Category: Issue Comments

DBRS has announced that it:

has today downgraded the preferred shares and innovative Tier 1 instrument ratings of the Canadian banks it rates, following the application of changes in DBRS’s global banking methodology. The ratings have been removed from Under Review with Negative Implications, where they were placed on April 20, 2009. All other ratings for the Canadian banks are unaffected; related rating trends remain unchanged. The downgrades reflect the revision of DBRS’s views on external support as it relates to preferred shares and the elevated risk of non-payment of preferred dividends relative to the risk of default indicated by senior debt ratings. The downgrades do not reflect any specific credit event at any of the listed institutions or related entities.

The change in methodology affects preferred shares ratings in three ways:

(1) The change in the global banking methodology dictates that the starting point for notching preferred shares will be based on the intrinsic assessment rating, rather than the senior debt rating (which may incorporate the benefit of external support). The primary factor that has led to this change in the methodology is recent actions taken in other jurisdictions that demonstrate no systemic external support for preferred shares. As such, the preferred shares and Tier 1 innovative instruments ratings of the listed institutions and their related entities that benefited from a one-notch uplift in October 2006 (due to the support assessment designation of SA2) will now be removed.

The preferred shares and Tier 1 innovative instruments of the affected institutions are: Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada, and Toronto-Dominion Bank.

(2) The other change in the global banking methodology incorporates the elevated risk of non-payment of preferred dividends relative to the risk of default for more senior debt instruments. As such, the changes in the methodology have increased the base notching, even within the strongest rating categories, and the base notching now expands as the credit quality of the bank migrates downward. Within this approach, there exists some flexibility to adjust the notching for factors that reflect the position of individual banks. Historically, DBRS’s methodology resulted in a fixed relationship across all rating categories.

The preferred shares and Tier 1 innovative instruments of the affected institutions are: National Bank of Canada and Laurentian Bank of Canada.

(3) The final change in the global banking methodology affects SA1 category banks. The preferred shares rating for the subsidiary will be notched relative to the preferred share of the parent in the same way that all debt ratings are notched between the two entities.

The preferred shares and Tier 1 innovative instruments of the affected institution is: HSBC Bank Canada.
…
DBRS will host a teleconference tomorrow morning, Tuesday June 30, at 11:00 am ET, to discuss today’s rating action.

Interested callers should dial the appropriate number listed below at least five minutes before the 11:00 am ET call time.

Local Callers: 416-695-5800, quoting passcode: 5742370

Toll Free Callers: 800-408-3053, quoting passcode: 5742370

This follows the original announcement that they were on Review-Negative.

Affected issues are:

The main effect of this, I feel, is the decreased notching between the top banks and the top insurers. Previously, MFC, SLF, PWF & GWO had been ranked a notch below the Big 5 … and I thought that was a little on the skimpy side. Now there’s no notching. Interesting…

Update: It is interesting to note that this is largely a reversal of the the October 2006 Mass Upgrade of Banks.

Newgrowth Corp. has announced:

that it has completed its public offering of Series 2 Class B Preferred Shares, (the “Preferred Shares”), raising approximately $ 30.7 million through the issuance of 2,238,510 Preferred Shares at a price of $ 13.70 per Preferred Share. The Preferred Shares were offered to the public by a syndicate of agents led by Scotia Capital Inc. The Preferred Shares were offered in order to maintain the leveraged “split share” structure of the Company following the successful reorganization of the Company approved by shareholders on May 11, 2009 which, among other things, extended the redemption date of the Capital Shares for an additional five year term. With the closing of the offering, there will be 2,238,510 Capital Shares and 2,238,510 Preferred Shares issued and outstanding on the close of business on June 26, 2009.

NewGrowth Corp. is a mutual fund corporation whose investment portfolio consists of publicly-listed securities of selected Canadian chartered banks and utility issuers. The Capital Shares and Preferred Shares of NewGrowth Corp. are both listed for trading on The Toronto Stock Exchange under the symbols NEW.A and NEW.PR.B respectively.

The issue pays $0.822 p.a., payable quarterly, for an issue yield on the issue price of 6.00%.

There is a monthly retraction feature:

A holder retracting Series 2 Preferred Shares will receive a cash price per Series 2 Preferred Share retracted equal to the amount, if any, by which 95% of the Unit Value exceeds the aggregate of (i) the average cost to the Company, including commissions, of purchasing a Class A Capital Share in the market; and (ii) $1.00. See “Retraction and Redemption of Series 2 Preferred Shares”.

… and annual calls at par until maturity:

Any outstanding Series 2 Preferred Shares will be redeemed by the Company on June 26, 2014 (the “Redemption Date”) at a price per share (the “Series 2 Preferred Share Redemption Price”) equal to the lesser of $13.70 and Unit Value.

Asset coverage is somewhere around 2.9:1 and DBRS has assigned a provisional rating of Pfd-2 on the issue; this seems a little conservative given the nature of the portfolio and the degree of asset coverage.

As previously discussed on PrefBlog, this issue refunds the NEW.PR.B. Sadly, the issue will not be tracked by HIMIPref™; it’s just too small.

Assiduous Readers with extremely good memories will remember that Empire Life was rated by DBRS in May, at which time I speculated that a new issue might be coming out.

Well, it did, but it was a private placement and I missed it. Their press release states:

The Empire Life Insurance Company (Empire Life) and E-L Financial Corporation Limited (E-L) (TSX:ELF)(TSX:ELF.PR.F)(TSX:ELF.PR.G) announced today that Empire Life offered in Canada, by way of private placement to accredited investors, $200 million principal amount of subordinated unsecured 6.73% fixed/floating debentures (Debentures) due May 20, 2019. The offering is expected to close May 20, 2009.

The Debentures will mature on May 20, 2019 and will bear interest at a fixed annual rate of 6.73% for the first five years, payable in equal semi-annual payments, and a variable annual rate equal to the three-month CDOR plus 5.75% for the last five years, payable quarterly. The Debentures have been provisionally rated “A (low)” with a stable trend by DBRS Limited.

The proceeds will be used for regulatory capital and general corporate purposes, and to repay a $125 million subordinated debenture issued to E-L (subject to approval by the Superintendent of Financial Institutions). The proceeds from the Debentures are expected to qualify as Tier 2B capital for regulatory purposes.

The issue has been offered on an agency basis by a syndicate of dealers co-led by RBC Dominion Securities Inc. and Scotia Capital Inc. Other syndicate members include: National Bank Financial Inc., TD Securities Inc., BMO Nesbitt Burns Inc., CIBC World Markets Inc. and HSBC Securities (Canada) Inc.

Impact of the debentures issue on financial strength

On a pro forma basis, the Company estimates that its Minimum Continuing Capital and Surplus Requirements (MCCSR) ratio would increase from 201% to 219% (as at March 31, 2009) following the issue of these Debentures and repayment of the E-L debenture.

Remember that as preferred shareholders in the holding company (ELF.PR.G, ELF.PR.F) we don’t care all that much about the MCCSR of the operating subsidiaries.

Quebecor World has announced:

the voting results for Quebecor World’s Third Amended Joint Plan of Reorganization (the “U.S. Plan”). Voting by classes of creditors entitled to vote on the Plan reflected broad-based support for the U.S. Plan, with all classes entitled to vote receiving the applicable affirmative vote as required under the U.S. Bankruptcy Code. Of the more than 2,800 ballots cast, 2,485, or 86.4%, of all voting creditors aggregated across classes voted to accept the U.S. Plan. Based on total dollar amount of claims voted, 88.9% of the total claims, or US$1.82 billion, aggregated across classes voted to accept the U.S. Plan. Although no assurances can be made, Quebecor World believes that the U.S. Plan satisfies the requirements of the Bankruptcy Code and is confirmable.

In addition, Quebecor World also announced that its Second Amended and Restated Canadian Plan of Reorganization and Compromise (the “Canadian Plan”) was approved by affected creditors at the creditors’ meeting held earlier today. At the Canadian meeting of affected creditors of Quebecor World, the Canadian Plan was approved by approximately 96% of those affected creditors who voted in person or by proxy, representing approximately 89% of the total value of affected claims that were voted at the meeting.

A joint confirmation hearing on the U.S. Plan and the Canadian Plan is scheduled to occur on June 30, 2009 in the U.S. Bankruptcy Court for the Southern District of New York and the Quebec Superior Court, and Quebecor World anticipates the consummation of the U.S. Plan and the Canadian Plan in mid-July 2009.
Details of the voting results including votes on a class-by-class basis will be available at the following websites:
http://www.donlinrecano.com/cases/caseinfo.aspx?cl=qw
http://documentcentre.eycan.com/pages/main.aspx?SID=54
And hyperlinked from: http://www.quebecorworld.com/restructuring.aspx

The restructuring plan states:

(iii) to change each issued and outstanding Subordinate Voting Share, Multiple Voting Share, Series 3 Cumulative Redeemable First Preferred Share and Series 5 Cumulative Redeemable First Preferred Share into 0.000001 of a Redeemable Share;

(iv) immediately following the redemption of all of the Redeemable Shares in accordance with Section 1.4 of Schedule I hereto, to cancel, remove and delete the authorized share capital of the Corporation, consisting of the Multiple Voting Shares, Subordinate Voting Shares, the First Preferred Shares issuable in series and the Redeemable Shares (collectively, the “Cancelled Classes of Shares”), along with the rights, privileges, restrictions and conditions attached to the Cancelled Classes of Shares and all rights to accrued dividends in respect of all of such classes and series of shares;
…
All of the outstanding Redeemable Shares and fractional interests therein shall be automatically redeemed by the Corporation immediately following their issuance, which issuance is provided for in item [(iii)] of the Corporation’s Articles of Reorganization on Form 14 to which this Schedule I is attached, without notice to the holders of such Redeemable Shares, on payment of CDN$0.01 for each whole Redeemable Share (the “Redemption Price”).

So each IQW.PR.C & IQW.PR.D share will be turned into one one-millionth of a Redeemable Share and each Redeemable Share will be instantly redeemed for a penny.

IQW.PR.C & IQW.PR.D were last mentioned on PrefBlog when they were suspended from trading on the TSX.

Update, 2009-7-26: It’s done.

The Toronto Stock Exchange has announced:

SUSPENDED – Nortel Networks Limited (the “Company”) – The Cumulative Redeemable Class A Preferred Shares, Series 5 (Symbol: NTL.PR.F) and the Non-Cumulative Redeemable Class A Preferred Shares, Series 7 (Symbol: NTL.PR.G) will be suspended from trading effective immediately as a result of the Company’s June 19, 2009 news release. Further information will be forthcoming regarding the Company’s expected delisting application.

The last mention of these issues on PrefBlog occurred when the company requested restrictions on trading.

Both issues have been tracked by HIMIPref™, but are relegated to the “Scraps” index on credit concerns. Tracking will cease immediately.

Update, 2009-6-23: The TSX has announced:

CHANGES IN STOCK LIST Nortel Networks Limited (the “Company”) – Further to TSX Bulletin #2009-0795, at the request of the Company, the Cumulative Redeemable Class A Preferred Shares, Series 5 (Symbol: NTL.PR.F) and the Non-Cumulative Redeemable Class A Preferred Shares, Series 7 (Symbol: NTL.PR.G) (collectively the “Shares”) will be delisted at the close of market on June 26, 2009. Trading in the Company’s Shares will remain suspended.

Commerce Split Corp. has announced:

The Company’s total net asset value is approximately $8.85 per unit as at June 18, 2009, consisting of less than 16% common shares of CIBC. The reduced exposure to CIBC will materially limit the future impact of price movements of CIBC shares on the net asset value of the Company and lower the ability of the Company to generate income from
dividends and its covered call option writing program.

The significant price decline of CIBC and the resultant implementation of the Priority Equity Protection Plan have made it extremely difficult to achieve the original stated objectives for both classes of shares. The Company established a normal course issuer’s bid which allows the Company to re-purchase units in the market when trading prices are at a discount to the net asset value.

Subsequent to the unsuccessful shareholder vote on February 5, 2009 of the reorganization proposal, the Company has continued to dialogue with certain larger shareholders to try and establish potential solutions for reorganizing the Company that would be suitable for all shareholders and result in a successful shareholder vote. Outside of certain larger shareholders, the remaining shareholders had voted overwhelmingly in support of management’s latest proposal.

The Company has received several shareholder requests to wind up the Company. In response to this request, the Company would like to remind all shareholders that all such reorganization proposals must receive a 66 2/3 favorable vote by both the Class A shareholders and the Preferred shareholders voting separately by class. This requirement is outlined in the Company’s prospectus and is part of the articles of incorporation of the Company. Under any kind of termination proposal at the current time, Class A shareholders would receive no value for their Class A shares since the net asset value per unit is below $10. The Class A shares have traded in a range between $0.36 and $1.84 since February 5, 2009 and closed at $1.02 on June 18, 2009. As such, the Company does not believe that this proposal is in the best interests of the Class A shareholders and any proposal that would provide no value to the Class A shareholders would ultimately never be approved by Class A shareholders.

The Company will continue to seek solutions that will balance and meet the interests of both Classes of shareholders and also result in a successful vote. The costs of holding a meeting are significant to the Company and, as such, the Company will only bring forward a proposal that has a high probability of being passed by the requisite majorities of each Class of shareholders.

Huh. Providing no value – indeed, taking away value – for the preferred shareholders didn’t seem to stop their last proposal from coming to vote.

XCM.PR.A is currently quoted at 7.20-31, while XCM is at 1.05-18. The company should buy the maximum permitted under its issuer bid when this can be done at or below NAV, remind shareholders of their retraction rights, and propose a wind-up that will pay the common shareholders a nominal sum. Waiving management fees, or a good chunk thereof, would be a good thing too, but I’m not holding my breath!

XCM.PR.A is not tracked by HIMIPref™.

M Split Corp has announced:

This sharp decline in Manulife has resulted in the Company’s net asset value being reduced significantly and as mentioned in previous updates, has required the Company to implement the Priority Equity Portfolio Protection Plan (the “Plan”) in accordance with the prospectus. As a result of implementing the Plan, the Company has been required to sell the vast majority of the Manulife common shares held in the Portfolio and acquire fixed income securities.

The Company’s total net asset value is approximately $8.37 per unit as at June 18, 2009, consisting of less than 1% common shares of Manulife. The reduced exposure to Manulife will materially limit the future impact of price movements of Manulife shares on the net asset value of the Company and lower the ability of the Company to generate income from dividends and its covered call option writing program.

The significant price decline of Manulife has made it extremely difficult to achieve the original stated objectives for both classes of shares. The Company established a normal course issuer’s bid which allows the Company to repurchase units in the market when trading prices are at a discount to the net asset value.

Subsequent to the unsuccessful shareholder vote on February 5, 2009 of the reorganization proposal, the Company has continued to dialogue with certain larger shareholders to try and establish potential solutions for reorganizing the Company that would be suitable for all shareholders and result in a successful shareholder vote. Outside of certain larger shareholders, the remaining shareholders had voted overwhelmingly in support of management’s latest proposal.

The Company has received several shareholder requests to wind up the Company. In response to this request, the Company would like to remind all shareholders that all such reorganization proposals must receive a 66 2/3 favorable vote by both the Class A shareholders and the Preferred shareholders voting separately by class. This requirement is outlined in the Company’s prospectus and is part of the articles of incorporation of the Company. Under any kind of termination proposal at the current time, Class A shareholders would receive no value for their Class A shares since the net asset value per unit is below $10. The Class A shares have traded in a range between $0.27 and $0.78 since February 5, 2009 and closed at $0.40 on June 18, 2009. As such, the Company does not believe that this proposal is in the best interests of the Class A shareholders and any proposal that would provide no value to the Class A shareholders would ultimately never be approved by Class A shareholders.

The Company will continue to seek solutions that will balance and meet the interests of both Classes of shareholders and also result in a successful vote. The costs of holding a meeting are significant to the Company and, as such, the Company will only bring forward a proposal that has a high probability of being passed by the requisite majorities of each Class of shareholders.

Huh. Providing no value – indeed, taking away value – for the preferred shareholders didn’t seem to stop their last proposal from coming to vote.

XMF.PR.A is currently quoted at 7.07-28, while XMF is at 0.36-50. The company should buy the maximum permitted under its issuer bid, remind shareholders of their retraction rights, and propose a wind-up that will pay the common shareholders a nominal sum. Waiving management fees, or a good chunk thereof, would be a good thing too, but I’m not holding my breath!

XMF.PR.A is not tracked by HIMIPref™.

A Globe & Mail story highlights a Manulife Financial Press Release that states:

On a separate matter unrelated to prior announcements made today by Manulife Financial Corporation, the Company stated that it received an enforcement notice from staff of the Ontario Securities Commission (OSC) this week relating to its disclosure before March 2009 of risks related to its variable annuity guarantee and segregated funds business. The OSC notice indicates that it is the preliminary conclusion of OSC staff that the Company failed to meet its continuous disclosure obligations related to its exposure to market price risk in its segregated funds and variable annuity guaranteed products. The Company has the opportunity to respond to the notice before OSC staff makes a decision whether to commence proceedings, and the Company intends to cooperate with OSC staff. The Company believes that its disclosure satisfied applicable disclosure requirements.

The prior announcements that the company is so anxious to emphasize are separate and unrelated are retirement of the CFO and Capital Update; the Capital Update trumpets MCCSR but makes no reference to the degree of double leverage inherent in the MFC holdco / insurance sub. structure. They never do, of course, but it is something that preferred shareholders in the holdco (MFC.PR.A, MFC.PR.B, MFC.PR.C, MFC.PR.D & MFC.PR.E) should bear firmly in mind at all times.

With respect to double-leverage, it is of interest to note that Manulife issued $1-billion of 5-Year MTNs at 4.896%, closing 2009-6-2, with the pricing supplement stating:

Approximately $730 million of the net proceeds to MFC from the sale of the Notes will be applied to reduce amounts outstanding under the Credit Facility and the balance of the net proceeds will be utilized for general corporate purposes of MFC.

There are – quite properly – no announcements regarding the enforcement notice regarding disclosure on the OSC website.

The MFC preferreds were last mentioned on PrefBlog when downgraded to A- [Negative Outlook] by Fitch.