Category: Issue Comments

DBRS has today:

downgraded the Preferred Shares issued by World Financial Split Corp. (the Company) to Pfd-2 (low) , with a Negative trend, from Pfd-2. The rating has been removed from Under Review with Developing Implications where it was placed on March 19, 2008.

In February 2004, the Company raised gross proceeds of approximately $471 million by issuing 18.85 million Preferred Shares at $10 each and an equal number of Class A Shares at $15 each. The net proceeds from the offering were invested in a portfolio of common shares (the Portfolio) that included the ten largest financial services companies by market capitalization in each of Canada, the United States and the rest of the world (only companies listed on a North American stock exchange). In addition, up to 20% of the net asset value (NAV) of the Company can be invested in financial services companies other than the 30 companies included in the Portfolio. The initial split share structure provided downside protection of approximately 57% to the Preferred Shares (after expenses).

The holders of the Preferred Shares receive fixed cumulative quarterly distributions equal to 5.25% per annum. The fixed distributions of dividends on the Preferred Shares are funded from the dividends received on the Portfolio Shares, with covered call option premium income and, if necessary, from the sale of the Portfolio’s shares. Holders of the Class A Shares receive regular quarterly cash dividends targeted to yield 8.0% per annum. The Company is currently required to generate a return of about 8% from sources other than dividend income in order to maintain a stable NAV. However, there is a NAV test that greatly mitigates this grind if the Portfolio value continues to deteriorate as no distributions will be paid to the Class A Shareholders if the asset coverage available to the holders of the Preferred Shares drops below 1.5 times (NAV of $15).

The Company’s NAV has experienced downward pressure over the past year, dropping from $22.48 per share to $16.56, a decline of 28%. The current downside protection available to the Preferred Shareholders is approximately 40% (as of June 12, 2008). The downgrade of the Preferred Shares is primarily based on the reduced level of asset coverage available to cover the Preferred Shares principal. The rating has a Negative trend due to the high hurdle rate currently required in order to avoid further deterioration in the NAV.

The redemption date for both classes of shares issued is June 30, 2011

The DBRS mass review of financial splits has been previously discussed. The issue was removed from the S&P/TSX Preferred Share Index effective December with all the other split-shares. WFS.PR.A is a member of the HIMIPref™ Split-Share Index.

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

DBRS has today:

downgraded the Class B Preferred Shares (the Preferred Shares) issued by 5Banc Split Inc. (the Company) to Pfd-2 (low), with a Stable trend, from Pfd-2. The rating has been removed from Under Review with Developing Implications where it was placed on March 19, 2008.

In December 2006 and January 2007, the Company raised gross proceeds of $282 million by issuing 14.1 million Preferred Shares at $10 each and an equal number of Capital Shares at $10 each. The net proceeds from the offering were invested in a portfolio of initially equally weighted common shares (the Portfolio) of the top five Canadian chartered banks: Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Royal Bank of Canada and The Toronto-Dominion Bank. The initial split share structure provided downside protection of approximately 48% to the Preferred Shares (after expenses).

The holders of the Preferred Shares receive fixed cumulative quarterly distributions equal to 4.75% per annum. The fixed distributions of dividends on the Preferred Shares are funded from the dividends received on the Portfolio and, if necessary, with proceeds from the sale of the Portfolio’s shares. The current yield on the Portfolio fully covers the Preferred Shares dividend, providing dividend coverage of approximately 1.3 times. Excess dividends net of all expenses of the Company are paid as dividends on the Capital Shares.

The Company’s net asset value (NAV) has experienced downward pressure over the past year, dropping from $19.35 per share to $15.87, a decline of 18%. The current downside protection available to the Preferred Shareholders is approximately 37% (as of June 19, 2008). The downgrade of the Preferred Shares is primarily based on the reduced level of asset coverage available to cover the Preferred Shares principal.

The redemption date for both classes of shares issued is December 15, 2011

The DBRS mass review of financial splits has been previously discussed. FBS.PR.B had a partial call for redemption in November, and was removed from the S&P/TSX Preferred Share Index with all the other split-share corporations at the last rebalancing. It is a included in the HIMIPref™ Split-Share Index.

Update: See also previous post for FBS.PR.B.

DBRS has today:

downgraded the Preferred Securities issued by Top 10 Split Trust (the Trust) to Pfd-3 (high) , with a Stable trend, from Pfd-2 (low). The rating has been removed from Under Review with Developing Implications where it was placed on March 19, 2008.

In February and March of 2006, the Trust raised gross proceeds of approximately $70 million by issuing 2.72 million Preferred Securities at $12.50 each and an equal number of Capital Units at $13.10 each. The net proceeds from the offering were invested in a portfolio of common shares (the Portfolio) that included the six largest Canadian chartered banks (Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada and The Toronto-Dominion Bank) and the four largest Canadian life insurance companies (Great-West Lifeco Inc., Industrial Alliance Insurance and Financial Services Inc., Manulife Financial Corporation and Sun Life Financial Inc.). The Portfolio is actively managed by Mulvihill Capital Management Inc., and the Trust will generally invest not less than 5% and not more than 15% of its assets in the securities of each issuer in the Portfolio. The initial split share structure provided downside protection of approximately 48% to the Preferred Securities (after expenses).

The holders of the Preferred Securities receive fixed quarterly distributions equal to 6.25% per annum. The interest payments on the Preferred Securities are funded from the dividends received from the Portfolio, covered call option premium income and, if necessary, with proceeds from the sale of the Portfolio’s shares. Holders of the Capital Units receive regular quarterly cash dividends targeted to yield 7.5% of the net asset value (NAV) of the Trust per annum. Basing the distributions on the NAV of the Trust reduces the hurdle rate for the Trust and its requirement to write more options in the event of a declining NAV. The Trust is currently required to generate a return of about 5% from sources other than dividend income in order to maintain a stable NAV.

The Trust’s NAV has experienced downward pressure over the past year, dropping from $23.87 per share to $19.61, a decline of about 18%. The current downside protection available to the Preferred Shareholders is approximately 36% (as of June 12, 2008). The downgrade of the Preferred Securities is primarily based on the reduced level of asset coverage available to cover the Preferred Securities principal.

The DBRS mass review of financial splits has been previously discussed. TXT.PR.A is not tracked by HIMIPref™.

The Fixed Reset 5.20%+165bp issue announced on June 12 settled today with good volume and tone. 308,269 shares traded in a range of 24.90-97, closing with a quote of 24.90-92, 14×230.

I have not yet seen a press release regarding the successful closing, which should also indicate how much, if any, of the greenshoe was taken up. There were 10-million shares in the issue, with a greenshoe for an additional 2-million shares exercisable prior to closing.

I still don’t like this issue structure … but with six of them now outstanding, it would appear that many people do! Once we get to ten good sized issues with this type of reset mechanism, I will commence tracking the issues with HIMIPref™ … and who knows, perhaps taking the occasional position when the yields get out of line!

Loblaw’s has announced:

the completion today of the sale of 9.0 million cumulative redeemable convertible Second Preferred Shares, Series A, to yield 5.95% per annum, to a syndicate of underwriters co-led by RBC Dominion Securities Inc. and CIBC World Markets Inc. for distribution to the public. The aggregate gross proceeds of the sale were $225 million. The Preferred Shares, Series A have been listed and posted to trade on the Toronto Stock Exchange under the symbol “L.PR.A”.

The announcement of this issue was reported on PrefBlog with the opinion:

This issue looks expensive.

It would appear the market agrees! The terms of the greenshoe were that the option had to be exercised prior to closing; but the size shown in the current press release indicates that the extra shares have not been issued.

It was a thoroughly pathetic opening day, with 4,448 shares trading in a range of 24.70-90, closing at 24.00-70, 10×52. The underwriters didn’t pretend to support the issue; at one point today the bid was 23.00.

More later.

Later, more:At $24.00, it doesn’t look so bad … but it’s scarcely an inventory blow-out sale!

Bear in mind that Pfd-3 issues (regardless of modifier) are considerably less liquid than they would be if they were higher grade. They will also tend to trade with higher correlation to the company’s common than they would otherwise; they are more equity-like than higher grade issues, both in theory and practice. I do not recommend a weighting of more than 10% total Pfd-3 issues in a diversified preferred share portfolio, with no more than 5% in any one name; have more than this if you like, but I will consider your portfolio to be “equity-substitute” rather than “fixed-income”.

