Category: Issue Comments

Standard & Poor’s has announced:

• We believe that the prospective earnings profile of Manulife Financial’s U.S. operations will be weaker than we previously expected given the current economic environment.
• In addition, we expect the volatility associated with Manulife Financial’s net earnings and capital to remain elevated over the intermediate term, until it makes more progress in reducing and containing its risks more in line with its updated risk tolerances.
• We have lowered our counterparty credit and financial strength ratings on Manulife Financial’s core and guaranteed insurance operating subsidiaries to ‘AA-‘ from ‘AA’ and our counterparty credit rating on Manulife Financial (the holding company) to ‘A-‘ from ‘A’.
• The outlook is stable.

This follows their Credit Watch Negative in November and the downgrade to P-2(high) in August.

Manulife has a fair batch of preferreds outstanding: MFC.PR.A, MFC.PR.B, MFC.PR.C, MFC.PR.D and MFC.PR.E.

Last February, Moody’s slashed bank preferred ratings by three notches, reflecting a reappraisal of the likelihood of government support, at least as far as preferreds were concerned:

Prior to the global financial crisis, Moody’s had incorporated into its ratings an assumption that support provided by national governments and central banks to shore up a troubled bank would, to some extent, benefit the holders of bank subordinated capital as well as the senior creditors. The systemic support for these instruments has not been forthcoming in many cases. The revised methodology largely removes previous assumptions of systemic support, resulting in today’s rating action. In addition, the revised methodology generally widens the notching on a bank hybrid’s rating that is based on the instrument’s features.

In that action, RY prefs were downgraded three notches, taking them from Aa2 to A2. The three notch downgrade was in line with almost every other bank. Almost.

A little while earlier, Moody’s had taken BMO prefs down four notches, due to concerns over the volatility of its capital market business.

In the RY Annual Report for 2010, they stated their strategic goals:

• In Canada, our goal is to be the undisputed leader in financial services.
• Globally, our goal is to be a leading provider of capital markets and wealth management solutions
• Intargeted markets, our goal is to be a leading provider of select financial services complementary to our core strengths.

Moody’s takes exception to the goal of growing the capital markets business:

Moody’s Investors Service has downgraded the ratings of Royal Bank of Canada, driven principally by the bank’s commitment to its sizeable and growing capital markets business, which potentially exposes bondholders to increased earnings volatility and poses significant risk management challenges .
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As part of its universal banking strategy, RBC management is selectively expanding upon its strong domestic investment banking and trading capabilities to build a global investment banking platform. Tactically, RBC has been able to exploit the continuing disarray at many of its investment banking competitors to upgrade and build out its banking, sales and trading capabilities outside Canada.

“Shareholders and bank managers are attracted to the growth potential of capital markets businesses, but these businesses can expose bank bondholders to hidden tail risks,” said Peter Nerby, a Moody’s Senior Vice-President.

Although Moody’s expects RBC’s other businesses will provide a substantial buffer against these risks, the rating agency believes the opacity and the potential volatility associated RBC’s enlarged and expanding capital markets operations are not consistent with its former B+ unsupported bank financial strength rating.

RBC already has a substantial commitment to the capital markets business. At year end 2010, the capital markets segment represented roughly 45% of the bank’s consolidated balance sheet, and management is attributing roughly 25% of the firm’s $33 billion in common equity to the capital markets segment. Over the long run, management has signaled that the contribution from capital markets businesses could be as much as 30% of overall revenue and earnings through the cycle.
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..Issuer: Royal Bank of Canada
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….Preferred Stock Preferred Stock, Downgraded to A3 from A2

Royal Bank has a host of preferreds outstanding: RY.PR.A, RY.PR.B, RY.PR.C, RY.PR.D, RY.PR.E, RY.PR.F, RY.PR.G, RY.PR.H, RY.PR.I, RY.PR.L, RY.PR.N, RY.PR.P, RY.PR.R, RY.PR.T, RY.PR.W, RY.PR.X and RY.PR.Y.

BAM Split Corp. has announced:

the completion of its previously announced issue of 5,000,000 Class AA Preferred Shares, Series 5 (the “Series 5 Preferred Shares”) at an offering price of $25.00 per Series 5 Preferred Share, raising gross proceeds of $125,000,000. The Series 5 Preferred Shares carry quarterly fixed cumulative preferential dividends representing a 4.85% annualized yield on the offering price and have a final maturity of December 10, 2017. The Series 5 Preferred Shares have been listed and posted for trading on the Toronto Stock Exchange under the symbol BNA.PR.E. The net proceeds of the offering will be used to pay a special cash dividend to holders of the Company’s Capital Shares.

Prior to the closing of the offering, the Company subdivided the existing Capital Shares held by BAM Investments so that there are an equal number of Preferred Shares and Capital Shares outstanding.

BNA.PR.E is a SplitShare issue with a 4.85% coupon and a seven year term, announced November 22. It traded 190,750 shares today in a tight range of 24.85-93, closing at 24.90-92, 2×10.

Vital statistics are:

The shares are rated Pfd-2(low) by DBRS:

The Pfd-2 (low) ratings of the Class AA Preferred Shares are primarily based on the downside protection and dividend coverage available to the Class AA Preferred Shares.

The main constraints to the rating are the following:

(1) The downside protection available to holders of the Class AA Preferred Shares depends solely on the market value of the BAM Shares held in the Portfolio, which will fluctuate over time.

(2) There is a lack of diversification as the Portfolio is entirely made up of BAM Shares.

(3) Changes in the dividend policy of BAM may result in reductions in Class AA Preferred Shares dividend coverage.

(4) The BAM Shares pay dividends in U.S. dollars, so the Company is exposed to foreign currency risk relating to the Canadian-U.S. exchange rate, which may have a negative impact on the Class AA Preferred Shares dividend coverage ratio.

This issue is ridiculously expensive. BNA.PR.C, which is the same credit with a mere one year of extra term, closed today at 22.01-06 to yield 6.30-27%.

BNS Split Corp. II has announced:

that the Company has issued one warrant for every two Capital Shares held by holders of Capital Shares of the Company of record as at the close of business on December 9, 2010.

Each warrant will entitle the holder to purchase one Unit, each Unit consisting of two Capital Shares and one Preferred Share, for a subscription price of $50.84 per Unit. Commencing December 10, 2010, warrants may be exercised at any time on or before 5:00 p.m. (Toronto time) on July 7, 2011. The warrants are listed on The Toronto Stock Exchange under the ticker symbol BSC.WT.

Holders of Preferred Shares are entitled to receive quarterly fixed cumulative distributions equal to $0.2003 per Preferred Share. The Company’s Capital Share dividend policy is to pay a quarterly dividend on the Capital Shares equal to the dividends received by the Company on the BNS Shares minus the dividends payable on the Preferred Shares and all administrative and operating expenses provided the net asset value per Unit at the time of declaration, after giving effect to the dividend, would be greater than the original issue price of the Preferred Shares.

BNS Split Corp. II is a mutual fund corporation created to hold a portfolio of common shares of The Bank of Nova Scotia. Capital Shares and Preferred Shares of BNS Split Corp. II are listed for trading on The Toronto Stock Exchange under the symbols BSC and BSC.PR.B respectively.

BSC.PR.B was last mentioned on PrefBlog when it was issued in September. BSC.PR.B is not tracked by HIMIPref™.

TransAlta Corp. has announced:

it has completed its public offering of 10,000,000 Cumulative Rate Reset First Preferred Shares, Series A (the “Series A Shares”). In addition, the full option granted to the syndicate of underwriters led by CIBC World Markets Inc., RBC Dominion Securities Inc. and Scotia Capital Inc., as bookrunners, was exercised for an additional 2,000,000 Series A Shares also at a price of $25.00 per Series A Share.

