Category: Issue Comments

Brompton Group has announced:

At special meetings of Preferred and Class A shareholders of Brompton Equity Split Corp. (“BE”) and Dividend Growth Split Corp. (“DGS”) held today, shareholders approved special resolutions to amalgamate BE and DGS to form a new fund to be named Dividend Growth Split Corp. (“New DGS”). The effective date of the merger is expected to be May 18, 2011, subject to applicable regulatory approvals. The merger is expected to be implemented on a tax deferred basis to shareholders of BE and DGS, subject to the assumptions and qualifications outlined in the joint management information circular for the meetings.

At the meeting, the extension of the term for New DGS for up to 5 years beyond the scheduled termination date for DGS of November 30, 2014 and thereafter for successive terms of up to 5 years as determined by the New DGS Board of Directors was approved. Shareholders will be able to redeem either their Preferred Shares or Class A Shares of New DGS at Net Asset Value per Share prior to any such extension and New DGS will provide at least 60 days’ notice to Shareholders of the extended retraction date by way of press release.

In addition, as a result of the approval of the special resolutions, shareholders of BE will have the opportunity to redeem their shares of BE prior to the merger if they do not wish to participate in the merger. Shareholders wishing to redeem their BE shares may surrender such BE shares to Computershare Investor Services Inc. up until 5:00 p.m. (Toronto time) on April 15, 2011. Shares are held on behalf of beneficial holders through CDS Participants who may have earlier cut off times.

New DGS will have the same investment objectives, strategies and restrictions as DGS as well as substantially the same preferred share and class A share attributes. DGS invests on an equally weighted basis in a portfolio of 20 large capitalization Canadian equities that have among the highest dividend growth rates on the TSX.

Under the merger proposal, each issued and outstanding preferred share of BE will become one preferred share of DGS. Each issued and outstanding class A share of BE will become the number of class A shares of DGS determined by dividing the net asset value per class A share of BE by the net asset value per class A share of DGS, each calculated on April 28, 2011. In order to maintain the same number of DGS class A and preferred shares outstanding following the merger, class A shares or preferred shares of BE may be redeemed by BE on a pro-rata basis prior to the merger as outlined in the joint management information circular.

The plan was reported on PrefBlog in the post BE.PR.A and DGS.PR.A to Merge?. BE.PR.A is not tracked by HIMIPref™. DGS.PR.A is tracked by HIMIPref™ but is assigned to the Scraps index on credit concerns.

DBRS comments:

If the 1:1 ratio of preferred shares to class A shares outstanding is maintained, the merger will not result in a decrease in downside protection for existing DGS Preferred Shareholders. As a result, provided BE exercises its right to restore the 1:1 ratio, DBRS expects that the New DGS Preferred Shares will be assigned the same rating as the DGS Preferred Shares.

BCE Inc. has announced:

BCE Inc. will, on May 1, 2011, continue to have Cumulative Redeemable First Preferred Shares, Series AG outstanding if, following the end of the conversion period on April 21, 2011, BCE Inc. determines that at least two million Series AG Preferred Shares would remain outstanding. In such a case, as of May 1, 2011, the Series AG 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 an annual fixed dividend rate equal to 4.50%.

BCE.PR.G forms a Strong Pair with BCE.PR.H. BCE has announced previously that the date for providing notice of conversion is April 21. Most brokers will have an internal deadline a few days in advance of this date.

A Pairs Equivalency Calculator for determining the break-even Prime Rate when choosing between these two (and other) issues has been published on PrefBlog.

While the pundits have been tireless in warning us that Prime is set to increase, they are less voluble on the matter of how much and how fast. There is also the question of how corporate paper will react to the increase – I suggest there will be some effect, but it won’t be one-to-one.

BCE Ratchet Rate issues such as BCE.PR.H are trading in the $23-24 range and have been paying 100% of prime for quite some time. As noted in the prospectus:

From May 1, 2006, Öoating adjustable cumulative preferred cash dividends, if declared, will be payable monthly on the twelfth day of each month following the month of May 2006, with the annual Öoating dividend rate for the Ñrst month equal to 80% of Prime. The dividend rate will Öoat in relation to changes in Prime and will be adjusted upwards or downwards on a monthly basis whenever the Calculated Trading Price of the Series 18 Preferred Shares is $24.875 or less or $25.125 or more respectively. The maximum monthly adjustment for changes related to the Calculated Trading Price will be
4.00% of Prime. However, the annual Öoating dividend rate applicable in a month will in no event be less than 50% of Prime or greater than Prime.

Thus, if prime should increase dramatically, there is every possibility that the proportion paid on Prim will decline equally dramatically.

The break-even rate for the Ratchet Rate is equal to the new Fixed-Floater rate of 4.5% over the next five years, given that the prices are identical (if not, you can currently buy the cheaper and convert to the more expensive issue). To achieve this breakeven rate, Prime would have to increase by 300bp over the next five years, or 60bp per year. I consider that not only such an increase to be a bit on the high side but, as mentioned, the calculation of the break-even is dependent upon BCE.PR.H continuing to pay 100% of Prime, which is by no means assured in such a scenario.

Thus, I recommend that holders of BCE.PR.G hold on to their issue, and that holders of BCE.PR.H exercise their conversion rights. If I’m wrong and hyperinflation comes to Canada … fear not! You’ll get another chance to convert in 2016.

NewGrowth Corp. has announced:

the closing of its warrant offering. The gross proceeds of the offering totaled $91.5 million, representing 100% of the maximum available subscription amount.

The net proceeds of the offering will be invested in accordance with the investment objectives of the Company.

NewGrowth Corp. is a mutual fund corporation whose investment portfolio consists of publicly-listed securities of selected Canadian chartered banks, telecommunication, pipeline and utility issuers. The Capital Shares and Preferred Shares of NewGrowth Corp. are all listed for trading on The Toronto Stock Exchange under the symbols NEW.A and NEW.PR.C respectively.

NEW.PR.C was last mentioned on PrefBlog when it was added to the HIMIPref™ database. It is currently assigned to the SplitShares index.

Manulife Asset Management Limited has announced:

that securityholders of the Corporation did not approve the extension of the termination date of the Class A Shares and Preferred Shares of the Corporation for an additional term of five years from May 31, 2011 to May 31, 2016. The Corporation will, therefore, terminate effective May 31, 2011 in accordance with its constating documents. On termination, shares of the Corporation will be redeemed and, following the payment or reservation for payment of all liabilities of the Corporation, the remaining property of the Corporation will be distributed to the Corporation’s shareholders in accordance with the terms of the Corporation’s constating documents. Shareholders need not take any action to receive the final distribution proceeds on termination of the Corporation.

This constitutes a rare victory of preferred shareholders over abusive management-inspired shareholder votes, for which the main cheerleaders were the directors:

• Paul Lorentz
• Sheila Hart
• Jennifer Mercanti
• Warren Law

Preferred share investors should exercise greater than usual caution before purchasing preferred shares issued by any corporation which includes any of these persons as directors.

ASC.PR.A was last mentioned on PrefBlog in the post ASC.PR.A Rigamarole Extraordinarily Abusive. ASC.PR.A is tracked by HIMIPref™, but is relegated to the Scraps index on credit concerns.

Brompton Group has announced:

the closing of warrant offerings for four of its funds under
management.

LBS / LBS.PR.A sold 3.3-million units for gross proceeds of $63.0-million.

LBS.PR.A was last mentioned on PrefBlog when I noted that the warrants were in the money. LBS.PR.A is tracked by HIMIPref™ but is relegated to the Scraps index on credit concerns.

C.A. BANCORP CANADIAN REALTY FINANCE CORPORATION has released an Information Circular:

You are invited to the Special Meeting of holders of Class A shares and Preferred shares, Series 1 (collectively, the “Shareholders”) of C.A. Bancorp Canadian Realty Finance Corporation (the “Corporation”) to be held at the offices of the Corporation, The Simpson Tower, 401 Bay Street, Suite 1600, Toronto, Ontario, M5H 2Y4 on April 25, 2011 at 2:00 P.M. (the “Meeting”). The purpose of the Meeting is to provide Shareholders with the opportunity to consider and pass a special resolution to approve the following proposed transaction:

• (a) the acquisition of all of the issued and outstanding shares of C.A. Bancorp Ltd. (the “Manager”) by Green Tree Capital Management Corp. (“Green Tree”) (the “Change of Control”);
• (b) an amendment to the commitment agreement dated January 31, 2008 between C.A. Bancorp Inc. (the “Parent”) and the Corporation (the “Commitment Agreement”) to permit the Commitment Agreement’s assignment from the Parent to Green Tree and the release of the Parent from any further obligations; and
• (c) an amendment to the management agreement dated July 6, 2009 between the Manager and the Corporation (the “Management Agreement”) to provide that the Manager is not entitled to payment of a termination fee where the Management Agreement is terminated by the Corporation in the context of a material breach or default.

Approval of the proposed transaction will result in the transfer of control of the Manager from the Parent to Green Tree, an Ontario corporation established for the sole purpose of entering the proposed transaction.

If successful, portfolio management will be contracted to Quantus:

Jamie Spreng formed Quantus Investment Corp. (formerly Spreng Asset Management Inc.) in April 2010. The firm became registered as a portfolio manager and investment fund manager in July 2010. Its offices are located at 36 Toronto Street, Suite 1150 in Toronto, Ontario. The firm subsequently added the registration category of exempt market dealer at the end of 2010. Mr. Spreng acts as Chief Executive Officer, Chief Compliance Officer, Chief Operating Officer, and Ultimate Designated Person for Quantus Investment Corporation. For Quantus, the investment objective is to maximize risk-adjusted returns. The Quantus Funds only charge a performance fee, there is no management fee. Mr. Spreng’s objective is to generate steady, consistent returns for clients pursuant to various hedge fund products.

Super. So the mortgages will be run by a hedge fund specialist with zero track record.

I mocked this issue at its genesis, due largely to the huge leverage. The leverage problem was addressed with a warrants issue and Asset Coverage is now a much more respectable 1.8-:1 based on the December 2010 Financials. So far so good.

But look at the assets! 36.4-milion in mortgages, 18.4-million in cash and 6.4-million in publicly traded securities, including preferred shares and junk bonds! The circular explains:

the uncertainty relating to the ownership of the Manager has depressed the number and quality of new lending opportunities for the Corporation, resulting in the Board’s decision to suspend quarterly distributions on the Class A Shares;

The preferreds have a rather unusual NAV Test:

Pursuant to the Commitment Agreement dated January 31, 2008 between the Parent and the Corporation, the Parent has agreed that, for so long as there are Preferred Shares of the Corporation outstanding, if the Adjusted Net Tangible Asset Value2 is less than 111% of the Original Preferred Share Issue Price3 as at the end of such quarter, the Parent will subscribe for, or arrange for subscriptions for, additional Class A Shares in an amount at least equal to the deficiency, within 10 business days following the end of the quarter (or if a deficiency or increased deficiency is discovered, including as a result of an audit or a review of the financial statements of the Corporation by its auditors, within 10 business days of confirming the amount of such deficiency). If the Parent defaults in its obligation then:

• (a) under the articles of the Corporation:
• (i) steps shall be initiated to redeem the Preferred Shares, the funding of which would occur pro rata as funds become available to fund such redemptions;
• (ii) the Preferred Shares become voting;
• (iii) the Class A Shares and Class J Shares become non-voting;
• (iv) the Board of Directors shall call a meeting of shareholders to elect a new Board of Directors, a majority of whom must be independent of the Parent and its affiliates; and
• (v) the Board of Directors shall appoint a qualified firm or individual to supervise an orderly liquidation of the Corporation;

and from the prospectus:

No distributions will be paid on the Class A Shares if (i) the distributions payable on the Preferred Shares are in arrears, or (ii) after the payment of the distribution by the Corporation the Adjusted Net Tangible Asset Value of the Corporation is less than 111% of the Original Preferred Share Issue Price. See ‘‘Description of Share Capital — Description of Class A Shares’’.

Well, I just plain don’t like this issue and recommend that preferred shareholders vote against the plan. A change in recommendation will be dependent upon:

• The company should obtain a credit rating for the preferreds
• The company should present a credible plan for funding the redemption of the preferreds (e.g., a credit line with a major bank).
• The NAV test should be more stringent.

BCE has mailed BCE.PR.H Conversion Notice:

Holders of BCE Inc. Series AH Preferred Shares have the right to convert all or part of their shares, effective on May 1, 2011, on a one-for-one basis into Cumulative Redeemable First Preferred Shares, Series AG of BCE Inc. (the “Series AG Preferred Shares”).
…
Registered holders electing to convert all or part of their Series AH Preferred Shares into Series AG Preferred Shares must complete and sign the conversion panel on the back of their Series AH Preferred Share certificate and deliver it, at the latest by 5:00 p.m. (Eastern time) on April 21, 2011, to one of the following addresses…

BCE.PR.H is the ratchet-rate preferred:

As of May 1, 2011, the Series AH Preferred Shares will pay a monthly floating dividend based on a dividend rate that will fluctuate over time between 50% and 100% of the Prime rate (“Prime”) for each month computed in accordance with the articles of BCE Inc. Accordingly, from May 1, 2011, the holders of Series AH Preferred Shares will continue to be entitled to receive floating adjustable cash dividends, as and when declared by the Board of Directors of BCE Inc., to be paid on the twelfth day of each month, commencing with the month of June 2011. The dividend rate will be adjusted upwards or downwards on a monthly basis by an Adjustment Factor (as described below) whenever the Calculated Trading Price, being the market price of the Series AH Preferred Shares computed in accordance with the articles of BCE Inc., is $24.875 or less or $25.125 or more, respectively.

Last night’s close was 23.00-24; it has been paying 100% of Prime for quite some time now.

There is also a conversion notice for BCE.PR.G:

Holders of BCE Inc. Series AG Preferred Shares have the right to convert all or part of their shares, effective on May 1, 2011, on a one-for-one basis into Cumulative Redeemable First Preferred Shares, Series AH of BCE Inc. (the “Series AH Preferred Shares”).
…
Registered holders electing to convert all or part of their Series AG Preferred Shares into Series AH Preferred Shares must complete and sign the conversion panel on the back of their Series AG Preferred Share certificate and deliver it, at the latest by 5:00 p.m. (Eastern time) on April 21, 2011, to one of the following addresses…
…
As of May 1, 2011, the Series AG Preferred Shares, should they remain outstanding, 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 determined by BCE Inc. on April 6, 2011 but which shall not be less than 80% of the five-year Government of Canada Yield (as defined in BCE Inc.’s articles) compounded semi-annually and computed on April 6, 2011 by two investment dealers appointed by BCE Inc.. The annual dividend rate applicable to the Series AG Preferred Shares will be published on April 8, 2011 in the national edition of The Globe and Mail, the Montreal Gazette and La Presse and will be posted on BCE Inc.’s website at www.bce.ca.

BCE.PR.G closed last night at 23.13-28. It currently pays 4.35% of par.

It’s too early to tell yet which of the two issues will be better as of May 1, but I’ll keep you posted!

Yellow Media has announced:

that it has reached a definitive agreement to sell Trader Corporation (“Trader”) to funds advised by Apax Partners for a purchase price consideration of $745M. Closing of the contemplated transaction is expected to occur in June 2011, subject to regulatory approvals and other customary conditions.
…
The purchase price consideration of $745M, subject to working capital and other adjustments, will be payable in cash at closing. The transaction has fully committed financing, consisting of equity provided by Apax Partners and financing commitments provided by RBC Capital Markets. The proceeds from this divestiture will be largely used to reduce indebtedness and for general corporate purposes.

Concurrent with this announcement, Standard & Poor’s and DBRS confirmed their credit ratings for Yellow Media Inc.

DBRS has announced that it:

has today confirmed the ratings of Yellow Media Inc. (Yellow Media or the Company), including its Medium-Term Notes at BBB (high) and Commercial Paper at R-1 (low), following the announcement that it has reached an agreement with Apax Partners to sell the automotive assets of Trader Corporation (Trader) for a purchase price of approximately $745 million. The agreement includes the sale of Trader’s print and online automotive businesses and its 30% stake in Dealer.com (results were consolidated). The trends are Stable.

The confirmation of Yellow Media’s ratings reflects the following:

(1) An acceleration of the Company’s goal to improve its financial risk profile as DBRS expects cash proceeds of approximately $745 million from the sale of Trader’s automotive businesses (the majority of its Vertical Media segment) to be mainly used to reduce debt.

(2) Its leading position in Directories, the Company’s principal segment, and the significant risks this segment continues to face as it transforms itself from a print-placement organization into an online/digital media and marketing service provider.

I would not ordinarily consider an affirmation to be worthy of comment, but there is a story in today’s Globe by John Heinzl titled Yellow Media’s dividend under the microscope:

Since peaking at more than $17 in 2006, the shares have plunged nearly 70 per cent, closing Thursday at $5.29. Adding to the pain, the directories publisher has chopped its dividend twice as it grappled with the financial crisis, its transition from print to digital media and a recent conversion from an income trust to a corporation.

Now some investors are asking: Is another dividend cut in the cards? The sky-high yield of 12.2 per cent isn’t a comforting sign.
…
The company doesn’t have a lot wiggle room with its credit ratings. Standard & Poor’s rates Yellow Media’s senior unsecured debt at triple-B-minus, which is one notch above speculative status. DBRS rates it triple-B (high), which is three notches above speculative.

Underlining the dangers, S&P has said it would like to see Yellow Media reduce its net debt by $450-million this year and that “downward pressure on the ratings would likely come from a failure to reduce debt levels as noted … as well as a failure to improve adjusted debt leverage as targeted.”

The company has been repurchasing its preferred shares:

Under its normal course issuer bid, Yellow Media Inc. intends to purchase for cancellation up to but not more than 1,174,691 and 720,000 of its outstanding preferred shares, Series 1 and preferred shares, Series 2, respectively, representing 10% of the public float of each series of preferred shares outstanding on June 8, 2010

During 2010, Yellow Media Inc. purchased for cancellation 635,714 preferred shares, Series 1 for a total cash consideration of $15.8 million including brokerage fees at an average price of $24.78 per share and 501,490 preferred shares, Series 2 for a total cash consideration of $10.4 million including brokerage fees at an average price of $20.79 per share. The carrying value of these preferred shares, Series 1 and Series 2 was $15.7 million and $12.3 million, respectively. A gain of $1.8 million was recorded in net earnings in financial charges.

Since June 11, 2009, the total cost of repurchasing preferred shares amounted to $39.9 million, including brokerage fees.

The company has four public issues of preferred shares outstanding:

YLO was last mentioned on PrefBlog when the ticker changed from YPG.

Update: Tom Kiladze of the Globe comments in Yellow Media buys some breathing room:

As for the deal metrics, the assets are getting sold for $745-million, but all together they were acquired for about $1.2-billion, according to Desjardins Securities analyst Maher Yaghi. He also noted that the divested assets generated about $69-million of EBITDA last year. That translates into a 10.8 times multiple for the sale, better than Yellow Media’s current market multiple of 6.7 times.

Yellow Media also indicated the Trader Corp. assets were sold for about 10 times EV to EBITDA, equating to $600-million, while the Dealer.com stake was sold for about 15 times, amounting to the remaining $145-million of the total price, Mr. Yaghi noted.

Top 10 Split Trust has announced:

that the Fund will effect a partial redemption of its preferred securities (“Preferred Securities”) in order to maintain an equal number of Preferred Securities and capital units (“Capital Units”) of the Fund outstanding. The partial redemption of Preferred Securities is being made in connection with the recent approval by holders of the Capital Units and the Preferred Securities (collectively, the “Securityholders”) of a proposal to extend the term of the Fund for an additional five-year term until March 31, 2016 and for automatic successive five-year terms thereafter.

Pursuant to the special retraction right granted to Securityholders in connection with the extension of the Fund, 284,227 Preferred Securities and 741,330 Capital Units were surrendered for retraction. In order to maintain an equal number of Preferred Securities and Capital Units, the Fund will redeem an aggregate of 457,103 Preferred Securities on a pro rata basis from all holders of record of Preferred Securities on March 31, 2011 (the “Repayment Date”), representing approximately 19.8% of the issued and outstanding Preferred Securities. Each Preferred Security that is redeemed pursuant to the partial redemption will be redeemed at a price equal to $12.50, being the principal amount per Preferred Security, plus all accrued and unpaid interest thereon (the “Repayment Price”). The Repayment Price will be paid to holders whose Preferred Securities are redeemed by the Fund within 10 business days following the Repayment Date.

I don’t know how I missed the reorg, but I did!

On February 15, the fund announced:

that the Board of Directors of Mulvihill Capital Management Inc. (“MCM”), the manager of the Fund, has approved a proposal, subject to securityholder approval, to extend the term of the Fund for five years beyond its scheduled termination date of March 31, 2011, and for successive five-year terms after March 31, 2016. If the extension is approved, holders of capital units (“Capital Units”) and preferred securities (“Preferred Securities”) of the Fund (“Securityholders”) will be given a special right to redeem their Capital Units or Preferred Securities at net asset value (“NAV”) per Capital Unit or at the repayment price per Preferred Security on March 31, 2011.
…
The Fund is also proposing to: (i) provide a special redemption right to enable holders of Capital Units and Preferred Securities to retract their securities on March 31, 2011 on the same terms that would have applied had the Fund retracted or repaid all Capital Units and Preferred Securities in accordance with the existing terms of such securities; (ii) change the monthly retraction prices for the Capital Units such that monthly retraction prices are calculated by reference to market price in addition to NAV and to change the notice period and payment period for the exercise of such rights and the payment of the retraction amount relating thereto; and (iii) consolidate the Capital Units or redeem the Preferred Securities on a pro rata basis, as the case may be, in order to maintain the same number of Capital Units and Preferred Securities outstanding.

The meeting date was then changed to March 21. The reorg was approved:

Top 10 Split Trust (the “Fund”) is pleased to announce that holders of capital units (“Capital Units”) and holders of preferred securities (“Preferred Securities”) of the Fund (collectively, the “Securityholders”) have approved a proposal to extend the term of the Fund for five years beyond its scheduled termination date of March 31, 2011, and for automatic successive five-year terms after March 31, 2016.
…
Holders of Preferred Securities have the opportunity to benefit from: (i) fixed quarterly cash interest payments equal to 6.25% per annum on the $12.50 principal amount of a Preferred Security and (ii) an attractive five-year term with automatic successive five-year term extensions after March 31, 2016.

NAV is 17.28 as of March 17 giving Asset Coverage of 1.4-:1. TXT.PR.A was last mentioned on PrefBlog when the rating of Pfd-4(high) was withdrawn by DBRS at the company’s request. TXT.PR.A is not tracked by HIMIPref™.