Category: Issue Comments

Standard & Poor’s has announced:

it has revised its outlooks on seven Canadian financial institution ratings to negative from stable. The financial institutions are:

• The Bank of Nova Scotia
• Central 1 Credit Union
• Home Capital Group Inc.
• Laurentian Bank of Canada
• National Bank of Canada
• Royal Bank of Canada
• Toronto-Dominion Bank

At the same time, Standard & Poor’s affirmed its ratings on all seven banks.
…
The outlook revisions are linked to our evolving views of economic risk and industry risk for banks operating in Canada. A prolonged run-up in housing prices and consumer indebtedness in Canada is in our view contributing to growing imbalances and Canada’s vulnerability to the generally weak global economy, applying negative pressure on economic risk for banks. Growing pressure on banks’ risk appetites and profitability arising from competition for loan and deposit market share could also lead to a deterioration in our view of industry risk.
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The negative outlook recognizes the potential for deterioration of Canadian banks’ financial performance and capitalization generally, associated with consumer debt burdens proving excessive in an unfavorable economic scenario, or due to competitive pressures amplified by the shift to a consumer deleveraging phase.

Over the past decade, Canadian consumer credit market debt (including residential mortgage loans and consumer credit) has risen to more than 150% from 110% of disposable income, and relative to GDP, consumer debt has increased to more than 90% from about 70%. Over the same period, Canadian house prices have approximately doubled, with compounded real growth in housing prices estimated to be about 5% per year.
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Bank risk profiles have benefited from Canadian banks’ underwriting practices, stable performance metrics for banks’ credit portfolios, and the sharing of mortgage risk between the banks, the borrowers (extensively based on full recourse to the consumer), and the providers of mortgage insurance, notably the Canada Mortgage and Housing Corporation (AAA/Stable/A-1+). In our view, Canadian banks’ risk tolerances and risk management capabilities are generally strong and attuned to risks inherent in the Canadian consumer and housing sectors. Even so, we believe there is currently growing potential for deterioration of Canadian bank credit profiles associated with scenarios incorporating consumer sector stress.

Systemic factors are incorporated in Standard & Poor’s rating methodology primarily through its Banking Industry Country Risk Assessment, or BICRA. The BICRA framework takes into account economic and institutional risk factors present in the environment in which banks operate. Canada’s BICRA is currently set at ‘1’ (lowest risk) on a 1 to 10 scale. The BICRA component of the analysis is intended to highlight emergent systemic risks that may not be fully apparent when viewing the sector at the level of individual banks.

The following preferred shares of the affected banks are outstanding:

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.PT.T, BNS.PR.X, BNS.PR.Y, BNS.PR.Z.

LB.PR.D, LB.PR.E.

NA.PR.K, NA.PR.L, NA.PR.M, NA.PR.N, NA.PR.O, NA.PR.P.

RY.PR.A, RY.PR.B, RY.PR.C, RY.PR.D, RY.PR.E, RY.PR.F, RY.PR.G, RY.PR.H, RY.PR.I, RY.PR.L, RY.PR.N, RY.PR.P, RY.PR.R, RY.PR.T, RY.PR.W, RY.PR.X, RY.PR.Y.

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.

Standard & Poor’s has announced:

• CNOOC Ltd. (AA-/Stable/–; cnAAA/–) has agreed to acquire Nexen Inc. in a transaction valued at about C$19.4 billion, including assumption of
  debt.

• We are placing our ratings, including our ‘BBB-‘ long-term corporate credit rating, on Nexen on CreditWatch with positive implications.
• The CreditWatch placement reflects the potential that we might raise our ratings on the company to match CNOOC’s stand-alone credit profile of ‘a’ upon the transaction’s completion.
• We expect to resolve the CreditWatch placement before the end of 2012.

S&P also announced:

that the rating on China-based CNOOC Ltd. (AA-/Stable/–; cnAAA) is not immediately affected by the company’s proposed acquisition of Nexen Inc. (BBB-/Watch Pos/–). In our view, the US$15.1-billion acquisition is larger than previous CNOOC deals in recent years and could test the company’s integration ability.

Standard & Poor’s sees the acquisition as consistent with CNOOC Ltd.’s strategy to expand outside China. The transaction, once completed, would increase CNOOC Ltd.’s proven reserves by about 30% and production by about 20%. More importantly, it provides a good opportunity for CNOOC Ltd. to diversify its operations materially in the low-risk member countries of the Organization for Economic Cooperation and Development (OECD). At the end of 2011, more than 71% of CNOOC Ltd.’s reserves are off the coast of China, and over 20% of reserves are in countries with high sovereign risks. After the acquisition, CNOOC Ltd.’s reserves in China will fall to 56% and its reserves in OECD countries would increase to above 28%.

NXY has issued a single preferred share issue, NXY.PR.A, which is tracked by HIMIPref™.

DBRS has announced that it:

has today downgraded the rating of the Preferred Shares issued by Prime Dividend Corp. (the Company) to Pfd-3 from Pfd-3 (high).

In November 2005, the Company issued 2.2 million Preferred Shares (at $10 each) and an equal number of Class A Shares (at $15 each). The redemption date for both classes of shares issued was originally December 1, 2012, but was extended to December 1, 2018, after holders of 96.1% of Class A Shares and 90.2% of Preferred Shares voted in favour of the extension.

The Company holds a portfolio consisting primarily of common shares (the Portfolio) of the six major Canadian banks, life insurance companies (Great-West Lifeco Inc., Manulife Financial Corporation, Sun Life Financial Inc.), investment management companies (AGF Management Limited, CI Financial Corp., IGM Financial Inc.) and a few other companies (BCE Inc., TransAlta Corporation, TransCanada Corporation, Power Financial Corporation, TSX Group Inc.). The common shares of each Portfolio company represent between 4% and 8% of the total NAV of the Company, and no more than 20% of the NAV of the Company may be invested in securities issued by financial services or utilities firms other than those listed above. The Portfolio is actively managed by Quadravest Capital Management Inc.

Dividends received from the Portfolio are used to pay to each Preferred Share a monthly floating-rate distribution equal to the prevailing prime rate in Canada (the Prime Rate) plus 0.75% per annum, with a minimum of 5% per annum and maximum of 7% per annum. Holders of Class A Shares are targeted to receive a monthly floating-rate distribution equal to the Prime Rate plus 2% per annum, with a minimum targeted rate of 5% per annum and a maximum targeted rate of 10% per annum. Holders of the Preferred Shares have been receiving the minimum monthly payment of $0.04167 per share (yielding 5% per annum) since November 2008.

On September 6, 2011, DBRS confirmed the ratings on the Preferred Shares at Pfd-3 (high) based on the sufficient level of downside protection available to holders of the Preferred Shares at the time. The NAV was fairly volatile in the months following the rating confirmation, with downside protection falling to 39.7% in November 2011 before recovering slightly over the first quarter of 2012. Since April 2012, the NAV declined again, dropping to $15.89 as of June 29, 2012. The current dividend coverage ratio is around 0.87 times and the downside protection available is approximately 37.1%, which fails to reach levels commensurate with a Pfd-3 (high) rating. As a result of the insufficient downside protection and dividend coverage ratio on the Portfolio, the Preferred Shares have been downgraded to Pfd-3 from Pfd-3 (high).

PDV.PR.A was last mentioned on PrefBlog in connection with its outstanding warrants. PDV.PR.A is not tracked by HIMIPref™, as there are only about 1.5-million of the $10-par-value shares outstanding.

DBRS has announced that it:

has today removed Fortis Inc.’s (Fortis or the Company) ratings from Under Review with Developing Implications (following the announced acquisition (the Acquisition) of CH Energy Group Inc. (CHG) on February 21, 2012). DBRS has also confirmed the ratings of Unsecured Debentures and Preferred Shares of the Company at A (low) and Pdf-2 (low), respectively, with Stable trend. The confirmation is based on the closing of subscription receipt offering (approximately $600 million) in June 2012 and further review of the Company’s financing plan. DBRS is comfortable that Fortis’s funding strategy includes appropriate measures to maintain a reasonable financial profile while executing its growth strategy, particularly the Acquisition (approximately $1.0 billion, plus $500 million in debt assumption) and the Waneta hydro power project (total $450 million in investment, $250 million required in 2012).

Fortis’s non-consolidated balance sheet leverage is expected to increase notably. However, given its current financial flexibility with non-consolidated debt-to-capital at near 14% and strong cash flow coverage, DBRS believes that Fortis’s financing plan is reasonable, such that the debt leverage within the 20% range can be maintained in-line with DBRS’s rating guidelines for notching a holding company relative to its subsidiaries. (See DBRS Criteria: Rating Parent/Holding Companies and Their Subsidiaries, dated March 2010.) Following the Acquisition and the financing of the Waneta project, cash flow coverage is expected to weaken temporarily but should still remain within the current rating category.

With the proposed Acquisition, Fortis’ business risk profile is expected to improve moderately, as approximately 97% of CHG’s earnings are generated from its regulated electric and gas businesses. This regulated earnings mix is higher than the Company’s current mix at approximately 90%. The remaining 10% of Fortis’s consolidated earnings are generated from higher-risk hotel properties and non-regulated generation businesses. The regulatory framework in New York is viewed as reasonable, as CHG is allowed to recover prudently incurred operating, capital and commodity costs and earn good returns on investment.

Fortis is currently rated the same as some of its subsidiaries (FortisBC Inc. and FortisAlberta Inc.) despite the structural subordination and double leverage at the parent. DBRS believes that Fortis’s ratings are supported by strong and stable cash flows from diversified sources, with a significant portion of dividends coming from its regulated subsidiaries with “A” ratings (FortisBC Energy Inc. and Newfoundland Power Inc.).

The acquisition of CH Energy Group caused S&P to place FTS on Review-Negative but that review was resolved in May:

• We are affirming our ratings, including our ‘A-‘ long-term corporate credit rating, on Fortis Inc. and subsidiary FortisAlberta Inc.
• We are also removing the ratings from CreditWatch with negative implications, where they were placed Feb. 22, 2012.
• The affirmation reflects Fortis’ financing plan for the proposed C$1.5 billion acquisition of CH Energy Group Inc. and the completion of its C$900 million Waneta hydroelectric construction project, on time and on budget in 2015.
• We expect that the company’s diversified portfolio should generate adequate and stable cash flow at or above our consolidated targets.
• The stable outlook reflects our assessment of the operating companies’ underlying operational and financial stability, which mitigates the relatively weak financial measures for the ratings.

Fortis has a number of preferred shares outstanding: FTS.PR.C, FTS.PR.E, FTS.PR.F, FTS.PR.G and FTS.PR.H.

DBRS has announced that it:

DBRS has today downgraded Yellow Media Inc.’s (Yellow Media or the Company) Issuer Rating to C (high) from CCC; its Medium-Term Notes rating to C (high) from CCC, with an RR4 recovery rating; and its Exchangeable Subordinated Debentures rating to C (low) from CC (high), with a recovery rating of RR6. DBRS has also placed these ratings and Yellow Media’s Cumulative Preferred Shares rating of Pfd-5 (low) (already at the lowest rating on the scale) Under Review with Negative Implications.

The downgrade follows the Company’s announcement of a recapitalization plan (the Recapitalization), which is intended to restructure the balance sheet in a manner that would better enable Yellow Media to focus on the transformation of its business from print to digital. DBRS notes the recapitalization proposal (see key components below) would result in a default, based on the fact that lenders would receive less than originally intended interest and principal repayment if the offer is approved in a vote on September 6, 2012.

The revised ratings have been placed Under Review with Negative Implications in consideration of the pending stakeholder vote on September 6, 2012. Should the proposal be approved, Yellow Media’s exchanged securities would be placed in default status in accordance with DBRS policy.

S&P has announced:

• Montreal-based classified directory publisher Yellow Media Inc. announced an offer to exchange its existing unsecured debt (credit facilities and medium-term notes) for new senior secured notes and subordinated unsecured exchangeable debentures, as well as cash and common shares.
• The company has also offered holders of existing convertible subordinated debentures, preferred shares, and common shares an exchange for 17.5% of the new common shares as well as warrants representing 10% of the new shares.
• We view the offer as a distressed exchange under our criteria and have therefore lowered our long-term corporate credit rating on Yellow Media to ‘CC’ from ‘CCC’.
• At the same, we lowered our issue-level rating on the company’s senior unsecured debt to ‘CC’ from ‘CCC’ and lowered the issue-level rating on its convertible subordinated debentures to ‘C’ from ‘CC’. The recovery ratings on these securities are unchanged at ‘4’ and ‘6’, respectively.
• We are removing the ratings from CreditWatch.
• Should the company complete the exchange as proposed, we would lower all ratings to ‘D’.

YLO has the following preferred shares outstanding: YLO.PR.A, YLO.PR.B, YLO.PR.C and YLO.PR.D. The proposed recapitalization has been discussed on PrefBlog.

Yellow Media Inc. has announced:

a recapitalization transaction (the “Recapitalization”) aimed at significantly reducing the Company’s debt and improving its maturity profile, with debt first coming due in 2018. The Recapitalization will allow the Company to pursue its business transformation.

Closing of the Recapitalization is anticipated by the end of September 2012.

The key components of the Recapitalization are as follows:

– Exchange of its credit facilities and medium term notes (the “Senior Unsecured Debt”), representing $1.8 billion of the Company’s debt, for a combination of:
$750 million of 9% Senior Secured Notes due in 2018;
$100 million of Subordinated Unsecured Exchangeable Debentures due in 2022, with interest payable in cash at 8.0% or in additional debentures at 12%;
82.5% of the New Common Shares; and
$250 million of cash;

– Holders of existing convertible debentures, preferred shares and common shares of the Company to receive in exchange for their securities a combination of:
17.5% of the New Common Shares; and
Warrants, representing in the aggregate 10% of the New Common Shares;

– Noteholders holding 30.0% of the medium term notes, and representing 23.7% of the Company’s Senior Unsecured Debt, have executed support agreements committing them to vote in favour of the Recapitalization;

– The Recapitalization will not impact customers, suppliers and other business partners of Yellow Media Inc.

The Company proposed this Recapitalization initiative to align its capital structure with its operating strategy. The Recapitalization will ensure the necessary financial flexibility to pursue the Company’s ongoing transformation in order to enhance long-term value for stakeholders. Upon completion of the Recapitalization, the Company will have debt of approximately $850 million consisting of $750 million of Senior Secured Notes and $100 million of Subordinated Unsecured Exchangeable Debentures. Annual interest expense will also be reduced by approximately $45 million.

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The Company intends to implement the Recapitalization pursuant to a plan of arrangement under the Canada Business Corporations Act. The implementation of the Recapitalization is subject to a number of conditions and other risks and uncertainties including the receipt of the final approval of the court and all necessary regulatory and stock exchange approvals, as well as to other conditions. Implementation of the Recapitalization is expected to occur by the end of September 2012.
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Noteholders holding 30.0% of the Company’s outstanding medium term notes, and representing 23.7% of the Company’s Senior Unsecured Debt, have executed a support agreement with, among others, Yellow Media whereby they have agreed, subject to certain conditions, to vote in favour of and support the Recapitalization. Noteholders are represented by Moelis & Company as financial advisors and Bennett Jones LLP as legal advisors.

