Category: Issue Comments

This issue is USD denominated and as such is not included in the HIMIPref™ universe, but I received a query about it anyway, regarding taxes payable on redemption.

The paid-up capital for the shares is USD 25.00 and the redemption price (commencing 2012-2-25) is USD 25.00, so there’s no problem there; but my interlocuter has been advised that “it may be beneficial for [holders] to sell the issue pre redemption as there are some unusual tax implications if held to redemption.”

According to the prospectus:

Under the CCRA administrative policy regarding paid-up capital described under ‘‘Foreign Currency Translation Issues’’, changes in the exchange rate of Canadian and U.S. dollars between the date of issuance of the Preferred Shares Series 10 (relevant to the computation of paid up capital) and the date of redemption (relevant to the computation of redemption proceeds) will affect the computation of any such deemed dividend. The difference between the amount paid by the Bank and the amount of the deemed dividend will be treated as proceeds of disposition for the purposes of computing the capital gain or capital loss arising on the disposition of such shares (see ‘‘Disposition’’ above).

and

The CCRA takes the position that notwithstanding that the stated capital, for corporate purposes, of Preferred Shares Series 10 will be maintained in U.S. dollars, the paid-up capital for purposes of the Act of the Preferred Shares Series 10 will be the Canadian dollar equivalent of the consideration for which the Preferred Shares Series 10 are issued, computed at the exchange rate prevailing at the time the Preferred Shares Series 10 are issued.

The “anticipated closing date” of the issue was 2001-12-20 and, according to the Bank of Canada, the noon USD rate was 1.5775 CAD per USD. So the paid-up capital on these shares is roughly CAD 39.44.

I suspect, but I am not sure, that this means that holders who hold until redemption at USD 25.00 (assuming, of course, that such a redemption will in fact occur) will therefore be deemed to have sold their shares at CAD 39.44 – resulting in a huge capital gain for those purchasing their shares when conversion rates were closer to par – and not being able to claim anything for the “negative deemed dividend”.

But: I am not a tax specialist and my suspicions could well be incorrect. I suspect that this will become a rather major issue as the prospective date of redemption approaches and I urge holders to bombard BMO’s Investor Relations Department with questions. I have sent the following query to the Corporate Secretary:

I write to enquire about the tax status of payments should BMO.PR.V be redeemed when the redemption option becomes available to BMO next February.

On a very approximate basis, I compute that the CAD paid-up capital per share on this issue is the USD figure of 25.00 times the conversion rate on issue date (2001-12-20) of 1.5775, or about CAD 39.44.

I further assume for convenience that the USD/CAD conversion rate will be par on the (presumed) date of redemption.

I believe that this implies holders whose shares are redeemed will be deemed for tax purposes to have disposed of their shares at CAD 39.44 (the 2001 issue price using exchange rates at that time) which may result in a very large taxable capital gain for recent purchasers, and that there will be no offsetting deduction for a “negative deemed dividend”.

I request your comment on my conclusion regarding the tax status of holders on possible redemption; I further request that any notice of redemption for this issue that may be prepared in the future contain a section explaining these consequences.

But there is an out, or there should be! “Paid up Capital” is irrelevant to those who sell on the market – in such a case, the capital gain or loss will be simply the usual difference between the CAD equivalent of your purchase price and the CAD equivalent of your sale price; using the conversion factors appropriate for each day.

Aimia, formerly known as Groupe Aeroplan, has announced:

Groupe Aeroplan Inc., now carrying on business as Aimia today reconfirmed that, effective October 7, 2011, the company’s ticker symbols on Toronto Stock Exchange will be changed and its common shares and cumulative rate reset preferred shares, Series 1 will begin trading under the symbols AIM and AIM.PR.A, respectively.

The ticker symbol changes follow the announcement earlier this week of the company’s new name and global brand identity.

“As announced earlier this week, we selected our new name, Aimia, to represent the full-suite, global loyalty business that we have become,” said Rupert Duchesne, President and CEO of Aimia. “It encompasses our straightforward passion to build long term, profitable relationships and our goal to become the recognized global leader in loyalty management.”

The proxy circular for the next Annual Meeting of Shareholders will include a proposal to amend the company’s articles of incorporation to change its corporate name to Aimia Inc.

Sentry Select has announced:

Diversified Preferred Share Trust (the “Trust”) (TSX:DPS.UN) announces a change to its quarterly distribution rate from $0.30 per unit to $0.25 per unit, effective with the fourth-quarter distribution, payable on January 13, 2012 to unitholders of record on December 30, 2011.

