Category: Issue Comments

The Thomson Corporation has announced:

new stock ticker symbols for Thomson Reuters that will be effective at the opening of trading on April 17, following the expected close of Thomson’s acquisition of Reuters Group PLC earlier that morning.

Thomson Reuters will have two parent companies, both of which will be publicly listed – The Thomson Corporation, an Ontario company, will be renamed Thomson Reuters Corporation, and Thomson Reuters PLC will be a new UK company in which existing Reuters shareholders will receive shares as part of their consideration in the transaction.

On April 17, Thomson Reuters Corporation common shares will begin trading on the New York Stock Exchange (NYSE) and Toronto Stock Exchange (TSX) under the ticker symbol “TRI”. Thomson common shares will continue to trade under the symbol “TOC” through April 16. The symbol for Thomson’s Series II preference shares that are listed on the TSX will change to “TRI.PR.B” from “TOC.PR.B”.

The CUSIP number for TRI.PR.B will be 884903 30 3.

TOC.PR.B is tracked by HIMIPref™; it has been in and out of the HIMIPref™ indices over the years on volume concerns – it is currently “out” due to volume concerns. Following a credit review, it was affirmed as Pfd-2(low) by DBRS.

In the list of March’s good and bad performers, I suggested that FTU.PR.A should, perhaps, be analyzed as an equity substitute … I’ve been thinking a bit more about this, on a very casual basis.

The issue is fully described on the fund’s website. The underlying portfolio is 15 US Financials, the asset coverage is only a little over 1.4:1 and the chance of a formal default is more than some might really be comfortable with – which is, presumably, why DBRS has them under review.

But hear me out! They’re currently quoted at 8.76-97 on the TSX and, given a bid of 8.76, yield 8.62% (dividend/capital gain) to maturity 2012-12-1. They may have been marked down too far, due to the “US Financials” angle and the relatively low asset coverage. If you assume you can take a good-sized position at $9.00 then your asset coverage on the actual amount invested is 1.6:1. If you further assume that:
(a) all dividend payments ($0.04375 monthly = $0.525 annually) are made
(b) the NAV declines by 37.5% to $9, implying a total return on US Financials over the next 4 3/4 years of -20% (after allowance of 17.5% for dividends paid) see update, below
(c) then the entire $9 will be paid to the pref holders
(d) and the return on the investment will be approximately $0.525/$9.00 = 5.8% annually.

Better performance by the US Financials would increase the investment return, to a maximum of the non-defaulting 8.62% rate.

That would be a fixed-incomey way of analyzing them … are there other ways? We have this … thing … worth $14.41 as of March 31. We can say that preferred shareholders have written a deep in the money call on the position, at $10 strike price, exercise 2012-12-1, after buying it at $9 (the assumed invested capital in the prefs). So, perhaps, in option terms, we’ve paid $14.41 for the position in US financials and received $5.41 for writing our call.

I know some Assiduous Readers LOVE options … perhaps some might have comments as to whether we’re happy or sad about the price we’ve received for the call?

Update: Assiduous Reader prefhound points out in the comments that expenses for the fund, plus withholding taxes on US dividends, will reduce the NAV by $1.58 over the remaining life of the fund. Therefore, point (b) of the analysis above should read:

(b) the NAV declines by 37.5% to $9, implying a total return on US Financials over the next 4 3/4 years of -20% -8.7% (after allowance of 17.5% for dividends paid and 11.3% for withholding & expenses and 0.0% for capital share dividends)

Mea culpa! I was too interested in casting the problem as an option exercise to do a proper job on the regular fixed-income style analysis.

Andrew Willis of the Globe has reported:

National Bank sold $150-million of perpetual preferred shares with a 6 per cent yield, and underwriters, led by National Bank Financial, reported brisk demand.

Mr. Willis speculates that RY will be next up. We will see!

As previously reported on PrefBlog the closing date for the new issue is April 16; the underwriters’ greenshoe is not exercisable until then.

BMO.PR.L, the 5.80% perp announced March 25 commenced trading today to less than rapturous applause, but enough volume to indicate that the underwriting was a modest success. Modest? Their press release indicated:

The Bank has granted to the underwriters an option to purchase up to an additional $50 million of the Preferred Shares exercisable at any time up to two days before closing.

… and I don’t see a press release on their site indicating that the option was picked up, nor is there anything on SEDAR.

