It happened last month with IQW.PR.D and now IQW.PR.C has become impossible to handle in a standard manner.
Today’s closing bid for IQW.PR.C is $0.25, less than what the “accrued dividend” would be if it was still paying dividends, and the price rejected as an obvious error. I will no longer be tracking it.
I will continue to report the quarterly conversions of this issue into common.
Faircourt Asset Management has announced:
In connection with the annual redemption of the Trust, 149,777 Trust Units were submitted for redemption without matching Preferred Securities. Based on the terms of the annual redemption as detailed in the Final Prospectus dated February 27, 2006, the Manager announces that $1,497,770 in aggregate principal amount of the Trust’s 5.75% outstanding Preferred Securities (the “Preferred Securities”) will be redeemed on October 22, 2008 (the “Redemption Date”) at a price of $10.4097 for each $10.00 principal amount of Securities, being equal to the aggregate of (i) $10.3750 (the “Redemption Price”), and (ii) all accrued and unpaid interest hereon to but excluding the Redemption Date. The record date of the Preferred Securities partial redemption is October 13, 2008. [later “clarified” to October 14 – JH] Unitholders who submitted unmatched Trust Units will receive $5.9142 per Trust Unit ($6.2892 Net Asset Value per Trust Unit less the $0.3750 call premium on the Preferred Securities). Payment will be made in full on October 22, 2008 (the “Payment Date”).
I love that word “clarification”! It covers so much!
On June 30, 2008, there were 1,939,730 units (a unit is one FCS.UN and one FCS.PR.A), so the number redeemed is 7.7% of the June 30 total. I am unable to determine how many FCS.PR.A disappeared due to Concurrent Retraction.
Distributions to the capital unitholders have been halted and the issue is under Review-Negative by DBRS.
FCS.PR.A is not tracked by HIMIPref™.
Faircourt Asset Management has announced:
that in accordance with the terms of Trust Indentures governing the Preferred Securities and the maintenance of a minimum 1.4 times asset coverage to be maintained by the Trusts, dated November 17, 2004 for Faircourt Income & Growth Split Trust and March 16, 2006 for Faircourt Split Trust, monthly distributions on the Trust Units (TSX: FIG.UN, FCS.UN) will be suspended until further notice, in order to protect the Trusts’ Net Asset Value and to preserve the Trusts’ ability to rebuild and meet their respective investment objectives in the long term.
This announcement does not affect the quarterly distributions related to the Preferred Securities of either Trust (TSX: FIG.PR.A, FCS.PR.A).
The potential for a buy-back or partial redemption of FIG.PR.A has been discussed on PrefBlog; it is currently a member of the HIMIPref™ InterestBearing subindex. FCS.PR.A had a partial redemption last year and another one this year.
Both issues are currently under Review-Negative by DBRS.
Update, 2008-10-29: Note that according to the June 30 Financials, there were 9,964,308 Preferred Securites and 7,061,762 Capital units, or about 0.71 Capital Units per Preferred … which is good to remember when computing asset coverage!
Assiduous Reader pugwash doesn’t say much, but when he does it’s to the point.
In the comments to October 20 he asked:
Newb question:
At current prices, why doesn’t BAM (for example) buy some of its prefs back.
… and I replied …
Don’t be so down on yourself, it’s a perfectly good question.
There have been scattered reports of LBO Debt Buybacks:
Kohlberg Kravis Roberts & Co. and PAI Partners bought loans used for their takeovers after prices tumbled in February. The purchases helped cut the global backlog of leveraged buyout debt to $91 billion from $230 billion nine months ago, according to Bank of America Corp.
… and more recently:
Apollo, TPG and Blackstone are reported to be close to a deal to buy USD 12.5 billion in “distressed” buyout debt, at the bargain price of what the New York Times has identified as “in the mid-80 cents on the dollar.” This is lower than the USD 87 cents identified as the average trading price by a special Credit Suisse index, but more than the 70-80 cents that many other buyout loans are currently trading at.
With respect to BAM particularly … the glib, meaningless answer is that they expect to be able to invest those funds as vultures, earning more than they could save from a buy-back of their own debt. Brookfield has a very expansionist agenda and could well just be waiting for a major bankruptcy, for instance, to put good assets that fit with their portfolio on the market for a song.
Even if that is not the case, there is always the question of liquidity. They have about $3-billion in liquidity now and they may be hoarding it … why buy back 5-year debt when they have the same amount of debt maturing next year that might be a nightmare to refinance? Nobody knows for sure how long this very tight environment is going to last … so everybody’s sitting on whatever cash they have …
… and now he’s followed up the crusher …
Thanks – helpful answer:
Which breeds a follow on question – how about the buy back situation with split share prefs (particularly short dated ones).
Doesn’t it make sense in today’s market for the issuer to buy back the pref at way below the $10 they will have to pay in a few years time.
Wouldn’t this also improve the asset coverage ratio.
Or is this what the difficult to understand retraction feature, you mentioned in September for eg WFS is all about.
Well, there’s a glib and cynical answer to that one and it’s tempting just to say: a buy-back is a voluntary reduction of Assets Under Management by the Manager; therefore a voluntary reduction of pay; and how likely is that?
But there is also the question of reputation. There are many shops (e.g., Mulvihill, Quadravest, Faircourt, inter alia) that make quite a good living packaging split shares and default on one series of prefs might make it harder to sell another.
I’m not a big believer in reputation, at least not as far as investment returns go (outright theft, fraud and such is another matter). The Street’s memory is short – the markets for Monthly Auction Preferred Shares and bank-issued 100-year floating rate bonds collapsed twenty years ago and now everybody’s pretending to be surprised about the collapse of the Auction Rate Securities market in the States. If nothing else, most readers will know that there are many stockbrokers and asset managers with little or no investment ability but who – somehow! – are able to attract money. The business is about selling, not performance.
Mulvihill is a particularly good case in point; I got extremely upset with them in the wake of the Tech Wreck for proposing to buy back full units of Global Telecom (GT.A & GT.PR.A) at a time when the asset coverage of the preferreds was less than 1.0, and when the combined price of the securities was less than NAV.
I took the view that there was nothing in the prospectus to prevent them from buying back the prefs only; and that buying back the capital units was an irresponsible waste of preferred shareholders’ money. They took the view that the prospectus forced them to buy back equal numbers of the two classes. The prospectus is very badly drafted; interested readers may decide for themselves who was right.
Anyway, my point is that despite my strong disapproval of their actions with respect to the buy-back plan, I have still been willing to invest in WFS.PR.A. Another day, another dollar … if you do business only with people you agree with all the time, you’ll soon not be doing much business.
So, speaking of WFS.PR.A (which is currently under Review-Negative, and I suspect a downgrade to Pfd-3 is forthcoming) let’s have a look at the prospectus:
Subject to applicable law, the Company may at any time or times purchase Preferred Shares and Class A Shares for cancellation at prices per Unit not exceeding the NAV per Unit on the Valuation Date immediately prior to such purchase.
… and we see that they’ve learnt something about prospectus-writing, because right there on the front page it says:
The Preferred Shares and the Class A Shares are offered separately but will be issued only on the basis that an equal number of each class of shares will be issued and outstanding.
So in the case of WFS.PR.A, they have the ability to buy-back full units for cancellation, as long as they do it at a price below NAV, which will improve the NAV of the remaining units. This situation is particularly poignant for WFS.PR.A because it is currently sitting on a whack of cash – which has cushioned the blow of falling share prices in this awful market. As of June 30:
Note also that 17.6% of the equities held were hedged with Puts. Putting that cash to work buying units might be a Good Thing: As of October 16, NAV was $13.82; WFS.PR.A closed at $8.00; WFS closed at $3.93; so the units as a whole closed at a 13.7% discount to NAV.
The other consideration they must account for when determining whether or not to buy back units is whether they will pre-empt unitholder retractions or be adding to them. From a business perspective, a simple pre-emption is a wonderful thing, since they will have lost the AUM anyway and it’s simply a question of who gets to keep the discount. I have previously noted that the discount is so extreme that even the Monthly Retraction, with its 4% built-in fee, is attractive. The “Annual Concurrent Retraction”, for which the retractor will receive full NAV, is even more attractive to arbitrageurs, but doesn’t happen until June.
So the question, as of October 16 prices, is who gets to keep the 13% market value discount to NAV? In a buy-back, the company gets to keep it; in a monthly retraction, the company only gets about a third of it; in an Annual Retraction, the company gets none of it. A buy-back would certainly make sense for both the Preferred Shareholders AND the capital unitholders … but, unfortunately, they don’t get a vote. It’s in the lap of Mulvihill.
Another highly interesting situation worth highlighting is the potential for FIG.PR.A to be partially called. Their prospectus has none of this silly stuff about keeping the number of shares equal; instead it states:
Preferred Securities may be redeemed in whole or in part by the Trust upon notice to Securityholders in accordance with the Trust Indenture at any time that the aggregate principal amount outstanding of the Preferred Securities exceeds 40% of the Total Assets. All Preferred Securities outstanding at maturity or immediately prior to the termination of the Trust, if earlier, will be redeemed by the Trust. The Preferred Securities would, in any such case, be redeemed at par, plus any accrued but unpaid interest.
This implies that redemption at par is an option for the company whenever asset coverage falls below 2.5:1. The surprising thing is that they have done it, redeeming about one-sixth of the preferreds in March. Now that distributions have been halted for the capital shares:
Faircourt Asset Management Inc., as Manager of Faircourt Income & Growth Split Trust (TSX: FIG.UN, FIG.PR.A) and Faircourt Split Trust (TSX: FCS.UN, FCS.PR.A) announces today that in accordance with the terms of Trust Indentures governing the Preferred Securities and the maintenance of a minimum 1.4 times asset coverage to be maintained by the Trusts, dated November 17, 2004 for Faircourt Income & Growth Split Trust and March 16, 2006 for Faircourt Split Trust, monthly distributions on the Trust Units (TSX: FIG.UN, FCS.UN) will be suspended until further notice, in order to protect the Trusts’ Net Asset Value and to preserve the Trusts’ ability to rebuild and meet their respective investment objectives in the long term.
… and the prefs are under Review-Negative, there is the potential – POTENTIAL! – for another partial call at par, which would be very good news for the preferred shareholders, given that FIG.PR.A closed at 7.67-70, 1×1 yesterday. Note, however, that they also have authorization to buy back the preferreds:
The Trust Indenture will provide that, subject to applicable law, the Trust may, in its sole discretion, from time to time, purchase (in the open market or by invitation for tenders) Preferred Securities for cancellation up to a maximum in any calendar year of ten percent of the aggregate principal amount of Preferred Securities outstanding at the beginning of that calendar
year.
So, what can I say to summarize? Rule #1 is, of course, be familiar with the prospectus. If investing was easy, it wouldn’t be fun! Bear in mind at all times that what’s good for you is not necessarily good for the Manager – I have not heard back from the company yet, but until I do, my working hypothesis is that the BSD.PR.A suspension of retractions is abusive to the shareholders. And if you decide to play any arbitrage games, remember at all times that it’s not a straightforward arbitrage – there are a lot of things that can go wrong.
The credit crunch keeps rolling … portfolio values keep dropping … and last spring’s review is no longer operable.
DBRS has announced it:
has today placed the rating of certain structured preferred shares (Split Shares) Under Review with Negative Implications. Each of these split share companies has invested in a portfolio of securities (the Portfolio) funded by issuing two classes of shares – dividend-yielding preferred shares or securities (the Preferred Shares) and capital shares or units (the Capital Shares). The Preferred Shares benefit from a stable dividend yield and downside principal protection via the net asset value (NAV) of the Capital Shares against the percentage loss in the Portfolio’s NAV. Preferred Shares have experienced significant declines in downside protection during the past number of weeks due to the unprecedented volatility in the global equity markets. As a result of this share price volatility, DBRS has placed the Preferred Shares listed below Under Review with Negative Implications. DBRS will take final rating action on these Preferred Shares once a longer-term trend has been established for the NAVs of the affected split share companies.
| DBRS Review Announced 2008-10-24 | ||||
| Ticker | Rating | Asset Coverage |
Last PrefBlog Post |
HIMIPref™ Index |
| FBS.PR.B | Pfd-2(low) | 1.4+:1 10/23 |
Downgraded | SplitShare |
| ASC.PR.A | Pfd-2(low) | 0.9+:1 10/24 |
Downgraded | Scraps |
| ALB.PR.A | Pfd-2(low) | 1.5+:1 10/23 |
Confirmed | SplitShare |
| BSD.PR.A | Pfd-2(low) | 1.0-:1 10/17 |
Retraction Suspended | InterestBearing |
| CIR.PR.A | Pfd-4(low) | 0.7-:1 10/24 |
Downgraded | None |
| CBW.PR.A | Pfd-5 | 0.7+:1 10/24 |
Downgraded | None |
| DF.PR.A | Pfd-2 | 1.6-:1 10/15 |
Don’t Panic!!! | Scraps |
| DGS.PR.A | Pfd-2 | 1.7-:1 10/23 |
Proposed Merger | None |
| ES.PR.B | Pfd-3(high) | 1.2+:1 10/23 |
Small Redemption | None |
| FCS.PR.A | Pfd-2 | 1.3+:1 10/22 |
Partial Redemption | None |
| GFV.PR.A | Pfd-2 | 1.5-:1 10/23 |
Issuer Bid | None |
| GBA.PR.A | Pfd-5 | 0.7+:1 10/23 |
Downgraded | None |
| HPF.PR.A | Pfd-2(low) | Their Numbers Note Calculation Dispute | Massive Retraction | Scraps |
| HPF.PR.B | Pfd-4 | Their Numbers Note Calculation Dispute | Massive Retraction | Scraps |
| FIG.PR.A | Pfd-2 | 10/22 1.3+:1 see update |
Partial Redemption | InterestBearing |
| PIC.PR.A | Pfd-3(high) | 1.3-:1 10/16 |
Downgraded | Yes |
| NBF.PR.A | Pfd-2(low) | 1.5+:1 10/23 |
Review – Developing Never Resolved |
None |
| SLS.PR.A | Pfd-2(low) | 1.2-:1 10/23 |
None | None |
| SNH.PR.U | Pfd-3(high) | 1.2-:1 10/23 |
None | None |
| SNP.PR.V | Pfd-2(low) | 1.3+:1 10/23 |
Partial Redemption | None |
| YLD.PR.A | Pfd-3 | 1.0+:1 10/15 |
Downgraded | Scraps |
| TXT.PR.A | Pfd-3(high) | 1.4-:1 10/16 |
Downgraded | None |
| WFS.PR.A | Pfd-2(low) | 1.4-:1 10/26 |
Monthly Retraction | SplitShare |
Update, 2008-10-26: There is an error in the calculation of the asset coverage for FIG.PR.A. As of the June 30 financials, the company had 9,964,308 preferreds outstanding and 7,061,762 capital units. Thus, net assets of $4.56 for the capital units equates to asset coverage of ((10 * 9,964,308) + (7,061,762 * 4.56))/9,964,308 = 1.32 … call it 1.3+:1.
Brookfield Funds has announced:
In accordance with its Declaration of Trust, and because the net asset value is currently below the required 1.4 times coverage ratio, the monthly distribution on the Capital Units of the Brascan SoundVest Rising Distribution Split Trust will not be paid this month. The Declaration of Trust prohibits the Trust from paying a cash distribution on its Capital Units if, after giving effect to the proposed distribution, the net asset value per unit of its Capital Units would be less than approximately $4.00 and as of October 17, 2008 this amount was $nil. The Trust will continue to monitor its net asset value per Capital Unit to determine if it will be able to make monthly distributions in the future.
These announcements do not affect the quarterly distributions payable on the Preferred Securities of Brascan SoundVest Rising Distribution Split Trust.
…
The Brascan SoundVest Rising Distribution Split Trust also announced that it is temporarily suspending the annual redemption rights that would have arisen in November in respect of both its Capital Units and Preferred Securities. The Declaration of Trust provides for the suspension of redemptions when the same 1.4 times coverage ratio mentioned above cannot be maintained. The Trust will monitor its net asset value to determine when it will be able to resume redemptions. Further details of the redemption procedure to be followed will be announced if and when the suspension is lifted.
After having previously kept the NAV of the portfolio secret, the managers have now made it available again: NAV as of October 17 was $9.98.
The suspension of retractions is something of a surprise, although their right to do so is indeed spelled out in the prospectus. This is not the greatest problem in the world for the preferred securityholders, however, since they always had to buy a capital unit before retracting anyway:
Commencing in 2005, Preferred Securities may be surrendered together with an equal number of Capital Units for redemption in the month of November of each year for redemption on the last Business Day (any day on which the Toronto Stock Exchange is open for trading is hereinafter referred to as a ‘‘Business Day’’) in November of that year (a ‘‘Redemption Date’’), subject to the Trust’s right to suspend redemptions in certain circumstances. A Securityholder who surrenders Preferred Securities together with Capital Units for redemption at least 15 Business Days prior to a Redemption Date will receive payment for each Combined Security equal to the Combined Value determined as of the Redemption Date, less redemption costs. Redemption proceeds will be payable on or before the fifteenth Business Day after the applicable Redemption Date. See ‘‘Details of the Offering — Certain Provisions of the Preferred Securities— Concurrent Annual
Redemption’’.
On October 17, BSD.UN closed at $1.50; BSD.PR.A closed at $7.40; given a NAV of $9.98 retraction would have been quite profitable. The prospectus language, by the way is (bolding added):
The Trust may suspend the redemption of Capital Units and the repayment of Preferred Securities or postpone repayment of redemption proceeds:
…
(iii) if, after giving effect to redemptions, the Combined Value would be less than 1.4 times the Repayment Price,
… so the language in the press release …
The Declaration of Trust provides for the suspension of redemptions when the same 1.4 times coverage ratio mentioned above cannot be maintained.
… is a bit of a stretch. To me, it looks like they just want to hang on to their assets. Inquiries and complaints may be directed to:
Zev Korman
Director, Investor Relations and Communications – Public Funds
Tel: 416-359-1955
Email: zkorman@brookfield.com
My own eMail says:
I note that BSD has suspended retractions and have commented on this on my blog at http://www.prefblog.com/?p=3565
Given that the prospectus gives the Trust the option of suspending retractions, without making this an obligation, what motivation is there for the suspension other than a desire to retain assets?
May I publish your response?
Continuing their plea for calm last week Quadravest has begged holders of FTN & FFN not to panic – please, don’t panic! we implore you not to panic!:
Fueled by the intensification of the ongoing credit crisis, world financial markets reached a level of “panic” during the last several weeks which arguably has never been seen by investors on such a global scale. Several of the largest financial institutions in the United States and around the world required unprecedented government intervention in order to rescue them from complete insolvency.
…
The impact of the broad based selling has adversely impacted the portfolios of Financial 15 Split Corp. (“Financial 15”) and Financial 15 Split Corp. II (“Financial 15 II”). The net asset values have declined by approximately 15% from August 31, 2008 to October 15, 2008.
Asset coverage of the preferred shares remains OK: 1.9+:1 for FTN.PR.A and just under 1.6:1 for FFN.PR.A according to the company. But the capital unitholders are certainly feeling some pain:
JovFunds Management has announced:
the special meetings of the unitholders of the Funds and preferred shareholders of Charterhouse could not be held today due to a failure to achieve the necessary quorum and that each special meeting has been adjourned to October 30, 2008.
The adjourned special meetings of the unitholders of the Funds and preferred shareholders of Charterhouse will be held at the offices of JovFunds, 26 Wellington Street East, Suite 700, Toronto on October 30, 2008 at 9:00 a.m. for the Funds and at 10:00 a.m. for Charterhouse. Unitholders of the Funds and preferred shareholders of Charterhouse wishing to tender proxies for the adjourned special meeting of the Funds or Charterhouse, respectively, must do so in accordance with the Management Information Circular dated September 19, 2008, that was distributed to securityholders of the Funds and Charterhouse previously.
The meeting has been previously discussed on PrefBlog. PFD.PR.A is not tracked by HIMPref™.
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.
| September, 2008 | ||||
| Issue | Index | DBRS Rating | Monthly Performance | Notes (“Now” means “September 30”) |
| BAM.PR.B | Floater | Pfd-2(low) | -18.0252% | |
| BNA.PR.C | SplitShare | Pfd-2(low) | -14.0403% | Asset coverage of just under 2.8:1 as of September 30, according to the company. Now with a pre-tax bid-YTW of 11.53% based on a bid of 14.51 and a hardMaturity 2019-1-10 at 25.00. Compare with BNA.PR.A (9.94% to 2010-9-30) and BNA.PR.B (9.64% to 2016-3-25). |
| BAM.PR.K | Floater | Pfd-2(low) | -13.6954% | |
| SBN.PR.A | SplitShare | Pfd-2(low) | -11.6603% | Asset coverage of 2.1+:1 as of September 30, according to Mulvihill. Now with a pre-tax bid-YTW of 7.91% based on a bid of 8.76 and a hardMaturity 2014-12-1 at 10.00. |
| GWO.PR.H | PerpetualDiscount | Pfd-1(low) | -10.4712% | Now with a pre-tax bid-YTW of 6.50% based on a bid of 18.81 and a limitMaturity. |
| … | … | … | … | … |
| PWF.PR.F | PerpetualDiscount | Pfd-1(low) | +0.7759% | Now with a pre-tax bid-YTW of 6.06% based on a bid of 22.08 and a limitMaturity. |
| PWF.PR.H | PerpetualDiscount | Pfd-1(low) | +0.8439% | Now with a pre-tax bid-YTW of 6.12% based on a bid of 23.90 and a limitMaturity. |
| BNS.PR.M | PerpetualDiscount | Pfd-1(low) | +1.6993% | Now with a pre-tax bid-YTW of 5.81% based on a bid of 19.75 and a limitMaturity. |
| BNS.PR.L | PerpetualDiscount | Pfd-1 | +1.8013% | Now with a pre-tax bid-YTW of 5.79% based on a bid of 19.78 and a limitMaturity. |
| BNS.PR.K | PerpetualDiscount | Pfd-1 | +1.9774% | Now with a pre-tax bid-YTW of 5.62% based on a bid of 21.66 and a limitMaturity. |
Brookfield Funds is now posting the Preferred Security NAV as well as the Capital Unit NAV; the asset coverage has now fallen below unity.
The following table shows the swiftness of the descent:
| BSD.UN + BSD.PR.A NAV | |
| Date | NAVPU |
| September 5 | 15.50 |
| September 12 | 14.99 |
| September 19 | 14.67 |
| September 26 | 14.30 |
| September 30 | 13.67 |
| October 3 | 12.70 |
| October 10 | 9.07 |
Holy smokes, that was FAST. Today’s closing quote on BSD.UN was 1.11-19, 100×2, with a trading range of 1.06-20; BSD.PR.A was quoted at 6.81-50, 25×7, with all 968 shares trading at 6.78.
Holders of BSD.PR.A (some of whom, I fear, bought it on my recommendation) should not sell instantly. The market price is well below the NAV and there remains a good chance that the income coverage of over 2:1 will yet repair the damage to asset coverage over the remaining term of the security (the scheduled wind-up date is 2015-3-31); there will be no payments to capital unitholders until the damage is repaired:
The Trust may not make any cash distributions on the Capital Units if, after giving effect to the proposed distribution, the Combined Value would be less than 1.4 times the Repayment Price.
There is the possibility of Concurrent Retraction in November:
Commencing in 2005, Preferred Securities may be surrendered together with an equal number of Capital Units for redemption in the month of November of each year for redemption on the last Business Day (any day on which the Toronto Stock Exchange is open for trading is hereinafter referred to as a ‘‘Business Day’’) in November of that year (a ‘‘Redemption Date’’), subject to the Trust’s right to suspend redemptions in certain circumstances. A Securityholder who surrenders Preferred Securities together with Capital Units for redemption at least 15 Business Days prior to a Redemption Date will receive payment for each Combined Security equal to the Combined Value determined as of the Redemption Date, less redemption costs.
DBRS still has the prefs rated at Pfd-2; FTU.PR.A was downgraded to Pfd-5 when it was in better shape.
For those holding this in their portfolios, I recommend – for now – that it be kept (since the realizable value on sale is far less than NAV) but that some thought be given to buying capital units for use in next month’s redemption opportunity. It should now be considered an equity for Asset Allocation purposes.
Also remember, that unless and until the distributions in the underlying holdings are cut massively, income will exceed expenditure.
BSD.PR.A is tracked by HIMIPref™ and is part of the InterestBearing index. It was last discussed on PrefBlog in a September post, BSD.PR.A: Globe & Mail Gets the Numbers Wrong.
Update, 2008-10-17: This is very odd. The Preferred Share NAV Page no longer exists on the Brookfield Funds website.