Category: Issue Comments

I confessed puzzlement yesterday about the price of YLO.PR.A … trading with an implied common conversion price of about $0.10, about half the current price of YLO. Assiduous Reader prefhound stepped up with two reasons:

• ex-dividend: as he says, the price drop on the 12/12 ex-date was extreme – the bid went from 2.30 to 1.80 after a dividend of $0.26563, a Drop Off Rate of 188% … but not so severe as September’s DOR of 670%!
• tax-loss selling: this is entirely reasonable when we look at YLO.PR.A in isolation, or even if we look at the whole YLO complex; but I feel the ratios should be better preserved

For more on the Dividend Drop Off Rate (in general, academic terms) see the May, 2011, edition of PrefLetter.

It’s the ratios that get me … say you’re an investor wanting to take a flutter on YLO. You can buy the common at $0.20 – and lots of people are; as many, in fact, as are selling at $0.20 – or you can buy YLO.PR.A as a common substitute at $0.10 / share. So why choose the former? The downside of the choice will only show up if the common goes above $2.00 before the end of March (assuming early conversion) or the end of 2012 (assuming late conversion) … if the buyers really do have conviction that this will happen, then why isn’t this showing up in the price?

And one thing that bothers me about the tax-loss selling idea is that it works a whole lot better in reverse. Say you own YLO common. You’ve taken a beating, but you want to maintain exposure. So, sell your damn YLO already and buy YLO.PR.A! Then you get your tax loss AND you maintain exposure AND you get the common cheaper. What’s not to like? The only thing I can think of that’s not to like (other than the potential for the common going above $2) is that this means you have to think about it, something I suspect many YLO holders are trying to avoid.

Assiduous Reader MC pointed out via eMail:

• Hard to borrow YLO, therefore hard to arbitrage the spread with a short YLO / long YLO.PR.A strategy
• Liquidity discount on the YLO.PR.A
• Fear of (forced?) selling of YLO common on conversion

With respect to the first point … that makes sense. Assiduous Reader SF tells me that his brokerage is issuing buy-in notices like crazy. This could also be a factor if we turn the question upside down: maybe it’s not YLO.PR.A that’s cheap, maybe it’s YLO that’s expensive, due to all the buy-ins.

We can all remember (or claim that we vaguely remember, anyway) the relatively recent example of Air Canada (?) common shortly before its reorganization. Remember? The company kept emphasizing that common shareholders would be wiped out, and the thing kept trading at around $1 anyway, due to buy-ins and people gambling that the buy-in pressure woud increase.

The third rationale doesn’t appeal to me much, since that should apply equally to both instruments; but it has occured to me that you can make an argument in favour of this mechanism based on differential awareness of the exchange … at this point, I presume that virtually all participants in the market for YLO.PR.A are aware of the potential for conversion, but I’m not sure how many of the common stock guys are. The Efficient Market Hypothesis, of course, says they all are, but maybe, just maybe, this is just one more hole to poke in the poor old thing.

So, in my continuing series of Worthwhile MBA Theses I suggest that some eager student look at as many similar situations as possible and see if the convertING instrument is always (mostly? statistically significantly?) undervalued relative to the convertED instrument. It’s certainly possible!

MC’s other two reasons sound good to me … but I’m still bothered by size of the deviation from fair value. You want to tell me these mean a discount of 10%, I’ll say fine. You say 20%, I’ll swallow hard and say OK. But 50%? Really?

Empire Company has announced:

that it will redeem all of its Series 2 Preferred Shares on January 31, 2012 in accordance with their terms. Currently 164,900 Series 2 Preferred Shares are issued and outstanding. The Series 2 Preferred Shares will be redeemed at a price of $25 per share plus an amount equal to all dividends accrued and unpaid to January 31, 2012.

This is a tiny little issue with only 164,900 shares outstanding – market capitalization is $4.1-million.

EMP.PR.B was last mentioned on PrefBlog when it was downgraded to Pfd-4(high) by DBRS. DBRS discontinued the rating in February 2009.

5Banc Split Inc, operated by TD Securities, has announced:

that it has completed an offering of 2,580,135 Class C preferred shares, series 1 (the “Class C Preferred Shares”) at a price of $10.00 per Class C Preferred Share raising gross proceeds of approximate $25.8 million. The Class C Preferred Shares were offered on a best efforts basis by a syndicate of agents led by TD Securities Inc. which included Scotia Capital Inc., BMO Capital Markets and National Bank Financial Inc.

The Company holds a portfolio of publicly listed common shares of Bank of Montreal, The Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Royal Bank of Canada and The Toronto-Dominion Bank in order to provide holders of the Class C Preferred Shares with fixed cumulative preferential dividends and to provide holders of its Class B capital shares (the “Capital Shares”) with a leveraged investment and excess dividends, if any, subject to the prior rights of holders of Class C Preferred Shares and after payment of the expenses of the Company and dividends payable on the Class C Preferred Shares.

The Class C Preferred Shares and the Capital Shares are listed and posted for trading on the Toronto Stock Exchange under the symbols FBS.PR.C and FBS.B, respectively. The Class C Preferred Shares are rated Pfd-2 (low) by DBRS Limited. The Class B preferred shares of the Company have been redeemed today in accordance with their terms.

The prospectus for FBS.PR.C is posted on the fund’s site.

FBS.PR.B was last mentioned on PrefBlog when the refunding was announced.

FBS.PR.C will be tracked by HIMIPref™ and will be eligible for the SplitShare index, but is expected to be relegated to the Scraps index on volume concerns.

Update: DBRS rates FBS.PR.C at Pfd-2(low).

Update: Vital statistics for FBS.PR.C are:

Talisman Energy Inc. has announced:

it has completed the sale to a syndicate of underwriters led by RBC Capital Markets and CIBC of 8,000,000 Cumulative Redeemable Rate Reset First Preferred Shares, Series 1 at a price of CAD$25.00 per share, pursuant to its previously announced public offering of the preferred shares in Canada.

There was a greenshoe for another 2-million shares which was not exercised.

TLM.PR.A is a FixedReset, 4.20%+277 announced December 5. The issue will be tracked by HIMIPref™ but relegated to the Scraps index on credit concerns.

The issue traded 68,600 shares in a range of 24.25-88 before closing at 24.10-25. Vital statistics are:

Standard and Poor’s has announced:

• Following a review of The Toronto-Dominion Bank (TD Bank) under Standard & Poor’s revised bank criteria (published on Nov. 9, 2011), we are affirming our ratings on the bank, including the ‘AA-/A-1+’ long- and short-term issuer credit ratings. The outlook is stable.
• The ratings on TD Bank are based on its strong business position, adequate capital and earnings, adequate risk position, and above-average funding and adequate liquidity, compared with those of global peers with the same industry and economic risk scores.
• The ratings on TD Bank benefit from a one-notch uplift for potential extraordinary government support in a crisis.
• We expect stable performance from TD Bank’s retail-oriented Canadian and U.S. franchises, based on resilient asset quality and ongoing revenue growth opportunities, despite an uncertain economic outlook.

As we previously announced, on Dec. 13, 2011, Standard & Poor’s Ratings Services affirmed its ratings on The Toronto-Dominion Bank (TD Bank), including the ‘AA-/A-1+’ long- and short-term issuer credit ratings. The stand-alone credit profile (SACP) on TD Bank is ‘a+’. In addition, we lowered the rating on TD Bank’s nondeferrable subordinated debt to ‘A’ from ‘A+’ and the rating on its preferred shares to ‘A-‘ from ‘A’. The outlook is stable.

The Preferred Share Scale ratings for the issue remain at P-1(low).

TD has the following issues outstanding: TD.PR.O, TD.PR.P, TD.PR.Q and TD.PR.R (DeemedRetractible) and TD.PR.A, TD.PR.C, TD.PR.E, TD.PR.G, TD.PR.I, TD.PR.K, TD.PR.S and TD.PR.Y (FixedReset).

Standard & Poor’s has announced:

• Following a review of Bank of Montreal (BMO) under our revised bank criteria (published on Nov. 9, 2011), we are affirming our ‘A+/A-1’ issuer credit rating on BMO. The outlook is stable.
• Our rating on BMO reflects our adequate scores for the bank’s business position, capital and earnings, and risk position, and average funding and adequate liquidity.
• The issuer credit rating on BMO incorporates one notch of uplift, reflecting BMO’s high systemic importance in Canada and our assessment of the Canadian government as supportive.
• We expect the bank to continue to generate consistent earnings, supported by its stable retail banking operations and to benefit from its higher proportion of commercial lending with better growth prospects and manageable loan losses.

As we previously announced, on Dec. 13, 2011, Standard & Poor’s Ratings Services affirmed its ‘A+/A-1’ issuer credit rating on Bank of Montreal (BMO). The stand-alone credit profile (SACP) is ‘a’. At the same time, we lowered our ratings on the bank and its subsidiaries’ hybrid securities and preferred stock to ‘BBB+’ from ‘A-‘, two notches below the SACP, consistent with application of our revised bank hybrid capital criteria (published Nov. 1, 2011). The outlook is stable.

As a result of this, the global scale rating is now BBB+; the preferred scale rating is P-2(high); for all issues.

BMO has the following preferred share issues outstanding: BMO.PR.H, BMO.PR.J, BMO.PR.K and BMO.PR.L (DeemedRetractible); and BMO.PR.M, BMO.PR.N, BMO.PR.O, BMO.PR.P and BMO.PR.Q (FixedReset).

Standard & Poor’s has announced:

• Following a review under Standard & Poor’s revised bank criteria (published on Nov. 9, 2011), we have affirmed our ‘A+/A-1’ issuer credit rating on Canadian Imperial Bank of Commerce (CIBC). The outlook is
  stable.

• Our ratings on CIBC reflect our adequate assessments for its business position, capital and earnings, risk position, and liquidity, and average funding.
• The ratings on CIBC benefit from one notch of uplift for potential extraordinary government support in a crisis.
• We expect CIBC’s profitability to continue to improve as loan quality improves and the company further executes on its core banking strategy.

As we previously announced, on Dec. 13, 2011, Standard & Poor’s Ratings Services affirmed its ‘A+/A-1’ issuer credit rating (ICR) on CIBC. The outlook is stable. The stand-alone credit profile (SACP) is ‘a’. In addition, we lowered the rating on CIBC’s nondeferrable subordinated debt to ‘A-‘ from ‘A’ and the rating on its preferred stock to ‘BBB+’ from ‘A-‘. CIBC’s nondeferrable subordinated debt is rated one notch below the ‘a’ SACP as opposed to being notched from the ‘A+’ ICR, based on our new hybrid criteria. Nondeferrable subordinated debt is rated below a bank’s SACP in countries whose legal or regulatory frameworks may not support this type of debt in a stress scenario. Recent guidance from Canada’s Office of the Superintendant of Financial Institutions expresses an expectation that all Tier 1 and Tier 2 capital instruments “must be able to absorb losses in a failed financial institution.” We expect different treatment would apply to capital instruments and senior debt as a Canadian bank approaches a state of nonviability. Preferred stock is rated two notches below the ‘a’ SACP, consistent with our new hybrid criteria.

CM has the following preferred share issues outstanding: CM.PR.D, CM.PR.E and CM.PR.G (PerpetualPremium); CM.PR.I, CM.PR.J and CM.PR.P (DeemedRetractible); and CM.PR.K, CM.PR.L and CM.PR.M (FixedReset).

The change has affected the rating of the preferreds on the local scale: CM.PR.D and CM.PR.E are now P-2 (CM.PR.G is not rated by S&P): all other issues are now P-2(high).

Standard & Poor’s has announced:

• Following a review of the Bank of Nova Scotia (BNS) under Standard & Poor’s revised bank criteria (published on Nov. 9, 2011), we are affirming the ‘AA-/A-1+’ long- and short-term issuer credit ratings on
  BNS. The outlook is stable.

• Our ratings on BNS reflect the bank’s strong business position, adequate
  capital and earnings, strong risk position, and average funding and adequate liquidity, as our criteria define these terms.

• The ratings on BNS benefit from a one-notch uplift for potential extraordinary government support in a crisis.
• We expect the bank to continue to generate consistent earnings supported by its stable retail banking operations and manageable loan losses.

As we previously announced, on Dec. 13, 2011, Standard & Poor’s Ratings Services affirmed its ‘AA-/A-1+’ long- and short-term issuer credit ratings on The Bank of Nova Scotia. The outlook is stable. At the same time, we lowered the ratings on the bank and its subsidiaries’ hybrid securities and preferred stock to ‘A-‘ from ‘A’, two notches below the SACP, consistent with the application of our revised bank hybrid capital criteria (published Nov. 1, 2011).

The issues remain at P-1(low) on the Preferred Scale.

BNS has the following issues outstanding: BNS.PR.J, BNS.PR.K, BNS.PR.L, BNS.PR.M, BNS.PR.N and BNS.PR.O (DeemedRetractible) and BNS.PR.P, BNS.PR.Q, BNS.PR.R, BNS.PR.T, BNS.PR.X, BNS.PR.Y and BNS.PR.Z (FixedReset).

Standard & Poor’s has announced:

• Following a review of Royal Bank of Canada (RBC) under Standard & Poor’s revised bank criteria (published Nov. 9, 2011), we are affirming the ‘AA-/A-1+’ issuer credit ratings on the bank. The outlook is stable.
• Our ratings on RBC are based on its strong business position, moderate capital and earnings, strong risk position, and average funding and adequate liquidity, as our criteria define these terms.
• The issuer credit rating on RBC receives one notch of uplift, reflecting RBC’s high systemic importance in Canada and our assessment of the Canadian government as supportive.
• We expect the bank to continue to generate consistent earnings supported
  by its premier business franchises in Canada with its stable retail banking operations and manageable loan losses.

As we previously announced, on Dec. 13, 2011, Standard & Poor’s Ratings Services affirmed its ‘AA-/A-1+’ issuer credit ratings on Royal Bank of Canada (RBC). The stand-alone credit profile (SACP) is ‘a+’. The outlook is stable. At the same time, we lowered the ratings on the bank and its subsidiaries’ hybrid securities and preferred stock to ‘A-‘ from ‘A’, two notches below the SACP, consistent with application of our revised bank hybrid capital criteria (published Nov. 1, 2011).

We also lowered our ratings on RBC and its subsidiaries’ nondeferrable subordinated debt to ‘A’ from ‘A+’. RBC’s nondeferrable subordinated debt is rated off the ‘a+’ SACP as opposed to being notched from the ‘AA-‘ issuer credit rating, based on our new hybrid criteria. We stipulate that nondeferrable subordinated debt would be rated below a bank’s SACP in countries whose legal or regulatory frameworks may not support this type of debt in a stress scenario. Recent guidance from the Office of the Superintendent of Financial Institutions (OSFI) expresses an expectation that, after a transition period, all Tier 1 and 2 capital instruments “must be able to absorb losses in a failed financial institution”. Standard & Poor’s expects differentiated treatment would apply to capital instruments and senior debt as a Canadian bank approaches a state of nonviability.

The issues remain at P-1(low) on the Preferred Scale.

RY has the following preferred shares outstanding: RY.PR.A, RY.PR.B, RY.PR.C, RY.PR.D, RY.PR.E, RY.PR.F, RY.PR.G and RY.PR.H (DeemedRetractible); RY.PR.I, RY.PR.L, RY.PR.N, RY.PR.P, RY.PR.R RY,PR.T, RY.PR.X and RY.PR.Y (FixedReset); and RY.PR.W (PerpetualDiscount)

Sun Life Financial announced December 12:

the completion of a major strategic review of its businesses. Dean A. Connor, President and Chief Executive Officer, said the company will be repositioned to accelerate growth, improve return on shareholders’ equity and reduce volatility by concentrating its future growth into four key pillars:

• Continuing to build on its leadership position in Canada in insurance, wealth management and employee benefits;
• Becoming a leader in group insurance and voluntary benefits in the U.S.;
• Supporting continued growth in MFS Investment Management, and broadening Sun Life’s other asset management businesses around the world; and
• Strengthening Sun Life’s competitive position in Asia.

As a result of this strategic review, the Company announced that it will close its domestic U.S. variable annuity and individual life products to new sales effective December 30, 2011. The decision to discontinue sales in these two lines of business is based on unfavourable product economics which, due to ongoing shifts in capital markets and regulatory requirements, no longer enhance shareholder value. This decision reflects the Company’s intensified focus on reducing volatility and improving the return on shareholders’ equity by shifting capital to businesses with superior growth, risk and return characteristics.

Standard & Poor’s has announced:

• Sun Life Financial Inc. announced that it will discontinue sales of its U.S. variable annuity (VA) and U.S. individual life products effective Dec. 31, 2011.
• We have placed our ratings on Sun Life Financial Inc., including our ‘A’ counterparty credit rating, on CreditWatch with negative implications, reflecting the potential loss of earnings quality and diversification at the holding company.
• In addition, we have revised our view of Sun Life Assurance Co. of Canada (U.S.) and subsidiaries (SLUS) to nonstrategically important to Sun Life Financial Inc., from core.
• As a result, we lowered our long-term counterparty and financial strength rating on SLUS to ‘A-‘ and placed the ratings on CreditWatch with negative implications.
• The ratings on the Canadian entities within the group are unaffected.

…
We expect to resolve the CreditWatch within three months, following a more in-depth analysis of the SLUS prospective stand-alone capitalization, earnings, the details of the run-off plan, and the potential parental support.

We could affirm the ratings on Sun Life Financial if, upon further analysis, we believe the loss of earnings from SLUS is immaterial and coverage ratios and earnings diversification from remaining operations continue to support the current holding company notching. Otherwise, we could lower our ratings on the holding company by one notch, so that we would rate it three notches below the financial strength rating on the group’s core subsidiaries instead of the current two notches.

In contrast:

DBRS has today commented on the decision announced today by Sun Life Financial Inc. (SLF or the Company) to stop selling variable annuity and individual life insurance products in the U.S. market. DBRS views the decision favourably. There are no rating changes as a result of this action.

SLF has the following preferred shares outstanding: SLF.PR.A, SLF.PR.B, SLF.PR.C, SLF.PR.D and SLF.PR.E (DeemedRetractible) and SLF.PR.F, SLF.PR.G, SLF.PR.H and SLF.PR.I (FixedReset). All are tracked by HIMIPref™ and assigned to their respective indices.