Category: Issue Comments

BMO’s new issue of Fixed-Reset 6.50%+383 announced November 25 closed today without incident.

Volume was good at 343,071 shares in a range of 24.86-05. The closing quote was 25.00-01, 44×10.

The issue was relatively small, only $150-million, but there was a greenshoe for $100-million. I am unable to determine whether any of the greenshoe was exercised.

The issue is tracked by HIMIPref™ and has been added to the Fixed-Reset Index.

Update, 2009-6-9: The TSX reports six million shares outstanding; therefore the greenshoe was not exercised.

DBRS has announced that it:

has today downgraded its preferred share ratings of Nortel Network Limited to D from Pfd-5 (low). Nortel Networks Limited is a wholly owned subsidiary of Nortel Networks Corporation (collectively, Nortel or the Company). This rating action follows the Under Review with Negative Implications status, where the ratings were placed November 10, 2008 (see press release dated November 10, 2008). Nortel’s long-term debt remains Under Review with Negative Implications.

This rating action results from Nortel suspending its dividend payments on its preferred shares. This suspension begins with its November 2008 dividends, which will not be paid on December 12, 2008. The last dividend the Company paid was on November 12, 2008, on its Series 5 preferred shares (cumulative) and its Series 7 preferred shares (non-cumulative) as originally declared on July 31, 2008.

DBRS notes that on November 10, 2008 Nortel released its Q3 2008 results, which were below DBRS’s expectations, and lowered its outlook for the year. Additionally, Nortel announced the suspension of its preferred share dividends in an effort to preserve its liquidity. Shortly after this announcement, DBRS placed all of Nortel’s ratings Under Review with Negative Implications.

Notes:
DBRS’s ratings on technology companies are primarily based on factors such as the product suite, the base of customers, the competitive landscape, research and development initiatives, gross operating margins and the financial profile.

These issues were last discussed on PrefBlog when Nortel announced its intention to default.

NTL.PR.F & NTL.PR.G are tracked by HIMIPref™. They would be included in the “Ratchet” index, but have been relegated to “Scraps” on credit concerns.

BCE Acquisition has announced:

that the agreement to acquire BCE Inc. (TSX, NYSE: BCE) has been terminated in accordance with its terms.

Receipt of a solvency opinion from a nationally recognized valuation firm was included in the June 30, 2007 definitive agreement between the Purchaser and BCE as a mutual closing condition. The agreement of the Purchaser and BCE to both the selection of KPMG to serve as the valuation firm and the form of the solvency opinion was reflected in the July 4, 2008 amendment to the definitive agreement. Because KPMG has concluded that a required test for the solvency opinion was not met, this mutual condition to completion of the acquisition could not be, and was not, satisfied. Accordingly, the Purchaser terminated the agreement in accordance with its terms. Under these circumstances neither party owes a termination fee to the other.

There is no telling what will happen now. In an ideal world, we return to the status quo ante and the BCE Prefs retain their Pfd-2(low) / P-2(low) credit rating. But Bloomberg reports other ideas:

BCE Inc., the Canadian phone company that had been planning to go private for the past 18 months, may have to buy back shares or restore its dividend to placate investors now that its leveraged buyout has fallen apart.

But I’m afraid that in the absence of strong, credible statements from BCE regarding their capital structure going forward, BCE prefs remain rather more speculative than I like.

The last post in this saga was BCE Buyout in Trouble; Prefs Plunge.

BCE has the following preferred shares outstanding: BCE.PR.A, BCE.PR.B, BCE.PR.C, BCE.PR.D, BCE.PR.E, BCE.PR.F, BCE.PR.G, BCE.PR.H, BCE.PR.I, BCE.PR.R, BCE.PR.S, BCE.PR.T, BCE.PR.Y & BCE.PR.Z

Update, 2008-12-11: BCE is desperately grandstanding:

BCE Inc. (TSX, NYSE: BCE) today announced that it received last evening from the Purchaser, a company formed by an investor group led by Teachers’ Private Capital, the private investment arm of the Ontario Teachers’ Pension Plan, and affiliates of Providence Equity Partners Inc., Madison Dearborn Partners, LLC, and Merrill Lynch Global Private Equity, a notice purporting to terminate the Definitive Agreement dated June 29, 2007, as amended. BCE disputes that the Purchaser was entitled to terminate the Definitive Agreement, as such notice was delivered prematurely, prior to the outside date for closing of the transaction, and therefore invalid. Given the Purchaser’s position, the BCE privatization
transaction will not proceed.

As previously announced, the closing of the privatization transaction is contingent upon the fulfillment of several closing conditions, including, pursuant to Section 8.1(f) of the Definitive Agreement, the receipt at the effective time of a positive solvency opinion from KPMG. Earlier this morning, KPMG confirmed that it would not be able to deliver an opinion that BCE would
meet, post transaction, the solvency tests set out in the Definitive Agreement.

In light of these developments, BCE will be terminating the Definitive Agreement in accordance with its terms, and will be demanding payment of the $1.2-billion break-up fee from the Purchaser. All closing conditions have been satisfied by BCE, other than the solvency opinion, a condition to closing that was to be satisfied by its nature at the effective time. Under such circumstances, the agreement provides that the break up fee will be owed to BCE by the Purchaser. The Purchaser has taken the position that it is not obligated to pay the break-up fee.

In addition, the BCE Board intends that immediately following termination of the Definitive Agreement in accordance with its terms, it will address a reinstatement of its common share dividend beginning with its fourth quarter common share dividend payable on January 15, 2009, and that it will return capital to its shareholders through a Normal Course Issuer Bid.

I would have a lot more confidence in the credit quality of the BCE Prefs if they indicated the size of the Normal Course Issuer Bid.

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.
…
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.