Category: Issue Comments

Yellow Media Inc. has announced (bolding added):

• Company will record a goodwill impairment charge of $2.9 billion
• Company eliminates future dividends on its common shares
• Company agrees to amend credit agreement following recent downgrade to its credit ratings
• Company decisively reduces debt while maintaining adequate liquidity
• Company is focused on executing its 360 Solution digital strategy

Montreal (Quebec), September 28, 2011 – As announced in the second quarter, Yellow Media Inc. (TSX: YLO) determined that, depending on the outcome of the review of its strategic and operating plans, the fair value of the Company’s assets may be determined to be less than their carrying value. As a result, the Company tested the goodwill and other long-lived assets related to its business for potential impairment. The impairment testing has now been completed and, as a result, the Company will record a goodwill impairment charge of $2.9 billion in net earnings for the period ending September 30, 2011.

This impairment charge is a non-cash item and does not affect the Company’s operations, its liquidity or cash flow from operating activities, its bank credit agreement or its note indentures. This charge will be reflected in the Company’s financial statements for the period ending September 30, 2011. It is the result of a combination of factors, including the decrease in the Company’s common share price and the pressure on EBITDA due to the accelerated transition from print to online, the uncertainties, if or when, new product introductions will compensate for the declining trend in print revenues and the lower margins from recent business acquisitions.

“We are decisively taking action to reduce our debt. The Board, the management team and all our employees are focused on the successful transformation of Yellow Media toward a digital media company through the execution of our 360 Solution strategy,” said Marc P. Tellier, President and CEO of Yellow Media.

Dividends on Common Shares to be Eliminated

The Yellow Media Board of Directors has determined that it is in the best interest of the Company to eliminate future dividends on its common shares. This decision is in compliance with the amendments that the Company has agreed to make to its principal credit agreement and will improve its financial profile and capital position. The $0.025 dividend per common share that was previously declared by the Company and announced on August 4, 2011 remains payable on October 17, 2011 to shareholders of record at the close of business on September 30, 2011. The cash retained from the elimination of dividends will be used to reduce indebtedness.

Yellow Media is committed to improving its financial position through further debt reduction by pursuing a prudent financial policy and by maintaining a capital structure that provides flexibility through diverse funding sources and timing of its debt maturities. Management’s current focus is to reinforce the Company’s financial foundation upon which to execute Yellow Media’s digital transformation. Yellow Media expects to achieve stronger credit protection measures through sustained cash flow generation and deleveraging of its balance sheet.

With the debt repayment announced today, the Company will have reduced its total indebtedness by approximately $700 million during the quarter (representing the amount of net proceeds from the previously announced sale of Trader Corporation), including the repayment of $238 million principal amount of Medium Term Notes.

Amendments to Existing Credit Agreement

As a result of the recent downgrade of its credit ratings, Yellow Media and its lenders have agreed to amend the terms of its principal $1 billion senior unsecured credit facility, which currently consists of a $750 million revolving term loan and a $250 million non-revolving term loan, each maturing on February 18, 2013. Yellow Media has agreed with the unanimous support of the banks forming part of the syndicate of lenders under the principal credit facility to repay a total amount of $500 million of its bank indebtedness and to reduce the committed size of the revolving term loan from $750 million to $250 million. The committed size of the non-revolving term loan remains unchanged. As a result, upon the effective date of the amendments, the new principal $500 million senior unsecured credit facility will consist of a $250 million revolving tranche and a $250 million non-revolving tranche, each maturing on February 18, 2013.

The Company has agreed to make quarterly payments of $25 million on the non-revolving term loan commencing in January 2012. Pursuant to the amendments, Yellow Media has also agreed to suspend future dividends on its common shares, except for the scheduled dividend payment on October 17, 2011.

Upon the downgrade of its credit ratings announced on August 4, 2011, Yellow Media became subject to a restriction contained in its credit agreement that limits the aggregate amount of excess cash that can be paid as dividends and for the repurchase of securities during any trailing 12-month period. As part of the amendments, Yellow Media is receiving a waiver of this distribution restriction in respect of the prior 12-month period.

A copy of the second amended and restated credit agreement will be available on www.sedar.com.

Whoosh! There’s nothing on SEDAR yet, but presumably it will be there by the weekend.

The impairment is trivial – YLO’s balance sheet has never been worth anything. As I remarked in the August PrefLetter, the business is all about relationships and turning those relationships into cash – it’s always been the statement of cash flows that has been important. If it were not for everything else in the release, the writedown could be dismissed as an effort by the new CFO (introduced on September 6) to put her mark on the company. But there were other things in the release…

What is important is that not only has the size of the revolving term loan been reduced to $250-million from $750-million, but that YLO has agreed to pay down the term loan in advance, in $25-million installments. Further, they do not appear to have got anything in exchange for these concessions – a longer term on the facilities would have been nice.

I remarked in PrefLetter that the important thing to watch for was any signs that the company might be losing access to the capital markets. Well … an important thing may have just happened.

It is also somewhat scary that they’ve eliminated the dividend. I’ve been saying since the 11Q2 report that the best thing that happened to preferred share and debt holders was the downgrade, as that forced a dividend cut under the old credit agreement – only a CEO educated at Lower Canada College or a sell-side analyst could possibly have thought the old rate was sustainable and the downgrade forced a little dose of reality into the company’s opium dreams. But total elimination? That’s a very stringent condition.

I don’t think the preferred dividend is at risk – companies will typically only eliminate their preferred dividends when they’re actually standing on the steps of bankruptcy court and cash flow is still positive. However, the probabilities of conversion of YLO.PR.A and YLO.PR.B into common at the earliest opportunity (March 2012 for the former; June 2012 for the latter) have now risen quite sharply.

The next big step is the 11Q3 results. The note about the “declining trend in print revenues and the lower margins from recent business acquisitions” makes it possible to speculate that revenues have fallen off a cliff.

In addition to the two retractibles, YLO.PR.A and YLO.PR.B, the company has two FixedResets outstanding, YLO.PR.C and YLO.PR.D, which are not convertible into common.

Canadian Utilities has announced:

it has closed its previously announced public offering of Cumulative Redeemable Second Preferred Shares Series Y, by a syndicate of underwriters co-led by RBC Capital Markets and BMO Capital Markets, and including TD Securities Inc. and Scotia Capital Inc. As a result of the underwriters exercising in full their option to purchase an additional 2 million Series Y Preferred Shares, Canadian Utilities Limited issued 13 million Series Y Preferred Shares for gross proceeds of $325 million. The Series Y Preferred Shares will begin trading on the TSX today under the symbol CU.PR.C. The proceeds will be used for capital expenditures, to repay indebtedness and for other general corporate purposes.

CU.PR.C is a FixedReset 4.00%+240 announced September 13. It is tracked by HIMIPref™ and is assigned to the FixedReset subindex.

The issue traded 471,280 shares today in a range of 25.15-25 before closing at 25.21-25, 9×181. Vital statistics are:

TD Bank has announced:

that it will exercise its right to redeem all of its 14 million outstanding Class A First Preferred Shares, Series M (the “Series M Shares”) on October 31, 2011 at the price per share of $25.50 (for an aggregate total of approximately $357 million). The redemption price represents a $0.50 premium to the $25.00 per share face price.

TD also announced it will exercise its right to redeem all of its 8 million outstanding Class A First Preferred Shares, Series N (the “Series N Shares”) on October 31, 2011 at the price per share of $25.50 (for an aggregate total of approximately $204 million). The redemption price represents a $0.50 premium to the $25.00 per share face price.

On September 1, 2011, the Board of Directors of TD declared a quarterly dividend of $0.29375 per Series M Share and $0.2875 per Series N Share. These will be the final dividends on the Series M Shares and Series N Shares, respectively, and will be paid in the usual manner on October 31, 2011 to shareholders of record on October 11, 2011, as previously announced. After October 31, 2011, the Series M Shares and Series N Shares will cease to be entitled to dividends and the holders of such shares will not be entitled to exercise any right in respect thereof except that of receiving the redemption amount.

TD recommends shareholders consult with their tax advisors to determine the appropriate treatment and impact of the redemptions. A general summary of the tax implications will be available shortly on our website, www.td.com, under Investor Relations/Share Information/Preferred Shares.

