Category: Issue Comments

Industrial Alliance has announced:

Industrial Alliance Insurance and Financial Services Inc. (“Industrial Alliance” or the “Company”) announced today the successful completion of a Canadian public offering of 4 million of Non-Cumulative 5-Year Rate Reset Class A Preferred Shares Series C (the “Series C Preferred Shares”) from Industrial Alliance for sale to the public at a price of $25.00 per preferred share, representing aggregate gross proceeds of $100 million.

The offering was underwritten by a syndicate of investment dealers led by Scotia Capital Inc. The Series C Preferred Shares commence trading on the Toronto Stock Exchange today under the symbol IAG.PR.C.

It would appear that no additional shares were sold by way of the greenshoe noted in the original announcement

The issue traded 115,300 shares in a range of 23.90-40, indicating that at least some of the issue made it off the underwriter’s shelves. It closed at 23.80-90, 100×4.

At the bid price, the YTW is 6.38% based on a Canada Five-Year rate of 2.57% and a limitMaturity. The “5-Year Yield” is 7.38%, based on a hoped for, but currently unlikely, call at par 2014-1-30.

The perpetual, IAG.PR.A, closed at 12.75-71 to yield 9.26% based on the bid price of 12.75 and a limitMaturity (yield from the ask is 8.54%). However you slice it, the spread vs. the straight is well over 200bp. Given that the 5-to-Long spread on Canadas is currently about 150bp I’d say the spreads between the straight perpetual yield and the Fixed-Reset’s Yield to Worst (not the five-year-call-yield) should be 100bp absolute maximum, and – I’m guessing, I can’t point to any analysis here and suspect that any such analysis would be … er … suspect – probably more like 60bp.

So, to me, these are still expensive. But I was saying that last spring and then look what happened!

M-Split Corp has announced (emphasis added):

Since the inception of the Company on April 18, 2007 the price of Manulife has declined 52% from $41.08 to $19.75 as of November 24, 2008. This sharp decline in Manulife has resulted in the Company’s net asset value being reduced significantly and as mentioned in the previous update, has required the Company to implement the Priority Equity Portfolio Protection Plan in accordance with the prospectus. The plan’s objective was to provide that the Priority Equity Share Repayment amount would be paid in full on the termination date (December 1, 2014). Due to the recent decline in Manulife’s share price of 20% during the week ended November 21, the Company has dramatically decreased its exposure to Manulife under the requirements of the plan.

The Company’s total net asset value is approximately $9.01 per unit as at November 24, 2008, consisting of $6.43 per unit in cash and permitted repayment securities (current value) and $2.58 in Manulife exposure per Unit. The permitted repayment securities have an estimated forward value of approximately $8.04 at maturity in 2014. The reduced exposure to Manulife will materially limit the future impact of price movements of Manulife shares on the net asset value of the Company and lower the ability of the Company to generate income from dividends and its covered call option writing program.

The combined trading prices of both classes of the Company’s shares are trading at a substantial discount to the current net asset value per unit. In addition, the significant price decline in Manulife shares since inception of the Company has made it difficult to achieve the original stated objectives for both classes of shares. As a result, the Company is reviewing options to maximize shareholder value that may include but not limited to establishing a normal course issuer’s bid and initiating proposals (subject to shareholder vote) to reorganize the Company.

The Company’s portfolio is continually rebalanced and adjusted based on market conditions to provide both security for Priority Equity shareholders and upside potential for Class A shareholders. The Company may buy or sell additional shares of Manulife, the permitted repayment securities, and or option positions based on market conditions and provided that the Company remains in compliance with the Priority Equity Protection Plan.

With respect to the net value of the firm, they have stroked the nail right on the button. XMF closed today at 0.91-1.15, 10×2. XMF.PR.A closed at 6.88-49, 51×28; which may be compared to “total net asset value is approximately $9.01 per unit as at November 24, 2008, consisting of $6.43 per unit in cash and permitted repayment securities (current value) and $2.58 in Manulife exposure per Unit.”. I confess I haven’t checked to see what retraction options there might be; nor have I looked at the effects of fees and expenses on NAV over time.

