Category: Issue Comments

Dominion Bond Rating Service has announced that it:

has today assigned a stability rating of STA-3 (high) to the retractable units (the Units) issued by Diversified 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 invest in a diversified portfolio (the Portfolio) of preferred shares and securities. The Portfolio is passively managed by Sentry Select Capital 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-3 (high) 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. The main constraint to the rating is the current shortfall in portfolio income relative to the distribution paid out to the Trust’s unitholders. The Trust’s net income can currently cover approximately 83% of the distributions paid out to unitholders. Other constraints to the rating include the interest rate risk of the Portfolio and the capital losses that may result 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.

The statement The Trust’s net income can currently cover approximately 83% of the distributions paid out to unitholders is, I think, a little misleading: a large proportion of the fund’s holdings are FixedResets, which may well be called in the short term; a chunk of the fund’s dividend income is, in fact, return of capital.

However, it must be remembered that in the fall of 2006, I predicted disaster for preferred share closed end fund distributions on the basis that all of them PerpetualPremium thingies were in danger of being called in the short term. Guess what happened next!

Additionally, I will quibble about the unqualified use of the word “passive” given the variation in the degree of leverage indulged in by the fund:

As at December 31, 2009, the Facility drawn down using bankers’ acceptances and prime rate loans was $Nil (2008 – $Nil) and $13,850,000 (2008 – $11,000,000), respectively. The interest and other charges on the Facility for the year was $407,608 (2008 – $810,482). During 2009, the minimum and maximum Facility balance was $6,000,000 (2008 – $11,000,000) and $13,850,000 (2008 – $25,000,000), respectively. As of December 31, 2009, the Fund is in compliance with the Facility’s covenants.

I am pleased to see that the fund is now publishing monthly performance numbers although it is not immediately clear whether the performance is based on market price or NAV.

Premium Income Corporation has announced:

that its Board of Directors has approved a proposal to extend the term of the Fund for an additional seven years.

The final redemption date for the Class A Shares and Preferred Shares of the Fund is currently November 1, 2010 and the Fund proposes to implement a reorganization (“Reorganization”) that will allow shareholders to retain their investment in the Fund until at least November 1, 2017.

In connection with the Reorganization, holders of Class A Shares will continue to receive ongoing leveraged exposure to a high-quality portfolio consisting principally of common shares of Bank of Montreal, The Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Royal Bank of Canada and The Toronto-Dominion Bank, as well as attractive quarterly cash distributions. Currently, the Fund is paying quarterly distributions at a rate of $0.60 per year. The Fund intends to continue to pay distributions at this rate until the net asset value (“NAV”) per Unit (a “Unit” being considered to consist of one Class A Share and one Preferred Share) reaches $22.50. At such time, quarterly distributions paid by the Fund will vary and will be calculated as approximately 8.0% per annum of the NAV of a Class A Share. If the Reorganization is approved and implemented, holders of Preferred Shares are expected to continue to benefit from fixed cumulative preferential quarterly cash dividends in the amount of $0.215625 per Preferred Share ($0.8625 per year) representing a yield of 5.75% per annum on the original issue price of $15.00.

As part of the Reorganization, the Fund is also proposing other changes including changing its authorized share capital by adding new classes of shares issuable in series, changing the monthly retraction prices for the Class A Shares and the Preferred Shares so that they are calculated by reference to market price in addition to NAV and changing the dates by which notice of monthly retractions needs to be provided and by which the retraction amount will be paid. The Fund will also allow for the calculation of a diluted NAV in the event the Fund should ever issue warrants or rights to acquire additional Class A Shares or Preferred Shares.

The Fund believes that the Reorganization will allow shareholders to maintain their investment in the Fund on a basis that will better enable it to meet its investment objectives for both classes of shares.

If the Reorganization is approved and implemented, shareholders will be given a special retraction right to retract their Class A Shares or Preferred Shares at NAV on November 1, 2010. The redemption date of the shares will automatically be extended for successive seven-year terms after November 1, 2017, the Board of Directors will be authorized to set the dividend rate on the Preferred Shares for any such extension of term and shareholders will be able to retract their Class A Shares or Preferred Shares at NAV prior to any such extension.

A special meeting of holders of Class A Shares and Preferred Shares has been called and will be held on September 29, 2010 to consider and vote upon the proposal. Further details of the proposal will be outlined in an information circular to be prepared and delivered to holders of Class A Shares and Preferred Shares in connection with the special meeting. The Reorganization is also subject to all required regulatory approvals.

A fascinating part of this press release is the section As part of the Reorganization, the Fund is also proposing other changes including changing its authorized share capital by adding new classes of shares issuable in series, changing the monthly retraction prices for the Class A Shares and the Preferred Shares so that they are calculated by reference to market price in addition to NAV and changing the dates by which notice of monthly retractions needs to be provided and by which the retraction amount will be paid.

So it sounds like they want to go the route taken by CGI and BNA (there may be others) and have what is essentially permanent capital units leveraged by a variety of preferreds. Changing the monthly retraction price sounds like it could be scary, but we will just have to wait for details.

Another item of interest is their intention to provide a partial NAV test on capital unit distributions, so that these distributions will be relatively low until Asset Coverage exceeds 1.5x.

However, the problem with this proposal is that preferred shareholders are being asked to provide a term extension for junk. The NAV on August 12 is only $19.94 implying Asset Coverage of only 1.3+:1. That’s pretty skimpy. On the other hand, the promoters are proposing to continue the dividend rate of 5.75%, which is relatively good.

Comparators are:

Well, you can make what you like of it, but I say that a measly 5.75% isn’t enough to compensate seven-year money for low Asset Coverage and the lack of a full NAV test (in which Capital Unitholders get NOTHING, zip, zero, zilch, for as long as Asset Coverage is below 1.5:1).

This is particularly true since Income Coverage in 1H10 was only 0.8-:1 … coverage of the distributions to both preferred share and capital unitholders was 0.5-:1.

We want more! At least one of:

• Full NAV Test
• Higher Coupon
• Higher Asset Coverage (by consolidation of Capital units / partial redemption of preferreds)

Otherwise – and subject to the potential for very pleasant, but unlikely, surprises in the final documents … VOTE NO!

PIC.PR.A was last mentioned on PrefBlog when it was Upgraded to Pfd-4(high) by DBRS. PIC.PR.A is tracked by HIMIPref™, but is relegated to the Scraps index on credit concerns.

AltaGas Ltd. has announced:

it has closed its previously announced public offering of 8,000,000 Cumulative Redeemable Five-Year Rate Reset Preferred Shares, Series A (the “Series A Preferred Shares”) at a price of $25 per Series A Preferred Share (the “Offering”). The Offering resulted in AltaGas receiving gross proceeds of $200 million.

The Offering was first announced on August 10, 2010 when AltaGas entered into an agreement with a syndicate of underwriters, led by TD Securities Inc., RBC Capital Markets and CIBC World Markets Inc.
Net proceeds from the Offering will be used to reduce outstanding indebtedness under AltaGas’ credit facilities, thereby strengthening AltaGas’ balance sheet and giving it the financial flexibility to support, among other things, construction activities related to the Forrest Kerr project.

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

The offering was super-sized from $150-million to $200-million, announced, August 10.

ALA.PR.A was announced as a FixedReset 5.00%+266 on August 10.

It traded 989,638 shares today in a range of 25.19-42 before closing at 25.38-44, 17×50.

Vital statistics are:

Faircourt Asset Management has announced:

that it will hold securityholder meetings on September 13, 2010 for Faircourt Income & Growth Split Trust (“FIG”) and Faircourt Split Trust (“FCS”, and together with FIG, the “Funds”). At the meetings, holders of units (“Unitholders”) and holders of preferred securities (“Preferred Securityholders”) of FIG will be asked to consider the proposed merger (the “Merger Proposal”) of FIG into FCS, to create a single trust (the “Continuing Trust”). Preferred Securityholders of FIG will also be asked to consider the proposed exchange (the “Exchange”) of FIG preferred securities for a new class of preferred securities of the Continuing Trust which, if approved, is expected to occur shortly following approval. FCS Unitholders and FCS Preferred Securityholders will also be asked to consider various amendments to the FCS declaration of trust and FCS trust indenture (the “FCS Proposals”).

The Merger Proposal and FCS Proposals are being proposed in 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 their investment restrictions. Consequently, the Manager has proposed that the investment mandate of the Continuing Trust be expanded to remedy this situation. The Manager believes that these amendments will also benefit Securityholders by allowing the Continuing Trust to invest in a broader range of securities and giving the Continuing Trust the flexibility to adjust its portfolio in the future as and when required to respond to market movements.

The meetings of Unitholders and Preferred Securityholders will be held on September 13, 2010 at Stikeman Elliott LLP, 199 Bay Street, 51st Floor, Toronto Ontario, M5L 1B9 and details regarding the Merger Proposal, FCS Proposals and the Exchange will be contained in a joint management information circular (the “Circular”) which will be mailed to Unitholders and Preferred Securityholders later in August. The Circular will also then be posted on Faircourt’s website and on the SEDAR website at www.sedar.com. The record date for the special meetings is August 13, 2010. If no quorum is present for any meeting of Unitholders, such meeting(s) will be adjourned until September 27, 2010. If no quorum is present for any meeting of Preferred Securityholders, such meeting(s) will be adjourned until September 20, 2010. Unitholders and Preferred Securityholders are encouraged to attend the meetings or complete the proxy forms or voting instruction forms (as described in the Circular) in order that their units and preferred securities can be voted at the meetings.

Pretty skimpy information and there’s nothing on the website. Yield? Tax status of future distributions? Asset Coverage? Portfolio Manager? We’ll just have to wait.

FIG.PR.A was last mentioned on PrefBlog when distributions to the Capital Unitholders were suspended. FIG.PR.A is tracked by HIMIPref™ but is relegated to the Scraps index due to credit concerns.

Update 2010-8-20: FIG.PR.A has been put on Review – Developing by DBRS

S Split Corp has announced:

that it has filed a final short form prospectus relating to an offering of Warrants to holders of its Class A Shares. Each Class A shareholder of record on August 23, 2010 will receive one Warrant for each Class A Share held.

Each Warrant will entitle its holder to acquire one Class A Share and one Preferred Share upon payment of the subscription price of $19.13.

The Toronto Stock Exchange has conditionally approved the listing of the Warrants under the symbol SBN.WT.A and the Class A Shares and the Preferred Shares issuable upon the exercise thereof. It is expected that the Warrants will commence trading on August 19, 2010 and will remain trading until noon (Toronto time) on the expiry date of January 17, 2011.

The exercise of Warrants by holders will provide the Fund with additional capital that can be used to take advantage of attractive investment opportunities and is also expected to increase the trading liquidity of the Class A Shares and the Preferred Shares and to reduce the management expense ratio of the Fund.

The Fund invests in a portfolio of common shares of The Bank of Nova Scotia.

SBN.PR.A was last mentioned on PrefBlog when they announced that they were going to try again with the warrants. SBN.PR.A is tracked by HIMIPref™, but is relegated to the Scraps index on credit concerns.

Update, 2010-10-9: The warrants have been issued:

Under the warrant offering, the Fund issued one Warrant for each Class A Share of the Fund held by holders of record on August 23, 2010. Each Warrant entitles its holder to acquire one Unit at a subscription price of $19.13 commencing on August 24, 2010 and ending on the expiry date of January 17, 2011. The Warrants trade on the Toronto Stock Exchange under the ticker symbol SBN.WT.A and will continue trading until noon (Toronto time) on the expiry date.

DBRS has announced that it:

has today placed the Pfd-4 (high) rating of the Preferred Shares issued by World Financial Split Corp. (the Company) Under Review with Negative Implications.

In February 2004, the Company raised gross proceeds of approximately $471 million by issuing 18.85 million Preferred Shares at $10 each and an equal number of Class A Shares at $15 each.
…
The NAV and the dividend income of the Portfolio have declined significantly over the past few years because of the high Portfolio concentration in global financial institutions. The current dividend income of the Portfolio does not fully cover the Preferred Share distribution; however, less than one year remains until the termination of the Company, mitigating the negative impact of the shortfall.

The NAV of the Company declined over the past four months, dropping from $13.35 on March 31, 2010, to $11.60 on July 31, 2010. The current downside protection available to the Preferred Shareholders is approximately 14% (as of July 31, 2010). As a result of the decreased protection available to the Preferred Shares, the rating has been placed Under Review with Negative Implications. The resolution of the Under Review status will depend on the performance of the Portfolio during August and September.

The final redemption date for both classes of shares issued is June 30, 2011.

I must say, I find the “Review-Negative” status a little surprising for a SplitShare corporation. I mean, the whole rating process is supposed to be formula driven, isn’t it? What are they reviewing? It’s not like the company has announced surprisingly poor earnings and they have to wait a month until they can meet management.

Waiting for performance for August and September to be learnt? That doesn’t make any sense to me at all. What is the percentage chance, NOW, of the issue defaulting?

But I suppose they had to say something – the warrant issue prospectus was filed today:

World Financial Split Corp. (the “Fund”) is pleased to announce that it has filed a final short form prospectus relating to an offering of Warrants to holders of its Class A Shares. Each Class A shareholder of record on August 23, 2010 will receive one Warrant for each Class A Share held.

Each Warrant will entitle its holder to acquire one Class A Share and one Preferred Share upon payment of the subscription price of $11.43.

The Toronto Stock Exchange has conditionally approved the listing of the Warrants under the symbol WFS.WT.A and the Class A Shares and the Preferred Shares issuable upon the exercise thereof. It is expected that the Warrants will commence trading on August 19, 2010 and will remain trading until noon (Toronto time) on the expiry date of January 17, 2011.

WFS.PR.A was last mentioned on PrefBlog when they announced preparations for the warrant issue. WFS.PR.A is tracked by HIMIPref™, but is relegated to the Scraps index on credit concerns.

Hard on the heels of the S&P downgrade, DBRS has announced that it:

has today downgraded its long-term debt and preferred share ratings on Manulife Financial Corporation (MFC or the Company) and its affiliates, including the Issuer Rating of its major operating subsidiary, The Manufacturers Life Insurance Company (MLI), to AA (low) from AA. The Claims Paying Ability and Commercial Paper ratings of MLI have been confirmed at IC-1 and R-1 (middle), respectively. All the trends are Stable. With earnings volatility expected to continue at elevated levels, notwithstanding the best efforts of management to contain market exposures, DBRS recognizes that the Company’s heightened risk profile and the associated adverse impact on regulatory capital and financial flexibility can no longer support the pre-existing ratings and have resulted in the negative rating action.
…
The Company has indicated that during the third quarter of 2010, it is expecting to complete its annual actuarial review of the morbidity assumptions embedded in the reserves held against its Long-Term Care policy liabilities. The Company expects to incur a charge of between $700 million and $800 million related to this change in assumptions, although this could be offset somewhat by in-force price adjustments.

I hadn’t seen that number before. As I noted when reporting their quarterly results in MFC Warns of Increased Capital Requirements, last week they had no idea what the number was going to be, except ‘Maybe big’.

the degree of the drop in the minimum continuing capital and surplus requirements (MCCSR) – from 250% at the end of March 2010 to 221% at the end of June 2010 – suggests that another negative quarter will force the Company to raise additional capital. In the meantime, it is DBRS’s view that the Company’s financial flexibility has become increasingly constrained, as the most readily available sources of capital have already been tapped. In addition to two major common equity issues totaling close to $5 billion in 2008 and 2009, a 50% cut in the common dividend and a corporate re-organization designed to free up regulatory capital, the Company has raised close to $1.5 billion in debt and preferred share financings, which increased its financial leverage ratios to the point where DBRS was no longer comfortable with the Company’s pre-existing ratings. At the new rating categories, the Company has at least some additional room to issue debt capital instruments.

MFC has the following preferred shares outstanding: MFC.PR.A (OpRet); MFC.PR.B & MFC.PR.C (PerpetualDiscount); MFC.PR.D & MFC.PR.E (FixedReset). All are tracked by HIMIPref™ and all are included in the noted indices.

And who knows? Perhaps DBRS mention of the “additional room to issue debt capital instruments” means that MFC has said ‘Please sir, I want some more!’

Standard & Poor’s has announced:

• The earnings volatility of the Manulife group of companies exceeds our expectations for higher ratings, and the group has significant variable annuity and segregated fund guarantee values that remain unhedged.
• In addition, Manulife Financial Corp. reported a C$2.4 billion net loss for the quarter ended June 30, 2010, and there could be material charges in the next quarter arising from its annual review of all actuarial methods and assumptions.
• As a result, we have lowered our counterparty credit rating on Manulife Financial Corp. to ‘A’ from ‘A+’ and our counterparty credit and financial strength ratings on its core and guaranteed insurance operating subsidiaries to ‘AA’ from ‘AA+’.
• The outlook is negative because of the continuing earnings volatility and the associated pressure on fixed-charge coverage and capitalization levels.

…
We could lower the ratings again if 2011 earnings continue to be highly volatile (whether because of unhedged variable annuity guarantee values or risk exposures), if fixed-charge coverage is less than the 6x-8x expected for similarly rated holding companies in 2011, or if capitalization is not solidly redundant at the ‘AA’ confidence level. Alternatively, if the group meets these conditions on a sustained basis and the group maintains its broad competitive advantages and relatively conservative investment risk profile, we would likely affirm the ratings.

MFC has the following preferred shares outstanding: MFC.PR.A (OpRet); MFC.PR.B & MFC.PR.C (PerpetualDiscount); MFC.PR.D & MFC.PR.E (FixedReset). All are tracked by HIMIPref™ and all are included in the noted indices.

This follows a similar cut in the SLF credit rating in April, although that one was on the basis of sustainable earnings rather than volatility.

Moody’s doesn’t rate MFC, but it does rate the subsidiaries … and it’s not too happy:

Moody’s Investors Service has placed on review for possible downgrade the Aa3 insurance financial strength (IFS) ratings of the life insurance subsidiaries of Manulife Financial Corporation (Manulife; TSX: MFC, unrated) – including The Manufacturers Life Insurance Company (MLI), and John Hancock Life Insurance Company (U.S.A). Other affiliated ratings were also placed on review for possible downgrade (see complete list, below). The rating action follows Manulife’s announcement of a C$2.4 billion net loss in 2Q10, as well as the likelihood of a sizeable charge in 3Q10 for unfavorable long-term care morbidity experience.

Commenting on the review for possible downgrade, Moody’s said that the poor experience of MFC’s U.S. long-term care (LTC) block was not anticipated in its 2009 rating downgrades of MFC’s life insurance subsidiaries. In addition, MFC’s 2Q10 results were materially worse than peers’, due to its more sizeable unhedged exposure to variable annuity/segregated funds and its greater sensitivity to low interest rates on its long-tailed, guaranteed insurance liabilities (i.e., LTC and universal life insurance with secondary guarantees).

2Q10 Shareholders’ Report:

OSFI continues to update and amend the MCCSR guideline in response to emerging issues. The capital requirements for segregated fund guarantees were amended in 2008 and the Company expects that the requirements will increase for new business issued after December 31, 2010. The extent of the increase in requirements has not been finalized and discussions with OSFI are on-going. The Company expects further changes in segregated fund guarantee requirements, likely in 2013, that will impact its existing business. The impact of these future changes is uncertain.

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