The fundamental reason for the change in the quarterly distribution rate is the significant downward movement in Canadian interest rates over the last several years. This low interest rate environment has resulted in a decline in the average yield of the Trust’s portfolio. Consequently, the Trust’s Board of Directors has deemed it reasonable to change the Trust’s distribution rate to a more sustainable level

DBRS has maintained its rating at STA-3:

DBRS has today confirmed the stability rating of STA-3 (high) on the retractable units (the Units) issued by Diversified Preferred Share Trust (the Trust).

Proceeds from the Trust’s offerings have been used to invest in a diversified portfolio (the Portfolio) of preferred shares and securities. The Portfolio is passively managed by Sentry Investment Inc. (the Administrator).
…
The current weighted average yield of the Portfolio is approximately 4.95%. The Trust has been making quarterly distributions to the Unitholders equal to $0.30 per unit, yielding 4.80% per annum on the unit issue price of $25. The amount of the distribution and the net asset value (NAV) of the Portfolio may vary in accordance with the credit profile of each of the Portfolio’s underlying securities, prevailing interest rates and rate change expectations, and any losses or gains on rebalancing the Portfolio. On September 26, 2011, the Trust announced a change in the quarterly distribution rate from $0.30 per unit to $0.25 per unit, effective with the fourth-quarter distribution, payable on January 13, 2012, to unitholders of record on December 30, 2011. The change in the dividend amount will remain as such until further guidance is provided by the Trust. The Trust’s net income can currently cover approximately 77% of the distributions paid out to the unitholders. The reduction in the distribution rate will be of benefit to the shortfall in portfolio income relative to the distribution paid out to the Trust’s unitholder. The distribution coverage would increase from 77% to 92% if the new distribution rate is applied. The rating of STA-3 (high) is considered sufficient based on the change in distribution rate and other factors such as asset composition, credit quality and diversification of the Trust’s Portfolio, among others.

I got a call today from an investor concerned about the recent performance of the SLF preferreds. This poor performance is well illustrated by the following three graphs, which plot Current Yield against Annual Dividend.

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As may be seen, the prices of the SLF preferreds have changed so that their Current Yields are now significantly higher than what they would be if they had maintained their relationship (shown on the 9/9 chart) with the GWO and PWF preferreds (note that GWO and SLF issues plotted are DeemedRetractibles; the PWFs are Straight Perpetuals and should have current yields greater than the other two issuers’ preferreds, but don’t. The market hasn’t been pricing in any possibility of regulatory redemption in 2022-1-31!

So what’s the problem? The only news of note lately has been the SLF purchase of McLean Budden, which doesn’t sound like a big deal. SLF common hit a new 52-week low on the NYSE recently, but a comparison of common prices for the three dates doesn’t really provide any clues:

In the absence of news or a confirming signal from the common I have to conclude that the variance from the relationship with the other two series of preferreds examined is due to liquidity pressures – in other words, I think somebody’s selling a whack of these things and is taking a big market impact cost in order to do so.

Mulvihill Capital Management has announced:

our new name, Strathbridge Asset Management Inc, reflecting our revitalized focus and commitment to our closed-end fund business. Strathbridge Asset Management (“Strathbridge”) builds on Mulvihill’s 15 years of experience managing closed-end investment funds. Strathbridge utilizes a dedicated team of investment professionals powered by a revised proprietary investment process.

The change in our name is the culmination of a process that began in 2008 with the spin-off of two divisions. Since that time, the firm has undergone an extensive review and improvement of all facets of the organization, ultimately leading to our rebranding as Strathbridge Asset Management.

Building on our experience, we have developed a revised proprietary investment process using quantitative algorithms that facilitate a more selective option writing strategy, which together with the appropriate use of protective puts, is expected to lead to better risk-adjusted returns for investors. The Strathbridge team will utilize their vast experience to identify unique investment opportunities for investors that provide income and exposure to selected asset classes or features that investors could not replicate cost effectively. We are dedicated to providing timely investor information and services to assist your investment decisions. Our new website at www.strathbridge.com provides detailed information regarding each Strathbridge investment
fund, regular commentary and analysis from our portfolio managers and other educational material helpful to investors.

Strathbridge is now the manager of: CDD.UN, GPF.UN, GSB.UN, PCU.UN, PIC.A, PIC.PR.A, SBN, SBN.PR.A, TCT.UN, TXT.PR.A, TXT.UN, UTE.UN, WFS, WFS.PR.A.

Sadly, the Strathbridge website does not appear to show any performance data for their “more selective option writing strategy”.

First Asset Management has announced:

that the Company completed the redemption of all of its outstanding Class A Shares and Preferred Shares on September 30, 2011.

Class A Shares were redeemed for $4.4827 per share. Preferred Shares were redeemed for $10 per share plus the previously announced quarterly distribution of $0.13125 per Preferred Share.

Payment will be made on or about October 5, 2011 to the beneficial holders of such shares through CDS Clearing and Depository Services Inc. Shareholders need not take any action to receive the final redemption proceeds.

DBRS has discontinued coverage of the no-longer-extant issue.

GFV.PR.A was not tracked by HIMIPref™.

Enbridge Inc. has announced:

it has closed its previously announced public offering of cumulative redeemable preferred shares, series b (the “Series B Preferred Shares”) by a syndicate of underwriters co-led by Scotia Capital Inc., RBC Capital Markets, and TD Securities Inc. Enbridge issued 20 million Series B Preferred Shares for gross proceeds of $500 million. The Series B Preferred Shares will begin trading on the TSX today under the symbol ENB.PR.B. The proceeds will be used for capital expenditures, to repay indebtedness and for other general corporate purposes.

ENB.PR.B is a FixedReset, 4.00%+240 announced September 21.

The issue traded 978,815 shares in a range of 25.15-25 before closing at 25.19-20, 24×100. Vital statistics are:

Claymore Investments has announced:

that Big Bank Big Oil Split Corp. (the “Company”) has completed its previously announced follow‐on offering (the “Offering”) of 1,546,550 preferred shares (the “Preferred Shares”) of the Company at a price of $10.20 per Preferred Share (of which 146,550 were sold pursuant to the exercise of the over‐allotment option) and 1,546,550 capital shares (the “Capital Shares”) of the Company at a price of $9.95 per Capital Share (of which 146,550 were sold pursuant to the exercise of the over‐allotment option) for total gross proceeds of $31,162,982.50 pursuant to a short form prospectus dated September 22, 2011.

The Capital Shares and Preferred Shares trade on the Toronto Stock Exchange under the symbols “BBO” and “BBO.PR.A” respectively. The Company invests in a portfolio (the “Portfolio”) of common shares of the six big Canadian banks and the ten biggest (by market capitalization) Canadian oil and gas companies utilizing a split share structure. The Company invests in the Portfolio on an equal‐weighted basis and provides a low fee exposure to the underlying sectors. The Preferred Shares are rated Pfd‐2 (low) by DBRS Ltd. The Company may write covered call options and cash covered put options on the Portfolio in order to generate additional returns.

The investment objectives for the Preferred Shares are: (i) to provide holders with fixed cumulative preferential quarterly cash distributions in the amount of $0.13125 per Preferred Share; and (ii) to return the original issue price of $10.00 per Preferred Share to holders on December 30, 2016. The investment objectives for the Capital Shares are: (i) to provide holders with regular monthly cash distributions, which are currently $0.09 per Capital Share; and (ii) to provide holders with the opportunity for growth in the net asset value per Capital Share.

The Offering was made on a best efforts agency basis in each of the provinces and territories in Canada through a syndicate of investment dealers co‐led by TD Securities Inc. and CIBC World Markets Inc. and including GMP Securities L.P., RBC Dominion Securities Inc., Scotia Capital Inc., BMO Nesbitt Burns Inc., National Bank Financial Inc., Canaccord Genuity Corp., HSBC Securities (Canada) Inc., Raymond James Ltd., Desjardins Securities Inc., Macquarie Private Wealth Inc., Dundee Securities Ltd., Mackie Research Capital Corporation, and Rothenberg Capital Management Inc.

The offering was discussed on PrefBlog in the post BBO.PR.A To Get Bigger Via Treasury Offering

The additional 1.5-million-odd shares basically doubles the size of the fund. BBO.PR.A is not currently tracked by HIMIPref™, but I’m going to have to start thinking about it!

See updates, below

I have heard from a non-authoritative source that:

4. The series 9 Preferred Shares curently pay a fixed annual dividend of 4.35% applied to $25.00 per share, payable quarterly. the final quarterly dividend payable at this rate of 40.271875 per share in Canadian funds is payable on November 1, 2011 to shareholders of record 15, 2011.

5. After November 1, 2011, the Series 9 Preferred shares will pay, on a quaterly basis, as and when declared by the Board of Directors of the Corporation, a fixed annual dividend of $0.95 per share in Canadian funds for the following five years, representing a yield of 3.80% applied to $25.00 per share.

