Category: Issue Comments

Standard & Poor’s has announced:

• Fairfax continues to successfully leverage its growing insurance business platform and related balance sheet assets to deliver above-average long-term investment performance for the consolidated organization.
• We believe the company’s consolidated competitive profile is improving and better positioned to drive profitable future growth.
• Therefore, we are revising our outlook on ultimate parent Fairfax Financial Holdings and its core insurance and reinsurance companies to positive from stable.
• We are affirming our ‘BBB-‘ counterparty rating on Fairfax Financial Holdings and its intermediary holding companies and our ‘A-‘ financial strength ratings on its core insurance operating companies.

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The positive outlook reflects the 1-in-3 likelihood of a one notch upgrade on FFH’s core insurance and reinsurance operating companies in the next 24 months.
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We could lower the ratings on Fairfax Group if its consolidated capital adequacy decreases below a very strong level, if the company reports major adverse reserve development–a development of more than two percentage points of prior year net loss reserves–if earnings volatility increases over a multiyear period excluding the effect of the equity hedge and Consumer Price Index-linked securities, or if its core subsidiaries’ underwriting performance consistently lags the underwriting performance of the industry.

Fairfax has the following preferreds outstanding: FFH.PR.C, FFH.PR.E, FFH.PR.G and FFH.PR.I. All are FixedResets; all are relegated to the Scraps index on credit concerns.

S&P rates the preferreds P-3; DBRS rates Pfd-3.

Reuters has reported:

Westcoast Energy on Tuesday sold C$300 million ($297 million) of notes in two parts, according to a term sheet seen by Reuters.
The sale consisted of C$150 million ($149 million) 10-year notes, due Oct. 28, 2021. The notes have a 3.883 percent coupon rate and were priced at par to yield 157.4 basis points over the Canadian government benchmark.

The sale also included C$150 million ($149 million) of 30-year notes, due Oct. 28, 2041, with a coupon rate of 4.791 percent and were priced at par to yield 182 basis points over the Canadian government benchmark.

Westcoast Energy Inc is a unit of Spectra Energy .

The investment dealer arms of Bank of Nova Scotia, and Canadian Imperial Bank of Commerce were the bookrunning managers of the sale.

The DBRS rating is A(low):

DBRS has today assigned a rating of A (low) with a Stable trend to the following Westcoast Energy Inc. (Westcoast) new debt issuance:

(1) Proposed $150 million of 3.883% unsecured Medium Term Notes (Notes) maturing October 28, 2021.

(2) Proposed $150 million of 4.791% Notes maturing October 28, 2041.

The issues are expected to settle on October 28, 2011.

The Notes will rank equally with all of Westcoast’s other senior unsecured indebtedness. Net proceeds from the issue will be used for general corporate purposes, which may include repayment of outstanding indebtedness, and financing capital expenditures and investments of Westcoast.

This can be compared with Westcoast’s preferred issues, W.PR.H and W.PR.J, both PerpetualDiscounts, currently trading a little under par to yield about 5.60%, which is equivalent to about 7.28% at the standard equivalency factor of 1.3x. Hence, the Seniority Spread for this issuer is about 250bp.

DBRS has announced:

On June 21, 2011, DBRS maintained Capital Power Income L.P.’s (CPILP or the Partnership) ratings Under Review with Negative Implications, pending a full review of the acquisition of CPILP by Atlantic Power Corporation (ATP, not rated by DBRS) (the Transaction). Upon further assessment, DBRS is now of the opinion that, if it closes as currently anticipated, the Transaction is expected to result in a downgrade of CPILP’s ratings to non-investment-grade category. DBRS expects to assign an Issuer Rating of BB to CPILP, a security rating of BB to CPILP’s Senior Unsecured & Medium Term Notes, and a recovery rating of RR4 (indicating an expected recovery of 30% to 50%) on the Senior Unsecured Debt & Medium-Term Notes, currently rated BBB (high). DBRS would also potentially downgrade the Cumulative Preferred Shares of CPILP’s affiliate, CPI Preferred Equity Ltd., to Pfd-4 from Pfd-3. The rating actions would result in the assignment of Stable trends.
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In June 2011, DBRS had assumed, based on publicly available information on ATP and on the proposed financing of the Transaction, that the ratings of CPILP would be downgraded yet remain investment-grade. However, further review of the details of the Transaction, forecast financial profile, complex financial structure and subordination implications of the combined entity warrant a non-investment-grade rating. Post-acquisition benefits such as an increase in the average power purchase agreement (PPA) term, asset base and market capitalization, as well as greater diversification of fuel source, geography and counterparty risk, are offset by combined credit metrics that are weaker than initially anticipated. Also, an October 2011 equity offering by ATP that was moderately less than expected should result in modestly higher total debt.

Pursuant to the proposed ATP bond offering, CPILP and various subsidiaries are expected to provide guarantees that were not previously contemplated:

(1) CPILP will be guaranteeing ATP’s new $300 million secured credit facility.

(2) CPILP will be guaranteeing ATP’s intended $460 million senior unsecured bond issuance. The guarantees of the intended ATP bonds will be senior unsecured obligations of the respective guarantors and will rank equally in right of payment with all of the guarantors existing and future senior debt of the guarantor and will be effectively subordinated in right of payment to all secured debt of each guarantor.

(3) Only CPILP’s C$210 million bonds will receive a senior unsecured guarantee from ATP (with the guarantee being an obligation of ATP and subordinate to its secured $300 million credit facility). The US$415 million of CPILP subsidiary bonds (in three separate issues of US$150 million, US$75 million and US$190 million) will receive no guarantee from ATP.
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DBRS expects that a final review of CPILP’s ratings will follow shortly after the November 1, 2011, shareholder vote and a full review of the final guarantee documentation to be provided by ATP.

S&P placed these issues on Watch-Negative in June, as discussed on PrefBlog. They have not made any announcements since.

Update, 2011-10-24:S&P gives Atlantic Power BB- rating:

• Atlantic Power Corp. has executed a definitive Plan of Arrangement to
  acquire Capital Power Income L.P. (CPILP; BBB/Watch Negative), a Canada-based publicly traded limited partnership with a C$1.1 billion market cap.

• Pro forma for the acquisition, we have assigned our ‘BB-‘ preliminary long-term corporate credit rating to Atlantic Power.
• At the same time, we assigned our preliminary issue rating of ‘BB-‘ to Atlantic Power’s $460 million senior unsecured notes due in 2018. We also
  assigned our ‘4’ preliminary recovery rating to the notes, indicating our expectation for average (30%-50%) recovery if a payment default occurs.

• The outlook on the ratings is stable.

Update, 2011-10-26: According to the proxy material, Atlantic Power will guarantee the preferred dividends:

9.3 Restriction on Dividends
The Guarantor hereby covenants and agrees that if and for so long as either the board of directors of the Corporation has failed to declare, or the Corporation has failed to pay, dividends on the Series 1 Shares, in each case, in accordance with the share conditions attaching thereto, then the Guarantor shall not declare or pay any dividends on its shares or make any distributions or pay any dividends on securities of any successor entity of the Guarantor.

They will continue to be guaranteed by Capital Power Income LP:

On the CPILP record date, CPI Preferred Equity Ltd. has issued 5,000,000 Series 1 Shares, 4,000,000 Series 2 Shares and no Series 3 Shares. The Series 1 Shares trade on the TSX under the symbol CZP.PR.A and the Series 2 Shares trade on the TSX under the symbol CZP.PR.B. CPILP has agreed to fully and unconditionally guarantee the Series 1 Shares, Series 2 Shares and Series 3 Shares on a subordinated basis as to: (i) payment of dividends, as and when declared; (ii) payment of amounts due on redemption; and (iii) payment of amounts due on liquidation, dissolution or winding up of CPI Preferred Equity Ltd. If, and for so long as, the declaration or payment of dividends on the Series 1 Shares, Series 2 Shares or Series 3 Shares is in arrears, CPILP will not make any distributions on the CPILP units. See ‘‘Capital Structure—Preferred Shares of CPEL’’ included in CPILP’s Annual Information Form dated March 11, 2011, which is delivered with, and/or incorporated by reference into, this joint proxy statement.

