Category: Issue Comments

DBRS has announced that it:

has today taken a range of rating actions on 13 structured preferred shares issued by 12 split share companies and trusts (collectively, the Issuers).

DBRS has announced that it:

has today placed its ratings of the debt and preferred share instruments of Sun Life Financial Inc. (Sun Life or the Company) and its affiliates Under Review with Negative Implications. The Claims Paying Ability rating of IC-1 assigned to The Sun Life Assurance Company of Canada has been confirmed. The rating action reflects the Company’s recent weak profitability and earnings volatility associated with exogenous market factors over the past several years. While these exposures are not unique to Sun Life, DBRS regards the current ratings, following a review of the industry, as being out of alignment with the Company’s recent earnings track record and those of its peers. The action also reflects uncertainty associated with the Company’s strategic transition as it attempts to restore profitability and earnings stability by pursuing more profitable products with fewer embedded risks and lower capital requirements. Sun Life faces a number of challenges in this regard, including associated execution challenges and the continuing weak economic and interest rate environment aggravated by evolving regulatory and accounting regimes.

The strength of the Company’s Canadian franchise, a growing appetite for its products and services, a reasonable level of diversification in attractive market niches in the United States and Asia, and conservative risk management are nevertheless not sufficient for Sun Life to maintain its current ratings in the absence of a recovery in core earnings and reduced earnings volatility to levels that are at least consistent with its 2015 earnings target of $2 billion (with a return on equity of between 12% and 14%). The resolution of the Under Review with Negative Implications status therefore hinges largely on an imminent return to reasonable profitability which would cover the Company’s fixed charges by at least 5.0 times. However, DBRS regards as ambitious the revenue growth assumptions underlying the achievement of such earnings.
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The Company’s financial performance in recent years suggests that its enterprise risk management platform, while regarded as superior, has mitigated but not eliminated earnings volatility tied to recent market conditions. In addition, hedging costs have put downward pressure on earnings. The requirement for additional regulatory capital at its operating subsidiaries in the wake of the financial crisis and the transition to International Financial Reporting Standards (IFRS) increased the Company’s consolidated financial leverage to 31% at June 30, 2012, from just over 21% five years ago. Without earnings to support the associated debt service costs, the five-year average fixed-charge coverage ratio has dropped to below 2.0 times from 8.0 times for the period prior to the financial crisis. The core fixed-charge coverage ratio, excluding volatile market-related factors, has similarly fallen to below 5.0 times from over 8.0 times, which is below the level expected for a company with the current ratings.
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DBRS intends to resolve the Under Review status within the next few months, following its annual review with the Company’s management team.

DBRS maintains its rating of Pfd-1(low) for the preferreds. S&P has them at P-2(high) [Outlook Negative]; the Outlook Negative was assessed in February, 2012. Moody’s downgraded the preferreds to Baa3(hyb) in January, 2012 and they remain at that level.

SLF has the following issues outstanding: SLF.PR.A, SLF.PR.B, SLF.PR.C, SLF.PR.D & SLF.PR.E (DeemedRetractible) and SLF.PR.F, SLF.PR.G, SLF.PR.H & SLF.PR.I (FixedReset).

DBRS has announced that it:

has today confirmed the ratings on Industrial Alliance Insurance and Financial Services Inc. (IAG or the Company) and its affiliate, Industrial Alliance Capital Trust, but has assigned a Negative trend. … The debt and preferred shares ratings have been removed from Under Review with Negative Implications, where they were placed on June 15, 2012. The Negative trend reflects the Company’s reduced financial flexibility as it has continued to shore up its regulatory capital ratios through the issuance of additional preferred shares, taking its total debt-to-capitalization ratio to 37.8% which is above the ratio expected by DBRS for an “A”-rated company in the Canadian life insurance industry. While this ratio is somewhat overstated, given the Company’s generally conservative actuarial reserve assumptions and the absence of any meaningful goodwill and intangibles, the Company’s fixed-charge coverage ratio has nevertheless also fallen below the 5.0 times lower limit, which delineates a lower rating category in the DBRS rating methodology.

The resolution of the Company’s Negative rating trend hinges to some degree on a return to a more sustainable interest rate environment which would take away some of the overhanging downward pressure on earnings. … Should earnings start to be negatively affected over the next 12 months by low interest rates or by deterioration in top-line growth following recent strategic decisions, DBRS would likely convert its Negative trend into a downgrade. The trend will revert to Stable if a planned reduction in new business strain, among other initiatives, is reflected in a sustained improvement in profitability, which would be signaled by a return to a fixed-charge coverage ratio in excess of 5.0 times and a reduction in the total debt ratio.
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Given the longer-than-expected period of low interest rates, however, the Company’s management team is now being forced to take more dramatic offsetting actions through repricing, redesign and withdrawal of products and business lines that would otherwise aggravate the Company’s earnings exposure to low interest rates through continued high new business strain and increased required regulatory capital. To limit market risk, the Company is also enhancing asset liability management through term extensions, rebalanced asset portfolios and intersegment notes.

S&P has called “Outlook Negative” since June and this remains effective.

IAG has the following preferred shares outstanding: IAG.PR.A, IAG.PR.E and IAG.PR.F (DeemedRetractible) and IAG.PR.C & IAG.PR.G (FixedReset). All are tracked by HIMIPref™ and all are assigned to the indicated indices.

Brookfield Asset Management has announced:

an offering of C$425 million of medium term notes (unsecured) (“notes”) with a March 2023 maturity and a yield of 4.546%.

The notes have been assigned a credit rating of Baa2 (stable outlook) by Moody’s; A – (negative outlook) by Standard & Poor’s; BBB (stable outlook) by Fitch; and A low (stable outlook) by DBRS. The notes are being offered through a syndicate of agents led by CIBC World Markets Inc., Scotia Capital Inc. and TD Securities Inc.

The company intends to use the net proceeds of the issue to redeem or repurchase $350 million of 8.95% notes that mature on June 2, 2014 and for general corporate purposes.

However, the item that most caught my eye was the rating announcement from DBRS (bolding added):

DBRS has today assigned a rating of A (low) to the $425 million Unsecured Medium-Term Notes (MTN) maturing March 31, 2023, issued today by Brookfield Asset Management Inc. (Brookfield). The trend is Stable.

The MTN will rank pari passu with all of Brookfield’s other senior unsecured debt obligations. The Company intends to use the net proceeds to redeem or repurchase $350 million of its 8.95% MTNs that will mature June 2, 2014 and for general corporate purposes.

The new issue will result in a modest increase in Brookfield’s long-term debt. As expressed in our Rating Report published April 24, 2012, DBRS considers that the current corporate-level financial measures at Brookfield are weak for its ratings and believes that there is currently minimal room for further deterioration without pressuring the ratings. We re-iterate our expectation (as expressed in our Rating Report published on April 24, 2012) that Brookfield will improve its cash flow coverage metrics to their 2010 level by the end of 2012. These levels are: funds from operation (FFO) coverage of debt of 30% and FFO coverage of interests of 5.0x. We understand that Brookfield intends to achieve a lower debt level mainly through reducing its outstanding commercial paper issuance and drawdown in credit facilities.

If one of the following scenarios were to materialize, DBRS will review and base our rating decision on an assessment of the contributing causes, the Company’s remedial plan and other relevant circumstances. These scenarios are: (1) material increase in the proportion of BAM’s invested capital in less-stable opportunistic investments and private equity, leading to debt increases; (2) material deterioration or rating downgrade in one or more of the core businesses in renewable power, property investments and infrastructure; (3) inability to improve cash flow coverage metrics (which could include FFO-to-debt and FFO fixed charge coverage) to their 2010 levels by the end of 2012.

This is new information, as far as I can tell. The only mention of commercial paper in the 12Q2 Financials is:

We completed the refinancing of the majority of our corporate level, $2.2 billion committed revolving term credit facilities subsequent to the end of the quarter. At June 30, 2012, approximately $1.6 billion of the facilities was utilized in respect of short-term bank or commercial paper borrowings and $0.2 billion utilized for letters of credit issued to support various business initiatives. Approximately $1.9 billion of the new facilities have a five-year term, and the remaining $300 million have a three-year term.

This is good news, because BAM is skating pretty near the water in terms of maintaining an investment-grade rating on its preferreds. The negative outlook from S&P is still in place.

BAM has a plethora of preferred share issues outstanding: BAM.PR.B & BAM.PR.C (Floater), BAM.PR.E (RatchetRate), BAM.PR.G (FixedFloater), BAM.PR.I (called for redemption) & BAM.PR.J (OperatingRetractible), BAM.PR.K (Floater), BAM.PR.M & BAM.PR.N (PerpetualDiscount), BAM.PR.O (OperatingRetractible), BAM.PR.P, BAM.PR.R, BAM.PR.T, BAM.PR.X, BAM.PR.Z and BAM.PF.A (FixedReset) … and one in the oven (FixedReset).

The YLO recapitalization announced in July and amended September 4, has been approved:

Yellow Media (TSX: YLO) announced today that its proposed recapitalization has been approved by the requisite majority of its debtholders and shareholders at their respective meetings, both of which were held earlier today in Montréal.

“We are pleased with the results of the vote” said Marc P. Tellier, Yellow Media’s President and Chief Executive Officer. “The approval by the debtholders and shareholders represents a significant milestone towards the completion of the recapitalization.”

The Company proposed the recapitalization to align its capital structure with its operating strategy. The recapitalization will substantially improve the financial flexibility of the Company and allow the Company to pursue its ongoing transformation in order to enhance long-term value for stakeholders.

The implementation of the recapitalization is expected to occur by the end of September 2012 subject to a number of conditions, including the receipt of the final approval by the Québec Superior Court, and to other risks and uncertainties.

The preferred shares, YLO.PR.A, YLO.PR.B, YLO.PR.C and YLO.PR.D, immediately jumped from about $0.50 to the $0.70-0.80 range.

As preferred shareholders will get 6.25 new common per 100 preferreds (as well as some warrants) this indicates that new common is being priced at about $12/share.

As about 28-million new common shares will be issued (and some warrants) this indicates market capitalization of about $335-million on the restructured company, on top of about $850-million in debt. As noted on April 9 the Cerberus / AT&T transaction indicated an enterprise value of about $1-billion for YLO, which some people (according to Boyd Erman) thought could stretch to the 1.4-billion to 2.2-billion range.

The common shares are now trading at 0.085-0.09; the recapitalization’s conversion ratios indicate that one preferred share should be worth about 12.5 old common shares.

Update, 2012-9-10: YLO provides reorganization timing:

Yellow Media Inc. (TSX: YLO) announced today that, following the approval of the recapitalization by the requisite majority of the Company’s debtholders and shareholders at their respective meetings held on September 6, 2012, the hearing for the final approval of the recapitalization by the Québec Superior Court has been set by the Court to begin on October 15, 2012.

The implementation of the recapitalization is currently expected to occur on or about October 31, 2012, subject to a number of conditions, including the receipt of the Court’s final approval as set forth above, and to other risks and uncertainties.

BCE has announced:

that 2,957,474 of its 10,081,586 fixed-rate Cumulative Redeemable First Preferred Shares, Series AA (series AA preferred shares) have been tendered for conversion on September 1, 2012, on a one-for-one basis, into floating-rate Cumulative Redeemable First Preferred Shares, Series AB (series AB preferred shares). In addition, 3,020,190 of its 9,918,414 series AB preferred shares have been tendered for conversion on September 1, 2012, on a one-for-one basis, into series AA preferred shares. Consequently, on September 1, 2012, BCE will have 10,144,302 series AA preferred shares and 9,855,698 series AB preferred shares issued and outstanding. The series AA preferred shares and the series AB preferred shares will continue to be listed on the Toronto Stock Exchange under the symbols BCE.PR.A and BCE.PR.B, respectively.

The series AA preferred shares will pay on a quarterly basis, for the five-year period beginning on September 1, 2012, as and when declared by the Board of Directors of BCE, a fixed cash dividend based on an annual fixed dividend rate of 3.45%.

The series AB preferred shares will continue to pay a monthly floating adjustable cash dividend for the five-year period beginning on September 1, 2012, as and when declared by the Board of Directors of BCE. The monthly floating adjustable dividend for any particular month will continue to be calculated based on the prime rate for such month and using the Designated Percentage for such month representing the sum of an adjustment factor (based on the market price of the series AB preferred shares in the preceding month) and the Designated Percentage for the preceding month.

I’m surprised to see that so many BCE.PR.A remain, particularly since I recommended conversion to BCE.PR.B. But that’s what makes a market!

Both BCE.PR.A and BCE.PR.B are tracked by HIMIPref™; both are relegated to the Scraps index on credit concerns.

As part of their new issue announcement, Brookfield Office Properties has announced:

The net proceeds of the issue will be used to redeem Brookfield Office Properties’ Cumulative Class AAA Preference Shares, Series F and, to the extent the underwriters’ option is exercised, for general corporate purposes. The offering is expected to close on or about September 13, 2012.

BPO.PR.F is an OperatingRetractible paying 6% of par, redeemable at par commencing 2012-9-30. It is tracked by HIMIPref™ but relegated to the Scraps index on credit concerns.

Yellow Media Inc. has announced:

that, in connection with its proposed recapitalization, it has amended the plan of arrangement to be considered and voted upon by the Company’s debtholders and shareholders at the meetings scheduled to be held this coming Thursday, September 6, 2012.

The Board of Directors of Yellow Media has decided to amend the plan of arrangement pursuant to Section 6.3 thereof so that the Company’s existing convertible unsecured subordinated debentures will be exchanged, as part of the recapitalization, for an increased number of existing common shares, on the basis of 50 shares, up from 12.5 shares, for each $100 principal amount of existing subordinated debentures. This amendment is supported by the holders of the Company’s existing medium term notes that have executed support agreements in favour of the recapitalization. The revised exchange ratio is the same as the exchange ratio used to determine the consideration to be received pursuant to the recapitalization by holders of the Company’s existing preferred shares. The Board has made this decision after giving consideration to the numerous representations made to the Company regarding the recapitalization, in particular by holders of existing subordinated debentures. Yellow Media is of the view that the recapitalization, after giving effect to the amendment, is responsive to the comments which have been received and strikes a better balance between the interests of stakeholders having regard to available alternatives while recognizing the imperative of moving forward with the recapitalization in order to provide the Company with the necessary financial flexibility to pursue its ongoing business transformation.
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The amendment does not affect the relative treatment of senior debtholders under the recapitalization. As such, in order to preserve the allocation to senior debtholders under the recapitalization and to account for the increased number of new common shares to be issued, the number of new common shares to be issued to senior debtholders pursuant to the recapitalization will increase from 21,295,090 to 23,062,947, the exercise price of the warrants will be reduced from $31.67 to $29.25, and the exchange price of the senior subordinated exchangeable debentures to be issued to senior debtholders pursuant to the recapitalization will be reduced from $21.95 to $20.27. The aggregate number of new common shares to be issued pursuant to the recapitalization will thus rise from 25,812,230 to 27,955,088.
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So it used to be that preferred shareholders would be getting 1.8-million new common shares out of 25.8-million, or 7% of the company … now they’re getting 1.83-million out of 27.96-million, or 6.5%.

I have previously recommended that preferred shareholders should vote against the plan:

YLO has four series of preferred shares outstanding: YLO.PR.A, YLO.PR.B, YLO.PR.C and YLO.PR.D. I recommend that preferred shareholders vote against the plan, on the grounds that they are being treated as if they have all be forcibly converted into common at the YLO.PR.A / YLO.PR.B rates prior to the conversion of the old common into new securities. That’s reasonable for YLO.PR.A and YLO.PR.B, but not so much for YLO.PR.C and YLO.PR.D, which are not convertible by the company. And, even for the A & B holders – you’re not getting paid to vote yes, so why give it away? If the company wants a yes vote from you, they should provide a little sweetener; the offer that’s on the table is already a worst-case scenario.

Tim Kiladze of the Globe and Mail reports:

Yellow Media’s hopes of amending its restructuring proposal have been smacked down by a Quebec court just days before the company faces a vote on its much-criticized plan.

Early last week, Yellow Media put together a conference call to threaten that it would seek creditor protection in order to reduce almost $2-billion of debt should stakeholders vote against its current restructuring proposal. Those efforts were shot down just a few days later by judge Robert Mongeon, who delivered his ruling just a few hours before the long weekend started.

The sequence of events is a bit tricky to follow, but the gist of the story is that Yellow Media’s restructuring proposal has been filed under the Canada Business Corporations Act (CBCA). Last week, Yellow Media chief executive officer Marc Tellier tried to complicate the matter by amending the current resolution to implement the plan through the Companies’ Creditors Arrangement Act (CCAA) if the current effort “appears for any reason impracticable.”
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Judge Mongeon didn’t let that language influence him. “I am of the view that the proposed amendment should not be part of the process currently envisaged under the CBCA inasmuch as it deals only with another proceeding under a different statute and which is, at this time, purely hypothetical.”

He explained his reasoning in detail. First, the judge noted that even Yellow Media admits that the proposed amendment isn’t necessary to pursue arrangement currently up for debate under the CBCA. Second, the CBCA and CCAA have different tests of admissability and different procedures, so having one proposal technically apply to both would be very tricky.

I am, of course, not a lawyer, but it’s my understanding that the CBCA is for solvent companies and the CCCA is for insolvent ones. Different admissabilities indeed!

I have previously recommended that preferred shareholders should vote against the plan:

YLO has four series of preferred shares outstanding: YLO.PR.A, YLO.PR.B, YLO.PR.C and YLO.PR.D. I recommend that preferred shareholders vote against the plan, on the grounds that they are being treated as if they have all be forcibly converted into common at the YLO.PR.A / YLO.PR.B rates prior to the conversion of the old common into new securities. That’s reasonable for YLO.PR.A and YLO.PR.B, but not so much for YLO.PR.C and YLO.PR.D, which are not convertible by the company. And, even for the A & B holders – you’re not getting paid to vote yes, so why give it away? If the company wants a yes vote from you, they should provide a little sweetener; the offer that’s on the table is already a worst-case scenario.

The Canadian Imperial Bank of Commerce has announced:

its intention to redeem all of its issued and outstanding Non-cumulative Class A Preferred Shares Series 18 for cash. The redemptions will occur on October 29, 2012. The redemption price is $25.00 per Series 18 share.

The $0.33811 per share dividend declared on August 30, 2012 will be the final dividend on the Series 18 shares for the period from August 1, 2012 to October 29, 2012, and will be paid on October 29, 2012 to shareholders of record on September 28, 2012.

Beneficial holders who are not directly the registered holder of these shares should contact the financial institution, broker or other intermediary through which they hold their shares to confirm how they will receive their redemption proceeds. Formal notices and instructions for the redemption of Series 18 shares will be forwarded to registered shareholders.