IAG.PR.C met a hostile reception when issued in November, closing at 23.80-90 on its opening day, but has since struggled back to today’s close 24.40-50, 9×225, on volume of 1,000 shares all at 24.50.
That was then. This is now.
The underwriters have announced an inventory blow-out sale at 23.50, to close January 14.
Many thanks to Assiduous Reader MP for providing me with proof that this is public, if not particularly well-publicized, knowledge!
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.
| December, 2008 | ||||
| Issue | Index | DBRS Rating | Monthly Performance | Notes (“Now” means “December 31”) |
| BCE.PR.Z | FixFloat | Pfd-2(low) | -23.35% | |
| BCE.PR.Y | Ratchet | Pfd-2(low) | -22.73% | |
| BCE.PR.S | FixFloat | Pfd-2(low) | -20.97% | |
| BCE.PR.R | FixFloat | Pfd-2(low) | -19.35% | |
| BCE.PR.I | FixFloat | Pfd-2(low) | -18.83% | |
| … | … | … | … | … |
| BNA.PR.B | SplitShare | Pfd-2(low) | +31.21% | Asset coverage of 1.8-:1 as of December 31 based on BAM.A at 18.55 and 2.4 BAM.A per preferred. Now with a pre-tax bid-YTW of 8.87% based on a bid of 20.01 and a hardMaturity 2016-3-25 at 25.00. Presumably helped out a lot by very favourable monthly retraction terms – estimated retraction price is now $21.77 based on an NAV of 44.52. |
| FTN.PR.A | SplitShare | Pfd-2(low) Review Negative |
+31.27% | Asset coverage of 1.4-:1 as of December 15 according to the company, with an estimated NAV of 13.75 based on the change in XFN since then. Now with a pre-tax bid-YTW of 8.94% based on a bid of 8.16 and a hardMaturity 2015-12-1. Estimated retraction price of $8.70 with capital units offered at $4.50. |
| BAM.PR.K | Floater | Pfd-2(low) | +34.66% | Was the worst performer in November, with a return of -35.06%. |
| FFN.PR.A | SplitShare | Pfd-2(low) Review Negative |
+35.09% | Was the fifth-worst performer in November, with a return of -25.48%. Asset coverage of 1.1+:1 as of December 15 according to the company; NAV now estimated as 11.63 based on change in XFN since then. Now with a pre-tax bid-YTW of 11.07% based on a bid of 7.56 and a hardMaturity 2014-12-1 at 10.00. Estimated retraction price of $8.19 with capital units offered at $2.97. |
| BAM.PR.B | Floater | Pfd-2(low) | +37.05% | Was the second-worst performer in November, with a return of -30.81%. |
The December rankings are not as mysterious as the November rankings … three of the best performers are merely bouncing back from horrible performance last month, while the five worst performers are all BCE issues … reacting as one might expect to the death of the Teachers’ deal.
It is interesting to note that the BPP floaters – issued by BPO Properties, which never fails to irritate me – had a horrible month. Two of the three would have made the list had they been included in the indices (they are excluded on credit concerns) … and they are now trading roughly kinda call it even yield with the BAM floaters, ending (for now) the long-standing credit inversion. To continue the graphs given in that post:
Was somebody saying something about efficient markets?
CIX Split Corp has announced:
that it has obtained approval from its shareholders to change the investment objectives, strategies and restrictions of the Corporation (the “Mandate Change”) to reflect that the Corporation will invest substantially all of its assets in common shares of the corporate successor (“CI Financial”) to CI Financial Income Fund (the “Income Fund”) after the Income Fund converts to a corporation. Currently, the Corporation has exposure to the trust units of the Income Fund.
The Mandate Change will become effective on or before January 1, 2009 and includes deleting from the Corporation’s investment objectives respecting its Class A Shares the reference to targeted monthly cash distributions. The Corporation also will complete the early settlement of the sale of its common share portfolio to the counterparty to its forward purchase and sale agreement and invest the proceeds thereof in additional common shares of CI Financial.
The Corporation’s Class A Shares and Priority Equity Shares are listed on the Toronto Stock Exchange under the symbols CXC and CXC.PR.A, respectively.
When reporting the notice of meeting, I recommended a “No” vote. This would have led to the early wind-up of the company and – given a closing NAV of $10 or more – full repayment to the Preferred Shareholders.
It would appear, however, that they would rather retain their preferred shares, which closed today at 7.70-89, 10×2, with full downside exposure to the underlying portfolio and no upside from the probable closing out price. Zip, Zero, Zilch. Morons.
The NAV of the Preferred and Capital Units combined was 10.58 at today’s close. CXC.PR.A is not tracked by HIMIPref™.
DBRS has announced that it:
has today downgraded the Preferred Shares issued by NB Split Corp. (the Company) to Pfd-4 (low) from Pfd-2 (low), with a Stable trend. The rating has been removed from Under Review with Negative Implications, where it was placed on October 24, 2008.
In February and March of 2007, the Company raised gross proceeds of approximately $106 million by issuing 1.521 million Preferred Shares (at $32.72 each) and 3.043 million Capital Shares (at $18.45 each). The initial split share structure provided downside protection of 50% to the Preferred Shares (after expenses).
The net proceeds from the initial offering were invested in a portfolio of common shares (the NB Shares) of National Bank of Canada (National Bank). Dividends received from the NB Shares are used to pay a fixed, cumulative quarterly dividend to the holders of the Preferred Shares yielding 4.75% annually. Excess dividends net of all expenses of the Company may be paid as dividends on the Capital Shares. The current dividend income on the NB Shares less administration fees and other Company expenses is sufficient to fully cover the cost of the Preferred Shares distributions.
The value of the NB Shares has declined significantly since inception. From February 22, 2007, to December 22, 2008, the net asset value (NAV) of the Company dropped from $67.20 to $31.06, a decline of about 54%. As a result, all of the downside protection available to the Preferred Shares at inception has been eroded. Based on the most recent NAV, holders of the Preferred Shares would experience a loss of approximately 5% of their initial issuance price if the NB Shares were liquidated and proceeds distributed. However, the credit quality of National Bank remains strong as DBRS confirmed its senior debt rating at AA (low) with a Stable trend on November 26, 2008.
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 National Bank may result in reductions in asset coverage or dividend coverage from time to time.
The redemption date for both classes of shares issued is February 15, 2012.
The NAV for NBF.PR.A is posted on its website, as $31.06 on December 22; the issue price of the preferreds was $32.72. The preferreds closed today at 25.50-27.99 (!) 43×1. Based on the NAV and the ask price of the capital shares of $2.19, the monthly retraction (with formula R=95%NAV – 2C – 0.40) was $24.73 and hence not supportive.
NBF.PR.A was mentioned on PrefBlog in conncection with the DBRS March Review (not resolved) and the DBRS October Review. NBF.PR.A is not tracked by HIMIPref™.
I will admit that sometimes I look at the analysis generated by HIMIPref™ and blink. The assumptions and procedures and approximations used in the course of the analysis can sometimes work together in unexpected ways … so the results need to be reviewed in order to determine whether
Such are the joys of quantitative analysis, when you can spend a month trying to figure out the analysis of one instrument on a date from ten years back!
This time, however, it’s today’s analysis of RY.PR.N: it closed today at 26.00-10, 28×1, after trading 29,390 shares in a range of 26.00-10.
And yet despite the $26.00 price, HIMIPref™ shows the pre-tax bid-YTW scenario as being the limitMaturity – that is, the dummy maturity thirty-years hence which is used as a substite for “forever”.
First, some facts: the issue closed on December 9 and is a fixed reset with the terms 6.25%+350. The analysis assumes that 5-year Canadas will now and forever yield 1.83%, so the rate is presumed to be reset to 5.33% at the first (and all subsequent) reset dates.
HIMIPref™ calculates the yield to first call of 5.4130% and yield-to-limit of 5.2913%. I have uploaded the cash-flow reports for the five year and 30-year maturities. The YTW is the worst yield, 5.2913%, and the YTW scenario is the 30-year maturity.
There cannot be much argument about the yield calculation for the five year maturity; everything is known, so it’s all perfectly standard. However, the thirty year maturity is simply an analytical placeholder for “forever” and the maturity value is not known. As you can see from the reports, HIMIPref™ estimates a price of $23.44 for the 30-year case.
Why $23.44? For that we have to look at the HIMIPref™ calculation of costYield … I have uploaded the relevant cash flow analysis. Readers will note the cash flow entry dated 2014-3-26, for -1.73 (future value) discounted to -1.34 (present value). This is the estimate of what the issuer’s call option is costing the holder; the implication is that if this option didn’t exist, we’d be willing to pay $1.34 (present value) more for the security.
The value of the option is calculated using a time-influenced distribution of possible prices centred on the current price. As shown by the Option Cash Flow Effect Analysis, it is currently assumed that there is a 53% chance of the option being exercised. Slicing the price distribution into two parts on that date, it is calculated that the average unconstrained price in exercise scenarios is 28.24; the average unconstrained price in non-exercise scenarios is 23.44. Voila! An estimated maturity price of $23.44.
I’ve also uploaded an Excel spreadsheet where I did a little fooling around with the reports. Raw data is in cells a1:e128. I’ve converted the semi-annual yield back into annual in cells c129:c130. The cash-flows with some decimals put back in are in cells g1:g122. My check on the arithmetic is in cells i1:j122 and sum to a present value of $26.03805; I’m assuming that the extra 3.805 cents is due to rounding differences of dates and days-in-year approximations. I used cells l1:n124 to play around with the yield-effect of different maturity values, and summarized my playing in cells l127:n130, which I will reproduce here:
| RY.PR.N Effect of Maturity Value on Calculated Yield |
|
| Maturity Value | Semi-Annual Yield |
| 25.00 | 5.38% |
| 26.00 | 5.44% |
| 23.44 | 5.290% |
It’s not all that sensitive, but the rate with a 26.00 end-value is slightly in excess of the 5-year rate, implying that if we rely on a 26.00 end-value then the 5-year yield is the YTW … as would be expected.
But I claim that you cannot count on a 26.00 end-value. I claim that if the unconstrained market price is 26.00 on a call date, then the issuer will call the issue at 25.00 instead. All you can count on at the end of eternity (which is 30-years off) is that fraction of the price distribution that escaped the calls … and that has an average value of 23.44.
And hence, the YTW scenario for a 26.00 issue callable at 25.00 in five years is … the limit maturity. This doesn’t happen for normal “straight” perpetuals: if the issue had an expected cash flow stream of 6.25% for the entire 30-year period, rather than 6.25% for five years and 5.33% thereafter, the five-year call would have a lower yield and hence be the YTW scenario.
And, just for fun, let’s have a contest! Presuming an end-value of 23.44, what post-reset 5-Year Canada yield (and hence, what dividend rate on RY.PR.N) do we need to bump the yield up to the point where the 5-year call becomes the Yield-To-Worst scenario? First correct answer wins a copy of the January edition of PrefLetter.
ROC Pref II Corp has announced:
that Standard & Poor’s (“S&P”) lowered its ratings on ROC II’s Preferred Shares from P-2 to P-3 and the Preferred Shares remain on CreditWatch with negative implications. S&P expects to resolve the CreditWatch placement within a period of 90 days and update its opinion. As announced in a press release dated December 8, the move comes as a result of the Tribune Company credit event as well as several downgrades of companies held in the Reference Portfolio.
ROC Pref II Corp.’s Preferred Shares pay a fixed quarterly coupon of 4.65% on their $25.00 principal value and will mature on or about December 31, 2009. The Standard & Poor’s rating addresses the likelihood of full payment of distributions and payment of $25.00 principal value per Preferred Share on the maturity date. The Preferred Shares are listed for trading on the Toronto Stock Exchange under the symbol RPA.PR.A.
The effect of the Tribune credit event was reported on PrefBlog.
RPA.PR.A is not tracked by HIMIPref™.
ROC Pref Corp has announced:
that Standard & Poor’s (“S&P”) lowered its ratings on the Company’s Preferred Shares from P-1 to P-2 (high) and the Preferred Shares remain on CreditWatch with negative implications. S&P expects to resolve the CreditWatch placement within a period of 90 days and update its opinion. As announced in a press release dated December 8, the move comes as a result of the Tribune Company credit event as well as several downgrades of companies held in the Reference Portfolio.
ROC Pref Corp.’s Preferred Shares pay a fixed quarterly coupon of 4.30% on their $25.00 principal value and will mature on or about September 30, 2009. The Standard & Poor’s rating addresses the likelihood of full payment of distributions and payment of $25.00 principal value per Preferred Share on the maturity date. The Preferred Shares are listed for trading on the Toronto Stock Exchange under the symbol PRF.PR.A.
The effect of the Tribune credit event was reported on PrefBlog.
PRF.PR.A is not tracked by HIMIPref™.
Brompton Group has announced:
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 Life & Banc Split 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 $12.86. 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.
LBS.PR.A has been placed on Review-Negative by DBRS … and Assiduous Reader lystgl asked the question:
LBS.PR.A is on the list of “about to be or may be” downgraded. I was just wanting, in terms I can understand, to know why.
My response is:
LBS.PR.A is backed by a portfolio of the Big 6 Banks and Big 4 Insurers. This is better than being backed by a single financial issuer, but is worse than the backing of a fully diversified portfolio.
Equity market declines have eroded the asset coverage of the portfolio to a mere 1.279:1 as of December 18. In DBRS terminology, thats “Downside Protection” of about 22% … in other words, if the portfolio declines by another 22%, then the Capital Units will have no intrinsic value (they will have option value) and the Preferred Shares will be fully exposed to further declines in portfolio value. Worse … when the NAV per Unit is $10, they have full downside exposure but no upside, as increases in the portfolio above that point will belong to the Capital Units.
The DBRS guideline (which is influenced by other factors, such as the nature of the underlying portfolio and income coverage) for a Pfd-2/Pfd-2(low) rating is downside protection of 40-50%. Since LBS.PR.A is currently below that figure, they’re reviewing it … and if there are no extenuating factors, they’ll cut the rating.
When we look at their most recent financial statements, we find that all the declared income looks sustainable – it’s nearly all dividends, with minor contributions from securities lending and interest income. There’s no one-off stuff in there, and no games-playing with “option income” or other crap. So we can estimate sustainable income going forward as $4.838-million per six-month period … dependent, of course, on none of their underlying holdings cutting the dividend.
Expenses were $1.189-million, which looks sustainable. Distributions on preferred shares were $2.980-million.
Thus, income coverage is 4.838/(1.189 + 2.980) = 1.16:1. This is a good number. They can cover their expenses and preferred share distribution with sustainable income (assuming no cuts in dividend receipts), which is a Good Thing and not the case for all split-shares (see Split Shares and the Credit Crunch).
There is a major drag on NAV of the Capital Unit distribution, which amounted to $6.818-million in the financial statements. Given that there were 11.363-million units outstanding, this amounts to a drag on NAV of $0.60 per unit per half, or $1.20 per year – which ties in admirably with the “8.0% targeted yield based on $15.00 issue price, paid monthly”. However, this drag has been eliminated due to:
No distributions will be paid on Class A shares if (i) distributions payable on the Preferred shares are in arrears or (ii) after the payment of the distributions by the Fund, the Published NAV per unit is less than $15.
Hurray!
So income and asset coverage both look reasonable especially when compared to the market price rather than to the obligation of $10. But to me, it doesn’t look good enough to warrant a Pfd-2/Pfd-2(low) rating and I expect a cut to maybe Pfd-3 / Pfd-3(high).
DBRS has announced that it:
has today placed the rating of certain structured preferred shares (Split Shares) Under Review with Negative Implications. Each of these split share companies has invested in a portfolio of securities (the Portfolio) funded by issuing two classes of shares – dividend-yielding preferred shares or securities (the Preferred Shares) and capital shares or units (the Capital Shares). The Preferred Shares benefit from a stable dividend yield and downside principal protection via the net asset value (NAV) of the Capital Shares against the percentage loss in the Portfolio’s NAV. Preferred Shares have experienced significant declines in downside protection during the past number of months due to volatility in the global equity markets. As a result, DBRS has placed the Preferred Shares listed below Under Review with Negative Implications. DBRS will take final rating action on these Preferred Shares once a longer-term trend has been established for the NAVs of the affected split share companies.
They note that analysis will be performed according to the methodology of 2007
They do not explicitly list the affected splits in the main text, but they do have a list of related issues. On the assumption that there is a one-to-one relationship, the following table may be prepared.
| DBRS Review Announced 2008-12-19 | ||||
| Ticker | Rating | Asset Coverage |
Last PrefBlog Post |
HIMIPref™ Index |
| ABK.PR.B | Pfd-2(low) | 1.3+:1 12/18 |
Issue Closes | None |
| TDS.PR.B | Pfd-2(low) | 1.5-:1 12/18 |
Microscopic Redemption | Scraps |
| FTN.PR.A | Pfd-2 | 1.4-:1 12/15 |
No Fear! | SplitShare |
| BMT.PR.A | Pfd-2(low) | 1.1+:1 12/18 |
Partial Call | Scraps |
| MST.PR.A | Pfd-2(low) | 1.3+:1 12/18 |
Capital Unit Dividend Suspended | Scraps |
| FFN.PR.A | Pfd-2(low) | 1.1+:1 12/15 |
Capital Unit Dividend Suspended | SplitShare |
| EN.PR.A | Pfd-2(low) | 1.4+:1 12/18 |
Partial Redemption | Scraps |
| BXN.PR.B | Pfd-2(low) | 1.6-:1 12/18 |
Partial Redemption | None |
| PPL.PR.A | Pfd-2 | 1.4-:1 12/15 |
Added to HIMIPref™ | SplitShare |
| LSC.PR.C | Pfd-2 | 1.4-:1 12/18 |
Partial Redemption | None |
| BSC.PR.A | Pfd-2(low) | 1.4+:1 12/18 |
Partial Redemption | None |
| SBC.PR.A | Pfd-2 | 1.3+:1 12/18 |
Added to HIMIPref™ | SplitShare |
| PDV.PR.A | Pfd-2 | 1.3+:1 12/15 |
None | None |
| SOT.PR.A | Pfd-2(low) | 1.4+:1 12/18 |
None | None |
| BBO.PR.A | Pfd-2 | 1.6+:1 12/11 |
Rights Offering | None |
| LBS.PR.A | Pfd-2 | 1.3-:1 12/18 |
Analysis | SplitShare |
| RBS.PR.A | Pfd-2(low) | 1.2-:1 12/18 |
Tiny Redemption | None |
| LCS.PR.A | Pfd-2 | 1.2+:1 12/18 |
Analysis | None |
The previous DBRS Review of Splits has not yet been completed. All these are new.
Globalbanc Advantaged 8 Split Corp. has announced:
a distribution of $0.07 per Preferred Share for the quarter ending December 31, 2008. The distribution will be paid on January 13, 2009 to holders of record on December 31, 2008. No distribution will be paid on the Class A Shares for the quarter ending December 31, 2008.
The Company has determined that, as a result of anticipated changes in the dividend payments to be paid by the banks included in the Bank Portfolio, future dividend payments to be received by the Company may not generate sufficient yield to pay in full the fixed cumulative quarterly dividends in the amount of $0.1125 per Preferred Share (as established by the share conditions relating to the Preferred Shares) and the expenses of the Company. Accordingly, the Company has determined to pay during 2009 a quarterly dividend amount of one-quarter of the Bloomberg Dividend Forecast of the dividends to be paid by the banks comprising the Bank Portfolio in the upcoming 12 months, less an estimate of the expenses of the Company. The Board of Directors will monitor these estimates and may revise the amount of dividends paid on the Preferred Shares in the future, up or down, to take in to account changes in these estimates and changes in the Company’s expenses.
Assuming dividends are paid by the Bank Portfolio at least consistent with these estimates over the coming 12 months, the Company will maintain sufficient cash flow to make dividend payments in accordance with the revised dividend policy and to fund current operating expenses. If the Company were to pay dividends and incur operating expenses in excess of these cash flows it may be necessary to dispose of a portion of the securities comprising the Bank Portfolio. The Board of Directors believes it is in the best interests of the Company to pay dividends at a level which avoids a sale of assets at this time.
The shortfall below the prescribed amount of the Preferred Share dividend will accumulate and, in accordance with the terms of the Preferred Shares and the Class A Shares, will be paid in priority to any payments on the Class A Shares.
In response, DBRS announced:
has today placed the Preferred Shares issued by GlobalBanc Advantaged 8 Split Corp. (the Company) Under Review with Negative Implications following the Company’s announcement of a revised dividend policy.
The Preferred Shares are entitled to fixed cumulative quarterly dividend payments of $0.1125 per share, yielding 4.5% per annum on the initial share price of $10. The Company has reduced the December 31 distribution to $0.07 per Preferred Share. For 2009, the Company plans to pay a quarterly dividend amount of one-quarter of the forecasted dividends to be received by the Company less an estimate of the expenses of the Company, in order for the Company to avoid a sale of assets to pay Preferred Share distributions.
As a result of the deterioration of the Company NAV and the decision by the Company to reduce the Preferred Shares dividend, DBRS has placed its rating of Pfd-5 (low) on the Preferred Shares Under Review with Negative Implications.
Asset coverage is 0.5+:1 as of December 18, according to the company.
GBA.PR.A was last mentioned on PrefBlog when DBRS downgraded it to Pfd-5(low). GBA.PR.A is not tracked by HIMIPref™.