Category: Issue Comments

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).
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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.
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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.
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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.
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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™.

I previously reported an upcoming meeting of PFD.PR.A holders, but was unable to provide details.

JovFunds Management has announced:

that, further to the Press Release of September 12, 2008, the special meetings of the preferred shareholders of Charterhouse and unitholders of the Funds that will occur on October 20, 2008, are being held to consider the following proposals

• to Replace the Trustee with an Affiliate of the Trustee…
• Reduction in Quorum Size of the Funds…
• Eliminate the Termination Date for Deans Knight and Fairway Diversified…
• Authority to Convert Charterhouse to an Open-Ended Mutual Fund Trust…
• Authority to Suspend the Retraction of Preferred Shares…
• Authority to Amend the Declaration of Trust of Long Reserve in the Event that Long Reserve is Converted to an Open-Ended Mutual Fund…

See the actual press release for further details of these points.

PFD.PR.A is not tracked by HIMPref™.

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