Category: Issue Comments

SLF.PR.F, the 6.00%+379 FixedReset announced on May 8 settled today.

Sun Life Financial announced:

the successful completion of a Canadian public offering of $250 million of Class A Non-Cumulative 5-Year Rate Reset Preferred Shares Series 6R (the “Series 6R Shares”) at a price of $25.00 per share and yielding 6.00 per cent annually. The offering, initially for $200 million of Series 6R Shares, was increased to $250 million following exercise by the underwriting syndicate, co-led by TD Securities Inc. and BMO Nesbitt Burns Inc., of an option to purchase an additional $50 million of Series 6R Shares.

The Series 6R Shares were issued under a prospectus supplement dated May 8, 2009, which was issued pursuant to a short form base shelf prospectus dated April 1, 2009. Copies of those documents are available on the SEDAR website for Sun Life Financial Inc. at www.sedar.com. The Series 6R Shares are listed on the Toronto Stock Exchange under the ticker symbol SLF.PR.F.

So the greenshoe was fully exercised.

Vital statistics after the first day’s trading are:

It will be most interesting to learn whether the rapturous reception accorded SLF.PR.F will coax a few more issues out of the woodwork!

SLF.PR.F has been added to the FixedReset HIMIPref™ subindex.

Newgrowth Corp. has announced:

that holders of its Class A Capital Shares (“Capital Shares”) have overwhelmingly approved a share capital reorganization (the “Reorganization”) allowing holders of Capital Shares, at their option, to retain their investment in the Company after the scheduled redemption date of June 26, 2009. The Reorganization will permit holders of Capital Shares to extend their investment in the Company beyond the redemption date of June 26, 2009 for up to an additional 5 years. The Class B Preferred Shares will be redeemed on the same terms originally contemplated in their share provisions and have been called for redemption on June 26, 2009. In order to maintain the leveraged “split share” structure of the Company, the Company expects to create and issue a new series of Class B preferred shares on or about June 26, 2009.
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The Reorganization will involve an adjustment of the Company’s Portfolio so that the Company provides broader exposure to Canadian chartered banks, telecommunication, utility and pipeline companies and the Portfolio will be rebalanced to an equal weight position in order to improve diversification and mitigate single issuer exposure.

Holders of Capital Shares who do not wish to continue their investment in the Company after June 26, 2009 must give notice that they wish to exercise their special retraction right and how they wish to be paid for their shares on or prior to May 29, 2009. Holders of Capital Shares who retract their Capital Shares will be paid on June 26, 2009. The Reorganization will become effective provided that holders of at least 1,340,000 Capital Shares retain their Capital Shares and do not exercise the special retraction right.

There are currently 2,327,407 units outstanding with a NAV of $38.12/unit so there is the potential for this to be a reasonably large-sized offering of replacement preferreds.

NEW.PR.B was last mentioned on PrefBlog when the proposed refunding was announced. NEW.PR.B is not tracked by HIMIPref™.

R Split II Corp. has announced:

The Capital Shares and Preferred Shares will be redeemed by the Company on May 29, 2009 (the “Redemption Date”) in accordance with the redemption provisions of the shares. Pursuant to these provisions, the Preferred Shares will be redeemed at a price per share equal to the lesser of $30.50 and the Net Asset Value per Unit. The Capital Shares will be redeemed at a price for every share equal to the amount (for every two capital shares) by which the Net Asset Value per Unit exceeds $30.50.
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A further press release will be issued by the Company in connection with the redemption prices on May 28, 2009. Payment of the amounts due to holders of Capital Shares and Preferred Shares will be made by the Company on May 29, 2009.

Given that asset coverage is currently 2.8+:1 there cannot be much doubt that maturity will be at par.

RBT.PR.A was last mentioned on PrefBlog with respect to last year’s partial call for redemption. RBT.PR.A is not tracked by HIMIPref™.

Update, 2009-06-01: Redemption completed.

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.