Category: Issue Comments

Issue Comments

NEW.PR.C Partial Call for Redemption

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.

Issue Comments

LBS.PR.A 2011 Annual Report

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

LBS / LBS.PR.A Performance
Instrument One
Year		 Three
Years		 Five
Years
Whole Unit -11.1% +12.3% -2.5%
LBS -32.4% +24.8% -10.7%
LBS.PR.A +5.4% +5.4% +5.4%
S&P/TSX Capped Financial Index -3.8% +15.0% -0.6%

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.

Issue Comments

LFE.PR.A: Recirculating?

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!

Issue Comments

IAG.PR.A Market-Maker Falls Asleep!

Assiduous Reader KB writes in and says:

I’m confused about something that happens once in a while and maybe you can clear it up.

There are lots of illiquid preferred shares, and they often have wide spreads. That’s fine as long as everyone is behaving.

If I want to purchase some shares and there isn’t available size at the ask, I have found the shares usually appear if you meet the ask price. I assume the market maker offers up the shares that are required. Same situation on the sell side.

But once in a while like today, I was watching one of my preferred’s (IAG.PR.A) since yesterday it took a rather strange drop in value that you had commented on in the PrefBlog.

Today at 1:13 PM 34 shares changed hands at a reasonable $23.65. Then at 2:56 PM 700 shares traded at $21.71 and 50 shares at $21.66. That’s ridiculous.

My questions is: Where do these shares come from? National Bank bought and sold the 700 and Desjardins sold the remaining 50 to National Bank.

Do these shares come from the market maker or were there people actually willing to sell at that price? You’ve not touched on this subject in PrefLetter or in PrefBlog and the internet doesn’t reveal much, so I decided to ask you directly. Maybe you’re
just as confused as I am.

Actually, I’ve discussed it earlier in the post Fed Up with Shoddy Market-Making!. It was as a result of my frustration with the system that I started publishing the “Wide Spread Highlights” table every day and it was due to my complaints on the topic that I discovered the TMX Close != Last pricing data fiasco.

At vast expense, I have purchased the day’s “Trades and Quotes” file for IAG.PR.A from the TSX. From 9:30 until 4:00 there were 1,023 quotes and three trades.

Easy part first: National was the seller of an odd lot at the offering price and the buyer of an odd lot at the bid price. This almost certainly means that National is the Market Maker. As discussed in the post linked above, Market Makers are required to, among other things, service odd-lot orders at the quote, in exchange for which they receive certain privileges.

The action from 2:55:31 until 2:57:49 is of great interest:

IAG.PR.A
Time Quote Trade
2:55:31 21.66-23.65, 1×2  
2:56:19 21.66-94, 1×2  
2:56:19   700 @ 21.71 (National Bank Cross)
2:56:20 21.66-23.65, 1×2  
2:56:20   50 @ 21.66 (National Bank purchase from Desjardins)
2:57:49 22.00-23.65, 4×2  

All day long the offer was at 23.65, with the exception of less than one second (time-stamping on the file available to me is precise only as to the second), at 2:56:19, when the offer suddenly declined to 21.94, making the spread 0.28. In the same second the trade of 700 shares occured, and in the next second the offer moved back to the 23.65 level, where it was for 6:29:59 of the trading day which lasted 6:30:00.

I must admit that I am very curious about this sequence of events and it does not seem credible that the sudden sharp decline of the offer price was entirely unrelated to the trade of 700 shares that occured during the same single second that the offer was so low. However, I am insufficiently knowledgable regarding the rules to know whether it is legal to front-run an incoming order by changing quote to make the fill seem more reasonable – certainly, if the quote had been 21.66-94 all day long, then a fill of a market order at 21.71 by an internal trade-matching algorithm would be quite reasonable and greatly appreciated.

It is unclear as to whether any front-running occurred at all, even if the change in quote and trade were related. It would be entirely rational for someone to place a limit order inside the quote (well inside the quote, in this case!) and then convert the order to a market order if not immediately filled – although the identity of the broker showing the 21.94 offer for one second is not available in the data I have, and the size was only 200 shares. It would be somewhat more normal for the offer to be allowed to stand for more than a second, as well. However, as became glaringly apparent during the Flash Crash, individual decisions made in the design of protocols and trading algorithms can start looking rather silly when conditions are different from those envisaged at design-time.

