Category: Issue Comments

DBRS has announced that it:

has today placed the long-term and short-term ratings of George Weston Limited (Weston or the Company) – the Notes & Debentures at BBB, the Preferred Shares at Pfd-3 and the Commercial Paper at R-2 (high) – Under Review with Developing Implications.

The action follows Weston’s announcement today that its subsidiary, Dunedin Holdings S.a.r.l. (Dunedin), has entered into an agreement to sell its U.S. fresh bread and baked goods business to Grupo Bimbo for net proceeds of approximately US$2.5 billion. The completion of the transaction is subject to normal closing conditions, including regulatory approval; if the closing conditions are met, the parties expect the transaction to close in the first quarter of 2009.

Although the transaction represents an opportunity for Weston to realize a significant gain on the sale of this business, which it acquired in 2001, it will fundamentally alter the Company’s profile as the business to be sold represents more than half of Weston’s (ex-Loblaw Companies Limited (Loblaw)) operating income.

Dunedin contributed US$255 million of EBITDA to Weston’s consolidated results for the 52-weeks ended October 4, 2008. On this basis, DBRS estimates Weston’s pro forma (from continuing businesses) EBITDA for the same period to be approximately $175 million – this estimate also adjusts for the December 1, 2008 sale of Neilson Dairy (approximately $50 million of annual EBITDA) to Saputo Inc. for net proceeds of approximately $400 million.

The proposed divestiture of these assets would also have a meaningful impact on Weston’s financial risk profile. DBRS estimates the Company would have total cash and cash equivalents of more than $3.5 billion, after repaying $250 million of notes that come due in February 2009 and satisfying it current intention to redeem approximately $265 million of preferred shares in 2009. This cash and equivalent balance would compare to an estimated gross debt balance of $775 million (after February 2009) and preferred share balance of $835 million.

In its review, DBRS will focus on Weston’s intention with regards to its large cash and cash equivalent balance, its remaining operating business and its investment in Loblaw. DBRS believes that with an appropriate financial profile, Weston has the ability to remain placed in the BBB rating category with its continuing businesses (i.e., gross debt-to-pro forma EBITDA a maximum of 2.5 times).

The ratings for Loblaw (rated BBB and R-2 (middle) with Negative trends) remain unaffected at this point as DBRS believes the proposed transaction, in and of itself, does not impact the credit risk profile of Loblaw.

We’ll see what happens! Presumably the credit would be adversely affected if they use the excess cash to privatize Loblaws:

Speculation has swirled over what the company could do with its bulked up bank account.

Galen Weston said the company could look towards opportunities in either the United States or Canada, and the possibility of expanding its frozen bakery business.

There have also been suggestions that Weston is planning to buy out minority shareholders of Loblaw Cos. (TSX: L.TO), Canada’s largest supermarket operator. That would cost Weston about $3.5 billion at current stock values.
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Galen Weston briefly addressed the rumours after an analyst question.

“The way we look at our position in the baking and supermarket business is there’s a lot more opportunity to come,” he said, without mentioning specifics.

Outstanding Weston issues are WN.PR.A, WN.PR.B, WN.PR.C, WN.PR.D and WN.PR.E. They were last mentioned on PrefBlog en masse when Loblaws was downgraded. All issues are tracked by HIMIPref™, but are incorporated in the Scraps index due to credit concerns.

Update: S&P is much more emphatic:

Standard & Poor’s Ratings Services today said it placed its ratings, including its ‘BBB’ long-term corporate credit rating, on Toronto-based George Weston Ltd. on CreditWatch with negative implications. This means that we could either lower or affirm the ratings after completion of our review.

