Category: Issue Comments

The new issue of National Bank 6.00% Perpetuals, announced March 31 and reported to have experienced brisk demand settled today, trading 412,080 shares in a range of 24.80-95, closing at 24.86-93, 10×25.

I have not seen an announcement regarding the greenshoe, but this is exercisable for 30 days after closing. The TSX website reflects the advertised 6-million-share ($150-million) size of the offering.

Comparables at the close are:

The TSX has announced that it is:

reviewing Algo Group Inc.’s Common Shares (Symbol: AO), Convertible Redeemable Retractable Third Preferred Shares Series I (Symbol: AO.PR.A) and 6% Cumulative Redeemable Convertible Second Preferred Shares Series I (Symbol: AO.PR.B) with respect to meeting the continued listing requirements. The Company has been granted 90 days in which to regain compliance with these requirements, pursuant to the Remedial Review
Process.

Algo is not having a nice time. The most recent financials on SEDAR show a working capital deficiency and a shareholders’ equity deficiency. Their recent press release was a tale of woe:

Algo Group Inc. (TSX : AO) announced that it has recently sold certain assets of its W. Green Jeans division and as a consequence ceased operations in this division. The sale was completed with 4453166 Canada Inc., a company controlled by Mr. Warren Green. The proceeds were used by the Company to reduce the loan with its primary lender. Mr. Green, previously the Company’s Vice President, Sportswear, has terminated his employment with the Company.
At the outset of 2008, due to an administrative reorganization of Algo, the services of the Company’s Chief Financial Officer, Mr. Ken Labelle, were terminated. Additionally, due to the administrative reorganization and Algo’s financial situation, Algo was not in a position early in the year to have its auditors commence the audit fieldwork required in order to complete its annual audit. As a result, the audit of Algo’s consolidated financial statements will not be completed by March 31, 2008 and, as such, Algo will not be in a position to file its audited consolidated financial statements, related audit report and MD&A by the March 31, 2008 filing deadline applicable to reporting issuers in Canada.

AO.PR.A and AO.PR.B are not tracked by HIMIPref™

S&P has announced:

placed its ratings on the issue of Global Credit Pref Corp.’s preferred shares on CreditWatch with negative implications (see list). The CreditWatch placement mirrors the CreditWatch action on the credit-linked note (CLN) to
which the issue of preferred shares is linked.
Standard & Poor’s will continue to monitor the underlying portfolio and expects to resolve the CreditWatch placement within a period of 90 days and update its opinion.

Global Credit Pref Corp.
Ratings Placed On CreditWatch Negative
To From
Preferred shares
Global scale: B+/Watch Neg B+
Canada national scale: P-4(High)/Watch Neg P-4(High)

(Related CLN: The Toronto-Dominion Bank C$48,031,000 Portfolio Credit Linked
Notes)

The follows the downgrade to P-4(high) less than a month ago.

Originally issued at $25.00, the NAV is now $11.92 according to the sponsor. Ouch! It is currently quoted at 11.01-35, 4×3.

GPA.PR.A is not tracked by HIMIPref™. Many thanks to the Assiduous Reader who brought this to my attention!

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.