Category: Issue Comments

Fairfax Financial Holdings Ltd. has announced that it:

has completed its previously announced public offering of Preferred Shares, Series K (the “Series K Shares”) in Canada. As a result of the underwriters’ exercising their option to purchase an additional 1,500,000 Series K Shares, Fairfax has issued 9,500,000 Series K Shares for gross proceeds of $237.5 million. Net proceeds of the issue, after commissions and expenses, are approximately $230 million.

Fairfax intends to use the net proceeds of the offering to augment its cash position, to increase short term investments and marketable securities held at the holding company level, to retire outstanding debt and other corporate obligations from time to time, and for general corporate purposes.

The Series K Shares were sold through a syndicate of Canadian underwriters led by BMO Capital Markets, CIBC, RBC Capital Markets Inc. and Scotia Capital Inc. and that also included TD Securities Inc., Cormark Securities Inc., Desjardins Securities Inc., GMP Securities L.P. and National Bank Financial Inc.

FFH.PR.K is a FixedReset, 5.00%+351, announced March 12. The greenshoe was for 2-million shares, so the option was not completely exercised. FFH.PR.K will be tracked by HIMIPref™, but assigned to the Scraps index on credit concerns.

FFH.PR.K traded 433,256 shares today in a range of 24.63-80 before closing at 24.68-69, 8×45. Vital statistics are:

Canadian Life Companies Split Corp. has finally announced the details of its reorganization:

The purpose of the meeting is to consider and vote upon 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. Extending the life of the Company would allow Shareholders to participate in any strengthening in the Canadian life insurance sector:
• Preferred Shareholders will receive an increased dividend and the opportunity to participate in increases in the net asset value as a result of the issuance of two classes of warrants; and
• Class A Shareholders could benefit from any market appreciation or dividend increase over the extended time period;

If the capital reorganization is approved Preferred Shareholders would receive an increased dividend payment of 6.25% per annum and the following securities for each Preferred share held on or about June 28, 2012 (the “Conversion Date”):

• One 2012 Preferred Share – paying fixed cumulative preferential monthly dividends to yield 6.25% per annum on the $10.00 nominal issue price and having a repayment objective on the termination date of $10.00;
• One 2013 Warrant – each 2013 Warrant can be exercised to purchase one 2012 Preferred Share and one Class A Share (together a “Unit”) for an exercise price of the lesser of $13.25 and 103% of the net asset value of the Company on the Conversion Date (the “2013 Warrant Subscription Price”) on any business day during the period commencing at market open (Eastern time) on the day following the Conversion Date and ending at 5:00 p.m. (Eastern time) on June 3, 2013; and
• One 2014 Warrant – each 2014 Warrant can be exercised to purchase one Unit for an exercise price of 105% of the 2013 Warrant Subscription Price on any business day during the period commencing at market open (Eastern time) on the day following the Conversion Date and ending at 5:00 p.m. (Eastern time) on June 2, 2014.

  In addition, if the capital reorganization is approved, Class A Shareholders and Preferred Shareholders will be provided with a Special Retraction Right as described in the Management Information Circular which is designed to provide Shareholders with an opportunity to retract their Shares, if they so wish, and receive a retraction price that is calculated in the same way that such price would be calculated if the Company were to terminate on December 1, 2012 as originally contemplated.

A look at the Information Circular shows the motion has an excellent chance of passing:

The Company will also pay dealers whose clients hold Shares of the Company a fee of $0.05 in respect of each Preferred Share and $0.03 in respect of each Class A Share voted in favour of the matters to be considered at the Meeting, such payments to be due and owing only if the special resolution in respect of such matters is approved and implemented, and provided the Shareholder does not exercise the 2012 Special Retraction Right discussed below.

