Category: Issue Comments

Dividend Growth Split Corp has announced:

that the board of directors has approved a private placement of 468,480 preferred shares at $10.30. The private placement is being made in order to maintain an equal number of outstanding preferred shares and class A shares of Dividend Growth Split Corp. following its merger with Brompton Equity Split Corp.

The closing of the private placement, as well as the merger, is expected to take place on May 18, 2011, subject to regulatory approvals. As a result of the private placement, there will be no requirement for Brompton Equity Split Corp. to redeem any of its class A shares, as more fully described in the joint management information circular of Brompton Equity Split Corp. and Dividend Growth Split Corp. dated March 11, 2011.

Based on the April 28, 2011 net asset values, the class A share exchange ratio for the merger is 1.493584 Dividend Growth Split Corp. class A shares for each Brompton Equity Split Corp. class A share. After giving effect to the private placement and the merger, Dividend Growth Split Corp. will have 6,374,149 class A shares and preferred shares outstanding.

I find it rather odd that the private placement was necessary: the implication is that a large number of preferred shareholders retracted at $10 rather than selling into the market at a higher price.

DGS.PR.A was last mentioned on PrefBlog when the merger and term extension were approved. DGS.PR.A is tracked by HIMIPref™ but is relegated to the Scraps index on credit concerns.

DBRS has revised the trend on the Pfd-3 rating of RON.PR.A from stable to negative:

DBRS has today changed the trend on the BBB Senior Unsecured Debt rating and Pfd-3 Preferred Shares rating of RONA inc. (RONA or the Company) to Negative from Stable. The rating action reflects DBRS’s concern that weak operating performance and a challenging consumer environment may result in RONA’s credit risk profile to deteriorate to a level that is no longer consistent with the current rating categories.

CA Bancorp Canadian Realty Finance Corporation has announced:

that the Class A and Series 1 Preferred Shareholders of the Corporation, each voting separately as a class, voted today to approve a special resolution to effect the following proposed transaction (the “Transaction”):

• •the acquisition of all of the issued and outstanding shares of C.A. Bancorp Ltd., the manager of the Corporation, (the “Manager”) by Green Tree Capital Management Corp. (“Green Tree”);
• •an amendment to the commitment agreement (the “Commitment Agreement”) dated January 31, 2008 between the Corporation and C.A. Bancorp Inc., the parent corporation of the Manager, (the “Parent”) to permit the assignment by the Parent of the Commitment Agreement to Green Tree and the release of the Parent from any further obligations under the Commitment Agreement; and
• •an amendment to the management agreement between the Manager and the Corporation 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.

The Transaction is expected to be completed on or about May 11, 2011.

I had recommended a “No” vote Ah, well, we’ll just have to see what happens.

RF.PR.A is not tracked by HIMIPref™.

As noted in the post RF.PR.A Special Meeting Adjourned, the special meeting to decide on the reorganization of C.A. BANCORP CANADIAN REALTY FINANCE CORPORATION was adjourned from the original date of April 25, 2011 until tomorrow, May 5, 2011 at 4:00 p.m. EST, due to lack of quorum.

Now, Barry Critchley reports:

Pref shareholders are concerned with the credit risk they are being asked to assume if Green Tree acquires the management contract. In short, despite what C.A. Bancorp says about Green Tree’s “experienced team” and “enhanced infrastructure,” no one knows how successful the new team will be.

Can they run the commercial mortgage business well enough to generate enough income to continue to pay out on the prefs? Currently, pref shareholders receive fixed quarterly distributions of $0.4219 per share or 6.75% per annum. At the end of 2010, the fair value of the prefs was $31.1 million, or $21.18 per share.

But there’s more to it than that! There’s an external party opposed to the reorganization that has been scooping up shares in the present manager, CABancorp:

One investor, New York-based CDJ Global Catalyst, which owns 15.1% of C.A. Bancorp, said last week it disagrees with the realization strategy and indicated in a release it has had discussions and exchanged correspondence with C.A. Bancorp’s directors. CDJ, which also indicated it may “initiate proposals and/or transactions with a view to enhancing and protecting shareholder value,” couldn’t be reached for comment. It has been a steady buyer of C.A. Bancorp shares with its most recent purchase (251,400 shares) being bought at an average price of $2.16 a share. Book value is $2.53.

CDJ has been diligently writing press releases; the most recent, released April 27, is titled CDJ Announces Acquisition of Shares of C.A. Bancorp Inc.:

CDJ Global Catalyst LLC (“CDJ”) announced that from March 10, 2011 until April 26, 2011, CDJ acquired, for one or more of its managed client accounts in respect of which it exercises sole discretion, an aggregate of 251,400 common shares of C.A. Bancorp Inc. (TSX:BKP) (“CAB”) representing approximately 2% of the total issued common shares of CAB. The common shares were purchased for an average price of $2.16.

Combined with the shares held by client accounts in respect of which CDJ exercises sole discretion, CDJ now has control over 1,856,651 common shares, representing approximately 15.1% of the total issued and outstanding common shares of CAB.
…
CDJ intends from time to time to seek to continue to have discussions with representatives of CAB and its investee, C.A. Bancorp Canadian Realty Finance Corporation, (the “Subsidiary”).

CDJ strongly disagrees with CAB’s proposed Realization Strategy (as such term is defined in CAB’s public record), including the proposed sale of its interest in C.A. Bancorp Canadian Realty Finance Corp.

As a result, CDJ may, either alone or with others, consider and/or initiate proposals and/or transactions with a view to enhancing and protecting shareholder value, including the value of its investment to date. Such alternative proposals and/or transactions may include CDJ, either alone or with others, (i) seeking to influence decisions of CAB’s management and directors including, without limitation, by seeking representation by membership or through observer status on the board of directors or otherwise; (ii) seeking to add nominees designated by the Offeror to CAB’s board of directors, which could include expanding the size of the board of directors and/or removing individuals from CAB’s board of directors; and (iii) acquiring some or all of the outstanding securities of CAB or the Subsidiary. Such alternative proposals and/or transactions may also include CDJ supporting others in an alternative proposal and/or transaction.

CDJ may, from time to time and at any time, acquire additional common shares of CAB and/or its Subsidiary and/or other equity securities of the Company or the Subsidiary (collectively, the “Securities”) in the open market or otherwise and reserves the right to dispose of any and all of its Securities in the open market or otherwise, at any time and from time to time, and to engage in hedging or similar transactions with respect to the Securities.

At the present time, CDJ does not intend to acquire 20% or more of any class of Securities of the Company or the Subsidiary.

I continue to recommend that preferred shareholders vote “No” to the change in manager.

Dominion Bond Rating Service has announced that it:

has today updated the ratings of preferred shares issued by three split share companies and trusts (the Issuers): Energy Split Corporation, SNP Split Corp. and Utility Split Trust. The preferred shares of Energy Split Corporation have been upgraded to Pfd-3 from Pfd-3 (low), and the preferred shares/securities of SNP Split Corp. and Utility Split Trust have been confirmed at Pfd-3 (high) and Pfd-2 (low), respectively.

Each of the Issuers has invested in a portfolio of securities funded by the issuance of two classes of shares – dividend-yielding preferred shares (or securities) and capital shares (or units). The main form of credit enhancement available to preferred shares is a buffer of downside protection. Downside protection corresponds to the percentage decline in market value of a portfolio that must be experienced before the preferred shares would be in a loss position. The amount of downside protection available to preferred shares will fluctuate over time based on changes in the market value of the portfolio.

Today’s rating actions reflect generally upward trends in the net asset value (NAV) of the respective portfolios over the past year. In its surveillance of split share funds, DBRS reviews historical trends in downside protection and assigns greater weighting to more recent Issuer NAVs. Each of the Issuers has a scheduled termination date in 2011.

Energy Split Corporation is ES.PR.B, last mentioned on PrefBlog when it was upgraded to Pfd-3(low) by DBRS. ES.PR.B is not tracked by HIMIPref™, but it will be considered for inclusion in the database if they go for a term extension.

Doug Alexander of Bloomberg reports:

Canadian Imperial Bank of Commerce plans to spend any extra capital to redeem C$3.16 billion ($3.32 billion) in preferred shares that won’t count as regulatory capital under new banking rules, Chief Executive Officer Gerald McCaughey said.

“We do have an excess of Tier 1 capital today and in the future,” McCaughey, 55, said in an interview today. “A first step in terms of our usage of excess resources will be to reduce instruments that we have that are ineffective in the new environment.”

Canada’s fifth-biggest bank had a so-called Tier 1 capital ratio of 14.3 percent as of Jan. 31, second only to National Bank of Canada. The Toronto-based bank sold more than C$2.4 billion in preferred shares and other notes since August 2008 to shore up its balance sheet during the financial crisis.
…
“We will be looking at our non-common Tier 1 instruments in the near future,” McCaughey said in Winnipeg, Manitoba, after the bank’s annual meeting. “That allows us to deploy a certain amount of excess resources in a fashion that does help earnings per share.”

Share buybacks aren’t a priority for the Toronto-based bank, McCaughey said.

