Category: Issue Comments

R Split III Corp has announced:

The Company has revised its Capital Share dividend policy and has determined that it will not pay a dividend on the Capital Shares if the net asset value per Unit at the time of declaration, after giving effect to the dividend, would be less than or equal to the original issue price of the Preferred Shares. In such circumstance, any excess dividends received on the common shares of the Royal Bank of Canada (“Royal Bank Shares”) minus the dividends payable on the Preferred Shares and all administrative, operating and income tax expenses will be reinvested in short-term debt securities or Royal Bank Shares. However, as long as net asset value per Unit at the date of declaration exceeds such amount, the Company intends to pay a dividend on the Capital Shares equal to the excess of the dividends received on the Royal Bank Shares minus the Preferred Share dividends and all administrative, operating and income tax expenses.

The prior policy was:

It will be the policy of the Board of Directors to declare and pay quarterly dividends on the Capital Shares in an amount equal to the dividends received by the Company on the Royal Bank Shares minus the distributions payable on the Preferred Shares and all administrative and operating expenses.

Given that the asset coverage of the preferred shares is now 1.5-:1, the change has no immediate implications.

RBS.PR.A was last mentioned on PrefBlog when it was downgraded to Pfd-4(low) by DBRS. RBS.PR.A is not tracked by HIMIPref™.

On April 21, Prime Rate Plus Corp announced:

a name change to Canadian Banc Recovery Corp. The management of the Company believes the name change better reflects the underlying holdings of the Company and its view of the ability of the underlying holdings to recover in price over the time frame remaining until the Company is scheduled to wind up in 2012.
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An application has been made with the TSX for new TSX trading symbols. The Preferred Share will change from PPL.PR.A to BK.PR.A and the Class A Share will change from PPL to BK. All other features and attributes of the Company and the applicable shares remain unchanged.

and today it was confirmed that trading has commenced under the new symbols.

Well … this is interesting enough to rate its own post, even though Empire Life has no publicly issued preferred shares … although its parent does: ELF.PR.F & ELF.PR.G.

DBRS is assigning:

a Claims Paying Rating of IC-2 to policy obligations issued by The Empire Life Insurance Company (Empire or the Company). DBRS has also assigned an Issuer Rating of “A” and a Subordinated Debt rating of A (low) to Empire. All ratings have a Stable trend.
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While capitalization has traditionally been very conservative, the recent deterioration in equity market performance has forced it to raise additional capital in the form of $125 million of subordinated debt issued to E-L Financial Corporation Limited (E-L), which brings the Company’s financial leverage ratios closer to those of its industry peers at around 16%.
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The underlying exposure of Canadian life insurance companies to equity markets has become apparent following the recent deterioration in global equity markets. The Company realized that it must reduce its direct holdings in common equities and completed steps to begin this reduction in 2006, recognizing that it is also indirectly exposed to equity markets through segregated fund guarantees and the fees earned on assets under management (AUM). The Company is currently managing its overall equity exposure (ownership of common stock and exposure to segregated fund guarantees) in order to remain consistent with the overall equity exposure level of industry peers. The Company’s asset mix is otherwise more conservative than that of industry peers, with lower exposure to mortgages and real estate and a greater portion of its mix in domestic government bonds.

One can only speculate as to whether we shall see any direct issuance from Empire Life in the future!

Loblaws has announced:

intends to issue $350 million principal amount of Medium Term Notes, Series 2-A pursuant to its Medium Term Notes, Series 2 program. The notes are to be offered through an agency syndicate led by CIBC World Markets Inc. and RBC Dominion Securities Inc and are expected to be issued on May 8, 2009. The notes will pay a fixed rate of 4.85% until maturity on May 8, 2014. The notes will be unsecured obligations of the Company and will rank equally with all other unsecured indebtedness of the Company that has not been subordinated. The net proceeds of the offering will be added to the general funds of the Company, used to repay short term debt, refinance other indebtedness and for general corporate purposes.