On the ‘new issue’ post there was a question about the relative levels of the TD and BMO prefs … so here’s a table, as of the close 4/2:

Internally, the TD issues look well behaved … the yield spread between the discount issues and the near-par ones is not quite the 15bp I have previously suggested as a rule of thumb, but it’s close enough for horse-shoes. Note that TD.PR.Q, despite its 25.11-15 quote, may legitimately be considered a discounted issue because it’s full of dividend … a dividend of $0.35 goes ex on April 4. The BMO issues, internally, are less in accord with the rule, with BMO.PR.K looking about 20bp cheap to its peers.

If we mentally adjust the BMO.PR.K issue, we can see that BMO is trading to yield about 30bp more, pre-tax, than TD across the curve. This may be contrasted with the best available bond comparison, sub-debt, the recent BMO issue, trading with a presumed call in 2018, is quoted at 261bp over Canadas, while a TD issue trading to a presumed call in 2017 (5 years prior to maturity), is at 245bp over Canadas. So that’s 16bp over, pre-tax, for 10-year sub-debt, which makes a 30bp pre-tax spread on preferreds seem plausible.

Looking at a Pfd-1(low) issuer: NA.PR.K yields 5.98%, NA.PR.L yield 5.96 (no allowance for convexity here!) with a new issue currently being flogged at a 6.00% yield. The BMO issues are at least trading through the NAs.

All in all, given the preferred share quotes, and supported by evidence from the sub-debt market, I’d say the differences between BMO and TD preferred yields are well explained by a presumption of credit quality.

DBRS has announced that it:

has today revised the ratings trend of Canadian Imperial Bank of Commerce (CIBC or the Bank) and related entities to Negative and removed the Bank from Under Review with Negative Implications, where it was placed on December 19, 2007. DBRS is confirming all the ratings of CIBC, including the Bank’s Deposits & Senior Debt at AA and Short-Term Instruments at R-1 (high).

The Negative trend reflects DBRS’s concerns about the effectiveness of the Bank’s risk management processes, especially in the context of managing risk to generate consistent and sustainable performance. Weaknesses surfaced in Q4 2007 and Q1 2008 following charges and losses associated with the deterioration of the U.S. sub-prime mortgage market.
…
DBRS believes successful execution by the new senior management team to address risk management issues will be instrumental in removing the Negative trend over the next year, as it is currently too early to determine the effectiveness of these actions.

The DBRS credit review was noted on PrefBlog in December.

CIBC has the following preferred share issues outstanding: CM.PR.A CM.PR.D CM.PR.E CM.PR.G CM.PR.H CM.PR.I CM.PR.J CM.PR.P and CM.PR.R

S&P rates the preferreds P-1(low) with no outlook or watch.

Moody’s does not rate the preferreds, but has Senior Unsecured or Equivalent at Aa2. They changed the outlook to Negative on December 7, 2007.

Fitch lists the long term debt as AA- with “Rating Watch On” and “Rating Watch Negative”.

TransCanada issued a press release yesterday:

its subsidiary has agreed to acquire from National Grid plc (National Grid), all the outstanding membership interests of KeySpan-Ravenswood, LLC, that directly or indirectly owns or controls the 2,480 megawatt (MW) Ravenswood Generating Facility (Ravenswood) located in Queens, New York for US$2.8 billion plus closing adjustments.
…
The acquisition will be financed in a manner consistent with TransCanada’s current capital structure and commitment to maintaining its ‘A’ credit rating.

Today, DBRS announced:

DBRS has today placed the Unsecured Debentures & Notes, Preferred Shares – cumulative and Junior Subordinated Notes ratings of TransCanada PipeLines Limited (TCPL or the Company) Under Review with Developing Implications.
…
The Company’s financial risk will initially rise based on the interim debt financing of the transaction, which will create execution risk, pending permanent financing expected by DBRS to occur within several months after transaction closing. On a fully debt-funded basis, DBRS estimates pro forma debt to capital of approximately 64% and cash flow to debt of 0.15 times based on the December 31, 2007 operating results (60% and 0.17 times respectively). However, TCPL intends to fund the acquisition with components of incremental debt and equity in line with its current capital structure in order to maintain appropriate credit metrics consistent with its current credit ratings.

