Category: Issue Comments

DBRS has announced that it:

has today downgraded the long-term rating of RONA inc. (Rona or the Company) to BBB (low) from BBB, maintaining the Negative trend. At the same time, DBRS has downgraded the Company’s Preferred Shares rating to Pfd-3 (low) from Pfd-3, also with a Negative trend.

On May 11, 2011, DBRS changed the trends on Rona’s ratings to Negative from Stable.
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Subsequent to that statement, Rona released its Q2 2011 results, which delivered same-store sales growth of -9.6%, overall revenue decline of -2.4% and EBITDA of $90 million (versus $133 million year-over-year) as the Company continued to engage in heavy promotional activity to spur growth. Yesterday, Rona released its Q3 2011 results, which delivered same-store sales growth of -5.1%. Overall revenue increased by 2.1% (due to the inclusion of acquisitions and new store openings), resulting in EBITDA of $105.4 million, an increase of 1.7% year-over-year. As such, combined with a moderate increase in debt from the previous year, lease-adjusted debt-to-EBITDAR for the last twelve months ended Q3 2011 increased to 3.1x.
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The deteriorating operating performance and weakened credit metrics result in a credit risk profile that is no longer consistent with a BBB rating. In terms of outlook, DBRS has maintained the Negative trend on the ratings as we believe meaningful recovery will remain challenging, since Rona is expected to continue facing intense competition in a highly promotional-based, consumer-challenged environment. The Company expects to generate some cost savings, which may help offset investment in pricing. Nevertheless, DBRS expects that any significant improvement in performance will be difficult to realize without same-store sales and margin stabilization over the near term.

If the Company’s plans and performance lead to signs of stabilization in same-store sales, operating income and key credit metrics (lease-adjusted debt-to-EBITDAR of approximately 3.0x) over the next year, the ratings outlook could stabilize. However, a continued and meaningful decline in same-store sales, operating income and key credit metrics over the course of 2012 could result in a downgrade to BB (high).

RON.PR.A was last discussed on PrefBlog in the post RON.PR.A: Ripe for Credit Downgrade?. RON.PR.A is tracked by HIMIPref™ but is relegated to the Scraps index on credit concerns.

DBRS reports that they have:

today assigned a rating of “A” with a Stable trend to the following TransCanada PipeLines Limited (TCPL) new debt issuance:

(1) Proposed $500 million 3.65% unsecured medium-term notes maturing on November 15, 2021.

(2) Proposed $250 million 4.55% unsecured medium-term notes maturing on November 15, 2041.

The issues are expected to settle on November 15, 2011.

The new debt will rank equally, except as to sinking funds, with all of TCPL’s existing and future senior unsecured debt. Net proceeds from the offering will be used to repay indebtedness and for general corporate purposes.

It’s odd that DBRS considers these to be “proposed” issues: the WSJ says it’s not only been done, but that the offering raised $250-million more than the minimum amount targetted and notes:

It also raised C$250 million from an offering of long bonds maturing November 2041. The issue was priced at 184 basis points over the Government of Canada 2041 benchmark to yield 4.587%. The bonds carry a coupon of 4.55%

TCA has two issues of preferred shares outstanding, TCA.PR.X and TCA.PR.Y, both PerpetualPremiums, both with a par value of $50, and both with annual dividends of $2.80, or 5.6%. Sadly, both are trading at levels of about $53, making the YTW scenario a call in the near term, so a comparison to long bonds is of dubious value.

By way of contrast, non-preferred-share-issuing Encana issued in USD at 5.15%:

DBRS has today assigned a rating of A (low) with a Negative trend to the following Encana Corporation (Encana) new debt issuance:

(1) Proposed $600 million 3.9% senior unsecured notes maturing November 15, 2021.

(2) Proposed $400 million 5.15% senior unsecured notes maturing November 15, 2041.

The issues are expected to settle on November 14, 2011.

The new debt will rank equally with all of Encana’s existing and future senior unsecured debt. Net proceeds from the offering will be used to pay down commercial paper indebtedness and for general corporate purposes.

Notes:
All figures in U.S. dollars unless otherwise noted

DBRS has commented:

RONA inc. (RONA or the Company) today announced that it has offered to purchase for cash, by way of two successive offers, up to $200 million of the aggregate principal amount of its 5.40% unsecured debentures due October 20, 2016.
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On May 11, 2011, DBRS revised RONA’s trend to Negative from Stable. That rating action reflected DBRS’s concern that weak operating performance and a challenging consumer environment may result in RONA’s credit risk profile deteriorating to a level that is no longer consistent with the current rating categories. DBRS’s concern was highlighted by continued weakness in same-store sales growth and the negative impact this was having on operating margins and income. At that time (end of Q1 2011), lease-adjusted debt-to-EBITDAR had increased to 2.82 times (x) from 2.55x a year earlier. DBRS stated that if RONA was successful in implementing a sustainable recovery, including improved operating performance (during the critical summer season, in particular) and prudent capital management that results in a lease-adjusted debt-to-EBITDAR ratio closer to the 2.5x level by the end of the year, it may consider changing the trend to Stable. On the other hand, a lack of improvement in sales, operating income and key credit metrics could result in a downgrade to the ratings before the end of the year.

Since then, RONA released its Q2 2011 results, which delivered same-store sales growth of -9.6%, overall revenue decline of -2.4% and EBITDA of $90 million (versus $133 million year-over-year) as the Company continued to engage in heavy promotional activity to spur growth. This performance resulted in the last 12 months lease-adjusted gross debt-to-EBITDAR of 3.1x.
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DBRS maintains its view that stabilization will require significant improvement in sales, operating income and significant capital conserving measures – including prudence with regards to capex, working capital management, dividend payouts, share repurchases and debt-financed acquisitions – for an extended period. Lack of improvement in sales, operating income, and key credit metrics in the near term could result in a ratings downgrade.

Brookfield Asset Management has announced:

the completion of its previously announced Preferred Shares, Series 30 issue in the amount of CDN$250 million. The offering was underwritten by a syndicate of underwriters led by CIBC, RBC Capital Markets, Scotia Capital Inc. and TD Securities Inc.

Brookfield Asset Management issued 10,000,000 Preferred Shares, Series 30 at a price of $25.00 per share, for aggregate gross proceeds of CDN$250,000,000. Holders of the Preferred Shares, Series 30 will be entitled to receive a cumulative quarterly fixed dividend yielding 4.80% annually for the initial period ending December 31, 2017. Thereafter, the dividend rate will be reset every five years at a rate equal to the 5-year Government of Canada bond yield plus 2.96%. The Preferred Shares, Series 30 will commence trading on the Toronto Stock Exchange on November 2, 2011 under the ticker symbol BAM.PR.Z.

The net proceeds of the issue will be used for general corporate purposes. The preferred shares may not be offered or sold in the United States or to U.S. persons absent registration or an applicable exemption from the registration requirements under the U.S. Securities Act.

BAM.PR.Z is a FixedReset, 4.80%+296 announced October 24; the $250-million size is an increase from the originally anticipated $175-million.

BAM.PR.Z traded 506,476 shares today in a narrow range of 24.94-08 before closing at 25.00-04, 33×51. Vital statistics are:

BAM.PR.Z will be tracked by HIMIPref™ and is assigned to the FixedReset index.

TD Split Inc. has announced:

that it has called 940,400 Class C Preferred Shares for cash redemption on November 15, 2011, representing approximately 31.25 % of the outstanding Class C Preferred Shares as a result of holders of 940,400 Class C Capital Shares exercising their special annual retraction rights. The Class C Preferred Shares shall be redeemed on a pro rata basis, so that holders of record of Class C Preferred Shares on the close of business on November 14, 2011 will have approximately 31.25 % of their Class C Preferred Shares redeemed. The redemption price for the Class C Preferred Shares will be $10.00 per share. Holders of Class C Preferred Shares that have been called for redemption will only be entitled to receive dividends thereon which have been declared but remain unpaid up to and including November 15, 2011.

