Category: Issue Comments

Global 45 Split Corp. has announced:

acceptance by the Toronto Stock Exchange (“TSX”) of the Company’s Notice of Intention to make a Normal Course Issuer Bid for its Preferred Shares and Class A Shares (collectively, the “Shares”).

Under this normal course issuer bid, the Company may purchase, from time to time, if it is considered advisable, up to 135,258 Preferred Shares and 135,258 Class A Shares, representing approximately 10% of the public float of the Shares, which is the same number as the Company’s issued and outstanding Shares, being 1,352,582 Preferred Shares and 1,352,582 Class A Shares as of the date hereof.
…
Under its previous normal course issuer bid, which commenced on July 5, 2007 and which expires on July 4, 2008, the Company has purchased and cancelled a total of 12,900 Preferred Shares and 12,900 Class A Shares at an average price of $10.5257 per Preferred Share and $14.7213 per Class A Share.

So … they did buy back some of their issue with the last bid, which plays a large role in my decision to post about the current bid. But don’t get too excited … according to First Asset, NAV as of June 26 was $22.14, while the TSX shows last trades of $12.25 for the capital units and $10.06 for the preferreds.

GFV.PR.A is not tracked by HIMIPref™.

Lawrence Asset Management has announced:

that 680,998 HI PREFS Series 1 Shares (TSX: HPF.PR.A) and 207,662 HI PREFS Series 2 Shares (TSX: HPF.PR.B) were submitted for the annual redemption on June 30, 2008. Subsequent to the annual redemption there are 410,956 Series 1 Shares issued and outstanding and 800,792 Series 2 Shares issued and outstanding.

The redemption proceeds will be paid to Series 1 and Series 2 shareholders who participated in the annual redemption on or before July 15, 2008. Series 1 shareholders will receive redemption proceeds of $25.00 per Series 1 Share submitted for redemption and Series 2 shareholders will receive redemption proceeds of $11.11 per Series 2 Share submitted for redemption.

This is very curious. The prospectus states:

The Series 1 Shares, Series 2 Shares and Equity Shares are offered separately, but will be issued only on the basis that there will be an equal number of Series 1 Shares, Series 2 Shares and Equity Shares issued.

… but note the word “issued”. The section titled “Redemption” is more forthcoming:

In the event that any Series 1 Shares, Series 2 Shares or Equity Shares are tendered for redemption on a Redemption Date, the Company will purchase in the market for cancellation Series 1 Shares, Series 2 Shares and/or Equity Shares, as applicable, (or if the Equity Shares are not traded on a public market, redeem Equity Shares at an amount per share equal to the greater of the Net Asset Value per Equity Share and $3.54) in order that, to the extent practicable, the ratio of outstanding securities of each class remains constant.

… but note the phrase “to the extent practicable”.

Want to figure this one out? Why not try listening to the conference call previously mocked on PrefBlog?

Their fund page states:

On June 30, 2008, HI PREFS has its annual redemption feature. To listen to the replay of a conference call hosted by the Manager discussing the upcoming redemption please call 416-695-5800 / 1-800-408-3053, passcode 3262786.

Calling either number provided and tapping in the passcode results in a message that the passcode is invalid.

I’ve asked it before … I’ll ask it again: Is there anything about this issue that is not wierd?

Thank heavens that HPF.PR.A is finally out of the HIMIPref™ index. I never liked it … it was there only because volume was sufficient and DBRS insists it’s still investment grade despite the dividend default. With roughly two-thirds of the issue now having retracted, I can only hope that it continues to be eliminated from consideration due to volume concerns.

Update: See also entries for HPF.PR.A and HPF.PR.B

DBRS has announced that it:

has today downgraded the Preferred Shares issued by GlobalBanc Advantaged 8 Split Corp. (the Company) to Pfd-5, with a Stable trend, from Pfd-4 (high).

In June 2007, the Company raised gross proceeds of $54 million by issuing 2.7 million Preferred Shares (at $10 each) and an equal amount 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 Capital Shareholders have received a total of $0.0485 per share, a return of less than 0.5% of the initial share price.

Based on the most recent dividends paid by its underlying companies, the Bank Portfolio can generate enough yield to pay the fixed preferred distributions and other annual expenses. However, changes in dividend policy by any of the banks included in the Bank Portfolio could cause a potential grind on the net asset value (NAV).

Since inception, the NAV has dropped from about $19 to $9.70 (as of June 30, 2008), a decline of nearly 50%. Since the NAV is currently below the $10 principal value of the Preferred Shares, the holders of the Preferred Shares would experience a loss of 3% of their initial investment if the portfolio were to be liquidated and proceeds distributed. The decline in NAV can be attributed to the Bank Portfolio’s 100% concentration in the international banking industry, as well as its exposure to those banks that have experienced credit writedowns during the past year.

The downgrade of the Preferred Shares is primarily based on the lower level of asset coverage available to cover the Preferred Shares principal.

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

This follows a downgrade to Pfd-4(high) on April 17. Anybody feeling like swearing at the Credit Rating Agencies? It was rated Pfd-2 until January 17, 2008 … that’s fast, eh? Pfd-2 (reasonable investment grade) to Pfd-5 (deep junk) in less than six months. Even the sternest critics will agree, I’m sure that losing half your money in a year while invested in …

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

… is a tad unusual. If there is such a thing, I wonder how “GlobalBanc Disadvantaged 8 Split Corp.” is doing!

GBA.PR.A is not tracked by HIMIPref™.

Update: The company has stated:

Current Net Asset Value (“NAV”) per Unit is $9.70, comprised of $9.70 per Preferred Share and $0.00 per Class A Share. Since the NAV per Unit is currently below the $10 principal value of the Preferred Shares, the holders of the Preferred Shares would receive less than $10 if the portfolio were to be liquidated and proceeds distributed as at today’s date. Based on the most recent dividends paid by the underlying companies, the Bank Portfolio currently generates enough yield to pay the fixed cumulative quarterly preferred dividends in the amount of $0.1125 per Preferred Share and the expenses of the Company. However, future changes in dividend policy by any of the banks included in the Bank Portfolio, among other things, may require the Company to further reduce NAV per Unit in order to sustain the dividend on the Preferred Shares. The redemption price payable for each Preferred Share outstanding on December 15, 2012 (the final redemption date) is equal to the lesser of: (i) $10.00 plus accrued and unpaid distributions; and (ii) the NAV per Preferred Share on that date.

This press release is not yet available on the company’s website.

DBRS has announced that it:

has today downgraded the Preferred Shares issued by Copernican World Banks Split Corp. (the Company) to Pfd-5, with a Negative trend, from Pfd-3 (low).

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 amount 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.

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 $15.00 after giving effect to such distributions. Since the Company’s NAV has decreased below $15.00, distributions to the Class A Shares are currently suspended, which greatly reduces the grind on the Portfolio going forward. The Company is currently required to generate a return of approximately 3% from sources other than dividend income to maintain a stable NAV. The required return will vary based on fluctuations in the Portfolio’s NAV and changes in the dividend policies of the World Banks.

The credit quality of the Portfolio is strong and globally diversified, but the NAV of the Portfolio has experienced downward pressure due to its concentration in the financial industry. Since inception, the NAV has dropped from $20 to $10.39 (as of June 30, 2008), a decline of 48%. As a result, the current downside protection available to the Preferred Shareholders is approximately 4%.

The downgrade of the Preferred Shares is primarily based on the greatly reduced asset coverage available to cover repayment of the Preferred Shares principal. The Negative rating trend is due to the additional return required to avoid further deterioration in the Company NAV.

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

This follows a downgrade to Pfd-3(low) on April 17. 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-4 (low), with a Negative trend, from Pfd-3.

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 amount 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 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.

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. Furthermore, the Company cannot make special distributions to the Class A Shares if the NAV drops to less than $20 unless the distribution is required to eliminate tax on net capital gains. Since the Company’s NAV has decreased below $16.50, distributions to the Class A Shares are currently suspended, which greatly reduces the grind on the Portfolio going forward. The Company is currently required to generate a return of approximately 2% from sources other than dividend income to maintain a stable NAV. The required return will vary based on fluctuations in the Portfolio’s NAV and changes in the dividend policies of the IFS.

The credit quality of the Portfolio is strong and globally diversified, but the NAV of the Portfolio has experienced downward pressure due to its concentration in the global financial industry. Since inception, the NAV has dropped from $20 to $11.20 (as of June 30, 2008), a decline of 44%. As a result, the current downside protection available to the Preferred Shareholders is approximately 11%.

The downgrade of the Preferred Shares is primarily based on the greatly reduced asset coverage available to cover repayment of the Preferred Shares principal. The Negative rating trend is due to the additional return required to avoid further deterioration in the Company NAV.

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

This follows a downgrade to Pfd-3 on April 17. CIR.PR.A is not tracked by HIMIPref™.

I have been posting a lot lately about how horrible June has been for preferred shareholders – see, for example, Party Like it’s 1999!, New Trough for Preferreds? and Market Timing?. And I will be posting more! Without wishing to rub salt into the wounds of other preferred share investors, this month has been very interesting from an academic perspective … but for now, the table of best and worst performers in June is a sufficient tale of woe.

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 doing a little playing around … and thinking of today’s market commentary … and I thought I’d post a few graphs regarding these two issues, taking data from the last approximate trough of November 30, 2007 until now.

• Pre-Tax Bid-YTW
• YTW difference
• Disparity [Pre-Tax]
• Disparity Difference [Pre-Tax]

“Disparity” is a proprietary HIMIPref™ measure of rich/cheap. It is not the same thing as valuation … but it is very influential in this calculation. It should be noted that in the above graphs, the disparity is calculated according to the pre-tax yield curve, which I never use for valuation purposes. So caveat lector … just enjoy the trends!

Update: See also previous post for RY.PR.F.

Quebecor World has announced:

on or prior to June 27, 2008, it received notices in respect of 744,124 of its remaining 2,507,153 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).

In accordance with the provisions governing the Series 5 Preferred Shares, registered holders of such shares are entitled to convert all or any number of their Series 5 Preferred Shares into a number of Subordinate Voting Shares effective as of September 1, 2008 (the “Conversion Date”), provided such holders gave notice of their intention to convert at least 65 days prior to the Conversion Date. The Series 5 Preferred Shares are convertible into that number of the Company’s Subordinate Voting Shares determined by dividing Cdn$25.00 together with all accrued and unpaid dividends on such shares up to August 31, 2008 by the greater of (i) Cdn$2.00 and (ii) 95% of the weighted average trading price of the Series 5 Preferred Shares on the Toronto Stock Exchange during the period of twenty trading days ending on August 28, 2008.

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 December 1, 2008, and notices of conversion in respect thereof must be deposited with the Company’s transfer agent, Computershare Investor Services Inc., on or before September 26, 2008.

This continuing conversion shows the value (to the company, and to the existing common shareholders) of the use of a minimum price to avoid ‘death spiral’ conversion. The last price of IQW.PR.C is $1.65; the last price of the IQW is $0.185 … but the face value ($25.00) plus accumulated dividends of IQW.PR.C is used as the numerator in the conversion, with the minimum of $2.00 per common share used as the denominator. In the last conversion, the ratio was 13.146875 common per preferred converted.

Update: See also previous post for IQW.PR.C.

Brookfield Asset Management has announced:

the completion of its previously-announced Class A Series 21 preference share issue in the amount of C$150 million.

Brookfield Asset Management Inc. issued 6 million Cumulative Class A Preference Shares, Series 21, at a price of C$25 per share with a yield of 5.00% per annum. The net proceeds will be utilized for general corporate purposes. The Series 21 Preference Shares will commence trading on the Toronto Stock Exchange on June 25, 2008 under the symbol BAM.PR.O.

They had to announce it, otherwise nobody would have noticed: the new issue traded 4,250 shares today, all at 24.50, closing at 24.50-55, 1×10. There were seven trades in the most sluggish opening day since … er … the last one.

Mind you, the issue itself isn’t all that terrible. Comparables are:

The issue suffered through its timing, having been announced on June 16 during the Swoon in June.

This post arises from inquiries I made subsequent to their debenture issue.

CU Inc. is a wholly owned subsidiary of Canadian Utilities Limited and in turn controls several operating utilities of its own.

Consolidated financial statements therefore bring with them a certain amount of confusion when considering their two series of preferred shares.

The “Series Preferred Shares” currently have only one series outstanding, which is CIU.PR.A. There also exist the “Series Second Preferred Shares”, of which Series U and Series V are outstanding.

