Category: Issue Comments

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.

BNS Split Corp II has announced:

that it has completed its public offering of 1,238,954 Class B Preferred Shares, Series 1 (“Series 1 Preferred Shares”), raising approximately $23.4 million. The Series 1 Preferred Shares were offered to the public by a syndicate of agents led by Scotia Capital Inc. In addition, the Company has redeemed all of its outstanding Class A Preferred Shares and 1,105,950 of its Class A Capital Shares.

The Series 1 Preferred Shares were offered in order to maintain the leveraged “split share” structure of the Company following the successful reorganization of the Company approved at a special meeting of holders of Class A Capital Shares on July 5, 2010, which among other things, extended the redemption date of the Class A Capital Shares for an additional five year term. At the close of business on September 22, 2010 there will be 2,477,908 Class A Capital Shares and 1,238,954 Series 1 Preferred Shares issued and outstanding.

The refunding was reported on PrefBlog in the post BSC.PR.A Refunding Approved. BSC.PR.B will not be tracked by HIMIPref™ – too small! The company has published the prospectus for the issue.

Update, 2010-9-23: DBRS Rates BNS Split Corp. II Class B Preferred Shares, Series 1 Pfd-2 (low):

As of September 14, 2010, the downside protection available to the holders of the Class B Preferred Shares was 62%. Based on the current dividend yield on the Portfolio, the initial Class B Preferred Share dividend coverage ratio is approximately 1.9 times.

The Pfd-2 (low) rating of the Class B Preferred Shares is primarily based on the downside protection and dividend coverage available, as well as on the credit quality and consistency of dividend distributions of the Portfolio holdings.

The main constraints to the rating are the following:

1) The downside protection provided to holders of the Class B Preferred Shares is dependent on the value of the shares in the Portfolio.

2) Volatility of price and changes in the dividend policies of The Bank of Nova Scotia (BNS) may result in significant reductions in downside protection from time to time.

3) The concentration of the entire Portfolio in the common shares of BNS.

Faircourt Asset Management has announced:

The adjourned special meetings of preferred securityholders of Faircourt Income & Growth Split Trust (“FIG”) and Faircourt Split Trust (“FCS”), which were originally held on September 13, 2010 but were adjourned for lack of quorum, were held today at which the preferred securityholders of FIG approved the merger of FIG into FCS (the “Merger”) and the exchange of preferred securities of FIG for a new class of preferred securities of FCS (the “Exchange”), and the preferred securityholders of FCS approved various amendments to the FCS declaration of trust and FCS trust indenture (the “FCS Proposals”), as described in the joint management information circular dated August 13, 2010 (the “Circular”). The Merger Proposal remains subject to approval by the unitholders of FIG.

The Merger and FCS Proposals are 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 and FCS to continue to meet its investment restrictions. Consequently, upon implementation of the FCS Proposals, 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.

The Merger will also be considered by unitholders of FIG the funds at the adjourned special meeting of such unitholders to be held on September 27, 2010, and implementation of the Merger and the FCS Proposals are conditional on the approval of the unitholders of FIG at such meeting, all as described in the Circular.

FIG.PR.A was last mentioned on PrefBlog when the first attempt to approve the merger did not get quorum. FIG.PR.A is tracked by HIMIPref™ but is relegated to the Scraps Index on credit concerns.

NewGrowth 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 September 17, 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 $41.57 per Unit. Commencing September 20, 2010, warrants may be exercised at any time on or before 5:00 p.m. (Toronto time) on March 31, 2011. The warrants are listed on the Toronto Stock Exchange under the ticker symbol NEW.WT.

Holders of the Preferred Shares are entitled to receive quarterly fixed cumulative dividends equal to $0.2055 per Preferred Share. The Company’s Capital Share dividend policy is to pay holders of Capital Shares quarterly dividends in an amount equal to the revenue received by the Company 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.

NewGrowth Corp. is a mutual fund corporation whose investment portfolio consists of publicly-listed securities of selected Canadian chartered banks, telecommunication, pipeline and utility issuers. The Capital Shares and Preferred Shares of NewGrowth Corp. are both listed for trading on The Toronto Stock Exchange under the symbols NEW.A and NEW.PR.C respectively.

The warrants will be outstanding for more than six months!

NEW.PR.C was last mentioned on PrefBlog when it started trading 2009-6-26. There are only 2.2-million of the $13.70 preferreds outstanding, so the issue won’t be tracked by HIMIPref™ any time soon.

DBRS has announced that it:

has today announced that it will discontinue its public rating on the First Preference Shares, Series 1 of E-L Financial Corporation Limited (E-L) on October 20, 2010 (30 days from today).

DBRS notes that this action is unrelated to E-L’s credit profile.

ELF has two issues of preferreds outstanding, both PerpetualDiscounts: ELF.PR.F & ELF.PR.G. The issues have been rated Pfd-2(low) by DBRS for a long time, contrasted with S&P’s ratings of P-2(high)/BBB+.

I don’t see any other news – and remember, ELF is probably the largest public company in Canada, if not North America, that doesn’t have a website – so it’s hard to guess what this might mean. It could be a signal that a new issue is on its way and ELF didn’t feel like cutting more cheques to DBRS.