The warrants are interesting:

amend the Articles of the Company to permit the Company to create warrants (the “Warrants”) of two series, one series designated as the “2013 Warrants” and providing the holders thereof with the right to acquire one 2012 Preferred Share and one Class A Share on any business day during the period commencing at market open (Eastern time) on the day following the Conversion Date (as defined below) and ending at 5:00 p.m. (Eastern time) on June 3, 2013, for an exercise price of the lesser of $13.25 and 103% of the net asset value of the Company on the Conversion Date (the “2013 Warrant Subscription Price”), and one series designated as the “2014 Warrants” and providing the holders thereof with the right to acquire one 2012 Preferred Share and one Class A Share on any business day during the period commencing at market open (Eastern time) on the day following the Conversion Date and ending at 5:00 p.m. (Eastern time) on June 2, 2014, for an exercise price of 105% of 2013 Warrant Subscription Price, all as more particularly described herein;

The definition of the Conversion Date should be noted carefully:

On the date the capital reorganization is implemented, which if the special resolution is approved is expected to be on or about June 28, 2012 (the “Conversion Date”),

So the exercise price of the warrants will be set sometime around the end of June and will not be more than 13.25.

However, before you whip out your financial calculator and start plugging in Black-Scholes, remember that there are income effects involved. The underlying portfolio yield is about 4.50%, which currently covers only 76% of the preferred share distribution. Once the preferred dividend has been hiked, the coverage will be more like 64% of the distribution. So the drag on the NAV for the first year will be a little over twenty cents, so the exercise price should be adjusted to more like 13.45. You can put your own price on the value of that option.

If the extension of the termination date is approved, a Shareholder who retracts a Class A Share under the 2012 Special Retraction Right will receive a retraction price per Class A Share equal to the net asset value per Unit calculated on May 31, 2012, less $10.00. A Shareholder who retracts a Preferred Share under the 2012 Special Retraction Right will receive a retraction price per Preferred Share equal to the lesser of (i) $10.00 and (ii) the net asset value per Unit calculated on May 31, 2012. Shareholders wishing to take advantage of the 2012 Special Retraction Right must surrender their Shares for retraction no later than the close of business on May 17, 2012 (the “2012 Special Retraction Right Notice Date”). 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.

It’s an interesting attempt to transfer value from the Capital Unitholders to the preferred shareholders, but it should be remembered that there are a lot of warrants outstanding! Say, for instance, that the NAV in June 2013 is 14.25. The warrants are in the money, so they all get exercised. And hey, presto, that dilutes the NAV to 13.75! So the other thing option analysts should consider is that the warrants shouldn’t be treated as an entire option, but only half an option.

All in all, this is a lot more interesting proposition than it would have appeared on the announcement date, when the most recent NAV was only 11.64 – the NAV is up more than $1 since then. There’s more asset coverage, and there’s transfer of more value from the Capital Unitholders than there was with the lower NAV, for the simple reason that they have more value to transfer. Naturally, this plan gets better and better as the NAV gets higher – but this also works in reverse!

Voting in favour of the plan is actually a way to reduce risk for preferred shareholders, since there is a Special Retraction Right:

If the extension of the termination date to December 1, 2018 is approved at the Meeting, the Company will also amend the Articles to provide Shareholders with a special retraction right (the “2012 Special Retraction Right”) which is designed to provide Shareholders with an opportunity to retract their Shares and receive a retraction price that is calculated in the same way that such price would be calculated if the Company were to terminate on December 1, 2012 as originally contemplated. Shareholders would be provided with notice of the 2012 Special Retraction Right, through the issuance of a press release and through the CDS Participant through which the Shares are held, and would have until the close of business on May 17, 2012 to provide the Company with notice if they wish to have their Shares redeemed pursuant to the 2012 Special Retraction Right.

If the extension of the termination date is approved, a Shareholder who retracts a Class A Share under the 2012 Special Retraction Right will receive a retraction price per Class A Share equal to the net asset value per Unit calculated on May 31, 2012, less $10.00.

This is a six-month shortening of term from the expected 2012-12-1 termination date.

Therefore, I recommend:

• Vote in favour of the reorganization
• Be prepared to tender for the Special Retraction in mid-May, effective May month-end, depending on the NAV in mid-May

LFE.PR.A was last mentioned on PrefBlog when I reviewed the 2011 Annual Report. LFE.PR.A is tracked by HIMIPref™, but is relegated to the Scraps index on credit concerns.