Instructions with respect to receipt of the redemption amount will be set out in the Letter of Transmittal to be mailed to registered holders of the Series M Shares and Series N Shares shortly. Inquiries should be directed to our Registrar and Transfer Agent, CIBC Mellon Trust Company, at 1-800-387-0825 (or in Toronto 416-643-5500). Beneficial holders who are not directly the registered holder of these shares should contact the financial institution, broker or other intermediary through which they hold these shares to confirm how they will receive their redemption proceeds. Further details and instructions will be posted shortly to our website, http://www.td.com/investor-relations/ir-homepage/share-information/preferred-shares/preferred.jsp.

Holders are reminded that the fifty-cent premium over the par value that will be paid on redemption is a deemed dividend for tax purposes and will be taxed as a dividend. Many investors will therefore wish to sell into the market shortly before the last possible date in order that whatever premium received (probably just a few pennies less than the fifty cents) will be treated as a capital gain (or reduction of capital loss, as the case may be)

BCE Inc. has announced:

As of November 1, 2011, the Series T Preferred Shares will, should they remain outstanding, 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 non-callable Government of Canada bonds with a 5-year maturity, multiplied by (b) the “Selected Percentage Rate”. The “Selected Percentage Rate” determined by BCE Inc. is 215%. The annual dividend rate applicable to the Series T Preferred Shares will be published on October 12, 2011 in the national edition of the Globe and Mail, the Montreal Gazette and La Presse and will be posted on the BCE Inc. website at www.bce.ca.

BCE’s deadline for conversion is October 18:

Registered holders electing to convert all or part of their Series T Preferred Shares into Series S Preferred Shares must complete and sign the conversion panel on the back of their Series T Preferred Share certificate and deliver it, at the latest by 5:00 p.m. (Eastern time) on October 18, 2011, to one of the following addresses of Canadian Stock Transfer Company Inc. (“Canadian Stock Transfer”):
….
Delivery may be done in person, by courier, by registered mail or by mail. However, if share certificates are delivered by courier, by registered mail or by mail, shareholders must ensure that they are sent sufficiently in advance so that they are received by Canadian Stock Transfer by the above-mentioned deadline.

Holders are reminded that their brokers will almost certainly have deadlines that are a day or two prior to the BCE deadline – check well in advance if you intend to convert!

Naturally, the notice for BCE.PR.S, the RatchetRate half of this Strong Pair, specifies the same deadline for those wishing to convert the other way.

It’s too soon to make a recommendation on this – we don’t know the actual rate to which BCE.PR.T will be reset yet! However, as of today the 5-Year GOC rate is 1.45%, so the indicative rate for BCE.PR.T is 3.12%, or $0.78 on its $25 par value, which will – probably, maybe, I think – be preferable to the 3% (100% of Canadian Prime) being paid on BCE.PR.S, since the fraction of prime paid on the latter issue will be reduced if the price goes much above par. It’s a pretty close call though, so watch this space!

Standard & Poor’s has announced:

• CIBC has received confirmation from its regulators establishing two rated hybrid issues as nonviable contingent capital (NVCC) instruments.
• We’re lowering our ratings on the two CIBC hybrids to ‘BBB+’ from ‘A-‘, reflecting contingent capital triggers as detailed in our contingent capital criteria (see “Related Criteria And Research”).
• We are affirming our ‘A+/A-1’ counterparty credit ratings on CIBC, and the outlook remains stable.

“The rating action reflects our view that the level of the trigger and the details of the mechanisms for the conversion of NVCCs are critical,” said Standard & Poor’s credit analyst John Bartko. The Canadian regulator’s (Office of the Superintendent of Financial Institutions, or OSFI) confirmation of treatment of these issues as NVCCs required CIBC to renounce its rights to convert the issues into common shares, except in circumstances considered a trigger event under the OSFI’s NVCC Advisory. The formal designation of these preferred shares as NVCC instruments, in conjunction with relevant OSFI guidance, establishes clear expectations as to circumstances in which the issuer would convert these issues to equity.

“In our opinion, because the conversion would occur at the point of nonviability, and not early enough to preempt nonviability, the formal designation of these instruments as NVCC does not in itself reduce the issuer’s default risk,” said Mr. Bartko. “Instruments with this conversion feature are rated one notch below hybrids that do not have the feature because the instruments would, at nonviability, have a lower ranking in the capital structure. If the issuer moves closer to the trigger point, we could lower the rating further to reflect the increased risk relative to other junior instruments in the issuer’s capital structure.”

