Category: Issue Comments

Great-West Lifeco has announced:

that it intends to redeem all of its outstanding Series E First Preferred Shares on December 31, 2009. The redemption price will be $26.00 for each Series E First Preferred Share plus an amount equal to all declared and unpaid dividends, less any tax required to be deducted and withheld by the Corporation. The paid-up capital of the Series E First Preferred Shares is $22.78 per share.

A formal notice and instructions for the redemption of the Series E First Preferred Shares will be sent to shareholders in accordance with the rights, privileges, restrictions and conditions attached to the Series E First Preferred Shares.

There’s a shocker! They closed last night at 26.60-63, so some players have found out the hard way that purchasing issues with a negative yield-to-worst is playing with fire.

As of August 18, GWO.PR.X was held in CPD with a weight of 3.82%; as of June 30, it was held in DPS.UN with a weight on August 18 (assuming that it was not sold in the interim) of 0.8%; and as of September 30 it was in the BMO-CM “50” index to the tune of 4.42%.

This is a monster issue, by the way, with the TSX reporting 22.09-million shares outstanding. Holders should also take note that the difference between the redemption price of 26.00 and the paid-up capital of 22.78 is a deemed dividend, while the capital gain or loss is determined by the difference between the holder’s ACB and the 22.78 figure … but check with your personal tax advisor before taking action on the basis of tax commentary from a portfolio manager!

GWO.PR.X was last mentioned on PrefBlog in the post Potential for Buy-Backs and Unscheduled Exchanges. GWO.PR.X is tracked by HIMIPref™ and is currently included in the Operating Retractible subindex.

YPG Holdings has released its 3Q09 financials with some information of interest to holders of the captioned issues. According to the Management Discussion & Analysis:

On June 9, 2009, YPG Holdings Inc. received approval from the Toronto Stock Exchange on its notice of intention to make a normal course issuer bid for its preferred shares Series 1 and 2 through the facilities of the Toronto Stock Exchange from June 11, 2009 to June 10, 2010, in accordance with applicable regulations of the Toronto Stock Exchange. Under its normal course issuer bid, the Fund intends to purchase for cancellation up to 1,200,000 and 800,000 of its series of preferred shares outstanding on June 9, 2009. These figures represent 10% of the public float of each series of preferred shares outstanding on June 9, 2009. Since June 11, 2009, 39,500 Preferred Shares Series 1 and 328,632 Preferred Shares series 2 were repurchased at average prices of $22.71 and $17.87, respectively. The total cost of repurchasing preferred shares in the second and third quarters of 2009 amounted to $6.8 million, including brokerage fees.

As of the second quarter, the amount repurchased – in the three weeks or so between NCIB approval and quarter end – the amount was derisory:

As at June 30, 2009, the Fund purchased for cancellation 8,800 Series 1 shares of the Fund for a total cash consideration of $0.2 million including brokerage fees at an average price of $22.47 per Series 1 share and 12,600 Series 2 shares of the Fund for a total cash consideration of $0.2 million including brokerage fees at an average price of $17.43 per Series 2 share.

YPG recorded a third quarter loss on goodwill writedown, but for a company like YPG – which is, basically, all goodwill – balance sheet values are of limited utility. It is operating cash flow that’s important; this was down, but not by more than one would expect in a vicious recession.

YPG.PR.A and YPG.PR.B were last mentioned on PrefBlog in connection with YPG’s issuance of 5-Year MTNs. YPG.PR.A and YPG.PR.B are both tracked by HIMIPref™ but are relegated to the Scraps subindex on credit concerns.

EPP.PR.B, the FixedReset 7.00%+418 announced mid-October has closed successfully.

It traded 291,267 shares in a range of 25.12-80 (!) before closing at 25.65-92, 17×10 on the Toronto Stock Exchange. There was no trading on either Pure or Alpha.

Vital statistics are:

EPP.PR.B will be tracked by HIMIPref™, but is assigned to the Scraps subindex on credit concerns.

Global Credit Pref Corp has announced:

that it received a credit event notice today from The Toronto-Dominion Bank with respect to CIT Group Inc. as a result of that entity filing for Chapter 11 bankruptcy protection in the Southern District of New York.
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The return on the credit linked note is linked to the number of defaults experienced over its term among the reference entities in the CLN Portfolio. The credit linked note has been structured so that it is unaffected by the first net losses on the CLN Portfolio up to 5.12% of the initial value of the CLN Portfolio (initially representing defaults by 11 reference entities in a CLN Portfolio comprised of 129 reference entities). The net loss on a reference entity that defaults is calculated as the percentage exposure in the CLN Portfolio to such reference entity reduced by a 40% fixed recovery rate. Following the credit event, the credit linked note will be able to withstand approximately 4 further credit events in the CLN Portfolio.

Global Credit Pref Corp.’s capacity to return $25.00 per preferred share on the scheduled redemption date of September 30, 2015 and the payment of quarterly fixed cumulative preferential distributions of $0.3281 per preferred share (a 5.25% yield on the original subscription price of $25.00 per preferred share) will not be affected by this credit event.

The preferred shares are listed for trading on the Toronto Stock Exchange under the symbol GPA.PR.A.

GPA.PR.A was last mentioned in PrefBlog when it announced it was affected by the Lear credit event. GPA.PR.A is not tracked by HIMIPref™.

ROC Pref Corp III has announced:

that the decision of the Board of Directors of CIT Group Inc.
(“CIT”) to proceed with a prepackaged plan of reorganization is expected to constitute a credit event under the credit linked note (“CLN”) issued by TD Bank to which the Company has exposure.
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The recovery rate for ROC Pref III Corp. is fixed at 40%. As a result, the CIT credit event is expected to reduce the number of additional credit events that ROC Pref III Corp. can sustain before the payment of $25.00 per Preferred Share at maturity is adversely affected from 1.6 to 0.6.

As indicated in a press release dated September 4, 2009, given the events of the credit market over the past year and the credit events that have occurred in the underlying portfolio, the Manager and Investment Advisor believe that a restructuring may be necessary in order to preserve the maximum value available to preferred shareholders. The Company expects to be in a position to announce a restructuring plan in November 2009.

ROC Pref III Corp. is listed for trading on the Toronto Stock Exchange under the symbol RPB.PR.A and is
scheduled to be redeemed on March 23, 2012.

The September 4 announcement was very light on details; it’s difficult to see just what may be done. September 30, the portfolio had 127 names; 6 of which had previously defaulted. Now it’s seven and the recovery rate drops off very sharply commencing with about 7.9 defaults; when eleven defaults have been experienced, recovery on the note – according to the original prospectus – is a big fat zero. They’ve already reorganized once:

Connor Clark & Lunn Capital Markets (the “Manager”) and Connor Clark & Lunn Investment Management (the “Investment Manager”) felt it was prudent to undertake certain restructuring initiatives during the quarter to increase the likelihood that ROC III will be able to repay the $25.00 preferred share issue price at maturity. These initiatives include: (i) the trading reserve account was used to buy additional subordination in the credit linked note (which increases the “safety cushion” by increasing the number of defaults the reference portfolio can withstand before the principal and interest payable on the credit linked note is adversely affected); (ii) coupons on the credit linked note payable from December 2008 to June 2009 have been sold to TD Bank in exchange for additional subordination; and (iii) the Manager’s deferred management fee has been made available for the benefit of the preferred shareholders. These restructuring initiatives were reviewed and approved by the independent members of the Company’s board of directors.

RPB.PR.A was last mentioned on PrefBlog when the reorganization idea was floated. RPB.PR.A is not tracked by HIMIPref™.

ROC Pref Corp. II has announced:

The impact of the CIT credit event on ROC Pref II Corp. will be known when the recovery rate is determined within the next several weeks. Before giving effect to the CIT credit event, a total of approximately 3.0 credit events among the companies in the CLN’s reference portfolio could be sustained before payments under the CLN are impacted including the payment of $25 per Preferred Share on December 31, 2009 based on the assumption of a 40% recovery rate for each credit event. Realized recovery rates for any particular reference company may vary substantially from the assumed 40% recovery rate and the Company would not be able to sustain 3.0 credit events and pay $25 per Preferred Share at maturity if the realized recovery rates were less than 40%. Currently in the market place, the recovery rate is trading at approximately 65%. If the realized recovery rate for CIT is 60%, the CIT credit event would be equivalent to approximately 0.7 credit events at a 40% recovery rate. The realized recovery rate may differ from this level.

ROC Pref II Corp. is listed for trading on the Toronto Stock Exchange under the symbol RPA.PR.A and is
scheduled to be redeemed on December 31, 2009.

Three fully weighted credit events … two months. It could be interesting!

RPA.PR.A was last mentioned on PrefBlog when the company announced the Idearc credit event. RPA.PR.A is not 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.

There were no repeaters from the September list, which is rather unusual – there’s usually some rebounding, but not this time.

TD Split Inc. has announced:

that it has called 194,364 Preferred Shares for cash redemption on November 13, 2009 representing approximately 21.4% of the outstanding Preferred Shares as a result of holders of 194,364 Capital Shares exercising their special annual retraction rights. The Preferred Shares shall be redeemed on a pro rata basis, so that each remaining holder of Preferred Shares will have approximately 21.4% of their Preferred Shares redeemed. The redemption price for the Preferred Shares will be $28.10 per share. Holders of Preferred Shares that have been called for redemption will be entitled to receive dividends thereon which have been declared but remain unpaid up to but not including November 13, 2009.

In addition, holders of a further 129,600 Preferred and Capital Shares have deposited such shares concurrently for retraction on November 13, 2009. As a result, a total of 323,964 Preferred and Capital Shares, or approximately 31.3% of both classes of shares currently outstanding will be redeemed.

Payment of the amount due to retracting shareholders will be made by the Company on November 13, 2009. From and after November 14, 2009 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.

TDS.PR.B was last mentioned on PrefBlog when it was upgraded to Pfd-3(high) by DBRS. TDS.PR.B is tracked by HIMIPref™ but is relegated to the “Scraps” subindex on both credit and volume concerns.

FortisAlberta has issued new 30-year notes at 5.37%:

DBRS has today assigned a rating of A (low), with a Stable trend, to the $125 million 5.37% medium-term notes (MTNs) due October 30, 2039, issued by FortisAlberta Inc. (FortisAlberta). The MTNs are expected to settle on October 30, 2009. The MTNs are being issued pursuant to FortisAlberta’s Short Form Base Shelf Prospectus dated December 15, 2008.

The MTNs will rank equally with all of FortisAlberta’s other present and future unsecured and unsubordinated senior obligations.

Thirty-year medium-term notes, eh? There’s a stretch!

FortisAlberta is a wholly-owned subsidary of Fortis Inc.:

As owner and operator of more than 60 per cent of Alberta’s total electricity distribution network, FortisAlberta’s focus remains the safe and reliable delivery of electricity to 460,700 customers in 175 communities across southern and central Alberta.
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The Corporation is a regulated electricity distribution utility in the Province of Alberta. Its business is the ownership and operation of regulated electricity distribution facilities that distribute electricity generated by other market participants from high-voltage transmission substations to end-use customers. The Corporation does not own or operate generation or transmission assets and is not involved in the direct sale of electricity. The Corporation has limited exposure to exchange rate fluctuations on foreign currency transactions. It is intended that the Corporation remain a regulated electric utility for the foreseeable future, focusing on the delivery of safe, reliable and cost-effective electricity services to its customers in Alberta.

While FortisAlberta is the largest of Fortis Inc.’s electric companies, in terms of both assets and profits, it’s a relatively small component of the entire group, contributing about 15% of total profit in 2008. Additionally, there is a big difference between a small regional fully-regulated subsidiary and a multinational company with ambitions:

Fortis is the largest investor-owned distribution utility in Canada serving more than 2,000,000 gas and electricity customers. Its regulated holdings include electric utilities in five Canadian provinces and three Caribbean countries and a natural gas utility in British Columbia. Fortis owns non-regulated generation assets, primarily hydroelectric, across Canada and in Belize and Upper New York State and hotels and commercial real estate in Canada. In 2008, the Corporation’s electricity distribution systems met a combined peak electricity demand of more than 5,700 megawatts (“MW”) and its gas distribution systems met a peak day demand of 1,402 terajoules (“TJ”). The vision of Fortis is to be the world leader in those segments of the regulated utility industry in which it operates and the leading service provider within its service areas. Fortis has adopted a strategy of profitable growth with earnings per common share as the primary measure of performance. The Corporation’s first priority is to pursue organic growth opportunities in existing operations. Additionally, Fortis pursues profitable growth through acquisitions.

Despite the caveat, it’s of interest to compare the 5.37% on the subsidiary’s 30-year note with the YTW on the parent’s PerpetualDiscount issue, FTS.PR.F.

FTS.PR.F closed today at 21.85-95, with a yield-to-worst of 5.70%. At this point, a table is in order:

I like DBRS’ ratings better than S&P’s – it seems to me that some notching is appropriate in this case. While the parent is wonderfully diversified relative to the subsidiary, which would normally imply equal ratings, in this case the sub is a regulated utility, while the parent is an expanding collection of businesses, some of which are unregulated. While I will agree that a compelling case can be made for equal ratings, I like a one notch better.

It is notable that FTS.PR.F is trading below the yield of the better-rated index; this is probably due to the market’s fondness for non-financials, which is proxied by the “cumulative” attribute. For all that, the spread of about 260bp (interest equivalent) is probably a little low, given that the index-to-index spread is about 250bp. To me, the preferred seems a little expensive against the bond here, all in.