Category: Issue Comments

IGM.PR.B which had a limp and lifeless opening day and closed last night at 24.90-99 on continued low volume is now quoted at 24.26-29, 7×29, on volume of over 72,000 shares.

More later.

Update: Vital statistics are:

Still not cheap, according to me.

DBRS has announced that it:

has today downgraded the rating of the Class B Preferred Shares, Series 1 (the Class B Preferred Shares) issued by Big 8 Split Inc. (the Company) to Pfd-2 from Pfd-2 (high). This action removes the rating from Under Review with Negative Implications, where it was placed on October 29, 2009. The Class B Preferred Shares have been downgraded as a result of a re-leveraging of the Company. Prior to the re-leveraging, there were 1,067,005 Class B Preferred Shares and an equal number of Class A Capital Shares (the Capital Shares) outstanding. The Company declared and paid a dividend in Capital Shares to the current holders of the Capital Shares (0.6 Capital Shares for each Capital Share outstanding). The Company subsequently issued 1,165,203 new Class C Preferred Shares at $12 each and 525,000 additional Capital Shares at $20 each through a public offering. A greater number of Class C Preferred Shares were issued so that an equal number of Capital Shares and Preferred Shares of the Company would remain outstanding following the Capital Share dividend payment. The Class C Preferred Shares rank pari passu with the Class B Preferred Shares with respect to return of principal and payment of dividends.
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Since the Class B Preferred Shares rank equal with the newly issued Class C Preferred Shares, all Preferred Shares of the Company will benefit from the same amount of downside protection. Following the completion of the re-leveraging, the downside protection available to the Preferred Shares has decreased from 71% to approximately 60% (after offering expenses). The rating on the Class B Preferred Shares has been downgraded to Pfd-2 to reflect the lower amount of downside protection available.

The scheduled final maturity date of the Class B Preferred Shares is December 15, 2013.

The intent to downgrade BIG.PR.B was discussed on PrefBlog.

Neither BIG.PR.B nor BIG.PR.C are tracked by HIMIPref™.

BCE has released:

• Notice to Holders of BCE Inc. Series AE Preferred Shares (BCE.PR.E) [Ratchet]
• Notice to Holders of BCE Inc. Series AF Preferred Shares (BCE.PR.F) [FixedFloater]

Since BCE isn’t much good at this technology stuff, the notices are scans, which makes copy-pasting and searching non-functional. But that’s not a bug, that’s a feature!

Each issue converts into the other and the conversion notice period is 2009-12-18 to 2010-1-18. Conversion takes effect 2010-2-1, and if there aren’t enough volunteers for one of the issues, then holding the other will become mandatory.

The Ratchet will continue to pay its ratchet rate, currently 100% of Prime, a proportion that will start to decrease if the price goes above 25.125. Canada Prime is now 2.25%.

The FixFloat will pay 168% of the 5-Year GOC rate determined on Jan 11. This determination will be published on January 12, and be effective from 2010-2-1 until the next Exchange Date 2015-2-1.

Five year Canadas now yield 2.44%, so the best current now for the fixed rate is 4.10%. I don’t know where Canadian 5-Year swaps are trading, but US five-year swaps (to receive 3-month LIBOR) are at 2.65% with the former rate now at 0.45%.

BCE.PR.F was last mentioned on PrefBlog when it was added to TXPR. BCE.PR.E was last mentioned when BCE Preferreds were downgraded by DBRS and S&P.

BCE.PR.F is tracked by HIMIPref™ but is relegated to the Scraps index on credit concerns. BCE.PR.E is not tracked by HIMIPref™ (there are less than 2-million outstanding) but I may add it to the list if there’s a rush to convert.

High Income Preferred Shares Corporation has announced:

it has endorsed a proposal (the “Proposal”) for consideration by shareholders to redeem early all of the outstanding Series 1 shares and Series 2 shares of the Corporation in advance of the Corporation’s stated termination date of June 29, 2012. The Proposal will be voted on at a special meeting of shareholders to be held on or about February 25, 2010.

