Category: Issue Comments

Remember the old days, when retractible issues yielded less than perpetuals? That inspired one of my first articles, in which I examined the question of just how bad things had to get before the tortoise outpaced the hare.

And, Assiduous Readers will recall, BNA.PR.C often exhibits puzzling behavior.

These two concepts have now met, with (at the closing bid) BNA.PR.C priced below BAM.PR.N.

BNA.PR.C yields 9.37%, based on a bid of 16.83 and a hardMaturity 2019-1-10 at 25.00, while BAM.PR.N yields 7.13% based on a bid of 17.00 and a limitMaturity. The former issue is a split share based solely on BAM.A, with asset coverage of 3.3+:1 as of July 31, according to the company. As of March 31, 2008, there were 19,032,000 Units outstanding, each unit comprised of one capital share and one preferred share – each series of preferreds has a $25 liquidation value. The company owns 46,161,000 shares of BAM.A, so the BAM.A:Unit ratio is 2.4:1, so at today’s closing price of $31.52, asset coverage is a hair over 3.0:1. Give or take.

Now, one thing that makes the BNA issues intrinsically fascinating is the fact that they are so well covered by a relatively poor credit. I wish I could be as poor a credit as Brookfield, at Pfd-2(low) according to DBRS, but it’s still worse than the banks! This means that the credit rating of BNA is constrained by the rating of the BAM prefs – which makes all kinds of sense. As a rough approximation – for conceptual purposes only – we can say that BNA prefholders get hurt when the common is below $10, while the BAM prefholders get hurt when the common is below $0.

Anyway, the upshot is:

• the BNA prefs may be thought of as being junior to the BAM prefs, but
• the BNA prefs have a fixed maturity date, while the BAM perps are … perps

I invite criticism on this point, but I suggest that the two influences cancel out, leaving credit quality of the two issues approximately equal for investment purposes.

But the spread between these issues has varied all over the place:

• Yield-to-Worst
• Spread

The wideness of the current spread really is most peculiar. The fund has recently swapped its BAM.PR.N holding for BNA.PR.C … we shall see how well it works out!

Update, 2008-09-06: BAM.PR.N was recently affirmed at Pfd-2(low) by DBRS.

Trading in CXC.PR.A was halted at 9:40am today on pending news; trading resumed at 10:30am.

The cause for the halt was “pending news” – CI Financial has announced:

At the request of the Investment Industry Regulatory Organization of Canada, on behalf of the Toronto Stock Exchange, CI Financial Income Fund (“CI”) today confirmed that over the past several months, CI has had discussions with a number of parties concerning possible strategic combinations involving CI and its subsidiaries. At the present time, there is no certainty that any transaction will be completed. As per company policy, CI will not comment further on rumours and speculation.

Amazing timing! There’s a story on Bloomberg today about what a lousy time it is to sell asset managers:

Their timing couldn’t be worse as prices for fund companies have fallen to the lowest in six years.
…
The market’s weakness can be measured by the ratio of stock prices to earnings of publicly traded asset managers such as BlackRock Inc. and Legg Mason Inc. A basket of 50 companies worldwide traded at an average of 11 times earnings in the second quarter, meaning investors were willing to pay $11 for each $1 of operating profit. That’s down from 17.7 times in the second quarter of 2003, according to data compiled by the Putnam Lovell unit of New York-based Jefferies Group Inc.

It’s the lowest valuation for the group since 2002, driven by a 17 percent decline in world stock prices since Jan. 1, as tracked by the MSCI World Index. Also dragging prices lower has been a selloff of publicly traded hedge funds, buyout firms and managers based outside of the U.S.

CIX recently announced:

Net income (adjusted for equity-based compensation) for the quarter ended June 30, 2008 was $135.8 million, down 11% from the three-month period ended June 30, 2007. On a per unit basis, adjusted earnings for the quarter were $0.49, down from $0.54 per unit for the three months ended June 30, 2007.

CIX.UN closed today at 22.11, up $1.14. The 52-week high/low is 28.49 / 19.20.

CXC.PR.A had asset coverage of 1.7+:1 as of August 21, according to CI Investments.

CXC.PR.A is not tracked by HIMIPref™

C.A.Bancorp has announced:

a change to the exercise price of the warrants being offered under a preliminary prospectus dated July 21, 2008.
…
Each Warrant will entitle the holder to purchase one Preferred Share at a subscription price of $23.75 at any time on or before 4:00 p.m. (Toronto time) on September 30, 2011. Previously, as filed in the preliminary prospectus, the subscription price was set at $24.50. The revised subscription price will be changed to $23.75 upon filing of the final prospectus.

The offering has been previously noted on PrefBlog. It would appear that they’re having a little difficulty selling it!

DBRS has announced that it:

has today discontinued its ratings coverage of Quebecor World Inc. (Quebecor World).

Quebecor World’s North American subsidiaries have been operating under the Companies’ Creditors Arrangement Act in Canada and under Chapter 11 of the United States Bankruptcy Code in the United States since January 21, 2008.

Short and sweet, eh? S&P withdrew their ratings on June 10. Moody’s withdrew theirs on February 6.

Quebecor World was last mentioned on PrefBlog in connection with the continuing conversion of IQW.PR.C to common.

JovFunds Management Inc. has announced:

at the special meeting of the preferred shareholders of Charterhouse held today, preferred shareholders voted:

a. Against a proposed resolution to approve an amendment of the articles of incorporation of Charterhouse to permit Charterhouse to redeem all outstanding preferred shares on a merger of Charterhouse into the Fairway Diversified Income and Growth Trust; and

b. For a proposed resolution to approve an amendment to the articles of incorporation of Charterhouse to permit the Corporation to redeem all outstanding preferred shares prior the scheduled redemption date. [sic]

The meeting was previously discussed on PrefBlog.

Morgan Meighan has announced that:

Canadian General Investments, Limited (the “Company”) today announced that it has provided notice to holders of its $60,000,000 5.40% Cumulative Redeemable Class A Preference Shares, Series 1 that the Company will redeem all of such Shares on October6, 2008 for the redemption price of $25.00 per share plus accrued and unpaid dividends (from and including the last scheduled dividend payment date, September15, 2008, to but excluding the date of redemption, and being in the amount of $0.07767 per share), less any required withholding tax.

This is the first date that the issue becomes retractible, according to the prospectus:

On and after October 5, 2008, Canadian General Investments, Limited (“CGI” or the “Corporation”) may, on not less than 30 nor more than 60 days’ notice, redeem for cash the Series 1 Shares in whole or in part, at the Corporation’s option, at $25.00 per share together with all accrued and unpaid dividends to the date of redemption. On and after October 5, 2003 the Corporation may, on not less than 30 nor more than 60 days’ notice redeem for cash all but not less than all of the Series 1 Shares upon payment of a redemption price equal to the higher of the Yield Price (as defined) and $25.00 per share together with accrued and unpaid dividends to the date of redemption. On and after October 5, 2008, the Series 1 Shares will be redeemable for cash, at the option of the holder, for $25.00 per share, plus accrued and unpaid dividends to the date of retraction.

CGI.PR.A is tracked by HIMIPref™. I consider it to be a SplitShare but it is in the “Scraps” index due to volume concerns.

Update: Morgan Meighan has issued a press release:

Canadian General Investments, Limited (the “Company”) today completed the previously announced redemption of its $60,000,000 5.40% Cumulative Redeemable Class A Preference Shares, Series 1. This redemption is in accordance with the terms of the governing short form prospectus. The aggregate amount of $60,186,480 (including accrued and unpaid dividends from September 15, 2008) was funded through the sale of portfolio securities.

… but the TMX website continues to report trading. I don’t know what the story on this one’s all about!

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.

… however, the previously scheduled end of the world was cancelled on July 17, and …

… so, after all the smoke has cleared …

Lawrence Asset Management has announced:

On July 31, 2008, holders of Preferred Shares are expected to be repaid $25.00 per Preferred Share from the proceeds of a forward agreement with Canadian Imperial Bank of Commerce. The Preferred Shares offer an attractive alternative to conventional preferred shares, bonds, money market and other income vehicles.

Equity Shares (TSX:PAY) On July 31, 2008, Equity Shareholders will receive the proceeds of the Managed Portfolio. Distributions to PAY holders were paid from the Fund’s inception to October 31, 2005. PAY does not currently have a distribution.

So the preferred shares will be paid in full; the equity shares will receive about $11.40, after having subscribed $20 in March 2002 … and, as noted by Lawrence Asset Management, not having received distributions for the past 2.75 years.

PAY.PR.A was last mentioned in February 2008.

C.A.Bancorp has announced:

that a preliminary prospectus had been filed with, and a receipt therefor issued by, the securities regulatory authorities in each of the provinces and territories of Canada.

The Corporation is offering (the “Offering”) units (the “Units”) at a price of $10.00 per Unit. Each Unit consists of one Class A Share and one warrant (a “Warrant”) to purchase one Series 1, Preferred Share (the “Preferred Shares”). Prospective purchasers may purchase Units by (i) cash payment, or (ii) an exchange (the “Exchange Option”) of eligible securities of certain issuers (“Issuers”) at the applicable exchange ratio. The Offering is for a minimum of 2,000,000 Units ($20,000,000) and a maximum of 10,000,000 Units ($100,000,000).
…
C.A. Bancorp Ltd. (the “Manager”) views the Preferred Shares as a form of financial leverage to the Class A Shares as the Preferred Shares have a fixed term, fixed cash distributions and fixed maturity value.

The Manager uses the maturity value of the Preferred Shares issued and outstanding and compares that to the tangible net book value of the Class A Shares issued and outstanding as a measure of debt (the Preferred Shares) to equity (the Class A Shares) ratio of the Corporation (the “Leverage Ratio”). As at June 30, 2008, the Leverage Ratio was 8.8 to 1.
…
Each Warrant will entitle the holder to purchase one Preferred Share at a subscription price of $24.50 at any time on or before 4:00 p.m. (Toronto time) on September 30, 2011.

Assiduous Readers will recall I hated this issue on announcement. At issue, the Leverage Ratio was about 8:1, so it would appear that so far in their short history, they’ve lost money … but this is just a guess, since their investment update, while lauding many attractive features of the fund, does not go so far as to provide even an estimated mark-to-market of the fund’s value. Fortunately, however, there is a prospectus for this capital raise on SEDAR (search the last six months for “Bancorp”):

EARNINGS COVERAGE RATIOS

The Preferred Shares’ distribution (interest) requirements, after giving effect of the issuance of Preferred Shares through the exercise of the maximum number of Warrants offered under this Offering would have been $19,473,273 per annum. The Corporation had a loss before interest of $1,870,240 (annualized from $666,113 for the 130 days ended June 30, 2008). An increase of $24,573,439 per annum in earnings would be necessary to produce an earnings coverage ratio of one to one for the annualized period ended June 30, 2008 which would have required a yield of 7.32% on any net proceeds received on a maximum Offering of Class A Shares and full exercise of all Warrants distributed under the Offering.

Well, it’s all very interesting, but I won’t be looking at this further. It’s a wonderful idea for a company, but I have great difficulty envisaging the preferred shares as investment grade. Mind you, RF.PR.A is currently quoted at 20.51-50, 4×1, so those with an appetite for junk might be interested.

Following the shareholder approval of the term extension, DBRS:

has today placed the rating of the Preferred Shares issued by Financial 15 Split Corp. (the Company) Under Review with Developing Implications.

An initial rating of Pfd-2 was assigned to the Preferred Shares in November 2003. The Preferred Shares had a scheduled final maturity date of December 1, 2008. On June 3, 2008, Quadravest Capital Management (the Manager) announced a proposal would be made to the Company’s shareholders to extend the mandatory termination date for the Company from December 1, 2008 to December 1, 2015.

On July 23, the Manager announced that the resolution to extend the final maturity was approved by the required percentage of Preferred Shareholders and Class A Shareholders. As a result of such developments, DBRS has placed the rating of the Preferred Shares Under Review with Developing Implications.

FTN.PR.A had an asset coverage of just under 1.7:1 as of July 15, according to the company, with the note:

As at the close on July 17, 2008, there have been material upward movements in the net asset values ranging from 10% to 25%.

Shall we guess? Based on the downgrade of WFS.PR.A and the downgrade of FFN.PR.A, I’d call it 50-50 between a rating of Pfd-2(low) and Pfd-3(high) once the review has been completed.