Category: Issue Comments

Desjardins has announced:

that it has entered into a support agreement with Western Financial Group (TSX:WES), the largest insurance and financial services retailer in Western Canada with 121 offices in British Columbia, Alberta, Saskatchewan and Manitoba, pursuant to which it will acquire all of the issued and outstanding common shares of Western Financial at a price of $4.15 per common share in cash (the ‘’Offer’’) for a total transaction value of $443 million.
…
Holders of convertible preferred shares and convertible unsecured debentures of Western Financial may participate in the Offer by converting such securities into common shares of Western Financial Group and tendering such shares to the Offer. By exercising the relevant conversion rights and participating in the Offer, holders of the following securities would receive the following premiums over par values: Series 2 preferred shares ‐ 15%; Series 5 preferred shares ‐ 48%; and convertible unsecured debentures ‐ 38%.

Great. Now I’m going to get all kinds of questions about convertible preferreds.

Series 5 is WES.PR.C which was issued in September 2009. The prospectus (available on SEDAR) states:

The Preferred Shares are convertible into our common shares (“Common Shares”) at the option of the holder at any time, or if called for redemption, on the business day immediately preceding the date fixed for redemption, at a conversion price of $2.81 per Common Share (the “Conversion Price”), being a rate of 35.5872 Common Shares per Preferred Share, subject to adjustment. See “Details of the Offering – Conversion”.

A nice windfall indeed!

WES.PR.D is Series 2, which closed in December 2009. According to the 2009 Annual Report:

Series 2 Preferred shares issued by the Company are convertible at the holder’s option at any time into common shares at a fixed conversion price of $3.60 per share. These shares are redeemable by the Company only after the third anniversary and up to the fifth anniversary if the common shares are trading at or greater than 135% of the $3.60 conversion price. These shares have been recorded as equity. Dividends paid and accrued are recorded against retained earnings.

Unfortunately, WES.PR.A is Series 3:

Series 3 Preferred shares issued by the Company are convertible at the holder’s option at any time into common shares at a fixed conversion price of $7.25 per share. These shares are redeemable by the Company only after the third anniversary and up to the fifth anniversary if the common shares are trading at or greater than 135% of the $7.25 conversion price. These shares have been recorded as equity. Dividends paid and accrued are recorded against retained earnings.

… and WES.PR.B is Series 4:

Series 4 Preferred shares issued by the Company are convertible at the holder’s option at any time into common shares at a fixed conversion price of $6.90 per share. These shares are redeemable by the Company only after the third anniversary and up to the fifth anniversary if the common shares are trading at or greater than 135% of the $6.90 conversion price. These shares have been recorded as equity. Dividends paid and accrued are recorded against retained earnings.

None of the WES preferred shares are tracked by HIMIPref™.

Update, 2011-1-21: Takeover bid documents mailed.

Standard & Poor’s has announced:

it affirmed its ‘CCC-‘ unsolicited long-term counterparty credit ratings and negative outlook on Kingsway Financial Services Inc. and its subsidiaries (Kingsway). Subsequently, we withdrew the unsolicited ratings.

“Our ratings on Kingsway Financial Services and its subsidiaries were based on the group’s weak operating performance, liquidity, capital adequacy, competitive position, and financial flexibility,” said Standard & Poor’s credit analyst Pablo Feldman.

Kingsway reduced its outstanding senior unsecured debt rated by Standard & Poor’s and held by third parties to about $36.9 million as of Sept. 30, 2010, from $176.8 million at year-end 2009. Kingsway financed this debt reduction with cash obtained from the sale of some of its subsidiaries and assets. “Because the company now has only a small amount of outstanding rated senior unsecured debt, we are withdrawing our unsolicited ratings,” said Mr. Feldman.

The negative outlook reflected our assessment of the company’s operating performance, liquidity, capital adequacy, competitive position, and financial flexibility as weak. We believe that the company has a high level of financial leverage and that its operating companies face a difficult underwriting environment. We also believe that Kingsway Financial Services is highly dependent upon favorable business, financial, and economic conditions to meet its financial obligations.

One of those financial obligations involves the future health of Kingsway Linked Return of Capital Trust, trading as KSP.UN and sponsored by Scotia Managed Companies:

The Trust was created to provide holders with exposure to a senior note issued by an affiliate of Kingsway Financial Services Inc. Holders of the LROC Preferred Units will receive primarily tax-deferred quarterly distributions of $0.3125 per LROC Preferred Unit representing a yield of 5.00% per annum on the $25.00 per LROC Preferred Unit offering price.

KSP.UN was last mentioned on PrefBlog when DBRS withdrew its rating last year. KSP.UN is not tracked by HIMIPref™.

Standard & Poors has announced:

it raised its long-term corporate credit rating on Montreal-based Transcontinental Inc. to ‘BBB’ from ‘BBB-‘. The outlook is stable.

“The upgrade reflects our expectation of the continued improvement in Transcontinental’s financial risk profile stemming from lower debt levels, increased profitability, and significant financial flexibility due to management’s focus on streamlining the business and cutting costs,” said Standard & Poor’s credit analyst Lori Harris. “These actions have resulted in a material strengthening of credit protection measures, with our expectation that Transcontinental will maintain an adjusted debt to EBITDA in the 2x area in the medium term,” Ms. Harris added.