In addition, holders of a further 111,100 Class C Preferred and Class C Capital Shares have deposited such shares concurrently for retraction on November 15, 2011. As a result, a total of 1,051,500 Class C Preferred and Class C Capital Shares, or approximately 33.70 % of both classes of shares currently outstanding will be redeemed.

Payments of cash owing as a result of shareholders having exercised their retraction privilege and the above notice of call on the Class C Preferred Shares, will be made by the Company on November 15, 2011.

TDS.PR.C was last mentioned on PrefBlog when it was issued in November 2010. TDS.PR.C is tracked by HIMIPref™ but is relegated to the Scraps index on credit concerns.

Atlantic Power has announced:

Atlantic Power Corporation (TSX: ATP) (NYSE: AT) (“Atlantic Power” or the “Company”) and Capital Power Income L.P. (TSX: CPA.UN) (“CPILP” or the “Partnership”) jointly announced today the results of their respective special meetings held to approve certain matters related to the previously announced plan of arrangement involving the proposed direct and indirect acquisition of all of the limited partnership units of CPILP by Atlantic Power (the “Arrangement”). The unitholders of CPILP who voted today at CPILP’s special meeting overwhelmingly approved the Arrangement (approximately 98.5% in favour) and the shareholders of Atlantic Power who voted at Atlantic Power’s special meeting overwhelmingly approved the issuance of approximately 31.5 million shares of Atlantic Power as partial consideration for the purchase price under the Arrangement (approximately 96.75% in favour).

The application to the Court of Queen’s Bench of Alberta to obtain the final court order approving the Arrangement is scheduled for the afternoon of November 1, 2011, as described in the management proxy circular and joint proxy statement dated September 28, 2011 and available on www.sedar.com. Assuming court approval is obtained and all other closing conditions have been satisfied or waived, it is currently anticipated that the Arrangement will be completed on or about November 5, 2011.

They announced shortly afterwards:

Atlantic Power Corporation (TSX: ATP) (NYSE: AT) (“Atlantic Power” or the “Company”) and Capital Power Income L.P. (TSX: CPA.UN) (“CPILP”) jointly announced today that the Court of Queen’s Bench of Alberta has granted the final order to approve the previously announced plan of arrangement under the Canada Business Corporations Act (the “Arrangement”) involving the proposed direct and indirect acquisition of all of the limited partnership units of CPILP by Atlantic Power.

Completion of the Arrangement is conditional on the satisfaction or waiver of other closing conditions. It is currently anticipated that the Arrangement will be completed on or about November 5, 2011, provided that all other closing conditions have been satisfied or waived.

As previously discussed on PrefBlog, DBRS warned of a three-notch downgrade to Pfd-4 upon consummation of the deal. S&P has not been quite so explicit, but they rate Atlantic Power’s senior debt at BB- (their recent issue of 7-year paper yielded 9.5%), so a massive downgrade from the current preferred share rating of BB+ / P-3(high) may be similarly expected.

Standard & Poor’s has announced:

Standard & Poor’s Ratings Services today said it corrected its Canadian scale ratings on two preferred issues of Canadian Imperial Bank of Commerce to P-2 (High) from P-1 (Low). On Sept. 16, we lowered our ratings on the two issues to ‘BBB+’ from ‘A-‘ because of their treatment by regulators as nonviable contingent capital instruments (see “Two Preferred Issues Of Canadian Imperial Bank of Commerce Downgraded To ‘BBB+’; All Other Ratings Affirmed,” published on RatingsDirect on the Global Credit Portal). However, because of an administrative error, we did not concurrently lower the Canadian scale preferred share ratings on these issues.

The downgrade on the global scale has been previously discussed on PrefBlog.

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