Category: Issue Comments

Canadian Utilities has announced:

Canadian Utilities Limited also announced today that it will redeem on July 19, 2012 all of its outstanding Cumulative Redeemable Second Preferred Shares Series W at a price of $25.00 per share plus accrued and unpaid dividends per share.

CU.PR.A has been tracked by HIMIPref™. It is a member of the PerpetualPremium index and closed Friday at 25.34-40 to yield (7.81%) – (10.56%) based on an immediate call. IIROC halted trading today at 3:12 “pending news”, prior to which the issue had traded 950 shares in a range of 25.34-38.

DBRS has announced that it:

has today placed the Subordinated Debt and Preferred Shares ratings of Industrial Alliance Insurance and Financial Services Inc. (IAG or the Company) Under Review with Negative Implications. The Claims Paying Rating of IC-2 is not affected by this rating action.

Following the DBRS annual review meetings with IAG management and certain disclosures included in the Company’s Investor Day (June 12, 2012) presentation, DBRS remains concerned that the Company’s exposure to the current low interest rate environment has impaired its financial flexibility at the current rating categories.

The Company’s total debt ratio has increased to 36.6% pro forma the $150 million preferred share issue completed in May 2012, which is above the range established by the DBRS rating methodology for the life insurance industry at the current rating category. Beyond our concerns for the Company’s financial leverage, DBRS observes that the Company continues to have higher-than-average exposures to interest rates by virtue of the relatively large exposure to long-duration life insurance liabilities with embedded interest rate guarantees that are more challenging to meet in the current rate environment.

While the Company is reducing some of its exposure to interest rate risk in the short run through more efficient asset liability matching and forward interest rate locks, and in the longer term through price increases and product redesign, the Company has also suggested that if rates do not increase before year-end 2012, it is likely going to have to take an estimated $120 million charge on account of lower ultimate reinvestment rate assumptions. The Company’s priority is to offset this adverse development with additional one-time earning gains while it waits for a more sustainable interest rate environment.

In the meantime, the Company is operating at a lower Solvency Ratio (the AMF’s MCCSR equivalent) of approximately 186% (March 31, 2012), which, while below the industry average of over 200%, factors in the Company’s inherent conservatism that is estimated to depress the ratio by close to 15 points. Nevertheless, the nine points gained by the addition of $150 million of preferred shares in May was more than absorbed by adverse market developments in April and May, which suggests that the Company and its regulatory capital ratio remain quite vulnerable to exogenous market forces.

With little demonstrable financial flexibility at the current rating category in terms of debt or preferred share capacity and the prospects of continued earnings and market volatility, which has a direct impact on regulatory capital ratios, the Company warrants the Under Review- Negative status at this time. DBRS expects to complete its review of the Company within the next two months.

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.

Bombardier Inc. has announced:

the basis for resetting the dividend rate on its Series 3 Preferred Shares in accordance with the terms applicable to those shares.

Holders of Bombardier Inc. Series 2 Preferred Shares have the right to convert all or part of their shares, effective on August 1, 2012, on a one-for-one basis into Series 3 Preferred Shares. Holders of Series 3 Preferred Shares have the right to convert all or part of their shares, effective on August 1, 2012, on a one-for-one basis into Series 2 Preferred Shares. Holders who do not convert their shares will retain their Series 2 Preferred Shares or Series 3 Preferred Shares, as the case may be.

In the case of the Series 2 Preferred Shares, starting as of August 1, 2012, holders will continue to receive a monthly floating adjustable cash dividend, as and when declared by the Board of Directors of Bombardier Inc., based on a dividend rate equal to a percentage of the prime rate, subject to certain adjustments in accordance with the terms of such shares.

In the case of the Series 3 Preferred Shares, starting as of August 1, 2012, holders will receive a quarterly fixed cash dividend for the following five years, as and when declared by the Board of Directors of Bombardier Inc., based on a fixed rate equal to 255% of the yield on five-year non-callable Government of Canada bonds determined as at July 11, 2012, in accordance with the terms of such shares. The annual dividend rate applicable to the Series 3 Preferred Shares will be published on July 12, 2012 in several newspapers.

Any registered shareholder who wishes to convert his or her Series 2 and/ or Series 3 Preferred Shares must complete and sign the conversion panel contained on the back of the Series 2 or Series 3 Preferred Share certificate as the case may be, and deliver it, at the latest by 5:00 p.m. (Montréal time) on July 18, 2012, to Computershare Investor Services Inc.

Shareholders who are beneficial owners and who wish to exercise their right of conversion should communicate as soon as possible with their broker or other nominee and follow their instructions. In that case, it is important that they follow such instructions and act in the time frame advised so as to provide enough time to their broker or other nominee to meet the July 18, 2012 deadline.