These two issues were recently highlighted on PrefBlog with the note:

There were some credit worries when they made a big investment in Dec 06, but these were taken care of by an equity issue.

S&P now has these issues at P-2 [Watch Negative], with the comment:

Standard & Poor’s Ratings Services today said it placed its ratings, including its ‘A-‘ long-term corporate credit rating, on TransCanada PipeLines Ltd. on CreditWatch with negative implications.
…
“Nevertheless, the facility’s returns will likely be more variable and less certain than those of TransCanada’s core pipeline business,” said Standard & Poor’s credit analyst Kenton Freitag. We expect the company to finance the transaction with a significant equity component so as to maintain its credit measures.
…
We expect that the review will be completed by mid-May. Changes to the ratings, if any, would be limited to one notch.

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.

Quebecor World has announced:

that, on or prior to March 27, 2008, it received notices in respect of 517,184 of its remaining 3,024,337 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 June 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 May 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 May 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 September 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 June 27, 2008.

IQW closed today at $0.15-0.155, 52×140, on volume of 2,305,378 in a range of $0.145-0.16.

IQW.PR.C closed today at $0.76-0.92, 3×16, on volume of 600 all at $0.75.

It’s interesting that accrued but unpaid dividends are included in the conversion total! The prior conversion took effect March 1.

BNS has announced:

that it has completed the domestic offering of 12 million, non-cumulative 5-year rate reset preferred shares Series 18 (the “Preferred Shares Series 18”) at a price of $25.00 per share on March 25, 2008.
The syndicate of investment dealers led by Scotia Capital Inc. have also fully exercised the over-allotment option to purchase an additional 1.8 million of Preferred Shares Series 18 at a price of $25.00 per share. It is expected that the closing for the additional 1.8 million shares will occur on March 27, 2008. After the closing of the additional shares, when combined with the existing 12 million shares, there will be a total of 13.8 million of the Preferred Shares Series 18 trading on the Toronto Stock Exchange under the symbol BNS.PR.P. The gross proceeds of the offering were $345 million.

Well! So much for my disdain for this issue! It’s an ill wind, however … Desjardins will be happy at the reception!

I’m astonished at the latest DBRS action:

DBRS has today confirmed two series of cumulative Preferred Shares issued by High Income Preferred Shares Corporation (the Company) following the March 19, 2008 announcement that monthly dividends to both the Series 1 Shares and Series 2 Shares have been suspended following the previously announced March 31, 2008 distribution.

Full repayment of Series 1 Shares principal will be provided via a forward agreement with the Canadian Imperial Bank of Commerce (CIBC). The Series 2 Shares principal relies fully on the Managed Portfolio for repayment of principal. In addition to providing coverage to the Series 2 Shares principal, the Managed Portfolio is used to pay annual fees and expenses, as well as monthly distributions to the Series 1 and Series 2 Shares (5.85% and 7.25% per annum, respectively). The Series 1 and Series 2 distributions rank pari passu to each other. The downside protection available to the Series 2 Shares principal is 12%, based on the current net asset value (NAV) of the Managed Portfolio.

Before dividends were suspended, the Managed Portfolio would be required to generate an annual return of over 20% to maintain its current NAV. The decision to suspend dividends will significantly reduce this annual grind to approximately 5% per annum.

The confirmation of the Series 1 Shares is based on CIBC providing full principal repayment via the forward agreement, as well as the risk that not all Series 1 dividends will be repaid, based on the NAV coverage over the remaining dividends. The confirmation of the Series 2 Shares is based on the current asset coverage available to cover the repayment of the Series 2 principal. The trend for both series of shares remains Negative due to the annual grind on the Managed Portfolio, as well as the additional remaining distribution payments that will now need to be made at maturity.

The termination date for each series of shares is June 29, 2012.

The suspension of dividends was reported on PrefBlog on March 19.

One may compare the insouciant nature of DBRS’ release with their attitude towards Quebecor:

DBRS notes preferred shareholders maintain a level of expectation that these dividends will be paid in a timely manner, and this expectation is reflected in the preferred share ratings. Having not met the expectation of preferred shareholders, DBRS notes the preferred shares are more reflective of a “D” rating.

I will also note that the dividends are cumulative. Given that, the “annual grind” of 20% noted by DBRS might – possibly – be reduced somewhat due to the time value of money, but if all the dividends are to be paid eventually, the reduction will be minimal.