Category: Issue Comments

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

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.