The previous mention of XMF.PR.A on PrefBlog noted the suspension of dividends on capital units. XMF.PR.A is not tracked by HIMIPref™.

Commerce Split Corp has announced (emphasis added):

Since the inception of the Company on February 16, 2007 the price of CIBC has declined 58% from $102.15 to $43.19 as of November 24, 2008. This sharp decline in CIBC has resulted in the Company’s net asset value being reduced significantly and as mentioned in previous updates, has required the Company to implement the Priority Equity Portfolio Protection Plan in accordance with the prospectus. The plan’s objective was to provide that the Priority Equity Share Repayment amount would be paid in full on the termination date (December 1, 2014). Due to the recent decline in CIBC’s share price of 21% during the week ended November 21, the Company has dramatically decreased its exposure to CIBC under the requirements of the plan.

The Company’s total net asset value is approximately $8.80 per unit as at November 24, 2008, consisting of $7.25 per unit in cash and permitted repayment securities (current value) and $1.55 in CIBC exposure per Unit. The permitted repayment securities have an estimated forward value of approximately $9.06 at maturity in 2014. The reduced exposure to CIBC will materially limit the future impact of price movements of CIBC shares on the net asset value of the Company and lower the ability of the Company to generate income from dividends and its covered call option writing program.

The combined trading prices of both classes of the Company’s shares are trading at a substantial discount to the current net asset value per unit. In addition, the significant price decline in CIBC shares since inception of the Fund has made it difficult to achieve the original stated objectives for both classes of shares. As a result, the Company is reviewing options to maximize shareholder value that may include but not limited to establishing a normal course issuer’s bid and initiating proposals (subject to shareholder vote) to reorganize the Company.

The Company’s portfolio is continually rebalanced and adjusted based on market conditions to provide both security for Priority Equity shareholders and upside potential for Class A shareholders. The Company may buy or sell additional shares of CIBC, the permitted repayment securities, and or option positions based on market conditions and provided that the Company remains in compliance with the Priority Equity Protection Plan.

They’re right, you know. XCM closed today with a quote of $1.11-29, 10×4; XCM.PR.A closed at $6.02-24, 5×3, compared to “total net asset value is approximately $8.80 per unit as at November 24, 2008, consisting of $7.25 per unit in cash and permitted repayment securities (current value) and $1.55 in CIBC exposure per Unit”

There are 8.667-million units outstanding, according to the TSX.

XCM.PR.A’s Protection-Plan Status has been previously reported on PrefBlog. XCM.PR.A is not tracked by HIMIPref™.

TDb Split Corp. has announced:

during the week ending November 21, 2008, the share price of TD Bank has declined by approximately 23% resulting in an overall total decrease in the share price of TD Bank of 38% since the inception date of the Company. TD Bank was $69.03 as at the inception date of the Company on August 7, 2007 and closed on November 24, 2008 at $42.90. This very sharp and accelerated decline in TD Bank has resulted in the Company’s net asset value being reduced significantly and has required the Company to implement the Priority Equity Portfolio Protection Plan in accordance with the prospectus. As detailed in the prospectus, this strategy is intended to provide that the Priority Equity Share Repayment amount will be paid in full to holders of the Priority Equity shares on the termination date on December 1, 2014.

The Priority Equity Portfolio Protection Plan provides that if the net asset value of the Company declines below a specified level, the Manager will liquidate a portion of the common shares of TD Bank held by the Company and use the net proceeds to acquire (i) qualifying debt securities or (ii) certain securities and enter into a forward agreement (collectively, the “Permitted Repayment Securities”) in order to cover the Preferred Share Repayment Amount in the event of further declines in the net asset value of the Company. Under the Priority Equity Portfolio Protection Plan, the amount of the Company’s net assets, if any, required to be allocated to Permitted Repayment Securities (the “Required Amount”) will be determined such that (i) the net asset value of the Company, less the value of the Permitted Repayment Securities held by the Company, is at least 125% of (ii) the Preferred Share Repayment Amount, less the amount anticipated to be received by the Company in respect of its Permitted Repayment Securities on the Termination Date.

The Company’s net asset value as at November 24, 2008 was $11.96 per unit which includes $8.84 per unit in shares of TD Bank and $3.12 per unit in cash and permitted repayment securities (current value). The permitted repayment securities have an estimated forward value of $3.90 per unit at maturity in 2014. This leaves the Priority Equity Shareholder exposed to $6.10 per share ($10.00 par value – $ 3.90 in cash and equivalent notional value of Permitted Repayment Securities) in TD Bank holdings.

The portfolio is continually rebalanced and adjusted based on market conditions to provide both security for Priority Equity shareholders and upside potential for Class A shareholders. The Company may buy or sell additional shares of TD Bank, the Permitted Repayment Securities, and/or option positions based on market conditions and provided that the Company remains in compliance with the Priority Equity Portfolio Protection Plan.

XTD.PR.A is a small issue, with only 1.75-million shares outstanding, according to the TSX. This is the first mention of this issue on PrefBlog. XTD.PR.A is not tracked by HIMIPref™.

Big 8 Split Inc. has announced:

that its Board of Directors has approved a proposal to reorganize the Company. The reorganization will permit holders of Class A Capital Shares to extend their investment in the Company beyond the redemption date of December 15, 2008 for up to an additional 5 years. The Class A Preferred Shares will be redeemed on the same terms originally contemplated in their share provisions.

Holders of Class A Capital Shares who do not wish to extend their investment and all holders of Class A Preferred Shares will have their shares redeemed on December 15, 2008. The Board has retained TD Securities Inc. to provide financial advice to the Company in this regard.

The reorganization will involve (i) the extension of the originally scheduled redemption date, (ii) a special retraction right to enable holders of Class A Capital Shares to retract their shares as originally contemplated should they not wish to extend their investment and (iii) the creation of new preferred shares to be known as the Class B Preferred Shares, Series 1 in order to provide continuing leverage for the Class A Capital Shares. The reorganization will be subject to receipt of all necessary regulatory approvals.

A special meeting of holders of Class A Capital Shares has been called and will be held on November 21, 2008 to consider and vote upon the reorganization. Details of the proposed reorganization will be outlined in an information circular to be prepared and delivered to holders of Class A Capital Shares in connection with the special meeting.

Big 8 Split was established to generate dividend income for the Preferred Shares while providing holders of the Capital Shares with a leveraged opportunity to participate in capital appreciation from a portfolio of common shares of Bank of Montreal, The Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Royal Bank of Canada, The Toronto-Dominion Bank, Great-West Lifeco Inc., Manulife Financial Corporation, and Sun Life Financial Inc. Information concerning Big 8 Split Inc. is available on our website at www.tdsponsoredcompanies.com.

The Capital Shares and Preferred Shares of Big 8 Split are listed on the Toronto Stock Exchange
under the symbols BIG.A and BIG.pr.A respectively.

The preliminary prospectus on SEDAR has all the interesting parts – like dividend rate – left blank.

The NAVPU has declined from $72.98 on 2008-1-3 to $41.80 on 2008-11-13, which means the capital unit NAV has gone from $47.98 to $16.80. Ouch! About 4.3% of outstanding units were retracted in 2007 … they were the lucky ones!

BIG.PR.A has not been tracked by HIMIPref™.

Update, 2008-11-24: Reorganization approved.

Faircourt Asset Management has announced:

that due to recent market conditions, it has decided to cancel its previously announced rights offering. Due to the current market conditions it was determined by the Manager, not to be in the best interests of Unitholders to proceed with the proposed rights
offering.

The Rights offering was finalized and discussed on PrefBlog on November 18 which, if my calender is still working, was TWO DAYS AGO! This is an epic crash, to be sure.

As of November 19, NAV per Capital Unit was $2.46 according to Faircourt and at 0.71 Capital Units per Pref, asset coverage of the prefs was – yesterday – 1.2-:1.

Canadian Utilities & Financials Split Corp. has announced:

The leveraging and de-leveraging mechanism offers the ability to increase leverage when the Company’s portfolio appreciates in value and reduce leverage when the portfolio declines in value. Leverage is actively managed by RBC Dominion Securities Inc. (“RBC”) in its capacity as the Company’s Leverage Agent. The value of the Company’s portfolio has declined significantly in recent months, a period characterized by extreme and unprecedented market conditions and economic weakness, and has declined by more than 34% since its inception. As a result, under the terms of the prospectus, RBC is required to sell portfolio securities and invest the proceeds in cash or cash equivalents in order to provide additional assurance that the Company’s objective to repay the $10.00 issue price of the Preferred Shares at maturity will be met and that the Preferred Shares continue to have a high rating from DBRS. Following the sale of portfolio securities, the Class A Shares will continue to have exposure to the portfolio on a non-leveraged basis and distributions on the Class A Shares will be suspended beginning in December. Should the portfolio continue to decline in value, the removal of leverage will lessen the impact of any further decline on the performance of the Class A Shares.

The Company has the ability to re-establish leverage as the portfolio’s value increases. If the remaining portfolio subsequently appreciates in value and the net asset value per Class A Share grew to approximately $7.37, RBC will be instructed to re-invest the cash raised in securities of the portfolio which will restore leverage on the Class A Shares and likely result in the resumption of distributions to holders of Class A Shares.

CFS.PR.A is tracked by HIMIPref™, but is a tiny issue. It was moved from the SplitShare index to Scraps in August 2007 on volume concerns.

M-Split Corp. has announced:

its regular monthly distribution $0.04375 for each Preferred share ($0.525 annually). Distributions are payable December 10, 2008 to shareholders on record as of November 28, 2008. There will not be a distribution paid to M-Split Class A Shares for November 28, 2008 as per the Prospectus which states no regular monthly dividends or other distributions will be paid on the Class A Shares in any month as long as the net asset value per unit is equal to or less than $12.50. The Net Asset Value as of November 14, 2008 was $10.13.

Since inception (April 18, 2007) Class A shareholders have received a total of $0.90 per share and Preferred shareholders have received a total of $0.85 per share inclusive of this distribution, for a combined total of $1.75 per share.

M-Split invests in common shares of Manulife Financial Corporation, the largest life insurer in Canada offering financial products and wealth management services.

The prospectus gives details of the Monthly Retraction option:

Priority Equity Shares may be surrendered at any time for retraction and will be retracted on a monthly basis on the last business day of each month (a ‘‘Retraction Date’’), provided such Priority Equity Shares are surrendered for retraction not less than 20 business days prior to the Retraction Date. Payment for any Priority Equity Shares so retracted will be made within 15 business days of the applicable Retraction Date.

Holders retracting a Priority Equity Share will be entitled to receive an amount per Priority Equity Share equal to the lesser of (i) $10.00; and (ii) 96% of the net asset value per Unit determined as of the Retraction Date less the cost to the Company of the purchase of a Class A Share in the market for cancellation. For this purpose, the cost of the purchase of a Class A Share will include the purchase price of the Class A Share and commissions and costs, if any, related to the liquidation of any portion of the assets of the Company to fund the purchase of the Class A Share (to a maximum of 1% of the net asset value per Unit).

It isn’t clear to me whether

R = 96% (NAV-C)
or
R = (96%NAV) – C

Interested Assiduous Readers will have to call the company! Whatever it is, Capital Units closed today at 1.41-50, 50×30 and Preferreds closed at 7.23-50, 50×120. On the November 14th NAV date, MFC closed at 23.08 and it closed today at 20.97, implying a November 19 NAV of about
10.13 * 20.97 / 23.08 = 9.20 … so the Monthly Retraction is

R = (96%NAV) – C …. [guessing at the proper form of the equation]
= (96%*9.20) – 1.50
= 8.83 – 1.50
= 7.33

So the preferreds are trading around estimated retraction price.

XMF.PR.A was last mentioned on PrefBlog when it entered the Protection Plan.

XMF.PR.A is not tracked by HIMIPref™.

First Asset has announced:

Global 45 Split Corp. (TSX:GFV) the “Company”) announces that it will not pay a monthly distribution on its Class A Shares for the month-ended November 30, 2008.

As set out in the Company’s articles of incorporation, the Company may not pay a distribution on the Class A Shares if, after the payment of the distribution by the Company, the Net Asset Value per Unit would be less than $15.00.

The Manager will assess the ability to pay distributions, and the amount thereof, on a monthly basis.

GFV.PR.A had asset coverage of 1.5+:1 as of November 13. The issue has a monthly retraction feature:

Preferred Shares may be surrendered at any time for retraction by the Company and will be retracted on a monthly basis on the second last business day of each month (a “Valuation Date”). Preferred Shares surrendered for retraction by a holder of Preferred Shares at least ten business days prior to a Valuation Date will be retracted on such Valuation Date and payment of proceeds will be made on or before the tenth business day following such Valuation Date. Except in the case
of the Annual Concurrent Retraction described below, holders retracting a Preferred Share will be entitled to receive an amount per Preferred Share equal to the lesser of: (i) 96% of the Net Asset Value per Unit (as defined herein) determined as of the relevant Valuation Date less the cost to the Company of the purchase of a Class A Share in the market for cancellation; and (ii) $10.00. The cost of the purchase of a Class A Share will include the purchase price of the Class A Share, commission and such other costs, if any, related to the liquidation of any portion of the Portfolio required to fund such purchase (not exceeding 1% of Net Asset Value per Unit). See “Details of the Offering – Certain Provisions of the Preferred Shares – Retraction
Privileges”.

The Annual Concurrent Retraction is in September.

The first trade of the Capital Units after the November 13 NAV was on Nov. 17, when they closed at 5.01. The Preferred Shares closed at $8.75 on November 14.

The estimated monthly retraction price using the last valuation data is:
R = 96% (NAV – C)
R = 96% (15.42 – 5.01)
R = 96% (10) … [Maximum Value]
R = $9.60

The monthly retraction feature is supportive … but mind you, the capital units closed today at 4.95-65, 62×2 and presumably the NAV is now below $15.00. The Preferreds closed at 8.86-54, 7×5.

GFV.PR.A was last mentioned on PrefBlog in the report that it had been caught up in the DBRS Mass Review of Splits. GFV.PR.A is not tracked by HIMIPref™.

Assiduous readers will be well aware of my disdain for market timing. The market goes up, the market goes down … the characteristics of the asset class don’t change very quickly and the steady drip, drip, drip of dividends eventually overwhelms the transient excitement of day to day noise. You just have to make sure you’re well diversified, invest in companies of good, solid investment grade, don’t get excited … and did I mention diversification? Lightning can strike at any time and you should never be in a position where it can wipe you out.

Up, down, piffle, that’s what I say!

But I do get highly annoyed when I see the market behaving in a stupid way. You wan’t to say a proper risk premium is 20bp – that’s fine. You want to say the risk premium should be 1000bp – that’s fine too. I don’t have any problems with that. We all have our individual investment objectives, risk tolerances, views on predicted apocalypses … overall market spreads, their proper levels and interpretation are always open for discussion and analysis.

But let’s not be stupid, OK? Let’s not be like the June 2008 market when it appeared that the market assigned a negative value to embedded call options. And let’s have similar issues from a single issuer at least trade within shouting distance of each other!

Almost a year ago, I wrote a post on yield differences, amazed that the market for Weston Prefs could be so inefficient. It’s true, of course, that there are fewer players in the Pfd-3 playground and so a certain lack of efficiency is to be expected … but never-the-less, a 34bp spread between the high- and low-yielding Weston Pref was rather extreme. I also looked at the spreads on investment-grade issuers at that time, just to show what a more efficient market looked like.

And now I’m going to update that table to last night’s close:

The fund I manage, Malachite Aggressive Preferred Fund, has been doing quite a bit of intra-issuer trading in the past several months – I highlighted an example of this for August 2008. These wide intra-issuer spreads are symptiomatic of a market starved for liquidity – suppliers of that liquidity can (if patient) very often get an extremely good price for it.