Category: Issue Comments

Financial 15 Split Corp. has announced:

its regular monthly distribution of $0.1257 for each Class A share ($1.5084 annually) and $0.04375 for each Preferred share ($0.525 annually). Distributions are payable June 10, 2009 to shareholders on record as of May 29, 2009.

This is of interest since the Capital Unit Dividend was suspended in December; therefore capital unitholders received no distributions for the five months from December to April inclusive, which has avoided the reduction of NAV by about $0.62.

The NAV on May 29 was $15.91 on May 29, according to the company.

FTN.PR.A is tracked by HIMIPref™ but has been relegated to the “Scraps” index due to credit concerns. It was last mentioned on PrefBlog when DBRS downgraded it to Pfd-4 in February as part of a mass downgrade of SplitShares.

Fitch Ratings has announced that it:

has downgraded the debt and preferred stock ratings of Manulife Financial Corporation (MFC) by one notch. Fitch also assigns an ‘A’ rating to MFC’s CAD1 billion 4.896% notes due 2019 and its 7.768% notes due 2019, and an ‘A-‘ rating to MFC’s non-cumulative preferred class 1, series 1 shares. The Rating Outlook is Negative.
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The one-notch downgrade of MFC’s parent company-related ratings reflects Fitch’s decision to move to standard notching of parent company ratings relative to insurance company subsidiary ratings. This is primarily as a result of the increased volatility in earnings and capital of the group, declining fixed-charge coverage at the holding company level, and a moderate increase in financial leverage. Earnings before interest and taxes (EBIT) to fixed charges declined to 2.6 times (x) in 2008, from an average of 13.1x for the previous three years ending 2008. Fitch considers MFC’s payment capacity to be solid and expects fixed charge coverage in 2009 to range between 6x and 7x in a generally flat equity market scenario.
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Fitch’s Negative Outlook reflects:

–Fitch’s view that near-term conditions in the financial markets will likely continue for an extended period, which could cause the company to experience higher-than-expected volatility in its financial results and additional challenges in 2009;
–The potential for higher-than-expected credit related investment losses;
–The potential need to further increase the capital supporting the company’s large, unhedged variable annuity business, driven by further declines in equity markets.

It was very recently that Fitch rated MFC Prefs at A with a negative outlook. These are fast changes for the credit rating!

Fitch rates SLF Prefs at BBB+ and GWO prefs at A … so beer tonight all ’round at GWO headquarters – they’re a notch better in Fitch’s view, at any rate!

MFC has the following issues outstanding: MFC.PR.A (OpRet), MFC.PR.B & MFC.PR.C (PerpetualDiscount) and MFC.PR.D & MFC.PR.E (FixedReset). All are tracked by HIMIPref™

The MFC credit was last mentioned on PrefBlog when Moody’s downgraded the “Insurer Financial Strength”.

It’s been a long time … but if the issue can hold on to its gains for another three weeks, then we’ll have a member of the long neglected PerpetualPremium index.

Vital statistics are:

It was transferred from PerpetualPremium to PerpetualDiscount at the June 2008 rebalancing, which left four issues in the PerpetualPremium index as of 2008-6-30.

Yellow Pages Income Fund has announced:

that its subsidiary YPG Holdings Inc. has received approval from the Toronto Stock Exchange on its notice of intention to make a normal course issuer bid for its first preferred shares through the facilities of the Toronto Stock Exchange from June 11, 2009 to no later than June 10, 2010, in accordance with applicable regulations of the Toronto Stock Exchange.

Under its normal course issuer bid, YPG Holdings intends to purchase for cancellation up to but not more than 1,200,000 and 800,000 of its outstanding first preferred shares, series 1 and first preferred shares, series 2, respectively, representing 10% of the public float of each series of first preferred shares outstanding on June 9, 2009. YPG Holdings currently has 12,000,000 first preferred shares, series 1 and 8,000,000 first preferred shares, series 2 issued and outstanding. Within the past 12 months, YPG Holdings has not purchased any of its first preferred shares. The average daily trading volumes of YPG Holdings’ first preferred shares, series 1 and first preferred shares, series 2 for the period between December 1, 2008 and May 31, 2009 were 17,290 and 20,929, respectively. In accordance with the rules of the Toronto Stock Exchange, the maximum numbers of first preferred shares, series 1 and first preferred shares, series 2 that can be purchased on a daily basis by YPG Holdings are respectively 4,322 and 5,232, subject to the block purchase exception.

