Assiduous Reader prefhound commented:
May I be baffled at the relative prices/yields of the two Yellow Pages Prefs?:
YPG.PR.A closing $19.80; Dividend $1.0625; Retractible Dec 31, 2012 for a YTM = 11.1%.
YPG.PR.B closing $11.75; Dividend $1.25; Retractible Jun 30, 2017 for a YTM = 17.1%
We are used to flaky pref prices when the lower priced issue has a smaller dividend, but here the Pref A has a lower dividend and lower current yield than the Pref B (5.4 vs 10.7%) — and that is before its lower capital gains potential!
If it is a yield curve difference (due to the extra 4.5 years for the pref B), then YPG.PR.B yields 11.1% through Dec 31, 2012 and 26.5% for the period 2013-retraction. Should we conclude that the company will be fine for 3 years and then fall apart in the subsequent five?
BAM and BPO retractible prefs of different maturity dates often have very similar yields to maturity, but not YPG. The YPG.PR.B yield is often more than PR.A, but the current 6 points seems absurd. If both Pref A and Pref B had the same yields to retraction, the Pref B should be $16.82 — more than 40% higher!
I smell arbitrage potential here, but am not sure how long it would take to sort out. Do you have any special insight into this pair?
… and I responded …
I think it all comes down to mortgages.
There is a very real preferred habitat amongst retail investors for short-term bonds, which are usually defined as bonds with five years or less to maturity, which just happens to be the term of most Canadian mortgages.
When you add in the fact that the number of watchers is reduced dramatically by the Pfd-3(high) rating, I think you have an explanation.
You are quite right that BPO retractibles all yield in the same ballpark – but that ballpark is the “penalty yield” ballpark … it is, perhaps, best thought of as a company that is not getting the benefit of the five-year cliff.
And BAM’s just plain wierd.
I suspect that any rationalization of the YPG.PR.B yield will have to wait until 2011-12, when retail will start thinking of it as something with a maturity instead of one of them never get yer money back things.
As I have previously disclosed, the fund holds a position in YPG.PR.B, taken as an optimization trade after the downgrade of BCE.PR.I made me uncomfortable with the fund’s weighting in that name. It’s a relatively small position, with a portfolio weight within the bounds I consider prudent. Barring an increase in credit concern, I’ll hold the damn thing to maturity at a yield of 17+%!
Yellow Pages recently announced that:
it has extended the term of the $500 million tranche of its core revolving credit facility by an additional year to May 2012. Combined with the $200 million revolving tranche, the full amount of the $700 million core revolving credit facility now matures in May 2012. This facility can be used for general corporate purposes and serves as back-up to the commercial paper program.
With the combination of the core revolving credit facility and the $450 million credit facility established in 2008, Yellow Pages Income Fund has access to $1.150 billion in long term committed bank lines, providing ample liquidity to fund its operations and to refinance the Series 1 Medium Term Notes maturing in April 2009.
I note from their most recent Management Discussion and Analysis:
In April 2009, YPG will be repaying at maturity the series 1 medium term notes issued in April 2004 ($450 million) and currently intends to draw under the New Revolving Facility to refinance these notes. We will also continue to monitor conditions in the fixed income market.
…
YPG Holdings Inc. has a total of $300 million of Exchangeable Unsecured Subordinated Debentures outstanding (the Exchangeable Debentures). The Exchangeable Debentures have a maturity date of August 1, 2011 and are exchangeable at any time, at the option of the holder, for units of the Fund at an exchange price of $20.00 per unit.
So the exchangeable-ha-ha debs mature in 2011 – prior to retraction for YPG.PR.A, so fears regarding these two refinancings is not the issue.
The supplemental disclosures provide a breakdown of the maturities:
Yellow Pages
Debt Term Structure |
| Date |
Amount |
Market
Yield |
| 2009-4-21 |
$450-million |
|
| 2011-2-28 |
$150-million |
|
| 2011-8-1 |
$300-million |
|
2012-12-31
Retraction
YPG.PR.A |
$300-million |
11.21%
(Dividend) |
| 2014-4-21 |
$300-million |
8.36% |
| 2016-2-25 |
$550-million |
8.57% |
2017-6-30
Retraction
YPG.PR.B |
$200-million |
17.67%
(Dividend) |
| 2019-11-18 |
$250-million |
9.25% |
| 2036-2-15 |
$350-million |
|
The revolving credit line (of which $359-million is drawn) has maturities:
Yellow Pages
Credit Line Maturities |
| Date |
Amount |
| 2011-5-8 |
$450-million |
| 2012-5-25 |
$200-million |
| 2011-5-21 |
$500-million |
There is a significant refunding due between the two pref series … but it’s not as if the entire debt matures between the two issues’ maturities, at least! If they can refinance the April maturity (currently being refunded via the credit line) with a ten-year term, that will remove at least a little uncertainty.
I should note that a significant proportion of the YPG.PR.B yield is back-end-loaded; that is, dependent upon maturity at par. It’s only yield if you actually get the money!
Finally, I will note the DBRS Press Release of 2008-11-6:
The rating remains underpinned by the Company’s dominance as the incumbent directories publisher in Canada, a market which continues to maintain high usage rates in traditional print directories, and supports a meaningful and growing online directories and vertical media platform.
The rating is further supported by YPG’s industry leading EBITDA margins of roughly 55% and the Company’s strong liquidity position, as evidenced by good free cash flow generation (approximately $130 million for the latest twelve months ending September 30, 2008), over $600 million of undrawn availability under its $950 million committed bank facilities at the end of the third quarter of 2008, and capability and flexibility to refinance upcoming maturities (including $450 million in notes which mature in April 2009).
…
YPG’s free cash flow is expected to continue to demonstrate solid growth through 2010 as a result of the Company’s limited capital requirements and a gradual reduction in the distribution payout ratio as YPG prepares to become fully taxable on January 1, 2011.
Through the end of 2008, DBRS expects YPG’s credit metrics to remain stable on a year-over-year basis, with DBRS-adjusted gross debt-to-EBITDA ranging between 2.90 times and 3.00 times. This is also expected to continue through 2009.
YPG is expected to continue to manage its balance sheet in a conservative manner, balancing strategic acquisitions and unit repurchases in line with its long-term unadjusted leverage targets, maintaining net debt-to-EBITDA between 2.80 times and 3.20 times (at September 30, 2008, this metric stood at roughly 2.90 times). These targets remain within the context of a strong investment grade rating when considering the Company’s favourable business risk profile and free cash flow capacity.
Both issues are tracked by HIMIPref™ and both are incorporated in the “Scraps” index due to credit concerns. The last mention of YPG.PR.A discussed its issue price and the last mention of YPG.PR.B commented on its hostile reception on its opening day in June 2007.