Category: Issue Comments

They’re playing hardball! M-Split Corp. has announced:

that it has suspended its regular monthly dividends effectively immediately for Priority Equity (“Preferred”) shareholders in order to preserve cash and to assist in rebuilding the net asset value in an attempt to meet longer term objectives. Since the Preferred shares are cumulative, this suspended dividend (and all subsequent dividends not paid) will be accrued to the benefit of the Preferred shareholders and recorded as a liability in the Company’s net asset value. Also, there will not be a distribution paid to Class A Shares for February 27, 2009 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 $12.50. The net asset value as of February 13, 2009 was $8.91 and has been adversely impacted by the significant decline in the Manulife stock held in the portfolio.

Preferred shareholders should be pretty upset with Quadra about this and demand that the company be wound up immediately. They can’t force the company to do so, but management does not appear to understand that every single penny of the company’s net assets belong to the preferred shareholders; the capital unitholders have been wiped out and are worth zip, zero, zilch.

However, Quadra has other ideas:

The Company’s total net asset value is approximately $8.71 per unit as at February 18, 2009, consisting of less than 7% common shares of Manulife. The reduced exposure to Manulife will materially limit the future impact of price movements of Manulife shares on the net asset value of the Company and lower the ability of the Company to generate income from dividends and its covered call option writing program.

The significant price decline of Manulife has made it extremely difficult to achieve the original stated objectives for both classes of shares. The Company intends to establish a normal course issuer’s bid which would allow the Company to re-purchase units in the market when trading prices are at a discount to the net asset value.

The Company will continue to review and dialogue with shareholders in order to establish potential solutions for reorganizing the Company that would be suitable for all shareholders.

… but then, what can you expect from people who use “dialogue” as a verb?

The Capital Units are currently quoted at $0.55-77, 1×1, on the Toronto Exchange. I object to the very idea of the company using the discount on the trading price of the preferreds to subsidize a free lunch for the capital unitholders; but on the other hand an issuer bid will be accretive to preferred shareholders not stupid enough to sell. So views on the topic will be mixed.

The company should be wound up. This will require consent of the capital unitholders; I suggest they be offered $0.25 on wind-up; this being $0.25 more than they’ll get if the company elects to drag the farce out to the scheduled wind-up on December 1, 2014. But, if not wound up, preferred shareholders should remember that they’ve got a perfectly good strip-bond-like investment, with minimal market exposure. They should certainly not even dream of selling on the market that the current quote of 7.00-38, which is an almost 20% discount to NAV at the bid.

XMF.PR.A is not tracked by HIMIPref™. It was last mentioned on PrefBlog when the preferred-unfriendly reorganization plan was defeated.

They’re playing hardball! Commerce Split Corporation has announced:

that it has suspended its regular monthly dividends effectively immediately for Priority Equity (“Preferred”) shareholders in order to preserve cash and to assist in rebuilding the net asset value in an attempt to meet longer term objectives. Since the Preferred shares are cumulative, this suspended dividend (and all subsequent dividends not paid) will be accrued to the benefit of the Preferred shareholders and recorded as a liability in the Company’s net asset value. Also, there will not be a distribution paid to Class A Shares for February 27, 2009 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 $12.50. The Net Asset Value as of February 13, 2009 was $9.07 and has been adversely impacted by the significant decline in the CIBC stock held in the portfolio.

Preferred shareholders should be pretty upset with Quadra about this and demand that the company be wound up immediately. They can’t force the company to do so, but management does not appear to understand that every single penny of the company’s net assets belong to the preferred shareholders; the capital unitholders have been wiped out and are worth zip, zero, zilch.

However, Quadra has other ideas:

The Company’s total net asset value is approximately $8.91 per unit as at February 18, 2009, consisting of less than 17% common shares of CIBC. The reduced exposure to CIBC will materially limit the future impact of price movements of CIBC shares on the net asset value of the Company and lower the ability of the Company to generate income from dividends and its covered call option writing program.

The significant price decline of CIBC has made it extremely difficult to achieve the original stated objectives for both classes of shares. The Company intends to establish a normal course issuer’s bid which would allow the Company to re-purchase units in the market when trading prices are at a discount to the net asset value.

The Company will continue to review and dialogue with shareholders in order to establish potential solutions for reorganizing the Company that would be suitable for all shareholders.

… but then, what can you expect from people who use “dialogue” as a verb?

The Capital Units are currently quoted at $0.66-87, 6×2, on the Toronto Exchange. I object to the very idea of the company using the discount on the trading price of the preferreds to subsidize a free lunch for the capital unitholders; but on the other hand an issuer bid will be accretive to preferred shareholders not stupid enough to sell. So views on the topic will be mixed.

The company should be wound up. This will require consent of the capital unitholders; I suggest they be offered $0.25 on wind-up; this being $0.25 more than they’ll get if the company elects to drag the farce out to the scheduled wind-up on December 1, 2014. But, if not wound up, preferred shareholders should remember that they’ve got a perfectly good strip-bond-like investment, with minimal market exposure. They should not even dream of selling on the market at the current quote of 7.01-24, a discount of over 20% to NAV at the bid.

XCM.PR.A is not tracked by HIMIPref™. It was last mentioned on PrefBlog when the preferred-shareholder-hostile reorganization plan was defeated.

Hat tip to Assiduous Reader and Cub Reporter franceal for alerting me to this development.

Weston has announced:

that it will redeem for cash, on April 1, 2009 (the “Redemption Date”), all of its outstanding Preferred Shares, Series II for a redemption price of $25.00 per share, together with an amount equal to all dividends, if any, accrued thereon and unpaid up to but not including the Redemption Date.

WN.PR.B is a 5.15% ($1.2875) retractible; April 1 is the first call date; it would have been retractible for shares on July 1.

WN.PR.B was last mentioned on PrefBlog when it was placed on Review-Developing by DBRS and Review-Negative by S&P. The issue has been tracked by HIMIPref™; it was moved from the OpRet subIndex to Scraps in May 2007 due to credit concerns.

Faircourt has announced:

a correction to the Net Asset Values (“NAV’s”) for the Fund for the period from December 23rd, 2008 to January 5th, 2009. The revision was required as a year-end special capital gains distribution declared by one of the Fund’s holdings was not reflected in the NAV during this period due to the late notification of the dividend to RBC Dexia Investor Services, the Fund’s valuation agent by its market and pricing feeds.
…
This correction only impacts the NAV of the Fund for the period from December 23rd to January 5th and does not impact the current NAV.

They get two bonus marks for disclosure, minus one for not telling us who’s to blame and minus another one for apostrophizing “NAVs”. Break-even.

The NAVs in question are from December and January:

The NAV of the Capital Units is $1.08 as of February 17.

FIG.PR.A was last mentioned on PrefBlog when it was downgraded to Pfd-5 in the DBRS Mass Downgrade of February 13. It is currently tracked by HIMIPref™ as part of the InterestBearing subIndex, but will (almost certainly) be moved to Scraps at month-end on credit concerns.

DBRS has announced that it:

today downgraded the Preferred Shares issued by BMONT Split Corp. (the Company) to Pfd-4, with a Stable trend, from Pfd-2 (low). The rating has been removed from Under Review with Negative Implications, where it was placed on December 19, 2008.

In August 2004, the Company raised gross proceeds of approximately $88 million by issuing 1.525 million Preferred Shares at $27.45 each and 3.05 million Capital Shares at $15.27 each, with a redemption date of August 5, 2009 (the Redemption Date) for both classes of shares. The net proceeds from the offering were invested in a portfolio of common shares (the BMO Shares) of Bank of Montreal (BMO). The initial split share structure provided downside protection of approximately 50% to the Preferred Shares.

The holders of the Preferred Shares receive fixed cumulative quarterly distributions yielding 4.5% per annum. The current dividend income from the BMO Shares provides dividend coverage of approximately 1.8 times. In the past, excess dividends net of all expenses of the Company have been paid as dividends to holders of the Capital Shares. On January 8, 2009, the Board of Directors of the Company announced that excess dividends would be invested in short-term debt securities or BMO Shares until the scheduled redemption of the Company’s shares on the Redemption Date.

The NAV of the BMO Shares has declined significantly, dropping from $54.89 per share to $30.77 in the last year, a decline of 44%. The current downside protection available to the Preferred Shareholders is approximately 11% (as of February 13, 2009). The downgrade of the Preferred Shares is primarily based on the lower level of asset coverage available to cover the Preferred Shares principal.

There are less than six months until the Redemption Date, which has limited the severity of the downgrade to the Preferred Shares. If the Redemption Date was to be extended past August 5, 2009, then negative rating action would likely be required.

BMT.PR.A is tracked by HIMIPref™. It was last mentioned on PrefBlog when the DBRS Mass Downgrade of Feb 13 left the issue under review and unresolved. It is included in the “Scraps” subIndex due to volume concerns – now there are two reasons!

DBRS has announced that it:

today downgraded the Preferred Shares issued by R Split III Corp. (the Company) to Pfd-4 (low), with a Stable trend, from Pfd-2 (low). The rating has been removed from Under Review with Negative Implications, where it was placed on December 19, 2008.

In April 2007, the Company raised gross proceeds of $140 million by issuing 2.273 million Preferred Shares at $29.22 each and 4.546 million Capital Shares at $16.19 each, with a final redemption date of May 31, 2012 (the Redemption Date) for both classes of shares. The net proceeds from the offering were invested in a portfolio of common shares (the RBC Shares) of Royal Bank of Canada (RBC). The initial split share structure provided downside protection of approximately 50% to the Preferred Shares.

The holders of the Preferred Shares receive fixed cumulative quarterly distributions yielding 4.5% per annum. The current dividend income from the RBC Shares provides dividend coverage of approximately 1.4 times. The Company’s dividend policy is to pay holders of the Capital Shares the excess dividend income after paying Preferred Shares dividends and other Company expenses.

The NAV of the RBC Shares has declined significantly, dropping from $50.19 per share to $29.92 in the last year, a decline of more than 40%. The current downside protection available to the Preferred Shareholders is approximately 2% (as of February 13, 2009).

As a result of the large decline in asset coverage, DBRS has downgraded the rating of the Preferred Shares to Pfd-4 (low) with a Stable trend. A main constraint to the rating is that volatility of the common share price and changes in dividend policies of RBC may result in reductions in asset coverage or dividend coverage from time to time.

RBS.PR.A is not tracked by HIMIPref™. It was last mentioned on PrefBlog when the DBRS Mass Downgrade of Feb 13 left the issue under review and unresolved.

DBRS has announced that it:

today downgraded the Class B, Preferred Shares (the Preferred Shares) issued by Energy Split Corporation (the Company) to Pfd-4 (low) from Pfd-3 (high). The rating remains Under Review with Negative Implications, where it was placed on October 24, 2008.

Investors in the Company’s Preferred Shares and Capital Shares gain exposure to a portfolio of selected oil and gas royalty trusts (the Portfolio) through a forward purchase and sale agreement (the Forward Agreement) with the Bank of Nova Scotia (the Counterparty). The Counterparty pays the Corporation the economic return provided by the Portfolio, which is held by an underlying fund (the Royalty Fund). In return, a portfolio of common shares of Canadian public companies acquired from proceeds of the Company’s initial offering is pledged to the Counterparty. The Forward Agreement is structured to provide tax-efficient distributions to the Company’s shareholders based on the performance of the Portfolio.

The holders of the Preferred Shares receive fixed preferred tax-efficient quarterly distributions yielding 4.5% per annum. The holders of the Capital Shares are entitled to leveraged tax-efficient distributions that are in excess of distributions paid to the Preferred Shares and all operating expenses of the Corporation.

The NAV of the Company has declined significantly in the last six months, dropping from $39.56 per share to $20.93, a decline of 47%. As a result, all of the downside protection available to the Preferred Shares has been eroded. Based on the most recent NAV, holders of the Preferred Shares would experience a loss of approximately 0.3% of their initial issuance price if the Forward Agreement were terminated and proceeds distributed. The Company’s dividend policy has been to pay quarterly distributions to the Capital Shares equal to the excess income available from the quarter after paying Preferred Shares dividends and other Company expenses. Due to the large amount of excess income available to the Company, the current policy allows for a very high level of payouts ($0.75 per Capital Share for each of the last two quarters) compared to what would be expected based on the current level of asset coverage available to the Preferred Shares. As a result, the Preferred Shares rating remains Under Review with Negative Implications.

As a result of the significant decline in asset coverage, DBRS has downgraded the rating of the Preferred Shares to Pfd-4 (low). A main constraint to the rating is that volatility of the market price and changes in distribution policies of the oil and gas trusts in the Portfolio may result in reductions in asset coverage or dividend coverage from time to time.

ES.PR.B is not tracked by HIMIPref™. It was last mentioned on PrefBlog when the DBRS Mass Downgrade of Feb 13 left the issue under review and unresolved.

DBRS has announced that it:

today downgraded the Preferred Securities issued by Multi Select Income Trust (the Trust) to Pfd-3 (high), with a Stable trend, from Pfd-2 (low). The rating has been removed from Under Review with Negative Implications, where it was placed on December 19, 2008.

In September 2004, the Trust raised gross proceeds of approximately $144 million by issuing 7.2 million Preferred Securities at $10 each and an equal number of Capital Units at $10 each, with a final redemption date of September 30, 2009 (the Redemption Date) for the Trust. The net proceeds from the offering were invested in a broadly diversified portfolio of Canadian income trusts (the Portfolio). The initial split share structure provided downside protection of approximately 50% to the Preferred Securities.

The holders of the Preferred Securities receive fixed quarterly distributions yielding 6.5% per annum. There is a Preferred Security Test that does not permit any cash distributions to the Capital unitholders if the NAV of the portfolio is less than 1.5 times the repayment price for the Preferred Securities.

The NAV of the Portfolio has declined significantly, dropping from $19.51 per security to $13.99 in the last year, a decline of 28%. The current downside protection available to holders of the Preferred Securities is approximately 29% (as of February 12, 2009). The downgrade of the Preferred Securities is primarily based on the lower level of asset coverage available to cover the Preferred Securities principal.

There are less than eight months until the Redemption Date, which has limited the severity of the downgrade to the Preferred Securities. If the Redemption Date was to be extended past September 30, 2009, then negative rating action would likely be required.

MST.PR.A is tracked by HIMIPref™. It was last mentioned on PrefBlog when the DBRS Mass Downgrade of Feb. 13 left the issue under review and unresolved. It was moved from the InterestBearing subIndex to Scraps in February 2008 on volume concerns.

An Assiduous Reader points out that I have been scooped by Financial Webring, which points out a highly unusual situation in the taxation status of WN.PR.A dividends:

The other preferreds (WN.PR.B, WN.PR.C, WN.PR.D & WN.PR.E) have no such division.

The Weston preferreds were last mentioned on PrefBlog when they were placed on Review-Developing by DBRS, where they remain.

Standard & Poors has announced:

it placed its ratings, including its ‘AA-‘ counterparty credit rating, on Sun Life Financial Inc. (TSX: SLF; Sun Life Financial) and its insurance operating subsidiaries (Sun Life) on CreditWatch with negative implications. Its key insurance operating subsidiaries would include Sun Life Assurance Co. of Canada and Sun Life Assurance Co. of Canada (U.S.).

“The CreditWatch placement reflects the deteriorating business and macroeconomic conditions that in our opinion are putting increasing pressure on the group’s earnings, investments, and capital adequacy position,” said Standard & Poor’s credit analyst Donald Chu.
…
While we believe that the sale of Sun Life Financial’s 37% stake in CI for C$2.3 billion has allowed it to strengthen its balance sheets at an opportune time, we believe that its fixed-charge coverage ratio is under pressure, and that it has limited room to issue debt or hybrids within the current rating category.

SunLife was recently downgraded by Moody’s following its 4Q08 Results.

SunLife has the following preferreds outstanding: SLF.PR.A, SLF.PR.B, SLF.PR.C, SLF.PR.D & SLF.PR.E.