Category: Issue Comments

Financial 15 Split Corp. II has announced:

its regular monthly distribution of $0.04375 for each Preferred share ($0.525 annually). Distributions are payable December 10, 2008 to shareholders on record as at November 28, 2008. There will not be a distribution paid to Financial 15 II 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 $15.00. The Net Asset Value as of November 14, 2008 was $14.06.

FFN.PR.A was last mentioned on PrefBlog when it implored unitholders NOT TO PANIC!!!!. There was a query regarding possible suspension of dividends on this thread; I concurred with the querant’s suggestion; both comments were posted *ahem* after the time-stamp of the press release. Well, it still hasn’t been posted on the fund’s website as of noon, that’s all I can say!

The monthly retraction feature for FFN.PR.A is supportive:

Holders retracting a Preferred Share will be entitled to receive an amount per Preferred Share equal to the lesser of (a) $10.00 and (b) 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 and less any related commissions and other costs (to a maximum of 1% of the Net Asset Value per Unit). Payment for any shares so retracted will be made within 15 days of the Retraction Date.

NAV on November 14 was $14.06. The capital units closed that day at $7.01; the preferreds closed at $7.00. Support was only mild as of that day’s prices (what on earth were the capital units doing, trading at a 75% premium to their NAV?) but today looks much better.

As I write this, FFN is quoted at 4.75-99 (still way above NAV!) and FFN.PR.A is quoted at $6.06-24. Using XFN as a proxy (not a particularly good proxy, since it’s all Canadian, and FFN is 1/3 American) … it closed at $18.60 on the 14th and is now trading at $17.12. That’s a loss on XFN of 8% in the period, so estimate the current NAV of FFN + FFN.PR.A units at $14.06 * 0.92 = 12.93.

Estimated Retraction Price:
R = 96% (NAV – C)
R = 96% (12.93 – 4.93) …. [cheating on the price a little bit!]
R = 96% (8.00)
R = $7.68.

So even with grossly over-valued capital units (although option players might have something to say about the value of the capital unitholders’ options) the monthly retraction is now looking extremely profitable.

Update, 2008-11-20: I have received the following communication from a very nervous Assiduous Reader:

I noticed your post on prefblog.com yesterday about FFN.PR.A. With coverage of the preferreds at 1.4:1 now and with today’s sharp declines in the price of Canadian financials, which make up the bulk of FFN’s assets, isn’t there a danger that it won’t pay dividends on the preferreds next month? Wouldn’t that also lead to a downward revision of
the NAV for the next monthly retraction?

Asset coverage of 1.4:1 is a lot. Maybe not when considering the long term, and maybe not when the underlying security is Consolidated Internet Mines & Telecom, Inc., but when the time scale is a matter of days and the underlying is blue-chip (well … as blue as they get, nowadays!) financials, it’s a lot. Asset coverage of 1.4:1 means the the underlying has to drop by 1 – (1/1.4) = 29% before the preferred shareholders become exposed to loss … and remember, that’s EXPOSED to loss, I’m talking about! At that point (asset coverage of 1:1), they basically own the portfolio of underlying equities.

My XFN proxy is now trading at 15.66, down a lot from the 17.12 I used above. That’s a loss of
about 8.5%, so estimate the current NAV of FFN + FFN.PR.A units at $12.93 * 0.915 = 11.83. This is incredible. Look at the 10-day chart:

This is epic. I pointed out the epic nature of this crash on October 31 and now it’s even … um … more epic.

And you STILL have asset coverage of just under 1.2:1; the underlying can STILL go down ANOTHER 15%-odd; the capital unit-holders can lose even more money – before the preferred shareholders even have direct exposure. They haven’t lost anything at that point, not even on paper; but it takes all this before they can even become exposed.

So while the cushion is being eroded, there’s still a cushion.

As far as the preferred share dividends are concerned … well, the company can suspend them any time they like. That would be an enormous step and I consider it highly unlikely. Now that the capital unit dividends have been suspended, the company is cash-flow positive after expenses and dividends (assuming constancy of incoming dividends) and their assets are easy to sell if they need some money. I can remember only one case in which a split-shares’ preferred dividends were suspended … that was GT.PR.A a few years back. I suspect that they wanted to suspend dividends to the capital units when their NAV got low, but there was no mechanism in the prospectus regarding an NAV test – so they left one single dividend on the preferreds unpaid, restarted preferred payments and left capital units hanging out to dry … because capital unitholders, under the terms of GT.PR.A’s prospectus, could not receive dividends if the company was in default to the preferreds.

Your concerns about a dividend cut on the preferreds are … well, nothing’s impossible, but the probability is miniscule. And anyway, the dividends are cumulative. On windup of the company, the preferred shareholders would get their $10 principal and all unpaid dividends before the capital unitholders saw a single penny.

However, non-payment of preferred dividends would have no effect on NAV. The cash would remain in the company, but so would a liability for unpaid dividends. There could well be an effect on market price, however!

You seem extremely worried about the FFN.PR.A position you hold. Although your worries seem overblown to me, it’s your money, not mine! You may wish to consider reducing your position to the point where you can sleep again … but I earnestly suggest that if you do reduce, you give consideration to retraction rather than market sale, because selling into this market is a highly unpleasant experience.

Sentry Select has announced:

that, in accordance with its initial terms, the Trust’s capital units and preferred securities will be delisted from the Toronto Stock Exchange at the close of business on Monday, November 24, 2008. The delisting of the capital units and preferred securities is being done in preparation for the conversion of the Trust into an open-ended mutual fund (the “Conversion”), which is expected to occur on December 2, 2008. The Trust’s preferred securities will mature prior to the Conversion, on December 1, 2008 (the “Maturity Date”). The Manager currently has sufficient cash on hand to repay the preferred securities and any other payment obligations on the Maturity Date.

It is Sentry Select’s current intention to merge the converted Trust with Sentry Select Canadian Income Fund (“CIF”) in early 2009 (the “Merger”). The Merger would be subject to any applicable unitholder and regulatory approvals. Following the Conversion and until further notice, Sentry Select anticipates that the Trust will pay a monthly distribution of $0.027 per unit, which, based on the net asset value per capital unit of $4.13 at the close of business on November 17, 2008, will provide unitholders with a yield of 7.85%. This yield would be similar to the yield of CIF, which was approximately 7.88% as of the close of business on November 17, 2008.

SFO was mentioned on PrefBlog when dividends on capital units were suspended. SFO.PR.A is not tracked by HIMIPref™.

CIX Split Corp. has announced:

that it will seek the approval of its shareholders to change the investment objectives, strategies and restrictions of the Corporation (the “Mandate Change”) to reflect that the Corporation will invest substantially all of its assets in common shares of the corporate successor (“CI Financial”) to CI Financial Income Fund (the “Income Fund”) if the Income Fund is successful in converting to a corporation. On October 15, 2008, the Income Fund announced its intention to convert its structure from an income trust to a corporation at the end of 2008, subject to receipt of all necessary unitholder, court and other approvals.

Currently, the Corporation has invested part of its assets in trust units of the Income Fund and the balance of its assets in a portfolio of common shares of Canadian public companies which, under a forward purchase and sale agreement, the Corporation has agreed to sell to a counterparty for a purchase price calculated by reference to the market value of a reference number of trust units of the Income Fund. As part of the Mandate Change, the Corporation also will complete the early settlement of the sale of its common share portfolio to the counterparty. The Corporation will invest the proceeds from such sale in common shares of CI Financial.

The Mandate Change also will include deleting from the Corporation’s investment objectives respecting its Class A Shares the reference to targeted monthly cash distributions. The Corporation is precluded by the terms of the Class A Shares from paying distributions thereon when the net asset value per unit (one Class A Share and one Priority Equity Share, together) is equal to or less than $15.00. Due to prevailing market conditions, it is no longer realistic for the Corporation to pursue an objective of targeted monthly cash distributions on the Class A Shares.

If the Mandate Change is not approved, the Corporation also will seek the approval of its shareholders to terminate the Corporation on or about December 31, 2008 since the Corporation will be unable to comply with its current investment objectives, strategies and restrictions after the Income Fund completes its reorganization into CI Financial.

A meeting of the shareholders of the Corporation will be held on or about December 23, 2008 to approve either the Mandate Change or the early termination of the Corporation. Shareholders of record at the close of business on November 22, 2008 will be entitled to receive notice of the
meeting. If the Mandate Change is approved and implemented, shareholders who do not wish to continue holding their shares of the Corporation may either dispose of their shares or exercise one of the retraction rights attached to their shares. Shareholders will not have a right under corporate laws to dissent from the Mandate Change.

CXC.PR.A had Asset Coverage of 1.2+:1 as of November 18, according to CI Investments, and closed today at 8.71-00, 1×5, while the capital units closed at 2.52-69.

According to the prospectus:

The following matters require the approval of the holders of Priority Equity Shares and Class A Shares by a two thirds majority vote (other than matters referred to in paragraphs (c), (f) and (g), which require approval of a simple majority vote) at a meeting called and held for such purpose:
(a) a change to the fundamental investment objectives and strategy of the Company;
…
Each Priority Equity Share and Class A Share will have one vote at such a meeting and will not vote separately as a class in respect of any vote taken (except for a vote in respect of the matters referred to in paragraphs (a), (b), (g) and (h) above and any other matters referred to above if a class is affected by the matter in a manner different from the other classes of shares of the Company). Ten per cent of the outstanding Priority Equity Shares and Class A Shares, as a group, or, where shares of a class vote separately, ten percent of the outstanding shares of that class, represented in person or by proxy at the meeting will constitute a quorum. If no quorum is present, the holders of Priority Equity Shares and Class A Shares then present will constitute a quorum at an adjourned meeting.

Given that monthly retraction rights are:

Holders retracting a Priority Equity Share on a Monthly Retraction Date will be entitled to receive an amount per Priority Equity Share equal to the lesser of: (i) $10.00; and (ii) 96% of the amount, if any, by which the net asset value per Unit on the relevant Monthly Retraction Date exceeds the cost to the Company of acquiring a Class A Share for cancellation. The cost of acquiring a Class A Share will include the price of the Class A Share, commission, and such other costs, if any, related to the partial ettlement of the Forward Agreement to fund such retraction.

… it is clearly in the interest of the preferred shareholders to vote no, have the company wound up and (almost certainly? very probably?) receive par value for their shares.

CXC.PR.A was last mentioned on PrefBlog when distributions to capital unitholders were suspended. CXC.PR.A is not tracked by HIMIPref™.

Faircourt Asset Management has announced:

that the Trust has received a receipt for the final short form prospectus in each of the provinces of Canada in connection with the previously announced distribution of rights to its unitholders (the “Rights Offering”).

Under the Rights Offering, holders of units of the Trust as of November 25, 2008 (the “Record Date”) will receive one right for each trust unit held. Each right will entitle the holder thereof to purchase one trust unit at a price (the “Subscription Price”) of $3.00 per trust unit, being 86.0% of the net asset value of a trust unit as at November 14, 2008 and 93.2% of the volume weighted average price of a trust unit on the Toronto Stock Exchange (the “TSX”) during the five trading days ended November 14, 2008 (both rounded to the nearest cent). The rights may be exercised for a period commencing on November 26, 2008 and ending at 4:00pm (Toronto time) on December 19, 2008.

The Rights will be listed on the TSX under the symbol FIG.RT and will commence trading on November 21, 2008.

Each holder of rights who subscribed for all of the trust units to which the holder is entitled under the basis subscription privilege may subscribe for any number of additional trust units, if available, at a price equal to the Subscription Price for each additional trust unit, subject to
availability.

The Trust will use the net proceeds of this issue to increase capital for investment and reduce leverage associated with the preferred securities of the Trust.

The NAV of the Fund’s Capital Units was $3.07 as of November 17, and there were 0.71 Capital Units per Preferred. Successful completion of the entire offering – by no means a given – would imply asset coverage of 1.4+:1 for the preferreds – still not very good!

Very strange. I’ve received two inquiries from investors recently via intermediaries regarding Quebecor World preferred shares (IQW.PR.C & IQW.PR.D). There are probably others who are wondering … so I’ll review the situation:

I regret that I must advise that the Quebecor World preferred shares are almost certainly worthless.

Dividends on the preferreds were suspended in November 2007. They entered bankruptcy protection in January after defaulting on an interest payment to senior bonds; an auction held on Credit Default Swaps referencing that debt indicated that the market valued senior bonds at 41.25 cents on the dollar.

The company continues to operate. The next date of interest is December 5, when all claims from creditors must be received but continues to have a negative net worth of about $1-billion.

The company notes:

In light of the Insolvency Proceedings, it is unlikely that the Company’s existing Multiple Voting Shares, Redeemable First Preferred Shares and Subordinate Voting Shares will have any material value following the approval of a Plan. There is a risk such shares could be cancelled.

HIMIPref™ no longer tracks IQW.PR.C or IQW.PR.D, as the low price was causing “sanity checks” in the programming to indicate errors.

Gatehouse Capital has announced:

Standard & Poor’s Ratings Services lowered the rating of Global Credit Pref Corp.’s (TSX:GPA.PR.A) preferred shares to P-5 on November 14 and they remain on CreditWatch with negative implications. The rating on the preferred shares of Global Credit Pref Corp. mirrors the lowering of the rating on the $48,031,000 fixed-rate static portfolio credit linked note issued by The Toronto-Dominion Bank to CCC Watch/Neg.

The Company has exposure to the credit linked note issued by The Toronto-Dominion Bank and held by Global Credit Trust, the return on which is linked to the credit performance of 124 reference entities.

The preferred shares are listed for trading on the Toronto Stock Exchange under the symbol GPA.PR.A

GPA.PR.A was placed on Watch-Negative following the WaMu Credit Event. There are 1.5-million shares outstanding, closing at 2.53-95 today. The NAV was $4.38 as of October 31 according to Gatehouse; shares outstanding are down slightly from the 1,537,267 reported June 30. According to the prospectus:

Preferred Shares may be surrendered at any time for retraction but will be retracted only
on the last day of the month (a “Valuation Date”) commencing October 31, 2005. Preferred Shares surrendered for retraction by a Holder at least five Business Days prior to a Valuation Date will be retracted on such Valuation Date and such Holder will receive payment on or before the tenth Business Day following such Valuation Date. On a retraction, Holders will be entitled to receive a retraction price per share (the “Preferred Share Retraction Price”) equal to 95% of the net asset value per Preferred Share determined as of the relevant Valuation Date, less $0.75.

GPA.PR.A is not tracked by HIMIPref™.

ROC Pref Corp II has announced:

that Standard & Poor’s (“S&P”) lowered its ratings on ROC II’s Preferred Shares from P-1 (low) to P-2 and the Preferred Shares remain on CreditWatch withnegative implications. S&P expects to resolve the CreditWatch placement within a period of 90 days and update its opinion. As announced in a press release dated September 25, the move comes as a result of the Lehman Brothers HoldingsInc. credit event as well as several downgrades of companies held in the Reference Portfolio.

ROC Pref II Corp.’s Preferred Shares pay a fixed quarterly coupon of 4.65% on their $25.00 principal value and will mature on December 31, 2008. The Standard & Poor’s rating addresses the likelihood of full payment of distributions and payment of $25.00 principal value per Preferred Share on the maturity date.

There’s an error in the release – the actual maturity date of the prefs is Dec. 31 2009, according to the prospectus, which makes the 90 day delay until resolution of the Credit Watch Negative much less amusing.

According to the 3Q08 Performance Report, the credit distribution is:

and

The subordination provides protection of approximately 5.5 defaults net of the estimated recovery rate of 40%, which is 6.6 times the average and 3.0 times the worst cumulative historical default level for a portfolio with the same credit ratings distribution over rolling 1.25-year periods (being equal to the remaining life of ROC II) during the 25-year period ending 20071. Although the trading reserve account has increased since inception, the rising cost of subordination (default protection or “safety cushion”) has reduced HSBC’s (the issuer of the credit linked note) estimate of the amount of additional protection that can be purchased in the event that CC&L decides to use the trading reserve account to purchase additional subordination by approximately 0.3 defaults. Inclusive of the trading reserve account, the additional number of defaults that ROC II can withstand declined by approximately 2.0 defaults during the quarter to 5.5 defaults.

RPA.PR.A was last discussed on PrefBlog when the effects of the Lehman bankruptcy were announced.

RPA.PR.A is not tracked by HIMIPref™.

Mulvihill Premium Split Share has announced:

that today, the Toronto Stock Exchange has accepted its Notice of Intention to make a normal course issuer bid. The Fund will have the right to purchase under the bid up to a maximum of 196,678 Class A Shares and 196,678 Priority Equity Shares (respectively representing approximately 10% of the Fund’s public float of 1,966,779 Class A Shares and 1,966,779 Priority Equity Shares, both as of October 30, 2008), together in units (each consisting of one Class A Share and one Priority Equity Share), commencing November 13, 2008. The Fund may not purchase more than 39,986 of its units (representing approximately 2% of the Fund’s 1,999,279 issued and outstanding Class A Shares and approximately 2% of the Fund’s 1,999,279 issued and outstanding Priority Equity Shares, both as of October 30, 2008) in any 30-day period under the bid. Purchases made pursuant to the normal course issuer bid will be made in the open market through the facilities of the Toronto Stock Exchange. The normal course issuer bid will remain in effect until the earlier of November 12, 2009, the termination of the bid by the Fund or the Fund purchasing the maximum number of units permitted under the bid. Class A Shares and Priority Equity Shares purchased by the Fund pursuant to the issuer bid will be cancelled. The Fund has not purchased any Class A Shares or Priority Equity Shares during the previous year pursuant to any issuer bid.

Directors of the Fund believe that units of the Fund may become available during the proposed purchase period at prices that would make such purchases in the best interests of the Fund.

Assiduous Readers are reminded that approved issuer bids do not necessarily get executed. They have authorization to do it, that’s all.

MUH.PR.A is tracked by HIMIPref™. Its term extension in December 2007 was reported on PrefBlog. The issue is included in the “Scraps” sub-index, on both volume and credit concerns.

World Financial Split Corp. has announced:

that today, the Toronto Stock Exchange has accepted its Notice of Intention to make a normal course issuer bid. The Fund will have the right to purchase under the bid up to a maximum of 1,275,271 Class A Shares and 1,275,271 Preferred Shares (respectively representing approximately 10% of the Fund’s public float of 12,752,706 Class A Shares and 12,752,706 Preferred Shares, both as of October 30, 2008), together in units (each consisting of one Class A Share and one Preferred Share), commencing November 13, 2008. The Fund may not purchase more than 255,054 of its units (representing approximately 2% of the Fund’s 12,752,706 issued and outstanding Class A Shares and approximately 2% of the Fund’s 12,752,706 issued and outstanding Preferred Shares, both as of October 30, 2008) in any 30-day period under the bid. Purchases made pursuant to the normal course issuer bid will be made in the open market through the facilities of the Toronto Stock Exchange. The normal course issuer bid will remain in effect until the earlier of November 12, 2009, the termination of the bid by the Fund or the Fund purchasing the maximum number of units permitted under the bid. Class A Shares and Preferred Shares purchased by the Fund pursuant to the issuer bid will be cancelled. The Fund has not purchased any Class A Shares or Preferred Shares during the previous year pursuant to any issuer bid.

Directors of the Fund believe that units of the Fund may become available during the proposed purchase period at prices that would make such purchases in the best interests of the Fund.

The possibility of a WFS buy-back has been discussed – inconclusively – on PrefBlog. Assiduous Readers should remember that getting authority for a buy back is one thing; putting cash money down on the table is another.

WFS.PR.A is tracked by HIMIPref™. It is currently a member of the SplitShare index … but is under credit review negative by DBRS and I suspect a downgrade is imminent.