Category: Issue Comments

Issue Comments

AL.PR.E & AL.PR.F Placed "Under Review – Developing" by DBRS

In response to Alcoa’s hostile bid for Alcan, DBRS has

placed the ratings of Alcan Inc. (Alcan or the Company) Under Review with Developing Implications … However, the financial profile of New Alcoa would be much more aggressive relative to that of stand-alone Alcan, given the debt incurred to finance the proposed acquisition. DBRS notes that Alcoa’s offer has an allocation of 20% stock and 80% cash. Accordingly, New Alcoa’s pro forma leverage (gross debt-to-capital) would be 64% versus 33% for stand-alone Alcan. Similarly, pro forma cash flow-to-total debt would be at 0.14 times for New Alcoa versus 0.56 times for stand-alone Alcan. DBRS notes that these financial metrics are very aggressive for the currently assigned ratings.

DBRS will continue to monitor the proposed acquisition. In the event that this transaction is completed based on the current structure of Alcoa’s offer, a downgrade in the ratings would likely result due to the aggressive financial profile. However, DBRS notes that the ratings in all likelihood would remain investment grade.

What with the BCE problem and the TOC problem, there soon won’t be any high quality floating rate issues of any description! Then … perhaps … a fund creating high-quality synthetic floaters will attract more attention!

Issue Comments

TOC.PR.B the Next Credit Worry?

I don’t think my regular readers will be surprised if I mention that I have something of a philosophical disdain for floating rate issues. They trade with lower yields (generally!) than their fixed-rate cousins and there’s not really a lot of reason for that. Sure, there is a certain amount of interest rate protection built into the concept of a floating rate, which is very nice to have – but, as I pointed out in an article last August one very big reason why short rates are lower than long rates is credit risk … and with a floating rate preferred share, you have perpetual credit risk.

So anyway, Reuters announced today:

it has received a preliminary approach from a third party which may or may not lead to an offer being made for Reuters. There is no certainty an offer will be made or necessary approvals, including those required under Reuters constitution, will be received.

It has been mooted that the suitor is Thomson:

News and financial data provider Reuters said it had received a takeover approach from an unidentified bidder, sending its shares up almost a third, with Canadian publisher Thomson widely touted as the suitor.

Canada’s Globe and Mail newspaper reported on its Web site on Friday that Thomson was in talks to buy London-based Reuters, citing sources close to both companies.

Reuters and Thomson both declined to comment.

There is more speculation on Bloomberg.

Thomson has some CAD denominated bonds outstanding, maturing in 2014. I have been advised that the spread on these bonds has moved from +48bp to +110bp, which is a hell of a move for a seven year bond. Let’s see … modified duration is, oh, call it 6 years, yield change 62bp, 6×0.62 = 3.72 … that’s a 3.7% price change on the bond. And I don’t mean the price went up! It would appear that the bond market – or, at the very least, a few trigger-happy participants thereof – are concerned about the financing of the deal.

The preferreds will be on the volume charts for today’s market action report! 245,800 shares traded, including a block of 41,800 at 25.50 crossed by National Bank; 96,300 crossed by Scotia at the same price; and another 103,700 crossed by Scotia at the same price again.

TOC.PR.B has been around since the beginning of time, drifting in and out of the HIMI Preferred Indices as the volume waxes and wanes. The last change was removal at the end of February.

Update, 2007-05-07: Thomson has issued a press release:

The Thomson Corporation (NYSE: TOC; TSX:TOC) confirmed today that it has made a preliminary approach to the Board of Directors of Reuters Group Plc. that may or may not lead to an offer being made for Reuters.

A further announcement will be made in due course.

Issue Comments

BNA.PR.A, BNA.PR.B, BNA.PR.C Downgraded by DBRS

DBRS has announced:

has downgraded the rating of BAM Split Corp. (the Company) to Pfd-2 (low) from Pfd-2, with a Stable trend, with respect to the 6.25% Class A Preferred Shares; the 4.95% Class AA Preferred Shares, Series 1; and the 4.35% Class AA Preferred Shares, Series 3 (collectively, the Preference Shares).

The entire portfolio (the Portfolio) owned by the Company is composed solely of Class A Limited Voting Shares of Brookfield Asset Management Inc. The downgrade reflects DBRS’s revisions to its rating approach for single name split share issuers. Pursuant to DBRS’s publication of January 31, 2007 (Split Share Issuers: A Performance Overview), the rating assigned for a preferred share issued by a single name split share company will generally be limited to the rating applicable to the corporate preferred shares related to those shares in the supporting Portfolio, unless there are structural or other features built into the split share issuer which serve to further enhance its credit quality. Brookfield Asset Management Inc.’s Preferred Shares are currently rated Pfd-2 (low) with a Stable trend by DBRS.

Notwithstanding the rating adjustment, the Portfolio has continued to perform well, having appreciated 11% since January 31, 2007. The current downside protection of over 77% provides significant capital protection to the holders of the Preference Shares. The Portfolio generates a sufficient yield (after expenses) to provide 1.21 coverage times over the distribution of dividends to the Preference Shares. If necessary, the Company may write covered calls or sell a portion of the Portfolio to fund the dividend on the Preference Shares.

So in other words, the rating is limited by the rating on the underlying securities, in the absence of mitigating factors. The publication they are referring is on their site.

The announcement does not appear to be related to BAM’s asset spin-off … but you never know!

BNA.PR.C is a recent new issue. The company changed its name last year, when the ticker symbol of the underlying shares changed from BNN to BAM.

Issue Comments

Weston Comparables

OK, so now that Weston has been downgraded by S&P (with DBRS still considering the possibility) and now that the shares have started to get hit, I thought it would be fun to look at some comparables:

Pfd-3 [high/-/low] (DBRS) Fixed-Rate Perpetuals
Issue DBRS Rating S&P Rating Coupon Quote, 5/3 Pre-tax bid-YTW YTW Mod Dur YTW Pseudo-Convexity
FAL.PR.H Pfd-3 (high) P-2(low)  1.625  25.61-63 4.58%  0.95  -4.82 
LB.PR.E Pfd-3 P-3(high)  1.3125  25.25-33 5.22%  5.23  -59.93 
FTS.PR.F Pfd-3 (high) P-2(low) Watch Positive  1.225 25.43-51  4.63%  7.07  -1.93 
LB.PR.D Pfd-3 P-3(high) 1.50 26.11-19  4.91%  1.60  -547.3 
WN.PR.A Pfd-2 (low) CW-Negative P-3(high) 1.45 25.30-44  5.71%  3.29  -67.2 
WN.PR.C Pfd-2 (low) CW-Negative P-3(high) 1.30 24.91-00  5.27%  15.00  -30.26 
WN.PR.D Pfd-2 (low) CW-Negative P-3(high) 1.30 24.70-07  5.32%  14.92  -9.99 
WN.PR.E Pfd-2 (low) CW-Negative P-3(high) 1.1875 24.25-44  4.94%  15.57  1.15 

Not many comparables, eh?

Issue Comments

Great-West Releases Quarterly Report … Everything on Hold

Great-West has released its 1Q07 report. There are two issues I was looking forward to hearing about:

(i) GWO.PR.X / GWO.PR.E Issuer Bid: Nothing happened! The company did not purchase any shares of either target on the open market in the first quarter. There was also no announcement regarding the possible redemption of CL.PR.B … I suspect they’re still getting their ducks in a row for …

(ii) Financing of the Putnam Acquisition: There was no announcement, just a reiteration that financing will include issues of equity, debentures and hybrids [probably preferred shares – JH], bank credit and securitization of the tax benefits.

Issue Comments

S&P Downgrades Loblaw, Weston

S&P has announced:

it lowered its long-term corporate credit and senior unsecured debt ratings on Toronto-based Loblaw Companies Ltd. by one notch, to ‘BBB+’ from ‘A-‘. Standard & Poor’s also lowered its long-term corporate credit and senior unsecured debt ratings on parent company George Weston Ltd. by one notch, to ‘BBB’ from ‘BBB+’. In addition, the Canadian scale CP rating on George Weston was lowered to ‘A-2’ from ‘A-1(Low)’, and the preferred stock rating on George Weston was lowered to ‘P-3(High)’ from ‘P-2(Low)’. At the same time, the ratings on both companies were removed from CreditWatch with negative implications, where they were placed Feb. 8, 2007, following Loblaw’s much weaker-than-expected earnings in the fourth quarter (ended Dec. 30, 2006). The outlook on both companies is stable.

This follows the earlier downgrade of Loblaw by DBRS, who have not yet announced a decision regarding Weston, and the Credit Watch Negative announcement by S&P.

Weston has the following preferred issues outstanding: WN.PR.A WN.PR.B WN.PR.C WN.PR.D & WN.PR.E

Issue Comments

BAM to Spin-Off Assets – What will the Agencies Say?

Brookfield Asset Management has announced:

Brookfield intends to distribute to its Class A shareholders a direct interest in its infrastructure operations through a newly created publicly traded partnership to be named Brookfield Infrastructure Partners L.P. (“Brookfield Infrastructure”). … Subject to receipt of the various required approvals, Brookfield will implement the spin-off by way of a special dividend currently estimated to be approximately US$1.00 per Brookfield Class A Share, taking into account the pending three-for-two stock split, or approximately $600 million in aggregate.

Based on their March 31, 2007, Balance Sheet, $600-million is about 10% of common equity. This is not good news for debt-holders or preferred share holders – whether it is sufficiently bad to warrant a downgrade awaits a detailed analysis by more specialized practitioners than I.

BAM currently has the following preferred share issues outstanding : BAM.PR.B BAM.PR.C BAM.PR.E BAM.PR.G BAM.PR.H BAM.PR.I BAM.PR.J BAM.PR.K BAM.PR.L BAM.PR.M BAM.PR.T and there is a new perpetual coming out soon.

Update: One source of uncertainty in the meaning of this is the book-value vs. the market-value of the assets spun out. BAM has a P/B ratio of 4.13:1. If the assets spun out have a market value of $1 and a book value of $0.25, then this will be a relatively minor change to the balance sheet.

Data Changes

RY.PR.G Splatters onto Market

The new issue of Royal Bank 4.5% perpetuals announced April 17 settled today and met a very poor reception, trading in a range of 24.48-60 and closing at 24.49-50, 20×12.

I’m at a bit of a loss to understand this and can only speculate that the continuing BCE debacle has caused a little nervousness amongst retail, while institutional buyers may be filled up on Royal after their string of new issues:

RY Issues Tracked by HIMIPref™
Ticker Listing Date Shares
RY.PR.K 1998-4-27 12,000,000
RY.PR.W 2005-01-31 12,000,000
RY.PR.A 2006-04-04 12,000,000
RY.PR.B 2006-07-20 12,000,000
RY.PR.C 2006-11-01 8,000,000
RY.PR.D 2006-12-13 10,000,000
RY.PR.E 2007-01-19 10,000,000
RY.PR.F 2007-03-14 8,000,000
RY.PR.G 2007-04-26 10,000,000

RY.PR.K is retractible – all the others are perps. 

However, it might not matter a lot whether the market is fed up with the name or not! Examining the figures for Royal’s tier one capital limits, we see that they had room to issue preferred of $520-million on February 6 (after the issuances of RY.PR.C, RY.PR.D & RY.PR.E and redemption of RY.PR.O) and with the 18-million shares issued since then have used up $450-million of that. That leaves a mere $70-million in issuance room and they might not be willing to go to market for such a paltry amount.

Note I will admit that I am somewhat at a loss to reconcile their Preferred Share Tier One Capital of $1,345-million at year end with their list of issues outstanding. The figure of $1,345-million is referred to in the MD&A on page 66 of the Annual Report – this table contains no mention of any preferred shares in Tier Two Capital, which is where I would expect to find the retractible issue RY.PR.K. Note 18 on Page 130 of the Report shows $1,050-million perpetuals, and $298-million “Preferred Share Liabilities”, specifically including RY.PR.K (Series N). So I guess that, somehow or other, they were able to include RY.PR.K in Tier 1 Capital.

So, given that the RY.PR.O has been redeemed, their Tier One Capital preferred situation now looks like this:

Tier 1 Capital / Preferreds / Royal Bank
Item Value (million)
Outstanding, year-end 1,345
Redeemed (150)
Issuance 1,150
Current Total 2,345
Preferred Limit, as of Year-End 2006 2,415

All in all, they’re very close to their limit now, unless they boost their equity capital in other ways, like hiking ATM fees. But fear not! The RY.PR.K becomes redeemable at par 2007-08-24 (although not retractible by holders until 2008-8-24) and eliminating this issue with open up another $300-million of issuance room.

RY.PR.G & Comparatives
Data RY.PR.G BNS.PR.M BAM.PR.?
Price due to base-rate 22.47 22.49 23.29
Price due to short-term -0.21 -0.21 -0.21
Price due to long-term 1.29 1.29 1.27
Price to to Cumulative Dividends 0.00 0.00 0.00
Price due to Credit Spread (2) 0.00 0.00 -0.62
Price due to Liquidity 1.53 1.53 1.48
Price due to error -0.06 -0.06 0.08
Price due to Credit Spread (low) 0.00 0.00 -0.62
Curve Price (Taxable Curve) 25.02 25.04 24.68
Dividend Rate 1.125 1.125 1.1875
Quote 4/26 24.49-50 24.89-92 25.00 Issue
YTW (at bid, after tax) 3.66% 3.61% 3.79%
YTW Date Infinite Infinite 2016-8-30 / Infinite
Credit Rating (DBRS) Pfd-1 Pfd-1 Pfd-2(low)
YTW (Pre-Tax) 4.61% 4.55% 4.76%
YTW Modified Duration (Pre-Tax) 16.23 16.31 15.95
YTW Pseudo-Convexity (Pre-Tax) 1.15 -30.29 -55.80

It is not my habit to include such an incomparable comparable as the BAM new issue, but I just couldn’t resist! BAM has a boatload of preferreds outstanding, and if we can blame overall market tone and angst for today’s RY.PR.G debacle, then the May 9 BAM settlement could prove interesting in the extreme.

The securityCode for RY.PR.G is A45016, replacing the preIssue code of P87500. A reorgDataEntry has been processed.

Issue Comments

CL.PR.B : YTW Returns to Positive Territory!

Readers will remember that I have been fascinated by CL.PR.B and its negative yield-to-worst for some time. Apart from very particular portfolio-management factors, there hasn’t seemed to be much rationale for holding it, other than a hope that it would continue to pay an annual dividend of 1.5625 forever.

The chance of this has never seemed too large to me, given that CL (Canada Life) is part of the GWO (Great-West) group of companies which is in turn controlled by PWF (Power Financial) … a conglomerate that has something of a reputation for knowing how many beans make five.

Even four months after I expected them to be redeemed, I am still a little confused, since paying 1.5625 on a perp when new perps are paying 1.125 – and I can’t see a GWO issue having to pay more that 1.30, no matter how sick the Street is of seeing the name – doesn’t make a lot of sense to me. However, as I have mentioned numerous times, the purchase of Putnam still needs to be financed and maybe they’re just delaying a little until they’ve got all that stuff squared away.

Today, however, the bid broke down and while the trading range was 26.31-42 (on volume of 1,950 shares), the closing quotation was 26.09-40, 5×25. So, in celebration, I’ve uploaded a few graphs:

The recent decline in price of CL.PR.B (and consequent increase in yieldToWorst) has had a salutary effect on the calculated mean-average-YTW of the PerpetualPremium index, which now has no members with a negative Yield-to-Worst and consequently a more meaningful mean. Problems with computing the mean – even less meaningful when negatives are included than it is with all positive numbers – has led me to use the median for the official HIMI Preferred Indices … and don’t worry, guys, I’m having scheduling problems at the moment, but will return to those computations in the near future. Unless a piano falls on my head.

Data Changes

FFN.PR.A : Term Extension Approved

Shareholders in Financial 15 Split Corp. II have approved the term extension to Dec. 1, 2014:

Shareholders were asked to consider a special resolution to amend the articles of the Company to extend the termination date for the Class A Shares and the Preferred Shares to December 1, 2014.

Preferred Shareholders voted 98.5% in favour of the resolution and Class A Shareholders voted 93.8% in favour of the resolution, and therefore the resolution to extend the termination date to December 1, 2014 was approved at the meeting held earlier today.

PrefInfo.com and the HIMIPref™ database will be updated with the new scheduled redemption date shortly.

Update: Updates have been completed. A reorgDataEntry has been processed in HIMIPref™ with the reorgType REORG_TERMCHANGE changing from the old securityCode A45260 to the new securityCode A45261 … and of course, all the other permanentDatabase tables changed as required to describe the new instrument.