Category: Issue Comments

DBRS has announced that it:

has today downgraded all the ratings of HSBC Bank Canada following the downgrade of the ratings of HSBC Holdings plc (the Parent; see DBRS’s HSBC Holdings plc press release dated February 8, 2013). The outlook on all ratings is Stable. The ratings have been removed from Under Review with Negative Implications, where they were placed on July 20, 2012.

DBRS ratings of HSBC Bank Canada, including the Long-Term Deposits and Senior Debt (no guarantee) rated AA (low) and Subordinated Debt (no guarantee) at A (high), are based largely on the relationship HSBC Bank Canada has with the Parent, which is one of the largest global banking groups. DBRS’s Issuer Rating – Long-Term of the Parent is AA with a Stable trend.

Under DBRS’s global bank rating methodology, DBRS has assigned HSBC Bank Canada a support assessment of SA1, reflecting a strong expectation of timely support from the Parent.

Given the strategic nature of the relationship between HSBC and the Parent, but lack of an explicit guarantee, the non-guaranteed long-term deposits and senior debt rating of HSBC has been assigned a rating that is one notch lower than HSBC Holdings plc.

The press release on HSBC Holdings states:

The downgrade takes into account HSBC’s recent fines and customer redress costs (including anti money laundering in the US and Payment Protection Insurance (PPI) in the UK), which demonstrate a weaker operational risk profile than is commensurate with the prior rating level. Moreover, DBRS expects the process for HSBC to raise compliance standards across the Group to be a lengthy and costly process. DBRS notes that HSBC already made major organisational changes to its structure in 2011, whereby control has been more centralised within the global businesses and functions rather than spread across multiple geographies, and that these changes should underpin the ongoing reforms. However, in DBRS’s view it is a significant challenge to successfully reform procedures and strengthen controls in large, complex banking organisations, such as HSBC.
…
…the Group has increased its spending on anti-money laundering, remedial measures, and an overhaul of controls and procedures, and intends to bring all controls globally to its highest global standard. DBRS considers that it is difficult to assess the full cost and revenue impact of meeting these higher standards, but expects it to be a drag on profitability.

Hurray! They’re going to spend more on anti-money laundering! It reminds me of John Allison’s remark:

And then there was the Patriot Act, which was supposed to catch terrorists. I’ve talked to many people in government and they all do this dancing act, but the fact is there has never been a single terrorist caught and convicted because of the Patriot Act. The Act cost the banking industry more than $5 billion annually, and I would argue that no one is going to be caught. If you are dumb enough to get caught under the Patriot Act, you are going to get caught anyway. The only significant conviction of the Patriot Act was Eliot Spitzer, the governor of New York, who was convicted of soliciting prostitutes under a law designed to catch terrorists.

The DBRS announcement in July that HSB was on Review-Negative was reported on PrefBlog.

HSBC Bank Canada is the issuer of HSB.PR.C, HSB.PR.D (both DeemedRetractibles) and HSB.PR.E (FixedReset). All are tracked by HIMIPref™ and assigned to the indicated subindices. All are now rated Pfd-2.

BCE Inc. has announced:

BCE Inc. will, on March 1, 2013, continue to have Cumulative Redeemable First Preferred Shares, Series AC (“Series AC Preferred Shares”) outstanding if, following the end of the conversion period on February 19, 2013, BCE Inc. determines that at least 2.5 million Series AC Preferred Shares would remain outstanding. In such a case, as of March 1, 2013, the Series AC Preferred Shares will pay, on a quarterly basis, as and when declared by the Board of Directors of BCE Inc., a fixed cash dividend for the following five years that will be based on an annual fixed dividend rate equal to 3.550%.

That’s a good step downwards from its last reset in 2008 to 4.60%!

As noted earlier:

As far as deadlines for conversion go:

In order to convert your shares, you must exercise your right of conversion during the conversion period, which runs from January 15, 2013 to February 19, 2013, inclusively.