The third CM issue to receive NVCC status was CM.PR.G (as reported in August), which is not mentioned in the release. I suspect that this is simply a careless oversight which will soon be corrected. There is also no indication as yet as to whether the downgrade will affect the “National Scale” rating of P-1(low).

I’ve been complaining for a long time – most recently in August – about OSFI’s prediliction for a “low-trigger” conversion rule, which they have never deigned to explain, arrogant idiots that they are. Now the low-trigger is having an observable effect. Thank you OSFI!

Update, 2011-9-17: S&P has updated their on-line rating summaries; the downgrade has not affected the P-1(low) rating on the courser “National Scale”.

Claymore Investments Inc. has announced:

that Big Bank Big Oil Split Corp. (the “Company”) has filed a preliminary short form prospectus in connection with a follow‐on offering (the “Offering”) of Capital Shares and Preferred Shares of the Company.

The Company completed its initial public offering of Capital Shares and Preferred Shares on June 16, 2006. The outstanding Capital Shares and Preferred Shares currently trade on the Toronto Stock Exchange (the “TSX”) 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 on an equal‐weighted basis and provides a low fee approach to the underlying sectors. The Preferred Shares are rated Pfd‐2 by Dominion Bond Rating Service 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 is being 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.

I was startled to see the claim that the issue is rated Pfd-2 by DBRS, because BBO.PR.A was last mentioned on PrefBlog when it was upgraded to Pfd-2(low). Did I miss something? Nope – it is still rated Pfd-2(low) and was confirmed at that level 2011-9-6.

Asset Coverage is currently 2.1-:1. The July, 2008 prospectus (for a warrant issue) indicates that there is a NAV test (1.5:1) and monthly retraction [96%(NAV – C)]

The issue has heretofore been too small to warrant tracking by HIMIPref™ (only about 1.6-million outstanding), but who knows? Maybe that will change.

Update, 2011-9-14: I wasn’t the only one who was startled:

Claymore Investments, Inc. wishes to confirm that the outstanding Preferred Shares of Big Bank Big Oil Split Corp. (the “Company”), which trade on the Toronto Stock Exchange under the symbol “BBO.PR.A”, are currently rated Pfd-2(low) by Dominion Bond Rating Service Ltd.

A press release issued on behalf of the Company on September 13, 2011 announcing the filing of a short form preliminary prospectus in respect of a proposed offering of Preferred Shares and Capital Shares of the Company inadvertently referred to the rating as Pfd-2.

Brookfield has announced:

a plan to combine Brookfield Renewable Power Fund and the power generating assets owned Brookfield Renewable Power Inc., to create Brookfield Renewable Energy Partners L.P. (“BREP”), a global, publicly-traded partnership focused on renewable power generation.
…
The transaction will require approval by 662/3% of Fund unitholders and a majority of unitholders other than Brookfield and related persons present at the meeting in person or by proxy and Ontario court approvals. In addition, Brookfield will seek approval from 662/3% of the holders of Preferred Shares and Brookfield Renewable Power’s unsecured bondholders, which are conditions to closing. Meeting materials containing details of the proposed transaction are expected to be mailed to security holders of the Fund, Brookfield Renewable Power Equity and Brookfield Renewable Power as soon as practicable. It is anticipated that meetings of security holders to seek the approvals referred to above will be held in October and November of 2011.

In response, DBRS has announced:

has today placed the Senior Unsecured Debentures and Notes rating of Brookfield Renewable Power Inc. (BRPI) Under Review with Developing Implications. DBRS has also placed the Issuer Rating and Income Fund rating of Brookfield Renewable Power Fund (the Fund) and the Preferred Shares, Series 1 (the Preferred Shares) rating of the Fund affiliate Brookfield Renewable Power Preferred Equity Inc. (Equity Inc.) Under Review with Developing Implications.
…
Equity Inc.’s Preferred Shares will become the obligation of a BREP subsidiary, guaranteed on a subordinate basis by BREP, mimicking the current structure under which the Preferred Shares are guaranteed on a subordinate basis by the Fund. Similar to the Fund, BREP would feature a contracted generation portfolio, with a weighted-average term of approximately 24 years. For the Preferred Shareholders, DBRS views the Transaction as offering a number of positive aspects that reduce business risk:

(1) BREP would be a much larger and more diverse renewable generator than the Fund, with the addition of contracted assets in the United States and Brazil. BREP’s approximate $13 billion in total assets would be more than double the Fund’s current size (C$5.6 billion as of June 30, 2011). BREP’s generating capacity (approximately 4,400 MW) is also substantially larger than that of the current Fund (approximately 1,700 MW). As mentioned above, BREP is expected to generate $1.1 billion annual EBITDA and $550 million cash flow from operations, based on long-term average hydrology and production levels. The added geographic diversity would result in lower exposure to weak hydrology in any one area.

