Category: Issue Comments

U.S. Financial 15 Split Corp. has announced:

it has added PNC Bank to its 15 core holdings as a replacement to Lehman Brothers Holdings.

The weakening of the financial sector in U.S. markets has accelerated in recent weeks and has lead to dramatic losses in market value for many financial services companies in the United States and around the world. Unprecedented U.S. government intervention in the last two weeks has occurred in an attempt to stabilize markets and restore confidence in the credit markets.

PNC Bank is one of the largest financial services companies in the country with over $139 billion in assets and providing personal banking, wealth management, business banking and corporate and institutional services for organizations all over the world.

US Financial 15 invests in a high quality portfolio consisting of 15 U.S. financial services companies as follows: American Express, American International Group, Bank of America, Citigroup, Fifth Third Bancorp, The Goldman Sachs Group, J.P. Morgan Chase, Merrill Lynch, Morgan Stanley, PNC Bank, SunTrust Banks, U.S. Bancorp, Wachovia Corporation, Washington Mutual and Wells Fargo.

FTU.PR.A had asset coverage of just over 1.0:1 as of September 15, according to the company. It was last mentioned on PrefBlog when it had a very exciting time in mid-July and was (very briefly) reviewed in context in my article SplitShares and the Credit Crunch.

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.

BMO has announced:

that on November 25, 2008, it will redeem all of its Non-Cumulative Class B Preferred Shares Series 6. The redemption price, as provided for in the terms of the issue, is $25.00 per share.

Separately from the redemption price, the final quarterly dividend of $0.296875 per share for the Series 6 shares will be paid in the usual manner on November 25, 2008 to shareholders of record on October 31, 2008.

Formal notice will be issued to shareholders in accordance with the share conditions. The redemption of the Series 6 shares is part of the Bank’s ongoing management of its Tier 1 capital.

BMO.PR.I was added to the TXPR index in July 2007. The issue was discussed at length in November 2006. It is tracked by HIMIPref™ and (volume permitting, which is almost certain) will continue to be included in the Operating Retractible index until redemption.

WFS.PR.A is an interesting issue and the fund was long at the end of August (current position not disclosed). With nearly 12.8-million shares outstanding (par value $10), it’s one of the bigger issues included in the SplitShare index.

It’s currently quoted at 8.55-04, 6×10. Some trades have gone through today at 8.50. The capital units are quoted at 4.62-84, 10×4. It’s hard to get a big position in these things, but patience is a virtue.

As with many split-share corporations, the prospectus for WFS describes a monthly retraction feature:

Regular Retraction: Preferred Shares may be surrendered at any time for retraction by the Company but will be retracted only on a monthly Valuation Date (as defined below). Preferred Shares surrendered for retraction by a holder of Preferred Shares at least five (5) business days prior to the last day of the month (a ‘‘Valuation Date’’) will be retracted on such Valuation Date and such shareholder will receive payment on or before the eighth business day following such Valuation Date. Shareholders whose Preferred Shares are retracted on a Valuation Date will be entitled to receive a retraction price per share equal to 96% of the lesser of (i) the NAV per Unit determined as of the relevant Valuation Date less the cost to the Company of the purchase of a Class A Share in the market for cancellation; and (ii) $10.00. The cost of the purchase of a Class A Share will include the purchase price of the Class A Share, commission and such other costs, if any, related to the liquidation of any portion of the Portfolio required to fund such purchase. See ‘‘Details of the Offering — Certain Provisions of the Preferred Shares — Retraction Privileges.’’

These monthly retractions are, in normal times, of very little interest to preferred shareholders and are neither noted on PrefInfo nor accounted for by HIMIPref™. But these are not normal times.

According to Mulvihill the NAV for WFS as of September 11 was $15.93.

Given the quote on WFS, there’s a pretty good chance (but only a chance!) that a preferred shareholder tendering for monthly retraction would find that the company had purchased the matching capital unit for less than $5.93 and that he would therefore receive (96% of $10.00) less liquidation costs; call it $9.50. There are lots of them trading now for less than $9.00 … this wouldn’t be a bad return at all for two weeks work!

There are risks, of course. There are always risks.

• The NAV could decline precipituously between the Sep 11 valuation noted and the Valuation Date. I think that the Valuation Date will be September 23, but anybody trying this should check with the company
• The company might pay more than net-NAV to purchase the matching capital unit (though the last trade was about 24% less than net-NAV).

It should be noted that as of June 30, the fund’s portfolio was 23.1% cash. I do not know whether more recent information is available.

There are risks, to be sure. But some investors might calculate that the risk/reward profile of taking a position below $9.00 and tendering for monthly retraction is worthwhile.

I have not checked the mechanics of such a move. It might be too late to initiate this for the September Valuation Date, given settlement times and delivery times … but, perhaps, an investor with a position in WFS.PR.A that he likes might buy additional shares in the next few days and tender out of his extant holdings. Or, to look at things arsey-versey, if he has an investment in WFS.PR.A that he doesn’t like, there is the potential for tendering rather than selling.

An Assiduous Reader wrote in:

Hi James: I have been tracking your recommendations supplied through Cdn Moneysaver.
I know you had covered this interest bearing preferred and wondered if it is still on your recommended list.
I was especially concerned with the EPS of negative 3.51 on this stock.

Thank you for the Moneysaver articles’ and your educational blog site.

Negative 3.51? That doesn’t tie in with anything I remember! So I asked for the source:

this is the GlobeInvestor site I referenced…

http://www.globeinvestor.com/servlet/Page/document/v5/data/stock?id=BSD.PR.A-T&pi_sponsor=

Thank you.

And hey, looky looky! He’s right! It says right there: EPS -3.51. There’s even a graph:

This is very odd, and not just because I don’t understand how the x-axis of the graph is labelled. I don’t understand this -3.51 business at all … which seems to be tied in (somehow) with a gross loss of 23.96-million, except that I don’t really understand how they labelled their table, either.

When in doubt, go to source documents! On the fund’s report page are annuals and quarterlies to 2Q08. After poking around a while, we open the full annual report for 2007 … and there it is. A loss of 23.96-million. In 2006.

The Globe & Mail – or their data supplier – might wish to update their figures.

Incidentally, looking at the 2Q08 Report, we derive the following table:

Note that in addition to the $1,359 return of capital, the capital unitholders also got $1,505 from net investment income.

The important thing to take from the table, however, is that Income after fees & expenses, but before Preferred Share distributions was $5,200 – $805, or $4,395. Since preferred share distributions are $1,705, income coverage is about 2.6:1, a very good figure. It’s not just a fluke – the figure for 2007 was 2.8:1.

There’s no guarantees this will continue to be the case, especially since the fund has a heavy weighting in resources. But that’s an excellent figure for Income Coverage.

Asset coverage has been bruised over the past year, but remains at just under 1.5:1 as of September 12, according to the company. Besides the layer of capital protection, preferred shares are protected by a covenant that there will be no distributions to Capital Unit Holders if the asset coverage thereby becomes less than 1.4.

Bottom line? Check source documents and make up your own minds (or subscribe to PrefLetter!). At the close last night, BSD.PR.A was bid at 8.88 to yield 8.33% (mostly as interest) until hardMaturity 2015-3-31 at 10.00.

BSD.PR.A is tracked by HIMIPref™ and incorporated in the InterestBearing index.

DBRS has announced:

has today changed the trend for the B (low) Issuer Rating and Pfd-5 (low) preferred share ratings of Nortel Networks Limited, Nortel Networks Corporation, and Nortel Networks Capital Corporation (collectively, Nortel or the Company), to Stable from Positive.

The rating action follows Nortel’s announcement today that: (1) a sustained and expanding economic downturn will pressure the Company’s operating and financial performance, (2) the Company will undergo further restructuring and cost reduction initiatives, and (3) the Company intends to explore a divestiture of its Metro Ethernet Networks (MEN) business.

DBRS had placed Nortel on Positive trend in July 2008. At the time, DBRS expected the Company could reasonably grow revenue in the low single-digit range, achieve gross margins comfortably above 40%, and grow and sustain operating margins above 8% (see separate press release dated July 14, 2008). DBRS had expected Nortel’s Enterprise Solutions and MEN businesses to be the primary drivers of expected operating improvement.

In light of Nortel’s revised business outlook, DBRS expects that the time horizon in which the Company can comfortably achieve these operating metrics has extended beyond what may be reasonable for the trend to remain Positive. Despite expected improvements in the gross margins (which are expected to remain above 40% at the end of the year), DBRS now anticipates that revenue growth and operating margin improvements will fall well short of previous expectations.

For the full year of 2008, DBRS now expects Nortel’s revenue to decline by just under 4% on a year-over-year basis, to roughly $10.6 billion, and operating margins are expected to remain well below 8% at the end of the year. DBRS expects Nortel’s liquidity to deteriorate slightly from historic levels, with the Company’s overall cash position declining to roughly $2.7 billion at the end of 2008.

With respect to its MEN business, while the impact of a divestiture on the Company’s consolidated financial and business risk profiles may be moderate, DBRS notes that exiting this business will remove the Company from a higher-growth segment, expected to be a partial driver of the Company’s overall operating improvement.

DBRS expects the long-term trend to remain Stable until DBRS can gain comfort on: (1) the relative mix in terms of the competitive and economic forces affecting the Company’s ability to achieve its long-term financial targets, (2) the impact on the Company’s financial and business risk profiles following any divestiture of the Company’s MEN business, and (3) Nortel’s long-term strategy to achieve meaningful and sustainable operating improvements in an intensely competitive and challenging operating environment.

Nortel prefs got hammered today, but not as badly as the stock:

Nortel, based in Toronto, fell $2.62, or 49 percent, to $2.68 at 4 p.m. in New York Stock Exchange composite trading, the biggest decline since July 1980, according to Bloomberg data.

The stock price has led to suggestions that a takeover is in order:

“The most likely option is that it will be acquired, either before or after a financial crisis,” suggested Duncan Stewart, president of Duncan Stewart Asset Management.

Stewart added that a deal might come before third-quarter earnings are released.

These issues were last mentioned on PrefBlog on March 10 in connection with their price differential:

NTL.PR.F closed today at 11.40-59, 10×7

NTL.PR.G closed today at 10.00-48, 15×10

Today,

• NTL.PR.F : 6.75-00, 10×5
• NTL.PR.G : 6.75-00, 3×15

Brompton Group has announced it:

is proposing a meeting of YEARS Financial Trust (“YTU”) to consider the merger of YTU into Dividend Growth Split Corp. (“DGS”). The merger is being proposed to address the economic inefficiencies of operating a small investment fund like YTU and to provide investors with a high quality portfolio at a low cost. Due to its smaller size, YTU’s annual general and administration costs currently represent 0.66% of its net asset value and YTU is becoming too small to operate on its own.

DGS invests on an equally weighted basis in a portfolio of 20 large capitalization Canadian equities that have among the highest dividend growth rates on the TSX and utilizes a split share structure. Over 60% of DGS’s portfolio is invested in Canadian financial equities and it includes nine of the eleven equities currently held in YTU. In addition, Highstreet Asset Management, which acts as portfolio manager of YTU, invests DGS’s assets, rebalances its portfolio and selectively writes covered options to generate additional income for DGS. As such, the Manager considers DGS to be a similar investment to YTU.

DGS had $30-million in assets as of January 31, 2008, while YTU had $23-million as of August 31.

DGS.PR.A is not tracked by HIMIPref™. The issue was announced last November.

The new issue announced September 8 settled today. Oddly, the ticker symbol is RY.PR.I, although the issue is Series AJ. It’s a shame, because they have been doing so well with series AA through AH of keeping the series designation congruent with the ticker … no telling how many trading errors that will cause over the life of the issue! Well, it solidifies PrefInfo‘s status as a useful site, anyway!

Royal announced on September 8:

as a result of strong investor demand for its domestic public offering of Non-Cumulative, 5 year rate reset Preferred Shares Series AJ (the “Preferred Shares Series AJ”), the size of the offering has been increased to 14 million shares. The gross proceeds of the offering will now be $350 million. In addition, the bank has granted the Underwriters an option, exercisable in whole or in part, to purchase up to an additional 2 million Preferred Shares Series AJ at a price of $25 per share.

This was a significant increase, given that the original issue size was announced as 9-million shares (=$225-million) + greenshoe.

I see nothing on Royal’s website or on SEDAR regarding exercise or expiry of the greenshoe.

The issue traded 611,570 shares today in a range of 24.90-00. The closing quote was 24.95-98.

RY.PR.I is tracked by HIMIPref™. It has been added to the FixedReset Index.

There was a host of temporary trading halts and related announcements from CC&L Group today regarding their structured-note-derivative-preferreds.

Lehman’s bankruptcy announcement constitutes a credit event and brings them all a little bit closer to the brink … I will leave my Assiduous Readers to judge whether they are dangerously close to the brink or not, I’m not taking a view.

Connor, Clark & Lunn will host a conference call to discuss the implications of recent events on Tuesday September 16, 2008 at 9:00 AM EST. The conference call number is (416) 644-3415 or 1 (800) 733-7571 and the replay number is (416) 640-1917 or 1 (877) 289-8525. The pass code is 21283536#.

The previous post on these issues was RPA.PR.A / RPB.PR.A / RPQ.PR.A Hit by FannieFreddieFiasco. There is no prior PrefBlog post for PRF.PR.A.

None of these issues is tracked by HIMIPref™.

I recently had a contest about ACO.PR.A which has been won by Assiduous Reader adrian2.

The question was:

So: here’s the question … how might a rational investor reason that paying $27.00 for this issue has enough chance of at least a half-way decent return to make it worth while? This investor knows that the yield to worst is negative and that he’s taking a chance … why might he buy it anyway?

ACO.PR.A closed at 26.62-75 on Friday, so the situation isn’t quite as dramatic as it was when the bid was $27.00. However, the portfolio of possibilities for this issue on Friday, according to HIMIPref™ was:

Call 2008-12-31 YTM: -1.78 % [Restricted: -0.54 %] (Prob: 40.10 %)
Call 2009-12-31 YTM: 2.35 % [Restricted: 2.35 %] (Prob: 1.01 %)
Soft Maturity 2011-11-30 YTM: 3.68 % [Restricted: 3.68 %] (Prob: 58.89 %)

So the YTW was -1.78%.

Why would an investor pay such a rich price for the issue? Well, there was a hint of the answer buried in my article about retractible preferreds and bonds:

One may sometimes make a reasonable argument that YTW is not the most appropriate method of calculating yields. Say, for instance, that a company has the ability to issue preferreds that pay $1.25 p.a. and has an issue outstanding that pays $1.40 and is currently callable at $26.00, with this price declining by $0.25 annually for the next four years. If the issue is trading above $26.00, the YTW scenario will almost certainly be an immediate call. However, since the company can save $0.25 by delaying redemption, the net cost to the company of leaving the shares outstanding for another year is the dividend less the saving, or $1.15 (during the declining call-price period). Since this is less than the rate it would pay on a new issue, the company may well prefer to wait.

The question of what to believe is a complex question—complex enough, in fact, that I am currently devoting a great deal of time to researching the matter. Most investors will be well advised to rely on YTW.

In other words, Atco (the issuer of ACO.PR.A) may look at the issue on 2008-12-1 and say – ‘well, this issue pays $1.4375 annually, or 5.75% of par (as dividends, which costs more than interest) … we’d better redeem.’

But according to the redemption schedule, they can save $0.50 off the redemption price every year by waiting! If we were going to analyze this precisely, we would look at the situation from their point of view as a loan of $26.00 which amortizes down to a $25.00 balloon payment on 2010-12-1 (the first date they can redeem at $25.00) via quarterly blended payments that include principal. But from a back-of-an-envelope, conceptual perspective, we can say that it’s a loan of $25.50 with an cost of $1.4375 dividend LESS the decrease of $0.50 in redemption price, for an all-in cost of $0.9375 … which comes to about 3.67%, a financing cost calculated to bring smiles to the most hardened CFO, even if it as expensive dividends.

These calculations will be incorporated into the next release of HIMIPref™ – yes, I am working on it, albeit slowly – as “Yield to Issuer Best”. To select YTIB from the table of possibilities, I will be determining the disparity of each redemption option from the yield curve – that is, cash flows for the instrument will be discounted by the self-consistent yield curve to arrive at a net present value for each option. The lowest NPV will determine the YTIB. I do not know, at this point, how influential in the valuation YTIB will be relative to YTW … but hey, it’s worth looking at!

Incidentally, ACO.PR.A was added to the TXPR index in the last rebalancing, despite what might be considered to be relatively low average trading value (HIMIPref™ indicates $18,374 worth of shares daily, TMXMoney calculated 1,600 shares (the difference doesn’t bother me; HIMIPref™ is an adjusted exponential moving average; I believe that TMXMoney is an unadjusted rolling average, virtually guaranteed to show a higher result). A large part of ACO.PR.A’s current price may well be buying from indexers.

The following graphs regarding ACO.PR.A have been prepared and uploaded:

• Yield to Worst
• Average Volume
• Daily Volume