Category: Issue Comments

Four and a half months after downgrading FTN.PR.A (which is a significantly better credit), DBRS has finally gotten around to downgrading FFN.PR.A to the same level:

DBRS has today downgraded the rating of the Preferred Shares issued by Financial 15 Split Corp. II (the Company) to Pfd-4 (high) from Pfd-3 (low).

In September 2004, the Company issued 6.4 million Preferred Shares (at $10 each) and an equal number of Class A Shares (at $15 each). Although these shares were offered separately, together they form a Unit. The redemption date for both classes of shares issued was initially December 1, 2009, but was extended to December 1, 2014, at a special meeting of shareholders in April 2007.
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On September 6, 2011, DBRS confirmed the ratings on the Preferred Shares at Pfd-3 (low) due to the fairly stable level of downside protection available to holders of the Preferred Shares, despite the NAV and downside protection decreasing gradually in the months leading up to the confirmation. However, the downside protection continued to decline after the rating confirmation until the beginning of the first quarter of 2012. From January to March 2012, the NAV has experienced some recovery, but the downside protection has not increased significantly enough over the past few months to offset its previous underperformance. Furthermore, the downside protection declined again in April to 26.1% due to the negative performance of most financial institutions in the Portfolio. The dividend coverage ratio is currently around 0.56, which results in a grind on the Portfolio. As a result, the rating has been downgraded to Pfd-4 (high).

The scheduled final maturity date of the Preferred Shares is December 1, 2014. DBRS will continue to closely monitor changes in the credit quality of the Preferred Shares and provide rating updates as required.

On 2012-4-30 the NAV of FFN.PR.A was 13.54 (the equivalently rated FTN.PR.A’s NAV was 14.41).

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

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

I suggest the reported outperformance probably has more to do with the poor performance of insurers over the past five years than with any manifestation of investment skill; on the other hand, the fund has handsomely outperformed BK / BK.PR.A for the past five years, even allowing for the one month difference in period end.

Figures of interest are:

MER: 0.98% of the whole unit value, “excluding the cost of leverage and the issuance costs.”

Average Net Assets: We need this to calculate portfolio yield. The Total Assets of the fund at year end was $119.9-million, compared to $128.1-million a year prior, so call it an average of $124-million.

Underlying Portfolio Yield: Investment income of $5.188-million received divided by average net assets of $124-million is 4.18%.

Income Coverage: Net investment income of $5.188-million less expenses of $1.253-million is $3.934-million, to cover preferred dividends of 3.149-million is about 125%.

SBC.PR.A was last mentioned on PrefBlog when a term extension of up to five years was approved last March.

Standard & Poor’s has announced:

• The prospect of near-term debt restructuring at Montreal-based Yellow Media Inc. has increased, in our opinion.
• As a result, we are lowering our long-term corporate rating on Yellow Media to ‘CCC’ from ‘B-‘.
• We are also lowering our issue-level rating on the company’s senior debt to ‘CCC’ from ‘B-‘ and lowering our rating on the subordinated debt to ‘CC’ from ‘CCC’; the recovery ratings on these debt obligations are unchanged.
• Finally, we are keeping all the ratings on Yellow Media on CreditWatch, where they had been placed with negative implications Dec. 5, 2011.
• The CreditWatch listing reflects our concern about the increased likelihood of near-term debt restructure, which is aimed at aligning the company’s capital structure to deteriorating operations as well as addressing the refinancing of sizable debt maturities in 2013 and beyond.

At the same time, Standard & Poor’s lowered its issue-level rating on the company’s senior unsecured debt to ‘CCC’ (the same as the corporate credit rating on Yellow Media) from ‘B-‘. The recovery rating on the debt is unchanged at ‘4’, indicating our expectation of average (30%-50%) recovery in the event of a default. Standard & Poor’s also lowered its issue-level rating on Yellow Media’s subordinated debt to ‘CC’ (two notches below the corporate credit rating on the company) from ‘CCC’. The recovery rating on this debt is unchanged at ‘6’, indicating our expectation of negligible (0%-10%) recovery in a default situation.
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In addition, we lowered the ratings on the company’s preferred shares outstanding to ‘D’ (default) from ‘C’, owing to the nonpayment of dividends on these securities when due.
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“The downgrade primarily reflects Yellow Media’s heightened risk of a near-term debt restructure given the significant refinancing risk for its debt maturities in 2013 and beyond,” said Standard & Poor’s credit analyst Madhav Hari. “The downgrade also reflects our view that the company’s current capital structure is unsustainable against the backdrop of deteriorating revenue and cash flow trends,” Mr. Hari added.

YLO has four series of preferred shares outstanding: YLO.PR.A, YLO.PR.B, YLO.PR.C and YLO.PR.D.

