Category: Issue Comments

DBRS has announced that it:

has today downgraded the rating of the Preferred Shares issued by Brompton Lifeco Split Corp. (the Company) to Pfd-5 (high) from Pfd-4 (low).

In April 2007, the Company issued 3.1 million Preferred Shares (at $10 each), along with an equal number of Class A Shares (at $15 each). The termination date for both classes of shares issued is April 30, 2014.

Not the best timing ever to start a lifeco SplitShare Corporation!

On March 20, 2012, DBRS downgraded the ratings of the Preferred Shares to Pfd-4 (low) from Pfd-4 (high), due to the considerable drop in downside protection available to holders of the Preferred Shares. Since the rating downgrade, the NAV of the Company has been volatile, causing downside protection to fluctuate widely between -4.9% and 18.3%. The downside protection available to the Preferred Shares was 8.2% as of October 11, 2012, and the current Preferred Shares distribution coverage ratio is approximately 0.7 times. As a result of the downside protection falling and remaining below acceptable levels for a prolonged period, along with the insufficient distribution coverage ratio on the Portfolio, the rating has been further downgraded to Pfd-5 (high).

LCS.PR.A was last mentioned on PrefBlog when it was downgraded to Pfd-4(low) by DBRS. LCS.PR.A is not tracked by HIMIPref™ – not only is the Asset Coverage very low, but there are less than 2-million units outstanding.

Strathbridge Asset Management has announced (but not yet on the fund’s website):

Premium Income Corporation (the “Fund”) is pleased to announce that it has filed a preliminary short form prospectus relating to an offering of rights (“Rights”) to holders (“Shareholders”) of its class A shares (“Class A Shares”) and preferred shares (“Preferred Shares”). Each Shareholder of record on a date to be established prior to filing the final short form prospectus will receive one Right for each Class A or Preferred Share held.

Two Rights will entitle the holder to acquire one Class A Share and one Preferred Share upon payment of the subscription price. The record date and the subscription price will be determined at the time the Fund files its final prospectus for the offering.

The exercise of Rights by holders will provide the Fund with additional capital that can be used to take advantage of attractive investment opportunities and is also expected to increase the trading liquidity of the Class A Shares and the Preferred Shares as well as reduce the management expense ratio of the Fund.

The Fund invests in a portfolio consisting principally of common shares of Bank of Montreal, The Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Royal Bank of Canada and The Toronto-Dominion Bank (the “Banks”). To generate additional returns above the dividend income earned on the Fund’s portfolio, the Fund may from time to time write covered call options in respect of some or all of the common shares in the Fund’s portfolio. The Fund may also, from time to time, write cash-covered put options in respect of securities in which the Fund is permitted to invest. The manager and investment manager of the Fund is Strathbridge Asset Management Inc.

It’s very interesting that they will be giving rights to the preferred shareholders as well.

DBRS has announced that it:

notes the trend change of Brookfield Office Properties Inc. (BOP) to Negative from Stable on October 18, 2012. DBRS has indicated in the past that rating changes at Brookfield Asset Management Inc.’s (BAM) major subsidiaries could have rating implications for BAM at the corporate level. DBRS is also of the view that BAM’s overall credit profile has weakened within its current rating category in recent years as a result of fluctuating cash flows from its opportunistic investments and increased leverage at the corporate level.

With this, there remains minimal room for further deterioration, as indicated in our most recent report on BAM, published on April 24, 2012. As such, DBRS believes that BAM’s current ratings could come under pressure due to: (1) a material deterioration or rating downgrade in one or more of the core businesses (including BOP); (2) corporate-level financial metrics for 2012 fall short of our targets (funds from operation (FFO)-to-debt of 30% or higher and FFO interest coverage of 5.0 times); or (3) a material increase in the proportion of BAM’s invested capital in less-stable opportunistic investments.

DBRS will continue to monitor BAM’s performance to determine whether one or more of any of these issues brings sufficient pressure to warrant a trend change or other rating action.

The Negative Trend on Brookfield Office Properties was announced on October 18 and reported on PrefBlog.

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

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, and Outlook Negative to BPO in the summer.

DBRS has announced that it:

has today confirmed the ratings of Brookfield Office Properties Inc. (Brookfield or the Company) at BBB (high) and Pfd-3 (high), changing the trend to Negative from Stable. The trend change reflects DBRS’s concern that Brookfield’s coverage ratios will remain at levels that are inconsistent with the current rating category, particularly in light of the slower-than-expected progress in re-leasing space at the World Financial Center (WFC) in New York City.

DBRS had previously expected Brookfield’s coverage ratios to show meaningful improvement by the end of 2012 or early 2013. DBRS now believes it will take longer to re-lease the upcoming vacancy at the WFC to new tenants. As a result, DBRS expects that operating income from this space may not stabilize until the latter part of 2014 or in early 2015. In addition, DBRS believes the Company’s U.S. markets will likely remain challenged by high unemployment rates and slow, uneven economic growth. As a result, material improvement in coverage ratios over the near to medium term will, in DBRS’s opinion, be difficult for the Company to achieve. Lack of improvement in coverage ratios due to weakening operating performance and/or more aggressive financial management would likely result in a downgrade in the near term. The pressure on Brookfield’s ratings could be relieved if the Company took meaningful steps to strengthen its financial profile by lowering debt levels and improving its EBITDA interest coverage ratio back to levels above 2.00 times.
…
Despite challenging economic conditions, particularly in the United States, DBRS expects Brookfield’s high-quality office properties in high barrier-to-entry markets and in-place average rental rates that are currently below average market rental rates to provide underlying support to cash flow stability going forward. In terms of financial flexibility, Brookfield has sufficient liquidity and sources of capital (including proceeds from a further sell-down of the Company’s interest in Brookfield Canada Office Properties and potential non-core asset sales in the range of $200 million to $250 million) to fund upcoming commitments.

Brookfield Office Properties is the proud issuer of:

• OperatingRetractibles BPO.PR.F, BPO.PR.H, BPO.PR.J, BPO.PR.K
• FixedResets BPO.PR.L, BPO.PR.N, BPO.PR.P, BPO.PR.R and BPO.PR.T

DBRS has announced that it:

has today upgraded the rating of the Class C Preferred Shares, Series 1 (the Class C Preferred Shares) issued by TD Split Inc. (the Company) to Pfd-2 from Pfd-2 (low).
…
On November 21, 2011, DBRS confirmed the ratings on the Class C Preferred Shares at Pfd-2 (low) mainly based on the stable downside protection levels available to holders of the Class C Preferred Shares over the prior year. Since the rating confirmation, the net asset value (NAV) of the Company has been increasing fairly steadily, rising from $25.93 on December 1, 2011, to $29.41 as of October 11, 2012. Downside protection available to the holders of the Class C Preferred Shares increased to approximately 66.0% as of October 11, 2012, from 61.4% on December 1, 2011. In addition, TD raised its dividends on August 30, 2012, increasing quarterly distributions by five cents to 77 cents per share. This dividend boost increases the Class C Preferred Share distribution coverage ratio to 2.0 times. The Class C Preferred Shares are being upgraded mainly due to the increased downside protection available and the improved distribution coverage ratio.

The main constraints to the rating are the following:

(1) The downside protection provided to holders of the Class C Preferred Shares is dependent on the value of the shares in the Portfolio.

(2) Volatility of price and changes in the dividend policies of TD may result in significant reductions in downside protection or dividend coverage from time to time.

(3) The concentration of the entire Portfolio is in the common shares of TD.

TDS.PR.C is tracked by HIMIPref™ but is relegated to the Scraps index on volume concerns. It was last mentioned on PrefBlog when there was a partial call for redemption last November.

LB.PR.F is a FixedReset, 4.00%+260, announced October 11. This issue will be tracked by HIMIPref™ but relegated to Scraps on credit concerns.

The prospectus supplement (SEDAR, October 11, 2012) contains some interesting wrinkles on the Non-Viability Contingent Capital (NVCC) theme:

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 Preferred Shares Series 11 as a result will not qualify as non-common Tier 1 capital under the new capital rules as no such conversion mechanism exists. As a result, the Bank may, with the prior approval of the Superintendent, redeem the Preferred Shares Series 11 in accordance with their terms. See “Risk Factors”.
…
The Basel Committee on Banking Supervision has announced new international bank capital adequacy rules (commonly called Basel III) which will amend the existing Basel II capital management framework. The Office of the Superintendent of Financial Institutions of Canada (“OSFI”) has announced that it plans to adopt the new Basel III rules for purposes of Canadian bank capital guidelines. 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 Preferred Shares Series 11 and, if and when issued, the Preferred Shares Series 12 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 Preferred Shares Series 11 and the Preferred Shares Series 12 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 Preferred Shares Series 11 and the Preferred Shares Series 12, if any, in accordance with their respective terms. If prevailing rates are lower at the time of redemption, a purchaser would not be able to reinvest the redemption proceeds in a comparable security at an effective yield as high as the yields on the Preferred Shares Series 11 or the Preferred Shares Series 12 being redeemed. The Bank’s redemption right may also adversely impact a purchaser’s ability to sell Preferred Shares Series 11 and Preferred Shares Series 12 as the optional redemption date or period approaches.

The 2011 Annual Report (complete with slogan “Our team – It’s (sic) Capital” on the front cover) states:

The BCBS published further details in January 2011 with regard to qualifying criteria for capital under the guidelines. OSFI subsequently provided additional guidance regarding the treatment of non-qualifying capital instruments in February 2011. As a result, certain capital instruments will no longer qualify fully as capital beginning January 1, 2013. The Bank’s
non-common capital instruments will be considered non-qualifying capital instruments under Basel III and will therefore be subject to a 10% phase-out per year beginning in 2013. These non-common capital instruments include both Series 9 and 10 preferred shares and Series 2010-1 subordinated Medium Term Notes. The Bank has not issued any hybrids or innovative Tier 1 instruments and none of its capital instruments are subject to a regulatory event redemption clause. Therefore, no regulatory event redemption is expected.

What are the Series 2010-1 sub MTNs? I’m glad you asked that:

On November 2, 2010, the Bank issued $250.0 million Series 2010-1 Medium Term Notes (Subordinated Indebtedness), for net proceeds of $248.4 million. The contractual maturity of the Series 2010-1 Medium Term Notes is November 2, 2020. Holders of the Series 2010-1 Medium Term Notes are entitled to receive semi-annually fixed interest payments for the initial five-year period ending November 2, 2015 at a rate of 3.70% per annum. The interest rate on the Series 2010-1 Medium Term Notes will reset on November 2, 2015 at the three-month bankers’ acceptance rate plus 1.76% per annum. The Series 2010-1 Medium Term Notes will not be redeemable prior to November 2, 2015. Subject to the provisions of the Bank Act, to the prior consent of OSFI and to the provisions described in the pricing supplement dated October 25, 2010, at any time on or after November 2, 2015, the Bank may redeem all or any part of the then outstanding Series 2010-1 Medium Term Notes, at the Bank’s option, by the payment of an amount in cash equal to the par value together with unpaid accrued interest. The $250.0 million Series 2010-1 Medium Term Notes are presented net of unamortized issue costs of $1.6 million on the consolidated balance sheet and include a net fair value adjustment of $5.9 million to reflect the change in the carrying value previously covered by a fair value hedge.

The Series 9 preferreds, LB.PR.D, pay 6% while Series 10, LB.PR.E, pay 5.25%. Both are Straight Perpetuals.

All this leaves me feeling a bit confused as to why this issue has been left without an NVCC clause. My first thought was that they had some capital instruments outstanding with such an absurdly low coupon that the company wanted to keep them outstanding for as long as possible; issuing these shares to be outstanding when the base for the sliding scale of Tier 1 eligibility is set could have helped such an effort. But this is not the case! Their non-common Tier 1 is actually a little bit expensive; if anything, I would have thought they’d issue NVCC shares to fund the redemption of LB.PR.D.

I just don’t get it. Any suggestions will be welcome. I stand ready to be corrected once the day comes, but I don’t think that a bank NVCC preferred will cost much more than a non-NVCC preferred; we Canadian know that not one of our banks will fail, because the government won’t let it happen.

Anyway, given the absence of an NVCC clause, I have put a DeemedMaturity entry into the call schedule, at 25.00 for 2022-1-31.

The issue traded 438,529 shares today in an unusually wide range of 25.18-65 before closing at 25.30-32, 5×28. Vital statistics are:

Brompton Split Banc Corp. has announced:

it has filed a preliminary short form prospectus with respect to a treasury offering of Preferred shares and Class A shares.

Brompton Split Banc Corp. invests in the common shares of the six largest Canadian banks with selective covered call writing in order to generate additional distributable income. Currently, the portfolio consists of common shares of:
Bank of Montreal
Royal Bank of Canada
Canadian Imperial Bank of Commerce
The Bank of Nova Scotia
National Bank of Canada
The Toronto-Dominion Bank

The closing price of the Preferred shares on the TSX on October 17, 2012 was $10.22. The investment objectives for the Preferred shares are to provide holders with fixed cumulative preferential quarterly cash distributions in the amount of $0.45 per annum paid in equal quarterly amounts, and to return the original issue price to holders of Preferred shares on the current maturity date of November 29, 2017.

The closing price of the Class A shares on the TSX on October 17, 2012 was $11.34. The investment objectives for the Class A shares are to provide holders with regular monthly cash distributions targeted to be $0.10 and to provide the opportunity for growth in net asset value per Class A share.

The final Class A and Preferred share offering prices will be announced in the final prospectus, and will be set at levels that ensure that existing unitholders are not diluted.

The syndicate of agents for the offering is being co-led by RBC Capital Markets and CIBC and includes BMO Capital Markets, National Bank Financial Inc., Scotiabank, TD Securities Inc., GMP Securities L.P., Macquarie Private Wealth Inc., Raymond James Ltd., Canaccord Genuity Corp., Desjardins Securities Inc., and Mackie Research Capital Corporation.

SBC.PR.A recently announced the details of their term extension.

SBC.PR.A is tracked by HIMIPref™ but is relegated to the Scraps index on credit concerns.