Subject to the approval by the holders of the Series 1 shares (TSX:HPF.pr.a) and the Series 2 shares (TSX:HPF.pr.b) and of the Corporation, it is proposed that the articles of the Corporation be amended to permit the redemption of all of the Series 1 shares and the Series 2 shares on the terms set forth below. Subject to the approval of such shareholders and any applicable securities regulatory authorities, it is expected that such redemptions will occur during the first quarter of 2010.

The independent members of the Corporation’s board of directors engaged Cormark Securities Inc. (“Cormark”) as financial advisor to prepare a fairness opinion in connection with the proposed early redemption of the Series 1 shares and the Series 2 shares. Cormark has rendered an opinion, subject to the assumptions and limitations described therein, that the amount to be paid to the holders of the Series 1 shares and the Series 2 shares upon the redemption thereof is fair, from a financial point of view, to such shareholders.

“We believe the early redemption Proposal represents a highly attractive option for shareholders to realize on the Net Asset Value of their investment plus cumulative, accrued distributions, rather than waiting until the stated termination date in 2012 or selling shares in the market given the discounted trading price and relative illiquidity,” said Ravi Sood, President of Lawrence Asset Management (“LAMI”), the Manager of HI PREFS.

Proposed Redemption of the Series 1 Shares

It is proposed that the Series 1 shares will be redeemed for $27.80 per Series 1 share, being the original investment amount of $25.00 plus (i) $2.4375, being the full amount of the cumulative distributions that have been accruing on such shares since distributions were suspended in March 2008 and (ii) $0.3656, being the full amount of the monthly distributions that will continue to accrue on such shares until the effective date of the redemption of such shares. The proposed redemption price of $27.80 per Series 1 share represents a premium of approximately 11.4% to the last trading price of the Series 1 shares on the Toronto Stock Exchange (which occurred on November 26, 2009).

Proposed Redemption of the Series 2 Shares

It is also proposed that the Series 2 shares will be redeemed for $16.46 per Series 2 share, being the original investment amount of $14.70 plus (i) $1.7763, being the full amount of the cumulative distributions that have been accruing on such shares since distributions were suspended in March 2008 and (ii) $0.2664, being the full amount of monthly distributions that will continue to accrue on such shares until the effective date of such redemption, less $0.28 per Series 2 share (the “Per Share Cost Amount”). The Per Share Cost Amount represents an amount per Series 2 share equal, in the aggregate, to one-half of the expected costs of effecting the proposed amendments to permit the early redemptions and to wind up the Corporation. The proposed redemption price of $16.46 per Series 2 share represents a premium of approximately 43.1% to the last trading price of the Series 2 shares on the Toronto Stock Exchange (which occurred on December 2, 2009).

Proposed Redemption of the Equity Shares

The Equity Shares, which do not trade on any stock exchange and are held entirely by Lawrence Asset Management Inc. (the “Manager”), will receive the residual proceeds of the Corporation’s portfolio (including the accrued management fees) after payment of all remaining accruals and after payment of the remaining portion of the costs of effecting the proposed amendments to allow the early share redemptions and to wind up the Corporation. There are no distributions accrued on the Equity Shares. The Equity Shareholder is in favour of the proposal to amend the articles to allow for the early wind-up of the Corporation.

Full details of the proposed amendments to the terms of the Series 1 shares and the Series 2 shares, and the proposed early redemption thereof, will be set out in an information circular that will be provided to shareholders in advance of the proposed special meeting of shareholders.

Wow. This has always been a difficult to understand structured investment, perhaps most notable for having all the (very highly levered) equity shares held by the Manager and stating that its profits on redemption of the preferreds exceeded closing equity in 2009. Unusual features of the annual retraction have been discussed previously. The proposal that the preferred shareholders pay half the cost of winding up the corporation represents one last kick at the can by the manager.

HPF.PR.A and HPF.PR.B were last mentioned on PrefBlog when their ratings were confirmed by DBRS. HPF.PR.A and HPF.PR.B are tracked by HIMIPref™, but are relegated to the Scraps index on volume and credit concerns respectively.

NB Split Corp. has announced:

that in accordance with the Company’s articles, it will redeem 324,208 Preferred Shares on December 24, 2009 at a price of $32.72 per Preferred Share for payment on December 29, 2009 as a result of the special annual retraction of Capital Shares by the holders thereof. The Preferred Shares shall be redeemed on a pro rata basis by CDS in accordance with its participants’ policies and procedures. In aggregate approximately 28.57% of the Company’s Preferred Shares will be redeemed.

Following the redemption of the Preferred Shares, and other Capital Shares and Preferred Shares tendered pursuant to the special annual retraction, there will remain approximately 1,621,490 Capital Shares and approximately 810,745 Preferred Shares outstanding, for an approximate net asset value of the Company of approximately $50 million, based on the current value of the National Bank shares.

NBF.PR.A was last mentioned on PrefBlog when it was upgraded to Pfd-3 by DBRS. NBF.PR.A is not tracked by HIMIPref™.

Big 8 Split Corp. has announced:

that it has filed a final prospectus in respect of a public offering of up to 2,743,877 Class C Preferred Shares, Series 1 at a price of $12.00 per preferred share and up to 2,103,674 additional Class A Capital Shares at a price of $20.00 per share (collectively, the “Shares”). The Shares are being offered to the public on a best efforts basis 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. The offering is expected to close on December 15, 2009.

This issue involves the relevering of Big 8 and an almost certain downgrade for BIG.PR.B.

Neither BIG.PR.B nor BIG.PR.C are tracked by HIMIPref™.

Brookfield Properties has announced:

that the Toronto Stock Exchange accepted a notice filed by Brookfield Properties of its intention to make a normal course issuer bid for its class AAA preference shares, series F (“Series F Shares”), series G (“Series G Shares”), series H (“Series H Shares”), series I (“Series I Shares”), series J (“Series J Shares”) and series K (“Series K Shares”). Brookfield Properties stated that at times its class AAA preference shares trade in price ranges that do not fully reflect their value. As a result, from time to time, acquiring class AAA preference shares will represent an attractive and a desirable use of available funds.
The notice provides that Brookfield Properties may, during the twelve month period commencing December 11, 2009 and ending December 10, 2010, purchase on the Toronto Stock Exchange up to 400,000 Series F Shares, 220,000 Series G Shares, 400,000 Series H Shares, 400,000 Series I Shares, 400,000 Series J Shares and 300,000 Series K Shares, each representing approximately 5% of the issued and outstanding of the relevant series of class AAA preference shares. At December 3, 2009, there were 8,000,000 Series F Shares, 4,400,000 Series G Shares, 8,000,000 Series H Shares, 8,000,000 Series I Shares, 8,000,000 Series J Shares and 6,000,000 Series K Shares issued and outstanding. Under the normal course issuer bid, Brookfield Properties may purchase up to 2,652 Series F Shares, 1,000 Series G Shares, 2,614 Series H Shares, 4,439 Series I Shares, 2,026 Series J Shares, and 1,550 Series K Shares on the Toronto Stock Exchange during any trading day, each of which represents 25% of the average daily trading volume on the Toronto Stock Exchange for the most recently completed six calendar months prior to the Toronto Stock Exchange’s acceptance of the notice of the normal course issuer bid. This limitation does not apply to purchases made pursuant to block purchase exemptions.

The price to be paid for the class AAA preference shares under the normal course issuer bid will be the market price at the time of purchase. The actual number of class AAA preference shares to be purchased and the timing of such purchases will be determined by Brookfield Properties, and all class AAA preference shares will be purchased on the open market or such other means as approved by the Toronto Stock Exchange. All class AAA preference shares purchased by Brookfield Properties under this bid will be promptly cancelled.

The average daily trading volumes of the class AAA preference shares on the Toronto Stock Exchange during the six months ended November, 2009 was 10,606 with respect to the Series F Shares, 3,636 with respect to the Series G Shares, 10,454 with respect to the Series H Shares, 17,755 with respect to the Series I Shares, 8,103 with respect to the Series J Shares, and 6,199 with respect to the Series K Shares.

There is no mention of a preferred share NCIB in the 2008 Annual Report (although there is a significant common share NCIB), so this announcement is not something I would normally report. In this case, however, I was specifically asked about it by Assiduous Reader MP and there are some other things that give credence to the idea … like, f’rinstance, relative yields:

BPO.PR.L, the FixedReset, has been insanely expensive since its opening date, yielding less, with a lower chance of 5-year maturity, than the retractible.

Even that might not have been enough for me to take this bid seriously … but there is also the recent YPG FixedReset 6.90%+426 issue to consider. This, the second YPG FixedReset, has just been announced and YPG.PR.B, retractible 2017-6-30 and the target of a real issuer bid continues to trade with a double digit yield. Such is the allure of FixedResets!

A FixedReset issue, being perpetual, will appear in the equity section of the balance sheet (retractibles are considered liabilities for balance sheet purposes) improving credit ratios; additionally, credit rating agencies will assign a greater equity equivalency factor to perpetuals. In terms of lowering the cost of bond issues, refinancing retractibles with FixedResets makes all kinds of sense.

No predictions! But it will be interesting to see how this turns out.

Investors’ Group has announced:

the successful completion and closing of an offering of 5.90% Non-Cumulative First Preferred Shares, Series B (the “Series B Shares”), priced at $25.00 per share to raise gross proceeds of $150 million.

The issue was bought by an underwriting group co-led by BMO Capital Markets and by RBC Capital Markets.

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

Vital statistics are:

It still looks expensive to me! The issue was announced on November 30.

IGM.PR.B will be tracked by HIMIPref™. It has been assigned to the PerpetualDiscount index.

ROC Pref Corp. III has released the Management Information Circular for the meeting regarding its potential dissolution. It includes some cheery statements:

The Credit Linked Note has been structured so that it is unaffected by the first net losses on the CLN Portfolio up to 3.84% of the initial value of the CLN Portfolio (representing defaults by eight Reference Companies in a CLN Portfolio comprised of 125 Reference Companies). The net loss on a Reference Company that defaults is calculated as the percentage exposure in the CLN Portfolio to such Reference Company multiplied by 60.0% (based on a 40.0% fixed recovery rate).

Since the Credit Linked Note was issued there have been 8.5 defaults in the CLN Portfolio. These companies include Dana Corporation, Fannie Mae, Freddie Mac, Lehman Brothers Holdings Inc., Washington Mutual, Tribune Company, Idearc Inc., Lear Corporation and CIT Group Inc. Idearc Inc. was a spin-off from Verizon Communications Inc. and therefore was represented in the CLN Portfolio at a one-half weight and constituted a half default.

The fixed recovery rate sounded like a good idea at the time – and, I understand, was preferred by the ratings agencies – but hurt a lot with Fannie and Freddie. CIT Group recovery, too, will be well in excess of the benchmark.

But to my mind, the most interesting part is:

The issuer of the Credit Linked Note, TD Bank, has agreed to repurchase the Credit Linked Note prior to maturity at a price equal to the value of the Credit Linked Note on December 18, 2009 plus an amount equal to $1.00 multiplied by the number of Preferred Shares then outstanding. The price at which TD Bank is obligated pursuant to a note repurchase agreement to repurchase portions of the Credit Linked Note in the event that Shareholders exercise their monthly retraction rights represents a discount to the value of the Credit Linked Note. There is no assurance that the agreement with TD Bank to repurchase the Credit Linked Note at the more favourable price would be available in the future.

Later on, they note that the Method of Valuation is described in the Annual Information Form, incorporated by reference. Oddly, Connor Clark & Lunn’s website publishes the 2008 AIF, but the 2009 AIF is available only on SEDAR. The 2008 version states:

The CLN is valued on the 10th and last business day of each month by TD Bank. Factors affecting the value of the CLN include the market‘s assessment of overall credit quality of the Reference Portfolio, as measured by the trading price of the debt (and derivatives thereof) of companies in the portfolio, and interest rates as measured by the Canadian dollar swap rate to the date of maturity of the note, as well as the value of the trading reserve account. At June 30, 2008, the CLN value was $102.6 million, down from $219.6 million at June 30, 2007.

The 2009 version states:

The CLN is valued on the 10th and last business day of each month by TD Bank. Factors affecting the value of the CLN include the market’s assessment of overall credit quality of the Reference Portfolio, as measured by the trading price of the debt (and derivatives thereof) of companies in the portfolio, and interest rates as measured by the Canadian dollar swap rate to the date of maturity of the note, as well as the value of the trading reserve account. At June 30, 2009, the CLN value was $40.9 million, down from $102.6 million at June 30, 2008.

All in all, I don’t get it. Why is TD Bank willing to pay $1 more than NAV? This question is not addressed in the supplied FAQs.

My best guess at an answer is that it has to do with the power of substitution – the following is taken from the 2009 AIF:

The CLN features an embedded trading reserve account (the “Trading Reserve Account”), initially in an amount of $2.1 million, which stood at $nil million on June 30, 2009. The Trading Reserve Account may be available to absorb net losses that might be incurred when making substitutions in the Reference Portfolio. The Trading Reserve Account was used to purchase additional subordination from TD Bank following the November restructuring initiatives.
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The Reference Portfolio is managed by the Investment Manager. The Investment Manager’s goal is to reduce the likelihood of having exposure to companies that default on their senior obligations. To that end, the Investment Manager can add or remove companies through a substitution process executed in accordance with the terms of the CLN. If the Investment Manager decides to remove a company that, in its judgment, has increased in risk, and to replace it with a lower risk company, there may be a net cost to the Trading Reserve Account depending on the credit spread comparison between the companies being substituted. The Trading Reserve Account described above may be available to absorb net losses that may be incurred through these substitutions.

The Investment Manager has made 66 substitutions in the Reference Portfolio since inception at a net benefit of $2.5 million to the Trading Reserve Account which, was used in the restructuring of the CLN.

It may be that the value – however it’s calculated – of the note is $3.50 per preferred, but with an infusion of – say – $2.00 new capital, substitutions could be effected to bring it to $10.00. Under this scenario, the ROC Pref III Corp. is scuppered because it has run out of money and has no reasonable way of getting more (and therefore cannot effect substitutions; also, even if they could get some money, they might not be permitted to put it into the CLN), but TD will be very happy to pay $3.50 NAV + $1.00 Premium + $2.00 recapitalization to get a $10.00 value.

I will make haste to note, however, that the above paragraph represents uninformed speculation on my part; I have always loathed structured products (whenever you want to sell, there’s exactly one buyer, at the ready with a large vise); I have no experience in the valuation of this sort of note; and acquiring such expertise would take me considerable time. Trying to understand preferred shares and more normal fixed income instruments is more my style.

Still … if I held RPB.PR.A, I’d be asking Connor Clark: “Before I vote, please tell me why TD is paying $1 over NAV.” They will almost certainly blandly direct inquiries of this nature to TD, so the follow-up question is: “Why aren’t you effecting substitutions out of the riskier elements of the portfolio?”

RPB.PR.A was last mentioned on PrefBlog when they announced their intention to hold the vote. RPB.PR.A is not tracked by HIMIPref™.

Update: The 2009 Annual Information Form is now available via CCL group.

Commerce Split Corp. has announced:

that it will hold a special meeting of shareholders on February 3, 2010 to vote on a proposed capital reorganization plan for the Company. The delay in setting the meeting date was attributable to additional time required by the regulatory process.

As previously announced in the Company’s press release of September 18, 2009, this proposal is designed to address the impact that the significant decline in price of the Company’s underlying holding of CIBC common stock and the resultant activation of the Priority Equity Portfolio Protection Plan has had on the ability of the Company to meet its original investment objectives.

The record date for shareholders entitled to receive notice of and vote at this special meeting has been established as December 14, 2009. Full details of the proposed reorganization will be contained in a Management Information Circular expected to be mailed to shareholders in early January, 2010.

The proposed reorganization has been discussed on PrefBlog.

XCM.PR.A is not tracked by HIMIPref™.