I am advised by multiple authoritative sources that there is a secondary offering under way (or is it “under weigh”? You can find much furious discussion of this on the web) for 2-million shares of BCE.PR.F, offered at 23.75.

The issue closed today at 23.95-98, 12×177. This is a wonderful issue for analysis, because there are so many ways of looking at comparators, but the easiest is its Strong Pair BCE.PR.E, a RatchetRate preferred. The two issues are interconvertible on 2015-2-15 and every five years thereafter. Until then BCE.PR.F pays a fixed 4.541% of par. while BCE.PR.E pays 100% of Canadian Prime, although this may be reduced if the price goes above 25.00.

BCE.PR.E closed today at 22.40-50 on less than a board lot traded; we can use this price for comparison purposes since it is close to the other BCE RatchetRates. The Pairs Equivalency Calculator (quick method) tells us that given a price of 22.40 on BCE.PR.E and 23.75 on BCE.PR.F, Canada Prime should average 2.32% until the February, 2015, Exchange Date for the total return on the two issues to be equal.

Seeing as Canada Prime is now 3.00% and is forecast to rise, if anything, over the next three years, BCE.PR.F looks grossly expensive at 23.75. I suspect that it is trading on the basis of its Current Yield of 4.78% and that the market is, as usual, ignoring conversion and dividend reset probabilities.

BCE.PR.F was last mentioned on PrefBlog when there was a secondary offering three-odd months ago. BCE.PR.F is tracked by HIMIPref™ but is relegated to the Scraps index on credit concerns.

Canadian Life Companies Split Corp. has announced the details of its reorganization, as promised when the proposal was approved and in accordance with announced terms.

The critical part of today’s announcement is:

Shareholders who do not wish to remain invested in the Company under its reorganized share structure will have until the close of business on May 17, 2012 to provide the Company with notice through their CDS participant that they wish to have their Preferred Shares or Class A Shares redeemed pursuant to the 2012 Special Retraction Right, and to surrender their Shares for retraction. On such a special retraction, each holder of a Preferred Share will receive the lesser of (i) $10.00 and (ii) the net asset value per Unit calculated on May 31, 2012; while holder of a Class A Share will receive the net asset value per Unit calculated on May 31, 2012, less $10.00. Shareholders interested in exercising such retraction right should contact the CDS Participant through which they hold the Shares for further information and instructions as to how to exercise this right. Shareholders should note that the requirements of any particular CDS Participant may vary, and that Shareholders may need to inform their CDS Participant of any intention to exercise this retraction right in advance of the May 17 deadline. Payment for the Class A Shares or Preferred Shares so tendered for retraction pursuant to the 2012 Special Retraction Right will be made no later than June 19, 2012.

Each broker will have a different deadline for notification of desired exercise of the Special Retraction Right, so make sure you know the date applicable to you! It should also be noted that there will be no maturity or retraction available on the previously scheduled wind-up date of 2012-12-1. That’s been wiped out.

The question is whether or not to retract. The NAV as of 2012-4-13 is $12.64. I believe that due to the increased coupon paid on the shares (it will be 6.25%) and the presence of warrants, it is now more appropriate to consider the preferred shares to be common shares in a closed-end fund trading at a discount rather than “preferred” in the normal sense.

It will be noted that the yield calculations presented above have been performed from April 13 and hence reflect receipt of the April monthly dividend. Valuation of the options is complex; if the preferreds are considered best analyzed as common shares in a discounted closed-end-fund, there must be some allowance made for the fact that extant capital unitholders will receive some fraction (possibly 100%; possibly as little as 33%) of any final NAV in excess of $10.00.

It will also be noted that there will be many who consider the expected total return of the underlying portfolio, estimated above as 7%, to be overly generous, considering all the current, expected and potential capital rule changes that will be imposed on the insurance industry over the next six years. Others will look at the fat coupon on the new preferreds and reason that this will, essentially, allow them to suck out the excess NAV over the next six years even if the industry doesn’t do very much (it will be noted that in the analytics above, the 50-percentile for the expected final NAV is 12.41 – thus, even given a 7% expected total return of the underlying portfolio, the extant capital unitholders should not expect to make a dime until maturity – no dividends, no capital gain!).

So, some will be attracted to this as an equity investment. But I don’t think these things should be considered “preferred shares” any more. For those who wish to hold preferred shares and accrue the benefits of holding the asset class, I recommend that the Special Retraction Right be exercised or that the shares be sold on the market if they should trade at a premium.