The Company will solicit additional support from credit facility lenders and noteholders for the Recapitalization.

The attached Powerpoint page has the following pro-forma table:

Note that since this is a plan of arrangement the preferred shareholders will have a vote.

It is interesting that the YLO.PR.A and YLO.PR.B are not being forcibly converted into equity prior to the changes.

I eagerly look forward to seeing the proposed detailed exchange ratios!

Update: As noted in the comments, the exchange ratios are on the press release, but way, way down at the bottom, below all the regulatory cautions and contact names.

There are a few angry holders of convertible debs:

The money managers who hold Yellow Media’s convertible debentures are furious, arguing they have been grossly mistreated under the company’s recapitalization plans.

The tip of this frustration came out on a conference call Monday, during which management explained the decision to extend its bond maturities, in exchange for handing senior debt holders an overwhelming majority of equity. Even though convertible debentures are technically debt instruments, their holders aren’t getting much.

Even worse, they’ve been offered less than preferred share holders, which are technically lower down in the capital structure. For every 100 preferred shares owned, the holders will receive 1.875 of the company’s common shares and 1.07143 warrants. Convert holders, however, will only get 0.62500 common shares and 0.35714 warrants for each $1,000 in principal.

Enraged money managers asked about this on the call, and for a while they didn’t really get an answer as to how this could be. But then it became clear: The financial advisers assumed that convertible debenture holders would convert to common shares before the recap is finalized, even though doing so would offer them much fewer common shares.

Under the plan, 100 YLO.PR.A will convert to 6.25 Common Shares and 3.57143 Warrants.

However, YLO has the ability to convert YLO.PR.A into common at $2 / share, based on par value ($25) and unpaid dividends (about $0.50, to make the numbers easier). So for 100 shares of YLO.PR.A, you would get 1,275 Old Common Shares.

For 100 Old Common, you get 0.5 New Common; so if we assume forcible conversion of YLO.PR.A prior to the reorganization, then 100 YLO.PR.A would become 6.375 New Common … basically equal, although the warrants could – possibly – make the actual reorganization more valuable.

But … holders of YLO.PR.C and YLO.PR.D are being treated in the same way! Why?

A DBRS headline states that DBRS Places HSBC Bank Canada Under Review with Negative Implications but details are Top Secret and available for subscribers only.

DBRS simultaneously placed HSBC USA Inc. and HSBC Bank USA, NA under review negative:

The ratings action follows DBRS’s placement of its ratings for HSBC Holdings plc (HSBC or the Group – rated AA (high)), HUSI’s and HBUS’s ultimate parent, Under Review with Negative Implications. Separately, DBRS has withdrawn its ratings on HUSI’s FDIC-guaranteed debt as this debt has been repaid.

The placement of HSBC’s ratings Under Review was driven by the combination of more detailed revelations of the Group’s historic missteps in relation to certain regulatory and legal issues, as well as the changed environment that poses greater challenges to HSBC’s franchise and credit fundamentals.
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The review will focus on HSBC Holdings plc’s prospects for ensuring that it delivers on improved controls to prevent future missteps. The review will also consider the evolving LIBOR/EURIBOR investigations and the more negative environment for large banking organizations. Among the consequences, HSBC’s organization and credit fundamentals could be impacted through increased compliance costs, added fees, limits on pay, increased capital requirements and ring-fencing that could disrupt the efficient operation of a global universal bank.

The missteps referred to are almost certainly the results of the US Senate probe:

HSBC’s U.S. unit “offers a gateway for terrorists to gain access to U.S. dollars and the U.S. financial system,” according to the subcommittee’s report.