The Series 1 Shares and Series 2 Shares will remain outstanding following completion of the Plan of Arrangement in accordance with their terms. CPILP will continue to guarantee the Series 1 Shares, Series 2 Shares and Series 3 Shares on the same terms and conditions as described above and Atlantic Power will provide substantially similar guarantees in the forms attached as Schedule J to the Arrangement Agreement.

However, Atlantic Power’s guarantee isn’t worth a lot since it’s not investment-grade, and the value of CPILP’s guarantee has been diminished since it will now also guarantee Atlantic Power’s senior debt (see the DBRS notes (1) and (2) above).

Update, 2011-10-27: Atlantic Power issued 7-year paper to yield 9.50%:

Atlantic Power Corp on
Wednesday sold $460 million of senior notes in the 144a private placement market, said IFR, a Thomson Reuters service. Morgan Stanley and TD Securities were the joint bookrunning managers for the sale.
BORROWER: ATLANTIC POWER CORPORATION
AMT $460 MLN COUPON 9.00 PCT MATURITY 11/15/2018
TYPE SR NTS ISS PRICE 97.471 FIRST PAY 5/15/2012
MOODY’S B1 YIELD 9.50 PCT SETTLEMENT 11/4/2011
S&P BB-MINUS SPREAD 784 BPS PAY FREQ SEMI-ANNUAL
FITCH N/A MORE THAN TREAS MAKE-WHOLE CALL 50 BPS

Brookfield Asset Management has announced:

the results of the exercise of the conversion privilege for its Class A Preference Shares, Series 8 (the “Series 8 Preferred Shares”) (TSX: BAM.PR.E) and its Class A Preference Shares, Series 9 (the “Series 9 Preferred Shares”) (TX: BAM.PR.GS).

Holders of the company’s Series 8 Preferred Shares and Series 9 Preferred Shares had the right to exchange their shares for the other series effective November 1, 2011, if they submitted an election to convert their shares on or prior to October 18, 2011. Holders of 927,590 Series 8 Preferred Shares have elected to convert these shares into an equivalent number of Series 9 Preferred Shares, and holders of 774,036 Series 9 Preferred Shares have elected to convert these shares into an equivalent number of Series 8 Preferred Shares.

These conversions will be effective on November 1, 2011. Following these conversions, there will be 1,652,394 Series 8 Preferred Shares and 6,347,606 Series 9 Preferred Shares issued and outstanding.

The Series 8 Preferred Shares pay a monthly floating rate dividend based on the Prime Rate, adjusted to reflect the trading price of these shares. The most recent monthly dividend paid on these shares on October 12, 2011 reflected an annualized dividend rate of 3.00%. The Series 9 Preferred Shares pay a quarterly dividend which is reset every five years based on a percentage of the five-year rate offered on Government of Canada bonds at the time. As previously announced, the annual rate on the Series 9 Preferred Shares has been reset at 3.80% commencing with the dividend payable on February 1, 2012.

Holders of the company’s Series 8 and Series 9 Preferred Shares will again have the opportunity to convert their shares into the other series effective November 1, 2016 and every five years thereafter.

The conversion details were previously discussed on PrefBlog.

Canadian Utilities has announced:

that it will issue $500,000,000 of 4.543% Debentures maturing on October 24, 2041, at a price of $100.00 to yield 4.543% and $200,000,000 of 4.593% Debentures maturing on October 24, 2061, at a price of $100.00 to yield 4.593%. These issues were sold by BMO Nesbitt Burns Inc., RBC Dominion Securities Inc., TD Securities Inc. and ScotiaCapital Inc. Proceeds from the issue will be used to finance capital expenditures, to repay existing indebtedness, and for other general corporate purposes of ATCO Electric Ltd. and ATCO Gas and Pipelines Ltd.

By way of comparison with the preferred share market …

The YTW of 4.80% is equivalent to 6.24% interest at the standard 1.3x equivalency factor, implying that the Seniority Spread for this issuer is about 165bp.

CIU is also the proud issuer of CIU.PR.B and CIU.PR.C, both FixedResets.

Update, 2011-10-24: Debentures rated A(high) by DBRS.

BCE Inc. has announced:

that 468,442 of its 2,279,791 floating-rate Cumulative Redeemable First Preferred Shares, Series S (series S preferred shares) have been tendered for conversion on November 1, 2011, on a one-for-one basis, into fixed-rate Cumulative Redeemable First Preferred Shares, Series T (series T preferred shares). In addition, 1,794,876 of its 5,720,209 series T preferred shares have been tendered for conversion on 1, 2011, on a one-for-one basis, into series S preferred shares. Consequently, on November 1, 2011 will have 3,606,225 series S preferred shares and 4,393,775 series T preferred shares issued and outstanding. The series S preferred shares and the series T preferred shares will continue to be listed on the Toronto Stock Exchange under the symbols BCE.PR.S and BCE.PR.T, respectively.

The series S preferred shares will continue to pay a monthly floating adjustable cash dividend for the five-year period beginning on November 1, 2011, as and when declared by the Board of Directors of BCE. The monthly floating adjustable dividend for any particular month will continue to be calculated based on the prime rate for such month and using the Designated Percentage for such month representing the sum of an adjustment factor (based on the market price of the series S preferred shares in the preceding month) and the Designated Percentage for the preceding month.

The series T preferred shares will pay on a quarterly basis, for the five-year period beginning on November 1, 2011, as and when declared by the Board of Directors of BCE, a fixed cash dividend based on an annual fixed dividend rate of 3.393%.

I had previously recommended that shareholders continue to hold, or convert to, BCE.PR.T. Nobody ever listens to me.

Moody’s has announced:

oody’s Investors Service has placed on review for possible downgrade the Aa3 insurance financial strength (IFS) rating of Sun life Assurance Company of Canada (U.S.) (Sun Life US), the wholly-owned U.S. life insurance subsidiary of Sun Life Financial Inc. (SLF: TSX;SLF; preferred stock at Baa2 (hyb)). Other affiliated U.S. ratings were also placed on review for possible downgrade (see list, below). Moody’s has also affirmed the Aa3 insurance financial strength rating of SLF’s Canadian subsidiary, Sun Life Assurance Company of Canada (SLA), and the ratings of other Canadian affiliates, but changed the outlook to negative from stable. The rating actions follow SLF’s pre-announcement of a $621 million IFRS loss for 3Q11, and a further estimated $500 million reduction in fourth quarter consolidated net income, due to a method and assumption change related to the valuation of its variable annuity and segregated fund liabilities.

RATINGS RATIONALE

Commenting on the review for possible downgrade of Sun Life US, Moody’s said that the pre-release of SLF’s 3Q11 IFRS earnings, announcing sizable consolidated operating and net losses, was largely related to the interest rate and equity market sensitivity of its US business, much of which is at Sun Life US (with the remainder at the US branch of SLA). The announced $500 million charge to 4Q11 is also largely related to the US operations. Moody’s Vice President David Beattie said, “Sun Life US had been experiencing persistent earnings weakness and volatility over multiple quarters due to its equity market exposure and emphasis on variable annuity sales. Despite hedging programs, earnings volatility and potential economic losses related to interest rate and equity market sensitivity continues to be a credit concern. “
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Moody’s stated that the change in SLA’s outlook to negative reflects the group’s diminished full-year consolidated profitability as a result of these charges and anticipated continued drag on earnings from Sun Life US, as well as weaker financial flexibility due to capital charges and the potential need to maintain higher than historical levels of capital to support the U.S. operations. SLA currently remains well capitalized with a MCCSR of approximately 210% as at September 30, 2011, down from 231% at the end of 2Q11.
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The following ratings were affirmed and the outlook changed to negative from stable:

Sun Life Financial, Inc. — preferred stock at Baa2 (hyb)

Moody’s does not rate the other four investment grade Canadian insurers.

This announcement follows SLF’s announcement of big charges in a press release that I discussed on October 17.

SLF has many preferred shares outstanding: SLF.PR.A, SLF.PR.B, SLF.PR.C, SLF.PR.D and SLF.PR.E (all DeemedRetractible) as well as SLF.PR.F, SLF.PR.G and SLF.PR.H (all FixedReset).

DBRS commented:

The majority of the loss consists of the adverse impact of the unprecedented decline in long-term interest rates and in equity markets between the second and third quarters in the U.S. and Canadian markets, which DBRS estimates having cost the Company close to $700 million, as well as a $200 million adverse reserve adjustment as a result of a change in the Company’s actuarial methods and assumptions. This annual adjustment to actuarial assumptions occurs normally in the third quarter of each fiscal year. Offsetting these items are core earnings of $400 million.

DBRS is concerned that market exposures, which are largely hedged, continue to have an outsized impact on reported earnings, albeit within the sensitivities published by the Company. If interest rates and equity markets continue to experience downward pressure from the uncertain economic environment, with an accompanying increase in earnings volatility, DBRS will have to review its rating on the life insurance industry generally, which could give rise to negative rating actions for insurance companies with relatively large capital markets exposures.
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As a result of the weak Q3 2011 results, the Minimum Continuing Capital and Surplus Requirements (MCCSR) ratio for the Company’s major operating subsidiary, Sun Life Assurance Company of Canada, is expected to fall to 210% from 231% at the end of Q2 2011. This result remains above the Company’s target ratio of 180% to 200%. Nevertheless, the Company’s financial flexibility will have deteriorated.

S&P remarked:

Standard & Poor’s Ratings Services said today that its ratings on Sun Life Financial Inc. (SLF; A/Stable/A-1) and Sun Life Assurance Co. of Canada (SLA; AA-/Stable/A-1+) and other rated affiliates (collectively Sun Life) are unchanged following the company’s pre-release of expected third-quarter results before the scheduled Nov. 3, 2011, earnings call, including comments on planned accounting changes in the fourth quarter. Sun Life’s reported results are within our ratings expectations not withstanding the lower equity markets’ and interest rates’ impact on earnings and capital.
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Given the very low interest rates, the potential for further declines, particularly in the rates on U.S. treasuries, is limited.
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We view Sun Life’s planned accounting revision for its hedging costs as inherently neutral to the ratings because it does not represent a change in the economics of the business.

I have been advised that Dundee Corporation is selling a big chunk of the BNS.PR.Z shares it received as part of its proceeds for the sale of Dundee Wealth to Scotia.

The original deal size was 3-million shares at 24.75, but I also understand that the deal has been upsized to 7-million shares.

I have not, as yet, been able to find an authoritative and public source for documents related to this sale – no press release, no nuthin’.

BNS.PR.Z was last discussed on PrefBlog with respect to its mysteriously vanishing regulatory event clause.

Update, 2011-10-27: Dundee press release:

TORONTO, ONTARIO, October 18, 2011 — Dundee Corporation (TSX: DC.A, DC.PR.A, DC.PR.B) announced today that it has sold 7,000,000 Scotiabank Preferred Shares Series 32 at a price of $24.75 per share, for total gross proceeds of $173,250,000, which will be added to working capital. The shares were initially acquired by Dundee Corporation as part of the consideration paid for the sale of its interest in DundeeWealth Inc. to Scotiabank. A syndicate of agents, led by TD Securities, co-led by Scotia Capital Inc. and including Dundee Securities Ltd., BMO Capital Markets, CIBC, RBC Capital Markets, National Bank Financial Inc., GMP Securities L.P. and Desjardins Securities Inc. acted in the sale of these shares. Dundee Corporation will receive the dividend of $0.23 per Preferred Share, Series 32 that was declared on August 30, 2011 and payable on October 27, 2011.

Dividend Growth Split Corp. has released its Semi-Annual Report to June 30, 2011.

Figures of interest are:

MER: The MER per unit of the Fund, excluding the cost of leverage, was 1.05% as at June 30, 2011.

Average Net Assets: This calculation is complicated by the merger with BE that took effect in May. We need figure to calculate portfolio yield. [79.0-million (NAV, beginning of period) + 119.0-million (NAV, end of period)] / 2 = about 99-million. Another method is to take the distributions on the preferred shares ($1,255,790) and divided by the distributions per share (0.2625) to get the average number of shares (4.78-million) and multiply by the average NAV ((18.65+18.17) / 2 = 18.41) to get the average assets ($88-million). The agreement isn’t very good! A third method is to take the dollar value of the fund expenses (525,506), annualize it (1.05-million) and divide by the quoted MER (1.05%) to get the Average Net Assets ($100-million). Let’s call it $100-million and cross our fingers.

Underlying Portfolio Yield: Total income of 1,866,783, times two (semi-annual) divided by average net assets of 100-million is 3.73%

Income Coverage: Net Investment Income of 1,339,277 divided by Preferred Share Distributions of 1,255,790 is 107%. This is almost certainly too low: the extra preferred shares were issued on May 18 and will have received the quarterly dividend; but given that coverage is in excess of 100% even so, the calculation of a number self-consistent with the other figures reported here is left as an exercise for the student.

BCE Inc. has announced (emphasis from original):

BCE Inc. will, on November 1, 2011, continue to have Cumulative Redeemable First Preferred Shares, Series T outstanding if, following the end of the conversion period on October 18, 2011, BCE Inc. determines that at least one million Series T Preferred Shares would remain outstanding. In such a case, as of November 1, 2011, the Series T Preferred Shares will pay, on a quarterly basis, as and when declared by the Board of Directors of BCE Inc., a fixed cash dividend for the following five years that will be based on a fixed rate equal to the product of: (a) the yield to maturity compounded semi-annually (the “Government of Canada Yield”), computed on October 11, 2011 by two investment dealers appointed by BCE Inc., that would be carried by Government of Canada bonds with a 5-year maturity, multiplied by (b) the “Selected Percentage Rate” for such period.

The “Selected Percentage Rate” determined by BCE Inc. for such period is 215%. The “Government of Canada Yield” is 1.578%. Accordingly, the annual dividend rate applicable to the Series T Preferred Shares for the five-year period beginning on November 1, 2011 will be 3.393%.

So it turned out higher than my September estimate of 3.12%, due to the increase in the Five-Year Canada yield in the interim. The annual dividend will be 0.84825 commencing November 1, down dramatically from the issue rate of 1.1255, which will probably cause some angst.

As previously noted, BCE’s deadline for conversion to and from BCE.PR.S, the RatchetRate half of this Strong Pair, is October 18, so anybody seeking to switch had better get cracking. I recommend that investors hold, or convert to, BCE.PR.T. While the chances of prime averaging more than 3.393% for the next five years are pretty good, it will be remembered that BCE.PR.S can only be relied on to pay 100% of prime for as long as the price remains below 25.00. If the price goes much above par, the percentage of prime paid will drop – which means total dividends may be less than what will be paid on BCE.PR.T even if prime averages, say, 4.00%.