Category: Issue Comments

Moody’s has announced:

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

RATINGS RATIONALE

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

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

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

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

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

DBRS commented:

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

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

S&P remarked:

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

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

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

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

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

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

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

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

Figures of interest are:

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

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

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

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

BCE Inc. has announced (emphasis from original):

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

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

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

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

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).
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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.

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™.