Category: Issue Comments

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.

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.