Category: Issue Comments

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!

MFC, after getting into trouble with imprudent stock speculation – and partially bailed out by OSFI – is issuing common stock:

Manulife Financial Corporation (MFC) will further strengthen its financial and capital position by issuing $2.125 billion in common equity which would raise its regulatory capital ratio to one of the highest levels in the Company’s history.
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On a pro forma basis, after giving effect to the $2.125 billion of common equity and the remaining $2 billion credit facility, and reflecting global equity market levels as of the end of November 2008, the consolidated capital ratio or MCCSR is estimated to be approximately 235%, one of the highest in the company’s history.
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MFC also provided an update on its expected earnings for 2008. Assuming global equity markets closed at the end of November 2008 levels, net income for the year is estimated to be approximately $900 million.

2008 earnings to the end of the third quarter had been reported as $2,485-million. Perhaps Manulife should have taken lessons from Portus Group, whose principal protection seems to have held up pretty well!

S&P announced:

it revised its outlook on Manulife Financial Corp. and all of its rated operating companies to negative from stable. In addition, Standard & Poor’s affirmed its ratings on Manulife Financial, including its ‘AA’ long-term counterparty credit rating and the ‘AAA’ financial strength ratings on its rated operating subsidiaries. Its key operating subsidiaries include: The Manufacturers Life Insurance Co., John Hancock Life Insurance Co., John Hancock Life Insurance Co. (U.S.A.), Manulife (International) Ltd., and Manulife Life Insurance Co. Ltd.

The outlook revision reflects our opinion of the reduced level of financial flexibility that the group has with its ‘AAA’ financial strength ratings given the decline and volatility of the global equity markets and the resultant impact on earnings and capital, utilization of its bank term facility, and plans to complete a C$2.125 billion common equity issue.
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While the negative outlook on Manulife Financial and its rated subsidiaries reflects our view of the group’s reduced level of financial flexibility, we believe that Manulife is likely to continue to maintain its solid operating performance, business franchise, and capital adequacy position. From our analysis, it has a higher risk business profile compared with other ‘AAA’ rated insurers. Standard & Poor’s ratings anticipate that the firm will maintain its current enterprise risk management practices, although we will continue to monitor how the company assesses its appetite for equity risk retention. Our ratings also reflect our expectations that the investment portfolio likely will remain well diversified with minimal asset quality issues, and revenue growth and financial leverage are expected to remain at levels that are in line with the current ratings. We could revise the outlook to stable if management actions remain responsive, the business franchise continues to show resilience through these challenging times by displaying very strong core operating performance, and the equity markets begin to show signs of recovery and the pressure on VA reserve and capital requirements diminish. We expect that the ratings could be lowered by one notch if there is any evidence of deterioration in one or more of the above metrics, or if the global equity markets remain in a deep and permanent decline.

These issues were last highlighted on PrefBlog when DBRS changed the trend from positive to stable.

Energy Split Corp. II has announced:

it has called 26,750 ROC Preferred Shares for cash redemption on December 16, 2008 (in accordance with the Company’s Articles) representing approximately 2.655% of the outstanding ROC Preferred Shares as a result of the special annual retraction of 403,700 Capital Yield Shares by the holders thereof. The ROC Preferred Shares shall be redeemed on a pro rata basis, so that each holder of ROC Preferred Shares of record on December 15, 2008 will have approximately 2.655% of their ROC Preferred Shares redeemed. The redemption price for the ROC Preferred Shares will be $13.74 per share.

Holders of ROC Preferred Shares that are on record for dividends but have been called for redemption will be entitled to receive dividends thereon which have been declared but remain unpaid up to but not including December 16, 2008.

Payment of the amount due to holders of ROC Preferred Shares will be made by the Company on December 16, 2008. From and after December 16, 2008 the holders of ROC Preferred Shares that have been called for redemption will not be entitled to dividends or to exercise any right in respect of such shares except to receive the amount due on redemption.

EN.PR.A was last mentioned on HIMIPref™ when they were subdivided to reflect differing rates of retraction when the term was extended last year.

EN.PR.A is tracked by HIMIPref™. It is incorporated in the “Scraps” sub-index rather than “SplitShare” due to volume concerns.

Union Gas has announced:

that it will not proceed with a proposed preference share redemption, planned for January 1, 2009. The share redemption, which received Board of Directors approval last September, was under consideration as part of a potential conversion of Union Gas into an unlimited liability company which will not proceed.

It’s rather odd. A “Material Change Report” filed on SEDAR states:

On September 11, 2008, the Corporation issued a news release through the facilities of Marketwire.

… and appends the press release in question …

Union Gas Limited announced today that it has received Board of Directors approval to initiate the redemption of all preference shares Union Gas has issued and outstanding. This share redemption would be effective January 1, 2009. The redemption would be undertaken in order to implement a new corporate legal structure that achieves financial benefits which far exceed share redemption expenses.

Union Gas will require approval from the Ontario Energy Board in connection with an internal share transfer that, together with the share redemption, would ultimately lead to the conversion of Union Gas into an unlimited liability company.

Union Gas reserves the right to not proceed with the redemption of the preference shares or the other reorganization actions. Should Union Gas determine to proceed with the redemption, it will issue a formal notice of redemption to the holders of preference shares in accordance with the preference share rights and restrictions.

Union Gas currently has the following classes of preference shares issued and outstanding:
1. 47,672 5.5% Cumulative Redeemable Class A Preference Shares, Series A;
2. 90,000 6% Cumulative Redeemable Class A Preference Shares, Series B;
3. 49,500 5% Cumulative Redeemable Class A Preference Shares, Series C; and
4. 4,000,000 4.79% Cumulative Redeemable Convertible Class B Preference Shares, Series 11.

… but there are no press releases data Sept. 11 for Union Gas on Marketwire. It’s on CNW … and somehow I missed it at the time.

UNG.PR.C & UNG.PR.D are not tracked by HIMIPref™.

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.

Just as in August 2007, BAM issues are over-represented in the poor performers’ list … and I am just as unable to find a convincing rationale for this.

Power Financial has announced:

the successful completion and closing of an offering of 7,000,000 Non-Cumulative 5-Year Rate Reset First Preferred Shares, Series M (the “Series M Shares”), priced at $25.00 per share to raise gross proceeds of $175 million.

The issue was bought by an underwriting group led by BMO Capital Markets and Scotia Capital Inc. Following the successful sale of the initially announced 6,000,000 Series M Shares, the underwriters exercised an option to purchase an additional 1,000,000 Series M Shares.

The Series M Shares will be listed and posted for trading on the Toronto Stock Exchange under the symbol “PWF.PR.M”. Proceeds from the issue will be used to supplement Power Financial’s financial resources and for general corporate purposes.

The greenshoe noted in the initial announcement was therefore 50% subscribed.

Sadly for the buyers, however, the issue is trading more as a perpetual than a retractible. closing at 23.83-98, 10×19, after trading 125,030 shares in a range of 23.75-20. The yield until the limitMaturity is 6.18%, while the yield to the first call is 7.13%.

The issue has been added to the FixedReset Index.

I have uploaded an evaluation of the FixedReset subIndex.

Greatwest Lifeco has announced:

the closing of its previously announced offering of Non-Cumulative 5-Year Rate Reset First Preferred Shares, Series J (the “Series J Shares”) priced at $25.00 per share. Following the successful sale of the initially announced offering of 8,000,000 Series J Shares, the underwriters of the offering exercised their over-allotment option to purchase an additional 1,200,000 Series J Shares, resulting in the Company issuing today 9,200,000 Series J Shares to raise gross proceeds of $230 million. The net proceeds will be used by the Company for general corporate purposes and to augment Lifeco’s current liquidity position.

The offering was made through a syndicate of underwriters led by BMO Nesbitt Burns Inc. and Scotia Capital Inc. The shares will be posted for trading on the Toronto Stock Exchange under the symbol “GWO.PR.J”.

The greenshoe noted in the initial announcement was therefore fully subscribed.

Sadly for the buyers, however, the issue is trading more as a perpetual than a retractible. closing at 24.25-35 on volume of 358,750 shares. The yield until the limitMaturity is 5.97%, while the yield to the first call is 6.73%.

The issue has been added to the FixedReset Index.

I have uploaded an evaluation of the FixedReset subIndex