(2) Average contract prices for the Ontario generation operations, which represent approximately 50% of the Fund’s production, will increase from C$68/MWh to C$88/MWh.

(3) Counterparty exposure to BRPI will be reduced. Currently, BRPI is the counterparty on more than 70% of the Fund’s revenues (DBRS estimate); with the addition of the new assets, this concentration is expected to decline to the range of 50% to 60%.

(4) BREP is expected to have improved access to equity capital given its larger market capitalization and broader investor base.

However, the Transaction is expected to increase the financial risk from the perspective of the Preferred Shareholders as post-Transaction, the Preferred Shares would rank behind the C$1.1 billion of MTNs as opposed to behind the minimal levels of Fund-level debt that existed historically. Additionally, many of the U.S. and Brazilian generating assets have existing non-recourse project debt (as do many of the Fund’s current assets). DBRS views this negative effect as being balanced by the above-mentioned improvement in business risk resulting from the much larger, diverse contracted asset base and, therefore, as neutral from the perspective of an Equity Inc. Preferred Shareholder.

BAM Split Corp., issuer of BNA.PR.B, BNA.PR.C, BNA.PR.D and BNA.PR.E, has released its Semi-Annual Report to March 31, 2011.

Figures of interest are:

MER: (excluding dividends on preferred shares, issue costs and Class A Preferred Share redemption premium) 0.0%. You don’t see that number very often! A more precise calculation from the Income Statement shows that the expenses totalled $190,000 for the half, or about 2bp p.a. on assets.

The expenses are wel itemized, however, and are a delight for voyeurs. I found the Listing Fees of $97,000 and Rating Fees of $7,000 to be most interesting.

Average Net Assets: This must be calculated if we’re to find the second decimal point on the MER. There was share issuance approximately half-way through the period, so say [1,547,354 (beginning of period) + 1,670,440 (end of period)] / 2 = 1,609-million, about

Underlying Portfolio Yield: Given the fund’s portfolio composition and investment policy, deviations from the raw yield on BAM.A will not be material. This is currently 1.875%

Income Coverage: Dividends & Interest of $14.117-million less expenses (before amortization of issue costs) of $0.190-million is $13.927-million, to cover preferred dividends of $11.298-million is 123%.

Life & Banc Split Corp. has released its Semi-Annual Report to June 30, 2011.

Figures of interest are:

MER: 0.99% of the whole unit value.

Average Net Assets: We need this to calculate portfolio yield, but it’s very rough due to the issuance of $63-million worth of new units on February 22 via a warrant offering. Try [190.8-million (NAV, beginning of period) + 250.3-million (NAV, end of period)] / 2 = about 221-million

Underlying Portfolio Yield: Total income of 4,367,129, times two (semi-annual) divided by average net assets of 221-million is 3.95%.

Income Coverage: Net Investment Income was 3,076,865. Preferred Share Distributions were 3,582,177, but don’t count the 0.13125 dividends on the 3,341,143 preferreds issued in March totalling 438,525. So net preferred dividends were 3,143,652, so Income Coverage is 98%.

Brompton Split Bank Corp. has released its Semi-Annual Report to June 30, 2011.

Figures of interest are:

MER: 1.00% of the whole unit value.

Average Net Assets: We need this to calculate portfolio yield. [128.1-million (NAV, beginning of period) + 132.3-million (NAV, end of period)] / 2 = about 130-million.

Underlying Portfolio Yield: Total income of 2,580,360, times two (semi-annual) divided by average net assets of 130-million is 3.97%

Income Coverage: Net Investment Income of 1,910,961 divided by Preferred Share Distributions of 1,574,707 is 121%.