Category: Issue Comments

HSBC Bank of Canada has announced:

HSBC Bank Canada (the “Bank”) intends to file an amended and restated prospectus supplement for the previously announced offering of Non-Cumulative 5-Year Rate Reset Class 1 Preferred Shares Series E (the “Preferred Shares Series E”). The amendment is a result of ratings action announced on 31 March 2009 by Standard and Poor’s (“S&P”) on the hybrid capital securities of over 60 European financial institutions, including the Bank’s parent company, HSBC Holdings plc. The S&P ratings of the Preferred Shares Series E of ‘P-1(Low)’ and ‘A’ under S&P’s Canadian and Global Preferred Share Rating scales, respectively, are among the highest of the major Canadian banks.

The Bank and a syndicate of investment dealers led by HSBC Securities (Canada) Inc. and Scotia Capital Inc. (the “Underwriters”) intend to enter into an agreement that will amend in certain respects the underwriting agreement they signed on 24 March 2009 (the “Underwriting Agreement” and together with the amending agreement, the “Amended Underwriting Agreement”). The size of the offering will be unchanged at 7 million shares at a price of $25.00 per share, for gross proceeds of C$175 million. The expected closing date for the offering, previously scheduled for 31 March 2009, will be amended to 8 April 2009.

Pursuant to the Amended Underwriting Agreement, HSBC Bank Canada will grant the Underwriters the option (the “Underwriters’ Option”), exercisable in whole or in part at any time up to two business days prior to closing, to purchase up to an additional 3 million Preferred Shares Series E at the issue price. Should the Underwriters’ Option be fully exercised, the total gross proceeds of the financing will be C$250 million.

The Preferred Shares Series E will entitle the holders to receive non-cumulative preferential fixed quarterly cash dividends if, as and when declared by the board of directors of the Bank, of C$0.4125 per share, to yield 6.60 per cent annually for the initial period ending 30 June 2014. Thereafter, the dividend rate will reset every five years at a rate equal to 4.85 per cent over the then five-year Government of Canada Bond Yield. Subject to regulatory approval, on 30 June 2014 and on 30 June every five years thereafter, the Bank may redeem the Preferred Shares Series E in whole or in part at par.

Based on the anticipated closing date of 8 April 2009, the first dividend on the Preferred Shares Series E will be payable on 30 June 2009 in the amount of C$0.3762 per share.

This resolves the confusion previously noted on PrefBlog. The issue was announced on March 23, with size bumped from $125-million to $175-million same-day.

The release on Newswire is timestamped 8:14 pm, for those who are interested.

Update, 2009-4-6: S&P has released a commentary on HSBC Canada:

Standard & Poor’s Ratings Services today commented on the March 31, 2009, downgrade of the rating on the preferred shares of HSBC Bank Canada (HSBC Canada; AA/Negative/A-1+). On that date, the global scale rating on HSBC Canada’s preferred shares was lowered to ‘A’ from ‘A+’, and the Canada scale rating on these instruments was lowered to ‘P-1(Low)’ from ‘P-1’.

This rating action was a direct consequence of a review of the ratings on the hybrid capital securities of various European banks (see “Hybrid Securities Of Over 60 European Financial Institutions Downgraded Following S&P Review”, published March 31, 2009, on RatingsDirect). One of the groups included in this review was HSBC Canada’s ultimate parent, HSBC Holdings PLC (HSBC Group; AA-/Negative/A-1+), which is U.K.-incorporated.
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The hybrid capital-related ratings downgrades on HSBC Canada were not related to the previously planned closing date for HSBC Canada’s preferred share issuance on March 31, 2009.

I have communicated my displeasure to HSBC Canada regarding its delay in issuing a press release on this matter. While I am very well aware that it was a nightmarish occurance for them, I think that a March 31 press release to the effect that “Due to S&P’s rating action this morning the issue did not close as planned. HSBC Canada is in discussions with the underwriters to resolve this situation” should have been issued.

RY.PR.X, the FixedReset issue announced last week had a very solid opening day, trading 725,748 shares in a range of 24.91-09 before closing at 25.02-05, 27×46.

Its vital statistics are:

This is an issue sure to be at the centre of many trade errors over the course of its existence. A few years back, Royal Bank started a new numbering system for its preferreds, presumably in cooperation with the TSX: Series ‘AA’ has ticker RY.PR.A, Series ‘AB’ has ticker RY.PR.B and so on. It was great, and a lot better than giving Series N the symbol RY.PR.K, for instance.

But now we have Series AV having ticker RY.PR.X. I suspect that the TSX reserves the “V” suffix for USD issues, or perhaps they consider it too soon after the redemption of the old RY.PR.V (USD 250-million, Series K, redeemed in 2003) to recycle the ticker.

One way or another, it would appear a little more communication is in order.

S&P has announced:

it lowered its issue ratings on the hybrid capital securities of over 60 European financial institutions.

The rating actions followed our review of ratings on the hybrid instruments of financial institutions in Europe. The downgrades reflect our assessment of the deteriorating financial prospects for the European banking industry in the worsening economic environment and our view that European governments and the European Commission (EC) over the medium term may be more willing than previously to encourage or force banks to suspend payments on hybrid securities to preserve cash and build capital. We did not change any of the issuer credit ratings (ICRs) on the banking groups that issue these hybrid securities.

Hybrids for HSBC Bank PLC has been downgraded from A+ to A; HSBC Holdings PLC has been downgraded from A to A-.

The rating of HSBC Bank Canada preferreds, have been reduced from A+ to A, which equates to a change from P-1 to P-1(low) on the national scale.

This has had repercussions for the new issue announced last week, which had been assigned the TSX ticker symbol HSB.PR.E.

The underwriting agreement dated March 24 (available on SEDAR) states:

The Bank shall cause to be delivered to the Underwriters’ Representative on behalf of all Underwriters at the Closing Time, and the Underwriters’ obligations pursuant to this Agreement will be conditional upon:
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(j) receipt by the Underwriters of a confirmation in a form reasonably acceptable to them that the Offered Securities have received a final rating from DBRS of Pfd-1 with a negative trend and from S&P of P-1 and A+, using S&P’s Canadian scale for preferred shares and S&P’s global scale for preferred shares, respectively;

It is my understanding that a new term sheet has been issued, but I haven’t seen it.

There is no press release and HSBC has not responded to my inquiry. You can’t expect important people like bankers and underwriters to demean themselves by communicating with investor scum.

This could be fun! Get your popcorn!

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.

The CIU Inc. Fixed-Resets, 6.70%+481 announced last week had a superb opening day, trading 182,555 shares in a range of 25.25-85 before closing with a quote of 25.61-85, 5×15.

Its vital statistics may be summed up as:

An encouraging sign! I can imagine the brokers are now beating the bushes desperately, looking for more potential issuers with a decent credit rating and the ability to offer cumulative dividends!

One interesting thing about this issue is that it still looks cheap against CIU.PR.A, which closed today at 17.55-90, 15×10, to yield a beggarly 6.64% at the bid, supported by the quite extraordinary premium the market is placing on cumulativity of dividends. This implies that the market is evaluating the value of reset feature at only 44bp … not too much!

BMO.PR.O, the 6.50%+458 Fixed-Reset announced on March 11 has settled successfully, trading 550,271 shares in a range of 24.90-20 before closing at 25.15-20, 8×50.

Issue size was $150-million plus a greenshoe for $75-million. No announcement has yet been made regarding take-up of the underwriters’ option; but with such heavy volume I’ll bet a nickel it was exercised in full.

Five-Year Canadas have come in considerably since the announcement and are now at 1.58%. This means that the yield-to-Perpetuity of the issue is now a more modest than expected 6.27%, based on a bid of 25.15 and a limitMaturity price of 25.10.

This issue has been added to the HIMIPref™ Fixed-Reset sub-index.

Moody’s has announced:

downgraded the insurance financial strength (IFS) ratings of Manulife Financial Corporation’s (Manulife; TSX: MFC) subsidiaries to Aa3 from Aa1.
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Manulife reported the following sensitivities of its capital and earnings to equity markets: (1) MLI’s regulatory capital ratio (known as MCCSR) will decline 2 percentage points for every 1 percentage point decline in the equity markets; and (2) MLI will suffer a C$1.6 billion rise in reserve charges (after-tax) for equity market guarantees for every 10% drop in equity markets. By contrast, some of Manulife’s peers have reported significantly less onerous sensitivities — with MCCSR and reserve charge sensitivities a fraction of Manulife’s. Equity markets, Moody’s notes, are down approximately 10-15% since the start of 2009, and had been down 20% earlier this year, highlighting the potential for further volatility in regulatory capitalization.
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The negative outlook reflects the company’s continuing susceptibility to declines in the equity markets. As noted above, Manulife, unlike most of the other large writers of variable annuities and segregated funds in North America, has not implemented a comprehensive equity hedging program, making the company more vulnerable than peers to equity market volatility. After giving benefit for Manulife’s C$450 million preferred share equity raise this month, Moody’s estimates MLI’s MCCSR at or around 200%, which is low relative to historic standards and relative to Moody’s expectations at Manulife’s current Aa3 IFS rating level. Assuming a C$2.4 billion charge for higher variable annuity guarantee reserves (given equity markets are down 15%), Moody’s estimates a consolidated financial leverage ratio of over 25% at present, versus 22% at the end of 2008.

Moody’s Global Rating Methodology for Life Insurers notes:

The IFS ratings are assigned to life insurance operating companies and are Moody’s opinions of the ability of insurance companies to repay punctually senior policyholder claims and obligations.

Manulife has the following preferreds outstanding: MFC.PR.A (OpRet); MFC.PR.B (PerpetualDiscount); and MFC.PR.C (PerpetualDiscount). These issues were last mentioned on PrefBlog when Fitch downgraded MFC on March 2.

RPQ.PR.A is a stuctured product which was last discussed on PrefBlog when dividends were suspended and the rating withdrawn.

Essentially, holders of this issue have written a “financial disaster insurance policy” – they get paid coupons as a premium on their money, but have to make a massive payment if there are too many defaults in the bonds comprising the reference portfolio.

The deal was structured via a Credit Linked Note issued by the Bank of Nova Scotia; I see that this Credit Linked Note – orginally rated A- by S&P – is now rated CCC, with a rating date of March 10. I note that the December ’08 Performance Update for RPQ.PR.A (published by CC&L group, the sponsor) states that the rating for the Credit Linked Note has been withdrawn – I’m not sure what’s going on. It is possible that BNS originally had two credit linked notes with the stated maturity, and that it is an unrelated issue that is now rated CCC … but I suggest that those potentially affected by this change contact CC&L, BNS and S&P … and let me know what you find out!

I confess to a certain morbid curiosity regarding this and its related issues. RPQ.PR.A is not tracked by HIMIPref™.

ROC Pref. Corp. II has announced:

it was informed on March 10th that Standard & Poor’s Rating services had lowered its rating on the Preferred Shares a notch to P-3(low) and kept them on CreditWatch with negative implications on February 5, 2009.

It was nice of S&P to inform the company only a month after the fact, eh?

RPA.PR.A had a NAV of 8.40 on February 27 and will mature at $25 on or about Dec. 31, 2009 if all goes well.

RPA.PR.A was last mentioned on PrefBlog when it was Downgraded to P-3 / Watch Negative by S&P.

RPA.PR.A is not tracked by HIMIPref™.