Category: Issue Comments

Enbridge has just issued thirty-year notes at 5.75%, according to DBRS:

DBRS has today assigned a rating of “A” with a Negative trend to Enbridge Inc.’s $400 million 4.77% unsecured medium-term notes (Notes) issue maturing September 2, 2019 and $200 million 5.75% unsecured medium-term notes (Notes) issue maturing September 2, 2039. The Notes are being issued under the pricing supplement dated August 28, 2009, to the prospectus dated June 6, 2008, and the Trust Indenture dated October 20, 1997, as supplemented and amended from time to time.

The Notes will rank equally with all of Enbridge Inc.’s existing senior unsecured medium-term notes and debentures. Net proceeds from the sale of the above-noted securities will be used for the repayment of outstanding commercial paper or credit facility borrowings, or both, and for other general corporate purposes.

This is good to know in light of ENB.PR.A, a 5.50% straight preferred that is currently redeemable at par and closed today at 25.25-40, 4×2.

Now, issuance of $200-million at 5.75% interest doesn’t mean they can issue more; and if they could issue more they might not want to, in order to keep shareholders’ equity where the regulators like it. Never-the-less, this is a clear signal that from a straight business perspective, Enbridge can probably consider this issue as representing fairly expensive money and that the decision to keep or call ENB.PR.A relies on non-interest-rate factors.

Mulvihill has announced:

World Financial Split Corp. (the “Fund”) has declared its quarterly distribution of $0.13125 on each of its Preferred Shares payable September 30, 2009 to shareholders of record as of September 15, 2009. To the extent that any portion of the distributions are ordinary taxable dividends and not capital gains dividends, they will be eligible dividends. Distributions on its Class A shares continue to be suspended in accordance with the terms of the offering prospectus, which states “No distribution will be paid on the Class A shares if (i) the distributions payable on the Preferred shares are in arrears; or (ii) after the payment of the distribution by the Company, the NAV per unit would be less than $15.00.

Asset Coverage as of August 27 was 1.3+:1.

The Semi-Annual Report of 2009-6-30 makes no mention of the ballyhooed issuer bid, so we may assume that idea is inoperable, despite the significant discount of market price to NAV. Investors were not so shy, however: nearly 20% of the funds total liabilities (that is, including equity) are on the books as being “Redemptions Payable” on the June 30 statements. The number of units outstanding dropped to 9,091,210 on June 30 from 11,835,359 on Dec. 31, 2008.

Income coverage is horrible, with a mere $290,924 net investment income available to cover $1,143,513 in expenses and $3,012,518 in preferred share distributions.

WFS.PR.A was last mentioned on PrefBlog when it was upgraded to Pfd-4 by DBRS. WFS.PR.A is tracked by HIMIPref™ but has been relegated to the “Scraps” index on credit concerns.

Energy Split Corp. has announced:

that it has called 31,450 Preferred Shares for cash redemption on September 16, 2009 (in accordance with the Company’s Articles) representing approximately 1.592% of the outstanding Preferred Shares as a result of the special annual retraction of 220,106 Capital Shares by the holders thereof. The Preferred Shares shall be redeemed on a pro rata basis, so that each holder of Preferred Shares of record on September 15, 2009 will have approximately 1.592% of their Preferred Shares redeemed. The redemption price for the Preferred Shares will be $21.00 per share.

Holders of Preferred Shares that are on record for dividends but have been called for redemption will be entitled to receive dividends thereon which have been declared but remain unpaid up to but not including September 16, 2009.

Payment of the amount due to holders of Preferred Shares will be made by the Company on September 16, 2009.

ES.PR.B was last mentioned on PrefBlog when it was upgraded to Pfd-4(low) by DBRS. They closed today at 17.61-00, 15×2, so the redemption price is a small bonus to holders who don’t mind having their board lots broken up.

ES.PR.B is not tracked by HIMIPref™.

Morgan Meighan has announced (emphasis added):

Canadian General Investments, Limited (the Company) has declared an “estimated” regular quarterly cash dividend of $0.06 per share payable on September 15, 2009 to common shareholders of record at the close of business on September 10, 2009.

The dividend is being filed with the TSX as an “estimated dividend” as a result of a dividend payment restriction contained in the Company’s Class A, Series 2 and Series 3 Preference Share provisions. This restriction provides that the Company shall not pay a dividend on its common shares unless after giving effect thereto, the ratio of its Assets to Obligations (both as defined in the Preference Share provisions) exceeds 2.5 times. Although the coverage ratio as at the close of business on August 31, 2009 was approximately 3.3 times, as a result of market conditions, it is not certain at today’s date whether the Company will still meet the coverage requirement on September 15, 2009.

The Company will make a further announcement regarding payment prior to September 15, 2009. In the event that payment of the common share dividend is deferred, the dividend will be paid to registered shareholders as of the original record date at such later time as the Company determines that it can properly be paid.

The wording follows that of the June declaration (3.0x); March declaration (2.6x) and the December declaration reported on PrefBlog (2.6x).

The caution seems excessive to me, but is prudent. I bet next time they write a prospectus it will be made clear that the asset test applies at the time of declaration, not the time of payment!

CGI.PR.B & CGI.PR.C were last mentioned on PrefBlog when they were downgraded to Pfd-1(low) by DBRS following a methodological change. Both are tracked by HIMIPref™ but are relegated to the “Scraps” index on volume concerns.

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.

Brookfield Soundvest Rising Distribution Split Trust has released its 1H09 Financials:

The published combined net asset value (the “Combined Net Asset Value”), which refers to the value of a capital unit and a preferred security of the Trust, was $8.52 at December 31, 2008 and increased by 13.4% during the period to $9.66 at June 30, 2009. During the same time frame, the S&P/TSX Capped Income Trust Total Return Index gained 14.5%. The Fund underperformed the index based on net asset value despite generating returns from all four income trust sectors in excess of the overall index. The underperformance is largely due to the net disbursements made from the Fund during the period ended June 30, 2009.

More underperformance!

To June 30, 2009, 13,400 capital units and 13,400 preferred securities had been purchased under the NCIB. We continue to be of the opinion that capital units and preferred securities of the Trust may become available during the proposed purchase period at prices that would make such purchases in the best interests of the Trust and its securityholders.
…
Subsequent to June 30, 2009, an additional 6,500 capital units and 6,500 preferred securities had been purchased under the normal course issuer bid.

Opinions are very nice, but cash is better. The capital units closed yesterday at 0.84-88, 6×2, while the preferreds were at 7.67-75, 1×9. The NAV was 10.46 on August 21 and, if anecdotal memory serves, this discount has been present throughout most of the piece. These guys have been refusing to execute their NCIB in a meaningful manner even with a discount to NAV on the order of 20%!

On October 23, 2008, the Trust announced that it was temporarily suspending the annual redemption rights that would have arisen in November in respect of both its Capital Units and Preferred Securities. The Trust’s Declaration of Trust provides for the suspension of redemptions when the Coverage Ratio cannot be maintained. The Trust is continuing to monitor its net asset value to determine when it will be able to resume redemptions.

This is a rather disingenuously phrased paragraph. The Declaration of Trust allows the manager to suspend redemptions when coverage is below 1.4, but does not stipulate that it must be suspended. Quite frankly, I consider the suspension of redemptions to be rather sharp practice by the Manager … and one reason why the combined units are trading so far below the combined NAV.

The Income Coverage Ratio is a rare piece of cheerful news. Gross Income for the half, excluding “Return of Capital” was 2,517,076; expenses were 431,767 (including Management fees of 275,909 and “General and Administrative” fees of 58,205, “Accounting and Administrative” fees of 16,916 and Directors’ fees of 6,928 … keep milking that cow, boys!); therefore net income was 2,085,309 to cover preferred security interest expense of 1,692,707. The Income Coverage Ratio is therefore 1.2+:1.

The directors signing the fund statements were Jeffrey M. Blidner & George E. Myhal, of Brookfield Investment Funds Management Inc., the Manager of the fund. One may only hope that, in their role as officers of the Manager of the Fund, they did not accept Directors Fees.

BSD.PR.A was last mentioned on PrefBlog when its Credit Trend was revised to “Stable” by DBRS.

BSD.PR.A is tracked by HIMIPref™, but has been relegated to the “Scraps” index due to credit concerns.

Well, I was late reporting the suspension of the capital unit dividend … and I am equally late reporting the reinstatement!

Brompton Announced on April 20:

that a monthly distribution in the amount of $0.10 per Class A share will be paid on May 14, 2009 to Class A shareholders of record at the close of business on April 30, 2009.

Recent improvement in equity markets has resulted in an increase in net asset value per unit (consisting of one class A share and one preferred share) of SBC to $16.32 as at April 16, 2009, which allows the Fund to reinstate the monthly class A share distribution. In accordance with the Class A Share Provisions and the prospectus, no cash distribution may be paid on the class A shares, if after payment of the distribution by the Fund, the net asset value per unit would be less than $15.00. The Fund will continue to monitor its net asset value per unit on a monthly basis to determine whether the Fund will pay a Class A distribution in each subsequent month. The Fund intends to continue to pay the $0.10 monthly, non-cumulative distribution per class A share in months where the net asset value per unit exceeds the $15.00 threshold after the payment of such distributions.

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

Faircourt Asset Management has announced:

that the [Faircourt Income & Growth Split] Trust has completed its previously announced distribution to its unitholders of 4,903,305 rights (the “Rights”) exercisable for units (“Units”) of the Trust (the “Rights Offering”). All 4,903,305 Rights issued pursuant to the Rights Offering were exercised prior to their expiry (4:00 pm on August 27, 2009) for a total of 4,903,305 Units, each Unit consisting of one trust unit of the Trust (a “Trust Unit”) and one transferable warrant to acquire a Trust Unit (a “Warrant”), at a price of $2.30 per Unit for aggregate gross proceeds of $11.3 million. Each Warrant entitles the holder thereof to purchase one Trust Unit on, and only on, June 25, 2010 at a subscription price of $4.00.

TD Securities Inc. was the dealer manager for the Rights Offering.

The Trust will use the net proceeds of this issue to increase capital for investment.

Faircourt doesn’t exactly have the most forthcoming website in the world, but the prospectus for the Rights issue is available on SEDAR, dated July 15:

During the period from January 1, 2009 up to and including July 2, 2009, 441,641 Trust Units have been redeemed by the Trust in accordance with the Trust Unit’s annual redemption rights and 101,900 Preferred Securities have been repurchased by the Trust in accordance with the Trust’s normal course issuer bid. Effective January 2009, the Trust decided not to renew its loan facility, which facility was undrawn as of December 31, 2008. As of the date hereof, there are 4,903,305 Trust Units and 9,856,908 Preferred Securities (issued in $10 denominations) issued and outstanding of the Trust.

After giving effect to this Offering and assuming the exercise in full of the Rights (but not the exercise of the Warrants), there will be issued and outstanding the following securities of the Trust: 9,806,610 Trust Units, 9,856,908 Preferred Securities and 4,903,305 Warrants (exercisable into 4,903,305 Trust Units).

The NAV was 4.49 as of August 27 implying 22.0-million in capital. Proceeds of the Rights issue were 11.3-million, so excess capital is now 33.3-million against Preferred obligations of 98.6-million. Asset Coverage is therefore approximately 1.3+:1.

FIG.PR.A was last mentioned on PrefBlog when it was upgraded by DBRS to Pfd-4. FIG.PR.A is tracked by HIMIPref™, but has been relegated to the “Scraps” index due to credit concerns.

DBRS has announced that it:

has today taken a range of rating actions on 54 structured preferred shares issued by 49 split share companies and trusts (the Issuers). All the trends are now Stable.

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 54 structured Preferred Share ratings updated today by DBRS, 32 have been upgraded, 18 have been confirmed and four have been downgraded. The majority of the ratings have been upgraded as a result of the strong gains in global equity markets over the past five months. In the first quarter of 2009, DBRS downgraded many of its Preferred Share ratings because of rapid and substantial declines in company net asset values (NAVs). From August 31, 2008, to March 9, 2009, the S&P/TSX Composite Index lost 45% of its value. Since March 9, the index has gained back more than half of those losses. As a result, many of the Preferred Shares that were downgraded in February or March have seen significant increases in NAV and are now being upgraded.

In addition to the recent rebound in equity markets, another factor in today’s rating changes is the release of an updated DBRS split share methodology, “Rating Canadian Split Share Companies and Trusts,” which details DBRS’s approach to rating Preferred Shares issued by split share companies and trusts. DRBS has applied a number of changes to strengthen its split share rating process,

Skot Kortje of StockTrends.ca has published a piece in the Globe and Mail touting CPD that, sadly, shows more of the perils of slipshod research and technical analysis (“technical analysis” is its own pejoritive) than anything else:

Although smart investors will scour for premium preferred shares with a fine-toothed comb, looking for the most secure issues with the best yield, trading the general strength of this broad group of secured securities is more easily facilitated by exchange traded funds that allow for a diversified position. In Canada, the Claymore S&P/TSX Canadian Preferred Share ETF has been trading on the Toronto Stock Exchange since the spring of 2007

As has been mentioned here before, CPD no longer reflects the broad preferred share market; it is heavily overweight in FixedResets and lower-quality retractibles. An investor might prefer this asset mix, to be sure, but the implicit claim that CPD reflects the broad group of preferred shares is simply false.

As of the close last night, CPD had a weighting of 25% in OperatingRetractibles, which doesn’t reflect any broad group of preferred shares I’ve heard of lately. Its 19% weighting in issues rate Pfd-3(high) or lower doesn’t ring any bells either.

Currently yielding 4.9 per cent, CPD …

Technically true, if we care about Current Yield – which we shouldn’t. With over 50% of the portfolio in instruments – OperatingRetractibles and FixedResets – which have a Current Yield well in excess of their Yield-to-Worst, it should be clear that today’s Current Yield is not sustainable.

Nevertheless, as the banks go, so goes CPD.

Nonsense. The correlation of preferred shares with financial common equity is pretty low – about 0.2. It rises in times of financial stress – like August 1998 and November 2009 – but the correlations of a great many asset classes rises in times of financial stress. A much more defensible statement would be ‘As the corporate bond markets go, so goes CPD’.

None of this should be taken as implying that CPD is a bad investment. It can be very useful for many investors and presents its own selection of attributes with varying degrees of desirability … none of which are discussed in the article at issue.