Category: Issue Comments

DBRS has announced that it:

has today confirmed the Pfd-3 (low) rating on the Preferred Share obligations of GMP Capital Inc. (GMP or the Company), but has changed the trend on the rating to Negative. The rating reflects the strength of the Company’s business franchise as a premier provider of investment banking and capital markets products and services to its targeted market of mid-sized Canadian companies, most of whom operate in the resource and energy sectors. The change in trend, however, reflects the current adverse market environment for the Company’s resource-oriented clients and DBRS’s belief that these conditions are not likely to turn favourable in the short term. While the Company has invested in geographical and business line diversification, largely through the 2011 acquisition of U.S.-based Miller Tabak Roberts Securities, LLC (MTR), which has provided new market opportunities and revenues, the weak market environment has caused earnings to remain weak since Q2 2011.
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The slump in underwriting and trading activities, which DBRS does not expect to recover in the short-to-medium-term, given the weak global economic outlook and continued absence of investor confidence, suggests that a Negative trend is appropriate until the Company returns to a healthy and sustainable level of net income, steady capital accumulation and improving capitalization ratios. In the current environment, the Company’s 32.7% interest in Richardson GMP, a high net worth wealth management operation with over $14 billion in assets under administration (AUA), is operating at break-even and is therefore not a source of profitable diversification for the Company. Similarly, the failure of the Company’s investment in EdgeStone Capital Partners, L.P., removes some of its previous potential for earnings diversification

CU Inc. has announced:

that it will issue $200,000,000 of 3.857% Debentures maturing on November 14, 2052, at a price of $100.00 to yield 3.857%. This issue was sold by RBC Dominion Securities Inc., BMO Nesbitt Burns Inc., TD Securities Inc. and Scotia Capital Inc. Proceeds from the issue will be used to finance capital expenditures, to repay existing indebtedness, and for other general corporate purposes of ATCO Electric Ltd. and ATCO Gas and Pipelines Ltd.

The bonds are rated “A” by S&P.

This is interesting because CIU.PR.A closed at 25.16-20 today to yield 4.57-56% to its limit maturity (although this issue is a PerpetualPremium, it doesn’t quite trigger a YTW scenario of a call in the HIMIPref™ analysis. The bid-YTW of 4.57% is equivalent to 5.94% interest at the standard conversion factor of 1.3x, so the pre-tax interest equivalent spread (in this context, the “Seniority Spread”) of the Straight Perpetual over the debenture is about 210bp – very close to the 220bp for long corporates vs. PerpetualDiscounts reported November 14.

So it would appear that despite all the problems with the lack of PerpetualDiscount issues and their poor quality (relative to what the index was before all the banks and insurers transformed into DeemedRetractibles), the Seniority Spread as calculted is still meaningful – at least as far as a single test is concerned!

Standard & Poor’s has announced:

• •We are lowering our long-term corporate rating on Bombardier Inc. to ‘BB’ from ‘BB+’.
• •The downgrade reflects what we view as the company’s significantly lower-than-expected cash generation in 2012 due to fewer customer advances and weaker operating profit given the global economy. This, combined with ongoing heavy capex on the C-Series programs (which are facing a six-month delay), will mean that Bombardier’s leverage ratio will remain high, over 6x, until 2014.
• •We are also assigning our ‘BB’ issue rating, and ‘4’ recovery rating, to Bombardier’s proposed US$1 billion of unsecured notes.
• •The stable outlook reflects our expectations of stable performance from the company’s rail segment and overall slight improvement in operating margins.

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A further downgrade is possible, if lower customer advances and additional delays in the CSeries programs lead to greater-than-expected negative free cash generation. This could ultimately lead to delays in any improvement to the adjusted leverage ratio from our current expectations in the next year-and-a-half.

Under the current business conditions, we believe an upgrade is unlikely in the near term. Nevertheless, when what we view as more normal and stable market conditions return and the company successfully launches the CSeries, we could consider revising the outlook to positive or raising the rating on Bombardier if in turn the company improves its financial measures, with adjusted debt to EBITDA falling below 4x or adjusted funds from operations to debt reaching 20%.

BBD has three series of preferred outstanding: BBD.PR.B, BBD.PR.C and BBD.PR.D.

