Category: Issue Comments

My heart sank as I began tracking down these guys in response to a query. Union Gas Limited is owned by Spectra Energy, which I am sure is a very nice company, run by people who are kind to small fluffy animals, but is completely useless at communicating with preferred shareholders of its subsidiaries.

Union Gas still publishes audited financials on SEDAR and the 2008 Annual Report discloses:
12. Mandatorily Redeemable Preference Shares

The Class A Preference Shares, Series A and C are cumulative and redeemable at $50.50 per share. The Company is obligated to offer to purchase $170,000 of Series A and $140,000 of Series C shares annually at the lowest price obtainable, but not exceeding $50 per share.

Any further information will have to come from Spectra!

Here’s an odd one! I was asked about this issue today – but it’s such a small issue it’s not in my database. So, I’m putting a short description here, just to make sure I have the information handy in the future.

The company is Pacific Northern Gas, soon to become famous as the corporation with the world’s slowest website.

According to the prospectus for common shares dated 2005-4-6 (available on SEDAR):

6 3/4% Cumulative Redeemable Preferred Shares

The Preferred Shares are entitled to the payment of Ñxed cumulative preferential cash dividends at the rate of 63/4% per annum on the amounts from time to time paid up thereon as when declared by the board of directors of the Company, have priority in the event of the liquidation, dissolution or winding up of the Company over the Common Shares, are non-voting and are redeemable at the option of the Company at $26 per share plus any accrued and unpaid dividends at the date of redemption. The Company may not create shares ranking prior to the Preferred Shares but may create and issue other shares ranking on parity with those shares.

Annual dividends are $1.6875; the par value is $25.00. There are only 200,000 of these shares outstanding.

One wonders why such a small issue remains outstanding. Hey! Any investment bankers out there? I know that in the States, many of their 8,000 banks issue preferred shares not to the public, but to CDO packagers and resellers. There must be quite a few Canadian corporations that would love to issue $5-million or so in prefs, but can’t because the cost is ridiculous. Why don’t we have CDO packagers and resellers in Canada?

Or – even better – an ETF! Start it off with a $100-million IPO (the insurers could supply suitable product for the initial holdings out of their back pocket) and then make it grow with share exchanges: you give me a $5-million private placement, I’ll give you 200,000 shares, which you can then sell.

Commerce Split Corp. has announced:

that it has filed and mailed the Management Information Circular to all holders of Priority Equity shares and Class A shares of record on December 14, 2009 in connection with a special meeting of shareholders to be held on Wednesday, February 3, 2010.

As previously reported, the purpose of the meeting is to consider and vote upon a proposal which would essentially offer all Priority Equity and Class A shareholders an alternative investment option from their current holdings in the Fund. The special resolution, if passed, would provide 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) choose to 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 Company.

Management and the Board of Directors of the Company believes the reorganization proposal is in the best interest of all shareholders in light of the current status of the Company and accordingly recommends that shareholders vote for the special resolution.

The reorganization is hopelessly complex. If it proceeds, shareholders can convert into the “New” or “Status Quo” structures; the status quo retains the rights and – presumably – claim on underlying assets of the existing structure.

So let us assume that every Preferred Shareholder converts to “Status Quo” and every Capital Unitholder converts to “New”, which seems to me to be the most rational option. What happens then? The Information Circular explains (contingency 8):

All Priority Equity Shares tendered for conversion into the Original Commerce Split Fund will be so converted. Class A Shareholders electing to convert into the New Commerce Split will only be allowed to so convert their Class A Shares, and Class A Shareholders failing to file an election form will only have their Class A Shares converted, on a pro rata basis, such that, at the end of the conversion, there are at least 500,000 Class A Shares converted into Class A Shares of the Original Commerce Split Fund. Additional Class A Shares will be converted into Class A Shares of the Original Commerce Split Fund on a pro rata basis, such that an equal number of Class A Shares and Priority Equity Shares are converted into Class A Shares and Priority Equity Shares of the Original Commerce Split Fund.

That part is at least half-way reasonable, but it’s a lot more reasonable to vote against the reorganization and pound it into the Capital Unitholders’ heads that their shares are basically worthless. Then buy ’em up and tender for the October retraction. If you want exposure to CM, allocate your current holdings of XCM.PR.A to your short-term bond portfolio and buy CM directly for your stock portfolio.

Vote No!

XCM.PR.A was last discussed on PrefBlog when the meeting date was announced. XCM.PR.A is not tracked by HIMIPref™.

M-Split Corporation has announced:

that it has filed and mailed the Management Information Circular to all holders of Priority Equity shares and Class A shares of record on December 14, 2009 in connection with a special meeting of shareholders to be held on Wednesday, February 3, 2010.
As previously reported, the purpose of the meeting is to consider and vote upon a proposal to reorganize the share capital of the Fund. The special resolution, if passed, would provide shareholders with the ability to have their existing Priority Equity and/or Class A shares reorganized into a new series of shares that would potentially provide greater distribution and capital growth potential, especially if the common shares of Manulife increase over the remaining 5 year term of the Company.
Management and the Board of Directors of the Company believes the reorganization proposal is in the best interest of all shareholders in light of the current status of the Company and accordingly recommends that shareholders vote for the special resolution.

The cover letter explains:

In summary, holders of the existing Priority Equity Shares would receive the following securities for each Priority Equity share held:

One $5 Class I Preferred share: paying fixed cumulative preferential monthly dividends to yield 7.5% per
annum and having a repayment objective on the Termination Date of $5

One $5 Class II Preferred share: paying distributions to yield 7.5% per annum on the $5 notional issue
price if and when the net asset value per Unit of the New M Split Fund exceeds $12.50 and having a repayment objective on the Termination date of $5.00

One 2011 Warrant: each Warrant can be used to purchase one Unit (consisting of one Class I Preferred share, one Class II Preferred share and one Capital share) for an exercise price of $10.00 at specified times until February 28, 2011

One 2012 Warrant: each Warrant can be used to purchase one Unit (consisting of one Class I Preferred share, one Class II Preferred share and one Capital share) 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 Class A share held:

One Capital Share: Capital shares would continue to participate in any net asset value growth over $10.00 per Unit and dividends would only be reinstated if and when the net asset value per Unit exceeds $15.00. The increased exposure to the Manulife common shares would offer much greater capital appreciation potential, especially if the value of such common shares were to increase over the remaining life of the Fund.

The package offered to the Preferred shareholders is a nightmare to price, which may well be the whole point. Multiple options – which really just allow for the dilution of the capital unitholders, they’re not really priceable as options in the usual manner – differential dividend policies …. I would be much more inclined to look at a Monte Carlo simulation to price this muck rather than attempting a closed form solution.

Ultimately, though, preferred shareholders are offering capital unitholders a package with some value, as opposed to the value they have now, which is zero. If you want exposure to MFC, it’s a whole lot easier to consider the current preferreds as a short-term fixed income investment and simply buy MFC directly.

Vote No!

It’s much easier to buy up the extant capital units (quoted today at 0.36-38, 1×10, no volume) and tender for the annual October retraction.

XMF.PR.A was last discussed on PrefBlog when the meeting date for this proposal was announced. XMF.PR.A is not tracked by HIMIPref™.

Big 8 Split Corp has announced (though not yet on their website):

that, pursuant to an over-allotment option, it has completed an additional issuance of 23,500 Class C Preferred Shares, Series 1 (the “Class C Preferred Shares”) and 23,500 Class A Capital Shares (the “Capital Shares”) raising $752,000. As a result, the company has raised gross proceeds totalling approximately $25.2 million under its recent offering. The Class C Preferred Shares and Capital Shares were offered to the public by a syndicate of agents led by TD Securities Inc and Scotia Capital Inc., and including BMO Capital Markets, National Bank Financial Inc., Canaccord Capital Corporation, GMP Securities L.P., HSBC Securities (Canada) Inc., Raymond James Ltd., Blackmont Capital Inc., Desjardins Securities Inc., Dundee Securities Corporation, Manulife Securities Incorporated and Wellington West Capital Markets Inc.

Big 8 Split Inc. was established to generate dividend income for the preferred shares while providing holders of the Capital Shares with a leveraged opportunity to participate in capital appreciation from a portfolio of common shares of Bank of Montreal, The Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Royal Bank of Canada, The Toronto-Dominion Bank, Great-West Lifeco Inc., Manulife Financial Corporation, and Sun Life Financial Inc. Information concerning Big 8 Split Inc. is available on our website at www.tdsponsoredcompanies.com

Canadian Life Companies Split Corp. has announced:

that it has filed a final prospectus relating to an offering of warrants (“Warrants”) to all Class A Shareholders. Each Class A Shareholder of record on January 15, 2010 will receive one Warrant for each Class A Share held. Each Warrant will entitle the holder to purchase a “Unit” (consists of one Class A Share and one Preferred Share) upon payment of the subscription price of $15.65 (which is the sum of the most recently calculated NAV per Unit prior to the date of the preliminary prospectus plus the estimated per Unit fees and expenses of the Offering). Warrants may be exercised at any time before the earlier of i) October 27, 2010 or ii) such date which is 20 business days from the date the Company exercises its right to call the Warrants.

The net proceeds from the subscription of Units will be used to acquire additional securities in accordance with the Company’s investment objectives. The exercise of Warrants by holders will provide the Company 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 reduce the management expense ratio of the Company.

The Warrants are being exclusively provided to all Class A Shareholders. Warrantholders will have the opportunity to potentially acquire Units at a price lower than the trading price in the marketplace.

The NAVPU was 15.67 as of Dec 31, according to the company. The prospectus is available.

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

Now I’ve seen it all.

CM.PR.A closed today at 26.65-80 after trading 3,142 shares in a range of 26.80-85.

According to the prospectus dated 2001-1-17:

The non-cumulative class A preferred shares Series 23 (the “Series 23 Shares”) of Canadian Imperial Bank of Commerce (“CIBC”) will be entitled to non-cumulative preferential cash dividends, payable quarterly, as and when declared by the Board of Directors of CIBC. Quarterly dividends shall be payable at a rate of $0.33125 per share.
…
on and after October 31, 2007, CIBC may redeem the Series 23 Shares in whole or in part by the payment in cash of a sum equal to the issue price per share plus, if redeemed before October 31, 2010, a premium, together with declared and unpaid dividends to the date fixed for redemption.
…
On and after July 31, 2011, subject to the right of CIBC on two days’ notice prior to the conversion date to redeem for cash or to find substitute purchasers, each Series 23 Share will be convertible at the option of the holder on the last business day of January, April, July and October in each year on 30 days’ notice into that number of freely-tradeable Common Shares determined by dividing $25.00 together with declared and unpaid dividends to the date of conversion, by the greater of $2.00 and 95% of the weighted average trading price of the Common Shares.

OK, is everybody clear on this? It’s important. The retraction date is 2011-7-31; it may therefore be assumed that the shares will be called at par 2011-7-30. So here’s the standard reasoning:

• If retracted by the holders, the holders will receive common shares worth $26.04
• Therefore, they will exercise their retraction privilege if the preferreds are trading at less than $26.04
• The shares will only trade above $26.04 on the retraction date if the coupon is significantly higher than market yields at that time
• If the coupon is significantly higher than the market yield, it will be in CM’s interest to call the issue.
• It is in CM’s interest to avoid retraction, since they would much rather sell $26.04 worth of common for $26.04 rather than taking $25 face value of preferreds for it.
• Therefore, it may be assumed that CM will call the issue – at the latest! – on the day prior to the holders getting the retraction privilege

It is possible to find fault with this logic – it’s not a mathematical theorum, for heaven’s sake – but the probability of a call at $25.00 is so overwhelmingly likely that any deviation from the scenario should be considered a bonus.

It should be noted that the very existence of this issue should be considered a bonus. Assiduous Reader adrian2 won a PrefLetter some time ago when I had a contest about the analysis of issues with a negative yield-to-worst. The explanation referred to ACO.PR.A, but it can be applied to anything.

Since CM.PR.A is currently callable at 25.25, it is clear that the market isn’t too worried about an immediate call and expects CM to hang on to the money for as long as possible.

But here’s the curious part – the cash flow analysis to the presumed maturity 2011-7-30:

2010-05-01 DIVIDEND 0.33 0.998579 0.33
2010-08-01 DIVIDEND 0.33 0.997453 0.33
2010-11-01 DIVIDEND 0.33 0.996328 0.33
2011-02-01 DIVIDEND 0.33 0.995205 0.33
2011-05-01 DIVIDEND 0.33 0.994120 0.33
2011-07-30 FINAL DIVIDEND 0.33 0.993023 0.32
2011-07-30 MATURITY 25.00 0.993023 24.83

There are only six more dividends payable prior to the presumed maturity at $25.00 and each dividend is for $0.33125 (rounded to 0.33 in the table above). Hence, the total cash flow expected from this issue is 26.9875 – not much higher than today’s prices.

In fact, when you perform a yield calculation for this issue, the yield until the 2011-7-30 softMaturity is 0.45%.

Let me repeat that:0.45%. And that’s the maximum. If it’s called earlier – like, for instance, 2010-10-31, the first day they can call at par – then the realized yield from today’s price will be less than this figure.

According to Canadian Bond Indices the 1.25% Canada bonds due June 1, 2011 are yielding 0.98%.

Now I’ve seen it all.

Update: Assiduous Reader BC writes in and says:

I periodically read the prefletter website and very much enjoy it. It is very useful and informative.

I have bought CM.PR.A although not above $26. In your Jan 6th posting you say CM ‘would much rather sell $26.04 worth of common for $26.04 rather than take $25 face value of the preferreds for it”

Before i bought i analyzed this risk and i think a factor your analysis might not take into account is that if CM goes to the market to sell common even if it is internally via CIBC WM they sill will pay commissions. Thus to me the analysis is not a straight $26.04 versus $25 but the $26.04 less their costs of issuance versus the $25.

With interest rates unlikely to go lower [ if that were even possible ] they might let the preferreds stay out there.

I think that at least makes the analysis more interesting. What do you think?

With respect to this specific situation, I will say that the annual dividend on this issue is $1.325, representing 5.3% of issue price – so this isn’t cheap money for them! I suggest that the only thing that has kept the issue alive so far is their desire to save the 25 cents per year in declining redemption price and that they will be overjoyed to redeem it on November 1 following their year-end.

More generally, the question of issuance costs is important – they are used in HIMIPref™ to adjust the probability of redemption calls in general. However, a 5% discount to market value is kind of steep, which is why it was set to 5% in the first place! Even accounting for issue costs, it is still cheaper for them to call CM.PR.A and issue something else.

But I would say the strongest argument against holding them is simply the fact that you have to indulge in these fancy analytics to justify the holding in the first place. There’s a fair bit of downside risk to these things that you need to minimize with arguments such as the above – there are less risky ways of making the same money.

Look at it from the holder’s perspective: after October 31, the call price finally drops to par and after 2011-7-31 it’s convertible to cheap common. Say it’s continuing to trade at $26.50. A holder has three choices:

• Convert to common
• Sell on the market
• Hold

If he holds, he is risking a call at $25 at any time; lots of risk. Converting to common and locking in at least some of the premium is much more likely. Either way, the price of $26.50 is hard to justify.

Standard and Poor’s has announced:

Manulife Financial Corp. (MFC) completed its planned subsidiary reorganization on Dec. 31, 2009. Following the close of this transaction, we have lowered the ratings on MFC and John Hancock Financial Services Inc. to ‘A+’ from ‘AA-‘ in order to restore standard notching upon completion of the subsidiary reorganization, because the reorganization reduces MFC’s cash flow diversification. At the same time, we have removed MFC from its CreditWatch listing where it was placed on Nov. 5, 2009.We are also both withdrawing and assigning new ratings on certain subsidiaries and issues to reflect the new group structure and the new rating action on MFC.The outlook on all of these ratings is negative, paralleling the negative outlook on MFC’s higher-rated insurance operating subsidiaries.

This executes the warning discussed in the PrefBlog post MFC: S&P Places Ratings on Watch-Negative, for the reasons discussed there (basically, all of the holdco’s income now comes from a single source and must be approved by a single regulator. Before, it was two sources and two regulators acting independently).

The preferreds remain at P-1(low), presumably because the mapping of the new “A-” global scale for them is still within the P-1(low) bounds of the courser national scale.

Manulife has five issues of preferred shares outstanding: MFC.PR.A (OpRet), MFC.PR.B & MFC.PR.C (PerpetualDiscount) and MFC.PR.D & MFC.PR.E (FixedReset).

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.

First Asset CanBanc Split Corp. has announced:

acceptance by the Toronto Stock Exchange (the “TSX”) of the Corporation’s Notice of Intention to make a Normal Course Issuer Bid (the “NCIB”) to permit the Corporation to acquire its Preferred Shares and Class A Shares (collectively, the “Securities”).

Pursuant to the NCIB, the Corporation proposes to purchase through the facilities of the TSX, from time to time, if it is considered advisable, up to 122,735 Preferred Shares and up to 122,735 Class A Shares of the Corporation, representing approximately 10% of the public float which is the same number as the Corporation’s issued and outstanding Securities, being 1,227,358 Preferred Shares and 1,227,358 Class A Shares as of the date hereof. The Corporation will not purchase in any given 30-day period, in the aggregate, more than 24,547 Preferred Shares and 24,547 Class A Shares, being 2% of the issued and outstanding Securities as of the date hereof. Purchases of Securities under the NCIB may commence on January 5, 2010. The Board of Directors of First Asset Investment Management Inc., the manager of the Corporation, believes that such purchases are in the best interests of the Corporation and are a desirable use of the Corporation’s funds. All purchases will be made through the facilities of the TSX in accordance with its rules and policies. All Securities purchased by the Corporation pursuant to the NCIB will not be cancelled and will be held for resale. The NCIB will expire on January 4, 2011.

On December 31, 2008, the Trust announced that it was making a Normal Course Issuer Bid, which commenced January 5, 2009, to purchase up to 132,000 Preferred Shares and up to 132,000 Class A Shares through the facilities of the TSX. Under the bid, which expires on January 4, 2010, an aggregate of 72,600 Class A Shares were repurchased at an average price of $14.90 per Class A Share including commissions. No Preferred Shares were repurchased.

I see lots of announcements of NCIBs, but not so many announcements of actual purchases!

It’s not entirely clear to me how the bookkeeping works. According to the June 2009 Financials:

A unit represents one Class A Share and one Preferred Share. The issued and outstanding units as at June 30, 2009 consists of 1,281,758 Class A Shares and 1,286,958 Preferred Shares. The Fund will ensure that an equal number of Class A Shares and Preferred Shares continue to be outstanding.

Now there are, according to the press release, 1,227,358 each, a decline of 54,400 Capital and 59,600 preferred in the past six months. And there was nothing on the books in June about the fund holding “treasury shares” or anything like that. However the prospectus (on SEDAR, dated October 31, 2008) states:

Preferred Shares may be surrendered at any time for retraction by the Company but will be retracted only on the second last Business Day of a month (the “Retraction Date”). Preferred Shares surrendered for retraction by a Preferred Shareholder at least ten Business Days prior to a Retraction Date will be retracted on such Retraction Date and such Preferred Shareholder will be paid on or before the 15th Business Day of the following month. Holders whose Preferred Shares are retracted on a Retraction Date will be entitled to receive a retraction price per share equal to the lesser of (i) 95% of the NAV per Unit determined as of the relevant Retraction Date less the pro rata portion of the Note then outstanding and less the cost to the Company of the purchase of a Class A Share for cancellation, and (ii) $10.00. The cost of the purchase of a Class A Share will include the purchase price of the Class A Share, commission and such other costs, if any, related to the liquidation of any portion of the Portfolio required to fund such purchase. If the Manager is unable to acquire sufficient Class A Shares for cancellation, the Preferred Shares will be redeemed on a pro rata basis based on the number of Class A Shares acquired or surrendered prior to the Retraction Date. If on any Retraction Date, Class A Shares are not required to be purchased in the market for cancellation in connection with the retraction of some or all of the Preferred Shares to be retracted, then the amount of the cost of a purchase of a Class A Share shall be such amount as the Manager determines is fair in the circumstances.

So it may be that the shares under this issuer bid are not cancelled immediately upon purchase, but are held for a few days and then cancelled to offset preferred share redemptions. But … it’s not clear.

Bookkeeping aside, the timing on this issue was excellent. They invested the proceeds at far better prices than anticipated in the prospectus and have 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.

CBU.PR.A was last mentioned on PrefBlog when it was upgraded to Pfd-2 by DBRS. CBU.PR.A is not tracked by HIMIPref™.