The credit rating of Allbanc Split Corp. II has been confirmed by DBRS:

DBRS has today confirmed the Preferred Shares issued by Allbanc Split Corp. II (the Company) at Pfd-2 (low) with a Stable trend. The rating has been removed from Under Review with Developing Implications where it was placed on March 19, 2008.

In February 2006, the Company raised gross proceeds of approximately $322 million by issuing 6.73 million Preferred Shares at $25.00 each and 13.46 million Capital Shares at $11.40 each. The net proceeds from the offering were invested in a portfolio of common shares (the Portfolio Shares) of the top six Canadian chartered banks: Bank of Montreal (19%), Bank of Nova Scotia (19%), Canadian Imperial Bank of Commerce (19%), Royal Bank of Canada (19%), The Toronto-Dominion Bank (19%) and National Bank of Canada (5%). The initial split share structure provided downside protection of approximately 45% to the Preferred Shares (after expenses).

The holders of the Preferred Shares receive fixed cumulative quarterly distributions equal to 4.25% per annum. The fixed distributions of dividends on the Preferred Shares are funded from the dividends received on the Portfolio Shares and, if necessary, with proceeds from the sale of Portfolio Shares or from covered call option premium income as determined by the board of directors. The current yield on the Portfolio Shares fully covers the Preferred Shares dividends, providing dividend coverage of approximately 1.6 times. Excess dividends net of all expenses of the Company are paid as dividends on the Capital Shares or re-invested by the Company in additional Portfolio Shares as determined by the board of directors of the Company.

The Company’s net asset value has experienced downward pressure over the past year, dropping from $52.86 to $42.87, a decline of about 19%. The current downside protection available to the Preferred Shareholders is approximately 41% (as of June 12, 2008). The confirmation of the Preferred Shares is based on the current level of asset coverage available to cover the Preferred Shares principal, the high dividend coverage ratio and the strong credit quality of the banks included in the Portfolio.

The redemption date for both classes of shares issued is February 28, 2011.

This would not normally be considered newsworthy, but I am tracking the effects of the DBRS mass review of financial split-shares. On 3/13, the asset coverage ratio was 1.6:1; as of June 19, the coverage is 1.7:1.

ALB.PR.A is tracked by HIMIPref™ and is incorporated in the Split-Share Index.

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

ROC Pref III Corp has announced:

its Preferred Shares have been placed on CreditWatch with negative implications. The move comes as a result several downgrades of companies held in the Reference Portfolio including the monoline insurance companies and Residential Capital (“ResCap”) during the past several weeks. The rating on the Preferred Shares reflects the rating on the fixed-rate managed credit linked note issued by The Toronto-Dominion Bank (the “CLN”). The return on the CLN, and thus on the Preferred Shares, is linked to the credit performance of a portfolio of 125 companies (the “Reference Portfolio”). The Reference Portfolio is actively managed by Connor, Clark & Lunn Investment Management Ltd. (the “Investment Manager”). The Investment Manager commented that “we remain confident in the overall portfolio credit quality. The vast majority of the holdings are performing well. Challenges in the US housing and mortgage market have caused a number of the holdings in the Reference Portfolio to be downgraded.

Recently, S&P classified ResCap’s debt restructuring as a “selective default” until they do further analysis. A selective default is not a default from the perspective of the Reference Portfolio and the CLN. If S&P restores ResCap’s rating to CCC, it may result in the removal of the Preferred Shares from CreditWatch.”

The Preferred Shares benefit from the protection of a first loss tranche equal to 3.35% of the Reference Portfolio and from a fixed recovery rate of 40% on any defaults. As a result, ROC Pref III Corp. will be able to sustain 7 defaults, which is approximately 2.5 times the average default rate and 1.3 times the worst default rate experienced in a portfolio of the same credit quality as the Reference Portfolio in any 3.8 year period since 1981. ROC Pref III Corp.’s Preferred Shares pay a fixed quarterly coupon of 4.40% on their $25.00 principal value and will mature on March 22, 2012. The Standard & Poor’s rating addresses the likelihood of full payment of interest and payment of $25.00 principal value per Preferred Share on the maturity date.

CC&L had to make a similar announcement for RPQ.PR.A in May.