If, after July 18, 2012, Bombardier Inc. determines that there would be less than one million Series 2 Preferred Shares outstanding after the conversion date (being August 1, 2012), then all remaining Series 2 Preferred Shares will automatically be converted into Series 3 Preferred Shares on a one-for-one basis. However, if, after such date, Bombardier Inc. determines that there would be less than one million Series 3 Preferred Shares outstanding after the conversion date (being August 1, 2012), then all remaining Series 3 Preferred Shares will automatically be converted into Series 2 Preferred Shares on a one-for-one basis. In either case, Bombardier Inc. shall give a written notice to that effect to holders of such remaining shares no later than July 25, 2012.

Subject to the conditions mentioned in the previous paragraph, on August 1, 2017, and every five years thereafter, holders of Series 2 Preferred Shares and holders of Series 3 Preferred Shares will have again the right to convert their shares into shares of the other series.

At the current five-year Canada yield (GOC5) of 1.19% (!) the indicated new yield will be 3.0345% or a little over $0.75 p.a. – a steep decline from the current payment of 5.267%, or $1.31675.

I have expressed astonishment in recent editions of PrefLetter that the price differential between BBD.PR.D and BBD.PR.B (the Ratchet Rate issue with which it is interconvertible) has remained so high for so long (closing prices June 14 were 17.75 and 14.90, respectively). But the preferred share market is an inefficient place!

The last arbitrage opportunity was, of course, five years ago. Both BBD.PR.B and BBD.PR.D are tracked by HIMIPref™; both issues are relegated to the Scraps index on credit concerns.

Scotia Managed Companies has announced:

NewGrowth Corp. (the “Company”) announced today that it has called 62,784 Preferred Shares for cash redemption on June 26, 2012 (in accordance with the Company’s Articles) representing approximately 2.284% of the outstanding Preferred Shares as a result of the special annual retraction of 62,784 Capital Shares by the holders thereof. The Preferred Shares shall be redeemed on a pro rata basis, so that each holder of Preferred Shares of record on June 22, 2012 will have approximately 2.284% of their Preferred Shares redeemed. The redemption price for the Preferred Shares will be $13.70 per share.

In addition, holders of a further 30 Capital Shares and 30 Preferred Shares have deposited such shares concurrently for retraction on June 26, 2012. As a result, a total of 62,814 Capital Shares and 62,814 Preferred Shares, or approximately 2.285% of both classes of shares currently outstanding, will be redeemed.

Holders of Preferred Shares that are on record for dividends but have been called for redemption will be entitled to receive dividends thereon which have been declared but remain unpaid up to but not including June 26, 2012.

Payment of the amount due to holders of Preferred Shares will be made by the Company on June 26, 2012. From and after June 26, 2012 the holders of Preferred Shares that have been called for redemption will not be entitled to dividends or to exercise any right in respect of such shares except to receive the amount due on redemption.

NewGrowth Corp. is a mutual fund corporation whose investment portfolio consists primarily of publicly listed securities of selected Canadian chartered banks, telecommunication, pipeline and utility issuers. The Capital Shares and Preferred Shares of NewGrowth Corp. are both listed for trading on The Toronto Stock Exchange under the symbols NEW.A and NEW.PR.C respectively.

NEW.PR.C was last mentioned on PrefBlog with respect to last year’s partial call for redemption. NEW.PR.C is tracked by HIMIPref™ but is assigned to the Scraps index on volume concerns.

Brompton Life & Banc Split Corp. has released its Annual Report to December 31, 2011.

Note that according to the implementation by iShares, the capped financial index is about 76% banks and 19% insurance, so the fund is by design overweight insurers relative to this benchmark – and insurers have underperformed.

Figures of interest are:

MER: 1.02% of the whole unit value, “excluding the cost of leverage and issuance costs.”

Average Net Assets: We need this to calculate portfolio yield. The Total Assets of the fund at year end was $204.4-million, compared to $190.8-million a year prior (there was an increase in shares outstanding due to a warrant offering), so call it an average of $198-million. This can be checked by examining distributions on preferred shares of $7.164-million, which at $0.525 / share implies an average of 13.6-million units outstanding, which at an average value of $16.75 implies average net assets of 227.8-million. Since the warrants were exercised in late March, 2011, the latter figure seems more appropriate.

Underlying Portfolio Yield: Investment income of $9.232-million received divided by average net assets of $227.8-million is 4.05%.

Income Coverage: Net investment income after expenses of $6.942-million received plus $0.048-million issuance costs added back is $6.990-million, to cover preferred dividends of 7.164-million is about 98%.

LBS.PR.A was last mentioned on PrefBlog when their 12H1 Semi-annual report was discussed.

Yesterday, in the post LFE.PR.A Tight-Lipped Regarding Special Retraction Results I expressed my irritation that results of the Special Retraction for LFE.PR.A had not been reported by the company immediately following the effective date of the Special Retraction.

I eMailed the company:

Knowledge of the consolidation ratio is critical to evaluation of the credit quality of LFE.PR.A and the option value of LFE.

What purpose is served by the delay?

Sincerely,

… and received a reply …

In the best interest of the shareholders, the Company has an obligation to attempt to recirculate the shares submitted for the special retraction, prior to the payment date. Therefore it does not mean that all shares submitted for the special retraction will be cancelled. Any cancellations will not occur until after the June 19th payment date.

Well, fair enough, although I consider it rather odd that the company is holding the position as treasury shares for almost three weeks.

Say that: (i) they have not yet raised the cash, and (ii) the underlying portfolio value plummets. Then they’re screwed, because they have, effectively, levered up the portfolio in a down market.

So to avoid this possibility, one might assume that a prudent person would have raised the cash as of the NAV calculation date (May 31).

So say that: (i) they have raised the cash, and (ii) the underlying portfolio value skyrockets. This gets a little complex, so say there were two units outstanding May 30, of which one was retracted May 31 at a price of $11. They raise the cash, so that their assets on May 31 are $11 securities and $11 cash, against two units outstanding, one of which is a treasury unit.

Then the underlying doubles, so on June 17 their assets are $22 securities and $11 cash, with two units outstanding, one of which started the period as a treasury. The unitholders will be happy or sad to the extent to which the company was able to sell units at prices reflecting their ability to invest the cash in the underlying portfolio. It gets a little hairy, especially when there are two classes of shares to worry about.

Attempting to recirculate units after the calculation of the cash payment obligation seems like a risky enterprise to me. But, of course, the numbers have been chose to make understanding simpler – the underlying portfolio is unlikely to either double or halve in the three week holding period.

In fact, they might well get away with it, given that the Capital Units are trading at a fat premium to the intrinsic value reported on May 31, which was $11.32. Despite this, the low price for the entire period for the capital units by the Toronto Stock Exchange was $1.70.

Those who have seen my seminar on SplitShares will know there is nothing automatically wrong with capital units trading at a premium – they can, to a certain extent, be modelled as options and may have time value that can be quite considerable. There’s more discussion of this nuance (for free, you cheap bastards) in the post Split Share Capital Unit Debate. But – and it’s a big but, as the Bishop said to the Actress – there will be a considerable cash drag on the portfolio following the reorganization and any attempt to model the capital units as options have to include this effect. I’m sure a lot of models don’t.

One way or another, however, I suspect that the company will be successful in flogging any Capital Units retracted for a price in excess of their redemption price of $1.32. Just what might happen to the preferred shares is much less clear. We shall see!

Emera has announced:

that it has completed its public offering of ten million Cumulative Rate Reset First Preferred Shares, Series C for aggregate gross proceeds of $250 million. The offering was first announced on May 29, 2012 when Emera entered into an agreement with a syndicate of underwriters in Canada led by Scotiabank, RBC Capital Markets and TD Securities Inc.

The net proceeds of the offering will be used for general corporate purposes.

EMA.PR.C is a FixedReset, 4.10%+265, announced May 29. The issue will be tracked by HIMIPref™, but assigned to the Scraps index on credit concerns.

EMA.PR.C traded 503,021 shares today in a range of 24.75-87 before closing at 24.81-84, 25×2. Vital statistics are:

Valener Inc. has announced:

the closing of the previously announced public offering of Cumulative Rate Reset Preferred Shares, Series A (the “Series A Preferred Shares”). Valener issued a total of 4,000,000 Series A Preferred Shares at a price of $25.00 per Series A Preferred Share, for gross proceeds of $100,000,000. The offering was made on a bought deal basis through a syndicate of underwriters co-led by BMO Capital Markets and TD Securities Inc.

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

“We are pleased that Valener has successfully completed its first distribution of Preferred Shares, which reflects the confidence the financial markets have in our company”, Mr. Pierre Monahan, Chairman of the Board of Directors of Valener, stated.

The net proceeds of the offering will be used by Valener to subscribe to additional units of Gaz Métro Limited Partnership (“Gaz Métro”) in order for Gaz Métro to finance part of its proposed acquisition of Central Vermont Public Service Corporation (the “CVPS Acquisition”) and any balance, for general corporate purposes. In the event the CVPS Acquisition does not proceed, Valener will use the net proceeds of the offering to repay amounts under its credit facility and for general corporate purposes.

Note that the issue size was upsized following announcement of the issue.

VNR.PR.A is a FixedReset, 4.35%+281, announced May 15. The issue will be tracked by HIMIPref™ and assigned to the FixedResets subindex.

VNR.PR.A traded 400,176 shares today in a range of 25.10-18 before closing at 25.14-15, 21×26. Vital statistics are: