) and the Preferred Shares rating to Pfd-4 (high) from Pfd-3 (low). DBRS has also changed the trends to Stable from Negative. When the trends were changed to Negative from Stable last August, DBRS stated that, considering the business risk profile of Innergex’s contracted renewable power portfolio and the structural protections of a non-recourse, project-financing strategy, deconsolidated leverage (i.e., debt at the holding company level) of over 30% and consolidated leverage of over 60% are viewed as not appropriate for maintaining investment-grade ratings. The ratings downgrade reflects DBRS’s view that Innergex’s aggressive financing strategy will result in weaker balance sheet strength driven by high dividend payouts and ongoing growth plans.

Although Innergex has planned to raise $125 million common equity in the coming months, DBRS expects the Company’s dividend payouts to remain high relative to earnings and to continue eroding the equity base. The high levels of dividends are also unsustainable given the Company’s announced growth plan, including the construction of seven projects with a total of approximately $812 million in spending expected for the next few years. With the debt portion of the funding plan, Innergex’s consolidated leverage ratio is expected to rise. In the absence of substantial corrective measures, DBRS no longer expects Innergex’s financial profile to remain consistent with investment-grade ratings. While the deconsolidated debt-to-capital ratio has improved to 30.4% from 32.3% in 2012, the consolidated total debt-to-capital and cash flow-to-total debt ratios have further weakened to 64.6% and 4.6%, respectively.

It will be most interesting to see what happens tomorrow for these issues, given that RON.PR.A was hammered after its downgrade (although it has since recovered about half of the losses sustained on that tumultuous day). One thing that might mitigate the damage is that the Innergex issues are not included in either ZPR’s holdings or in CPD’s holdings, since INE.PR.A has only 3.4-million shares outstanding (closing today at 24.95-98) and INE.PR.C has only 2-million shares outstanding (closing today at 23.65-74).

BPO Properties Ltd. has announced:

a proposal to exchange its existing preferred shares for new class AAA preference shares of Brookfield Office Properties Inc. (“Brookfield Office Properties”) with substantially the same terms and conditions.

Brookfield Office Properties acquired 100% of the outstanding common shares of BPO Properties in 2010 in connection with the formation of Brookfield Canada Office Properties, a limited purpose unincorporated, closed-ended real estate investment trust. Since that time, BPO Properties has continued to be a reporting issuer with publicly traded preferred shares. The proposed transaction will reduce administrative costs and simplify operations.

On closing of the proposed transaction, holders of preferred shares of BPO Properties will receive one class AAA preference share of Brookfield Office Properties for each preferred share of BPO Properties held. The class AAA preference shares of Brookfield Office Properties will have substantially the same terms and conditions as the preferred shares of BPO Properties that are exchanged. In particular, dividend rates will remain unchanged. Brookfield Office Properties does not expect that the proposed transaction will affect its class AAA preference share ratings, which are the same as those of the preferred shares of BPO Properties.

Currently, the series G, J and M preferred shares of BPO Properties are listed on the TSX Venture Exchange (“TSXV”). If approved by the Toronto Stock Exchange (“TSX”), the new class AAA preference shares of Brookfield Office Properties replacing the series G, J and M preferred shares will begin trading on the TSX shortly following closing of the proposed transaction and the series G, J and M preferred shares of BPO Properties will be delisted from the TSXV.

The transfer of the listing for these three preferred shares happened last August:

Effective at the opening, Thursday, August 16, 2012, the preferred shares of the Company will commence trading on TSX Venture Exchange. This includes the preferred shares: Series G, Series J and Series M. The Company is classified as a ‘Lessor of Non-Residential Buildings’ company.

The Company is presently trading on Toronto Stock Exchange and will be delisted from Toronto Stock Exchange on August 15, 2012.

Corporate Jurisdiction: Canada

Capitalization: unlimited preferred shares with no par value of which
1,805,489 Series G Preferred shares are issued and outstanding
3,816,527 Series J Preferred Shares are issued and outstanding
2,847,711 Series M Preferred Shares are issued and outstanding

Escrowed Shares: 0 shares

Transfer Agent: CIBC Mellon Trust Company

Trading Symbol: Series G “BPP.PR.G”
CUSIP Number: Series G (05565B200)

Trading Symbol: Series J “BPP.PR.J”
CUSIP Number: Series J (05565B408)

Trading Symbol: Series M “BPP.PR.M”
CUSIP Number: Series M (05565B507)

All three issues are tracked by HIMIPref™ – having been grandfathered when they were transferred to the TSXV – but are relegated to the Scraps index on credit, volume and listing concerns.

The proposed issue would have a market capitalization in excess of $100-million, making it eligible for inclusion in TXPR and TXPL, although clearing the volume hurdle might be a problem. Index inclusion is an important consideration these days, with ZPR having amassed a staggering AUM of $489-million in a little over four months.

Update, 2013-4-27: It’s not in the press release, but SEDAR has the Material Change Report dated March 28, 2013, to which I am not allowed to link because the CSA permits CDS to abuse the monopoly over dissemination of public records.:

The board of directors, on the unanimous recommendation of the independent committee, has determined that the proposed transaction is in the best interests of BPO Properties and is unanimously recommending that preferred shareholders vote in favour of the proposed transaction at the upcoming meeting of preferred shareholders, expected to take place on or about April 26, 2013.
…
If preferred shareholders approve the proposed transaction at the meeting, and the requisite court approval is obtained, it is anticipated that the proposed transaction will be completed on or about April 29, 2013.