Standard & Poor’s has announced:

• •The combined operating performance of CFSL’s operating entities, CGIC and CLIC, has improved.
• •We view the capital adequacy for the consolidated Co-operators group as
  very strong.

• •We are affirming the financial strength and issuer credit ratings on CGIC and CLIC and the counterparty credit rating on CFSL.
• •We revised the outlook on all these ratings to positive from stable.

… that it affirmed its ‘BBB+’ long-term financial strength and issuer credit ratings on the operating companies of the Co-operators Group, Co-operators General Insurance Co. (CGIC) and Co-operators Life Insurance Co. (CLIC). We also affirmed our ‘BBB-‘ long-term counterparty credit rating on their immediate holding company Co-operators Financial Services Ltd. (CFSL). We revised the outlooks on all ratings to positive from stable.

“The positive outlooks reflect our view that the continued and improved capital strength at the consolidated Co-operators group is very strong,” said Standard & Poor’s credit analyst Jieqiu Fan. The significantly improved operating performance at CGIC in the past two years partially benefited from the Ontario Auto Reform that capped escalating accident benefit claims, and was offset somewhat by the weakening operating performance at CLIC. CGIC had underwriting losses in 2008-2010 driven by many claims from the Ontario auto sector. In 2011 CGIC generated underwriting profits, and continued to do so in the first six months of 2012.

The ratings are also based on the company’s strong competitive position as the fifth-largest property/casualty insurance company in Canada and its well-established multichannel distribution. Offsetting these strengths are its concentration in the highly regulated Ontario auto sector and expense ratios higher than peers’.
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We expect CLIC’s operating performance to be marginal in 2012, but improve in 2013 to an after-tax return on equity of 4%-5%. We expect CFSL’s debt plus preferred-to-total capital ratio to remain less than 35% and its EBIT fixed-charge coverage to be near or more than 3.5x. In the next 12 months, if the company meets these expectations and we believe this performance level is sustainable, we could raise the ratings by one notch.
Alternatively, we could lower the ratings if the company significantly underperforms (five or more combined ratio points) the Canadian personal lines industry or experiences significant deterioration in its capital strength, reflecting a low ‘A’ level of consolidated capital adequacy.

Co-operators General Insurance Co. (referred to as CGIC in the press release) is the proud issuer of CCS.PR.C and CCS.PR.D. Both are tracked by HIMIPref™; both are relegated to the Scraps index on credit concerns.

S&P rates the preferreds at P-2(low). The company was upgraded to Pfd-3(high) by DBRS in July.

Great-West Lifeco Inc. has announced:

the completion of its offering of 8,000,000 Non-Cumulative First Preferred Shares, Series R through a syndicate of underwriters co-led by BMO Capital Markets, RBC Capital Markets, and Scotiabank for gross proceeds of $200 million. The Series R Shares will be posted for trading on the Toronto Stock Exchange under the symbol “GWO.PR.R”.

GWO.PR.R is a Straight Perpetual, 4.80%, announced October 3. As it is issued by an Insurance Holding Company and does not have a NVCC clause, it is considered to be a DeemedRetractible and a maturity entry – justified only by my analysis, not by anything in the prospectus – has been added to the options table, at par, effective 2022-1-31. The issue will be tracked by HIMIPref™ and assigned to the DeemedRetractible index.

The issue traded 332,564 shares today in a range of 24.97-00, closing at 24.99-00, 1×338. Vital statistics are:

Brookfield Renewable Energy Partners has announced:

the completion of the previously announced offering of 10,000,000 Class A Preference Shares, Series 3 (the “Series 3 Shares”), (including 2,000,000 Series 3 Shares sold pursuant to an underwriters’ option that was exercised in full prior to closing), at a price of CDN$25.00 per Series 3 Share, for total gross proceeds of CDN$250,000,000. The offering was underwritten by a syndicate led by TD Securities Inc., CIBC, RBC Capital Markets and Scotiabank.

A subsidiary of Brookfield Renewable issued the Series 3 Shares, which are guaranteed by Brookfield Renewable. Holders of the Series 3 Shares will be entitled to receive fixed cumulative dividends yielding 4.4% at the issue price annually and payable quarterly for the initial period ending July 31, 2019. Thereafter, the dividend rate will be reset every five years at a rate equal to the then five-year Government of Canada bond yield plus 2.94%.

Brookfield Renewable intends to use the net proceeds of the issue of the Series 3 Shares to repay outstanding indebtedness and for general corporate purposes.

The Series 3 Shares will commence trading today on the Toronto Stock Exchange under the ticker symbol BRF.PR.C.

BRF.PR.C is a FixedReset, 4.40%+294, announced October 1. This issue will be tracked by HIMIPref™, but assigned to the Scraps index on credit concerns.

The issue traded 552,596 shares today in a range of 24.99-05 before closing at 25.01-02, 14×359. Vital statistics are: