Category: Issue Comments

There’s something new going on with LFE.PR.B … this is the fact that the reported NAV per Unit as of 2012-6-29 of 11.83 carries the note:

Diluted NAV (assuming full exercise of 2013 warrants)

Huh? How come they’re reporting a Diluted NAV when the 2013 warrants have an exercise price of 12.00? I eMailed the company:

I see that you are reporting (http://www.lifesplit.com/valuations.html) a “Diluted NAV (assuming full exercise of 2013 warrants)” of 11.83 for 2012-6-29, although the exercise price of these warrants is 12.00 (http://www.lifesplit.com/pdf/LFE%20Jun%2025.12-Warrant%20Pricing.pdf).

i) what is the undiluted NAV?

ii) why did you decide to report an NAV assuming full exercise of the 2013 warrants when these warrants are currently out of the money?

… and they replied …

We are required to post a diluted NAV when the net asset value is above the 2013 warrant net-commission exercise price of $11.75 ($12 less 25 cents commission).

The undiluted NAV is $11.91.

Yes indeed, I find when I look at the information circular:

The Company will pay a subscription fee of $0.25 per Unit in respect of each subscription procured by a CDS Participant on behalf of their clients.

So yes, the warrants are out-of-the-money relative to NAV as far as the clients are concerned; but dilutive to the company as far as its net proceeds are concerned.

It is interesting to note that today:

• LFE closed at 2.46-54
• LFE.PR.B closed at 9.60-70
• LFE.WT.A closed at 0.24-25

So that the warrants are slightly in-the-money from the clients’ perspective vis-a-vis market price, with an intrinsic value of (2.46 + 9.60 – 12.00) = 0.06 and time value of 0.18 … which seems quite low, considering the time value on LFE of (2.46 bid – 1.83 intrinsic value [diluted]) = 0.63 and the huge cash drag on the underlying portfolio.

Scotia Managed Companies has announced:

The Board of Directors of Lifeco Split Corporation Inc. (“Lifeco”) has declared today dividends of $0.3684 per Preferred Share and $0.2 per Capital Share payable on July 31, 2012 to holders of record at the close of business on July 27, 2012.

The Capital Shares and Preferred Shares will be redeemed by the Company on July 31, 2012 (the “Redemption Date”) in accordance with the redemption provisions as detailed in the Information circular dated June 15, 2010. Pursuant to these provisions, the Preferred Shares will be redeemed at a price per shares equal to the lesser of $36.84 and the Net Asset Value per Unit. The Capital Shares will be redeemed at a price equal to the amount by which the Net Asset Value per unit exceeds $36.84.

A further press release will be issued by the Company in connection with the redemption prices on July 30, 2012. Payment of the amounts due to holders of Capital Shares and Preferred Shares will be made by the Company on July 31, 2012.
Lifeco is a mutual fund corporation created to hold a portfolio of common shares of selected publicly listed Canadian life insurance companies. Lifeco 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 portfolio shares.
Capital Shares and Preferred Shares of Lifeco are listed for trading on The Toronto Stock Exchange under the symbols LSC and LSC.PR.C respectively.

LSC.PR.C was last mentioned on PrefBlog when there was a partial redemption in 2011. The information circular to which they refer was discussed on PrefBlog.

LSC.PR.C is not tracked by HIMIPref™.

Standard & Poor’s has announced:

• Brookfield’s fixed-charge coverage remains low, and we do not expect it to improve until a large pending vacancy at World Financial Center is
  back-filled with new tenants and cash flow related to this property stabilizes.

• We are revising our outlook on Brookfield Properties Corp. and Brookfield Office Properties Canada to negative from stable.
• Our negative outlook reflects our belief that previously expected improvements to fixed-charge coverage will take longer to occur.

Standard & Poor’s Ratings Services today revised its outlook on Brookfield Office Properties Inc. (Brookfield) and its Toronto-based affiliate, Brookfield Office Properties Canada (BOX), to negative from stable. We continue to analytically view these two related companies as one rated entity. Brookfield retains an indirect ownership interest in BOX of 83.3%.
…
The outlook is negative. Brookfield’s fixed-charge coverage remains low, and, we believe, is now unlikely to improve for two years. We would likely lower the corporate credit rating one notch if fixed-charge coverage measures deteriorate from their current (1.4x) levels. Our credit perspective could also change if BAM’s strategic evolution materially alters the operating platform or legal structure of Brookfield. We don’t see much potential for upgrade despite Brookfield’s “strong” business risk profile, unless the company meaningfully deleverages its balance sheet to strengthen its currently “significant” financial risk profile.

BPO has the following preferred share issues outstanding: BPO.PR.F, BPO.PR.H, BPO.PR.J, BPO.PR.K, BPO.PR.L, BPO.PR.N, BPO.PR.P and BPO.PR.R.

Additionally, BPO Properties is a subsidiary of the company and has the following preferreds outstanding: BPP.PR.G, BPP.PR.J and BPP.PR.M, but these are not rated by S&P. DBRS rates BPP preferreds a notch lower than BPO preferreds.

The most relevant recent mention of BPO on PrefBlog was just over a year ago, when S&P changed the trend from Negative to Stable.

US Financial 15 Split Corp. has announced:

the completion of the capital reorganization of the Preferred Shares of the Company (the “Reorganization”) that was approved at the special meeting of shareholders held on April 16, 2012, and the related consolidation of Class A Shares (the “Consolidation”).

As a result of the Reorganization, holders of Preferred Shares who did not exercise the 2012 Special Retraction Right, will receive the following securities for each Preferred Share:
1. one 2012 Preferred Share (Symbol: FTU.PR.B),
2. one 2013 Warrant (Symbol: FTU.WT.A); and
3. one 2014 Warrant (Symbol: FTU.WT.B).
The 2012 Preferred Share, 2013 Warrants and 2014 Warrants will be listed on the TSX and posted for trading at market open on June 25, 2012.

The exercise prices for the 2013 Warrants and the 2014 Warrants are $5.15 and $5.40, respectively.

As previously announced, the Consolidation is necessary to maintain an equal number of Class A shares and 2012 Preferred Shares outstanding following the Reorganization. After the Reorganization and the Consolidation, there will be 2,207,399 2012 Preferred Shares and 2,207,399 Class A Shares outstanding with a net asset value per unit of $4.99 as of the opening of business on June 25, 2012. The increase in net asset value of the Company from its value as of the close of business on
June 22, 2012 is attributable to the amount of the cumulative dividend arrears for Preferred Shares that are retained by the Company and added back to the net asset value of the Company as part of the Reorganization.

Additional information regarding the capital reorganization is contained in the Management Information Circular dated March 9, 2012 prepared in respect of the special meeting, available on SEDAR at www.sedar.com or on the Company’s website www.financial15.com.

FTU.PR.A was last mentioned on PrefBlog when the capital units were consolidated.

As discussed in the post FTU.PR.A Reorganization Details, FTU.PR.B will pay a dividend of 5.25% of the lesser of NAV and $10. FTU.PR.A used to be tracked by HIMIPref™, but no more, since the preferred share dividends will now be calculated as a percentage of NAV, rather than as a percentage of par. FTU.PR.B will not be tracked by HIMIPref™.

Canadian Life Companies Split Corp. has announced:

the completion of the capital reorganization of the Preferred Shares of the Company (the “Reorganization”) that was approved at the special meeting of shareholders held on April 16, 2012, and the related consolidation of Class A Shares (the “Consolidation”).

As a result of the Reorganization, holders of Preferred Shares who did not exercise the 2012 Special Retraction Right, will receive the following securities for each Preferred Share:
1. one 2012 Preferred Share (Symbol: LFE.PR.B),
2. one 2013 Warrant (Symbol: LFE.WT.A); and
3. one 2014 Warrant (Symbol: LFE.WT.B).

The 2012 Preferred Share, 2013 Warrants and 2014 Warrants will be listed on the TSX and posted for trading at market open on June 25, 2012.

The exercise prices for the 2013 Warrants and the 2014 Warrants are $12.00 and $12.60, respectively. As previously announced, the Consolidation is necessary to maintain an equal number of Class A shares and 2012 Preferred Shares outstanding following the Reorganization. After the Reorganization and the Consolidation, there will be 7,776,613 2012 Preferred Shares and 7,776,613 Class A Shares outstanding with a net asset value per unit of $11.66 as of the opening of business on June 25, 2012.

Additional information regarding the capital reorganization is contained in the Management Information Circular dated March 14, 2012 prepared in respect of the special meeting, available on SEDAR at www.sedar.com or on the Company’s website www.lifesplit.com.

The NAVPU of $11.66 implies a small gain from the estimated pro-forma June 15 valuation of $11.55.

As discussed in the post LFE.PR.A Unveils Reorg Proposal, the “2013 Warrants” (LFE.WT.A), may be exercised at any time until 2013-6-3 and the “2014 Warrants” (LFE.WT.B) at any time until 2014-6-2. Note that these are the deadlines as far as the company is concerned; your custodial broker will probably have a deadline a day or two in advance of this. Your broker should be able to tell you its deadline a few weeks in advance of the company deadline.

The termination date for the company is 2018-12-1. Let’s take a shot at valuing the components!

The tricksy thing about valuing the options is that there is a very significant cash drag on the portfolio, since the dividend yield on the underlying portfolio is about 4.5% (of the whole unit value) while the preferred shares are getting a distribution of 6.25% (of their 10% par value) and the MER is about 1.00% (of the whole unit value, after the fee reduction that is part of the reorganization).

This means that at a NAVPU of 12.00, the portfolio has cash outflows of 0.625 (preferred shares) + 0.12 (1% of NAV) = $0.745, or about 6.21% of the NAV, with inflows of 0.045 * 12 = $0.54, for a net outflow of $0.205, or about 1.71% p.a. This is deducted from the Risk-Free Rate to get the Net Risk Free Rate to be used in Black-Scholes.

For Annual Volatility of the underlying portfolio, let’s use 30%

This gives rise to the following calculation when the NAVPU is $12:

The calculation for the capital units, LFE, is dubious. In the first place, I’m not convinced Implied Volatilities for such relatively long periods are realistic; in the second place, the value will be highly path-dependent, as the end-value may be affected by dilution due to exercise of the warrants. [see note] Still, the results for the two warrants look relatively reasonable – although the quotes near the close on the day of issue are much, much, lower, this is on zero volume.

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Update – Note: And in the third place, Sequence of Returns risk means that the cash drag is more harmful than is modelled by the Black-Scholes Risk-Free Rate Adjustment.

Standard & Poor’s has announced:

• Industrial Alliance Insurance and Financial Services Inc. has announced that it will issue C$100 million in noncumulative preferred shares.
• We are revising our outlook on the company to negative and affirming all ratings.
• We could lower the rating in the next 18-24 months if leverage is not reduced to less than 35%, and debt service coverage does not improve to
  more than 5x.

NEW YORK (Standard & Poor’s) June 19, 2012–Standard & Poor’s Ratings Services said today that it affirmed its ‘A-‘ debt rating on Industrial Alliance Insurance and Financial Services Inc.’s. (Industrial Alliance) non-cumulative five-year rate reset Class A preferred share Series G after its C$100 million add on. The series does not have a fixed maturity date. At the same time, we have revised our outlook on the counterparty credit and financial strength ratings to negative from stable.

Although the issuance of these preferred shares strengthens the company’s capital base, it has also marginally weakened certain leverage and fixed-charge coverage metrics to levels marginally below those appropriate for the rating. The company’s announcement to issue C$100 million non-cumulative preferred shares follows the issuance of C$150 million of the same series of securities that closed on June 1, 2012.

Although we did not change our outlook on Industrial Alliance after the recent preferred share issuance, the company’s decision to issue an additional C$100 million of the same securities has resulted in a marginal weakening of certain pro forma financial metrics. Specifically, we expect similarly rated companies to maintain leverage (including debt, hybrids, and preferred shares) of less than 35% and debt service coverage of at least 5x. Although Industrial Alliance maintains a strong financial profile, the recent preferred share issues have marginally weakened these metrics on a pro forma basis, resulting
in the negative outlook.

The capital raise reflects the company’s exposure to the current low interest rate environment. The bulk of this exposure is from the company’s 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 the Canadian regulatory capital rules. Although the company has a number of alternative means available to manage its Canadian regulatory capital adequacy position, it is choosing to supplement this with an additional preferred share issue to increase and optimize its options. Alternative options would include managing down new business strain, de-risking and repricing products to reduce capital strain, reinsuring on-balance-sheet mortality risk, or following the minimum guidelines for the ultimate reinvestment rate rather than accelerating the implementation of this by one year.

The outlook is negative. We could downgrade the company during the next 18-24 months if it does not reduce leverage to less than 35%, and improve its debt-service coverage to more than 5x. Alternatively, if the company were able to achieve these financial metrics, we would return the outlook to stable.

The reopening of IAG.PR.G has been discussed on PrefBlog. This news follows the DBRS announcement that the preferred shares and sub-debt of IAG are on Review-Negative.

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.

US Financial 15 Split Corp. has announced:

a Class A share consolidation for all Class A shareholders of record on June 25, 2012 (the “Consolidation”) that will decrease the number of Class A shares held by each Class A shareholder. The purpose of the share Consolidation is to maintain an equal number of Class A shares and Preferred shares outstanding. The intrinsic value of each investor’s holdings in Class A shares will remain the same after the Consolidation.

As a result of the successful vote to reorganize the Preferred shares of the Company at the recent Special Meeting of Shareholders held on April 16, 2012, both Class A shareholders and Preferred shareholders were given a special retraction right. This special retraction right allowed both classes of shareholders to tender one or both classes of shares. In aggregate, there were more Preferred shares tendered for retraction than Class A shares. Since the Company is required to maintain an equal number of shares outstanding for each class as per the prospectus, the Company must decrease the Class A shares to match the number of Preferred shares.

Immediately after payments for the May and June monthly retraction and the special retraction right on June 19, 2012, there will be 2,207,399 Preferred shares and 3,080,059 Class A shares outstanding. In order to restore an equal amount of shares outstanding for each class, Class A shareholders of record as at June 25, 2012 will receive approximately 0.71667425851 Class A shares for each Class A share outstanding. The decrease in shares (Consolidation) is a non taxable event.

The impact of the Class A share Consolidation will be reflected in the next reported net asset value per unit as at the June 22, 2012 Consolidation date. Net assets of the Company after the retraction payments will be approximately $9.2 million.

It looks like not a single one of the Capital Units was retracted, which makes sense because retractors will be paid nothing and can have had no reasonable expectation of being paid anything. But, if there were any who did retract, the company was successful in recirculating their shares.

As the June 15 NAVPU (net of accrued but unpaid preferred share dividends) was only 4.42, credit quality cannot be said to have improved as a result of the consolidation.

The reorganization has been discussed previously on PrefBlog. FTU.PR.A used to be tracked by HIMIPref™, but no more, since the preferred share dividends will now be calculated as a percentage of NAV, rather than as a percentage of par.

Canadian Life Companies Split Corp. has announced:

a Class A share consolidation for all Class A shareholders of record on June 25, 2012 (the “Consolidation”) that will decrease the number of Class A shares held by each Class A shareholder. The purpose of the share Consolidation is to maintain an equal number of Class A shares and Preferred shares outstanding. The intrinsic value of each investor’s holdings in Class A shares will remain the same after the Consolidation. The decrease in the number of Class A shares would be proportionate to the increase in the net assets attributable to the Class A shares.

As a result of the successful vote to reorganize the Preferred shares of the Company at the recent Special Meeting of Shareholders held on April 16, 2012, both Class A shareholders and Preferred shareholders were given a special retraction right. This special retraction right allowed both classes of shareholders to tender one or both classes of shares. In aggregate, there were more Preferred shares tendered for retraction than Class A shares. Since the Company is required to maintain an equal number of shares outstanding for each class as per the prospectus, the Company must decrease the Class A shares to match the number of Preferred shares.

Immediately after payments for the May and June monthly retraction and the special retraction right on June 19, 2012, there will be 7,776,613 Preferred shares and 10,693,243 Class A shares outstanding. In order to restore an equal amount of shares outstanding for each class, Class A shareholders of record as at June 25, 2012 will receive approximately 0.7272455138 Class A shares for each Class A share outstanding. The decrease in shares (Consolidation) is a non taxable event.

The impact of the Class A share Consolidation will be reflected in the next reported net asset value per unit as at the June 22, 2012 Consolidation date. Net assets of the Company after the retraction payments will be approximately $91.7 million.

The pre-consolidation 2012-6-15 NAVPU of 11.13 may therefore be translated pro-forma into about 11.55 post-consolidation.

The pre-consolidation Capital Units outstanding was 10,712,753, which implies that about 20,000 Capital Units were retracted and uncirculated. I am a bit surprised at that, given that the closing price of LFE has been significantly higher than the retraction price on all dates following the retraction date.

In the last post on this issue, LFE.PR.A: Recirculating?, I noted that the May 31 (pre-consolidation) NAVPU was 11.32; thus the fund lost approximately 1.68% for the two weeks. This may be compared with the performance of the constituents of the underlying portfolio:

It looks like the company was prudent and raised the required cash on or about the redemption valuation date!

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

Canadian Utilities has announced:

it has closed its previously announced public offering of Cumulative Redeemable Second Preferred Shares Series AA, by a syndicate of underwriters co-led by BMO Capital Markets and RBC Capital Markets, and including TD Securities Inc. and Scotiabank. Canadian Utilities Limited issued 6,000,000 Series AA Preferred Shares for gross proceeds of $150 million. The Series AA Preferred Shares will begin trading on the TSX today under the symbol CU.PR.D. The proceeds will be used to fund the previously announced redemption of all of the outstanding Cumulative Redeemable Second Preferred Shares Series X of Canadian Utilities Limited.

CU.PR.D is a Straight Perpetual, 4.90%, announced May 30.

The issue is rated Pfd-2(high) by DBRS.

CU.PR.D traded 518,880 shares today in a range of 25.00-23 before closing at 25.03-09, 10×137. Vital statistics are:

It seems clear that both the company and the underwriters are pleased by the reception for this issue since – Whoops! I did it again! – an identical new issue was announced today. Well – it saves on legal fees!