Category: Issue Comments

Manulife Financial Corporation has announced

that it has priced a public offering in the United States of U.S.$1.1 billion aggregate principal amount of two series of its senior notes consisting of U.S.$600 million aggregate principal amount of 3.40% senior notes due 2015 (the “2015 Notes”) and U.S.$500 million aggregate principal amount of 4.90% senior notes due 2020 (the “2020 Notes”). The public offering price of the 2015 Notes is 99.854% and the public offering price of the 2020 Notes is 99.844%. The offering was made pursuant to an effective shelf registration statement.

The Company intends to use the net proceeds from the sale of the notes for general corporate purposes, including investments in its subsidiaries.

Morgan Stanley & Co. Incorporated, Citigroup Global Markets Inc., Banc of America Securities LLC and Goldman, Sachs & Co. are acting as joint book-running managers for the offering.

At 3.40%, the five-year notes yield 215bp over Treasuries; meanwhile, I see on CBID that the recent CAD 4.079% of 2015 are yielding 4.16%, about 205bp over Canadas.

These yields may be contrasted with the MFC sort-of-short-term preferreds:

To the extent one is fearful that the extension risk will apply (or, to take a more extreme view, that they may actually go bankrupt in the next five years, which will presumably wipe out preferred shareholders while merely hurting the debtholders), there should be a premium on the preferreds; but given that the Bid Yield to Presumed Call will be received as the net amount of dividends and the expected capital loss on call, then those yields may be multiplied by the standard factor of 1.4x to give interest-equivalent yields in the range of 5.62%-6.08% … which seems like an awfully strong inducement.

The debt issue are interesting for another reason … there is some thought that MFC has maxed out on debt:

Manulife Financial Corp.’s US$1.1-billion debt raise (US$600-million in 5-year notes at 3.40% and US$500-million in 10-year notes at 4.90%) would bring its debt (plus preferreds and hybrids) to total capital ratio up to 30% from 27.7%.

That’s probably at the top end of Manulife’s range and above its long-term 25% target, according to BMO Capital Markets analyst Tom MacKinnon. As a result, he believes the company has little room for more debt or preferreds.

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Note, however, that the smaller IAG was confirmed at Pfd-2(high) in February with higher gross leverage:

Capitalization has become more aggressive, in line with that of the industry, with a total debt ratio of 32% at the end of 2009, increasing to 33.2% pro forma a $200 million preferred and common share issue in mid-February. Within the last two years, Canadian life insurance companies have been increasing their financial leverage to better maximize return on equity, while also optimizing regulatory capital in a low interest rate environment. The Company’s adjusted debt ratio, which gives some equity treatment to preferred shares, was 22.6% at year-end, falling to 22% following the February issues, which is within DBRS’s tolerance for the current credit rating. However, the Company’s use of hybrid capital instruments such as preferred shares has increased over the past two years, significantly reducing its fixed-charge coverage ratio, which has fallen from double digits in the pre-2008 period to 6.0 times in 2009, notwithstanding the return to normal profitability.

Innergex Renewable Energy Inc. has announced:

the closing of the previously announced offering of Cumulative Rate Reset Preferred Shares, Series A (the “Series A Preferred Shares”). The Corporation issued a total of 3,400,000 Series A Preferred Shares at $25 per share for aggregate gross proceeds of $85 million. The offering was made on a bought deal basis through a syndicate of underwriters led by BMO Capital Markets and TD Securities Inc.

The Series A Preferred Shares commence trading on the Toronto Stock Exchange today under the symbol INE.PR.A.

The Corporation intends to use the net proceeds of the offering to enhance its financial flexibility, to reduce indebtedness and for general corporate purposes.

Innergex Renewable Energy Inc. is a leading developer, owner and operator of run-of-river hydroelectric facilities and wind energy projects in North America. Innergex’s management team has been involved in the renewable power industry since 1990. Innergex owns a portfolio of projects which consists of: i) interests in 17 operating facilities with an aggregate net installed capacity of 326 MW; ii) interests in 7 projects under development with an aggregate net installed capacity of 203 MW for which power purchase agreements have been secured; and iii) prospective projects of more than 2,000 MW (net).

The issue traded 574,215 shares in a range of 24.96-18 before closing at 25.10-13.

Vital statistics are:

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

Update, 2011-03-23: This is a 5.00%+279 FixedReset as previously announced.

Moody’s Investor Services has announced:

placed all the long-term ratings of Royal Bank of Canada, including its Aaa rating for deposits, on review for possible downgrade. Royal Bank’s unsupported bank financial strength rating is rated B+, which maps to a Aa2. Royal Bank is rated Aaa for long-term deposits and senior debt, two notches higher than its unsupported ratings, because of Moody’s very high systemic support assumptions. The bank’s Prime-1 short-term ratings were affirmed.

During its review Moody’s will focus on Royal Bank’s commitment to capital markets and its growth plans for the business. Moody’s will also examine the bank’s controls on these businesses, including its limits on position concentrations and less-liquid assets.

On an industry basis, Moody’s believes wholesale banking activities poses heightened risks including those associated with concentrated positions, high levels of leverage, confidence sensitivity and opacity. Capital market activities expose bondholders to extreme events or “tail risks” if controls fail. Tail risk is difficult to measure and makes management of a global capital markets businesses especially challenging. Moreover, as market conditions improve and competitive pressures increase, managers at investment banks may relax their disciplines and venture into more complex products.

On a firm-wide basis, RBC management has expressed a strategic target to maintain a 25 to 30% earnings contribution on average from the capital markets segment, which Moody’s considers high for a B+ BFSR bank. Moody’s noted Royal Bank’s growth plans include select hiring of professionals and a growing contribution of revenues from outside Canada.

“Royal Bank and many other investment banks have recently de-risked, but shareholder demands will inevitably cause firms to increase risk and complexity over the next market cycle” said Peter Nerby, a Moody’s Senior Vice President.

This news about risk appetite will make Mr. Carney sad. Fortunately, the rest of us know this already.

On Review for Possible Downgrade:

• …
• Issuer: Royal Bank of Canada
  • …
  • Preferred Stock Preferred Stock, Placed on Review for Possible Downgrade, currently A2

Outlook actions:

• …
• Issuer: Royal Bank of Canada
  • Outlook, Changed To Rating Under Review From Negative(m)

RY has a host of preferred shares:
FixedResets

• RY.PR.I
• RY.PR.L
• RY.PR.N
• RY.PR.P
• RY.PR.R
• RY.PR.T
• RY.PR.X
• RY.PR.Y

PerpetualDiscount

• RY.PR.A
• RY.PR.B
• RY.PR.C
• RY.PR.D
• RY.PR.E
• RY.PR.F
• RY.PR.G
• RY.PR.W

The agencies are becoming increasingly concerned about banks’ exposure to dealing. Moody’s downgraded BMO an extra notch on these grounds in January.

Faircourt has announced:

The special meeting of unitholders of Faircourt Split Trust (“FCS”) was held today at which the unitholders approved various amendments to the FCS declaration of trust (the “FCS Proposals”), as described in the joint management information circular dated August 13, 2010 (the “Circular”). The FCS Proposals remain subject to approval by the preferred securityholders of FCS.

In addition the announced special meetings of unitholders and preferred securityholders of FIG and of preferred securityholders of FCS, were convened but adjourned because a quorum was not present. The special meetings for the Funds were adjourned to September 20, 2010 in the case of the meetings of preferred securityholders of FIG and FCS, and to September 27, 2010 in the case of the meeting of unitholders of FIG. Each special meeting will be at the offices of Stikeman Elliott LLP, 199 Bay Street, 53rd Floor, Toronto, Ontario, M5L 1B9 at 10:00 a.m. on the applicable date. As described in the Circular, the deadline for submitting proxies for the adjourned special meetings is Friday September 17, 2010 at 10:00 a.m., in the case of FIG and FCS preferred securityholders and Friday September 24, 2010 at 10:00 a.m., in the case of FIG unitholders.

The FCS Proposals were approved in contemplation of the proposed merger (the “Merger Proposal”) of Faircourt Income & Growth Split Trust (“FIG” and together with FCS, the “Funds”) into FCS to create a single trust, with FCS as the continuing trust (the “Continuing Trust”). The Merger Proposal, as described in the Circular, remains subject to approval by the unitholders and preferred securityholders of FIG.

The FCS Proposals are part of 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 FCS to continue to meet its investment restrictions. Consequently, if the FCS Proposals are approved by preferred securityholders, the investment mandate of the Continuing Trust will be expanded to remedy this situation and the Continuing Trust 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.

Plans for he meeting have been reported on PrefBlog. There should be a prize for interested investors who can find the Management Information Circular on the Faircourt site – I wouldn’t win, I’ll tell you that much. It’s available on SEDAR, filing date 2010-8-18.

I recommend that FIG.PR.A holders vote in favour of the merger – it will be slightly accretive to Asset Coverage.

BCE Inc. has announced:

it has agreed to acquire 100% of CTV, the Canadian leader in specialtytelevision, digital media, conventional TV and radio broadcasting.
…
Bell currently owns a 15% equity position in CTV and will acquire the remaining 85% for $1.3 billion inequity value from The Woodbridge Company Limited, the Toronto-based holding company of the Thomsonfamily; Ontario Teachers Pension Plan; and Torstar Corporation. Including the value of Bell’s present stake,the transaction has an equity value of $1.5 billion. Together with $1.7 billion in proportionate debt, the totaltransaction value is $3.2 billion. The purchase price represents a multiple of 10x proportionate EBITDA,comparable with similar recent media-industry transactions. In a separate transaction, Woodbridge willacquire ownership of the Globe and Mail, in which Bell will continue to retain a 15% equity position.
…
Video is growing rapidly in popularity among Canadians, who are increasingly moving to mobile, online anddigital TV platforms for video content. Bell already offers Canada’s leading High Definition TV and onlineservices and the most advanced mobile TV products, and is in the process of launching its leading-edgeBell Fibe IPTV (internet protocol television) service in major urban centres. Bell TV now representsapproximately 40% of total residential service revenues, surpassing traditional home phone revenues.Bell is accelerating its wireline and wireless video capabilities with significant new investments in broadbandnetworks, including capital expenditures of almost $3 billion in 2010 alone. Bell is rolling out high-speedfibre to more houses, apartments, condominiums and businesses in Québec and Ontario to support newInternet and TV services and is enhancing its new world-leading HSPA+ wireless network, which alreadyserves 93% of the Canadian population.
…
“The transaction purchase price represents an attractive standalone valuation for Canada’s leading mediaprovider even before upside opportunities from monetizing CTV’s programming across all of Bell’sbroadband wireless and wireline platforms. This acquisition is entirely consistent with Bell’s shareholdervalue objectives and dividend growth model,” said Siim Vanaselja, Chief Financial Officer for Bell Canadaand BCE. “It is immediately accretive to earnings and to free cash flow before potential synergies, with100% access to CTV cash flows. Bell’s acquisition of CTV will be funded with a new, fully committed bankfacility of $2 billion, $750 million in new BCE common shares that will be issued to Woodbridge, andsurplus cash on hand. The resulting pro forma net leverage of 2x EBITDA is consistent with Bell’s capitalstructure and financial policies. Based on our discussions with the rating agencies, we expect our creditratings to be confirmed.”
…
Bell will hold a conference call for financial analysts to discuss its acquisition of CTV today at 9:30amEastern. Media are welcome to participate on a listen-only basis. To participate, please dial (416) 340-8018or toll-free 1-866-223-7781 shortly before the start of the call. A replay will be available for one week bydialing (416) 695-5800 or 1-800-408-3053 and entering pass code 6461260 followed by the number sign.There will also be a live audio webcast of the call available at www.bce.ca/en/news/eventscalendar/webcasts/2010/20100910. The MP3 file will be available for download on this page later in the day.

DBRS has announced that it:

has today confirmed the long- and short-term ratings of BCE Inc. (BCE) and its wholly-owned operating subsidiary, Bell Canada, at A (low) and R-1 (low), following Bell Canada’s announcement today that it will acquire 85% of CTVglobemedia Inc. (CTV) and its television, digital media and radio operations (excluding The Globe and Mail) for $1.3 billion in equity value. The trend on all ratings is Stable.
…
From a financial perspective, while the acquisition of CTV will slightly weaken Bell Canada’s credit metrics, DBRS believes that the impact will be manageable. DBRS anticipates that while Bell Canada’s gross debt-to-EBITDA is expected to increase from roughly 1.52x (at June 30, 2010), this ratio is not expected to exceed 2.0x with the acquisition of CTV. DBRS does note that the financing of the acquisition of CTV, along with the refinancing of the majority of its existing debt, is expected to be carried out at the Bell Canada level. As such, CTV will support the credit profile of Bell Canada once the transaction closes.

BCE has a plethora of FixedFloaters and Ratchets outstanding. Tracked by HIMIPref™ are: BCE.PR.A, BCE.PR.B, BCE.PR.C, BCE.PR.D, BCE.PR.F, BCE.PR.G, BCE.PR.H, BCE.PR.I, BCE.PR.R, BCE.PR.S, BCE.PR.T, BCE.PR.Y and BCE.PR.Z. Not tracked by HIMIPref™, for no particularly good reason, is BCE.PR.E.

All the tracked issues are relegated to the Scraps index on credit concerns.

Canadian Utilities (CU) and Canadian Utilities Inc. (CIU) have announced:

that their Boards of Directors have approved the transfer of Alberta Power (2000) Ltd. from CU Inc. to ATCO Power Ltd., a wholly-owned subsidiary of Canadian Utilities Limited.

Alberta Power (2000) Ltd. owns the 670 MW Battle River Generating Station and has a 50 per cent stake in the 760 MW Sheerness Generating Station. The transfer allows Canadian Utilities Limited to align its ownership of its power generation assets under ATCO Power Ltd. and its rate regulated utility assets under CU Inc. ATCO Electric, ATCO Gas and ATCO Pipelines will continue to be owned and financed by CU Inc.
…
CU Inc., a wholly owned subsidiary of Canadian Utilities Limited, is an Alberta-based corporation with assets of approximately $6.7 billion and more than 4,100 employees. As a result of this transfer, CU Inc. will be comprised of rate regulated utility operations in pipelines, natural gas and electricity transmission and distribution.

DBRS has announced that it:

today confirmed the ratings of CU Inc. (CUI) as follows: Unsecured Debentures & Medium-Term Notes at A (high), Commercial Paper at R-1 (low) and Cumulative Preferred Shares at Pfd-2 (high), all with Stable trends.
…
DBRS expects the transfer to result in a modest reduction in CUI’s level of business risk as a result of exiting the power generation business.
…
DBRS also views the transfer as resulting in a modest increase in CUI’s level of financial risk. With the loss of APL2000’s EBITDA contribution, DBRS would expect the transfer to result in a modest weakening of CUI’s adjusted credit coverage metrics (i.e., on a pro forma basis for 2009, EBITDA-to-interest would be approximately 0.3 times lower).

Overall, the increase in financial risk is offset by the reduction in business risk, and as such, there is no impact on CUI’s ratings.

CIU has two issues of preferreds outstanding: CIU.PR.A (a PerpetualDiscount) and CIU.PR.B (a FixedReset). Both are tracked by HIMIPref™.

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.

Great-West Life Assurance has announced:

that it intends to redeem all of its outstanding 5.55% Series O Preferred Shares (GWL.PR.O) on October 31, 2010. The redemption price will be $25.00 for each Series O Preferred Share plus an amount equal to all declared and unpaid dividends, less any tax required to be deducted and withheld by the Company. The paid-up capital of the Series O Preferred Shares is $17.26 per share.

A formal notice and instructions for the redemption of the Series O Preferred Shares will be sent to shareholders in accordance with the rights, privileges, restrictions and conditions attached to the Series O Preferred Shares.

Holders should very carefully examine the sentence about paid-up capital! When the issue is redeemed, holders will be taxed as if there is a capital loss from their purchase price to the paid-up capital of $17.26, with a deemed dividend equal to the difference between the $25.00 paid and this paid-up capital, or $7.74 (in addition to the dividends paid that actually look like dividends, of course). There will be many holders who hold it on the redemption date without knowing this, and there will be a great wailing and a gnashing of teeth when they do their taxes.

GWL.PR.O was last mentioned on PrefBlog when I discussed its particulars. GWL.PR.O is tracked by HIMIPref™ and is currently a member of the PerpetualPremium index.

Update, 2010-9-15: Bolding above is a correction to a stenographical error.

The mailbag brings the following:

I have followed your blog for quite some time, and have found it both interesting and quite informative. I recently got a report from CIBC that says that CBU.PR.A had a yield to maturity of only 0.5%, which seems very low, any idea why someone would want to buy this name? It seems like a no brainer to sell it, and swap it out for something else with similar risk, but a higher yield. But maybe I’m missing something.

Ah yes … when people want to know what’s going on, they come to me. When they want to do actual cash business, they go to CIBC. Story of my life. But since my interlocuter was careful to insert some flattery into the request, why not?

CBU.PR.A was last discussed on PrefBlog in the post CBU.PR.A Announces Normal Course Issuer Bid and at that time I noted that:

benefitted to the point where a unit sold at $25 last fall is now worth $35.65 and the capital units are trading at a big fat discount to intrinsic value.

This still the case. The NAV is currently $36.61, against prices of $21.10 for the capital units and $12.75 for the prefs.

According to the prospectus:

Annual Concurrent Retraction: A holder of a Preferred Share may concurrently retract an equal number of Preferred Shares and Class A Shares on the second last Business Day of January of each year (the “Annual Retraction Date”), commencing in January 2010, at a retraction price equal to the NAV per Unit on that date, less the pro rata portion of the Note then outstanding and less any costs associated with the retraction, including commissions and other such costs, if any, related to the liquidation of any portion of the Portfolio required to fund such retraction. The Preferred Shares and Class A Shares must both be surrendered for retraction at least ten Business Days prior to the Annual Retraction Date. Payment of the proceeds of retraction will be made on or before the 15th Business Day of the following month.

According to the fund’s 2009 Report, the Note had a value 2009-12-31 of about $1.7-million or slightly less than $0.10 per unit.

There are also monthly retractions available at a discount; these were highlighted in the last post.

So if you buy both a capital unit and a preferred share, you are essentially buying a closed end fund at a discount of about 8% that you can liquidate at the end of the year. By me, this is just another instance of the occasionally highly lucrative Split Share Retraction Game and the question is not ‘Why is CBU.PR.A priced so high?’, but ‘Why is CBU priced so low?’

For an answer to the latter question, however, Assiduous Readers will have to query somebody who works at a brokerage that is on television a lot.

CBU.PR.A is not tracked by HIMIPref™.

DBRS has announced that it:

has today assigned a stability rating of STA-2 (middle) to the retractable units (the Units) issued by Advantaged Preferred Share Trust (the Trust). The previous rating of Pfd-2 (low) has been discontinued as the DBRS preferred share rating scale will no longer be applied to the Trust.

Proceeds from the Trust’s offerings have been used to enter into a forward agreement with Royal Bank of Canada in order to gain exposure to a diversified portfolio (the Portfolio) of preferred shares. The forward agreement provides unitholders with a return equivalent to a direct investment in the Portfolio. The Portfolio is passively managed by RBC Dominion Securities Inc. (the Administrator).

On May 11, 2010, DBRS published a methodology for rating structured income funds. Prior to the release of the methodology, DBRS had applied its stability ratings only to income trusts, but with the release of the methodology, the stability rating scale now also applies to Canadian investment income funds. A stability rating provides an opinion on both the stability and sustainability of a fund’s cash distributions per unit.

A stability rating of STA-2 (middle) has been assigned to the Units issued by the Trust. This rating is mainly based on the strong credit quality of the Trust’s preferred share portfolio and the limited flexibility for the Administrator to invest in riskier assets. Also, the Trust’s current net income (including a regular additional payment under the forward agreement to offset operating expenses) covers the full distribution paid out to unitholders. The main constraints to the rating are the interest rate risk of the Portfolio and the potential for capital losses and reductions in income resulting from underlying securities being called for redemption by their respective issuers.

DBRS believes that a stability rating reflecting an opinion on the stability of the fund’s distributions will be useful to the Trust’s investors. The rating is based on factors such as the asset composition, credit quality and diversification of the Trust’s portfolio, among others. For more information on the rating factors considered by DBRS in its analysis, refer to the Structured Income Fund methodology that was published on May 11, 2010.