Category: Issue Comments

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.

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.