Category: Issue Comments

Assiduous Reader Cal alerted me in the comments to the prior post on the ASC term extension proposal that the company, AIC Global Financial Split Corp., which is now flying the banner of Manulife Investments has – finally – posted the Management Information Circular on SEDAR.

The plan is extraordinarily abusive and the directors

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

should be extremely ashamed of themselves.

There is, as projected in the comments to the notification of intent, no “sweetener” to the NAV that might convince a rational preferred shareholder to vote in favour. The current asset coverage is 1.1-:1, a very low figure that means a lot of immediate downside risk is being borne by the preferred shareholders.

Readers will remember the recent proposal to extend term for PIC.PR.A which was eventually approved. I didn’t think much of that plan either, given the distribution policy and the low level of asset coverage (which was nevertheless higher than is currently the case with ASC.PR.A), but the promoter, Mulvihill, acted with all the integrity one might wish: they provided that in the case of the term extension proceeding, there would be a special retraction right, effective on the date of the original maturity, whereby shareholders could bail out if they didn’t like the prospects going forward. This resulted in a large retraction, which wound up improving the credit quality of the preferred shares significantly. This was well done: bravo Mulvihill!

There is no such privilege being offered to holders of ASC.PR.A.

Instead, security holders are treated to a page and a half of unfamiliar gobbledygook regarding their Rights of Dissent:

Pursuant to the provisions of Section 185 of the Business Corporations Act (Ontario) (“OBCA”), Securityholders are entitled to dissent and be paid the fair value of their shares if they object to the Special Resolution and the Special Resolution becomes effective.
…
In order to dissent, a Securityholder must send a written objection (an “Objection Notice”) to the Special Resolution to the Corporation at Proxy Tabulation, P.O. Box 2800 Stn LCD Malton, Mississauga, Ontario L5T 2T7 on or before the date of the Special Meeting.
…
Within 10 days following the date of the Special Meeting, the Corporation will deliver to each Securityholder who has filed an Objection Notice in respect of the Special Resolution, at the address specified for such purpose in such Securityholder’s Objection Notice, a notice stating that the Special Resolution has been adopted (the “Corporation Notice”).
…
Within 20 days after receipt by a Securityholder of the Corporation Notice or, if no Corporation Notice is received by the dissenting Securityholder, within 20 days after such Securityholder learns that the Special Resolution has been adopted, the dissenting Securityholder is required to send a written notice to the Corporation, at the address set forth in the preceding paragraph, containing the Securityholder’s name and address, the number of shares held in respect of which such Securityholder dissents and a demand for payment of the fair value of such shares (the “Demand for Payment”). Within 30 days thereafter, the Securityholder must send the share certificates representing such shares to the Corporation. Such share certificates will be endorsed by the Corporation with a notice that the holder is a dissenting Securityholder and will be returned to the dissenting Securityholder. A Securityholder who fails to forward share certificates within the time required loses any right to make a claim for payment of the fair value of such Securityholder’s shares.
…
Not later than seven days after the later of the day on which the action approved by the Special Resolution becomes effective and the date the Corporation receives the Demand for Payment, the Corporation will send to each dissenting Securityholder a written offer (the “Offer to Pay”) to pay for the shares which are the subject of the Objection Notice in an amount considered by the Board of Directors of the Corporation to be the fair value of such shares as of the close of business on the day before the day on which the action approved by the Special Resolution becomes effective accompanied by a statement showing how the fair value was determined.
…
If the Corporation fails to make the Offer to Pay or a dissenting Securityholder fails to accept the Offer to Pay within the time limit prescribed therfor, the Corporation may apply under the OBCA to a court to fix a fair value for the shares within 50 days after the day on which the action approved Special Resolution becomes effective or within such further period as the court may allow.
…
Provided that the Special Resolution becomes effective, a Securityholder who complies with each of the steps required to dissent effectively is entitled to be paid the fair value of the shares in respect of which such Securityholder has dissented. Such fair value as determined by the court may be more than, less than or equal to the consideration to be received under the Offer to Pay.

The foregoing is a summary only of the rights of dissenting Securityholders. Any Securityholder desiring to exercise a right to dissent should seek legal advice since failure to comply strictly with the provisions of Section 185 of the OBCA may prejudice that right.

Look at all the backing-and-forthing! Dissenters have to send at least three official notices to the compay: first the Objection Notice, then the Demand for Payment, then – if you’re lucky – the acceptance of the Offer to Pay. Ridiculous!

The repeated references to share certificates are a disgraceful attempt to confuse shareholders such as my good friend Cal: there aren’t any:

As a result of the Corporation issuing shares in book-entry form only, CDS is the sole registered Securityholder of each of the shares.

The only good thing one can say about this is that at least the corporation is not adding injury to insult by paying the expenses itself:

All external costs incurred by the Corporation in connection with the Extension will be borne by the Manager. Such external costs are estimated to be $50,000.

On the other hand:

Management fees in the amount of $127,438 were paid by the Corporation to the Manager during the year ended December 31, 2010.

Of course, we’re not told what the “internal” costs might be, so don’t break out the champagne and party hats just yet!

I’ll probably catch some flak due to my characterization of the plan as “abusive”. After all, some might say, since the Manager is paying the $50,000 ticket, all that’s happening is the preferred shareholders are being asked to vote. A no vote on the resolution will halt the plan at no cost to them, either directly or in the form of reduced Asset coverage (unless, of course, there are significant “internal” costs not disclosed in the Circular).

To which I say: piffle. Most preferred shareholders are not financial professionals and most of their advisors – being stockbrokers – aren’t much good. Those who take the view that this process is perfectly fair are in the same moral position as those who convince grandma to pay $20,000 for new aluminum siding.

A term extension will come with very high risk to preferred shareholders. Hymas Investment Management Inc. strongly recommends that preferred shareholders:

• Vote NO!
• Exercise rights of dissent

Specific details of who must do what by what date in order to dissent will – probably – vary from broker to broker. Preferred shareholders should contact their brokers well before the meeting (“to be held on Monday, April 4, 2011 at 10:00 a.m.”) to ensure their rights of dissent are not inadverdently lost. Note that:

If you are a holder of Class A Shares or Preferred Shares … you should submit a voting instruction form … well in advance of the 5:00 p.m. (Toronto time) deadline on April 1, 2011 for deposit of proxies.

Specific dates will vary from broker to broker, but will generally be at least a day or two in advance of Friday April 1.

Update, 2011-3-1: Note that the prospectus (available on SEDAR, dated May 18, 2004, allows for:

Annual Concurrent Retraction. A holder of a Preferred Share may concurrently retract an equal number of Preferred Shares and an equal number of Class A Shares on the Retraction Date in May of each year, commencing on the Retraction Date in May in 2005, at a retraction price equal to the NAV per Unit on that date. To be retracted in this manner, the Preferred Shares and Class A Shares must both be surrendered for retraction at least five Business Days prior to the Retraction Date in May for the applicable year. Payment of the proceeds of retraction will be made on or before the eighth Business Day following the Retraction Date in May for the applicable year.

However, the Capital Units are currently quoted at 1.45-50, well above their intrinsic value; additionally, preferred shareholders will have to incur commission expenses and take exposure to Whole Units in order to take advantage of this provision. The preferreds are now at 9.45-89.

Allbanc Split Corp has announced:

that it has called 244,293 Preferred Shares for cash redemption on March 10, 2011 (in accordance with the Company’s Articles) representing approximately 23.003% of the outstanding Preferred Shares as a result of the special annual retraction of 244,293 Capital Shares by the holders thereof. The Preferred Shares shall be redeemed on a pro rata basis, so that each holder of Preferred Shares of record on March 9, 2011 will have approximately 23.003% of their Preferred Shares redeemed. The redemption price for the Preferred Shares will be $26.75 per share.

Holders of Preferred Shares that are on record for dividends but have been called for redemption will be entitled to receive dividends thereon which have been declared but remain unpaid up to but not including March 10, 2011.

Payment of the amount due to holders of Preferred Shares will be made by the Company on March 10, 2011. From and after March 10, 2011 the holders of Preferred Shares that have been called for redemption will not be entitled to dividends or to exercise any right in respect of such shares except to receive the amount due on redemption.

Allbanc Split Corp. is a mutual fund Corporation created to hold a portfolio of publicly listed common shares of selected Canadian chartered banks. Class A Capital Shares and Class B Preferred Shares of Allbanc Split Corp. are listed for trading on The Toronto Stock Exchange under the symbols ABK.A and ABK.PR.B respectively.

National Bank has announced:

that it intends to make an offer to purchase (the “Offers”) all of the issued and outstanding Non-Cumulative 5-Year Rate Reset First Preferred Shares Series 21 (the “Preferred Shares Series 21”), all of the issued and outstanding Non-Cumulative 5-Year Rate Reset First Preferred Shares Series 24 (the “Preferred Shares Series 24”), and all of the issued and outstanding Non-Cumulative 5-Year Rate Reset First Preferred Shares Series 26 (the “Preferred Shares Series 26”, and together with the Preferred Shares Series 21 and the Preferred Shares Series 24, the “Preferred Shares”).

Holders of the Preferred Shares (the “Shareholders”) will have the opportunity to tender all or a portion of their Preferred Shares for the applicable purchase price payable in cash. The purchase price for each of the Preferred Shares is as follows:

(i) $26.81 per Preferred Share Series 21, representing a 2.8% premium over the February 23, 2011 closing price;

ii) $28.03 per Preferred Share Series 24, representing a 2.5% premium over the February 23, 2011 closing price;

(iii) $28.03 per Preferred Share Series 26, representing a 2.4% premium over the February 23, 2011 closing price.

In addition, Shareholders of record as of April 8, 2011 (including Shareholders who tender their Preferred Shares under the Offers) will also be entitled to the regularly scheduled dividend payment on May 15, 2011.

The Bank believes that the Offers provide an opportunity for holders of Preferred Shares to realize all or a portion of their investment at a premium to the market prior to the announcement of the Offers. The Bank also believes that the Offers represent an appropriate use of its available cash and is part of prudent capital management practice by the Bank in accordance with its capital plan to meet regulatory requirements.

The take up of the Preferred Shares tendered pursuant to the Offers will be financed from the Bank’s existing cash reserves. Preferred Shares acquired pursuant to the Offers will be cancelled. The Offers are not subject to any minimum number of Preferred Shares being deposited but are subject to customary conditions, including obtaining all regulatory approvals required.

Shareholders can tender their Preferred Shares in accordance with the terms and subject to the conditions set forth in the Offers to be contained in an issuer bid circular which will be filed with applicable Canadian securities regulators and mailed to Shareholders. The Bank expects to mail the circular on or about March 4, 2011. The Bank advises its Shareholders to read the circular when it is available, as it contains important information. The circular will also be available at www.sedar.com.

Computershare Investor Services Inc. will serve as the depositary. It is expected that the Offers will expire at 5:00 p.m. (Montréal time) on April 11, 2011 or at such later time and date to which the Offers may be extended by the Bank.

Well, you can’t tell your players without a programme!

I realize that as a financial professional, I am at this point expected to stroke my beard wisely and murmer that I was expecting this …. but, I confess, this has got me flummoxed. The bid is extraordinarily rich , as shown by the yields to call (calculated as of the expiration date, April 11, at the Offer Price, to the first par call, holders at that point not getting the May dividend (the estimated ex-Dividend date is April 5, and the offer is quite clear that those who tender will get the dividend.

Clearly, given the yields to par call, holders should tender. The Issuer Bid is clearly related to the issues’ eventual loss of Tier 1 status. But questions remain: what’s the rush? and what about their straight perpetuals, NA.PR.K, NA.PR.L and NA.PR.M ?

Update: Note that an error in the yield in the table in the original posting has now been corrected. Thanks to Assiduous Reader MC for alerting me.

Update: OK, I’ve come up with two possible rationales, neither of which I find particularly convincing:

1) They have, and expect to have, way more capital than necessary and also have a lot more available cash than they can profitably deploy, currently sitting in Money Market. They are therefore quite happy to swap their money market instruments, yielding 1%+ as interest, for FixedResets yielding about 2% dividend.

2) They have decided to try to issue a FixedReset with an NVCC clause at a very low coupon/reset in the second half of April. They are therefore trying to get everybody feeling happy about their wonderful NA preferred share investment.

Updated, 2011-2-25: Assiduous Reader blue notes a better reason in the comments. The webcast conference call disclosed that the premium will be a direct hit to retained earnings, bypassing the P&L statement, and the gross preferred dividends saved will be paid out as common dividends.

Update, 2011-2-25, Later: It seems to me that there is a strong possibility that this is accounting gimmickry that is ultimately deleterious to the best interests of the common shareholders. Their 2010 Annual Report discloses an effective tax rate of 16.7% in 2010 compared to 21.7% in 2009. If we estimate the effective tax rate at 20% going forward, then the 2.7% pre-tax financing cost disclosed in conference calls becomes 2.16% after tax; compared to the 1.98% they are saving by buying the preferreds at the given prices.

There are a lot of moving parts to this simple calculation, though (marginal tax rate? tax effect of buying at a premium out of retained earnings?) and I’m certainly not an expert on bank taxation. Further comment are welcome.

Update, 2011-2-28: National Bank Investor Relations states in an eMail:

For information purpose our average statutory tax rate is approximatly 30%. The effective tax rate is affected by non taxable revenues such as dividends from Canadian corporations. To analyse the after tax cost of
funding it is more appropriate to use the statutory tax rate.

A 30% tax rate on a financing cost of 2.7% makes the after-tax cost of funds 1.89% – giving the transaction a slightly positive Net Present Value on an after-tax basis … subject to any peculiarities the purchase premium might have on the taxation of the bank.

Manulife Asset Management Limited has announced:

that the Corporation’s board of directors has reviewed the terms of a proposed 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 and has determined that the extension is in the best interests of the Corporation and its securityholders and unanimously recommends that securityholders vote in favour of such extension.

The proposed extension would provide securityholders the potential to benefit from a more complete market recovery of the Corporation’s net asset value.

A special meeting of holders of the Class A Shares, Preferred Shares and Class J Shares of the Corporation (the “Securityholders”) has been called and will be held on April 4, 2011 to consider and vote upon the extension (the “Special Meeting”). Securityholders of record of the Corporation at the close of business on February 18, 2011 are entitled to receive notice of and vote at the Special Meeting. Further details of the extension are outlined in a management information circular that has been delivered to Securityholders in connection with the Special Meeting.

Asset coverage of the preferreds is currently 1.1+:1.

The Management Information Circular is not yet available on SEDAR.

As previously discussed, Manulife is disgracing itself by engaging in such an egregious form of shareholder abuse. With such skimpy first-loss protection, no preferred shareholder in his right mind will vote in favour of the deal.

Vote No.

Rona Inc. has announced:

that it has closed its previously announced bought deal public offering of Cumulative 5 Year Rate Reset Series 6 Class A Preferred Shares (the “Series 6 Class A Preferred Shares”) at a price of $25.00 per Series 6 Class A Preferred Share purchased by a syndicate of underwriters led by National Bank Financial Inc. and BMO Capital Markets, acting as joint bookrunners. The offering results in a total of 6,000,000 Series 6 Class A Preferred Shares being issued today by RONA for gross proceeds of $150,000,000. The underwriters have an over-allotment option to purchase up to an additional 900,000 Series 6 Class A Preferred Shares at a price of $25.00 per Series 6 Class A Preferred Share, exercisable for a period of 30 days from closing on the same terms and conditions as the offering. If the over-allotment option is exercised in full, the total gross proceeds to RONA will be $172,500,000.

RON.PR.A is a FixedReset, 5.25%+265, announced February 1. The issue traded 454,407 shares today in a range of 25.10-35 before closing at 25.13-15, 2×3.

Vital Statistics are:

RON.PR.A will be tracked by HIMIPref™ but relegated to the Scraps index on credit concerns.

GMP Capital has announced:

the completion of its offering of 4,000,000 Cumulative 5-Year Rate Reset Preferred Shares, Series B ( the “Series B Shares”) of GMP at a purchase price of $25.00 per Series B Share, for aggregate gross proceeds of $100,000,000. The Series B Shares are expected to commence trading on the Toronto Stock Exchange on February 22, 2011 under the trading symbol “GMP.PR.B”.

The offering was underwritten on a bought deal basis by a syndicate co-led by National Bank Financial Inc., GMP Securities L.P. and Scotia Capital Inc., that included BMO Nesbitt Burns Inc., CIBC World Markets Inc., RBC Dominion Securities Inc., Canaccord Genuity Corp., Macquarie Capital Markets Canada Ltd., Desjardins Securities Inc., Dundee Securities Ltd., Haywood Securities Inc., HSBC Securities (Canada) Inc., Raymond James Ltd. and Wellington West Capital Markets Inc.

GMP has granted to the underwriters an over-allotment option, exercisable for a period of 30 days following closing, to purchase up to an additional 600,000 Series B Shares which, if exercised in full, would increase the gross proceeds to $115,000,000.

GMP intends to use the net proceeds from the offering for general corporate purposes, which will include the redemption of the senior unsecured notes issued on November 1, 2006 by Griffiths McBurney L.P., an indirect wholly-owned subsidiary of GMP, in the aggregate principal amount of $60 million, such redemption to occur in accordance with the note indenture governing the notes, and may include acquisitions and investments with a view to growing or expanding GMP’s businesses.

GMP.PR.B is a FixedReset 5.50%+289 announced February 1. The issue traded 183,700 shares today in a range of 24.63-90 before closing at 24.68-69, 4×20.

Vital Statistics are:

GMP.PR.B will be tracked by HIMIPref™ but relegated to the Scraps index on credit concerns.

Update, 2011-3-1: Despite a quote of 24.75-87 and the fact that the high since issue date is 24.90, they were able to announce full take-up of the greenshoe:

GMP Capital Inc. (“GMP”) (TSX: GMP) announced today that it has closed the over-allotment option granted to the underwriters in connection with GMP’s bought deal public offering of Cumulative 5-Year Rate Reset Preferred Shares, Series B (the “Series B Shares”), which closed on February 22, 2011. As a result of the exercise of the over-allotment option, GMP sold an additional 600,000 Series B Shares at a price of $25.00 per share for additional gross proceeds of $15,000,000. In total, GMP has issued 4,600,000 Series B Shares for aggregate gross proceeds of $115,000,000. The Series B Shares trade on the Toronto Stock Exchange under the trading symbol “GMP.PR.B”.

GMP intends to use the net proceeds from the offering for general corporate purposes, which will include the redemption of the senior unsecured notes issued on November 1, 2006 by Griffiths McBurney L.P., an indirect wholly-owned subsidiary of GMP, in the aggregate principal amount of $60 million, such redemption to occur in accordance with the note indenture governing the notes, and may include acquisitions and investments with a view to growing or expanding GMP’s businesses.

I have been under the impression that BNS.PR.Z has a Regulatory Event clause and made mention of this when the issue was posted for trading. This assertion was based on the December 2 Material Documents:

Lock-Up Agreeement (Material Document, English, Dec. 2, 2010, 310K)

Upon the occurrence of a Regulatory Event, BNS may, at its option, with the prior approval of the Superintendent, on not more than 60 nor less than 30 days’ notice, redeem all or any number of the then outstanding Floating Rate Preferred Shares upon payment in cash for each Floating Rate Preferred Share so redeemed of an amount equal to $25.00 per Floating Rate Preferred Share together with all declared and unpaid dividends to the date fixed for redemption.

“Regulatory Event” means the receipt by BNS of a notice or advice from the Superintendent that all or any portion of the Floating Rate Preferred Shares no longer qualify as Tier 1 capital under the Canadian bank capital guidelines issued by the Superintendent or other governmental authority in Canada concerning the maintenance of adequate capital reserves by Canadian chartered banks, including BNS, from time to time.

Support Agreement (Material Document – English, December 2, 2010, 374K)

Upon the occurrence of a Regulatory Event, the Offeror may, at its option, with the prior approval of the Superintendent, on not more than 60 nor less than 30 days’ notice, redeem all or any number of the then outstanding Offeror Reset Preferred Shares upon payment in cash for each Offeror Reset Preferred Share so redeemed of an amount equal to $25.00 per Offeror Reset Preferred Share together with all declared and unpaid dividends to the date fixed for redemption.

“Regulatory Event” means the receipt by the Offeror of a notice or advice from the Superintendent that all or any portion of the Offeror Reset Preferred Shares no longer qualify as Tier 1 capital under the Canadian bank capital guidelines issued by the Superintendent or other governmental authority in Canada concerning the maintenance of adequate capital reserves by Canadian chartered banks, including the Offeror, from time to time.

However, when looking for definitive, prospectus-like, language to quote to exemplify a Regulatory Event I found:

Security Holders Documents – English, February 1, 2011:

Nothing. There is nothing I can see in the Security Holders’ Documents that would indicate that the bank has the option to call at par given the occurance of a Regulatory Event.

There is also nothing in the Offer to Purchase … DundeeWealth dated 2010-12-15, which is linked on the Scotia preferred share page as the “Prosp.”.

There is also nothing in the similarly linked Share Terms, which I believe is idential to the the “Security Holders Documents” on SEDAR.

So what happened?

Brompton Group’s Life & Banc Split Corp. has announced:

that it has filed a final prospectus for an offering of warrants to Class A shareholders of the Company. Each Class A shareholder of record on February 22, 2011 will receive one half of one warrant for each Class A share held.

One warrant will entitle the holder to purchase a Unit (consisting of one Class A share and one Preferred share of the Company) upon payment of the subscription price of $18.87, which is the sum of:
a) the most recently calculated NAV per Unit prior to the date of filing the preliminary prospectus; and
b) the estimated per Unit fees and expenses of the offering.

Warrants may be exercised on or before the expiry date of March 24, 2011. The Company has applied to list the warrants on the TSX under the ticker symbol LBS.WT. Warrants will be distributed to client accounts on a best-efforts basis after the February 22, 2011 record date. There is no additional subscription privilege under this offering. A holder of warrants may only subscribe for Units by exercising their warrants by the expiry date. The closing prices on February 9, 2011 for both the Class A shares ($9.96) and Preferred shares ($10.40) amounted to $20.36, which was above the subscription price.

The filing of the preliminary prospectus has been previously reported. LBS.PR.A is tracked by HIMIPref™ but is relegated to the Scraps index on credit concerns.

Brookfield Asset Management has announced:

the completion of its previously announced Preferred Shares, Series 28 issue in the amount of CDN$215 million.

Brookfield issued 8,600,000 Preferred Shares, Series 28 at a price of $25.00 per share, for gross proceeds of CDN$215,000,000. Holders of the Preferred Shares, Series 28 will be entitled to receive a cumulative quarterly fixed dividend yielding 4.60% annually for the initial period ending June 30, 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 1.80%. The Preferred Shares, Series 28 will commence trading on the Toronto Stock Exchange on February 8, 2011 under the ticker symbol BAM.PR.X.

Brookfield has granted the underwriters an over-allotment option, exercisable for a period of 30 days following closing, to purchase up to an additional 1,290,000 Preferred Shares, Series 28 which, if exercised, would increase the gross offering size to CDN$247,250,000.

The net proceeds of the issue will be used for general corporate purposes, including funding a portion of the company’s acquisition of additional common shares in U.S. mall operator General Growth Properties Inc.

The issue is a FixedReset, 4.60%+180, announced January 19.

The issue traded 206,559 shares today in a range of 24.63-88 before closing as 24.70-75.

Vital statistics are:

BAM.PR.X will be tracked by HIMIPref™ and incorporated in the FixedReset index.