Category: Issue Comments

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™.

DBRS has announced it:

has today upgraded the Deposits & Senior Debt rating of Laurentian Bank of Canada (Laurentian, LB or the Bank) to BBB (high), the Subordinated Debt to BBB and the Short-Term Instruments to R-1 (low) from BBB, BBB (low) and R-2 (high), respectively; all the trends are Stable.

The rating upgrades reflect the progress LB has made in improving its sustainable internal capital generation through improvement in its earnings profile. DBRS believes LB’s strategy to focus on its three core segments (Retail & SME Québec, B2B Trust and Real Estate & Commercial) and its improved operating efficiency have been instrumental in increasing the quality of earnings over the last several years. A more clearly defined target market, investment in technology, strengthened relations with its unionized workforce and incentive compensation programs contributed to this improvement.

The core strategy is expected to deliver further improvements in return on equity (ROE) and internal capital generation in the intermediate term, although these improvements will likely be hampered in the near term by the slowing regional economy and difficult operating environment for banks in general.

Over the longer term, material improvements in efficiency are required to eliminate the Bank’s competitive disadvantage in its cost structure. Further efficiency improvements are targeted by increasing revenues while holding expense growth to lower levels, which DBRS views as an appropriate strategy. Working with the unionized workforce and improving the sales culture of the organization are integral to this goal.

B2B Trust has been (and is expected to continue to be) a positive factor in Laurentian’s credit profile in terms of its contribution to profitability, as well as the beneficial effect it has on both business line and geographic diversification.

Under DBRS’s global rating methodology for banks, Laurentian’s long-term Deposits & Senior Debt rating has an Intrinsic Assessment of BBB (high) and a Support Assessment of SA3. The SA3 rating, which reflects the expectation of no timely external support, results in the final rating being equivalent to the Intrinsic Assessment.

Laurentian reported adjusted ROE and internal capital generation in the first half of 2008 of 10.9% and 7.1%, respectively. While still comparatively low and assisted by an outsized securitization gain, these results are the highest in the past six years. Relative to other Canadian banks, LB has benefited from its higher proportion of retail deposit funding over the past nine months of credit market instability. Asset quality has remained strong.

While not mentioned in the text of the press release, the summary shows the preferreds being upgraded to Pfd-3(high).

This is a welcome change in direction for the bank’s ratings:

Update: The preferreds continue to be rated P-3(high) by S&P, while the credit rating is BBB with a positive trend.

Update: See also previous commentary for LB.PR.D and LB.PR.E

Brompton Group has announced:

A special meeting of securityholders for the funds listed below (collectively, the “Funds”) was held today at which securityholders approved the extraordinary resolutions to reorganize the Funds, including the merger of certain funds.

According to the website, VIP.PR.A will come with the same terms as BDS.PR.A, although the Information Circular does not appear to make this clear. The original intent had been to redeem BDS.PR.A, but these plans were changed in April.

Scotiabank has announced:

that it has completed the domestic offering of 14 million, non-cumulative 5-year rate reset preferred shares Series 20 (the “Preferred Shares Series 20”) including the full exercise of the underwriters’ option, at a price of $25.00 per share. The gross proceeds of the offering were $350 million.
The offering was made through a syndicate of investment dealers led by Scotia Capital Inc. Following the successful sale of the initially announced 12 million Preferred Shares Series 20, the syndicate fully exercised the underwriters’ option to purchase an additional 2 million shares. The Preferred Shares Series 20 commence trading on the Toronto Stock Exchange today under the symbol BNS.PR.Q.

The issue traded 629,480 shares today in a range of 24.95-07, closing at 24.98-00, 4×156. The related BNS.PR.P (which resets at +205) closed at 25.41-50, 15×66. It would seem the market it placing a lot of faith in actually seeing those extra thirty-five beeps!

BNS.PR.Q was announced and analyzed on May 27.

Lawrence Asset Management continues to break new ground in the field of split-share corporation management.

Assiduous Readers will recall my post regarding the Annual Retraction Feature for these shares; the “equity” (ha-ha) shares are guaranteed a price well in excess of their value, while the “preferred” (ha-ha) shares will get a price that may be well below their NAV.

They have now announced:

it intends to hold a conference call at 10 a.m. EST on June 10, 2008, to discuss the outlook for HI PREFS (TSX:HPF.pr.a, HPF.pr.b).

Shareholders and Investment Advisors are invited to join the conference call.

The details are as follows:
Date: Tuesday, June 10, 2008
Time: 10:00 am EST
Dial in: 416-695-7806 / 1-888-789-9572
Passcode: 3267826
For More Information Contact:
Investor Relations
Catherine Stretch
416-362-6283
info@lawvest.com

I will be the first to admit that I don’t know everything there is to know about the financial world – but I can’t remember seeing any such announcement for a split-share corporation before, let alone one for a conference call with such a vague agenda.

Lawrence Asset Management has announced:

On June 30, 2008, HI PREFS has its annual redemption feature. Investors who wish to participate must notify their broker of their intentions to do so at least five business days in advance of the redemption date. Proceeds from the redemption will be paid within ten business days into a shareholders brokerage account. For more details on how the annual and monthly redemption values are calculated for each of HPF.pr.a and HPF.pr.b, please click through to the next page.

Tendering HPF.pr.a to the Annual Redemption

The annual redemption value for the Series 1 share (HPF.pr.a) is calculated as the lowest of:

a) $25.00 per Series 1 Share
b) the Equivalent Canada Bond Value
c) the Net Asset Value per Unit determined as of the relevant Redemption Date after deducting the cost to the Company of the purchase for cancellation of one Series 2 Share and one Equity Share.