Canadian Life Companies Split Inc. has released its Annual Report to November 30, 2011.

The S&P/TSX Financial Index is not a particularly well-matched index, as it will be dominated by banks, but we do what we can! Canadian Banc Corp. has the opposite problem. Note that at year-end, the portfolio was about 18.6% banks and 6.6% cash.

Figures of interest are:

MER: 1.14% of thw whole unit value, excluding one time initial offering expenses.

Average Net Assets: We need this to calculate portfolio yield. The number of units changed only very slightly over the year, so the average of the beginning and end of year’s net assets will be close enough: ($116.1-million + $150.4-million) / 2 = $133.2-million.

Underlying Portfolio Yield: Dividends received (net of withholding) of 5,995,631 divided by average net assets of 133.2-million is 4.50%

Income Coverage: Net Investment Income of 4,290,246 divided by Preferred Share Distributions of 5,614,485 is 76%.

DBRS has announced that it:

has today downgraded the rating of the Preferred Shares issued by Brompton Lifeco Split Corp. (the Company) to Pfd-4 (low) from Pfd-4 (high).

In April 2007, the Company issued 3.1 million Preferred Shares (at $10 each) and an equal number of Class A Shares (at $15 each). The termination date for both classes of shares issued is April 30, 2014.

The Company holds a portfolio consisting primarily of common shares of the four largest publicly traded Canadian life insurance companies (the Portfolio). As of December 31, 2011, the Portfolio’s composition was: Great-West Lifeco Inc. (27.6%), Manulife Financial Corporation (23.8%), Industrial Alliance Insurance and Financial Services Inc. (23.6%), and Sun Life Financial Inc. (23.2%). The Portfolio was initially equally weighted and is subject to annual rebalancing.
…
On September 8, 2011, DBRS confirmed the ratings of the Preferred Shares at Pfd-4 (high) due to the sufficient level of downside protection at the time. However, the NAV of the Portfolio experienced significant downward movement over the subsequent months due to the negative performance of Canadian life insurance companies in the third and fourth quarter of 2011. The downside protection available to the Preferred Shares fell from 25.8% on July 28, 2011, to -2.9% on December 29, 2011, and now stands at 10.0% as of March 1, 2012. As a result of the downside protection dropping below acceptable levels for a prolonged period, the rating has been downgraded to Pfd-4 (low).

LCS.PR.A was last mentioned on PrefBlog when it was downgraded to Pfd-4(high) in December 2009. LCS.PR.A is not tracked by HIMIPref™.

As we all know, YLO.PR.A is convertible at the option of the company into common commencing March 31. We also know that YLO.PR.B is similarly convertible (with a premium) commencing June 30.

But Assiduous Reader JY tells me:

The other bigger issue is that it appears to us that they cannot convert the preferred series 1 to either common or a similar financial instrument (IR’s words and as of a few weeks ago this was still on the table according to [redacted]). The roadblock is that they have to pay at least the one dividend on the preferred A’s either in cash or shares. The issue then becomes since the preferreds are pari-pasu or equal then pay one, you have to pay all 4 series. As you are probably aware they have to do this before the end of the year. The one possible way out is if they can somehow say that the dividend is not a dividend but additional shares. Our feeling is that is a bit of a stretch but given how this situation has gone; perhaps a sharp lawyer can get them around this.

So the idea is: the conversion value of the preferreds includes accrued but unpaid dividends; therefore, conversion of YLO.PR.A will involve giving value for the accrued but unpaid dividends; therefore, they won’t be able to convert YLO.PR.A or YLO.PR.B without bringing the dividends on YLO.PR.C and YLO.PR.D up to date.

However, there’s a section in the 2009-9-15 prospectus for YLO.PR.D (and probably the others as well – I didn’t check) that states:

Unless all accrued and unpaid dividends on outstanding Series 3 Preferred Shares and Series 4 Preferred Shares and all accrued and unpaid dividends on all other outstanding shares ranking senior to or on parity with the Series 3 Preferred Shares and Series 4 Preferred Shares have been declared and paid or set apart for payment, YPG Holdings will not, without the approval of the holders of outstanding Series 3 Preferred Shares and Series 4 Preferred Shares, in each case voting as a series: … declare, pay or set apart for payment any dividends on any of its shares ranking as to dividends on parity with or junior to the Series 3 Preferred Shares or Series 4 Preferred Shares, as applicable (other than stock dividends payable in shares of YPG Holdings ranking as to dividends and capital junior to the Series 3 Preferred Shares or Series 4 Preferred Shares, as applicable);

So … given that there’s an exemption available for “stock dividends”, which is not a defined term, could YLO claim that paying the conversion price in common shares make the dividend count as a stock dividend, which will not trigger mandatory payment of the other outstanding dividends? I will leave that one for the lawyers.

The YLO preferreds (YLO.PR.A, YLO.PR.B, YLO.PR.C & YLO.PR.D) were last mentioned on PrefBlog when S&P downgraded them to C. All the issues are tracked by HIMIPref™ but are relegated to the Scraps index on credit concerns.

R Split III Corp. has announced:

that holders of its Class A Capital Shares (“Capital Shares”) have overwhelmingly approved a share capital reorganization (the “Reorganization”) allowing holders of Capital Shares, at their option, to retain their investment in the Company after the scheduled redemption date of May 31, 2012. The Reorganization will permit holders of Capital Shares to extend their investment in the Company beyond the redemption date of May 31, 2012 for up to an additional 5 years. The Class A Preferred Shares will be redeemed on the same terms originally contemplated in their share provisions and have been called for redemption on May 31, 2012. In order to maintain the leveraged “split share” structure of the Company, the Company expects to create and issue a new series of Class B preferred shares on or about May 31, 2012.

Holders of Capital Shares electing to retain their investment in the Company will continue to enjoy the benefit of a leveraged participation in the capital appreciation of the Company’s portfolio of common shares (the ‘‘Royal Bank Shares’’) of Royal Bank of Canada (‘‘Royal Bank’’).

Holders of Capital Shares who do not wish to continue their investment in the Company after May 31, 2012 must give notice that they wish to exercise their special retraction right and how they wish to be paid for their shares on or prior to April 3, 2012. Holders of Capital Shares who retract their Capital Shares will be paid on May 31, 2012. The Reorganization will become effective provided that holders of at least 1,405,000 Capital Shares retain their Capital Shares and do not exercise the special retraction right.

RBS.PR.A was last mentioned on PrefBlog when the reorganization proposal was announced. RBS.PR.A is not tracked by HIMIPref™.

Brookfield Asset Management has announced:

the completion of its previously announced Class A Preference Shares, Series 32 issue in the amount of CDN$300,000,000. The offering was underwritten by a syndicate led by RBC Dominion Securities Inc., CIBC World Markets Inc., Scotia Capital Inc. and TD Securities Inc.

Brookfield issued 12,000,000 Series 32 Shares at a price of CDN$25.00 per share, for aggregate gross proceeds of CDN$300,000,000. Holders of the Series 32 Shares will be entitled to receive a cumulative quarterly fixed dividend yielding 4.50% annually for the initial period ending September 30, 2018. Thereafter, the dividend rate will be reset every five years at a rate equal to the 5-year Government of Canada bond yield plus 2.90%. The Series 32 Shares will commence trading on the Toronto Stock Exchange this morning under the ticker symbol BAM.PF.A.

Brookfield intends to use the net proceeds of the issue of Series 32 Shares to redeem its Class A Preference Shares, Series 10 and for general corporate purposes.

Doubtless you are wondering: What’s all this “.PF” guff? I wondered too:

In response to your inquiry – Brookfield Asset Management has issued so many pref share series that they had to use the “PF.A” extension. The Company could have re-used some old extensions for series that are no longer listed but decided to use the new extension to prevent confusion with the old series.

I have a vague recollection that at one time there was an explicit rule at the Toronto Exchange that you couldn’t have a “.PR” extension unless staff had determined to its satisfaction that the issue was, in fact, preferred over common. Now, while I wish to make it clear that there is no doubt whatsoever in my mind that these shares are ‘preferred’, I’m just wondering if the same policy or rule is still in place.