DBRS has announced that it:

has today confirmed the ratings of Brookfield Asset Management Inc. (BAM or the Company) at A (low), R-1 (low) and Pfd-2 (low). The ratings pertain to BAM at the corporate level. The ratings remain on a Stable trend, notwithstanding weaker corporate-level financial metrics in 2011 because of increased corporate-level debt to finance the growing invested capital. DBRS recognizes that the financial metrics are now weak for the ratings and believes that there is currently minimal room for further deterioration without pressuring the ratings. 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. (3) Inability to improve cash flow coverage metrics (which could include funds from operations (FFO)-to-debt and FFO fixed charge coverage) to their 2010 levels by the end of 2012.
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BAM’s corporate-level debt and issuance of preferred shares have increased in the past two years to partly finance its investments. In the meantime, operating cash flows from its investments recorded only modest growth. As a result, BAM’s corporate-level cash flow coverage metrics have weakened during the period, with FFO coverage-to-debt of 23% in 2011 (from 30% in 2010), FFO-to-interest of 4.5 times (x) (from 5.1x) and FFO-to-fixed charges (interests and preferred share dividend) of 3.1x (from 3.7x). We consider these 2011 levels weak for the ratings and expect improvement during 2012.

BAM’s corporate-level liquidity is strong, supported by corporate-level cash and available credit facilities of $2.4 billion as at December 31, 2011, and annual FFO after corporate expenses of about US$1.0 billion. Currently, there is no material debt repayment scheduled until 2014, when US$518 million comes due. The Company’s financial flexibility is further supported by its ability to access its external investor base and capital markets and to monetize part of its investments in listed vehicles, estimated to have a market value of US$17.9 billion (covering 3.8x the corporate-level debt of US$4.7 billion). While BAM’s liquidity should comfortably cover its corporate-level needs, DBRS notes that the Company remains largely dependent on external investors’ capital and equity issuances to support its growth.

This follows a similar, but more emphatic judgement by S&P.

BAM is the proud issuer of a great many preferred share issues: BAM.PF.A, BAM.PR.B, BAM.PR.C, BAM.PR.E, BAM.PR.G, BAM.PR.I, BAM.PR.J, BAM.PR.K, BAM.PR.M, BAM.PR.N, BAM.PR.O, BAM.PR.P, BAM.PR.R, BAM.PR.T, BAM.PR.X and BAM.PR.Z.

DBRS has announced that it:

has today confirmed its long-term and preferred share ratings on Transcontinental Inc. (Transcontinental or the Company) at BBB (high) and Pfd-3 (high), respectively. The trends have been changed to Negative. While the Company’s business risk profile and financial profile continue to support a rating above the BB (high) business risk rating for the printing industry, DBRS expects the structural factors that Transcontinental is facing (such as declining demand for print and pricing pressure), along with increased competitive forces (both factors contributed to lower revenue and EBITDA for the two most recent quarters), to persist and potentially accelerate further for Transcontinental over the medium term. As such, these challenges could reduce the Company’s rating differential relative to the printing industry.

The Negative trend reflects DBRS’s expectation that structural forces in both Transcontinental’s Printing and Media segments will persist and could accelerate with excess capacity in the printing industry and a structural shift to digital forms of media affecting both segments. In fact, DBRS notes that, from an industry perspective, digital advertising in the United States surpassed newspaper print advertising for the first time in 2011 (likely just below this level in Canada at the end of 2011), with digital advertising in the United States expected to surpass combined newspaper and magazine print advertising spending in 2012.
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From a financial risk perspective, Transcontinental has demonstrated healthy free cash flow conversion, leverage and credit metrics that are above the industry average. This includes EBITDA interest coverage of over 9.0 times, cash flow-to-debt of 0.40 times and gross debt-to-EBITDA of 1.76 times. However, with organic revenue and EBITDA growth under pressure, DBRS believes free cash flow will be directed to small-to-medium acquisitions and increasingly toward shareholder-friendly initiatives. In fact, DBRS notes that inorganic growth must be undertaken by Transcontinental in order to support the dividend growth model that the Company strives to maintain.

DBRS believes Transcontinental’s business risk profile continues to weaken due to a structural shift from traditional forms of media to new forms of media. Competitive forces in the traditional printing industry should continue to intensify with ongoing excess capacity, while the new forms of media are also highly competitive with lower barriers to entry and a less-proven profit model.

TCL.PR.D was added to TXPR in the January, 2012, rebalancing after having been removed in July, 2011. It was upgraded to P-3(high) by S&P in December, 2010.

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

Canadian Life Companies Split Corp. has announced:

A special meeting of the shareholders of Canadian Life Companies Split Corp. (the “Company”) was held earlier today.

The primary purpose of the meeting was to consider and, if thought advisable, to approve a special resolution to reorganize the Company, including a capital reorganization of the Preferred Shares of the Company and an extension of the termination date of the Company, as described in the Management Information Circular dated March 14, 2012 and the March 21, 2012 press release. Class A Shareholders voted 95.0% in favour of the resolution and Preferred Shareholders voted 82.6% in favour of the resolution, and therefore the resolution was approved.

The Company will issue shortly a further press release including all key dates related to the capital reorganization and special retraction.

The proposal was unveiled in late March.

More to follow …