Note that brokerages will have their own deadlines for notice, which may be a few days earlier than the date on which BCE must be notified – so if you’re contemplating conversion, check well in advance!

Less than two weeks to go! So if you’re planning to convert from BCE.PR.C to or from BCE.PR.D, better start getting your ducks in a row now!

BCE.PR.D is a RatchetRate preferred, by which I mean it pays between 50% and 100% of Canada Prime on its par value of $25. The percentage paid increases when the market price of the issue is significantly less than $25, and decreases when the price is significantly above. The issue has been well below par for some time and the current percentage is 100%.

Given that Canada Prime can be estimated to be about 200bp above three-month treasury bills, this makes BCE.PR.D the rough equivalent of a FloatingReset (of which none yet exist; they will appear by conversion from FixedResets) with an Issue Reset Spread of 200bp, for as long as it trades below par. Since +200bp is a pretty skimpy spread for an issuer of BCE’s credit quality, it is reasonable to assume that it will trade below par for the next five years … while always remembering that it might not!

Given the above, we can assume that BCE.PR.D will pay 100% of Canada Prime for the next five years; thus, it will pay more dividends than BCE.PR.C if the average Canada Prime Rate over the period is more than 3.55%.

I think there’s a pretty good chance of that, and even if that turns out not to be the case, it is hard to imagine that Canada Prime will actually go down over the period, so the downside of being wrong isn’t all that terrible.

Therefore, I recommend that holders of BCE.PR.C convert to BCE.PR.D and recommend that holders of BCE.PR.D retain their holdings (at least, so far as conversion is concerned; no recommendation is made here regarding potential trades out of BCE.PR.D into any other issue).

Laurentian Bank has announced:

Laurentian Bank of Canada announces that it will redeem, on March 15, 2013, all of its Non-Cumulative Class A Preferred Shares Series 9 then outstanding. Such preferred shares will be redeemed at a redemption price of $25.00 per share, together with any declared and unpaid dividends.

Beneficial holders who are not the registered holders of these shares should contact the financial institution, broker or other intermediary through which they hold such shares to confirm how they will receive the redemption proceeds. Formal notices and instructions for the redemption will be forwarded to all registered shareholders.

LB.PR.D is a DeemedRetractible with a 6.00% coupon. It was last mentioned on PrefBlog when the LB preferreds were downgraded to P-3(high) by S&P in December, 2012. LB.PR.D has been tracked by HIMIPref™, but has been relegated to the Scraps index on credit concerns.

DBRS has announced that it:

has today assigned a provisional rating of A (low) to a proposed $350 million Unsecured Medium Term Notes (the Notes) to be issued by Brookfield Asset Management Inc. (Brookfield or the Company). The trend is Stable. The provisional rating is based on draft term sheets provided by the Company on January 28, 2013. The assignment of a final rating is subject to receipt by DBRS of final documentation that is consistent with that which DBRS has already reviewed.

The proposed Notes, a $175 million tranche maturing April 2019 and a $175 million tranche maturing March 2023, will be an unsecured obligation and will rank equally and ratably with all of the Company’s other unsecured and unsubordinated obligations. Proceeds of the Notes will be used for the redemption of the $150 million unsecured debt maturing June 2014 (including related costs), refinancing of the US$75 million unsecured debt maturing October 2013 and reduction of short-term borrowing outstanding. DBRS understands that the transaction will not result in any material increase in the level of corporate borrowing at Brookfield.

In assigning the provisional instrument rating, DBRS reiterates that there remains minimal room for further deterioration, as indicated in our most recent commentary on the Company, published on October 19, 2012. DBRS expects that Brookfield’s corporate-level financial metrics for 2012 will reach our targets (funds from operations (FFO) to debt of 30% or higher and FFO interest coverage of 5.0 times) for the ratings and will maintain them at these levels going forward. The ratings could come under pressure if these metrics fall materially short of the targets or if there is a material deterioration or rating downgrade in one or more of the core businesses (including Brookfield Office Properties Inc.).

Brookfield Asset Management is the proud issuer of:

• FixedResets BAM.PF.A, BAM.PF.B, BAM.PR.P, BAM.PR.R, BAM.PR.T, BAM.PR.X, BAM.PR.Z
• Floaters BAM.PR.B, BAM.PR.C, BAM.PR.K
• RatchetRate BAM.PR.E
• FixedFloater BAM.PR.G
• OperatingRetractible BAM.PR.J, BAM.PR.O
• Straight Perpetual BAM.PR.M, BAM.PR.N

A downgrade of BAM would also have an immediate effect on the SplitShares issued by BAM Split Corp.: BNA.PR.B, BNA.PR.C, BNA.PR.D and BNA.PR.E.

It also seems likely that a BAM downgrade would involve collateral or related damage to the ratings of Brookfield Properties Corp (BPO.PR.F, BPO.PR.H, BPO.PR.J, BPO.PR.K, BPO.PR.L, BPO.PR.N, BPO.PR.P, BPO.PR.R, BPO.PR.T), Brookfield Office Properties (BPP.PR.G, BPP.PR.J, BPP.PR.M), Brookfield Renewable Power Preferred Equity Inc (BRF.PR.A, BRF.PR.C, BRF.PR.E) and Brookfield Investments Corporation (BRN.PR.A).

DBRS’ increasing discomfort with the rating on BAM has been reported on PrefBlog in several posts: BAM To Slow Balance Sheet Deterioration and DBRS: BAM is Not-Quite-Trend-Negative. S&P assigned Outlook Negative to BAM last spring, Outlook Negative to BPO in the summer and, most recently, DBRS Increasingly Nervous About BAM.

Scotia Managed Companies has announced:

The Board of Directors of SL Split Corp.(the “Company”) has announced today that the redemption prices for all outstanding Capital Shares and Preferred Shares to be paid on
January 31, 2013 are as follows:

Redemption Price per Preferred Share: $25.78

Redemption Price per Capital Share: $1.55

Holders of 189,000 Capital Shares requested delivery of and will receive their pro rata share of portfolio shares in payment for their Capital Shares.

Capital Shares and Preferred Shares of SL Split Corp. are listed for trading on The Toronto Stock Exchange under the symbols SLS and SLS.PR.A respectively. The Capital Shares and Preferred Shares will be de-listed from The Toronto Stock Exchange as at the close of trading on January 31, 2013.

The intention to redeem was reported on PrefBlog. SLS.PR.A was not tracked by HIMIPref™.

Brookfield Renewable Energy Partners has announced:

the completion of its previously announced 5% perpetual Class A Preferred Shares, Series 5 (“Preferred Shares”) issue in the amount of CDN$175,000,000. Brookfield Renewable issued, through a wholly-owned subsidiary, 7,000,000 Preferred Shares at a price of CDN$25.00 per share, for total gross proceeds of CDN$175,000,000.

The offering was underwritten by a syndicate led by RBC Capital Markets, CIBC, Scotiabank, and TD Securities Inc.

The Series 5 Preferred Shares will commence trading on the Toronto Stock Exchange this morning under the ticker symbol BRF.PR.E.

BRF.PR.E is a Straight Perpetual, 5.00%, announced January 21. It has been rated Pfd-3(high) by DBRS.

The issue traded 560,718 shares in a range of 24.94-03 before closing at 24.99-01, 25×14. Vital statistics are:

Scotia Managed Companies has announced:

allBanc Split Corp. (the “Company”) is pleased to announce that it filed a preliminary short form prospectus in respect of a proposed public offering of Class C preferred shares, series 1 and additional Class A capital shares (the “Capital Shares”) collectively, the “Shares”.