RPB.PR.A is not tracked by HIMIPref™.

Commerce Split has announced:

When the fund was launched on February 16, 2007 the price of CIBC common shares was $102.15. As of June 12, 2008 the price of CIBC commons shares has declined to $62.54 or a drop of 38% since the inception of the fund.

This sharp decline has resulted in the fund’s net asset value being reduced significantly and has required the Company to implement the Priority Equity Protection Plan in accordance with the prospectus. This plan was implemented to maintain a preferred share coverage ratio of 125% as defined in the prospectus. The Company has executed trades to remain in compliance with the Protection Plan by purchasing permitted repayment securities.

Currently, the portfolio has over $2.45 in notional value of permitted repayment securities per unit (a unit being 1 Priority Equity Share plus 1 Class A Share) thereby reducing the risk to Priority Equity shareholders to any further declines in the price of CIBC common shares.

The Company’s investment portfolio also has approximately $10.57 in CIBC exposure per unit ($9.49 per unit in CIBC common shares and the equivalent of $1.08 per unit in exposure through long CIBC call options) which provides exposure to any potential upside in the value of CIBC common shares. The Company has call options written on a portion of these positions at higher levels.

The Company’s portfolio is continually rebalanced and adjusted based on market conditions to provide both security for Priority Equity shareholders and upside potential for Class A shareholders. The Company may buy or sell additional shares of CIBC, the permitted repayment securities, and or option positions based on market conditions and provided that the Company remains in compliance with the Priority Equity Protection Plan.

The company is a little shy about providing details on its website regarding historical NAVs and precise dates of Protection Plan enforcement. The last instance of PEPP invocation was reported on PrefBlog and appears to have lasted only a week. CM shares closed today at $63.45, a loss of over 9% month-to-date. The unit NAV on May 31 was $12.62, and it was 92% invested … call it $11.60-worth of CM. A nine percent loss on that is worth $1.04 … so it seems reasonable to assume that the XCM unit value is now about $11.60.

XCM.PR.A is not rated by any rating agency and is not tracked by HIMIPref™.

NewGrowth Corp. has announced:

it has called 2,960 Preferred Shares for cash redemption on June 26, 2008 (in accordance with the Company’s Articles) representing approximately 0.127% of the outstanding Preferred Shares as a result of the special annual retraction of 62,860 Capital Shares by the holders thereof. The Preferred Shares shall be redeemed on a pro rata basis, so that each holder of Preferred Shares of record on June 25, 2008 will have approximately 0.127% of their Preferred Shares redeemed. The redemption price for the Preferred Shares will be $18.25 per share.

Holders of Preferred Shares that are on record for dividends but have been called for redemption will be entitled to receive dividends thereon which have been declared but remain unpaid up to but not including June 26, 2008.

Payment of the amount due to holders of Preferred Shares will be made by the Company on June 26, 2008. From and after June 26, 2008 the holders of Preferred Shares that have been called for redemption will not be entitled to dividends or to exercise any right in respect of such shares except to receive the amount due on redemption.

NEW.PR.B is not tracked by HIMIPref™.

Not, perhaps, unequivocally a preferred share, but Kingsway Linked Return of Capital Trust is managed by Scotia Managed Companies and is rated by both S&P and DBRS using their “preferred share scale” … and we all know how dreadfully important the ratings scales are, don’t we? Critically important! Crucially important!

So anyway, DBRS says:

DBRS has today downgraded the LROC Preferred Units (the Units) issued by Kingsway Linked Return of Capital Trust to Pfd-3 from Pfd-3 (high), with a Negative trend. The rating had been placed Under Review with Negative Implications on December 21, 2007.

The Units are supported by an exposure to a note guaranteed by Kingsway Financial Services Inc. and Kingsway America Inc. (collectively, Kingsway) through a forward purchase agreement. The downgrade of the Units is a result of DBRS downgrading the long-term debt ratings of Kingsway on June 6, 2008, to BBB (low) from BBB, with a Negative trend.

The redemption date for the Units will be June 30, 2015.

The issue continues to be rated P-3 by S&P (which rates Kingsway Financial at BB (negative trend) and issues of Kingsway America at BB.

KSP.UN is not tracked by HIMIPref™.