I will also point out that the data available to me reflect only the TMX data – I do not have a consolidated tape that would include quotations from Alpha, Pure, etc.

And finally, I will point out that I don’t really understand the relative identities of the buyers and sellers. It strains credulity to imagine that National’s cross of 700 shares was completely unrelated to the sale of 50 shares by Desjardins to National that occurred one second later; but definitive information regarding the precise order flow (back to the actual beneficial owner) is not available to me.

So I will leave it to those more familiar with the intricacies of UMIR and with more access to consolidated tapes to determine whether any jiggery-pokery occured.

All one can do is ask questions – the following eMail has been sent to the Exchange:

On 2012-6-7, the offer price reported by the TMX for IAG.PR.A was 23.65 for the entire day, except for one second commencing 14:56:19. In that second the offer price changed to 21.94 and a cross was executed at 21.71, which was down 1.87 from the closing price on 2012-6-6.

The time-weighted average spread for the full trading session was, according to my calculations using data supplied by the Toronto Stock Exchange, $1.47. The quoted spread exceeded this figure for over four hours in the course of the trading day (to be precise, 4:13:53) and was between $1.95 and $2.00 for nearly all this time (4:10:09).

Can you tell me:
i) Who is the market maker for this security?
ii) What commitments has the market maker made to the exchange regarding the bid-offer spread to be maintained for this security?
iii) When was the last review of the market-maker’s success in meeting the commitments made with respect to bid-offer spread?
iv) What were the results of the last review specified by (iii)?

Sincerely,

Issue Comments

EMA.PR.C Soft on Good Volume

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:

EMA.PR.C FixedReset YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2042-06-07
Maturity Price : 23.04
Evaluated at bid price : 24.81
Bid-YTW : 3.77 %
Issue Comments

VNR.PR.A Firm on Good Volume

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:

VNR.PR.A FixedReset YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2042-06-06
Maturity Price : 23.19
Evaluated at bid price : 25.15
Bid-YTW : 3.88 %
Better Communication, Please!

LFE.PR.A Tight-Lipped Regarding Special Retraction Results

It will be recalled that LFE.PR.A is undergoing a reorganization; a very important part of this reorganization was:

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.

So – the company has known what the consolidation ratio was going to be for which issue (either the capital units or the preferreds) since … oh, call it the morning of May 18. In my innocence, I had assumed that the details of the consolidation would be made available on the NAV date of May 31 (or June 1, anyway!):

If more Class A Shares are tendered for retraction under the 2012 Special Retraction Right than Preferred Shares, the outstanding Preferred Shares will be consolidated so that following the retraction pursuant to the 2012 Special Retraction Right there would be an equal number of Preferred Shares and Class A Shares outstanding. Similarly, if more Preferred Shares are tendered for retraction than Class A Shares, the outstanding Class A shares will be consolidated so that again there would be an equal number of Preferred Shares and Class A Shares outstanding following implementation of the 2012 Special Retraction Right. The Company may implement this consolidation by adjusting the number of 2012 Preferred Shares, 2013 Warrants and 2014 Warrants to be issued to holders of Preferred Shares, in the event a consolidation of Preferred Shares is required.

No announcement has yet been made, so I inquired; the answer received was:

A news release will likely be disseminated close to the June 19th Special Retraction payment date.

Knowing the consolidation ratio is critical when evaluating credit quality of LFE.PR.A; it is also critical when evaluating the option value of LFE. But good old Quadravest is going to keep us in the dark; and I cannot even begin to fathom the purpose behind the delay.

All I can suggest is that according to the 2011 Financials, there were 10,712,753 units outstanding on 2011-11-30 and this number is reflected for each part of the unit on the TMX Money Website. Another possibility is to check SEDAR for filings that are only semi-publicized.

What a total waste of time.

Issue Comments

ALA.PR.U Weak on Good Volume

AltaGas has announced:

it has closed its previously announced public offering of 8,000,000 Cumulative Redeemable Five-Year Fixed Rate Reset Preferred Shares, Series C (the “Series C Preferred Shares”) at a price of US$25.00 per Series C Preferred Share (“the Offering”) for aggregate gross proceeds of US$200 million. The previously announced underwriters’ option to purchase an additional 2,000,000 Series C Preferred Shares at a price of US$25.00 per share was exercised in full.

The Offering was first announced on May 29, 2012 when AltaGas entered into an agreement with a syndicate of underwriters, co-led by RBC Capital Markets, CIBC and Scotiabank.

Net proceeds will be used to reduce outstanding indebtedness and for general corporate purposes.

The Series C Preferred Shares will commence trading today on the Toronto Stock Exchange under the symbol ALA.PR.U.

ALA.PR.U is a FixedReset, US-Pay, 4.40%+358, announced May 29. The issue traded 402,860 shares today in a range of 24.35-60 before closing at 24.45-49, 20×1.

ALA.PR.U will not be tracked by HIMIPref™ as there are insufficient USD issues available to form a coherent universe.

Issue Comments

IAG.PR.G Firm on Good Volume

Industrial Alliance Insurance and Financial Services Inc. has announced:

that it has closed its previously announced bought deal public offering of Non-Cumulative 5-Year Rate Reset Class A Preferred Shares Series G (the “Series G Preferred Shares”) at a price of $25.00 per Series G Preferred Share purchased by a syndicate of underwriters co-led by Scotiabank and RBC Capital Markets. The offering results in a total of 6,000,000 Series G Preferred Shares being issued today by Industrial Alliance for gross proceeds of $150,000,000.

The net proceeds of this offering will be used for general corporate purposes and will be added to Industrial Alliance’s capital base.

The Series G Preferred Shares were issued under a prospectus supplement dated May 25, 2012 to the short form base shelf prospectus of Industrial Alliance dated April 29, 2011. Details of the offering are set out in the prospectus supplement which is available on SEDAR at www.sedar.com.

IAG.PR.G is a FixedReset, 4.30%+285, announced May 24. The issue will be tracked by HIMIPref™ and assigned to the FixedReset subindex.

IAG.PR.G traded 353,936 shares today in a range of 24.90-09 before closing at 25.05-08, 6×35. Vital statistics are:

IAG.PR.G FixedReset YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.05
Bid-YTW : 4.24 %
Issue Comments

RBS.PR.B Offering Completed

R Split III Corp. has announced:

it has completed its initial public offering of its Class B Preferred Shares, Series 1 (the “Preferred Shares”), raising approximately $16.8 million through the issuance of 1,234,962 Preferred Shares at a price of $13.60 per Preferred Share. In addition, the Company has redeemed all of its outstanding Class A Preferred Shares.

The Preferred Shares were offered to maintain the leveraged “split share” structure of the Company following the successful reorganization of the Company (approved at a special meeting of holders of Class A Capital Shares on March 14, 2012), which, among other things, extended the redemption date of the Capital Shares for an additional five year term. The Preferred Shares were offered to the public by a syndicate of agents led by Scotia Capital Inc.

Upon the close of business on May 31, 2012 there will be 2,469,924 Capital Shares and 1,234,962 Preferred Shares issued and outstanding.

R Split III Corp. is a mutual fund corporation created to hold a portfolio of common shares of the Royal Bank of Canada. Capital Shares and Preferred Shares of R Split III Corp. are listed for trading on The Toronto Stock Exchange under the symbols RBS and RBS.PR.B respectively.

The prospectus provides the following information:

  • Coupon = 4.25%
  • Redemption Date 2017-5-31
  • Monthly Retraction with formula: 95%NAV – (2C + 1)
  • MER = 0.48% of Whole Unit Value

Asset Coverage is currently 1.7+:1

Income Coverage as of the 12H1 Financials was 1.4+:1. These financials note a wonderfully conservative dividend policy:

The Company pays fixed distributions on the Preferred Shares and should the net asset value per Unit at the date of each dividend declaration exceed the original issue price of the Preferred Shares after giving effect to the Capital Share dividend, the Company’s policy is to make cash distributions on the Capital Shares equal to the excess, if any, of dividends received by the Company on the Royal Bank Shares less the fixed preferential distribution paid on the Preferred Shares and all administrative and operating expenses. Where the net asset value per Unit at time of declaration, after giving effect to the Capital Share dividend, is less than or equal to the original price of the Preferred Shares, any excess cash will be reinvested in short-term debt securities or Royal Bank Shares.

DBRS Rating = Pfd-2(low).

Sadly, there are not enough of these preferreds extant to warrant tracking by HIMIPref™.