“The CreditWatch placement follows the company’s announcement that its subsidiary, Dunedin Holdings SARL, is in discussions with Mexico-based Grupo Bimbo S.A.B. de C.V. about the possible divestment of George Weston’s U.S. fresh bread and baked goods business,” said Standard & Poor’s credit analyst Lori Harris. Although total estimated sales proceeds and their redeployment are currently unknown, there is market speculation about whether the proceeds will be used for the possible privatization of George Weston’s 62%-owned subsidiary Loblaw Companies Ltd. (BBB/Negative/–) or of George Weston itself.

“In Standard & Poor’s opinion, the deployment of potential sales proceeds for privatization or acquisitions, combined with the absence of the EBITDA for the U.S. fresh baked goods business, could lead to higher debt levels and weaker credit protection measures,” Ms. Harris added. With adjusted debt to EBITDA of about 4.4x for the 12 months ended Oct. 4, 2008, George Weston’s credit measures are already weak for the ratings in our view.

While the ratings on George Weston and Loblaw are currently the same, the rating relationship between the two remains one of linkage, not equalization, with each rating jointly influenced by the respective credit profiles. In the event of the sale, Standard & Poor’s would reevaluate the key parent-subsidiary relationship, including the strategic importance and ownership structure, to determine the rating links between George Weston and Loblaw. The ratings could become equalized should the relationship become significantly closer.

Standard & Poor’s will monitor current developments and meet with management to discuss the proposed divestment and use of proceeds. The resolution of the CreditWatch placement depends on the transaction closing and subsequent redeployment of funds, the revised capital structure, and George Weston’s future business and financial strategies.

The Royal Bank Fixed-Reset 6.25%+350 announced November 24 settled today on good volume and little price movement – a departure from recent norms for which the underwriters will doubtless be grateful!

It traded 389,932 shares in a range of 24.85-05, closing at 25.00-03, 40×177. From the bid of 25.00, the YTW is 5.89% to the limitMaturity, while the yield to the five year call is 6.27%.

Connor Clark & Lunn has announced:

that Tribune Company’s decision to voluntarily restructure its debt obligations under the protection of Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware is expected to constitute a credit event under the credit linked note (“CLN”) issued by their respective counterparties.

When it was chosen for inclusion in the Reference Portfolios, Tribune was in a stable industry with ample cash flow generation and rated A- by Standard & Poor’s. In December 2007, Tribune was acquired in a leveraged buy-out which reduced its rating to B- and it needed to sell off assets in order to raise cash to pay down its large debt load. Following the acquisition, a precipitous decline in revenue and a tough economy coupled with the credit crisis that makes it extremely difficult to support its current level of debt.

When Connor, Clark & Lunn Capital Markets Inc. receives further information regarding the credit event and the recovery rate we will provide an update on the impact on the companies.

A very defensive sounding press release! Bloomberg has a story on the Tribune filing.

Guys, guys, guys! I’m an old bond guy. I’ve been there. Bad things happen. The problem is not your selection of Tribune Company as one of your 125-odd names. The problem is your decision to concentrate your investment (by the terms of the credit note) to such an extent that a single default becomes a major problem. Such a note can make sense to both the buyer and the seller, as long as both realize that it’s disaster insurance; the buyer of the note gets a small premium and assumes the very small risk of a very large payout. But … that risk is increasing.

RPQ.PR.A was last mentioned on PrefBlog when the dividend was suspended and the rating withdrawn.

RPB.PR.A was last mentioned on PrefBlog when the dividend was suspended and the rating withdrawn.

RPA.PR.A was last mentioned on PrefBlog when S&P downgraded it to P-2.

PRF.PR.A was last mentioned on PrefBlog with respect to the Lehman credit event.

None of these issues is tracked by HIMIPref™.

DBRS has announced that it:

has today downgraded the Preferred Shares issued by SL Split 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 October 24, 2008.

In November 2007, the Company raised gross proceeds of $59.4 million by issuing 1.055 million Preferred Shares (at $25.78 each) and 2.11 million Capital Shares (at $15.26 each). The initial split share structure provided downside protection of 52% to the Preferred Shares (after expenses).

