Category: Issue Comments

Standard and Poor’s has announced:

• •We are lowering our long-term corporate credit rating on Montreal-based Transcontinental Inc. to ‘BBB-‘ from ‘BBB’.
• •We base the downgrade on our view of challenging industry fundamentals, whereby the company could continue to experience declines in organic revenue and profitability, absent gains from the Quad/Graphics Canada transaction, prompting our revision of the company’s business risk profile to “fair” from “satisfactory.”
• •The stable outlook reflects Standard & Poor’s expectation that Transcontinental’s financial policy will be moderate, operating performance will be good despite secular pressures, free cash flow will remain healthy, and credit measures will be managed in line with our expectations in the medium term, including adjusted debt to EBITDA in the 2x area.

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We could lower the ratings if Transcontinental’s operating performance deteriorates, if it does not achieve our revenue targets, if margins decline, or if debt leverage exceeds 2.5x. Given challenging industry conditions, Standard & Poor’s is not contemplating raising the ratings in the next year. However, we could raise the ratings on Transcontinental in the medium term if the company improves its market position in growing sectors, while strengthening its operating performance and credit protection measures on a sustainable basis.

The previous Negative Outlook on TCL was reported on PrefBlog.

TCL has a single issue outstanding, TCL.PR.D, which is tracked by HIMIPref™ but relegated to the Scraps index on credit concerns.

Power Financial Corporation has announced:

the successful completion and closing of an offering of 12,000,000 4.80% Non-Cumulative First Preferred Shares, Series S (the “Series S Shares”) priced at $25.00 per share to raise gross proceeds of $300 million.

The issue was bought by an underwriting syndicate co-led by BMO Capital Markets, RBC Capital Markets and Scotiabank.

The Series S Shares will be listed and posted for trading on the Toronto Stock Exchange under the symbol “PWF.PR.S”. Proceeds from the issue will be used to acquire subscription receipts of Great-West Lifeco Inc. (“Lifeco”) exchangeable into common shares of Lifeco as part of the $1.25 billion offering of subscription receipts announced by Lifeco on February 19, 2013 in connection with its proposed acquisition of Irish Life Group Limited and to supplement Power Financial’s financial resources.

PWF.PR.S is a Straight Perpetual, 4.80%, announced February 19. It will be tracked by HIMIPref™ and has been assigned to the PerpetualDiscount index.

The issue traded 673,150 shares today in a range of 24.93-99 before closing at 24.96-98, 16×44. Vital statistics are:

DBRS has announced that it:

has today downgraded its ratings on the debt and preferred share obligations of Sun Life Financial Inc. (Sun Life or the Company) and its affiliates by a single notch, including the senior debt of Sun Life to A (high) from AA (low). The IC-1 Claims Paying Ability rating of Sun Life Assurance Company of Canada, the Company’s major operating subsidiary, is not affected by this action. The trend on all ratings is Stable. Today’s rating actions resolve DBRS’s September 7, 2012, decision to put the debt and preferred shares of Sun Life Under Review with Negative Implications following a review of industry peers and their ratings. DBRS regards the pre-existing ratings as being out of alignment with the Company’s recent earnings track record and those of its peers.

DBRS recognizes the strength of the Company’s core Canadian franchise, with leading positions in individual life insurance, employee benefits and group retirement services such as pension administration and payout annuities. DBRS also acknowledges that the announced sale of the Sun Life Assurance Company of Canada (U.S.) subsidiary is expected to remove a material source of earnings uncertainty and market risk exposure, which is net positive for the credit. The resulting runoff block of the U.S. life insurance business is also expected to be a long-term, albeit declining, contributor to earnings as will the Company’s MFS Investment Management asset management operation, which continues to experience positive inflows on the back of strong fund performance. Less visible to DBRS is the Company’s growth prospects for its U.S. employee benefits business, which has been investing in development of the targeted voluntary benefits business and in Asia where growth through acquisition and distribution expansion continues to weigh on earnings, at least in the short term.

A recovery in earnings to meet the 15% return on equity and seven times fixed-charge coverage ratio thresholds for AA-rated life insurance companies, as published in the DBRS methodology “Rating Companies in the Canadian Life Insurance Industry” (January 2013), would reflect the Company’s ability to articulate and execute on its chosen strategies. In turn, such a recovery in earnings would put upward pressure on the Company’s ratings. Additionally, a reduction in financial leverage (measured by debt plus preferred shares relative to total capitalization) from the current levels of 29.4% would be viewed favourably.

The Canadian life insurance industry has gone through a fair amount of turmoil over the past five years, largely related to rapid sales growth of wealth management products with embedded equity market guarantees and a continuing low interest rate environment which has resulted in increasing policy reserves and earnings volatility. The related impacts on actuarial assumptions regarding expected market returns, reinvestment rate assumptions and policyholder behaviours have given rise to similar adverse reserve developments and earnings volatility. Risk mitigating hedging activity has also reduced earnings. The impact of reduced earnings has filtered through to downward pressure on capital, which has resulted in the need for additional third party-provided capital in the form of increased financial leverage. Correspondingly, earnings and fixed-charge coverage ratios have remained below former levels and, in the case of Sun Life, below the levels prescribed by the DBRS methodology for a AA-rated life insurance company.

While DBRS recognizes a number of market challenges for the Canadian life insurance industry, it also acknowledges a number of growth opportunities and fundamental credit strengths, including increasingly effective risk management, conservative reserving practices and rigourous regulatory oversight, which support the industry’s relatively strong ratings.

DBRS’ Review-Negative was reported on PrefBlog. When SLF sold its US unit in December 2012, DBRS yawned and Moody’s put the prefs on watch for a possible upgrade.

Sun Life Financial has the following issues outstanding: SLF.PR.A, SLF.PR.B, SLF.PR.C, SLF.PR.D & SLF.PR.E (all DeemedRetractible) and SLF.PR.F, SLF.PR.G, SLF.PR.H & SLF.PR.I (all FixedReset). All are tracked by HIMIPref™ and all are constituents of the indicated subindices. All are now rated Pfd-2(high) by DBRS.

Industrial Alliance Insurance and Financial Services Inc. has announced that it:

has today entered into an agreement with a syndicate of underwriters co-led by National Bank Financial Inc. and BMO Capital Markets, pursuant to which the underwriters have agreed to purchase, on a bought deal basis, 6,000,000 Common Shares (the “Common Shares”) from Industrial Alliance for sale to the public at a price of $37.50 per Common Share, representing aggregate gross proceeds of $225 million.

The Company has also granted the underwriters an option to buy up to an additional $25 million of the Common Shares at the same price per share to cover over-allotments, if any.

This share offering is expected to close on or about February 27, 2013, subject to certain conditions including approval from the Toronto Stock Exchange. The net proceeds of approximately $216 million, after deducting underwriting commissions and before issuance costs, will be used to redeem all of the outstanding 8.25% subordinated debentures due March 27, 2019 (the “Subordinated Debentures”) with a nominal value of $100 million and to redeem all of the Industrial Alliance Trust Securities (“IATS”) – Series A (the “IATS – Series A”) with a nominal value of $150 million. Following closing of this offering, Industrial Alliance intends to issue a redemption notice to redeem the Subordinated Debentures on or about March 29, 2013 and to issue the necessary notice to redeem the IATS – Series A on June 30, 2013. The Subordinated Debentures and the IATS – Series A will be redeemed for a consideration determined in accordance with their respective terms.

According to the Company’s financial information as at December 31, 2012, an issue of $225 million of Common Shares, if the abovementioned redemptions are taken into account, would reduce the debt ratio from 18.5% to 12.4% if only the debentures and the IATS are considered debt, and from 35.2% to 29.3% if preferred shares are also considered debt. The solvency ratio, which stood at 217% as at December 31, 2012 (230% as at January 1, 2013), would decline by about two percentage points, but would remain unchanged if the full $25 million over allotment option were exercised. The Company maintains its guidance for 2013 provided on February 15, 2013.

As a result, S&P has announced:

• •Industrial Alliance Insurance and Financial Services Inc. will issue up to C$250 million in common shares to retire C$250 million in debentures and trust securities.
• •We are revising our outlook on the company to stable from negative and affirming all ratings.
• •We expect leverage to drop to approximately 29% and fixed-charge coverage to increase to 6x.

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The capital raise reflects the company’s exposure to the current low interest rate environment primarily through its relatively large exposure to long-duration individual life insurance products and the fair-value treatment that these liabilities receive under Canadian International Financial Reporting Standards and Canadian regulatory capital rules. Management has taken a number of proactive steps to strengthen its capital position, including de-risking and re-pricing products to reduce capital strain, selling capital-intensive businesses, and successfully negotiating the capital requirements underlying the lapse assumptions for retail insurance with Canadian regulators.

The outlook is stable. We could downgrade the company if leverage exceeds 35% and if its fixed -charge coverage falls to less than 5x. Alternatively, we could consider raising the rating on the company if it were able to reduce leverage meaningfully and increase fixed-charge coverage to 8x.

IAG has several preferred share issues outstanding: IAG.PR.A, IAG.PR.E & IAG.PR.F, DeemedRetractibles, and IAG.PR.C & IAG.PR.G, FixedResets. All are tracked by HIMIPref™ all are assigned to their respective indices.

Scotia Managed Companies has announced:

Allbanc Split Corp. II (the “Company”) announced today that it has called 372,225 Preferred Shares for cash redemption on February 28, 2013 (in accordance with the Company’s Articles) representing approximately 23.7281707% of the outstanding Preferred Shares as a result of the special annual retraction of 744,450 Capital Shares by the holders thereof. The Preferred Shares shall be redeemed on a pro rata basis, so that each holder of Preferred Shares of record on February 26, 2013 will have approximately 23.7281707% of their Preferred Shares redeemed. The redemption price for the Preferred Shares will be $21.80 per share.

Holders of Preferred Shares that are on record for dividends but have been called for redemption will be entitled to receive dividends thereon which have been declared but remain unpaid up to but not including February 28, 2013.

Payment of the amount due to holders of Preferred Shares will be made by the Company on February 28, 2013. From and after February 28, 2013 the holders of Preferred Shares that have been called for redemption will not be entitled to dividends or to exercise any right in respect of such shares except to receive the amount due on redemption.

Allbanc Split Corp. II is a mutual fund corporation created to hold a portfolio of publicly listed common shares of selected Canadian chartered banks. Capital Shares and Preferred Shares of Allbanc Split Corp. II are listed for trading on The Toronto Stock Exchange under the symbols ALB and ALB.PR.B respectively.

ALB.PR.B was last mentioned on PrefBlog when there was a partial redemption in February 2012. ALB.PR.B is tracked by HIMIPref™, but relegated to the Scraps index on credit concerns.

Bell Aliant Inc. has announced:

that its subsidiary, Bell Aliant Preferred Equity Inc. (the “Company”), has closed the sale of 8,000,000 4.25 per cent Cumulative 5-Year Rate Reset Series E Preferred Shares (the “Series E Preferred Shares”) at a price of $25.00 per Series E Preferred Share for total gross proceeds of $200 million. This follows the Company’s previously announced bought deal public offering led by Scotiabank, TD Securities Inc, and CIBC. The Series E Preferred Shares begin trading on the TSX under the symbol “BAF.PR.E” today.

BAF.PR.E is a FixedReset, 4.25%+264, announced January 30. The announced issue size of $200-million implies that the greenshoe option for another $30-million was not exercised.

The issue traded 908,461 shares today in a range of 25.12-50 before closing at 25.28-30, 3×42. Vital statistics are:

BAF.PR.E will be tracked by HIMIPref™ but relegated to the Scraps index on credit concerns.

On July 23, 2012, Nexen entered into an agreed to be acquired by CNOOC:

In addition, under the terms of the transaction, if approved by the holders of preferred shares in a separate class vote, CNOOC Limited will acquire the outstanding preferred shares of Nexen for a purchase price of C$26.00 per share in cash, plus any dividends accrued but unpaid at the time of closing. However, closing of the arrangement is not conditioned upon approval by the holders of the Nexen preferred shares.

According to the information circular:

Full details of the Arrangement are set out in the accompanying Notice of Special Meeting of Shareholders and Information Circular and Proxy Statement (the ‘‘Information Circular’’). The following is a summary of the relevant terms of the Arrangement for the holders of outstanding Shares:

• • Common Shareholders (other than dissenting holders of Common Shares) will receive, for each Common Share held, U.S.$27.50 in cash, without interest (the ‘‘Common Share Consideration’’); and
• • subject to the requisite approval of the Arrangement by the Preferred Shareholders, the Preferred Shareholders (other than dissenting holders of Preferred Shares) will receive, for each Preferred Share held, Cdn.$26.00 in cash (together with an amount equal to all accrued and unpaid dividends up to, but excluding, the date of closing of the Arrangement), without interest (the ‘‘Preferred Share Consideration’’).

The plan was approved by shareholders on September 20, 2012:

The arrangement was approved by approximately 99% of the votes cast by Nexen common shareholders and approximately 87% of the votes cast by Nexen preferred shareholders at the special meeting held on September 20, 2012.

The closing of the arrangement remains subject to the granting of the final order by the Court of Queen’s Bench of Alberta, the receipt of required regulatory approvals and the satisfaction or waiver of the other customary closing conditions.

Nexen has now announced:

Nexen Inc. (“Nexen”, TSX, NYSE: NXY) announced today that Nexen has received approval from the Committee on Foreign Investment in the United States (CFIUS) with respect to the proposed acquisition of Nexen by CNOOC Limited, and now has all of the requisite approvals to proceed to close.

The transaction is expected to close the week of February 25, 2013 and remains subject to customary closing conditions.

S&P has announced:

S&P Canadian Index Services will make the following changes in the S&P/TSX Canadian Indices:

Nexen Inc. (TSX: NXY) has announced today the receipt of all regulatory, shareholder and court approvals for its transaction with CNOOC whereby the shares of Nexen will be acquired by CNOOC for $US27.50 cash per share. The shares of Nexen will be removed from the S&P/TSX Composite, Capped Composite and Composite Equal Weight, the S&P/TSX 60, 60 Capped, 60 130/30 and 60 Equal Weight, the S&P/TSX Capped Energy, the S&P/TSX Composite Dividend and the S&P/TSX Equal Weight Oil & Gas Indices after the close of trading on Wednesday, February 20, 2013. Catamaran Corporation (TSX: CCT) will be removed from the S&P/TSX Completion Index and added to the S&P/TSX 60, 60 Capped and 60 Equal Weight Indices. Catamaran will not be added to the S&P/TSX 60 130/30 Index at this time. The Class ‘A’ Series 2 Preferred Shares of Nexen (TSX: NXY.PR.A) will be removed from the S&P/TSX Preferred Share, the S&P/TSX Preferred Share Laddered and the S&P/TSX North American Preferred Stock Indices at the same time.

BAM Split Corp., issuer of BNA.PR.B, BNA.PR.C, BNA.PR.D and BNA.PR.E, has released its Annual Report to September 30, 2012.

Figures of interest are:

MER: (excluding dividends on preferred shares, issue costs and Class A Preferred Share redemption premium) 0.0%. You don’t see that number very often! A more precise calculation from the Income Statement shows that the expenses totalled $319,000 for the year, or about 3bp p.a. on net assets.

The expenses are wel itemized, however, and are a delight for voyeurs. I found the Listing Fees of $96,000 and Rating Fees of $6,000 to be most interesting.

Average Net Assets: This must be calculated if we’re to find the second decimal point on the MER. On 2011-9-30, total assets were 1.541-billion; on 2012-9-30, 1.802-billion. I used the lower figure.

Underlying Portfolio Yield: Given the fund’s portfolio composition and investment policy, deviations from the raw yield on BAM.A will not be material. This is currently 1.446%

Income Coverage: Dividends & Interest of $28.731-million less expenses (before amortization of issue costs) of $0.319-million is $28.412-million, to cover preferred (both junior and senior, which is not standard) dividends of $28.5-million is 100%.

The Brookfield guys never miss an accounting trick. They have on their books deferred issuance costs of $4.556-million, which reduces the value of the preferreds and hence increases the value of the Capital Units. Split Share Corporations normally expense their issuance costs immediately upon issue, but doing it this way means that the Capital Unit Value, and hence the Unit Value, is higher than it would be otherwise. This amounts to about $0.16 per unit. Naturally, keeping it on the books means you’ve got to charge it to annual expenses via amortization, but nobody’s going to look at that for analytical purposes. I didn’t! Strictly speaking, though, the $0.16 should be deducted from the NAVPU when calculating Asset Coverage.