The offering, previously announced on December 2, 2010, resulted in gross proceeds to TransAlta of Cdn $300 million. The net proceeds of the offering will be used to partially fund capital projects, for other general corporate purposes and to reduce short term indebtedness of the company and its affiliates, which short term indebtedness was used to fund TransAlta’s capital program and for general corporate purposes. TransAlta may invest funds that it does not immediately require in short term marketable debt securities.

The Series A Shares were offered to the public in Canada through the underwriters or their affiliates by way of a prospectus supplement that was filed with securities regulatory authorities in Canada under TransAlta’s short form base shelf prospectus, which was previously filed with securities regulatory authorities in Canada.

Holders of Series A Shares are entitled to receive a cumulative quarterly fixed dividend yielding 4.60% annually for the initial period ending March 31, 2016. Thereafter, the dividend rate will be reset every five years at a rate equal to the 5-year Government of Canada bond yield plus 2.03%. Holders of Series A Shares will have the right, at their option, to convert their shares into Cumulative Rate Reset First Preferred Shares, Series B (the “Series B Shares”), subject to certain conditions, on March 31, 2016 and on March 31 every five years thereafter. Holders of Series B Shares will be entitled to receive cumulative quarterly floating dividends at a rate equal to the three-month Government of Canada Treasury Bill yield plus 2.03%. The Series A Shares are listed on the Toronto Stock Exchange under the ticker symbol TA.PR.D.

The 4.60%+203 FixedReset was announced on December 2.

The issue traded 591,764 shares today in a range of 24.80-97 before closing at 24.93-94, 50×80. Vital statistics are:

Dividend Growth Split Corp. has announced:

that it has completed its treasury offering of 1,100,000 class A shares and 1,100,000 preferred shares for aggregate gross proceeds of $21,230,000. Shares will continue to trade on the Toronto Stock Exchange under the existing symbols DGS (class A shares) and DGS.PR.A (preferred shares).

Dividend Growth Split Corp. invests in a portfolio of common shares of high quality, large capitalization companies, which have among the highest dividend growth rates of those companies included in the S&P/TSX Composite Index.
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The preferred shares were offered at a price of $10.00 per share. The investment objectives for the preferred shares are to provide their holders with fixed cumulative preferential quarterly cash distributions in the amount of $0.13125 per preferred share to yield 5.25% per annum on the original issue price, and to return the original issue price at the time of redemption on November 30, 2014.

The class A shares were offered at a price of $9.30 per share. The investment objectives for the class A shares are to provide their holders with regular monthly cash distributions targeted to be $0.10 per class A share, and to provide the opportunity for growth in net asset value per class A share.

The offering was placed through a group of agents co-led by RBC Capital Markets and CIBC World Markets Inc., and included TD Securities Inc., BMO Nesbitt Burns Inc., National Bank Financial Inc., Scotia Capital Inc., GMP Securities L.P., HSBC Securities (Canada) Inc., Mackie Research Capital Corporation, Macquarie Private Wealth Inc., Manulife Securities Incorporated, Raymond James Ltd., Canaccord Genuity Corp., Dundee Securities Corporation, Desjardins Securities Inc., and Wellington West Capital Markets Inc

DGS.PR.A was last mentioned on PrefBlog when the offering was announced. DGS.PR.A is not tracked by HIMIPref™ as it is too small … but that excuse won’t hold up for much longer if they keep up the pace of treasury offerings!

Big 8 Split Corp. has announced:

that it has called a total of 410,530 Preferred Shares, comprised of 194,191 Class B Preferred Shares and 216,339 Class C Preferred Shares, for cash redemption on December 15, 2010 representing approximately 18.2% of all outstanding Preferred Shares as a result of holders of 410,530 Capital Shares exercising their special annual retraction rights. The Preferred Shares shall be redeemed on a pro rata basis, so that holders of record of Preferred Shares on the close of business on December 14, 2010 will have approximately 18.2% of their Preferred Shares redeemed. The redemption price of $12.00 per share, will be paid on December 15, 2010. Holders of Preferred Shares that have been called for redemption will only be entitled to receive dividends thereon which have been declared but remain unpaid up to and including December 15, 2010

In addition, holders of a further 1,000 Preferred and Capital Shares have deposited such shares concurrently for retraction on December 15, 2010. As a result, a total of 411,530 Preferred and Capital Shares, or approximately 18.2% of both classes of shares currently outstanding will be redeemed.

Payments and delivery of cash and common shares owing as a result of shareholders having exercised their retraction privilege and the above notice of call, will be made by the Company on December 15, 2010.

BIG.PR.B was last discussed on PrefBlog when it was downgraded to Pfd-2 by DBRS. BIG.PR.C was last discussed when there was a partial take-up of the issuance greenshoe. Neither BIG.PR.B nor BIG.PR.C are tracked by HIMIPref™.

Allbanc Split Corp. II has announced:

that holders of its Class A Capital Shares have approved a share capital reorganization (the “Reorganization”) allowing holders of Class A Capital Shares, at their option, to retain their investment in the Company after the scheduled redemption date of February 28, 2011. The Reorganization will permit holders of Class A Capital Shares to extend their investment in the Company beyond the redemption date of February 28, 2011 for an additional 5 years. The Class A Preferred Shares will be redeemed on the same terms originally contemplated in their share provisions and will be called for redemption on or about February 28, 2011. In order to maintain the leveraged “split share” structure of the Company, a new class of shares to be known as the Series 1 Preferred Shares will be created and issued.

Holders of Class A Capital Shares who do not wish to continue their investment in the Company after February 28, 2011 must give notice that they wish to exercise their special retraction right and how they wish to be paid for their shares on or prior to January 7, 2011. Holders of Class A Capital Shares who retract their Class A Capital Shares will be paid on or about February 28, 2011. The Reorganization will become effective provided that holders of at least 2,667,000 Class A Capital Shares retain their Class A Capital Shares and do not exercise the special retraction right.

ALB.PR.A was last mentioned on PrefBlog when the reorganization proposal was approved by the directors. ALB.PR.A is tracked by HIMIPref™ but is relegated to the Scraps index on credit concerns.

DBRS has announced that it:

has today upgraded the Preferred Securities issued by Brookfield Soundvest Split Trust (the Trust) to Pfd-4 (low) from Pfd-5 (high).
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As of September 30, 2010, the Portfolio primarily consisted of various types of income trusts. The composition of the Portfolio may change significantly in 2011 as more income trusts convert to corporations. The Portfolio provides downside protection of approximately 29% to the holders of the Preferred Securities (as of November 30, 2010).

Over the past four months, the net asset value (NAV) of the Trust has increased from $12.41 to $14.07, an increase of approximately 13%. Furthermore, the downside protection has fluctuated between 16% and 29% in 2010 to date compared with 2% to 15% from August to November 2009. This significant increase in protection has resulted in an upgrade in the rating of the Preferred Securities to Pfd-4 (low) from Pfd-5 (high). The upgrade has been limited to one notch due to the lower credit quality of the Portfolio (the majority of its holdings are not rated by any rating agency) and uncertainty related to the potential reduction in income earned on the Portfolio because of the impending taxation of Canadian income trusts.

The redemption date for the Preferred Securities is March 31, 2015.

BSD.PR.A was last mentioned on PrefBlog when an extraordinatry resolution was passed allowing the fund to invest in other instruments beside income trusts. BSD.PR.A is tracked by HIMIPref™ but is relegated to the Scraps index on credit concerns.

CIU.PR.C, the 3.80%+136 FixedReset announced November 16, has settled.

The issue traded 294,500 shares in a very tight range of 25.00-05 before closing at 25.00-09, 10×10.

Vital statistics are:

CIU.PR.C is tracked by HIMIPref™ and has been assigned to the FixedReset index.