The net proceeds from the initial offering were invested in a portfolio of common shares (the Sun Life Shares) of Sun Life Financial Inc. (Sun Life). Dividends received from the Sun Life Shares are used to pay a fixed, cumulative quarterly dividend to the holders of the Preferred Shares yielding 5.00% 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 Sun Life Shares less administration fees and other Company expenses is approximately equal to the cost of the Preferred Shares distributions.

The value of the Sun Life Shares has declined significantly since inception. Sun Life announced a third-quarter loss due to writedowns of $636 million from holdings in Lehman Brothers Holdings Inc., Washington Mutual, Inc. and American International Group, Inc (AIG), as well as $326 million in charges from the decline in equity markets. From November 7, 2007, to December 3, 2008, the net asset value (NAV) of the Company dropped from $53.31 to $24.87, a decline of about 53%. As a result, all of the initial downside protection available to the Preferred Shares has eroded. As of December 3, 2008, holders of the Preferred Shares would have experienced a loss of approximately 3.5% of their initial issuance price if the Sun Life Shares had been liquidated and proceeds distributed. However, the credit quality of Sun Life remains strong as DBRS confirmed its senior unsecured debt rating at AA (low) with a Stable trend on July 9, 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 the dividend policies of Sun Life may result in reductions in asset coverage or dividend coverage from time to time.

The redemption date for both classes of shares issued is January 31, 2013.

SLS.PR.A was part of the DBRS Mass Review of Splits. It is not tracked by HIMIPref™.

DBRS has announced that it:

has today downgraded the Preferred Shares issued by SNP Health Split Corp. (the Company) to Pfd-5 (high), with a Stable trend, from Pfd-3 (high). The rating has been removed from Under Review with Negative Implications, where it was placed on October 24, 2008.

In February 2002, the Company raised gross proceeds of approximately US$156 million by issuing 3.3 million Preferred Shares (at US$25 each) and 6.6 million Capital Shares (at US$11.15 each). The initial split share structure provided downside protection of 47% to the Preferred Shares (after expenses).

The net proceeds from the initial offering were invested in a portfolio of common shares (the Portfolio) of companies that make up the S&P Health Care Sector Index of the S&P 500 Index. Holders of the Preferred Shares receive a fixed, cumulative quarterly dividend yielding 6% annually. The distributions are funded from dividends received on the Portfolio holdings as well as from income generated by writing covered call options and cash-covered put options. The Capital Shareholders do not receive distributions.

The redemption date for both classes of shares issued is February 11, 2009, so there are less than three months remaining until maturity. However, the value of the Portfolio has declined significantly in the last few months, putting full repayment of the Preferred Shares principal at risk. From August 28, 2008, to December 3, 2008, the net asset value (NAV) of the Company dropped from $36.80 to $26.34 due to market volatility, a decline of approximately 28%. As a result, most of the initial downside protection available to the Preferred Shares has eroded; the current downside protection is 5% (as of December 3, 2008).

As a result of the volatility in the current equity markets and the lower asset coverage available, DBRS has downgraded the rating of the Preferred Shares to Pfd-5 (high) with a Stable trend.

SNH.PR.U was part of the DBRS Mass Review of Splits. It is not tracked by HIMIPref™.

DBRS has announced that it:

has today downgraded the Preferred Securities issued by Brascan SoundVest Rising Distribution Split Trust (the Trust) to Pfd-5, with a Negative trend, from Pfd-2. The rating has been removed from Under Review with Negative Implications, where it was placed on October 24, 2008.

In March 2005, the Trust raised gross proceeds of $180 million by issuing 7.2 million Preferred Securities (at $10 each) and an equal number of Capital Units (at $15 each). The initial split share structure provided downside protection of 58% to the Preferred Securities (after expenses).

The net proceeds from the initial offering were invested in a diversified portfolio of Canadian income trusts (the Portfolio). Holders of the Preferred Securities receive fixed quarterly interest payments yielding 6% annually. The Capital Units received regular monthly cash distributions from April 2005 to September 2008. The Trust may not make any cash distributions on the Capital Units if the asset coverage available to the Preferred Securities would be less than 1.4 times after giving effect to the proposed distribution. Due to a large decline in the net asset value (NAV) during September and October, the Capital Unit distribution was suspended for the first time in October 2008.

Based on the 2008 interim financial statements, the interest coverage ratio available to the holders of the Preferred Securities was over 2.5 times. This ratio will vary depending on the distributions from the Trust’s underlying holdings.

The NAV of the Trust has declined significantly in the last few months. From August 29, 2008, to November 28, 2008, the NAV of the Trust dropped from $16.35 to $8.72, a decline of about 47%. As a result, all of the initial downside protection available to the Preferred Securities has been eroded. As of November 28, 2008, holders of the Preferred Securities would have experienced a loss of approximately 13% of their initial issuance price if the Portfolio holdings had been liquidated and proceeds distributed. As a result of the large decline in asset coverage, DBRS has downgraded the rating of the Preferred Securities to Pfd-5 with a Negative trend.

The redemption date for the Preferred Securities is March 31, 2015.

BSD.PR.A was part of the DBRS Mass Review of Splits. Retractions and the Capital Unit dividend were suspended in October. The reported NAV has been extremely volatile lately.

BSD.PR.A is tracked by HIMIPref™ and is part of the InterestBearing subIndex. Given the downgrade, it will be relegated to “Scraps” at the December month-end rebalancing.

This issue has been the topic of much discussion on PrefBlog over the past few months. Assiduous Reader prefhound takes the view that the vaunted income coverage will decline considerably in the near future.

DBRS has announced:

has today downgraded the Series 2 Shares issued by High Income Preferred Shares Corporation (the Company) to Pfd-5 (low) , with a Negative trend, from Pfd-4. The Series 1 Shares have been confirmed at Pfd-2 (low) with a Negative trend. Both ratings have been removed from Under Review with Negative Implications, where they were placed on October 24, 2008.

At inception, the Company issued 1.26 million Series 1 Shares at $25 per share, 1.26 million Series 2 Shares at $14.70 per share and privately placed 1.26 million Equity Shares at $3.54 per share. The termination date for each series of shares is June 29, 2012 (the Redemption Date).

Approximately 33% of the gross proceeds from the initial offering were used to enter into a forward agreement with Canadian Imperial Bank of Commerce (the Counterparty) to provide for the full repayment of the Series 1 Shares principal on the Redemption Date. The remaining net proceeds from the initial offering were invested in a portfolio of common shares (the Managed Portfolio), which initially provided asset coverage to the Series 2 Shares of about 1.8 times (downside protection of 44%). In addition to providing coverage to the Series 2 Shares principal, the Managed Portfolio is used to pay annual fees and expenses, as well as cumulative monthly distributions to the Series 1 Shares and Series 2 Shares (5.85% and 7.25% per annum, respectively). The Series 1 Shares dividends rank equally (pari passu) with the Series 2 Shares dividends.

The Managed Portfolio is actively managed by Lawrence Asset Management Inc. (the Manager). The Manager has the ability to engage in option writing to generate additional income. Since inception, the Managed Portfolio’s net asset value (NAV) has declined 48%, from about $27 to $13.94 per share (as of November 28, 2008), which is less than the Series 2 Shares principal amount of $14.70 per share.

Both Series 1 Shares and Series 2 Shares dividends have been suspended subsequent to the March 31, 2008, distribution. Assuming that the dividends continue to be suspended until the Redemption Date, the Company will owe $6.22 per Series 1 Share and $4.53 per Series 2 Share in unpaid dividends on the Redemption Date. Currently, there are 377,000 Series 1 Shares outstanding and 655,000 Series 2 Shares outstanding (0.576 Series 1 Shares for every Series 2 Share). As a result, a total of $8.11 in combined Series 1 Shares and Series 2 Shares dividends will be owed on the Redemption Date for every Series 2 Share outstanding.

On the Redemption Date, the holders of the Series 1 Shares and Series 2 Shares will be entitled to receive all cumulative dividends that are in arrears in priority over the Series 2 Shareholders’ principal repayment. The Managed Portfolio NAV of $13.94 provides downside protection of 42% over the remaining Series 1 Shares and Series 2 Shares dividends of $8.11 per Series 2 Share. As a result, the ultimate payment of cumulative dividends to the Series 1 Shareholders and Series 2 Shareholders is likely.

The full Series 1 Shares principal is guaranteed, subject to the Counterparty meeting its obligations as part of the Series 1 Shares Forward Agreement. The DBRS rating confirmation of the Series 1 Shares is based on the full principal protection, as well as the current likelihood that all Series 1 Shares cumulative dividends will be repaid, based on the NAV coverage over the remaining Series 1 Shares and Series 2 Shares dividends. The Series 1 Shares rating trend is Negative due to the risk of further deterioration in the NAV from the active management and option writing on the Managed Portfolio’s holdings.

The downgrade of the Series 2 Shares is based on the level of capital appreciation required over the remaining term of the Company in order to fully cover the repayment of the Series 2 Shares unpaid dividends and initial principal. The probability of the holders of the Series 2 Shares not receiving full principal on the Redemption Date is significantly high. A total annualized return of approximately 15% is required from the Managed Portfolio in order for the Series 2 Shareholders to receive full principal and unpaid dividends.

These issues were both reviewed as part of the DBRS Mass Review of Splits. The prior mention of them on PrefBlog was with respect to a massive retraction in June.

HPF.PR.A & HPF.PR.B are both tracked by HIMIPref™. They would both normally be in the SplitShares index, but are relegated to “Scraps”; the former due to volume concerns, the latter due to credit concerns.

Commerce Split Corp. has announced:

Commerce Split Corp. (“the Company”) was required to sell the majority of its holdings in CIBC. The proceeds of these sales have been used to purchase fixed income securities under the Priority Equity Protection Plan as per the prospectus.
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The Company, subject to all necessary Board and regulatory approvals, expects to send out the full details of this proposal to all shareholders through a Management Information Circular sometime in January, 2009 with a shareholder vote to follow in February, 2009. The key aspects of the proposal are discussed below.

The Plan will recommend the fixed income instruments purchased under the Priority Equity Protection Plan be liquidated and the proceeds be re-invested in common shares of CIBC.

The Plan will propose that each Priority Equity share be exchanged for the following three securities: i) one new $5 preferred share to yield 7.5% per annum; ii) one $5 par value equity share that will receive dividends of 7.5% per annum if and when the Company’s net asset value exceeds $12.50; and also iii) one half warrant to purchase a full unit (consisting of one new preferred share, one new equity share and a Class A share) of the Company at a price of $10 at specified times during the first two years subsequent to the approval date. The warrant will effectively provide upside potential on the performance of CIBC shares. The Company believes that the proposed package of securities will provide Priority Equity shareholders with substantial value added compared to their existing investment.

The Class A shares will remain the same except that the threshold for reinstatement of dividends on the Class A shares will only occur if the net asset value per unit reaches $15.00 per unit (current threshold is $12.50 net asset value per unit.) Increases in the net asset value per unit above $10 (current net asset value per unit was $9.15 as at November 28, 2008) will continue to accrue to the Class A shareholder. The value of this opportunity is that it is similar to an option on CIBC and the Company believes this provides substantial shareholder value relative to Class A shareholders’ existing investment.

At first blush, this sounds like a pretty lousy option for the preferred shareholders. Right now their dividends are impaired – or soon will be impaired – but they have full ownership of a portfolio of fixed income securities worth $9.15. If they proceed with this exchange, they will be getting 3.75% (approx) on their money as a dividend because the new class of shares will only pay dividends if there is significant price appreciation.

The new class of share will be fully exposed to declines in the value of the underlying CM shares, but will participate in future capital gains only to the extent of the $0.85 current price difference. The new class won’t even get dividends until there’s been a 25%+ increase in capital value.

I am open to arguments based on the value of the option they are being granted – feel free to write in and analyze! – but it looks to me like they should probably VOTE NO!

XCM.PR.A was last mentioned on PrefBlog when the company announced it was mulling over a reorganization plan. XCM.PR.A is not tracked by HIMIPref™.

Update: After further thought, I have decided that I am not open to arguments based on the value of the option. The preferred shareholders – currently holding a perfectly good fixed-income portfolio – are being asked to provide all the funding for the new company, taking all the downside risk of the portfolio holdings and giving away, free, gratis and for nothing an option on a big chunk of the upside. VOTE NO!

M-Split Corp. has announced:

due to the dramatic and volatile drop in the price of Manulife common shares, M Split Corp. (“the Company”) was required to sell the majority of its holdings in Manulife. The proceeds of these sales have been used to purchase fixed income securities under the Priority Equity Protection Plan as per the prospectus.
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the Company is recommending to shareholders that the Company be reorganized. The Company, subject to all necessary Board and regulatory approvals, expects to send out the full details of this proposal to all shareholders through a Management Information Circular sometime in January, 2009 with a shareholder vote to follow in February, 2009. The key aspects of the proposal are discussed below.

The Plan will recommend the fixed income instruments purchased under the Priority Equity Protection Plan be liquidated and the proceeds be re-invested in common shares of Manulife.

The Plan will propose that each Priority Equity share be exchanged for the following three securities: i) one new $5 preferred share to yield 7.5% per annum; ii) one $5 par value equity share that will receive dividends of 7.5% per annum if and when the Company’s net asset value exceeds $12.50; and also iii) one half warrant to purchase a full unit (consisting of one new preferred share, one new equity share and a Class A share) of the Company at a price of $10 at specified times during the first two years subsequent to the approval date. The warrant will effectively provide upside potential on the performance of Manulife shares. The Company believes that the proposed package of securities will provide Priority Equity shareholders with substantial value added compared to their existing investment.

The Class A shares will remain the same except that the threshold for reinstatement of dividends on the Class A shares will only occur if the net asset value per unit reaches $15.00 per unit (current threshold is $12.50 net asset value per unit.) Increases in the net asset value per unit above $10 (current net asset value per unit was $9.63 as at November 28, 2008) will continue to accrue to the Class A shareholder. The value of this opportunity is that it is similar to an option on Manulife and the Company believes this provides substantial shareholder value relative to Class A shareholders’ existing investment.

At first blush, this sounds like a pretty lousy option for the preferred shareholders. Right now their dividends are impaired – or soon will be impaired – but they have full ownership of a portfolio of fixed income securities worth $9.63. If they proceed with this exchange, they will be getting 3.75% (approx) on their money as a dividend because the new class of shares will only pay dividends if there is significant price appreciation.

The new class of share will be fully exposed to declines in the value of the underlying Manulife shares, but will participate in future capital gains only to the extent of the $0.37 current price difference. The new class won’t even get dividends until there’s been a 25%+ increase in capital value.

I am open to arguments based on the value of the option they are being granted – feel free to write in and analyze! – but it looks to me like they should probably VOTE NO!

XMF.PR.A was last mentioned on PrefBlog when the company announced it was mulling over plans to reorganize. XMF.PR.A is not tracked by HIMIPref™.

Update: After further thought, I have decided that I am not open to arguments based on the value of the option. The preferred shareholders – currently holding a perfectly good fixed-income portfolio – are being asked to provide all the funding for the new company, taking all the downside risk of the portfolio holdings and giving away, free, gratis and for nothing an option on a big chunk of the upside. VOTE NO!