Category: Issue Comments

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.

Click for big

Click for Big

Click for Big

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:

Click for Big

Click for Big

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.
…
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.

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)