Category: Issue Comments

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.

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™.