Highlights are:

• We are raising our long-term corporate credit rating on Montreal-based Transcontinental Inc. to ‘BBB’ from ‘BBB-‘.
• We base the upgrade on Transcontinental’s improved operating performance and credit metrics, as reflected in its fiscal 2010 results.
• The stable outlook is based on our expectation that Transcontinental’s financial policy will be moderate, operating performance will remain good, and the company will manage its credit measures in line with our expectations in the medium term, including maintaining adjusted debt to EBITDA in the 2x area

TCL.PR.D was last mentioned on PrefBlog at the time of issue. TCL.PR.D is tracked by HIMIPref™ but is relegated to the Scraps index on credit concerns.

Manulife Asset Management Limited, the manager of AIC Global Financial Split Corp. has announced:

that it intends to extend the termination date of the Corporation which is currently set for May 31, 2011 for another five years, with a new termination date scheduled to be on May 31, 2016.

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 and Preferred Shares of the Corporation will be held to consider and vote upon the extension. Further details of the extension will be outlined in a management information circular to be prepared and delivered to holders of the Class A Shares and Preferred Shares in connection with the special meeting. Such extension would be subject to any required regulatory approvals.

This must be the most ridiculous attempt to extend term ever. The NAV as of Dec. 17 is $9.98 – that is, the $10 p.v. preferred shares are actualy underwater right now. I feel quite safe in saying that the only reason they’re quoted at 9.19-27 is due to the imminence of the scheduled redemption date.

The press release does not mention who is going to pay the expenses of the special meeting – I’ll bet a nickel that expenses will be borne by the Split Share Corp., not the manager.

The fund started in 2004, and there is nothing unusual about its terms. As can be surmised from the name of the fund, it simply ran into a train wreck; there’s no shame in that.

There is shame, however, in such a grossly abusive waste of shareholder time and money as to seek a term extension. I can think of no inducement that could possibly be offered to the preferred shareholders that would cause an alert and prudent preferred shareholder to vote in favour of a term extension. As with the reorganization of XCM.PR.A and XMF.PR.A, any value at all that is offered to the Capital Unitholders comes directly out of the preferred shareholders’ pockets.

I am surprised that Manulife is putting its name such a sleazy exercise, simply in an attempt to keep fourteen lousy million dollars under management – assuming there are no retractions on the scheduled wind-up date date. And trust me, if this obscenity somehow passes I’ll be recommending retraction.

Vote no.

ASC.PR.A was last mentioned on PrefBlog when DBRS withdrew its rating at the request of the manager. ASC.PR.A is tracked by HIMIPref™, but is relegated to the Scraps index on credit concerns.

Capital Power Corporation has announced:

that it has closed its previously announced offering of 5,000,000 Cumulative Rate Reset Preference Shares, Series 1 (the “Series 1 Shares”) at a price of $25 per Series 1 Share (the “Offering”) for aggregate gross proceeds of $125 million on a bought deal basis with a syndicate of underwriters, led by TD Securities Inc. and RBC Capital Markets.

CPX.PR.A is a FixedReset 4.60%+217 announced December 1. The issue traded 262,349 shares in a range of 24.85-95 before closing at 24.88-90, 4×116.

Vital statistics are:

Brompton Group has announced:

that it has filed a preliminary prospectus relating to an offering of warrants to Class A shareholders of the Company. Each Class A shareholder will receive one half of a warrant for each Class A share held on a record date which will be set upon filing of the final prospectus.

One warrant will entitle the holder to purchase a Unit (consist ing of one Class A share and one Preferred share of the Company) upon payment of the subscription price, which will be determined as the lesser of:
(i) $18.87 (which is the sum of (a) the most recently calculated NAV per Unit prior to the date hereof and
(b) the estimated per Unit fees and expenses of the offering), and (ii) the most recently calculated NAV per Unit prior to the date of filing the final prospectus plus the estimated per Unit fees and expenses of the offering. The Company has applied to list the warrants and the Class A shares and Preferred shares issuable on the exercise thereof on the TSX.

Successful completion of the warrants offering will provide the Company with additional capital that can be used to take advantage of attractive investment opportunities and it is also expected to increase the trading liquidity of the Class A shares and Preferred shares and reduce the ongoing management expense ratio of the Company.

There is no word yet regarding the exercise date of the warrants, but with the last one the warrants were outstanding for about a month.

LBS.PR.A was last mentioned on PrefBlog at the time of their warrant offering five months ago, which was something of a fizzle. LBS.PR.A is tracked by HIMIPref™ but is relegated to the Scraps index on credit concerns.

Energy Split Corp. II has announced:

that the redemption prices for all outstanding Capital Yield Shares and ROC Preferred Shares to be paid on December 16, 2010 are as follows:

Redemption Price per ROC Preferred Share: $13.74

Redemption Price per Capital Yield Share: $9.86

The Capital Yield Shares and ROC Preferred Shares are listed for trading on The Toronto Stock Exchange under the symbols EN and EN.PR.A, respectively. The Capital Yield Shares and ROC Preferred Shares will be de-listed from the Toronto Stock Exchange as at the close of trading on December 16, 2010.

EN.PR.A was last mentioned on PrefBlog last December when there was a tiny partial redemption. EN.PR.A has been tracked by HIMIPref™, but relegated to the Scraps index on volume concerns – there were less than 1-million shares outstanding.

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 .
…
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.
…
..Issuer: Royal Bank of Canada
…
….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%.