Category: Issue Comments

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.
…
“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.
…
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.

Quebecor World has announced:

that it has received a written request from the Toronto Stock Exchange (TSX) that trading in all of Quebecor World’s outstanding classes and series of securities currently listed on the TSX be suspended. In the request letter, the TSX stated its view that, following the Company’s announcement on April 8, 2009 regarding the agreement in principle between Quebecor World and its key creditor constituencies on the material terms and conditions of a consolidated restructuring plan that would form the basis of a comprehensive plan of reorganization, arrangement or compromise, it is inappropriate for Quebecor World’s securities to continue to trade on the TSX. As the Company has consistently stated, it is highly unlikely that its existing Multiple Voting Shares, Redeemable First Preferred Shares and Subordinate Voting Shares will have any value following the implementation of any such plan of reorganization, arrangement or compromise. Based on the foregoing, and in response to the TSX’s written request, the Company has indicated to the TSX that it does not object to the TSX’s position and will comply with its request that all trading in Quebecor World’s securities on the TSX be suspended.

Consequently, effective after the close of markets on Friday, April 17, 2009, Quebecor World’s Subordinate Voting Shares (“IQW”), Series 3 Preferred Shares (“IQW.PD”) and Series 5 Preferred Shares (“IQW.PC”) will be suspended from trading on the TSX, which suspension will remain in place until the effectiveness of any reorganization, arrangement or compromise relating to Quebecor World and its subsidiaries under the ongoing insolvency proceedings.

Shareholders may contact their financial institutions, brokers or financial advisors to obtain more details on trading alternatives including the over-the-counter market.

The bare fact of suspension has been rather tersely confirmed by the TSX.

Both issues were last mentioned on PrefBlog in response to inquiries about their possible value subsequent to reorganization.

HIMIPref™ no longer tracks IQW.PR.C or IQW.PR.D, as the low price was causing “sanity checks” in the programming to indicate errors.

CC&L Group announced on March 31:

ROC Pref II Corp., ROC Pref III Corp. and Connor, Clark & Lunn ROC Pref Corp. (collectively the “Companies”) announced that the decision by Idearc Inc. to voluntarily file petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code is expected to constitute a credit event under the credit linked note (“CLN”) issued by their respective counterparties.

Idearc was created through a spin-off from Verizon Communications Inc. in November 2006. The Reference Portfolios of the Companies have exposure to Idearc Inc. at a half-weight as opposed to a full weight as a result of the spin-off. Idearc operates yellow pages directories in the U.S. The economic recession has negatively affected spending on directories advertising with customer cancellations due to credit deterioration and lower customer renewal rates resulting in declining cash flows thereby reducing Idearc’s ability to support its current level of debt.

The impact of the Idearc credit event on ROC Pref II Corp. and Connor, Clark & Lunn ROC Pref Corp. will be known when the recovery rate is determined within the next several weeks. The recovery rate for ROC Pref III Corp. is fixed at 40%. As a result, the Idearc credit event is expected to reduce the number of additional defaults that ROC Pref III Corp. can sustain before the payment of $25.00 per Preferred Share at maturity is adversely affected by approximately 0.5 to 2.6.

ROC Pref II Corp., ROC Pref III Corp. and Connor, Clark & Lunn ROC Pref Corp. are listed for trading on the Toronto Stock Exchange under the symbols RPA.PR.A, RPB.PR.B and RPQ.PR.A, respectively.

Additionally, RPQ.PR.A is restating its financials:

the Company has restated and refiled its interim financial statements and management report of fund performance for the six months ended December 31, 2008.

In November 2008, the Company announced the implementation of restructuring initiatives designed to increase the likelihood that the Company will be able to repay the $25.00 Preferred Share issue price on the redemption of the Preferred Shares on June 30, 2011. As part of these initiatives, the next three quarters’ coupons on the underlying credit linked note (“CLN”) were sold to The Bank of Nova Scotia (“BNS”) (the issuer of the CLN) in return for additional subordination so that the number of defaults the CLN can sustain before principal and interest payments are adversely affected was increased.

In March 2009, the Manager determined that the 2008 fourth quarter CLN coupon payment had mistakenly been made by BNS resulting in an overstatement of Credit Trust IV’s and the Company’s net asset value. At the same time, the Manager also revisited the assumptions used to calculate the deferred management fee. The net impact of the two adjustments was a decrease in net assets by $0.07 per Preferred Share as at December 31, 2008. The Company has been reimbursed for the excess amounts paid out on the redemption of Preferred Shares as a result of the higher Preferred Share value.

It never rains but it pours!

RPQ.PR.A was last mentioned on PrefBlog in connection with the downgrade of the credit linked note (or, at least, what I think is the credit linked note). All three issues were mentioned with respect to the Tribune Credit Event in December.

None of these issues are tracked by HIMIPref™.

Better late than never! Brompton Split Banc Corp. announced on 2008-12-17:

In accordance with its prospectus and the Class A Share Provisions, the regular, non-cumulative, monthly distribution for the month of December will not be paid on the class A shares of Brompton Split Banc Corp. Under 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 (consisting of one class A share and one preferred share) would be less than $15.00. The net asset value per unit as at December 11, 2008 was $13.52. The Fund will re-evaluate the payment of class A share distributions in each subsequent month with the expectation that normal monthly distributions will resume and a press release will be issued if the net asset value per unit is in excess of $15.00 prior to declaration.

NAV was $15.16 on April 2 according to the company, so resumption may well be in the cards!

SBC.PR.A was last mentioned on PrefBlog when it was downgraded to Pfd-3 by DBRS. SBC.PR.A is tracked by HIMIPref™ but was relegated to the “Scraps” index at the February 2009 rebalancing on credit concerns.

Better late than never! Canadian Life Companies Split Corp announced on Dec. 18:

There will not be a distribution paid to the Class A shares for December 31, 2008 as per the Prospectus which states no regular monthly dividends or other distributions will be paid on the Class A shares in any month as long as the net asset value per unit is equal to or less than $15.00. The net asset value as of December 15, 2008 was $13.65.

The NAV on March 31 was $11.69 according to the company.

LFE.PR.A was last mentioned on PrefBlog when it was downgraded to Pfd-4 by DBRS. LFE.PR.A is tracked by HIMIPref™ but was relegated to the “Scraps” index in the March 2009 rebalancing due to credit concerns.

HSBC Bank of Canada has announced:

has completed the offering of 10 million Non-Cumulative 5-Year Rate Reset Class 1 Preferred Shares Series E (the “Preferred Shares Series E”), issued at a price of C$25.00 per share to raise gross proceeds of C$250 million. The offering was made through a syndicate of underwriters led by HSBC Securities (Canada) Inc. and Scotia Capital Inc. The underwriters exercised an option to purchase 3 million Preferred Shares Series E in addition to the 7 million shares that they had previously agreed to purchase. The Preferred Shares Series E commenced trading today on the Toronto Stock Exchange under the ticker symbol HSB.PR.E.

This was the Fixed Reset 6.60%+485 issuee that had originally been scheduled to close on March 31 but had to be pulled when S&P downgraded HSBC Holdings, its parent. It would appear that HSBC Canada is much happier about issuing press releases when events proceed as expected! They did not acknowledge the problem until a press release was issued after 8pm on April 1.

To a point, I feel sorry for these guys. The downgrade was beyond the control of the Canada unit and the timing was horrible. But only to a point. There should have been a press release as soon as it was known that there was a problem … but then, HSBC is a huge organization, and nobody ever got anywhere in a huge organization (and many small ones!) by highlighting events that the corporation would rather forget (or, even better, not know in the first place). What do you think caused the credit crisis, anyway?

Be that as it may, the vital statistics for HSB.PR.E are:

It traded 615,220 shares in a range of 24.98-23 before closing at 25.20-23, 40×6.

IGM Financial Inc. has announced:

that it has priced the issuance of $375 million principal amount of debentures. The debentures will be offered through a group of agents to be led by BMO Capital Markets and RBC Capital Markets.

The Debentures will be dated April 7, 2009 and will mature April 8, 2019. These debentures will bear interest at a rate of 7.35% per cent per annum payable semi-annually in arrears in equal installments on April 8 and October 8 of each year, commencing on October 8, 2009. The Debentures have been priced to provide a yield to maturity of 7.358% percent.

The senior unsecured credit rating for IGM assigned by S&P is A+ and by DBRS is A (High).

This looks like a reasonable deal compared to the IGM.PR.A retractible (retraction date 2013-6-30). The preferred closed yesterday at 25.85-99, which corresponds to a YTW market of 4.91%-72. When the retractible’s yield is multiplied by the standard equivalency factor of 1.4x, the YTW market becomes 6.87%-61.

Bearing in mind the junior nature of preferreds, shorter term of IGM.PR.A and convexity of the preferred, these issues seem in line with each other.

TD.PR.K, the 6.25%+433 FixedReset announced last week closed today – all $350-million of it – and traded 832,732 shares in a range of 24.98-20 before closing at 25.17-22, 12×2.

Its vital statistics are: