Category: Issue Comments

Moody’s Investors Service has announced:

Moody’s Investors Service (Moody’s) placed the long-term ratings of the Bank of Montreal (BMO) and all its subsidiaries on review for downgrade.
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BMO’s credit ratings have long been predicated on the view that its better-than-peer loan loss performance compensated for below-peer risk-adjusted profitability. In addition, BMO’s profitability, though low, was less volatile than some of its similarly rated peers.

The recent period of financial and economic stress, however, revealed weaknesses in BMO’s U.S. business (both retail banking and capital markets) which have, in turn, led to a deviation from the aforementioned rationale underpinning the ratings (i.e., low credit risk offsetting weaker profitability). Higher loan and trading losses in the bank’s U.S. retail banking and capital markets arms, respectively, have led to two consecutive years of net losses in the U.S. and, in all likelihood, a third in 2009. Moody’s notes that these costs may continue to depress the bank’s risk-adjusted profitability.

The U.S. weighting in BMO’s business mix has also contributed to the erosion of its credit advantage relative to similarly rated peers. BMO has produced a net charge-off ratio on loans that was well below peer medians every year between 1991 and 2007. In 2008 and 2009, Moody’s notes that BMO lagged its domestic peers on this ratio. Although the bank still outperforms peers on many individual asset classes, the bank’s mix (in aggregate) has a more pronounced weighting towards stressed asset classes (e.g., U.S. commercial real estate, residential mortgage, and commercial loans) which has resulted in credit losses above peer averages.

Moody’s will evaluate these weakening rating factors in comparison to steady improvements in the bank’s Canadian retail banking franchise, consistent performance in its Canadian wealth management arm, and strong capital ratios. The review will focus on whether the aforementioned deteriorating rating factors outweigh the strengthening Canadian franchise and its capital position.
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Preferred Stock, Placed on Review for Possible Downgrade, currently Aa3

Moody’s rates BNS preferred stock at Aa3; CM at A1; TD at Aa2; NA at A1. Oddly, no preferred share rating is reported for RY although, for instance, the prospectus for Series AR (dated 2009-1-23) discloses a provisional rating of Aa2.

BMO has the following preferred issues outstanding: BMO.PR.H, BMO.PR.J, BMO.PR.K, BMO.PR.L, BMO.PR.M, BMO.PR.N, BMO.PR.O and BMO.PR.P.

Dividend 15 Split Corp. has announced:

that it will issue rights (“Rights”), to all Class A Shareholders. Each Class A Shareholder will be entitled to receive one Right for each Class A Share held as of the record date of October 21, 2009. Four Rights will entitle the holder to purchase a Unit consisting of one Class A Share and one Preferred Share for $19.75. The Rights will expire at 4:00 p.m. (local time) on November 16, 2009, the expiry date. If all the Rights are exercised the Company will issue approximately 2,509,428 Units and will receive net proceeds of $48,708,375. The net proceeds from the subscription of Units will be used to acquire additional securities in accordance with the Company’s Investment objectives. By raising additional cash through this offering it allows the Company to capitalize on certain attractive investment opportunities that may arise over the next few months.

The exercise price is set at a premium to the most recently published net asset value per Unit. On that basis, if the exercise price remains above the most recently published net asset value, the exercise of the rights would be accretive to existing shareholders on a net asset value basis. In addition, if the full subscription was exercised the offering is expected to increase the trading liquidity of the Company and reduce the management expense ratio.

Both the Preferred Shares and Class A Shares trade on the Toronto Stock Exchange (the “TSX”) under the symbol “DFN.PR.A” and “DFN” respectively. The Rights will be listed on the TSX under the ticker symbol DFN.RT. It is expected that Rights will commence trading on October 19, 2009 and continue trading until 12:00 noon (EST) on November 16, 2009.

The Company was created to provide investors with a high quality portfolio of leading Canadian dividend yielding stocks. The Company invests in: Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Royal Bank of Canada, Toronto-Dominion Bank, National Bank of Canada, CI Financial Income Fund, BCE Inc., Manulife Financial, Enbridge, Sun Life Financial, TELUS Corporation, The Thomson Corporation, TransAlta Corporation and TransCanada Corporation. Shares held within the portfolio are expected to range between 4-8% in weight but may vary at any time.

The Class A shareholders receive monthly distributions of $1.20 per share annually. The Preferred Share holder receives $0.525 per share annually. The company offers a low management fee and opportunity for growth in the net asset value.

The NAVPU for October 15 has not yet been published; it was at 19.97 on September 30. It is unusual, to say the least, to price a rights offering above the current value; but the liquidity will appeal to some. DFN closed today at 12.38-47, 5×10, and DFN.PR.A closed at 10.12-17, 5×20, so the offering is at a substantial discount to market price. It is very odd that the the Capital Units are trading so high above intrinsic value, but it’s a funny old world.

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

Industrial Alliance has announced:

the closing of its previously announced offering of 4,000,000 6% Non-Cumulative Class A Preferred Shares Series E (the “Series E Preferred Shares”) at a price of $25.00 per Series E Preferred Share, representing aggregate gross proceeds of $100 million.

The offering was underwritten, on a bought deal basis, by a syndicate of underwriters co-led by Scotia Capital Inc. and RBC Dominion Securities Inc. and which includes National Bank Financial Inc., BMO Nesbitt Burns Inc., CIBC World Markets Inc., TD Securities Inc., Desjardins Securities Inc., Casgrain & Company Limited, Dundee Securities Corporation, HSBC Securities (Canada) Inc., Industrial Alliance Securities Inc. and Laurentian Bank Securities Inc. This offering was made under the terms of a prospectus supplement dated October 7, 2009 to the short form base shelf prospectus dated April 30, 2009. The prospectus supplement is available on the SEDAR website at www.sedar.com and on the Company’s website at www.inalco.com.

The Series E Preferred Shares yield 6.00% per annum, payable quarterly, as and when declared by the Board of Directors of the Company. The Series E Preferred Shares commence trading on the Toronto Stock Exchange today under the symbol IAG.PR.E. The net proceeds of the offering will be used for general corporate purposes.

The Series E Preferred Shares are not redeemable prior to December 31, 2014. Subject to regulatory approval, on or after December 31, 2014, Industrial Alliance may, on no less than 30 or more than 60 days’ notice, redeem the Series E Preferred Shares in whole or in part, at the Company’s option, by the payment in cash of $26.00 per Series E Preferred Share if redeemed prior to December 31, 2015, at $25.75 per Series E Preferred Share if redeemed on or after December 31, 2015 but prior to December 31, 2016, at $25.50 per Series E Preferred Share if redeemed on or after December 31, 2016 but prior to December 31, 2017, at $25.25 per Series E Preferred Share if redeemed on or after December 31, 2017 but prior to December 31, 2018 and at $25.00 per Series E Preferred Share if redeemed on or after December 31, 2018, in each case together with all declared and unpaid dividends up to but excluding the date fixed for redemption.

The issue traded 170,412 shares in a range of 24.00-69 (!) before closing at 24.26-34, 4×10.

Vital statistics are:

The issue was announced on October 6 and has been hurt by the 1.8% decline in the PerpetualDiscount subindex 10/6 – 10/15, although that does not account for the entire loss.

The issue is tracked by HIMIPref™. It has been added to the PerpetualDiscount subindex.

Middlefield has announced:

Investors may elect to receive units of COMPASS, valued as at November 30, 2009, in lieu of receiving cash in satisfaction of all or a portion of the amount they would otherwise receive from STRATA upon its termination on December 14, 2009.

COMPASS is a Toronto Stock Exchange (“TSX”) listed closed-end investment fund that invests in a diversified portfolio comprised primarily of high yielding equity securities of issuers operating in various industries and geographical regions. COMPASS’ annualized return since inception is 9.8% and its year-to-date total return to October 8, 2009 is 18.1%. COMPASS offers an annual redemption on November 30 at net asset value less costs. COMPASS trades on the TSX under the symbol CMZ.UN.

The value of COMPASS units issued to capital unitholders will be equivalent to a pro rata share of the net assets of STRATA remaining after payment or accrual of all debts and liabilities and liquidation expenses of STRATA. The capital units will be paid out in cash or in COMPASS units, or a combination thereof, at the capital unitholders’ option, on December 14, 2009.

The value of COMPASS units issued to preferred securityholders will be equivalent to the repayment price on the November 30, 2009 maturity date of the preferred securities. The repayment price will amount to $10.0994565 per preferred security on November 30, 2009 and will be paid in cash on November 30, 2009 or in COMPASS units on December 14, 2009, or a combination thereof, at the securityholders’ option.

The press release is not yet on the relevant web-page, but I am sure they would wish me to emphasize that this is not actually a regulatory requirement.

STW.PR.A was last mentioned on PrefBlog when a Normal-Course Issuer Bid was announced. STW.PR.A is tracked by HIMIPref™, but is relegated to the Scraps index on volume concerns.

I speculated last week that EPP.PR.A was at risk for a downgrade, and today DBRS downgraded EPP.PR.A to Pfd-3:

DBRS has today downgraded the rating of EPCOR Power Equity Ltd.’s (Power Equity) Cumulative Redeemable Preferred Shares, Series 1 (Series 1 Preferreds), to Pfd-3 from Pfd-3 (high). The trend remains Negative. This action follows Power Equity’s announcement that it has sold, via a bought deal arrangement, $100 million of Cumulative Rate Reset Preferred Shares, Series 2 (Series 2 Preferreds), to which DBRS has assigned a rating of Pfd-3 with a Negative trend.

Power Equity is a wholly-owned subsidiary of EPCOR Power L.P. (Power LP), with Power LP guaranteeing, on a subordinated basis, certain amounts relating to Power Equity’s Series 1 Preferreds and Series 2 Preferreds (including payment of dividends, as and when declared). As such, the preferred share ratings of Power Equity continue to be based on the credit profile of Power LP. Following the sale of the Series 2 Preferreds, Power LP’s capitalization will include an amount of preferred equity (totalling approximately $220 million) that is large compared with the amount of the Partners’ equity on the balance sheet ($564 million as of June 30, 2009). The rating on the Series 1 Preferreds has been downgraded by one notch to Pfd-3 (with the same rating assigned to the Series 2 Preferreds) to reflect the now-significant amount of preferred equity Power LP carries in relation to its level of Partners’ equity.

Not the same reasons that triggered my speculation! That’s forecasting for you! DBRS continues:

The change in Power Equity’s preferred rating has no impact on the ratings of Power LP, which stand at: Senior Unsecured Debt & Medium-Term Notes of BBB (high) with a Negative trend, and a stability rating of STA-2 (low). See the DBRS press releases dated April 29, 2009, and June 8, 2009, for additional details on recent rating actions and the Negative trends. Since the change in trend from Stable to Negative in April, there have been two developments viewed as positive for Power LP’s credit profile: 1) a reduction in unit distributions, expected to conserve approximately $40 million in cash flow per year; and 2) the proceeds from the sale of the Series 2 Preferreds will be applied to debt reduction. Both of these developments should help Power LP avoid moving closer to its 65% debt-to-capitalization covenant. However, the trends will remain Negative until DBRS views Power LP’s capitalization as stable on a sustainable basis, and expected levels of cash flow are maintained.

Power LP recently stated that it was modestly reducing its financial expectations for 2009, largely as a result of low operating margins at its two North Carolina facilities. DBRS does not view this as a material change, as a reduced level of contributions from these facilities has already been factored into our analysis.

Power Financial Corporation has announced:

the successful completion and closing of an offering of 6,000,000 Non-Cumulative First Preferred Shares, Series O (the “Series O Shares”), priced at $25.00 per share to raise gross proceeds of $150 million.

The issue was bought by an underwriting group led by BMO Capital Markets, Scotia Capital Inc. and RBC Capital Markets.

The Series O Shares will be listed and posted for trading on the Toronto Stock Exchange under the symbol “PWF.PR.O”. Proceeds from the issue will be used to supplement Power Financial’s financial resources and for general corporate purposes.

This 5.80% Straight was announced last week.

PWF.PR.O traded 149,780 shares in a range of 25.35-50 before closing at 24.35-39.

Vital statistics are:

PWF.PR.O is tracked by HIMIPref™. It has been assigned to the PerpetualDiscount index.

It’s interesting to look at the comparators:

S Split Corp has announced:

that it has filed a preliminary short form prospectus relating to an offering of Warrants to holders of Class A Shares of the Fund. Each Class A sharholder of record on the record date will receive one Warrant for each Class A Share held. Each Warrant will entitle its holder to acquire one Class A Share and one Preferred Share upon payment of the subscription price. The record date and the subscription price will be determined at the time the Fund files its final prospectus for the offering. The Fund has applied to list the Warrants and the Class A Shares and the Preferred Shares issuable upon the exercise thereof on the Toronto Stock Exchange. The exercise of Warrants by holders will provide the Fund 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 to reduce the management expense ratio of the Fund.

The Fund invests in a portfolio of common shares of The Bank of Nova Scotia. To generate additional returns above the distributions earned on its securities, the Fund may, from time to time, write covered call options in respect of some or all of the securities in its portfolio. The Fund may also, from time to time, write cash-covered put options in respect of securities in which the Fund is permitted to invest. The Fund’s investment portfolio is managed by its investment manager, Mulvihill Capital Management Inc.

The preliminary prospectus does not yet appear to be available.

SBN.PR.A is scheduled to be wound-up 2014-12-1. It seems too early to be looking for a term extension; perhaps the prospectus, when available, will clarify the matter. SBN.PR.A has an Asset Coverage of 2.1-:1 as of September 30.

SBN.PR.A was last mentioned on PrefBlog when it was downgraded to Pfd-3 by DBRS. SBN.PR.A is tracked by HIMIPref™, but has been relegated to the Scraps index on credit concerns.

World Financial Split Corp. has announced:

that it has filed a preliminary short form prospectus relating to an offering of Warrants to holders of Class A Shares of the Fund. Each Class A shareholder of record on the record date will receive one Warrant for each Class A Share held. Each Warrant will entitle its holder to acquire one Class A Share and one Preferred Share upon payment of the subscription price. The record date and the subscription price will be determined at the time the Fund files its final prospectus for the offering. The Fund has applied to list the Warrants and the Class A Shares and the Preferred Shares issuable upon the exercise thereof on the Toronto Stock Exchange. The exercise of Warrants by holders will provide the Fund 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 to reduce the management expense ratio of the Fund.

The Fund invests in a portfolio that includes common equity securities selected from the ten largest financial services companies by market capitalization in each of Canada, the United States and the rest of the world (the “Portfolio Universe”). In addition, up to 20% of the NAV of the Fund may be invested in common equity securities of financial services companies that are not in the Portfolio Universe but meet certain market capitalization and credit rating thresholds. To generate additional returns above the distributions earned on its securities, the Fund may, from time to time, write covered call options in respect of some or all of the securities in its portfolio. The Fund may also, from time to time, write cash-covered put options in respect of securities in which the Fund is permitted to invest. The Fund’s investment portfolio is managed by its investment manager, Mulvihill Capital Management Inc.

The preliminary prospectus does not yet appear to be available.

WFS.PR.A has an Asset Coverage of 1.4-:1 as of September 30 and is scheduled to be wound-up 2011-6-30; I suspect that a term extension is in the works.

WFS.PR.A was last mentioned on PrefBlog with the reminder that the Capital Unit dividend was still suspended – it cannot be paid unless Asset Coverage of the preferreds is greater than 1.5:1. WFS.PR.A is tracked by HIMIPref™, but is relegated to the Scraps index on credit concerns.

Brookfield Asset Management and Brookfield Infrastructure Partners has announced:

that they have signed an agreement with Babcock & Brown Infrastructure (ASX: BBI) (“BBI”) to sponsor a comprehensive restructuring and recapitalization (“Recapitalization”). BBI has a diverse portfolio of transportation and utility assets located in Australia, the U.S., the UK, continental Europe, New Zealand and China.

Under the agreement with BBI, Brookfield Asset Management and Brookfield Infrastructure (collectively, “Brookfield”) have jointly and severally subscribed for a proposed investment in stapled securities and assets of BBI of approximately US$1.1 billion. The proposed investment is comprised of the purchase of approximately A$625 million to A$713 million (~US$555 million to $635 million) of stapled securities for a 35% to 40% interest in the restructured BBI and A$295 million (~US$265 million) for the direct purchase2 from BBI of a 49.9% economic interest in Dalrymple Bay Coal Terminal (“DBCT”), in Queensland, Australia, and 100% of PD Ports, a leading ports business in northeast England. Immediately following the purchase of PD Ports, Brookfield will repay £100 million (~US$160 million) of debt at PD Ports.

Brookfield’s Investor Presentation includes the following graphic:

Click for big

DBRS comments:

DBRS views this plan as neutral to Brookfield’s ratings providing it (i) is not required to acquire any additional portion of the investment that BIP does not acquire and (ii) maintains sufficient liquidity at the corporate level while supporting the BBI restructuring program. At the end of Q2 2009, Brookfield had over $800 million in cash and financial assets on hand as well as bank lines at the corporate level, plus access to ongoing cash flow and other forms of liquidity within the Brookfield group. DBRS would view negatively a combination of this plan along with any other acquisitions that together puts pressure on Brookfield’s liquidity at the corporate level.

The following BAM preferred shares are tracked by HIMIPref™: BAM.PR.B, BAM.PR.E, BAM.PR.G, BAM.PR.H, BAM.PR.I, BAM.PR.J, BAM.PR.K, BAM.PR.M, BAM.PR.N, BAM.PR.O and BAM.PR.P.

Epcor Power LP issued a press release today with respect to various partnership, operating and regulatory problems:

EPCOR Power L.P. (TSX: EP.UN) (the Partnership) and EPCOR Power Equity Ltd. (TSX: EPP.PR.A) announced today that the Partnership’s current financial expectations for 2009 will be approximately 5 per cent lower than its previous 2009 financial guidance provided in March 2009. The 2009 financial guidance provided in March 2009 was based on the expectation that cash provided by operating activities before working capital changes plus dividends from Primary Energy Recycling Holdings would be approximately $147 million.
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The Partnership also provided an update on the negotiations of new power purchase agreements (PPAs) for the North Carolina facilities, where the current PPAs expire on December 31, 2009. The Partnership and Progress Energy Carolinas, Inc. (Progress) have been in negotiations but, to date, have been unable to finalize new PPAs that are acceptable to both parties. As a result, the Partnership will be applying to the North Carolina Utilities Commission (NCUC) to arbitrate.
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The Partnership noted that in August 2009, Progress applied to the NCUC to replace 397 megawatts of coal-fired generation with 950 megawatts of new gas-fired generation, a net add of over 550 megawatts, with an expected in service date of early 2013. On October 1, 2009 the NCUC issued a notice of decision that requires Progress to submit for NCUC approval, its plans to retire additional coal generation reasonably proportionate to the additional 550 megawatts as a condition to the approval of the new 950 megawatt plant. The Partnership believes that the retirement of additional generation creates a gap in Progress’ resource plan which the cost competitive generation offered by the Partnership’s North Carolina facilities can help fill.

DBRS continued its trend negative assessment in June:

DBRS will continue to monitor the situation while incorporating the positive aspects of the distribution reduction, with a one-notch downgrade of the current debt and preferred ratings possible if Power LP’s financial flexibility diminishes and the prospect of a covenant issue becomes more concrete, and/or there were material reductions in cash flow.

EPP.PR.A was last mentioned on PrefBlog when DBRS assigned the negative trend. EPP.PR.A is tracked by HIMIPref™, but is relegated to the “Scraps” index on credit concerns.