However I see nothing on the Brookfield website about this, nor is there anything on SEDAR. A rate of 3.80% would be very generous compared with my estimate of 3.12% for BCE.PR.T (which will be finalized in mid-October).

I have sent an inquiry to the company.

The issue is convertable to and from BAM.PR.E on 2011-11-1

Update, 2011-9-29: The company directed me to a web page with all the information. The Notice of Conversion Privilege for BAM.PR.G‘s Point 5 reads in full:

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Yellow Media’s press release of this morning (discussed previously) has had some immediate consequences!

DBRS has announced that it:

has today downgraded the ratings of Yellow Media Inc. (Yellow Media or the Company), including the Medium-Term Notes to BB from BBB, its Exchangeable Subordinated Debentures to B (high) from BBB (low) and its Commercial Paper to R-4 from R-2 (high). The trends remain Negative. As part of our leveraged finance rating methodology, DBRS has also assigned an Issuer Rating of BB to Yellow Media and a recovery rating of RR4 to the Medium-Term Notes (indicating expected recovery of 30% to 50%) and an RR6 to the Exchangeable Subordinated Debentures (indicating expected recovery of 0% to 10%).

The downgrade reflects increased concern regarding the timing, execution and success of Yellow Media’s transition from print to digital and a meaningful reduction of the Company’s financial flexibility. DBRS notes that as part of Yellow Media’s goodwill impairment testing that was announced today, the Company indicated that EBITDA will be pressured as a result of the accelerated transition from print to digital, which raises uncertainty regarding the timing and ability of digital to offset the ongoing pressure on print. The uncertainty and lack of visibility around the Company’s progress on this transition continue to mount. As a result, DBRS expects revenue and EBITDA could be meaningfully less than DBRS had previously anticipated.

Secondly, DBRS believes Yellow Media’s financial flexibility and liquidity have been significantly reduced despite completing $700 million of debt reduction in Q3 2011 (gross debt-to-EBITDA was approximately 3.0 times at June 30, 2011). This is reflected by the fact that the Company’s credit facility was reduced from $1 billion to $500 million, while maintaining a February 2013 maturity, and that it has reduced access to the capital markets with a significantly higher cost of capital.

DBRS notes that these factors have accelerated since DBRS’s previous downgrade on August 4, 2011, which included changing the trend to Negative from Stable. As such, the Company’s credit risk profile is no longer consistent with an investment-grade credit rating. The Negative trend on August 4, 2011, reflected risks associated with executing the digital transition, generating reasonable levels of EBITDA and cash flow from operations and maintaining an adequate level of financial flexibility.

Today’s action follows Yellow Media’s announcement that a non-cash goodwill impairment charge of $2.9 billion will be taken in Q3 2011; that its common dividend will be eliminated following its October 17, 2011, payment; and that it will be making a number of amendments to its credit facility, including reducing it to $500 million.

The Negative trend reflects the following: (1) heightened uncertainty surrounding Yellow Media’s business profile as print pressure accelerates and the timing and scale of digital growth remain unknown; (2) concerns related to the execution of its digital strategy; (3) DBRS’s concern that the transforming businesses’ income and the capacity to generate cash flow from operations may not be sufficient to support Yellow Media’s evolving capital structure; and (4) the Company’s reduced ability in terms of financial flexibility to manage through this transition.

There has been no announcement of a rating change from S&P (yet!).

YLO has four issues of preferred shares outstanding: YLO.PR.A & YLO.PR.B (retractible) and YLO.PR.C & YLO.PR.D (FixedReset).

Update: S&P has spoken:

Standard & Poor’s Ratings Services today said that the ratings on Montreal-based classified directory publisher Yellow Media Inc. (BB+/Stable/–) and its related entities are unchanged following the company’s announcement today to take a C$2.9 billion noncash goodwill impairment charge to earnings in the quarter ended Sept. 30, 2011, eliminate future dividends on its common shares, and amend its bank credit facilities.
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Given our current expectations for funds from operations in the next 12-18 months, our assumption of about C$200 million of availability under the company’s C$250 million operating revolver due Feb. 18, 2013, modest capital requirements, and minimal mandatory debt repayments in 2012, we view Yellow Media’s liquidity as adequate, as per our definitions. We expect the company to remain compliant with its revised financial covenants in the next 12 months.

Ratings remain at P-4(high) for preferreds and BB+ local long-term.