Now, as far as I’m concerned, it’s not really a big deal. When I buy something, I like to know what I’m buying and I don’t rely on the TMX’s “.PR.” extension, or the IOSCO “(sf)” or “(hyb)” suffix on credit ratings to give me an excuse not to look at the prospectus. But … if I am remembering correctly, there was at one time a formal commitment from the Exchange that they wouldn’t just go around slapping a “.PR” extension on just anything. I don’t know if this still applies, or if it now applies to the brand-new “.PF” extension. I can’t find anything relevant in the Company Handbook or TMX Rulebook.

To tell you the truth, I’m rather annoyed by this. I’m tracking 265 preferred shares. I’m sure there are at least 35 more that are too small for me, or otherwise not tracked. So that’s at least 300 preferred share issues trading on the Exchange. Until yesterday, every single one had a “.PR” extension. So they add a new extension – that’s OK, times change, I can deal with that. But does it occur to anybody – the company, the Exchange, anybody at all, to make a note of that and add a brief explanation? Anything at all, just to let the ultimate customers – that’s you and me, buddies – know what’s going on? Hell no, this is Canada. Fuck the customer, we’re in a meeting.

BAM.PF.A is a FixedReset, 4.50%+290, announced March 5. The issue will be tracked by HIMIPref™ and assigned to the FixedReset index. The issue is rated Pfd-2(low) by DBRS.

BAM.PF.A traded 487,690 shares today in a range of 24.90-05 before closing at 24.85-90, 50×4. Vital statistics are:

Financial 15 Split Inc. has released its Annual Report to November 30, 2011.

I am aware that “The portfolio has generally retained a 3/4 weighting in Canadian financial services stocks versus the U.S. financial services stocks during the year,” but have calculated a benchmark based on a 2/3 weighting as that’s the default. Overweighting Canada is an active-management decision.

Figures of interest are:

MER: 1.11% of thw whole unit value, excluding one time initial offering expenses.

Average Net Assets: We need this to calculate portfolio yield. The number of units did not change over the year, so the average of the beginning and end of year’s net assets will be close enough: ($120.8-million + $147.6-million) / 2 = $134.2-million.

Underlying Portfolio Yield: Dividends received (net of withholding) of 4,500,148 divided by average net assets of 134.2-million is 3.35%

Income Coverage: Net Investment Income of 2,940,086 divided by Preferred Share Distributions of 4,857,794 is 61%.

Canadian Banc Corp. has released its Annual Report to November 30, 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.

Figures of interest are:

MER: 1.57% of the whole unit value, excluding one time initial offering expenses.

Average Net Assets: We need this to calculate portfolio yield; unfortunately the number of units changesd, which makes it more approximate. The Total Assets of the fund at year end was $152.3-million, compared to $181.6-million a year prior, so call it an average of $167-million. Total Preferred Share Distribution in 2010 was $3.971-million, at $0.50/share implies an average of 7.942-million units, at an average NAV of ((20.17 + 22.09) / 2 = 21.13, so call it $167.8-million. Close enough! Call the Average Net Assets $167-million.

Underlying Portfolio Yield: Investment income of $6.606-million received divided by average net assets of $167-million is 3.96%.

Income Coverage: Net investment income of $6.606-million less expenses before issuance fees of $2.771-million is $3.835-million, to cover preferred dividends of 3.971-million is just under 97%.

BK.PR.A was last mentioned on PrefBlog when the Semi-annual report was examined.

Canadian Imperial Bank of Commerce has announced:

its intention to redeem all of its issued and outstanding Non-cumulative Class A Preferred Shares Series 32 for cash. The redemptions will occur on April 30, 2012. The redemption price is $26.00 per Series 32 share.

The $0.281250 per share quarterly dividend declared on March 8, 2012 will be the final dividend on the Series 32 shares and will be paid on April 27, 2012 to shareholders of record on March 28, 2012.

Holders of the Series 32 shares should contact the financial institution, broker or other intermediary through which they hold the shares to confirm how they will receive their redemption proceeds.