BCE Inc. has announced:

BCE Inc. will, on December 1, 2012, continue to have Cumulative Redeemable First Preferred Shares, Series Z (“Series Z Preferred Shares”) outstanding if, following the end of the conversion period on November 19, 2012, BCE Inc. determines that at least one million Series Z Preferred Shares would remain outstanding. In such a case, as of December 1, 2012, the Series Z 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 a fixed rate equal to the product of: (a) the average of the yields to maturity compounded semi-annually, determined on November 13, 2012 by two investment dealers selected by BCE Inc., that would be carried by non-callable Government of Canada bonds with a 5-year maturity (the “Government of Canada Yield”), multiplied by (b) a percentage rate determined by BCE Inc. (the “Selected Percentage Rate”) for such period.

The “Selected Percentage Rate” determined by BCE Inc. for such period is 243%. The “Government of Canada Yield” is 1.297%. Accordingly, the annual dividend rate applicable to the Series Z Preferred Shares for the period of five years beginning on December 1, 2012 will be 3.152%.

The company has previously published

• BCE.PR.Z Conversion Notice
• BCE.PR.Y Conversion Notice

Similarly to to my recommendation in the BCE.PR.A / BCE.PR.B interconversion, I recommend that holders of BCE.PR.Z convert to BCE.PR.Y. The total dividends paid over the next five years will greater for the latter issue if the average prime rate exceeds 3.152% (provided that this issue continues to pay 100% of prime, which it will do unless the current price of a little under $22 increases to over $25). This condition will be met if prime increases steadily to 3.5% at the end of five years, and doesn’t miss by much if there’s only a single hike to 3.25%. This is a reasonably good bet, even with the Fed announcing continued financial repression through mid-2015. Additionally, I judge the chance of an overshoot of this figure to be much greater than the chance of an extreme undershoot; in other words, I judge the chances of average prime being 5% to be much greater than the chance of average prime being 2%.

Fortis Inc. has announced:

that it has closed its public offering (the “Offering”) of Cumulative Redeemable First Preference Shares, Series J (“Series J First Preference Shares”) underwritten by a syndicate of underwriters led by BMO Capital Markets and RBC Capital Markets. Fortis issued 8,000,000 Series J First Preference Shares at a price of $25.00 per share for aggregate gross proceeds to the Corporation of $200,000,000.

The net proceeds from the Offering will be used towards repaying borrowings under the Corporation’s $1 billion committed corporate credit facility, which borrowings were primarily incurred to support the construction of the non-regulated Waneta Expansion hydroelectric generating facility and for other general corporate purposes.

The Series J 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.J.

FTS.PR.J is a Straight Perpetual, 4.75%, announced November 1. The $200-million final size of the issue indicates that the $50-million greenshoe option was exercised in full. The issue will be tracked by HIMIPref™ and initially assigned to the PerpetualPremium index.

FTS.PR.J traded 1,173,968 shares today in a range of 25.04-19 before closing at 25.16-20, 72×110. Vital statistics are:

Dividend Growth Split Corp. has released its Semi-Annual Report to June 30, 2012.

Figures of interest are:

MER: The MER per unit of the Fund, excluding the cost of leverage, was 1.09% as at June 30, 2012.

Average Net Assets: We need this figure to calculate portfolio yield. [(41.0+63.7-million (NAV, beginning of period) + 37.3+63.7-million (NAV, end of period)] / 2 = about 103-million. Note that when the fund reports its NAV on page 4 of the report, they are referring only to the capital units, so 63.7-million for the preferreds needs to be added.

Underlying Portfolio Yield: Total income of 2,395,765, times two (semi-annual) divided by average net assets of 103-million is 4.65%

Income Coverage: Net Investment Income of 1,819,683 divided by Preferred Share Distributions of 1,650,413 is 110%.

Algonquin Power and Utilities Corp. has announced:

the closing of the previously announced offering of Cumulative Rate Reset Preferred Shares, Series A (the “Series A Shares”). Algonquin issued a total of 4,800,000 Series A Shares at $25 per share for aggregate gross proceeds of $120 million. For the initial period ending December 31, 2018, holders of Series A Shares are entitled to receive a cumulative quarterly fixed dividend of $1.1250 per share per annum (4.5% on the subscription price of $25 per share), as and when declared by the board of directors of the Corporation.

The offering was made on a bought deal basis through a syndicate of underwriters led by Scotiabank and TD Securities Inc., and included BMO Capital Markets, CIBC World Markets Inc., Desjardins Securities Inc., National Bank Financial Inc., RBC Capital Markets, Canaccord Genuity Corp., Cormark Securities Inc. and Raymond James Ltd.

The Series A Shares will commence trading on the Toronto Stock Exchange today under the symbol AQN.PR.A.

