Category: Issue Comments

Faircourt Asset Management has announced:

the completion of the merger of Faircourt Income & Growth Split Trust (“FIG”) into Faircourt Split Trust, as the continuing fund (“FCS”), effective September 30, 2010 (the “Merger”). The Merger was approved by unitholders and preferred securityholders of each of FIG and FCS at special meetings of the preferred securityholders and unitholders held on September 13, 2010, September 20, 2010 and September 27, 2010. FCS will continue trading on the Toronto Stock Exchange (“TSX”) under the symbols “FCS.UN” for the units and “FCS.PR.B” for the new preferred securities.
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In addition, in connection with the Merger, the preferred securities of FIG were exchanged on a one-for-one basis for 6.25% preferred securities of FCS. Again, as preferred securities are recorded on a book-based system, no action is required by holders of the preferred securities to be recognized as a preferred securityholder of FCS.

By effecting the Merger on a taxable basis for both the unitholders and the holders of preferred securities rather than on a tax-deferred rollover basis, the Merger will also enable FCS to preserve its realized capital losses from the current taxation year and loss carry forwards from prior taxation years and to avoid realizing its unrealized losses.

DBRS has announced that it:

has today assigned a rating of Pfd-3 (low) to the 6.25% Preferred Securities issued by Faircourt Split Trust (FCS). DBRS has also discontinued the Pfd-3 rating of FCS’s 5.75% Preferred Securities and the Pfd-4 (high) rating of the Preferred Securities issued by Faircourt Income & Growth Split Trust (FIG).

Faircourt Asset Management Inc. (Faircourt) was the manager of both FIG and FCS. The ratings of FIG and FCS were placed Under Review with Developing Implications on August 19, 2010, after Faircourt announced that shareholder meetings would be held for both funds to vote on a proposal to merge FIG into FCS (the Continuing Trust). In meetings held from September 13 to 27, 2010 (adjournments were caused by a lack of quorum), the preferred securityholders and unitholders of FIG and FCS approved the merger.
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The FIG preferred securityholders approved an extraordinary resolution authorizing the exchange of their existing securities for the new series of 6.25% Preferred Securities issued by FCS.
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Holders of the 6.25% Preferred Securities have benefited from an effective upgrade in credit quality, resulting mainly from an increase in downside protection following the merger into the Continuing Trust.
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The Pfd-3 (low) rating of the 6.25% Preferred Securities is primarily based on the downside protection available (32% as of October 5, 2010) and the diversification of the Continuing Trust’s investment portfolio. The main constraints to the rating are the following:

(1) The downside protection provided to holders of the 6.25% Preferred Securities is dependent on the value of the securities in the investment portfolio.

(2) Volatility of price and changes in the dividend policies of the underlying issuers may result in significant reductions in dividend coverage or downside protection from time to time.

(3) Reliance on the manager to generate a high yield on the investment portfolio to meet distributions and other trust expenses without having to liquidate portfolio securities.

The 6.25% Preferred Securities are scheduled to mature on December 31, 2014.

FIG.PR.A was last mentioned on PrefBlog when the merger and exchange was approved. FCS.PR.B is tracked by HIMIPref™, but is relegated to the Scraps index on credit concerns.

Fairfax Financial Holdings has announced that it:

has completed its previously announced public offering of Preferred Shares, Series I (the “Series I Shares”) in Canada. As a result of the underwriters’ exercising in full their option to purchase an additional 2,000,000 Series I Shares, Fairfax has issued 12,000,000 Series I Shares for gross proceeds of $300 million. Net proceeds of the issue, after commissions and expenses, are approximately $291 million.

Fairfax intends to use the net proceeds of the offering to augment its cash position, to increase short term investments and marketable securities held at the holding company level, to retire outstanding debt and other corporate obligations from time to time, and for general corporate purposes.

The Series I Shares were sold through a syndicate of Canadian underwriters led by BMO Capital Markets, CIBC World Markets Inc., RBC Dominion Securities Inc. and Scotia Capital Inc., and that also included TD Securities Inc., National Bank Financial Inc., Cormark Securities Inc., GMP Securities L.P., Canaccord Genuity Corp., Desjardins Securities Inc. and HSBC Securities (Canada) Inc.

$300-million? That means the greenshoe was fully exercised. FFH.PR.I is a FixedReset 5.00%+285, announced September 27.

FFH.PR.I traded 516,783 shares in a range of 24.85-97 before closing at 24.91-93, 5×33.

Vital statistics are:

FFH.PR.I is tracked by HIMIPref™ but is relegated to the Scraps index on credit concerns.

Allbanc Split Corp. has announced:

that the Company has issued one warrant for each Capital Share held by holders of Capital Shares of the Company of record as at the close of business on October 1, 2010.

Each warrant will entitle the holder to purchase one Unit, each Unit consisting of one Capital Share and one Preferred Share, for a subscription price of $62.78 per Unit. Commencing October 4, 2010, warrants may be exercised at any time on or before 5:00 p.m. (Toronto time) on June 6, 2011. The warrants are listed on the Toronto Stock Exchange under the ticker symbol ABK.WT.

Holders of Preferred Shares are entitled to receive quarterly fixed cumulative distributions equal to $0.3344 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 on the underlying portfolio securities 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.

ABK.PR.B was last mentioned on PrefBlog when there was a partial call for redemption in February 2010. ABK.PR.B is not tracked by HIMIPref™.

DBRS has announced that it:

has today placed the BBB (high) Senior Unsecured Debt & Medium-Term Notes rating of Capital Power Income L.P. (the Partnership or CPILP) and the Pfd-3 Cumulative Preferred Shares rating of CPI Preferred Equity Ltd. Under Review with Negative Implications. The rating action follows the joint announcement by CPILP and Capital Power Corporation (CPC) that CPILP will initiate a process to review its strategic alternatives. CPC’s subsidiary, Capital Power L.P. (CPLP, rated BBB with a Stable trend) is the 30% indirect owner and manager of CPILP.

The decision is the result of strategic review processes, undertaken by each of a Special Committee of CPILP Independent Directors and CPC, to explore alternatives for maximizing value for both CPILP unitholders and CPC shareholders. CPC has advised the Special Committee that it will support the review of strategic alternatives and that if the process results in a determination to proceed with a sale of the Partnership, CPC (and, therefore, CPLP) does not intend to participate as a prospective buyer. The process is anticipated to take place over the next several months.

Although the announcement of a strategic review process most typically results in an Under Review with Developing Implications action, DBRS has placed CPILP’s ratings Under Review with Negative Implications to reflect both the strategic review announcement and the Negative trends on CPILP’s ratings prior to today’s rating action. DBRS continues to monitor the Partnership’s financial performance and the final decision of the North Carolina arbitration on the power purchase agreements (PPAs). Clarification on these items during the Under Review with Negative Implications period, if viewed as positive for CPILP’s credit quality, could result in a change of the Under Review status from Negative to Developing.

CZP.PR.A is a ticker change from the original EPP.PR.A. This issue had a rough underwriting, and is a Straight Perpetual with a 4.85% coupon.

CZP.PR.B, originally EPP.PR.B, had a more successful underwriting and is a FixedReset, 7.00%+418. It was removed from TXPR in July 2010.

Both issues are tracked by HIMIPref™ but are relegated to the Scraps index on credit concerns.

DBRS has announced that it:

has today upgraded the ratings of Fortis Inc. (Fortis or the Company) to A (low) and Pfd-2 (low) from BBB (high) and Pfd-3 (high), respectively. The trends have been changed to Stable from Positive.

The upgrade is driven by the Company’s low business risk profile (benefiting from its ownership of a diversified basket of utility businesses, which provide over 90% of consolidated EBITDA), its reasonable credit metrics (which have improved modestly over the years), the significant reduction in external debt at subsidiary Terasen Inc., and the Company’s demonstrated ability to acquire and integrate stable utility businesses financed on a conservative basis.
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At the time of our last review in June 2010, when the trends were changed to Positive, DBRS stated that it would consider an upgrade of Fortis’s ratings if the Company continued to exhibit strong financial and operating performance and as long as its operating subsidiaries would not suffer any material negative regulatory action in the near future or pursue any mergers and acquisitions activity financed on an aggressive basis.

There are the following issues outstanding: FTS.PR.C & FTS.PR.E (OpRet); FTS.PR.F (PerpetualDiscount); and FTS.PR.G & FTS.PR.H (FixedReset). These will be moved (volume permitting) to their appropriate HIMIPref™ rebalancing, as of October 31.

FTS was last mentioned on PrefBlog when DBRS assigned the positive trend.

Details are pretty skimpy, but I’ll do what I can …

In their 2009 Annual Report, GWO disclosed:

The trial of the class proceedings in Ontario regarding the participation of the London Life and Great-West Life participating accounts in the financing of the acquisition of London Insurance Group Inc. (LIG) in 1997 by Great-West Life concluded on January 15, 2010. The Court reserved and a decision is expected later in 2010. Based on information presently known, these proceedings are not expected to have a material adverse effect on the consolidated financial position of the Company.

Now, however, is reported:

A group of disgruntled life insurance policyholders has won a class-action lawsuit against Great-West Life Assurance Co. and London Life Insurance Co., with an Ontario court ruling Friday the companies must pay $455.7 million in one of the largest contested class-action payouts to date in Canada.

The suit originates from parent Great-West Lifeco Inc.’s 1997 takeover of London Insurance Group Inc. for $2.9 billion, outbidding Royal Bank of Canada at the time.

The plaintiffs had claimed in the 45-day trial in London, Ont. that the two insurance companies transferred $220 million from participating accounts with London Life and Great-West Life to help finance about 7.5 per cent of the takeover. The cash was replaced by an accounting instrument called a “prepaid expense asset” (PPEA) — but the cash was never repaid.
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In her ruling dated Oct. 1, Ontario Superior Court Justice Johanne Morissette declared the actions of Great-West and London Life as unlawful and in violation of the Insurance Companies Act.

“By creating the (participating account transactions) the defendants have done indirectly what was prohibited from being done directly,” the ruling said. “The PPEA could be characterized as ‘creative accounting,’ however they are not assets recognized by GAAP (Generally Accepted Accounting Principles).”

As a result, Morissette has ordered the two companies repay the par accounts the $220 million taken, plus $172.7 million in foregone investment income and $63 million of gross-up for taxes. This works out to $372.2 million to the London Life account and $83.5 million to the Great-West Life account.

The company states:

Although the decision confirms in many respects the Companies’ position, there are significant aspects of the decision which the Companies believe are in error. Accordingly, the Companies intend to appeal the decision.

The decision, if sustained on appeal, would require that the Companies pay an amount of $456 million to the participating accounts for distribution ($372 million in respect of London Life and $84 million in respect of Great-West Life). These amounts include both capital and interest items.

Regardless of the ultimate outcome of this case, all of the participating policy contract terms and conditions will continue to be honoured. As well, the decision, if sustained on appeal, is not expected to have a material impact on the capital position of the Companies.

Class action opportunists legal counsel crowed:

The court held that the defendant companies breached s. 462, and other sections of the Insurance Companies Act (“ICA”) which prohibits transfers from the participating accounts of federally incorporated life insurers. The court conducted an analysis of the facts underlying the transaction and concluded at paragraph 105 of the judgment:

“This Court, therefore finds that the $220 million payment involved a transfer of cash in contravention of s. 462 of the ICA”.

The court reviewed the conduct of the companies, their auditors and external advisors and concluded that the accounting for the par account transactions failed to comply with Generally Accepted Accounting Principles (GAAP) contrary to s. 331(4) of the Insurance Companies Act.

It’s rather difficult to tell what the implications might be for the books …. the GWO press release refers to capital and interest portions, which implies that some of the amount is on the books already and therefore won’t be a hit to profit. Additionally, GWO claims that “the decision, if sustained on appeal, is not expected to have a material impact on the capital position of the Companies.”, but, naturally enough, do not specify what the benchmark for materiality might be.

Stay tuned!

The last mention of GWO in the “Issue Comments” category was GWO Warns of Higher Seg-Fund Capital Requirements.

These are total returns, with dividends presumed to have been reinvested at the bid price on the ex-date. The list has been restricted to issues in the HIMIPref™ indices.

The Canadian Imperial Bank of Commerce has announced:

its intention to redeem all of its issued and outstanding Non-cumulative Class A Preferred Shares, Series 19 and all of its issued and outstanding Non-cumulative Class A Preferred Shares Series 23, for cash. The redemptions will occur on October 31, 2010. The redemption price is $25.45 per Series 19 share and $25.00 per Series 23 share.

The final quarterly dividend of $0.309375 per Series 19 share and $0.331250 dividend per Series 23 share for the period from August 1, 2010 to October 31, 2010 will be paid in the usual manner on October 28, 2010 to holders of record on September 28, 2010.

Beneficial holders who are not directly the registered holder of these shares should contact the financial institution, broker or other intermediary through which they hold their shares to confirm how they will receive their redemption proceeds. Formal notices and instructions for the redemption of Series 19 shares and Series 23 shares will be forwarded to registered shareholders.

Series 19 is CM.PR.R, which was listed 1998-03-26 and closed at 26.05-24 on September 27, is an OperatingRetractible with the option schedule:

Retraction 2013-04-30 INFINITE DATE 26.040000
Redemption 2008-04-30 2009-04-29 25.750000
Redemption 2009-04-30 2010-04-29 25.600000
Redemption 2010-04-30 2011-04-29 25.450000
Redemption 2011-04-30 2012-04-29 25.300000
Redemption 2012-04-30 2013-04-29 25.150000
Redemption 2013-04-30 2999-12-29 25.000000

The YTW Scenario as of last night’s close was for an immediate call at 25.45 to yield -27.01% … and that’s what happened. Investors were presumably counting on it to last until its softMaturity 2013-4-29 to yield 3.29%. This issue was relegated to the Scraps index on volume concerns.

Series 23 is CM.PR.A, which was listed 2001-02-06 and closed at 25.10-29 on September 27, is an OperatingRetractible with the option schedule:

Redemption 2007-10-31 2008-10-30 25.750000
Redemption 2008-10-31 2009-10-30 25.500000
Redemption 2009-10-31 2010-10-30 25.250000
Redemption 2010-10-31 INFINITE DATE 25.000000
Retraction 2011-07-31 INFINITE DATE 26.040000

The YTW scenario as of the close last night was for a call 2010-11-30 at 25.25 to yield 0.20% … pretty close! Investors were presumably counting on it to last until its softMaturity 2011-7-30 to yield 4.25%.

DBRS comments that it:

has reviewed the announcement by Canadian Imperial Bank of Commerce (CIBC or the Bank) to redeem all of the outstanding Non-Cumulative Class A Preferred Shares, Series 19 and Series 23. The redemption has no rating implications for CIBC at this time.

DBRS believes this transaction will reduce the Bank’s Tier 1 capital ratio by approximately 50 basis points (bps), which still leaves the ratio at the top end of its Canadian peer group range. At the end of Q3 2010, CIBC’s Tier 1 capital ratio was 14.2%. No impact is expected on the tangible common equity to risk-weighted assets ratio, which was 9.0% at the end of Q3 2010, as DBRS already excludes preferred shares from this calculation.

Given changes in Basel capital requirements and international accounting standards, the redemption of these two series of preferred shares is not unexpected.

After these redemptions, there will be only eight members left in the OperatingRetractible index. It will be interesting to see what happens to TD.PR.M and TD.PR.N tomorrow!

Faircourt Asset Management has announced:

The adjourned special meeting of unitholders of Faircourt Income & Growth Split Trust (“FIG”) which was originally held on September 13, 2010 but was adjourned for lack of quorum, was held today at which the unitholders of FIG approved the merger (the “Merger”) of FIG into and Faircourt Split Trust (“FCS”), as the continuing fund, as described in the joint management information circular dated August 13, 2010 (the “Circular”). The Merger is expected to occur on or about September 30, 2010.

The Merger is, in part, a response to expected changes in the taxation of income funds. As a result of these changes, there are now an insufficient number of “income funds” for FIG to continue to meet its investment restrictions. Concurrent with the Merger, the investment mandate of FCS, as the continuing trust, will be expanded to remedy this situation and FCS will be able to invest in a broader range of securities and adjust its portfolio in the future as and when required to respond to market movements, as described in the Circular.

The prior stage in this process was the approval by FIG.PR.A holders; today’s approval was by holders of FIG.UN.

FIG.PR.A is tracked by HIMIPref™ but is relegated to the Scraps index on credit concerns.

The Wall Street Journal reports:

Pipeline operator Enbridge Inc. (ENB) raised a total of C$300 million from two bond issues, according to a person familiar with the matter.

Enbridge raised C$200 million from an issue of 10-year bonds maturing in February 2021. The offering was priced at 138 basis points over the revelant benchmark curve, or at the low-end of the guidance, for a yield of 4.266%. The bonds carry a coupon of 4.26%.

The Calgary-based company raised another C$100 million from an issue of 30-year bonds maturing in September 2040. The bonds were priced at 170 basis points over the government of Canada 5% 2037 benchmark, or in line with guidance, for a yield of 3.420%. The bonds carry a coupon of 5.12%.

Additonally, DBRS notes:

DBRS has today assigned a rating of “A” with a Stable trend to Enbridge Inc.’s $200 million 4.26% unsecured medium-term notes (Notes) issue maturing February 1, 2021 and its $100 million 5.12% Notes issue maturing September 28, 2040. The issues are expected to settle on September 28, 2010.

The Notes rank equally with all of Enbridge Inc.’s other senior unsecured indebtedness. Net proceeds from the issue will be used for general corporate purposes, which may include repayment of outstanding indebtedness and financing capital expenditures and investments of Enbridge Inc.

This is interestng in light of ENB.PR.A, a straight perpetual issued in December 1998 with a coupon of 5.5%, now quoted at 25.35-43 for a current yield of 5.42% and a YTW of -7.12% based on an immediate call at par.

If we say that the Seniority Spread should be 220bp for an Enbridge straight (a little tighter than the 245bp reported September 22 to account for its scarcity value as a non-financial) and tack on another 25bp for option effects on a par issue, we come up with a projected new issue for ENB at 5.12% + 225bp + 25bp = 7.62% interest equivalent or 5.44% as dividend … which means that, insofar as you can trust the 225bp and 25bp wild guesses estimates, ENB.PR.A is fairly priced relative to their bonds.

Whether Enbridge is happy about the 225 Seniority Spread is, of course, another question entirely.