Bearing in mind the language from the CIU.PR.A prospectus (bolding added):

In the event of the liquidation, dissolution or winding up of the Corporation, or other distribution of assets of the Corporation among its shareholders for the purpose of winding-up its affairs, the holders of the Series 1 Preferred Shares shall be entitled to receive the amount paid up on such shares together with all accrued and unpaid cumulative preferential dividends thereon and, if such liquidation, dissolution, winding-up or distribution is voluntary, a premium of $1.00 per share if such event commences prior to June 1, 2009, and, if such event commences thereafter, a premium equivalent to the premium payable on redemption if such shares were to be redeemed at the date of commencement of any such voluntary liquidation, dissolution, winding-up or distribution, before any amount shall be paid or any property or assets of the Corporation shall be distributed to the holders of any Class A non-voting shares or Class B common shares or other shares ranking junior to the Series 1 Preferred Shares. After payment to the holders of the Series 1 Preferred Shares of the amounts so payable to them, they shall not be entitled to share in any further distribution of the property or assets of the Corporation.

It seems reasonable to ask: are the “Series Second Preferred Shares” junior, senior or parri passu with the Series 1 Preferred Shares?

It turns out – as is not made clear in any financial statements or prospectus that I’ve been able to find – that the “Series Second Preferred Shares” are actually issued by CU Inc.’s subsidiaries and are held by Canadian Utilities (the parent). So what happens if disaster strikes? It’s something of a persnicketty question to be asking of a utility holding company, to be sure … but disaster can strike at any time and as fixed income investors, we seek to ensure it strikes somebody else.

I have been unable to determine just which of CU Inc’s subsidiaries have issued the “Series Second”, so let’s analyze this generically – assume that CU Inc holds all the common equity in SubPref and SubPlain. Canadian Utilities (“Parent”) owns all the common of CU Inc, and all the preferreds issued by SubPref. We – public preferred share holders – hold all the preferreds issued by CU Inc. Let’s look at some scenarios.

CU Inc dragged down by bankruptcy of SubPref: All the common equity in SubPref has been lost; there is only enough to cover SubPrefs Preferreds. Parent gets paid off for its preferreds; CU Inc gets nothing; it is conceivable that CIU.PR.A holders get nothing. In this case, we may regard the SubPref Preferreds to be at least parri passu and possibly senior to CIU.PR.A

CU Inc dragged down by bankruptcy of SubPlain: All the common equity in SubPlain is gone; this loss could be enough to wipe out CU Inc’s common and Preferred equity, as the value of the SubPref equity is just enough to cover CU Inc’s senior debt. However, Parent still has an interest in the SubPref preferreds. Again, the Series Second is at least parri passu and possibly senior to CIU.PR.A

Even worse bankruptcy of SubPref: All the common AND all the preferred equity of SubPref is wiped out, but SubPlain has enough equity to pay off CIU.PR.A. In this scenario, anyway, CIU.PR.A is at least parri passu and possibly senior to “Series Second”.

So, we look at this … the first two scenarios, at a glance, look more believable than the third, in the absence of any numbers, anyway. In any event, given the absence of deconsolidated statements, we have to believe that the first two scenarios are possible … and since these are the worst-case scenarios, gloomy fixed income investors such as ourselves will assume they’re likely.

Therefore, I suggest that anybody constructing a table of asset coverage ratios for operating company preferreds should assume that CIU.PR.A is junior to “Series Second” and therefore is protected only by the common equity buffer. Drat! The coverage would have been 10% higher if we had comfort that they were, in fact, senior.

This assumption of Junior status can be contradicted at any time that Atco / Canadian Utilities / CU Inc. chooses to make deconsolidated statements available. However, what puzzles me is the question of why this situation exists in the first place. Why is Canadian Utilities Inc. insisting on holding a claim in ultimate subsidiaries that is senior to the claim of an intermediate subsidiary? It doesn’t show a lot of confidence in the viability of the ultimate subsidiaries, and leaves investors in the intermediate subsidiary with the possibility that they will be left holding the baby.

It may be a regulatory thing … it may be a tax thing. The company does not see fit to address the issue.

Please note! This is Finance Geek stuff! CU Inc is rated Pfd-2(high) by DBRS and P-2(high) by S&P and I have no quarrels with these ratings … although I would like to see some of that material non-public information that the company may selectively disclose to these agencies to assist them to a favourable conclusion.

Update: See also previous post for CIU.PR.A