The net proceeds of the offering will be used to fund a portion of Algonquin’s investment in two wind farms (Minonk and Senate) in the United States and for general corporate purposes.

AQN.PR.A is a FixedReset, 4.50%+294, announced October 25. The issue will be tracked by HIMIPref™, but relegated to the Scraps index on credit concerns.

The issue traded 302,554 shares today in a range of 24.98-10 before closing at 24.96-99, 3×7. Vital statistics are:

NA.PR.Q, the FixedReset 3.80%+243 announced October 30 settled today.

The prospectus, dated October 31 and available on SEDAR, is noteworthy for its hopeless misunderstanding of the NVCC rules:

Under the new Basel III rules, effective January 1, 2013, all non-common Tier 1 and Tier 2 capital instruments issued by a bank must have, either in their contractual terms and conditions or by way of statute in the issuer’s home country, a clause requiring a full and permanent conversion into common shares of such bank upon certain trigger events at the point where such bank is determined to be no longer viable. The First Preferred Shares Series 28 and, if and when issued, the First Preferred Shares Series 29 as a result will not qualify as non-common Tier 1 capital under the new capital rules as no such conversion mechanism exists. For purposes of being included in the Bank’s regulatory capital under the new capital rules, the First Preferred Shares Series 28 and the First Preferred Shares Series 29 would be phased out beginning January 31, 2013 (their recognition will be capped at 90% of total Tier 1 capital from January 1, 2013, with the cap reducing by 10% in each subsequent year). As a result, the Bank may, with the prior approval of the Superintendent, redeem the First Preferred Shares Series 28 and the First Preferred Shares Series 29, if any, in accordance with their respective terms.

In fact, the cap for inclusion of non-NVCC Tier 1 will be set according to the amount outstanding at the end of this year. 100 percent of this total may be included in Tier 1 in 2013; 90% in 2014; and so on. The decline is by total non-NVCC, not by issue, so some banks may have entire issues included in Tier 1 by the time we get to the end of the schedule, as long as those issues are less than 10% of what they have outstanding at year-end.

However, such details did not hurt sales – TMX Money advises that there are 8-million shares outstanding, so we may conclude that the greenshoe option for a million shares was exercised in full.

In accordance with my policy with respect to non-NVCC issues of regulated financial institutions, I have added a maturity entry to the option schedule used for analytical purposes by my software, HIMIPref™; this instrument is analyzed with a call option at par on 2017-11-15 (as stated in the prospectus) and a maturity 2022-1-31 (a totally synthetic entry designed to reflect the likelihood of a call). I am all too well aware that the instrument will not, in fact, mature on 2022-1-31: for this and other instruments I will simply cross my fingers and hope that the situation clarifies in the next five years (it could be called; shareholders could vote to change the terms); if not then I will decide what to do when I change the terms of the issue in 2017 to reflect the reset dividend rate.

Also in accordance with my standard practice, this issue is being assigned to the FixedResets index, lumped together with all the non-financial issues for which NVCC is not applicable; I have not (yet) considered that the differences are significant enough for FixedResets to warrant the creation of a new index, as I did with DeemedRetractibles.

I really hate this mess. Thank you OSFI!

NA.PR.Q traded 1,663,080 shares today in a range of 25.27-42 before closing at 25.39-42, 100×6. Vital statistics are:

Scotia Managed Companies has announced:

The Board of Directors of allBanc Split Corp. (the “Company”) announced today it has approved a proposal to reorganize the Company. The reorganization will permit holders of Capital Shares to extend their investment in the Company beyond the scheduled redemption date of March 8, 2013 for an additional five years. The Preferred Shares will be redeemed on the same terms originally contemplated in their share provisions on March 8, 2013. Holders of Capital Shares who do not wish to extend their investment and all holders of Preferred Shares will have their shares redeemed on March 8, 2013.

The reorganization will involve (i) the extension of the originally scheduled redemption date, (ii) a special retraction right to enable holders of Capital Shares to retract their shares as originally contemplated should they not wish to extend their investment and (iii) the issuance of a new class of preferred shares in order to provide continuing leverage for the Capital Shares. The Company may also offer additional Capital Shares at the time of the preferred share offering.

A special meeting of holders of the Capital Shares will be held on December 13, 2012 to consider and vote upon the proposed reorganization. Details of the proposed reorganization will be outlined in an information circular to be prepared and delivered to holders of Capital Shares of record on November 9, 2012 in connection with the special meeting and will be available on www.sedar.com. Implementation of the proposed reorganization will also be subject to applicable regulatory approval including the Toronto Stock Exchange.