The lender ignored links to terrorist financing among its customer banks, including Riyadh, Saudi Arabia-based Al Rajhi Bank (RJHI), which had ties to terror groups through its owners, the report said.
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The report also cited HSBC’s violations of Treasury Department sanctions on dealings with Iran.
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An outside audit by Deloitte LLP showed that 25,000 transactions totaling more than $19.4 billion involved Iran, according to the report. Of those, as many as 90 percent passed through the bank’s U.S. accounts with no disclosure of ties to Iran, the report shows. Senate investigators documented similar transactions involving North Korea, Cuba, Sudan and Burma.

Bank documents also showed HSBC’s U.S. unit cleared transactions through at least six Iranian banks.

HSBC Bank Canada is the issuer of HSB.PR.C, HSB.PR.D (both DeemedRetractibles) and HSB.PR.E (FixedReset). All are tracked by HIMIPref™ and assigned to the indicated subindices.

Dominion Bond Rating Service has announced that it:

has today placed Transcontinental Inc.’s (Transcontinental or the Company) Senior Unsecured Debt rating of BBB (high) and Preferred Share rating of Pfd-3 (high) Under Review with Negative Implications. Those ratings were previously on Negative trend. The Under Review action follows DBRS’ update of the methodology Rating the Printing Industry, which involved lowering the Industry Business Risk Rating (BRR). The BRR was reduced to the BB (high)/BB range from BB (high). (See separate PR released earlier today.)

The rationale for the methodology change was based on DBRS’ view that the highly competitive industry is being increasingly affected by the structural transition toward digital-based mediums and is applying pressure to traditional printing revenue.

In its review of Transcontinental, DBRS will focus on the Company’s potential to adapt to the changing environment and will assess the Company’s prospects going forward.

Transcontinental’s current rating reflects the Company’s sound financial profile and established position as the largest printer in Canada. The rating also considers the highly competitive and cyclical nature of the printing industry. The earnings profile of Transcontinental is being challenged as customers shift to digital forms of media and the Company struggles to sustain revenues and profitability. In terms of financial profile, Transcontinental remains reasonably sound despite pressure on operating cash flow and higher dividends due to the Company’s modest level of debt.

Transcontinental is the issuer of TCL.PR.D, currently rated Pfd-3(high) by DBRS and P-3(high) by S&P.

Enbridge has announced:

it has closed its previously announced public offering of Cumulative Redeemable Preference shares, Series N (the “Series N Preferred Shares”) by a syndicate of underwriters led by RBC Capital Markets, CIBC, Scotiabank, and TD Securities Inc. Enbridge issued 18 million Series N Preferred Shares for gross proceeds of $450 million. The Series N Preferred Shares will begin trading on the TSX today under the symbol ENB.PR.N. The net proceeds will be used to partially fund capital projects, to reduce short term indebtedness and for other general corporate purposes.

The upsizing from the initially announced $250-million issue size was announced July 9:

as a result of strong investor demand for its previously announced offering of cumulative redeemable preference shares, series N (the “Series N Preferred Shares”), the size of the offering has been increased to 18 million shares. The aggregate gross proceeds will be $450 million.

ENB.PR.N is a FixedReset, 4.00%+265, announced July 9.

The issue traded 1,205,755 shares today in a range of 25.00-10 before closing at 25.06-08, 25×70. ENB.PR.N has been added to HIMIPref™ database and assigned to the FixedReset subindex. Vital statistics are:

BCE Inc. has released the conversion notice for BCE.PR.A and a matching notice for BCE.PR.B.

These issues constitute a Strong Pair.

The effective date of the interconversion is 2012-9-1. The deadline for instructing the company to convert shares is 2012-8-22 – but note that brokers serving the public will probably have internal deadlines a day or two in advance of this. The new dividend rate on BCE.PR.A will be published 2012-8-9.

At the first conversion opportunity in 2007, about half the outstanding BCE.PR.A were conversted into BCE.PR.B. The remaining shares of BCE.PR.A have paid 4.80% since then. Prime was at 6.25% when the last conversion was effective … how times have changed!

These shares are trading at very nearly the same price … alas, there isn’t much of an arbitrage possibility here!