“We do not expect in the near term to be deploying that capital in activities such as buybacks,” he said.

This is fascinating. On the surface, it sounds as if they don’t intend any issuance of non-common Tier 1 at all – but I find that very hard to believe.

National Bank has announced:

the expiry of the Bank’s offers 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”).

The Bank announced that all of the Preferred Shares validly deposited under the Offers and not withdrawn as of April 26, 2011 have been taken up and accepted for payment by the Bank. As a result, the Bank has taken up a total of 4,639,139 Preferred Shares Series 21, 4,374,120 Preferred Shares Series 24 and 4,075,165 Preferred Shares Series 26 under the Offers for an aggregate consideration of $361,208,775.14.

The Preferred Shares taken up under the Offers represent approximately (i) 57.63% of the outstanding Preferred Shares Series 21, (ii) 64.33% of the outstanding Preferred Shares Series 24, and (iii) 70.26% of the outstanding Preferred Shares Series 26.

The extension of the offer was reported on PrefBlog on April 12.

Series 21 is NA.PR.N; series 24 is NA.PR.O; and series 26 is NA.PR.P.

World Financial Split Corp. has released its Annual Report to December 31, 2010.

Figures of interest are:

MER: 1.51% of the whole unit value, excluding one time initial offering expenses.

Average Net Assets: We need this to calculate portfolio yield; unfortunately the number of units changesd, which makes it more approximate. The Total Assets of the fund at year end was $76.6-million, compared to $107.3-million a year prior, so call it an average of $92.0-million. Total Preferred Share Distribution in 2010 was $3.888-million, at $0.525/share implies an average of 7.41-million units, at an average NAV of ((11.57 + 13.11) / 2 = 12.34, so call it $91.4-million. Close enough! Call the Average Net Assets $92-million.

Underlying Portfolio Yield: Investment income (sum of interest, dividends and withholding taxes) of $1.964-million received divided by average net assets of $92-million is 2.13%.

Income Coverage: Net investment income of $1.964-million less expenses before issuance fees of $1.743-million is $0.221-million, to cover preferred dividends of 3.888-million is just under 6%.

WFS.PR.A was last mentioned on PrefBlog when a term extension proposal was announced.

Well, this wasn’t particularly hard to see coming, after the company’s warrant issue expired less than six months before dissolution! Mulvihill’s World Financial Split Corp. has announced:

its Board of Directors has approved a proposal to extend the term of the Fund for an additional seven years. The final redemption date for the Class A Shares and Preferred Shares of the Fund is currently June 30, 2011 and the Fund proposes to implement a reorganization (“Reorganization”) that will allow shareholders to retain their investment in the Fund until at least June 30, 2018.

In connection with the Reorganization, holders of Class A Shares will continue to benefit from the potential for leveraged capital appreciation in a high quality portfolio consisting principally of copmmon shares of the ten largest financial services companies in each of Canada, the United States of America and the rest of the world. If the Reorganization is approved and implemented, holders of Preferred Shares will continue to enjoy preferential quarterly cash dividends in the amount of $0.13125 per Preferred Share representing a yield of 5.25% per annum on the original issue price of $10.00 per Preferred Share.

As part of the Reorganization, the Fund is also proposing other changes including changing the monthly retraction prices for the Class A Shares and the Preferred Shares so that they are calculated by reference to market price in addition to NAV and changing the dates by which notice of monthly retractions needs to be provided and by which the retraction amount will be paid. The Fund will also allow for the calculation of a diluted NAV in the event the Fund should ever issue warrants or rights to acquire additional Class A Shares or Preferred Shares.

Mulvihill Capital Management Inc. the manager of the Fund (the “Manager”), believes the global financial services sector is poised for strong returns over the next several years after experiencing one of the worst financial crises in history over the 2007 – 2009 time period. Subsequently, regulatory oversight and capital requirements increased in order to reduce the risk of another crisis from happening. Despite a decline in 2010 due to the concerns regarding European Sovereign defaults, many of the companies within the Fund’s portfolio universe are well capitalized and are expected to return capital to shareholders in the form of increased dividends and share repurchases which the Manager believes should benefit share prices. The Manager also believes that the Reorganization will allow the Fund to increase in value as the global economy recovers and financial services companies around the world grow stronger.

If the Reorganization is approved and implemented, shareholders will be given a special retraction right to retract their Class A Shares or Preferred Shares at NAV on June 30, 2011 on the same terms had the final redemption date of the Fund not been extended. The redemption date of the shares will automatically be extended for successive seven-year terms after June 30, 2018 and shareholders will be able to retract their Class A Shares or Preferred Shares at NAV prior to any such extension.

A special meeting of holders of Class A Shares and Preferred Shares has been called and will be held on May 31, 2011 to consider and vote upon the proposal. Further details of the proposal will be outlined in an information circular to be prepared and delivered to holders of Class A Shares and Preferred Shares in connection with the special meeting. The Reorganization is also subject to all required regulatory approvals.

The warrants’ exercise price was $11.43 and the Whole Unit NAV is now about $11.47, so those who exercised their warrants have, basically, earned the coupon. The company raised $12.8-million on warrant exercise, implying that take-up was about 15%.

WFS.PR.A no longer has a credit rating, since DBRS withdrew the Pfd-4(low) rating last November at the request of the company.

I applaud Mulvihill for their conduct in making a special retraction right part of the reorganization package. Such a feature cost them considerable AUM when it became exercisable with the PIC / PIC.PR.A term extension. Granting of such a right should be automatic; but for as long as there are sponsors in the market with less sterling ethical standards, such as Manulife Asset Management (as shown in the ASC.PR.A term extension proposal) and such people remaining in the business as Paul Lorentz, Sheila Hart, Jennifer Mercanti and Warren Law (the directors of ASC, who approved the terms of the proposal and recommended that preferred shareholders vote in favour), I will give credit where credit is due.

The company’s prospectus specifies a NAV test for capital unit distributions:

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 Company, the NAV per Unit would be less than $15.00. In addition, the Company will not pay special distributions, meaning distributions in excess of the targeted 8% distributions, on the Class A Shares if after payment of the distribution the NAV per Unit would be less than $23.50 unless the Company would need to make such distributions so as to fully recover refundable taxes.

Despite these good things I am recommending a No vote on the term extension. With an Asset Coverage ratio of only 1.1+:1, the credit quality of the preferreds is simply insufficient to accept a term extension.

If the reorganization is approved anyway, I recommend exercising the special retraction right, while cognizant of the fact that, as in the case of the PIC.PR.A term extension, it is entirely possible that there might be sufficient preferred shares retracted that, on consolidation of the capital units, credit quality is restored to more acceptable levels. We can’t count on that, though!

It is my hope that, through voting No, preferred shareholders will get some kind of sweetener in a revised proposal. Most obvious, and perhaps least likely (and perhaps, given the extraordinarly low level of income coverage at present values, least desirable), is an increase in coupon. However, if a revised reorganization proposal provided, for example, for the forced redemption of a large number of preferred shares and the subsequent consolidation of the corresponding capital units with the combined effect of restoring Asset Coverage to more traditional levels, I would be very happy to recommend a favourable vote.

C.A. Bancorp Canadian Realty Finance Corporation has announced:

that the Corporation’s special meeting of Class A and Series 1 Preferred Shareholders (the “CRFC Shareholders”) to be held today (the “Special Meeting”) to consider the previously announced Proposed Transaction has been adjourned until May 5, 2011.

An insufficient number of holders of Series 1 Preferred Shares was present in person or represented by proxy to constitute a quorum for the conduct of business at the Special Meeting. The adjourned Special Meeting will be held on May 5, 2011 at 4:00 p.m. EST at the Corporation’s offices at 401 Bay Street, Suite 1600, Toronto, Ontario. Proxies for the adjourned Special Meeting must be received no later than May 3, 2011 at 4:00 p.m. EST.

CRFC Shareholders are encouraged to read the Information Circular for the Special Meeting, which contains detailed information about the Proposed Transaction, and to vote their shares. A copy of the Information Circular is available under the corporate profile of CRFC on the System for Electronic Document Analysis and Retrieval (SEDAR) at www.sedar.com and on CRFC’s website at www.cabancorp.com.

CRFC Shareholders who have questions about the information contained in the Information Circular or the Proposed Transaction or who require assistance in completing the applicable form of proxy, are encouraged to contact Kingsdale Shareholder Services Inc. by telephone at 1-866-581-1513 toll free in North America or 416-867-2272 outside of North America or by email at contactus@kingsdaleshareholder.com.

Director Resignation

The Corporation also announced today that Robert Wolf has tendered his resignation as a director of the Corporation. The Board will consider the need for a replacement director if the Proposed Transaction described in the Information Circular does not proceed. In the meantime, the remaining two directors will continue to carry out the duties of the Board. The Board is currently comprised of John Driscoll (Chair) and Paul Haggis.

The information circular is available on-line and was discussed in the post RF.PR.A: Shareholders to Vote on Manager Change.

In that post I pointed out that the proposed new manager is a hedge fund specialist with no publicly published track record and concluded:

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.

I see no reason to change the recommendation as yet. Vote No!