Category: Issue Comments

Commerce Split Corp. has announced:

was launched on February 16, 2007 and at that time the price of CIBC common shares was $102.15. As of March 24, 2008 the price of CIBC commons shares has declined to $66.80 or a drop of 35% 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 $2.60 (a decrease from $4.25 per unit – please refer to the Press Release dated March 19, 2008 Portfolio Update) 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 $11.09 in CIBC exposure per unit which is an increase of $1.82 per unit from the last Portfolio Update on March 19, 2008. There is $9.93 per unit in CIBC common shares and the equivalent of $1.16 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 written call options on a portion of these positions at higher levels.

The Company’s portfolio is continually rebalanced 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 provided that the Company remains in compliance with the Priority Equity Protection Plan.

Dividends on the Capital Units have been suspended, but the Prefs are still paying. The last Capital Unit distribution was in January.

Quadravest has described the PEPP in a previous release.

XCM.PR.A is not tracked by HIMIPref™. They are not rated by any rating organization.

Update, 2008-4-1: The company has announced:

The Company’s investment portfolio has approximately $12.24 in CIBC exposure per unit which is an increase of approximately 10% in exposure per unit from the last Portfolio Update on March 25, 2008. This exposure consists of $11.05 per unit in CIBC common shares and the equivalent of $1.19 per unit in exposure through long CIBC call options. The Company has written call options on a portion of these positions at higher levels. The Company retains $1.69 in notional value of Permitted Repayment Securities for the protection of Priority Equity Shareholders Capital.

The Company’s current net asset value as at the close on April 1, 2008 exceeds the $12.50 threshold for payment of capital share dividends and is no longer in a position that would require the Company to set aside funds into the repayment securities.

Holy smokes, that didn’t take long!

RF.PR.A is a new issue that settled on February 22. The exercise of the greenshoe of 100,000 shares was announced March 20. Today’s closing quotation was 23.75-00, 2×3, on volume of 1,300 shares.

The company has announced:

that it intends to purchase up to 145,760 of the preference shares, series 1 of the Corporation (the “Shares”) for cancellation by way of a normal course issuer bid through the facilities of the Toronto Stock Exchange (the “TSX”). The 145,760 Shares represent approximately 10% of the public float of the Corporation. As of March 20, 2008, 1,540,000 Shares are issued and outstanding.
…
The purchases may commence on March 26, 2008 and will terminate on March 25, 2009, or on such earlier date as the Corporation may complete its purchase or provide notice of termination. Any such purchases will be made by the Corporation at the prevailing market price at the time of such purchases in accordance with the requirements of the TSX.

If Shares are offered on the TSX at prices that are less than or equal to $25.00, the Corporation may offer to purchase such Shares, if it determines that such purchases are in the best interests of shareholders, and subject to compliance with the applicable regulatory requirements and limitations.

The Corporation will not purchase in any 30 day period more than 30,800 Shares, being 2% of the issued and outstanding Shares as at the date of acceptance of the notice of the normal course issuer bid by the TSX.

I’m really surprised by the resiliency shown by the two TransCanada PipeLines issues – these are very similar perpetuals, with a $50 par value and pay $2.80 p.a. – a coupon of 5.6%. TCA.PR.X is redeemable at par commencing 2013-10-15, while the TCA.PR.Y is redeemable at par commencing 2014-3-5.

TCA.PR.X was issued in October 1998 as TRP.PR.X, while TCA.PR.Y began life 1999-3-5 as TRP.PR.Y. Four million shares of each series are outstanding so they’re a nice size for non-financial issues.

These issues are perennial favourites of mine. They were hard hit when TRP cut its common share dividend, with the low point being 2000-5-23: TRP.PR.Y had closing quote of 34.80-25 on volume of 6,180 shares. I made a fair bit of money on that – tough times do not lead inevitably to default.

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

More recently, their 5.6% coupon, far higher than most of their competition in recent years (other issues with similarly high coupons have been called) made them exemplars of the virtues of the PerpetualPremium class – when they yielded 4.10% to call, as they did about a year ago, the difference between this yield and the coupon implied a lot of interest-rate protection for investors.

They’ve weathered the storm of the past year beautifully – well down from the high of 55.71-10 on no volume, reached 2006-12-4 by TCA.PR.Y, but not nearly as badly hit as perpetuals without such high coupons … just chugging along, paying their coupon, and still trading above thier call price.

Which is my problem. Why are they still trading above their call price? The cycle has turned, and a coupon of 5.6% is not as extraordinary as it was a year ago – see the new issues of TD.PR.R, TD.PR.Q and BNS.PR.O all with similar coupons and a call date at par that is further away than the TCA calls (and it is unequivocally better for the call date to be further away, since the call won’t be exercised if you want it to be – and vice versa!).

Why are TCA.PR.X and TCA.PR.Y, both rated Pfd-2(low) by DBRS and P-2 by S&P, trading to yield less than the bank issues, rated Pfd-1 [DBRS] and P-1(low) [S&P]? One explanation may be scarcity value (many players are fully loaded on banks in general and these banks in particular) and another might be extreme sector aversion to financials. But it still doesn’t make a lot of sense to me.

I’ve uploaded some charts, comparing these two issues with others that have a 5.6% coupon…

• YTW TCA.PR.X & W.PR.J
• Modified Duration TCA.PR.X & W.PR.J
• Yield Difference TCA.PR.X & W.PR.J
• Yield Disparity TCA.PR.X
• YTW, CM.PR.E & POW.PR.A
• Modified Duration, CM.PR.E & POW.PR.A
• YTW Difference, CM.PR.E & POW.PR.A

Yield disparity, by the way, is the amount of yield that would have to be added or subtracted from the yield curve in order to achieve a calculated price equal to the market price – some players may know this as the “Z-Spread”. It is not unusual for an issue (such as TCA.PR.X over the past year) to be “always expensive” – this may mean that there is something about the issue that is not incorporated in the model (a restrictive covenant, perhaps, or scarcity value, or … something) but it is clear to see from the chart that TCA.PR.X (and TCA.PR.Y) have become more expensive than usual.

And I completely fail to understand why they’re trading through the banks.

Update, 2008-03-23: In response to prefhound‘s points in the comments, I have uploaded listings for PerpetualDiscount and PerpetualPremium yieldDisparities. Note that these yield disparities contain adjustments for Cumulative Dividends – which I believe to be an artefact, but will admit that I am unsure. The cumulativeDividend adjustment to curve price (and hence curve yield) is quite substantial – without it, TCA.PR.X would appear even more expensive than they do now.

• TD.PR.R Curve Price
• TCA.PR.X Curve Price

High Income Preferred Shares Corporation has announced:

that given the erosion in the value of the Managed Portfolio since inception, two recent ratings downgrades by DBRS and based on advice received from the Manager, it believes it would be prudent to revise the distribution policy. Consequently, distributions to Series 1 (TSX:HPF.pr.a) and Series 2 (TSX:HPF.pr.b) Shareholders will be suspended following the previously announced distribution that is payable on March 31st, 2008.

Maintenance of the current distribution policy without causing further erosion to the Managed Portfolio requires HI PREFS to generate an annual return in excess of 20%. As such, based on the advice of the Manager, the Board believes the decision to suspend further distributions is in the best interests of shareholders in the current market environment.

The Board will continue to review the distribution policy on a regular basis. Unpaid distributions to Series 1 and Series 2 Shareholders are cumulative and will be paid on the scheduled termination of HI PREFS on June 29, 2012. On termination, unpaid distributions to Series 1 and Series 2 Shareholders will be paid out of available net assets after the principal repayment to Series 1 Shareholders, but in priority to the principal repayment to Series 2 Shareholders.

Since inception, Series 1 Shareholders have received $8.33 per Series 1 Share in distributions and Series 2 Shareholders have received $6.07 per Series 2 Share in distributions in accordance with their terms.

HI PREFS Preferred Repayment Forward Agreement remains in place with Canadian Imperial Bank of Commerce. This will provide Series 1 Shareholders with a payment of $25.00 per share on June 29, 2012. HI PREFS Series 2 Shareholders will be entitled to the proceeds of the Managed Portfolio up to $14.70, after making provisions for the Company’s liabilities, if any, and after payment of any cumulative unpaid distributions to both Series 1 and Series 2 Shareholders on a pro rata basis. As of Friday, March 14, 2008, the Managed Portfolio had a Net Asset Value of $17.30 per Unit and the Series 2 Shares had a Net Asset Value of $13.14 per share. The Equity Shares, which are entirely held by the Manager and rank below the Series 2 Shares in priority for capital repayment, will receive no proceeds of the Managed Portfolio on termination unless Series 1 Shares are repaid their original investment amount of $25.00 per Series 1 Share, Series 1 and Series 2 Shareholders receive all cumulative unpaid distributions and the Series 2 Shareholders have been repaid their original investment amount of $14.70 per Series 2 Share.

The DBRS January 16 downgrade of these issues was reported by PrefBlog at the time.

DBRS has announced that it:

has today placed the rating of certain structured preferred shares (Split Shares) with significant exposure to the financials sector Under Review with Developing Implications. Each of these split share companies has invested in a portfolio of securities with a focused exposure to financial institutions. The market concerns regarding the current credit quality of domestic and international banks has resulted in ongoing volatility in the share price of many financial institutions. As a result of this volatility, the downside protection available to these Split Shares has come under increasing pressure.

Affected issues are:

I’ll try to add some colour to the table later … websites and asset coverage ratios, for instance. 

Update: Colour Added! The SplitShare index for 3/19 has been uploaded.

S&P has tersely noted that it has:

lowered its ratings on Global Credit Pref. Corp.’s preferred shares and removed them from CreditWatch with negative implications, where they were placed Jan. 16, 2008
…
The lowering of the ratings mirrors the lowering of the rating on the credit-linked note to which the preferred shares are linked.

The rating had previously been P-3(low)/Watch Negative.

The sponsor’s website notes:

Global Credit Pref Corp. is a mutual fund corporation that will issue 10-year redeemable, retractable cumulative preferred shares. The Preferred Shares have been assigned a preliminary rating of P-1 (Low) by Standard & Poor’s

Par value is $25.00. The sponsor claims that the NAVPS is $13.70. They closed on the TSX today at 9.80-50, 17×10. Ouch!

There are 1.6+ million shares outstanding. GPA.PR.A is not tracked by HIMIPref™.

Connor, Clark & Lunn has announced:

that its preferred shares have been placed on CreditWatch with negative implications as of today. The preferred shares are currently rated P-1 (low) by Standard & Poor’s (“S&P”). The move comes as the result of recent downgrades in the Reference Portfolio as well the removal of Residential Capital from the portfolio and its replacement with Tribune Corp, which was lower-rated at the time of the replacement. There have been no defaults in the reference portfolio since its launch in February 2006.

The rating on the preferred shares reflects the A- rating on the C$95,040,000 fixed-rate managed credit linked note issued by the Bank of Nova Scotia (the “CLN”). The return on the CLN, and thus on the preferred shares, is linked to the credit performance of a portfolio of 127 companies (the “Reference Portfolio”). The Reference Portfolio is actively managed by Connor, Clark & Lunn Investment Management Ltd. The CLN benefits from subordination of 2.82% of the reference portfolio as well as a trading reserve account which would currently buy an additional 0.07% of subordination. As a result, if there are less than seven defaults in the next three and a quarter years, investors will continue to receive scheduled quarterly distributions as well as the full $25 par value at maturity.

CC&L ROC Pref Corp. matures in June 2011. The S&P rating speaks to the product’s ability to pay all of its dividends and to return the full $25 par value at maturity. CC&L remains confident that CC&L ROC Pref Corp. will meet its investment objectives.

A similary CC&L structured instrument, RPA.PR.A, sustained a “credit event” in January, but there have been no developments since then for this issue.

RPQ.PR.A is not tracked by HIMIPref™.

TD.PR.R, announced March 3, settled today and was unable to trade above par, with volume of 771,292 in a range of 24.85-97. The closing quotation was 24.88-90, 29×2.

This is particularly surprising since the very similar TD.PR.Q (the only difference is a three month shift in redemption schedule and a long first coupon for TD.PR.R), which had been trading around 25.60 prior to the TD.PR.R announcement, closed at 25.10-15, 20×8 today.

Given the volume for TD.PR.R and the fact that the take-up of the greenshoe was announced on the day following the new issue announcement, I can only assume that the underwriting was a success but that, unfortunately for some, there were a great many players who decided that the new issue would instantly trade at a sixty-cent premium and resolved to subscribe to the issue and sell at the opening.

Too many cooks spoil the broth! We are now in the fairly unusual situation in which one member of a Preferred Pair is in the PerpetualDiscount index, and the other is a PerpetualPremium!

It is also noteworthy that the similar TD.PR.P, which pays a dividend of $1.3125 compared to $1.40 for the other two, closed at 24.40-44, 6×7, with a pre-tax bid-YTW of 5.45%.

Curve Prices (that is to say, fair values as estimated by HIMIPref™) were: TD.PR.P = 24.10; TD.PR.Q = 25.26; TD.PR.R = 25.14.

Assiduous Readers will recall that the redemption of ABK.PR.C was to be funded by a new issue.