YPG Holdings believes that the trading price of the series 1 and series 2 first preferred shares may from time to time not reflect the fundamentals and future prospects for the business of YPG Holdings and the Fund. YPG Holdings’ directors have authorized this normal course issuer bid and, in their opinion, such purchases are in the best interest of YPG Holdings and its securityholders and constitute an appropriate use of YPG Holdings’ funds.

The yields of YPG.PR.A and YPG.PR.A were discussed on PrefBlog last March; while the junkier credits have surged in price since then, they closed last night at 22.50-73 (7.82-50%) and 17.46-69 (10.98-76%), giving interest equivalent yields well in excess of, for instance, the YPG 5.25 of 2016, currently quoted to yield 7.48%.

Not much has happened as yet on this news, although prices have moved up … YPG.PR.A is now 22.61-87 and YPG.PR.B is now 17.71-99. Note that today is the last cum-dividend date for the current coupon: it goes ex-Dividend tomorrow.

It is not my normal practice to comment on NCIB’s unless the company has a history of actually putting up a little actual cash to back up their press release … but in this case spreads are so extreme that a healthy company might well consider a buy-back attractive.

DBRS has announced that it:

has today downgraded the LROC Preferred Units issued by Kingsway Linked Return of Capital Trust to Pfd-4 from Pfd-3. The rating remains Under Review with Negative Implications, where it was initially placed on February 10, 2009.

The LROC Preferred Units are supported by an exposure to a note guaranteed by Kingsway Financial Services Inc. and Kingsway America Inc. (collectively, Kingsway) through a forward purchase agreement. The downgrade of the LROC Preferred Units is a result of DBRS downgrading the long-term debt ratings of Kingsway on June 4, 2009, to BB (low) from BBB (low) and leaving the ratings Under Review with Negative Implications.

The DBRS downgrade of Kingsway has been previously discussed on PrefBlog.

KSP.UN is not tracked by HIMIPref™.

BAM.PR.P, the Brookfield Asset Management FixedReset 7.00%+445 announced on May 27, has commenced trading.

The issue traded 947,772 shares in a range of 25.05-30 before closing at 25.25-28, 9×19.

Vital statistics are:

BAM.PR.P has been added to the HIMIPref™ FixedReset subindex.

It is of interest that Brookfield issued CAD 500-million in five-year notes almost simultaneously with this issue. The debentures carry a coupon of 8.95%, with the following highlighted in the prospectus:

We may redeem some or all of the notes at any time at 100% of the principal amount plus a make-whole premium. We will be required to make an offer to purchase the notes at a price equal to 101% of their principal amount, plus accrued and unpaid interest to the date of repurchase upon the occurrence of a Change of Control Triggering Event (as defined herein).

The “make-whole” provision is simply a Canada call at +162bp. The Change of Control Triggering Event means not just a change in control, but also a downgrade of the debs to below investment grade by three out of the four main rating agencies.

DBRS has announced that it:

has today downgraded the long-term debt ratings of Kingsway Financial Services Inc. (Kingsway or the Company) and its U.S. holding company, Kingsway America Inc., to BB (low) from BBB (low). The ratings remain Under Review with Negative Implications, where they were placed on February 9, 2009.

There has not, as yet, been a change announced in their rating of KSP.UN, a structured preferred-ha-ha ultimately dependent upon the credit of Kingsway Financial Services.

KSP.UN was downgraded on May 13 by S&P to B- / P-4(low).

KSP.UN was last mentioned on PrefBlog when DBRS placed it under review-negative. KSP.UN is not tracked by HIMIPref™.

MFC.PR.E, the FixedReset 5.60%+323 issue announced last week, settled today.

It traded 1,143,332 shares in a range of 25.00-14 before closing at 25.05-09, 30×48.

Vital statistics are:

MFC.PR.E has been added to the HIMIPref™ FixedReset subindex.

Newgrowth Corp. has announced:

that the final condition required to extend the term of the Company for an additional five years to June 26, 2014 has been met. Holders of Class A Capital Shares previously approved the extension of the term of the Company subject to the condition that a minimum of 1,340,000 Class A Capital Shares remain outstanding after giving effect to the special retraction right (the “Special Retraction Right”).

Under the Special Retraction Right, 88,897 Class A Capital Shares have been tendered to the Company for retraction on June 26, 2009. Holders of these shares will receive a retraction price equal to the amount, if any, by which the Unit Value exceeds $18.25. Holders of the remaining 2,238,510 Class A Capital Shares will continue to enjoy the benefits of a leveraged participation in the capital appreciation of the Company’s portfolio of publicly listed common shares of selected Canadian chartered banks, telecommunication, pipeline and utility companies.

The Class B Preferred Shares will be redeemed by the Company on June 26, 2009 in accordance their terms at a price per share equal to the lesser of $18.25 and Unit Value. In order to maintain the leveraged “split share” structure of the Company, the Company will offer a new series of Class B Preferred Shares to be called the Series 2 Preferred Shares pursuant to a preliminary prospectus dated May 22, 2009.

The preliminary prospectus for the new issue does not state a dividend rate. Given that the capital units (NEW.A) have a market value of about $44-million and that coverage of at least 2:1 may be reasonably expected, it is unlikely that the new issue will be tracked by HIMIPref™.

The refunding proposal has been previously discussed on PrefBlog. NEW.PR.B is not tracked by HIMIPref™.

Moody’s has announced it has:

changed the rating outlook on the Bank of Montreal (BMO) and its subsidiaries to negative from stable. BMO is rated B for bank financial strength and Aa1 for deposits. The negative outlook applies to BMO’s Harris subsidiaries including Harris N.A. (bank financial strength rating of B-, long-term deposits of Aa3). Note that there already exists a negative outlook on Harris N.A.’s bank financial strength rating.

Senior vice president, Peter Routledge, stated that “the outlook change is the product of several factors. First, BMO’s business mix has a material weighting towards capital markets activities in general, and structured credit activities specifically, which is likely to result in continued earnings volatility, in Moody’s view. Second, the bank has entered a prolonged period of higher loan losses which will pressure earnings for several quarters. Finally, these two factors will dampen BMO’s risk-adjusted profitability, which is already low relative to its current rating level.” Partially offsetting these concerns is the bank’s strong level of capitalization and an improving risk management discipline.
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BMO’s structured credit exposures have produced approximately C$2 billion in pre-tax losses since the turmoil in the credit markets began. Although the bank has bled much of the potential losses contained in these exposures into its earnings, additional losses could accelerate rapidly in a severe economic downturn. Moody’s primary focus is on two BMO exposures: (1) credit protection vehicle — known as Apex Trust; and (2) the structured investment vehicles, Links Finance Corporation / Links Finance LLC and Parkland Finance Corporation / Parkland (USA) LLC.
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According to Mr. Routledge, “the challenge BMO faces is managing these two points of earnings pressure from a low level of risk-adjusted profitability, relative to its current ratings level.” BMO’s performance since 2007 is instructive. During that time, the bank’s capital markets charges have consumed approximately 25% of BMO’s pre-provision, pre-tax (core) earnings, and caused its already weak ratio of core earnings to risk-weighted assets to drop by 50 basis points on average (i.e., from approximately 2.2% to 1.7%). According to Mr. Routledge, “while Moody’s believes that BMO’s core earnings and capital are more than adequate to absorb prospective credit and capital markets losses, a deterioration in risk-adjusted profitability — a long-stated major ratings driver for the bank — could ultimately lead to a downgrade in BMO’s bank financial strength rating.”

As noted above, two positive credit trends offset partially the aforementioned negative rating drivers. First, the bank’s capitalization is very strong, with a Tier 1 ratio of 10.7% and a ratio of tangible common equity (adjusted for Moody’s hybrid credit) as a percent of risk-weighted assets at 9%.

BMO has seven issues of preferreds on the Toronto exchange: the PerpetualDiscounts BMO.PR.H, BMO.PR.J, BMO.PR.K & BMO.PR.L and the FixedResets BMO.PR.M (+165), BMO.PR.N (+383) & BMO.PR.O (+458).

All are tracked by HIMIPref™ and are included in their respective indices.