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 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.

ABK.PR.B is a fairly small issue, with less than a million shares outstanding with a par value of $26.75 each. It is scheduled for redemption 2013-3-8.

ABK.PR.B was last mentioned on PrefBlog when they retained their advisor for this transaction. ABK.PR.B is not tracked by HIMIPref™.

Moody’s Investors Service has announced that it:

has placed the long-term ratings of six Canadian banks (including the bank financial strength ratings, all senior debt, junior subordinated debt, and preferred stock ratings) on review for downgrade.
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Following the review, the senior debt and deposit ratings for the six banks are expected to generally be no more than one notch lower than today.

During this review Moody’s will also consider the removal of systemic support from the ratings of all seven Canadian banks’ subordinated debt instruments that benefit from support. It is our view that the global trend towards imposing losses on junior creditors in the context of future bank resolutions may reduce the predictability of such support being provided to the sub-debt holders of the large Canadian banks. We currently incorporate two notches of systemic support into the subordinated debt ratings of the six banks outlined above as well as in Royal Bank of Canada (RBC; Aa3 Stable (m); C+/a2 Stable). All RBC ratings were affirmed (as they were addressed by our rating actions on Firms with Global Capital Markets Operations in June 2012) except for its supported subordinated debt ratings that have been placed on review for downgrade.
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High levels of consumer indebtedness and elevated housing prices leave Canadian banks more vulnerable to downside risks to the Canadian economy than in the past. By the second quarter of 2012, Canadian household debt to personal disposable income reached a record 163%, up from 137% in the second quarter of 2007, reflecting growth in debt that significantly outpaced personal incomes. Growth in consumer debt has been driven by rising house prices, which have increased by 21% since August 2007 (Source: Teranet-National Bank House Price Index).

Moody’s central scenario for Canada’s gross domestic product (GDP) is to grow between 2% and 3% in 2013, but downside risks have increased. The open, commodity-oriented economy is exposed to external risks, primarily (i) the weak US economic recovery (ii) the ongoing sovereign and banking crisis in the euro area; and (iii) a slowdown in emerging markets which weighs on commodity prices. Should these risks materialize, they would have significant ramifications for the Canadian economy that would be transmitted into the banking system.

Additionally, the large Canadian banks’ noteworthy reliance on confidence-sensitive wholesale funding, which is obscured by limited public disclosure, increases their vulnerability to financial markets turmoil.

In addition to the macro-economic factors cited above, National Bank of Canada, Bank of Montreal, Bank of Nova Scotia and Canadian Imperial Bank of Commerce have sizable 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.

Toronto Dominion and Caisse Centrale Desjardins have other idiosyncratic factors that are additive to the macro-economic risks. Toronto Dominion’s exceptionally robust creditworthiness may be weakened by the increasing contribution of its less-strong US subsidiary…

There has been lots of handwringing and crocodile tears from Lapdog Carney regarding Canadian consumer debt recently:

Mr. Carney also said the risk posed by household debt might be dissipating as the Bank of Canada’s repeated warnings sink in.

… and – after the water has been tested – from his boss:

Finance Minister Jim Flaherty has also made this a crusade as the ratio of household debt to disposable income holds at record levels, and is expected to rise further.

… but the most obvious way to address the problem is though the other group of highly politicized financial lackeys. Unfortunately, however, there has been nothing – absolutely nothing – from OSFI on the subject.

The problem is that reducing interest rates has not had as great an effect on business spending as might have been hoped, but there has been a large effect on consumer spending; that is, low rates have not been used to buy capital goods so much as they have been to finance consumption (and I believe that while there is an element of “capital goods” in houses, there is also a large component of “consumption”, an effect that can be captured through such concepts as “owner equivalent rents” or, perhaps the price to rent ratio)

Monetary policy is a very blunt instrument and Spend-every-penny has been gleefully exploiting this weakness to indulge in micro-management of the mortgage market and – at last, this part is actually good, if long overdue – throttling back on the money he’s been using to inflate a housing bubble.

This possible downgrade serves as a great argument in favour of countercyclical capital buffers. This is much more general than the micro-management indulged in so far, because, if properly designed, it is irrelevant whether consumers are over-borrowing for houses or tulip bulbs. Trouble is, this might require OSFI to spend some time actually thinking about what it’s doing, so I don’t think we’ll see it any time soon.

Issues affect by the possible downgrade 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