Category: Issue Comments

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™.

Connor, Clark & Lunn has announced:

that its shareholders have approved the proposal to change the redemption date of the Preferred Shares from June 30, 2011 to December 22, 2009 (the “Proposal”). As a result of the Proposal, Shareholders will have their Preferred Shares redeemed by the Company on December 22, 2009 and will be paid the net asset value per Preferred Share as of December 18, 2009.

Trading of the Preferred Shares will be halted at the opening of market on December 22, 2009 and the Preferred Shares will be delisted at the close of business on that day.

The redemption price was $12.98 per share compared with $25.00 par value.

RPQ.PR.A was last discussed on PrefBlog at the time that the wind-up was proposed

RPQ.PR.A was not tracked by HIMIPref™.

Connor Clark & Lunn has announced:

that its shareholders have approved a proposal to change the redemption date of the Preferred Shares from March 23, 2012 to December 22, 2009 (the “Proposal”). As a result of the Proposal, Shareholders will have their Preferred Shares redeemed by the Company on December 22, 2009 and will be paid the net asset value redemption price per Preferred Share as of December 18, 2009 plus a redemption premium of $1.00 per Preferred Share.

Trading of the Preferred Shares will be halted at the opening of market on December 22, 2009 and the Preferred Shares will be delisted at the close of business on that day.

The redemption price was $6.55 including the $1 premium to NAV, on shares with a $25.00 par value.

RPB.PR.A was last discussed on PrefBlog at the time of the release of the Information Circular.

The issue was not tracked by HIMIPref™.

YPG.PR.D, the 6.90%+426 FixedReset announced December 7, commenced trading today with a dull thud.

It traded 157,195 shares in a range of 23.75-25 before closing at 23.86-90.

Vital statistics are:

Looking at relative yields is amusing:

DBRS has announced that it:

has today taken rating action on structured preferred shares issued by 18 split share companies and trusts (the Issuers).

Each of the Issuers has invested in a portfolio of securities (the Portfolio) funded by issuing two classes of shares – dividend-yielding preferred shares or securities (the Preferred Shares) and capital shares or units (the Capital Shares). The main form of credit enhancement available to these Preferred Shares is a buffer of downside protection. Downside protection corresponds to the percentage decline in market value of the Portfolio that must be experienced before the Preferred Shares would be in a loss position. The amount of downside protection available to Preferred Shares will fluctuate over time based on changes in the market value of the Portfolio.

Of the 18 structured Preferred Share ratings updated today by DBRS, 16 have been upgraded and two have been downgraded. The upgraded ratings reflect an increase in net asset value (NAV) of the respective portfolios over the past four months and a greater stability in equity prices over this period. Two Preferred Share ratings were downgraded mainly because their Issuers have 100% exposure to Canadian life insurance companies, whose equity prices declined in value over the past four months.

They claim The upgraded ratings reflect an increase in net asset value (NAV) of the respective portfolios over the past four months and a greater stability in equity prices over this period …. while the latter part of this assertion is indubitably correct, some NAVs have actually declined over the period – at least, according the NAVs given in my August report of their review and the current NAVs. Of course, reporting-time is not the same thing as rating-time, so it could well be that the NAVs of all upgraded companies did, in fact, increase when measured from rating-time to rating time. Maybe!

I note, for instance, that the NAV of FTN / FTN.PR.A was 18.44 on August 31 and 17.42 on November 30 (the July 31 NAV was 17.89, while Dec 15 was 17.30).

In a two part post, Canadian Business Online columnist Larry MacDonald took a look at the DFN Capital Shares and the DFN.PR.A Preferred Shares; he was kind enough to quote me in the latter post.

DFN.PR.A was last mentioned on PrefBlog when the company announced that its rights offering was 47% subscribed. DFN.PR.A is tracked by HIMIPref™ but is relegated to the Scraps subindex on credit concerns.

Update, 2009-12-29: Mr. MacDonald recycled my comments for a non-public piece published by TD Webbroker titled Looking for Income Yield?