Based on calculations as of May 21, 2008, it is expected that the lowest of these three for the purposes of the annual redemption value calculation will be a) $25.00 per Series 1 Share. Therefore at this time, shareholders of HPF.pr.a are expected to receive $25.00 per share if they choose to redeem on June 30th, 2008. This is an estimate only to assist Series 1 Shareholders in deciding if they wish to tender to the redemption and may change between now and the annual redemption date.

There is also a monthly redemption feature on months other than the annual redemption date on which a redeemer would receive 95% of the annual redemption calculation. The monthly redemption value for redemptions received on April 30th, 2008 was $23.75.

Tendering HPF.pr.b to the Annual Redemption

The annual redemption value for the Series 2 share (HPF.pr.b) is calculated as the lowest of:

a) $14.70 per Series 2 Share
b) the Equivalent Canada Bond Value
c) the Net Asset Value per Unit determined as of the relevant Redemption Date after deducting the cost to the Company of the purchase for cancellation of one Series 1 Share and one Equity Share.

Based on calculations as of May 21, 2008, it is expected that the lowest of these three for the purposes of the annual redemption value calculation will be c) the Net Asset Value per Unit determined as of the relevant Redemption Date after deducting the cost to the Company of the purchase for cancellation of one Series 1 Share and one Equity Share. The NAV of the Unit is calculated by adding the NAV of the Series 1 Share ($25.00) plus the NAV of the Series 2 Share ($14.36 as at May 21, 2008). The cost to the Company to purchase for cancellation one Series 1 Share includes the cost to purchase the Series 1 Share on the TSX (currently trading at $24.00) plus commission of $0.04 and the fee that the Company pays to cancel the forward contract related to that Series 1 Share (approximately $0.50). As per the Prospectus, for the purposes of the redemption calculation the cost of the Equity share is deemed to be $3.54. Therefore at this time, shareholders of HPF.pr.b would be projected to receive approximately $11.28 per share if they choose to redeem on June 30th, 2008. This is an estimate only to assist Series 2 Shareholders in deciding if they wish to tender to the redemption and will change between now and the annual redemption date as the calculation is subject to market values that fluctuate daily.

It seems very odd that HPF.PR.A should be quoted today at 24.00-50, 5×7; the quote for HPF.PR.B makes a lot more sense at 10.00 – 12.00 (nice little $2 spread there!), 62×2. The NAVs are touted as $25.00 and $14.05 respectively, as of May 30.

However, nothing about this particular vehicle makes any sense at all; I’ve puzzled over it many times over the years, most recently in HPF.PR.A / HPF.PR.B : DBRS Affirms Ratings Despite Dividend Suspension.

Update: PrefBlog’s Department of Things that Make No Sense has discovered that the prospectus does not have any mechanism whereby holders can submit a unit – that is, HPF.PR.A & HPF.PR.B – and get the Unit Value. This is partly because Equity Shares are all held by the manager:

HI PREFS capital structure consists of Series 1 Shares (HPF.PR.A) and Series 2 Shares (HPF.PR.B) owned by the public and Equity Shares owned by Lawrence Asset Management Inc. (“the Manager”)

and – this is the best part (emphasis added):

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.

I guess it’s the price guarantee that makes them “Equity Shares”!

So, potentially, you could buy a big block of HPF.PR.A at – say – $24.00, tender for retraction with the expectation of getting $25.00 … but then find that everybody else had done the same thing and the manager had bought a matching number of HPF.PR.B at – say – $16.00 (a high price due to forced buying … and what do they care anyway?), so you would get Unit Value of (May 30) $39.13 less Redemption price of Equity Share to Manager $3.54 less cost of buying HPF.PR.B (nasty assumption) $16.00 … and get not $25.00 but rather $19.59. Ouch!

Is there anything about this issue that is not wierd?

Financial 15 Split Corp. has announced:

that a special meeting of the holders of the Company’s Preferred Shares and Class A Shares will be held at 10:00 a.m. (Eastern standard time) on Wednesday, July 23, 2008. The purpose of the meeting is to consider a special resolution to extend the mandatory termination date for the Company from December 1, 2008 to December 1, 2015. Shareholders of record at the close of business on June 16, 2008 will be provided with the notice of meeting and management information circular in respect of the meeting and will be entitled to vote at the meeting.

If the extension is approved, Class A Shareholders and Preferred Shareholders will be provided with a Special Retraction right which is designed to provide Shareholders with an opportunity to retract their Shares and receive a retraction price that is calculated in the same way that such price would be calculated if the Company were to terminate on December 1, 2008 as originally contemplated.

A term extension would be a good thing for the preferred shareholders; there is good asset coverage with this issue and a coupon of 5.25%. Unfortunately, the capital units are now valued below their issue price, implying that tax consequences to the capital unit-holders for a termination won’t be all that terrible. The ABK.PR.C exchange/extension was a much easier call for those capital unitholders, given the enormous unrealized capital gains they had.

FTN.PR.A is incorporated in the HIMIPref™ SplitShare Index. There are currently 10,174,941 shares outstanding, according to the TSX, with a par value of $10.00 – so it’s a nice size and would be good to keep on the board.

Update: Assiduous Reader cowboylutrell reminds me in the comments that this is a second attempt to extend term. The prior attempt was denied in April 2007 while term extensions for FFN.PR.A and DFN.PR.A were approved.

Update: See also previous commentary for FTN.PR.A