Category: Issue Comments

I don’t usually highly rating agency confirmations, but this press release, DBRS Confirms Ratings on Industrial Alliance at “A”, Pfd-2 (high) was sufficiently meaty to warrant wider exposure.

DBRS has today confirmed its ratings on Industrial Alliance Insurance and Financial Services Inc. (IAG or the Company) and its related entities. All ratings have a Stable trend. The ratings reflect the Company’s consistently profitable operations and its sustainable and expanding market presence in the Canadian life insurance and wealth management industries, where it serves the financial planning and protection needs of individuals and groups. The Company’s market position is complemented by a conservative risk culture which has limited IAG’s earnings exposure to equity and credit market volatility through the recent credit/economic crisis.

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. The Company’s regulatory capital ratio, at 208% at the end of 2009, is currently above the top end of the Company’s targeted range of 175% to 200% and will rise further to 226%, pro forma the recent preferred and common share issues. The recent share issues have substantially improved IAG’s financial flexibility should it be required to augment its required capital or to fund another in a long line of acquisitions.

Given the existing conservative actuarial reserves and recent favourable experience in terms of interest rate and equity markets, there were no major net reserve adjustments required in 2009 as a result of changing actuarial assumptions or adverse experience. However, because the Company is more focused on the Canadian individual life insurance market than its peers, including its relatively strong market presence in the universal life market, it remains more exposed to the adverse impact of lower interest rates than its more diversified peers. Similarly, the Company retains a larger on-balance-sheet equity exposure to hedge the long-term liabilities under its life insurance products. A severe economic slowdown resulting in prolonged lower interest rates and equity markets would more seriously affect the Company than its peers, all other things being equal. To mitigate some of this risk, the Company remains very conservative in setting its policy reserves, including a recent reduction in the ultimate reinvestment rate assumption to 20 basis points below the Canadian Institute of Actuaries prescribed standard and relatively high reserves against equity market deterioration. In addition, the Company retains a higher proportion of mortality risk than its peers, rather than reinsuring it, since the long-term improvement in mortality ultimately accrues to the Company’s benefit, given its relatively large block of individual insurance.

The Company’s steady diversification of revenues and income across both product lines and geographical markets, combined with a conservative risk culture, has helped it to return to attractive levels of profitability before many of its larger competitors.

IAG has two Straight issues outstanding, IAG.PR.A and IAG.PR.E; and one FixedReset, IAG.PR.C. They are currently marketting a new issue of 5.90% Straights.

ATCO Ltd. has announced:

it will redeem on March 23, 2010 all of its outstanding 5.75% Cumulative Redeemable Preferred Shares, Series 3 at a price of $25.586644 (representing the $25.00 designated capital of each share and a prescribed premium of $0.50 per share plus $0.086644 of accrued and unpaid dividends per share). The total cost of this redemption is $153.5 million.

	Shares	TSX Stock	Redemption Price
Shares	Outstanding	Symbol	Per Share ($)
5.75% Series 3	6,000,000	ACO.PR.A	25.586644

These dividends are eligible dividends for Canadian income tax purposes.

A formal notice and instructions for the redemption of the Series 3 Preferred Shares will be sent to preferred shareholders in accordance with the conditions attached to the Series 3 Preferred Shares.

ACO.PR.A closed last night at 26.20-38, so the risks of holding issues with negative yields-to-worst are illustrated yet again! Of course, one reason they are priced so high appears to be buying by CPD and other indexers in response to the issue’s addition to TXPR in the January rebalancing.

ACO.PR.A was last mentioned on PrefBlog in connection with the calculation of yield-to-issuer-best. It is tracked by HIMIPref™ and is a constituent of the Operating Retractible subindex.

Update: I have uploaded a Chart of the ACO.PR.A / CM.PR.A bid prices from 2009-12-31 to 2010-2-17 (CM.PR.A is the best comparator I can find, although not a very good one). There is a clear bump in the price of ACO.PR.A in the period in which it may be assumed CPD was buying. See the post POW.PR.C: Yes, CPD is the Buyer for another example.

Update, 2010-3-16: S&P announcement of removal from TXPR.

M-Split Corp. has announced:

In connection with the reorganization, the Company’s investment manager, Quadravest Capital Management Inc. (“Quadravest”), will be lowering its annual management fee from 0.55% to 0.45% per annum of the net asset value of the Company. In addition, the discount to net asset value applicable to monthly redemptions of Class I Preferred Shares, Class II Preferred Shares and Capital Shares will be decreased from 4% to 3% and this discount will be paid to Quadravest and not retained by the Company. These measures are intended to lower ongoing expenses of the Company and improve trading prices of the Class I Preferred Shares, Class II Preferred Shares and Capital Shares relative to net asset value for the Company.

Shareholders are being given a special retraction right as a result of the approval of this capital reorganization, which is in addition to the regular monthly retraction at the end of February and the dissent rights which Shareholders had in respect of the special meeting under the Business Corporations Act (Ontario).

Shareholders who do not wish to remain invested in the Company under its reorganized share structure will have until 5:00 p.m. (Toronto time) on February 26, 2010 to provide the Company with notice through their CDS participant that they wish to have their Priority Equity Shares or Class A Shares redeemed pursuant to this special retraction right. On such a special retraction, each holder of a Priority Equity Share will receive the lesser of (i) 96% of the net asset value per Unit of the Company at the retraction date, and (ii) $7.63 per Priority Equity Share (representing the volume weighted average trading price (“VWAP”) of the Priority Equity Shares on the Toronto Stock Exchange (“TSX”) for the 20 trading days ending on February 2, 2010); while holders of Class A Shares will receive the lesser of (i) 4% of the net asset value per Unit of the Company at the retraction date, and (ii) $0.46 per Class A Share (representing the VWAP of the Class A Shares on the TSX for the 20 trading days ending on February 2, 2010). Shareholders interested in exercising such retraction right should contact the CDS Participant through which they hold the Shares for further information and instructions as to how to exercise this right. Shareholders should note that the requirements of any particular CDS Participant may vary, and that Shareholders may need to inform their CDS Participant of any intention to exercise this retraction right in advance of the February 26 deadline.

If more Class A Shares are tendered for retraction under the special retraction right than Priority Equity Shares, the outstanding Priority Equity Shares will be consolidated so that following the retraction pursuant to this special retraction right there would be an equal number of Priority Equity Shares and Class A Shares outstanding. Similarly, if more Priority Equity Shares are tendered for retraction than Class A Shares, the outstanding Class A Shares will be consolidated so that again there would be an equal number of Priority Equity Shares and Class A Shares outstanding following implementation of the special retraction. The Company may implement this consolidation by adjusting the number of Class I Preferred Shares, Class II Preferred Shares, 2011 Warrants and 2012 Warrants to be issued to holders of Priority Equity Shares (in the event a consolidation of Priority Equity Shares is required) or by adjusting the number of Capital Shares to be issued to holders of Class A Shares (in the event a consolidation of Capital Shares is required).

The Company has the discretion not to proceed with this capital reorganization, notwithstanding it has been approved by Shareholders. The Company expects that it will exercise its discretion in this regard only if the number of Priority Equity Shares or Class A Shares being retracted pursuant to the special retraction right is such that the number of Shareholders remaining, or the number of Class I Preferred Shares, Class II Preferred Shares and Capital Shares to be issued and outstanding following implementation of the capital reorganization, is insufficient to meet the listing requirements of the TSX in respect of the Class I Preferred Shares, Class II Preferred Shares and Capital Shares.

The NAVPU as of January 29 is 8.50 net of accrued dividends for the preferred shareholders according to the company, so the ability to retract at 7.63 is no great shakes. It is a total disgrace that the capital unitholders are being allowed to retract at over thirty cents; this displays the spinelessness of preferred shareholders who voted for this plan.

XMF.PR.A was last mentioned on PrefBlog when the reorganization was approved. XMF.PR.A is not tracked by HIMIPref™.

Commerce Split Corp. has announced:

In order to elect one of the two investment options, Shareholders must ensure that they make their election through their CDS Participant, in accordance with such participant’s election process and timing, so that the election is received by Computershare Investor Services Inc. no later than 5:00 p.m. (Toronto Time) on February 26, 2010 (the “Notice Deadline”).

Shareholder should note that the requirements of any particular CDS Participant may vary, and that Shareholders may need to inform their CDS Participant of any intention to elect in advance of the February 26 deadline.

If an Election Notice is not received from a Shareholder by the Notice Deadline, the Shareholder will be deemed to have elected to transfer to into the New Commerce Split Fund. Shareholders are advised to contact their financial advisers if they need assistance in making an investment decision in respect of this election.

Assiduous Readers will remember I recommended against the Reorg but that it passed anyway. Bloodied but unbowed, I now recommend that holders of XCM.PR.A elect to receive units in the “Original Commerce Split Fund”, since I don’t really see any financial advantage on a portfolio perspective that would justify the recapitalization of the company with preferred share-holder money without the extant capital unitholders being wiped out.

XCM.PR.A is not tracked by HIMIPref™.

Allbanc Split Corp. II has announced:

that it has called 441,030 Preferred Shares for cash redemption on February 26, 2010 (in accordance with the Company’s Articles) representing approximately 11.683% of the outstanding Preferred Shares as a result of the special annual retraction of 882,060 Capital Shares by the holders thereof. The Preferred Shares shall be redeemed on a pro rata basis, so that each holder of Preferred Shares of record on February 25, 2010 will have approximately 11.683% of their Preferred Shares redeemed. The redemption price for the Preferred Shares will be $25.00 per share.

In addition, holders of a further 911,822 Capital Shares and 455,911 Preferred Shares have deposited such shares concurrently for retraction on February 26, 2010. As a result, a total of 1,793,882 Capital Shares and 896,941 Preferred Shares, or approximately 21.201% of both classes of shares currently outstanding, will be redeemed.

Holders of Preferred Shares that are on record for dividends but have been called for redemption will be entitled to receive dividends thereon which have been declared but remain unpaid up to but not including February 26, 2010.

Payment of the amount due to holders of Preferred Shares will be made by the Company on February 26, 2010. From and after February 26, 2010 the holders of Preferred Shares that have been called for redemption will not be entitled to dividends or to exercise any right in respect of such shares except to receive the amount due on redemption.

ALB.PR.A was last mentioned on PrefBlog when it was upgraded to Pfd-3(high) by DBRS. ALB.PR.A is tracked by HIMIPref™, but is relegated to the Scraps subindex on credit concerns.

Dominion Bond Rating Service has announced:

that Yellow Media’s conversion, as described, is not expected to have any impact on its current R-1 (low), BBB (high), BBB and Pfd-3 (high) credit ratings. DBRS notes that its credit ratings remain supported by: (1) a manageable business risk profile to date, with Yellow Media’s Directories segment (more than 90% of EBITDA) exhibiting stable results, while cyclical pressure remains evident in its Vertical Media segment (less than 10% of EBITDA), and (2) the improvement in its financial risk profile, which has been a direct result of debt reduction efforts afforded by its reduced distribution rate in May 2009.
…
Additionally, DBRS notes that since Yellow Media lowered its distribution in 2009, the Company has improved its financial risk profile by reducing leverage to end 2009 with debt-to-EBITDA of roughly 2.57 times, down from 2.91 times at the end of 2008. The Company also announced that it plans to continue deleveraging during this transitional period.
…
While reduced leverage helps to support Yellow Media’s financial risk profile, DBRS notes that its ratings are largely based on its business risk profile. While there are significant risks on the horizon as the Company repositions its businesses to adapt to an increasingly digital world, to date DBRS has seen no evidence that this transformation has materially changed the Company’s business risk profile – that is, it retains its leading position as the incumbent directory company across Canada, servicing more than 400,000 local small and medium-sized enterprises.

YPG’s press release is titled Yellow Pages Income Fund Provides Clarity on Path to Conversion to a Corporation

YPG has four preferred share issues outstanding: YPG.PR.A & YPG.PR.B (Operating Retractible) and YPG.PR.C & YPG.PR.D (FixedReset). All are tracked by HIMIPref™ and all are relegated to the Scraps subindex on credit concerns.

Commerce Split Corp. has announced:

that a proposed capital reorganization plan for the Company was approved at the special meeting of Shareholders held earlier today. The Company believes this reorganization has the potential to significantly increase the value attributed to all shareholders.

The reorganization will provide all shareholders with the ability to elect to:

• 1. Maintain the current investment characteristics of their existing shares (a status quo option), through the Original Commerce Split Fund, or
• 2. Have their existing Priority Equity and/or Class A shares reorganized into a new series of shares (the New Commerce Split Fund) that would potentially provide greater distribution and capital growth potential, especially if the common shares of CIBC increase over the remaining 5 year term of the Fund.

Under the New Commerce Split Fund, holders of the existing Priority Equity Shares that elect to transfer into the New Commerce Split Fund will receive the following securities for each Priority Equity share held at the close of business on the record date (to be determined):

One $5.00 Class I Preferred Share – paying fixed cumulative preferential monthly dividends to yield 7.50% per annum on the $5.00 notional issue price and having a repayment objective on December 1, 2014 or such other date as the Company may be terminated (the “Termination Date”) of $5.00;

One $5.00 Class II Preferred Share – paying distributions to yield 7.50% per annum on the $5.00 notional issue price if and when the net asset value per Unit exceeds $12.50 and having a repayment objective on the Termination Date of $5.00;

One-half 2011 Warrant – each full 2011 Warrant can be exercised to purchase one Unit for an exercise price of $10.00 at specified times until February 28, 2011; and

One 2012 Warrant – each 2012 Warrant can be exercised to purchase one Unit for an exercise price of $12.50 at specified times until February 28, 2012.

Holders of the existing Class A Shares would receive a Capital share for each share held and would continue to participate in any net asset value growth over $10.00 per Unit.

It is expected that Class I Preferred Shares, Class II Preferred Shares, Capital Shares, 2011 Warrants and 2012 Warrants will be issued sometime in March 2010 and will commence trading on the TSX at the opening of trading on such date.

The Company will issue shortly a further press release including all key dates related to the election process and capital reorganization.

I had previously recommended against the plan but nobody ever listens to me. Undeterred, I will now recommend that holders of XMF.PR.A elect to receive holdings in the “Original” group. I challenge all comers to show me a scenario of prices of CIBC common (“CM”) which show that the “New” plan is superior to assigning extant holdings to the “bond” part of their portfolios and buying a few CM shares directly.

XCM.PR.A is not tracked by HIMIPref™.

M-Split Corp. has announced:

that a proposed capital reorganization plan for the Company was approved at the special meeting of Shareholders held earlier today. The Company believes this reorganization has the potential to significantly increase the value attributed to all shareholders.

Holders of the existing Priority Equity Shares will receive the following securities for each Priority Equity share held at the close of business on the record date (to be determined):

One $5.00 Class I Preferred Share – paying fixed cumulative preferential monthly dividends to yield 7.50% per annum on the $5.00 notional issue price and having a repayment objective on December 1, 2014 or such other date as the Company may be terminated (the “Termination Date”) of $5.00;

One $5.00 Class II Preferred Share – paying distributions to yield 7.50% per annum on the $5.00 notional issue price if and when the net asset value per Unit exceeds $12.50 and having a repayment objective on the Termination Date of $5.00;

One 2011 Warrant – each 2011 Warrant can be exercised to purchase one Unit for an exercise price of $10.00 at specified times until February 28, 2011; and

One 2012 Warrant – each 2012 Warrant can be exercised to purchase one Unit for an exercise price of $12.50 at specified times until February 28, 2012.

Holders of the existing Class A Shares would receive a Capital share for each share held and would continue to participate in any net asset value growth over $10.00 per Unit.

It is expected that Class I Preferred Shares, Class II Preferred Shares, Capital Shares, 2011 Warrants and 2012 Warrants will be issued sometime in March 2010 and will commence trading on the TSX at the opening of trading on such date.

The Company will issue shortly a further press release including all key dates related to the capital reorganization.

I had previously recommended against the reorganization, but does anybody every listen to me? I believe the preferred shareholders have given up a perfectly good, well secured fixed income investment for more speculative securities; they would have been better off reallocating their holdings to the “bond” part of their portfolio and buying better preferreds … but that isn’t what happened.

XMF.PR.A is not tracked by HIMIPref™.

Fairfax Financial Holdings has announced that it:

has completed its previously announced public offering of Cumulative 5-Year Rate Reset Preferred Shares, Series E in Canada. Fairfax issued 8 million Series E Preferred Shares for net proceeds, after commissions and expenses, of approximately $194 million.

The Series E Preferred Shares were sold through a syndicate of Canadian underwriters led by BMO Capital Markets that included CIBC World Markets, RBC Capital Markets, Scotia Capital, TD Securities, National Bank Financial, GMP Securities, Cormark Securities, Desjardins Securities and HSBC Securities.

The issue suffered through a rather poor first day, trading 117,310 shares in a range of 24.00-50 before closing at 24.10-19, 5×14. I suspect a good chunk is still on the underwriters’ books.

Vital Statistics are:

The FixedReset 4.75%+216 issue was announced January 21. FFH.PR.E is tracked by HIMIPref™, but is relegated to the Scraps subindex on credit concerns.

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.