The Company intends to file in Canada a pricing supplement for this issue pursuant to its short form base shelf prospectus dated June 5, 2008 and its prospectus supplement dated May 5, 2009 in respect of the program. Details of the offering will be set out in the prospectus supplement and the pricing supplement, which will be available on the SEDAR website at www.sedar.com.

L.PR.A is a very liquid OperatingRetractible, relegated to the HIMIPref™ Scraps index due to credit concerns. It closed last night at 25.40-70 to yield 5.70-47% until its softMaturity 2015-7-31.

The 5.70% bid-side dividend yield is equivalent to 7.98% interest, so we can say that the pre-tax interest-equivalent spread vs. bonds for this issue is over 310bp … balancing the poorer credit vs. the advantages of retraction, I’d say the preferreds are cheap here.

L.PR.A was last mentioned on PrefBlog in the post L.PR.A Goes Stale on Shelf … it had a difficult underwriting in June 2008.

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.

Every now and then an Assiduous Reader writes in and says he can’t reproduce my reported yield calculation; most recently this has happened with RY.PR.Y.

The yields reported on PrefBlog are taken right off the HIMIPref™ analytical software, which contains approximations of various kinds that make the analysis a little easier to perform. It should be noted, as an aside, that reported yields are not directly a particularly large component of the valuation that goes into HIMIPref™’s trade recommendation: as discussed on the software’s site, the big driver is price disparity – the estimate of the price change required to put the issue back on self-consistent yield curve where it belongs.

There are a number of reasons why the reported YTWs may be irreproducible:

• maturityNoticePeriod
• Compounding
• CASHFLOW_ADJUSTMENT_FIRSTDIVIDEND
• CASHFLOW_FINALDIVIDEND

maturityNoticePeriod: As pointed out by my correspondent, I am calculating the yield to 2014-12-24, when in fact the redemption option is for 2014-11-24. This is the maturityNoticePeriod for a call. In the early days of the programme, with lots of instruments trading in excess of their current call price, I was getting too many violently negative returns that had knock-on effects on the rest of the analysis. In order to alleviate these difficulties, I introduced maturityNoticePeriod and set constraints; it is assumed that a redemption will not take place for a certain number of days after the date in the database. In the case of options of the type OPTION_TYPE_CALL, the effective constraint is MATURITY_NOTICE_PERIOD, currently set equal to 30.

At some point I really should introduce a sub-type of call, that will reduce maturityNoticePeriod to zero under certain circumstances (e.g., last date of option period equal to the first; first date of option period more than n days in the future). However, I haven’t done this yet because:

• I’m lazy
• It doesn’t make much difference
  • The system applies a lower limit on the duration of instruments it is willing to trade
  • the inaccurate adjustment is applied to all FixedResets
  • the effect on yield is fairly minor at this point

Fortuitously, an example of the behaviour that triggered this analytical adjustment was reported April 30 in the volume table: CM.PR.A closed at 25.82-90, although it is currently callable at 25.50. The reported YTW of -9.75% to May 30 is bad enough; without the adjustment it would have been ridiculous.

Compounding: I report yields as bond-equivalent; that is, first I calculate the IRR, which applies annual compounding, then I manipulate it to provide YTM, like so:

(1+YTM/2)*(1+YTM/2) = 1+IRR

CASHFLOW_ADJUSTMENT_FIRSTDIVIDEND: Did you remember that there’s a fat first dividend?

CASHFLOW_FINALDIVIDEND: There’s also a final dividend payable on redemption for the period between the last pay-date and the redemption paydate.

So, after doing all this, I report a YTW of 5.62% for RY.PR.Y. The report of the cashFlowDiscountingBox has been uploaded, as well as the PseudoPortfolioReport.

RY.PR.Y was last mentioned in PrefBlog in the post RY.PR.Y Soars to Premium on Frantic Trading. It is tracked by HIMIPref™ and is a component of the HIMIPref™ FixedReset Index.

DBRS has announced that it:

today changed the trend on the BBB (high) Senior Unsecured Debt and Medium-Term Notes rating of EPCOR Power L.P. (Power LP) to Negative from Stable, as well as the trend on the Pfd-3 (high) Cumulative Redeemable Preferred Shares, Series 1 rating of EPCOR Power Equity Ltd. DBRS has also downgraded the Power LP stability rating to STA-2 (middle) from STA-2 (high).

The actions follow the release of Power LP’s first-quarter 2009 earnings, which showed a net loss of $33 million that when combined with distributions, led to a $47 million decline in partners’ equity. The net loss was largely the result of a $50 million unrealized loss on the change in the fair value of natural gas supply and foreign exchange contracts. This followed a net loss of $68 million for year-end 2008, the primary driver of which was unrealized fair value losses. These non-cash fair value losses have resulted in a decrease in partners’ equity, which is largely responsible for the increase in Power LP’s debt-to-total-capital ratio from less than 40% in 2007 to the current 55%. The accounting recognition of these fair value changes is not reflective of the underlying economic circumstances, as the natural gas is largely used to produce electricity, which is sold at contracted rates.

DBRS noted on March 6, 2009, that while Power LP had ample room under its maintenance covenants (primarily that debt-to-total capital not exceed 65%), an increase in Power LP’s debt-to-total capital level closer to the maintenance covenant restriction would result in financial flexibility being reduced, which could lead to negative rating implications. With the current increase in debt-to-total capital to 55%, combined with Power LP’s expectation of an additional US$72 million in debt in 2009 to fund capital expenditures, there is a likely scenario that Power LP’s leverage ratio would approach 60%, and potentially exceed that value if there were additional negative fair value impacts. This scenario will constrain financial flexibility for the current debt and preferred rating levels. DBRS will continue to monitor the situation, with a one-notch downgrade of the current debt and preferred ratings likely if Power LP’s financial flexibility continues to diminish and the prospect of a covenant issue becomes more concrete. Alternatively, if leverage ratio pressure were to be alleviated (e.g., through asset sales, unit issuance, a reversal in fair value changes, etc.), DBRS would consider returning the trends to Stable.

The stability rating has been downgraded to reflect (1) that a decrease in distributions would be one of Power LP’s options to shore up its partners’ equity level in the event of a covenant issue and (2) weakness in distributable cash flow, which has resulted in the payout ratio (DBRS adjusted) continuing to exceed 100% – it increased to approximately 120% on a last 12 months basis ending March 31, 2009, compared with 110% at year-end 2008.

EPP.PR.A is a PerpetualDiscount currently quoted at 15.21-64 to yield 8.11% at the bid. It was last mentioned on PrefBlog in the post EPP.PR.A and WN.PR.E: Coupled? Decoupled?. Those keeping track of such things will note that WN.PR.E now yields 7.24% … way, way, way, WAY through the EPP issue.

The issue continues to be split-rated, with S&P gauging it as P-2(low) on the national scale. It may be noted that the Credit Rating of the company itself is BBB+/Negative Trend by S&P, so everybody’s carefully watching!

EPP.PR.A is tracked by HIMIPref™, but is relegated to the “Scraps” Index on credit concerns.

It was a very good opening day for RY.PR.Y, the Fixed-Reset 6.10%+413 issue announced last week that settled today.

It traded 985,152 shares in a range of 25.30-50 before closing at 25.48-49, 31×22. Vital statistics are:

RY.PR.Y has been added to the HIMIPref™ Fixed-Reset subindex.

Update, 2009-5-1: There are 13-million shares outstanding, implying that the full revised greenshoe of 1-million shares was exercised in full.

DBRS has announced that it:

has today placed the preferred shares and Tier 1 innovative instruments ratings of all the Canadian banks it rates Under Review with Negative Implications following changes made to the DBRS global banking methodology, which will be made public shortly, and the updated Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessment. The changes in methodologies reflect the revision of our 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 based on the more severe business environment being faced by global banks. They do not reflect any specific credit event at any of the listed institutions or related entities. Today’s actions apply only to the preferred shares and Tier 1 innovative instruments of the Canadian banks that DBRS rates; all other ratings are unaffected.

Under the previous Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessment (for more details, refer to the press release dated October 6, 2006), many of the preferred shares and Tier 1 innovative instruments ratings of both the listed institutions and their related entities benefited from a one-notch uplift in October 2006. The primary factor that has led DBRS to rethink our support assessment methodology as it applies to preferred shares and Tier 1 innovative instruments is recent actions taken in other jurisdictions that demonstrate no systemic external support for preferred shares.

Historically, DBRS’s Rating Banks in Canada methodology resulted in a generally fixed relationship between the different securities of the same banking entity, with preferred shares ratings being notched down from the senior unsecured debt rating level. The changes in the methodologies have increased the base notching at even the strongest rating categories and the base notching also now expands as the credit quality of the bank migrates downward. Within this approach, there exists greater flexibility to adjust the notching for factors that reflect the position of individual banks. Canadian Tier 1 innovative instruments, as they are typically convertible into preferred shares, will continue to be rated in line with preferred shares.

Our review will consider the revised global banking methodology in light of the fact that neither the Canadian financial system nor Canadian banks have exhibited the types of stress that have been witnessed with many other banks. Should rating downgrades be the result of our review for Canadian banks, DBRS does not expect the downgrades to be as severe as the actions DBRS has recently taken with ratings in the U.S. banking sector. For more information on the U.S. banking downgrades, please see the related press releases at www.dbrs.com.

The applicable methodologies are Rating Banks in Canada and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessment, which can be found on the DBRS website under Methodologies.

They provide a link to the methodology. The mass-upgrade of October 2006 and its effect on the yield curve were discussed on PrefBlog.

Well! Here’s some excitement in PrefLand! They did a mass downgrade of US financial preferreds today as well:

• Morgan Stanley
• CIT Group Inc.
• Goldman Sachs Group, Inc., The
• Bank of America Corporation
• KeyCorp
• Zions Bancorporation
• U.S. Bancorp
• Fifth Third Bancorp
• SunTrust Banks, Inc.
• Huntington Bancshares Inc.
• Webster Financial Corporation
• New York Community Bank
• CBG Florida REIT Corp.

Update, 2009-4-21: DBRS inadverdently left the HSBC HaTS off the Review-Negative list; they have now been added.

In a Mass Downgrade of European Hybrids they note:

banks and their regulators in Europe and elsewhere have become much more focused on conserving capital, particularly common equity, which may be achieved in part by the suspension of preferred dividends. Today’s action also reflects the increasing importance being placed on common equity in the capital structure by regulators and the financial markets that could lead to adverse action on preferreds. One consequence is that the starting point in rating preferred shares and hybrids becomes the intrinsic assessment, rather than the final rating, which benefits from implicit systemic support by typically a notch for SA2 banks. Preferred shares and hybrids are very unlikely to benefit from systemic support and do not benefit from any implied support. The application of DBRS’s methodology has resulted in a generally fixed relationship across rating categories between preferreds and senior issuer ratings, with some flexibility. Today’s actions reflect a revision to DBRS’s methodology whereby the notching has been increased at even the strongest rating categories and expanded as the credit quality of a bank migrates downwards. Within this approach, there remains the flexibility to adjust the notching for factors that reflect the position of individual banks.

Power Corporation has announced:

that it has priced the issuance of an aggregate principal amount of $400 million debentures (the “Debentures”) consisting of $250 million principal amount of 7.57% debentures due April 22, 2019 (the “10 Year Debentures”) and $150 million principal amount of 8.57% debentures due April 22, 2039 (the “30 Year Debentures”). The Debentures will be offered through a group of agents to be led by BMO Nesbitt Burns Inc. and Scotia Capital Inc.
…
The 30 Year Debentures will be dated April 20, 2009 and will mature on April 22, 2039. Interest on the 30 Year Debentures at the rate of 8.57% per annum will be payable semi-annually in arrears in April and October in each year, commencing October 22, 2009, until April 22, 2039. The 30 Year Debentures have been priced to provide a yield to maturity of 8.577%.

The credit rating for senior unsecured Power debentures assigned by S&P is A and by DBRS is A(High)

The offering of Debentures is expected to close on or about April 20, 2009. The net proceeds will be used to supplement the Corporation’s financial resources and for general corporate purposes.

IIROC has not yet issued a ruling regarding whether or not this price is fair, so investors of all kinds will just have to guess … if they’re allowed to buy it at all.

At the close last night, Power’s PerpetualDiscounts were quoted at:

So let’s say that the indicative bid-side YTW for a generic POW PerpetualDiscount is 7% … at the standard equivalency factor of 1.4x, this is equivalent to 9.80% as interest, implying a pre-tax interest-equivalent spread of a mere 122bp. These bonds look cheap to me. Relative to the Preferreds, anyway, even after giving the Prefs a bonus for their capital gains potential!

Update, 2009-4-19: Note that this issue has a Canada Call:

“Canada Yield Price” for any Debentures, means a price equal to the price of such Debentures calculated to provide an annual yield from the date of redemption to April 22, 2019 in the case of the 2019 Debentures and April 22, 2039 in the case of the 2039 Debentures, equal to the Government of Canada Yield plus 116 basis points for the 2019 Debentures and 122.5 basis points for the 2039 Debentures, compounded semi-annually and calculated in accordance with generally accepted financial practice on the business day preceding the date on which the Corporation gives notice of redemption pursuant to the Trust Indentures.
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“Government of Canada Yield” on any date means the yield to maturity on such date, compounded semiannually and calculated in accordance with generally accepted financial practice, which a non-callable Government of Canada Bond would carry if issued, in Canadian dollars in Canada, at 100% of its principal amount on such date with a term to maturity equal to the remaining term to April 22, 2019, in the case of the 2019 Debentures and April 22, 2039, in the case of the 2039 Debentures. In calculating the Government of Canada Yield for purposes of a redemption of the Debentures, the Corporation will use the average of the yields provided by two major Canadian investment dealers selected by the Corporation.
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Power may, at its option, redeem the Debentures in whole or in part from time to time, on not less than 30 nor more
than 60 days’ prior notice to the registered holder, at a redemption price which is equal to the greater of the Canada Yield Price (as defined herein) and par, together in each case with accrued and unpaid interest to the date fixed for redemption. In cases of partial redemption, the Debentures to be redeemed will be selected by the Trustee (as defined herein) pro rata or in such other manner as it shall deem appropriate. Any Debentures that are redeemed by the Corporation will be cancelled and will not be reissued.

There is also Change of Control protection:

The Trust Indentures will each contain provisions to the effect that if a Change of Control Triggering Event (as defined below) occurs, unless the Corporation has exercised its optional right to redeem all of the Debentures, the Corporation will be required to make an offer to repurchase all or, at the option of each Debentureholder, any part (equal to $1,000 or an integral multiple thereof) of each Debentureholder’s Debentures pursuant to the offer described below (the “Change of Control Offer”), at a purchase price payable in cash equal to 101% of the outstanding principal amount of Debentures together with accrued and unpaid interest, if any, to the date of purchase.

There is also credit rating protection:

“Rating Event” means the rating on the Debentures is lowered to below an Investment Grade Rating by each of the Specified Rating Agencies, if there are less than three Specified Rating Agencies, or by two out of three of the Specified Rating Agencies, if there are three Specified Rating Agencies (the “Required Threshold”), on any day within the 60-day period (which 60-day period will be extended so long as the rating of the Debentures is under publicly announced consideration for a possible downgrade by such number of the Specified Rating Agencies which, together with Specified Rating Agencies which have already lowered their ratings on the Debentures as aforesaid, would aggregate in number the Required Threshold, but only to the extent that, and for so long as, a Change of Control Triggering Event would result if such downgrade were to occur) after the earlier of (a) the occurrence of a Change of Control and (b) public notice of the occurrence of a Change of Control or of the Corporation’s intention or agreement to effect a Change of Control.

Update, 2009-4-20: Closed on schedule.