Scotia Managed Companies has announced:

that it has completed its public offering of 1,329,368 Class B Preferred Shares, raising approximately $35.6 million. The Class B Preferred Shares were offered to the public by a syndicate of agents led by Scotia Capital Inc. In addition, the Company has redeemed all of its outstanding Class A Preferred Shares and 66,684 of its Class A Capital Shares.

Holders of 332,342 Class A Capital Shares (before giving effect to the four-for-one share subdivision) did not retract their Class A Capital Shares pursuant to the special retraction right created in accordance with the capital reorganization approved by holders of the Class A Capital Shares on January 25, 2008 and, accordingly, 1,329,368 Class A Capital Shares remain outstanding after giving effect to the four-for-one share subdivision, which became effective as of March 10, 2008. The Class B Preferred Shares were offered in order to fund in part, the redemption of 66,684 Class A Capital Shares and all of the Class A Preferred Shares and to maintain the leveraged “split share” structure of the Company.

The prospectus for ABK.PR.B states:

Holders of Class B Preferred Shares will be entitled to receive quarterly fixed cumulative preferential distributions equal to $0.3344 per Class B Preferred Share. On an annualized basis, this would represent a yield on the offering price of the Class B Preferred Shares of approximately 5.00%. Based on the expected closing date of March 10, 2008, the initial dividend will be approximately $0.3344 per Class B Preferred Share and is expected to be payable on or about June 10, 2008. See ‘‘Details of the Offering — Certain Provisions of the Class B Preferred Shares’’.

The Class B Preferred Shares may be surrendered for retraction at any time and will be redeemed by the Company on March 8, 2013 (the ‘‘Redemption Date’’). In addition, the Class B Preferred Shares are redeemable at the option of the Company, at any time, in whole or in part, at a premium which declines to $26.75 in year five and may otherwise be redeemed by the Company prior to the Redemption Date in certain limited circumstances including on March 10 in each year or, where such day is not a business day, on the preceding business day, if there are any unmatched retractions of Class A Capital Shares. See ‘‘Description of Share Capital — Certain Provisions of the Class A Capital Shares’’.

It should be noted that these shares have the nasty provision of being callable at par annually, if there are unmatched capital unit retractions:

The Company may also redeem Class B Preferred Shares on March 10 of any year commencing in 2009 at a price per share equal to $26.75 to the extent that unmatched Class A Capital Shares have been tendered for retraction under a Special Annual Retraction. See ‘‘Details of the Offering — Certain Provisions of the Class B Preferred Shares — Redemption’’.

This issue will not be tracked by HIMIPref™. It’s too small and the annual redemption at par makes the risk/reward profile too asymmetric for my taste.

Update, 2008-3-11: DBRS has rated this issue Pfd-2(low):

the split share structure provides downside protection of 50% to the Class B Preferred Shares (after expenses). The redemption date for the Class B Preferred Shares and the Class A Capital Shares is March 8, 2013.
…
The Pfd-2 (low) rating of the Class B Preferred Shares is based on the downside protection available to the Preferred Shareholders, as well as the initial dividend coverage.

The primary constraints to the rating are the following:

(1) The downside protection available to holders of the Class B Preferred Shares depends completely on the value of the common shares of the Portfolio.

(2) The concentration of the entire portfolio in the financial services industry and the general exposure of the Canadian banks to the current credit cycle.

(3) Volatility of price and changes in dividend policies of the Portfolio’s underlying banks may result in reductions in downside protection from time to time.

I don’t normally talk about junk paper in this blog, but Prefblog’s Prettiest Assiduous Reader writes in and points out that there’s some really strange behaviour going on.

NTL.PR.F closed today at 11.40-59, 10×7

NTL.PR.G closed today at 10.00-48, 15×10

These two issues constitute a “weak pair”, as defined in my article about Preferred Pairs. They’re “ratchet rate” floaters, currently paying 100% of prime on their par value of $25.00 – which comes to $1.3125 at today’s prime of 5.25%. In other words, an interest rate of over 11% on investment … although, mind you, you can only call it 11% if you actually get paid the money. DBRS rates the Nortel Preferreds at Pfd-5(low), which is their lowest ranking short of default, and Nortel’s senior unsecured debt at B(low), which isn’t exactly investment grade either.

But regardless of where the level should be for these issues, why is there a difference?

NTL.PR.F had a conversion option to fixed rate in 2006. NTL.PR.G has been mentioned on PrefBlog in a post about distressed preferreds.