Category: Issue Comments

CC&L Group has announced:

the implementation of restructuring initiatives by Connor, Clark & Lunn Capital Markets Inc. (the “Manager”) and Connor, Clark & Lunn Investment Management Ltd. (the “Investment Manager”) which acts as investment manager to Credit Trust III. Credit Trust III owns the credit linked note issued by TD Bank to which the Company has exposure. The initiatives have been undertaken in order to increase the likelihood that the Company will be able to repay the $25.00 preferred share issue price at maturity.

In this regard:

1. The trading reserve account has been used to buy additional subordination in the credit linked note (additional subordination increases the “safety cushion” by increasing the number of defaults the reference portfolio can withstand before principal and interest payments on the note are adversely affected).

2. For the next three quarters the coupons on the credit linked note have been sold to TD Bank in exchange for additional subordination. As a result, dividends on the preferred shares of the Company have been suspended commencing with the December 31, 2008 dividend. Regular quarterly dividends are expected to be re-instated in respect of the quarter ending September 30, 2009. The manager will ask Standard & Poors to withdraw its rating on the preferred shares as the rating applies to the payment of all dividends.

3. The deferred management fee has been made available for the benefit of the preferred shareholders.

The following pay-off table is provided:

According to the company, there were 125 names in the portfolio as of September 30, of which 5 have defaulted. The non-defaulted issues have the credit distribution:

The NAV is $2.97 as of October 31. Interestingly, the prospectus includes the language:

Preferred Shares may be surrendered for retraction at any time but will be retracted only on the last day of the month (a ‘‘Valuation Date’’) commencing June 30, 2005. Preferred Shares surrendered for retraction by a Holder at least five (5) 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 $0.25. As this Preferred Share Retraction Price may be less than $25.00 and will vary depending on the net asset value at the time of retraction, the S&P rating of the Preferred Shares does not extend to the amount payable on a retraction. See ‘‘Details of the Offering — Certain Provisions of the Preferred Shares — Retraction’’ and ‘‘Details of the Offering — Suspension of Redemption or Retractions of Preferred Shares’’.

The issue’s closing quote today was 1.70-75, 3×87. The TSX reports 10.248-million shares currently outstanding, a slight decline from the 10.342-million shares outstanding as of June 30. Shares redeemed in the twelve months to June 2008 were 18,900.

I’m not aware of redemptions having been suspended … but anyone drooling at the arbitrage had better check!

RPB.PR.A is not tracked by HIMIPref™. It was last mentioned on PrefBlog in connection with the Fannie/Freddie Credit Event.

CIX Split Corp. has announced:

that it was precluded by the terms of the Class A Shares from declaring a dividend of $0.07 per Class A Share to holders of record as at November 15, 2008. According to the terms of the Class A Shares, a dividend cannot be paid 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. As of the close of business on November 5, 2008, the net asset value per unit was $13.53. A distribution of $0.04167 per Priority Equity Share payable on November 30, 2008 to shareholders of record as at November 15, 2008 will still be paid.

The Corporation’s Priority Equity Shares and Class A Shares are listed on the Toronto Stock Exchange under the symbol CXC.PR.A and CXC respectively.

CXC.PR.A was last mentioned on PrefBlog amidst rumours of a takeover of CI Financial, shares of which are the split corporations only portfolio investment.

CXC.PR.A is not tracked by HIMIPref™.

DBRS has announced that it:

has today downgraded the Preferred Shares issued by AIC Global Financial Split Corp. (the Company) to Pfd-5, with a Negative trend, from Pfd-2 (low). The rating has been removed from Under Review with Negative Implications, where it was placed on October 24, 2008.

In 2004, the Company issued 1.6 million Preferred Shares at $10 each and 1.6 million of Class A Shares at $15 each. The initial structure provided downside protection of approximately 58% (net of expenses).

The net proceeds from the offering were invested in a portfolio (the Portfolio) that included equity securities selected from leading bank-based, insurance-based and investment management based financial services companies with strong credit ratings. The Portfolio is actively managed by AIC Investment Services (the Manager) to invest in companies that have at least a US$1 billion market capitalization, and the weighted-average credit rating of the Portfolio will be at least equivalent to “A” at all times. To mitigate net asset value (NAV) volatility relating to foreign currency exchange fluctuation, it is expected that a minimum of 90% of all foreign content will be hedged back to Canadian dollars for the life of the transaction. The Manager also employs an option-writing strategy (covered calls and cash-covered puts) to generate additional income.

Holders of the Preferred Shares receive fixed cumulative quarterly dividends yielding 5.25% per annum. The Company aims to provide holders of the Class A Shares with monthly distributions targeted at 8.0% per annum. There is an asset coverage test in place that does not permit the Company to make monthly distributions to the Class A Shares if the dividends on the Preferred Shares are in arrears or if the NAV of the Portfolio is less than $15 after giving effect to such distributions. Consequently, Class A distributions were suspended in September 2008.

The NAV of the Portfolio has declined significantly since inception. On April 17, 2008, DBRS downgraded the Preferred Shares to Pfd-2 (low), when the downside protection available to the Preferred Shares was 46%. Since then, the NAV has declined from $18.45 to $9.93 (a 46% decrease). The Preferred Shares have lost all of their downside protection and consequently have a significantly higher probability of experiencing first-dollar loss.

After taking into consideration the suspension of the Class A distributions, the Portfolio currently requires a total annualized return of more than 7% for the remaining term of the Company (about 2.5 years) in order to pay all cumulative dividends and full principal with respect to the Preferred Shares on the final maturity date. These returns will need to be generated from dividend income, option writing or capital appreciation in the Portfolio’s holdings.

Given the high hurdle rate and the grind to the portfolio, DBRS has assigned a Negative trend to the rating of the Preferred Shares.

The redemption date for both classes of shares issued is May 31, 2011.

ASC.PR.A was reviewed as part of the Mass DBRS Review of Splits

ASC.PR.A is tracked by HIMIPref™. It was moved from the SplitShare subindex to “Scraps” at the April 2007 Rebalancing on volume concerns.

DBRS has announced that it:

today downgraded the Preferred Shares issued by Copernican World Banks Split Corp. (the Company) to Pfd-5 (low), with a Negative trend, from Pfd-5. The rating has been removed from Under Review with Negative Implications, where it was placed on October 24, 2008.

In November 2007, the Company raised gross proceeds of $96.1 million by issuing 4.805 million Preferred Shares (at $10 each) and an equal number of Class A Shares (at $10 each). The initial structure provided downside protection of 50% to the Preferred Shares as all issuance costs were paid by AIC Investment Services Inc. (the Manager).

The net proceeds from the offering were used to invest in a portfolio of common shares (the Portfolio) issued by bank-based financial institutions with strong credit quality (World Banks). The Portfolio is actively managed by the Manager to invest in World Banks that have at least a US$1 billion market capitalization and exhibit the potential for attractive dividend yields and strong earnings growth momentum. It is expected that a minimum of 80% of all foreign content will be hedged back to Canadian dollars at all times to mitigate net asset value (NAV) volatility relating to foreign currency exchange fluctuation. The Manager also employs an option-writing strategy (covered calls and cash-covered puts) to generate additional income.

Holders of the Preferred Shares receive fixed cumulative quarterly dividends yielding 5.25% per annum. The Company aims to provide holders of the Class A Shares with monthly distributions targeted at 8.0% per annum. There is an asset coverage test in place that does not permit the Company to make monthly distributions to the Class A Shares if the dividends on the Preferred Shares are in arrears or if the NAV of the Portfolio is less than $15 after giving effect to such distributions. As a result, distributions to the Class A Shares have been suspended since December 2007.

The NAV of the Portfolio has declined significantly since inception. On July 2, 2008, DBRS downgraded the Preferred Shares to Pfd-5 when the downside protection available to the Preferred Shares was 4%. Since then, the NAV has declined from $10.39 to $7.79 (a 25% decrease). As of October 31, 2008, holders of the Preferred Shares would have experienced a loss of approximately 22% of their initial issuance price if the Portfolio holdings had been liquidated and proceeds distributed. The Portfolio requires an annualized return of more than 13% for the remaining term of the Company (about five years) in order to pay all cumulative dividends and full principal with respect to the Preferred Shares on the final maturity date. These returns will need to be generated from dividend income, option writing or capital appreciation in the Portfolio’s holdings.

There is now a significant chance that holders of the Preferred Shares will experience losses. DBRS will not lower its rating to D until it becomes clear that losses are unavoidable. Since there are still five years remaining until final maturity, the Manager has sufficient time to generate the returns necessary for holders of the Preferred Shares to avoid experiencing first-dollar loss.

The redemption date for both classes of shares issued is December 2, 2013.

CBW.PR.A was reviewed as part of the DBRS Mass Review of Splits.

CBW.PR.A is not tracked by HIMIPref™.

DBRS has announced that it:

has today downgraded the Preferred Shares issued by Copernican International Financial Split Corp. (the Company) to Pfd-5 (low), with a Negative trend, from Pfd-4 (low). The rating has been removed from Under Review with Negative Implications, where it was placed on October 24, 2008.

In March and April of 2007, the Company raised gross proceeds of $158.4 million by issuing 7.92 million Preferred Shares (at $10 each) and an equal number of Class A Shares (at $10 each). The initial split share structure provided downside protection of 50% to the Preferred Shares as all issuance costs were paid by AIC Investment Services Inc. (the Manager).

The net proceeds from the offering were used to invest in a portfolio of common shares (the Portfolio) issued by international financial institutions (IFS) with strong credit quality. The Portfolio is actively managed by the Manager to invest in IFS that have at least a US$1 billion market capitalization and exhibit the potential for attractive dividend yields and strong earnings growth momentum. It is expected that a minimum of 80% of all foreign content will be hedged back to Canadian dollars at all times to mitigate net asset value (NAV) volatility relating to foreign currency exchange fluctuation. The Manager also employs an option-writing strategy (covered calls and cash-covered puts) to generate additional income.

Holders of the Preferred Shares receive fixed cumulative quarterly dividends yielding 5.0% per annum. The Company aims to provide holders of the Class A Shares with monthly distributions targeted at 8.0% per annum. There is an asset coverage test in place that does not permit the Company to make monthly distributions to the Class A Shares if the dividends on the Preferred Shares are in arrears or if the NAV of the Portfolio is less than $16.50 after giving effect to such distributions. As a result, distributions to the Class A Shares have been suspended since January 2008.

The NAV of the Portfolio has declined significantly since inception. On July 2, 2008, DBRS downgraded the Preferred Shares to Pfd-4 (low) when the downside protection available to the Preferred Shares was 11%. Since then, the NAV has declined from $11.20 to $7.24 (a 35% decrease). As of October 31, 2008, holders of the Preferred Shares would have experienced a loss of approximately 28% of their initial issuance price if the Portfolio holdings had been liquidated and proceeds distributed. The Portfolio requires an annualized return of more than 15% for the remaining term of the Company (about five years) in order to pay all cumulative dividends and full principal with respect to the Preferred Shares on the final maturity date. These returns will need to be generated from dividend income, option writing or capital appreciation in the Portfolio’s holdings.

There is now a significant chance that holders of the Preferred Shares will experience losses. DBRS will not lower its rating to D until it becomes clear that losses are unavoidable. Since there are still five years remaining until final maturity, the Manager has sufficient time to generate the returns necessary for holders of the Preferred Shares to avoid experiencing first-dollar loss.

The redemption date for both classes of shares issued is December 2, 2013.

CIR.PR.A was reviewed as part of the DBRS Mass Review of Splits.

CIR.PR.A is not tracked by HIMIPref™.

DBRS has announced:

has today downgraded the Preferred Shares issued by GlobalBanc Advantaged 8 Split Corp. (the Company) to Pfd-5 (low), with a Negative trend, from Pfd-5. The rating has been removed from Under Review with Negative Implications, where it was placed on October 24, 2008.

In June 2007, the Company raised gross proceeds of $54 million by issuing 2.7 million Preferred Shares (at $10 each) and an equal number of Class A Shares (at $10 each) to provide downside protection of approximately 47% to the Preferred Shares (after issuance costs).

The net proceeds from the initial offering were used to purchase a portfolio of Canadian securities that were pledged to the National Bank of Canada (the Counterparty) to enter a forward agreement (the Forward Agreement) in order to gain exposure to a portfolio of common shares (the Bank Portfolio) issued by eight of the world’s largest banks, Citigroup Inc., Bank of America Corp. (DE), Royal Bank of Scotland Group plc, UBS AG, Banco Santander Central Hispano S.A., BNP Paribas, Société Générale Group and Deutsche Bank AG.

Holders of the Preferred Shares receive fixed cumulative quarterly distributions equal to 4.5% per annum. The Company provides Class A Shareholders with distributions of capital gains when declared by the board of directors. Since inception, the Class A Shareholders have received a total of $0.0485 per share, a return of less than 0.5% of the initial share price.

The NAV of the Portfolio has declined sharply since inception. On July 2, 2008, DBRS downgraded the Preferred Shares to Pfd-5 when the NAV of the Preferred Shares was $9.70 (slightly below the par value of the Preferred Shares). Since then, the NAV has declined to $7.74 (a 20% decrease). As of November 3, 2008, holders of the Preferred Shares would have experienced a loss of approximately 23% of their initial issuance price if the Portfolio holdings had been liquidated and proceeds distributed. The Portfolio requires an annualized return of more than 11% for the remaining term of the Company (about four years) in order to pay all cumulative dividends and full principal with respect to the Preferred Shares on the final maturity date. These returns will need to be generated from dividend income and capital appreciation in the Portfolio’s holdings.

There is now a significant chance that holders of the Preferred Shares will experience losses. DBRS will not lower its rating to D until it becomes clear that losses are unavoidable. Since there are still four years remaining until final maturity, there is sufficient time for the Portfolio NAV to increase above the $10 Preferred Shares issuance price through capital appreciation.

The redemption date for both classes of shares issued is December 15, 2012.

GBA.PR.A was reviewed as part of the DBRS Mass Review of Splits.

GBA.PR.A is not tracked by HIMIPref™.

DBRS has announced:

has today downgraded the 5.5% Class I Cumulative Preferred Shares (the Class I Shares) issued by Split Yield Corporation (the Company) to Pfd-5, with a Negative trend, from Pfd-3. The rating has been removed from Under Review with Negative Implications, where it was placed on October 24, 2008. Also, DBRS has confirmed the rating of the 7.0% Class II Cumulative Preferred Shares (the Class II Shares) at D.

In April 1998, the Company issued $30.6 million of Class I Shares at $20 each, $23 million of Class II Shares at $15 each and $23 million of Capital Shares at $15 each. The net proceeds of the offering are invested in a portfolio (the Portfolio) of common shares of companies listed on one of two selected North American equity indices. The Portfolio provided initial downside protection of about 58% to the Class I Shares and 26% to the Class II Shares (after expenses). In December 2004, the final maturity date for all classes of shares was extended from February 1, 2006, to February 1, 2012 (the Termination Date), as a result of a resolution approved at a special shareholders’ meeting.

Quadravest Capital Management (the Manager) manages the Portfolio, generating income from dividends, covered-call option premiums and capital appreciation. The holders of the Class I Shares and the Class II Shares receive fixed, cumulative quarterly dividends yielding 5.50% and 7.00% per annum, respectively. The Class I Shares rank in priority to the Class II Shares with respect to the payment of dividends and repayment of capital on the Termination Date. On July 18, 2008, the Company announced that it would suspend its dividend payment for the Class II Shares for the quarter in order to preserve cash and to assist in rebuilding the net asset value (NAV) in an attempt to meet its long-term repayment objectives. The Class II Shares dividend was again suspended for the October 2008 payment. The suspension of the Class II Shares dividend benefits the Class I Shares by significantly reducing the hurdle rate required for the Manager to maintain a stable NAV.

The NAV of the Portfolio has declined significantly since inception. On January 7, 2008, DBRS downgraded the Class I Shares to Pfd-3 when the downside protection available was about 30%. Since then, the NAV has declined from $28.40 to $20.59 (a 27% decrease). As of October 31, 2008, the downside protection available to the Class I Shares is only 3%. The downgrade of the Class I Shares is primarily based on the reduced asset coverage available for the repayment of principal on the Termination Date.

Assuming the continued suspension of the Class II Shares distributions, the Portfolio still requires an annualized return of more than 7% from dividend income, option writing and/or capital appreciation in order to maintain a stable NAV. Given the high hurdle rate and the grind to the portfolio, DBRS has assigned a Negative trend to the rating of the Class I Shares.

This issue was part of the DBRS Mass Review of Split Corporations.

YLD.PR.A is tracked by HIMIPref™. It is included in the “Scraps” sub-index rather than “SplitShares” due to both volume and credit concerns.

Monday’s settlement of RY.PR.L provided one data point and here’s another … it looks like we may state fairly conclusively that the market is currently pricing the Fixed Reset issues as if the market price will be $25 at the time of the first call – whether that is due to a call or a reset of the dividend to a market comparable number.

The issue seems to have been well-received: I updated the issue announcement post with news that the greenshoe had been partially exercised.

The Royal Bank Fixed-Reset 5.60%+267 closed today, an event fraught with interest due to the question posed on October 28: “through or wide?”.

The problem, you see, is that the extant fixed-resets are all trading with a yield-to-five-year-call well in excess of the 5.60% dividend and simultaneously with a yield-to-limitMaturity well below the 5.60% dividend. Thus, if the market considers these issues to be five-years, the new Royal should trade at a discount to par; if it considers them to be perpetuals, at a premium. This is the first case where the initial fixed coupon and the subsequent resets were significantly enough different from extant issues to make such a comparison meaningful.

And the results are in! RY.PR.L traded 418,820 shares today and closed at 24.70-75. After accounting for underwriter support, we can draw a preliminary conclusion, based mainly on the fact that the issue trades at a discount to par: the market considers it to be a five year. Probably. The issues trade with less five year variance than perpetual variance but the results are not devoid of ambiguity … they never are! That’s what makes this fun!

We’ll get another data point on Wednesday, when the TD 5.60%+274 settles.

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.

Consider, for example, BBD.PR.B. It’s a ratchet-rate issue, paying a maximum of 100% of prime on its par value, minimum 50%. On October 31, DBRS confirmed Bombardier’s preferreds at Pfd-4. Since Brookfields floaters in the index, BAM.PR.B and BAM.PR.K, both pay 70% of prime on their par value, we can assume that, given equal credit quality, BBD.PR.B should trade at 100/70 = 1.43 times the price of BAM.PR.B/K (since a reduction in BBD.PR.B’s rate will occur only if it trades significantly above par, which does not appear too likely in the near future).

BBD.PR.B is quoted at 12.00-23, implying – roughly speaking – that if it paid 70% of prime it would be trading at 8.40. Compare that to BAM.PR.B/K, at 9.90-98 and 10.78-11.66, respectively – there is not much premium being paid for the difference between Pfd-2(low) and Pfd-4!

Compare also (as Mr. Nagel did) to TRI.PR.B: it’s also rated Pfd-2(low) and also pays 70% of prime, but is less liquid … and is quoted at 18.05-00!

I will suggest that the Street is trading the BAM issues as if their credit quality is significantly worse than it actually is.

If you like floaters, you’ll probably like the Brookfield issues – but remember! While Brookfield is a good name, it is not so good a name that it may be overweighted with abandon! Investing in Brookfield is a bet on their credit quality, the same way as investing in any fixed income issue is a bet on credit quality. Recognize that occasionally you’re going to be wrong and keep your bets small in order to give the statistics a chance to work.