The Shares are being offered to the public on a best efforts basis by a syndicate of agents led by Scotiabank and including CIBC, RBC Capital Markets, TD Securities Inc., BMO Capital Markets, National Bank Financial Inc., Canaccord Genuity Corp., Macquarie Private Wealth Inc., Raymond James Ltd., GMP Securities L.P. Mackie Research Capital Corporation, Burgeonvest Bick Securities Limited, Desjardins Securities Inc. and Manulife Securities Incorporated.

allBanc Split Corp. is a mutual fund corporation created to hold a portfolio of common shares of the Bank of Montreal, Canadian Imperial Bank of Commerce, The Bank of Nova Scotia, Royal Bank of Canada and The Toronto Dominion Bank. Capital Shares and Class B preferred shares of allBanc Split Corp. are listed for trading on the Toronto Stock Exchange under the symbols ABK.A and ABK.PR.B respectively.

The intent to come out with a refunding issue was reported on PrefBlog. ABK.PR.B is a fairly small issue, with less than half a million shares outstanding with a par value of $26.75 each and is not tracked by HIMIPref™. It is likely that the new issue will also be too small to track.

Following its warning last fall, Moody’s Investor Service has announced:

today downgraded the long-term ratings of six Canadian banks concluding the review initiated on 26 October 2012. The long-term senior debt ratings of the banks were all downgraded by 1 notch. We also removed systemic support from the ratings of all rated Canadian banks’ subordinated debt instruments, including those issued by Royal Bank of Canada (RBC). RBC’s other ratings were affirmed. The short term Prime-1 ratings of the Canadian banks were affirmed. All ratings for these banks now have a stable outlook. Moody’s special comment “Key drivers of Canadian bank rating actions” ([LINK]) provides additional commentary on the rationale behind today’s actions. “Today’s downgrade of the Canadian banks reflects our ongoing concerns that Canadian banks’ exposure to the increasingly indebted Canadian consumer and elevated housing prices leaves them more vulnerable to unpredictable downside risks facing the Canadian economy than in the past.” said David Beattie, a Moody’s Vice President. “Following today’s actions, the Canadian banks still rank amongst the highest rated banks in our global rating universe.”

OVERVIEW OF TODAY’S ACTIONS

Bank of Montreal (BMO; downgraded to Aa3 stable from Aa2 for long-term deposits)

Bank of Nova Scotia (BNS; downgraded to Aa2 stable from Aa1 for long-term deposits)

Caisse centrale Desjardins (CcD; downgraded to Aa2 stable from Aa1 for long-term deposits)

Canadian Imperial Bank of Commerce (CIBC; downgraded to Aa3 stable from Aa2 for long-term deposits)

National Bank of Canada (NBC; downgraded to Aa3 stable from Aa2 for long-term deposits)

Toronto-Dominion Bank (TD; downgraded to Aa1 stable from Aaa for long-term deposits)

Please click on the following link to access the full list of affected credit ratings. This list is an integral part of this press release and identifies each affected issuer: [LINK]

SUMMARY RATINGS RATIONALE

High levels of consumer indebtedness and elevated housing prices leave Canadian banks more vulnerable than in the past to downside risks the Canadian economy faces:

• …
• NBC, BMO and BNS have sizeable exposure to volatile capital markets businesses:
• Moody’s believes that trading and investment banking activities expose financial firms to the risk of outsized losses and risk management and controls challenges, and leave them highly dependent on the confidence of investors, customers and counterparties.
• Canadian banks’ have noteworthy reliance on wholesale funding:
• The Canadian bank’s noteworthy reliance on confidence-sensitive wholesale funding, which is obscured by limited public disclosure, increases their vulnerability to financial markets turmoil.
• Moody’s has removed systemic support from the ratings of all Canadian banks’ subordinated debt instruments that had benefited from support “uplift”:
• The rating agency believes the global trend towards imposing losses on junior creditors in the context of future bank resolutions reduces the predictability of such support being provided to the sub-debt holders of the large Canadian banks given the Canadian regulators’ broad legislated resolution powers. The removal of support for subordinated debt is consistent with recent actions we’ve taken elsewhere, including in many European countries, reflecting the increased likelihood that sub-debt holders would be subject to burden sharing in the event support was required.

The bit about capital markets exposure shows that OSFI’s touting of the benefits is dubious:

Policymakers in Europe and the U.S. are getting set to prohibit banks from getting into risky capital markets activities, but such a step would not make sense in Canada, according a senior executive at the country’s top banking regulator.

Speaking to an industry conference in Toronto, Mark Zelmer, assistant superintendent of the Office of the Superintendent of Financial Institutions, said that for Canada to adopt such a strategy would “be akin to conducting surgery on the [banking system] in the hope of” finding a miraculous solution to the problem of excess risk.
…
Canada has no need to follow the U.S. approach because for decades banks in this country have benefitted from owning capital markets businesses. Ever since lenders were able to own investment dealers back in the 1980s the increased diversification of revenue “helped them weather several financial storms,” he said. “For example, profits from investment banking activities helped cushion bank profits a few years ago when commercial banking activities were experiencing rising loan loss provisions. By the same token, commercial bank profits over the years have helped some banks weather the occasional stumble in capital markets.”

Mr. Zelmer cautioned that the issue is not for OSFI alone to decide, but his comments make clear which way the regulator is leaning.

Anyway, Moody’s ratings on the preferreds are now:

• BMO, Baa2(hyb)
• BNS, Baa1(hyb)
• CM, Baa2(hyb)
• NA, Baa3(hyb)
• TD, A3(hyb)

Like all those hybs? Regulators insist on them, so that investors won’t have to read the prospectus to determine whether a particular instrument is a hybrid or not before buying it.

Issues affect by the preferred share downgrades are (deep breath):
BMO.PR.H, BMO.PR.J, BMO.PR.K, BMO.PR.L, BMO.PR.M, BMO.PR.N, BMO.PR.O, BMO.PR.P, BMO.PR.Q
BNS.PR.J, BNS.PR.K, BNS.PR.L, BNS.PR.M, BNS.PR.N, BNS.PR.O, BNS.PR.P, BNS.PR.Q, BNS.PR.R, BNS.PR.T, BNS.PR.X, BNS.PR.Y, BNS.PR.Z
CM.PR.D, CM.PR.E, CM.PR.G, CM.PR.K, CM.PR.L, CM.PR.M, CM.PR.P
NA.PR.K, NA.PR.L, NA.PR.M, NA.PR.N, NA.PR.O, NA.PR.P
TD.PR.A, TD.PR.C, TD.PR.E, TD.PR.G, TD.PR.I, TD.PR.K, TD.PR.O, TD.PR.P, TD.PR.Q, TD.PR.R, TD.PR.S, TD.PR.Y

Scotia Managed Companies has announced:

The Board of Directors of SL Split Corp. (the “Company”) has today declared an ordinary dividend of $0.3223 per Preferred Share payable on January 31, 2013 to holders of record at the close of business on January 29, 2013.

The Capital Shares and Preferred Shares will be redeemed by the Company on January 31, 2013 (the “Redemption Date”) in accordance with the redemption provisions of the shares as described in the prospectus dated October 31, 2007. The Preferred Shares will be redeemed at the lesser of (i) $25.78; and (ii) the Unit Value. Holders of the Capital Shares will receive an amount per share, if any, by which the Unit Value exceeds $25.78. As at January 14, 2013 the Unit Value was $27.28.

A further press release will be issued by the Company in connection with the redemption prices on January 30, 2013. Payment of the amounts due to holders of Capital Shares and Preferred Shares will be made by the Company on January 31, 2013.

SL Split Corp. is a mutual fund corporation created to hold a portfolio of common shares of Sun Life Financial Inc. The Company will generate a fixed quarterly dividend for the Preferred shareholders and provide the Capital shareholders with a leveraged investment, the value of which is linked to changes in the market price of the Sun Life shares. Capital
Shares and Preferred Shares of SL Split Corp. are listed for trading on The Toronto Stock Exchange under the symbols SLS and SLS.PR.A respectively.

SLS.PR.A was last mentioned on PrefBlog when it was downgraded to Pfd-5 by DBRS (who still show it at that level). SLS.PR.A is not tracked by HIMIPref™