Category: Issue Comments

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:

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.

Fresh from silencing criticism of FTU.PR.A’s credit quality, Quadravest has issued an extraordinary press release:

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.
…
The impact of the broad based selling has adversely impacted the portfolios of Dividend 15 Split Corp. (“Dividend 15”) and Dividend 15 Split Corp. II (“Dividend 15 II”). The net asset values have declined by approximately 21% from August 31, 2008 to October 16, 2008.
…
The portfolio manager continues to view the underlying holdings of Dividend 15 and Dividend 15 II as among the lowest risk companies in Canada. When capital market liquidation slows or ceases and investors return to fundamentals of the underlying companies, we believe the portfolios will be fairly rewarded. High dividend yields, low valuations and significant option premiums available in the market place all bode well for the Dividend 15 and Dividend 15 II portfolios.

Normally it would be up to the brokers to shriek for calm … :

The Manager will pay the Service Fee to each dealer whose clients hold Class A Shares. The Service Fee will be calculated and paid at the end of each calendar quarter and will be equal to 0.50% annually of the value of the Class A Shares held by clients of the dealer. For these purposes, the value of a Class A Share is the Net Asset Value per Unit less $10.00. No Service Fee will be paid in any calendar quarter if regular dividends are not paid to holders of Class A Shares in respect of each month in such calendar quarter.

… but with the NAV down as much as it is, I guess 50bp doesn’t buy what it used to … especially if the dividends for the Class A shareholders are at risk:

No regular monthly dividends will be paid in any year on the Class A Shares so long as any dividends on the Preferred Shares are then in arrears or so long as the Net Asset Value per Unit is equal to or less than $15.00

Oddly, today’s press release did not contain NAV information, but applying the 21% figure to the August month end valuations for DFN and for DF we can derived the following table:

… so the numbers aren’t really all that bad … but with the recent preciptuous decline in the market price of the capital units:

… I suppose they had to do something!

DBRS has tersely announced that it:

has today discontinued its ratings on the Preferred Shares issued by US Financial 15 Split Corp. at the request of Quadravest Capital Management Inc. (the Promoter).

DBRS had downgraded the issue to Pfd-5 [Trend Negative] on September 30. The asset coverage at September 30 was just under 1.1:1 according to the company, but there have – ahem! – been further developments in the financial markets since then. S&P reports that the S&P 500 Financials were down 14.54% month-to-October 14, and I think it’s reasonably safe to say the figure is now worse than -20%. So say that NAV is now about $8.50.

One thing I find interesting about the issue is the monthly retraction:

Holders retracting a Preferred Share will be entitled to receive an amount per Preferred Share equal to the lesser of (i) $10.00; and (ii) 96% of the Net Asset Value per Unit determined as of the Retraction Date less the cost to the Company of the purchase of a Class A Share in the market for cancellation. Payment for any shares so retracted will be made within 15 days of the Retraction Date.

Unfortunately, hope is springing eternal for the capital unitholders – FTU closed at $2.65 today. The termination date is Dec. 1, 2012, so quick! What’s the fair value of a call option on US Financials currently worth $8.50, with strike price $10.00 and a four year term? Don’t forget the management fee grind! Whatever it is, I bet it’s less than $2.65!

FTU.PR.A closed at $5.50. Assuming the $8.50 NAV (an extremely approximate number, don’t anyone dare take market action without doing their own work!) then the preferred share monthly retraction price is (96% * $8.50) – $2.65 = about $5.50. It’s surprisingly close!

DBRS has announced that it:

has today downgraded the Class A Shares issued by Mulvihill Pro-AMS RSP Split Share Corp. (the Company) to D from Pfd-5.

After paying offering expenses and an initial contribution to a Class B Shares forward agreement, the net proceeds from the initial offering were invested in a diversified portfolio of Canadian and U.S. equities (the Managed Portfolio), providing asset coverage of approximately 1.8 times to the Class A Shares. In addition to providing principal protection for the Class A Shares, the Managed Portfolio has been used to make fixed cumulative monthly distributions to the Class A Shares equal to 6.5% per annum and to pay annual fees and expenses. In addition to this, the Company has been making semi-annual contributions of $0.43 per Class A Share from the Managed Portfolio to a forward agreement with the Counterparty for the repayment of the Class A Shares principal on December 31, 2013 (the Termination Date).

On September 3, 2008, the Company announced that distributions to the Class A Shares would be suspended subsequent to the September 2008 distribution payment in order to provide greater certainty to the repayment of principal.

The Managed Portfolio has declined more than 90% since inception. About one-third of the decline has resulted from the semi-annual contributions to the Class A Forward Account. Based on previous contributions to the Class A Forward Account, the Counterparty has guaranteed to repay 89.8% of the Class A Shares principal amount on the Termination Date. The current net asset value (NAV) of the Managed Portfolio is $1.48 (as of September 25, 2008), which is sufficient for the Company to contribute the remaining funds necessary to secure 100% of the principal amount on the Termination Date through the forward agreement. However, there is an additional $3.41 per Class A Share in cumulative dividends still to be paid at maturity. In order for the Company to repay full principal and cumulative dividends on the Termination Date, a return of 23% per year on the Managed Portfolio is required. Once Company expenses are taken into account, the return required to meet all Class A Shares principal and dividend obligations increases to more than 40% per year. Based on the foregoing, DBRS has downgraded the rating of the Class A Shares to D.

SPL.A was last mentioned on PrefBlog when it was downgraded to Pfd-5. SPL.A is tracked by HIMIPref™ and is included in the “Scraps” index – it would be SplitShare … but there are credit concerns!

Assiduous Readers will remember that I laid at least part of the blame for preferred shares’ appalling performance in October 2007 on forced-sales to meet retractions by DPS.UN:

Diversified Preferred Share Trust (fully described at www.sentryselect.com) is a closed-end preferred share fund trading on the Toronto Stock Exchange. In October, many of its shareholders decided that they’d had enough bad news for one year, thank you very much, and exercised their retraction rights over one-sixth of the portfolio holdings. And therefore, preferred shares worth $40-million hit the market on a “must-sell” basis.

Well … it’s October again! (very nearly)

On September 24, DPS.UN had a NAVPS of 19.64 and has gone ex-Dividend for $0.30.

We can estimate a total return for the intervening period of -1.24%, using figures for CPD ($16.63 on Sep 24, $16.21 on Sep 30, ex-Dividend of $0.2135).

With this in hand, we may estimate a NAVPS of $19.10 for DPS.UN as of the close Sep. 30. The market was 18.67-75, 10×8, last 18.67. At the bid, therefore, we can estimate a discount of 2.2%.

This is in the same region as the discount at this time last year … the discount later changed to around 4.5% at around October 10/11 and there were mass redemptions which – regardless of the actual effect on the market – created selling pressure in issues held by DPS.UN.

So … what’s going to happen this time? I don’t have any fearless predictions … does anybody?

DBRS has announced it:

has today downgraded the Preferred Shares issued by US Financial 15 Split Corp. (the Company) to Pfd-5 from Pfd-3, with a Negative trend.
…
Lehman Brothers Holdings Inc. (Lehman) and Washington Mutual, Inc. (WaMu) were two of the Portfolio’s core holdings…Also, American International Group, Inc. and Wachovia Corporation are two of the Portfolio’s core holdings.
…
As of September 15, 2008, the NAV of the Company was $10.33, declining about 50% over the past year. As a result, the downside protection available to the Preferred Shareholders is approximately 3%. The decrease in the capital protection available has resulted in a downgrade of the rating of the Preferred Shares. The revised rating is based on the downside protection available to holders of the Preferred Shares (3%) and the asset coverage test limiting distributions to the Class A Shares.

The main challenges to the rating are the following:

(1) The protection provided to holders of the Preferred Shares is dependent on the value of the common shares of the Portfolio.

(2) The volatility of price and changes in the dividend policies of the Portfolio Companies and potential erosion of the Portfolio under challenging market conditions may result in significant reductions in downside protection from time to time.

(3) The Portfolio is entirely concentrated in the US financials industry.

(4) There is a reliance on option writing to generate income.

(5) There is a risk of fluctuation in the NAV of the Portfolio due to unhedged U.S. currency exposure.

The trend is Negative due to the additional return required in order to maintain a stable NAV.

The redemption date for both classes of shares issued is December 1, 2012.

FTU.PR.A was last mentioned on PrefBlog in connection with LEH debacle. FTU.PR.A is tracked by HIMIPref™ and is a member of the “Scraps” index. It would be part of the “SplitShare” index, but there are credit concerns.

At this point, the prefs have basically full exposure to the portfolio and are effectively short a call at $10. On the other hand, they are currently quoted at 6.21-71 … so there is also a discount to NAV.

Update, 2008-9-30: The company is sufficiently alarmed that it has issued a portfolio update.

Global Credit Pref Corp has announced:

it received a credit event notice today from The Toronto-Dominion Bank with respect to Washington Mutual, Inc. as a result of that entity filing for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code with the United States Bankruptcy Court for the District of Delaware.

Global Credit Pref Corp. is a mutual fund corporation that issued 10-year redeemable, retractable cumulative preferred shares. The Company has exposure, by way of an equity forward sale agreement, to a structured credit linked note issued by The Toronto-Dominion Bank and held by Global Credit Trust, the return on which is currently linked to the credit performance of 125 reference entities, including Washington Mutual, Inc. (the “CLN Portfolio”).

The return on the credit linked note is linked to the number of defaults experienced over its term among the reference entities in the CLN Portfolio. The credit linked note has been structured so that it is unaffected by the first net losses on the CLN Portfolio up to 5.12% of the initial value of the CLN Portfolio (initially representing defaults by 11 reference entities in a CLN Portfolio comprised of 129 reference entities). The net loss on a reference entity that defaults is calculated as the percentage exposure in the CLN Portfolio to such reference entity reduced by a 40% fixed recovery rate. Following the credit event, the credit linked note will be able to withstand approximately 7 further credit events in the CLN Portfolio.

Global Credit Pref Corp.’s capacity to return $25.00 per preferred share on the scheduled redemption date of September 30, 2015 and the payment of quarterly fixed cumulative preferential distributions of $0.3281 per preferred share (a 5.25% yield on the original subscription price of $25.00 per preferred share) will not be affected by this credit event.

GPA.PR.A was last mentioned on PrefBlog in connection with the S&P Watch Negative after the Lehman event. There are 1.6+ million shares outstanding. GPA.PR.A is not tracked by HIMIPref™.

Quebecor World has announced:

that, on or prior to September 26, 2008, it received notices in respect of 66,601 of its remaining 1,763,029 issued and outstanding Series 5 Cumulative Redeemable First Preferred Shares (TSX: IQW.PR.C) (the “Series 5 Preferred Shares”) requesting conversion into the Company’s Subordinate Voting Shares (TSX: IQW).
…
The next conversion date on which registered holders of the Series 5 Preferred Shares will be entitled to convert all or any number of such shares into Subordinate Voting Shares is March 1, 2009, and notices of conversion in respect thereof must be deposited with the Company’s transfer agent, Computershare Investor Services Inc., on or before December 29, 2008.

There were 744,124 shares converted at the last opportunity.

IQW.PR.C is tracked by HIMIPref™. It is included in the “Scraps” index; it would normally be in the “Operating Retractible” index, but there are credit concerns.

Gatehouse Capital has announced:

it received credit event notices today from The Toronto-Dominion Bank with respect to Lehman Brothers Holdings Inc. as a result of that company filing a petition under Chapter 11 of the U.S. Bankruptcy Code with the United States Bankruptcy Court for the Southern District of New York, as well as with respect to the Federal National Mortgage Association as a result of the appointment of a conservator.
…
The return on the credit linked note is linked to the number of defaults experienced over its term among the reference entities in the CLN Portfolio. The credit linked note has been structured so that it is unaffected by the first net losses on the CLN Portfolio up to 5.12% of the initial value of the CLN Portfolio (initially representing defaults by 11 reference entities in a CLN Portfolio comprised of 129 reference entities). The net loss on a reference entity that defaults is calculated as the percentage exposure in the CLN Portfolio to such reference entity reduced by a 40% fixed recovery rate. Following the credit events, the credit linked note will be able to withstand approximately 8 further credit events in the CLN Portfolio.

and today comes the news that:

Standard & Poor’s Ratings Services placed the rating of Global Credit Pref Corp.’s P-4 rated Preferred Shares on CreditWatch with negative implications yesterday. The rating on the Preferred Shares of Global Credit Pref Corp. mirrors the B/ Watch Neg rating on the structured credit linked note issued by The Toronto-Dominion Bank and held by Global Credit Trust, to which Global Credit Pref Corp. has exposure, as a result of credit events relating to reference entities in the financial industry sector.

GPA.PR.A was last mentioned on PrefBlog when it was downgraded to P-4. There are 1.6+ million shares outstanding. GPA.PR.A is not tracked by HIMIPref™.

CC&L Group announced yesterday:

that Standard & Poor’s (“S&P”) placed its ratings on CC&L ROC’s Preferred Shares on CreditWatch with negative implications. S&P expects to resolve the CreditWatch placement within a period of 90 days and update its opinion. The Preferred Shares are currently rated P-2 (high).

The move comes as a result of the Lehman Brothers Holdings Inc. credit event announced on September 15, 2008 as well as several downgrades of companies held in the Reference Portfolio as a consequence of the ongoing extremely difficult conditions facing the United States financial system.
…
The Preferred Shares are listed for trading on the Toronto Stock Exchange under the symbol RPQ.PR.A.

There was another announcement that:

Standard & Poor’s (“S&P”) lowered its ratings on ROC III’s Preferred Shares from P-2 (low) to P-4 (high) and placed them on CreditWatch with negative implications. As indicated in a press release dated September 11, 2008, the ratings on the Preferred Shares were expected to be adversely affected by recent events. S&P expects to resolve the CreditWatch placement within a period of 90 days and update its opinion.

The move comes as a result of credit events in the Reference Portfolio, namely Lehman Brothers Holdings Inc., Fannie Mae and Freddie Mac, as well as several downgrades of companies held in the Reference Portfolio as a consequence of the ongoing extremely difficult conditions facing the United States financial system. CC&L and ROC III are reviewing and will explore the options, legal and otherwise, that are available to ROC III relating to the delivery of the credit event notices in respect of Fannie Mae and Freddie Mac.
…
The Preferred Shares are listed for trading on the Toronto Stock Exchange under the symbol RPB.PR.A.

And, just in time for the weekend comes today’s announcement:

that the closure of Washington Mutual (“WaMu”) by the Office of Thrift Supervision and naming of the Federal Deposit Insurance Corporation (“FDIC”) as receiver is expected to constitute a credit event under the Companies’ credit linked notes (“CLN”). TD Bank is the issuer of the CLN for ROC III and The Bank of Nova Scotia is the issuer of the CLN for CC&L ROC.

This credit event is a consequence of the ongoing extremely difficult conditions facing the United States financial system. Connor, Clark & Lunn is disappointed with the impact this crisis has had on the performance of the Companies and is reviewing strategic alternatives for the Companies.

The last post on these issues was in connection with the Lehman bankruptcy. Neither of these issues is tracked by HIMIPref™.