Category: Issue Comments

The Toronto Stock Exchange has announced it:

is reviewing the securities of Quebecor World Inc. (Symbols: IQW; IQW.PR.C; IQW.PR.D) with respect to meeting the requirements for continued listing. The Company has been granted 30-days in which to regain compliance with these requirements, pursuant to the Remedial Review Process.

In the impressive tradition of the TSX, they can’t be bothered to tell retail scum just which requirements have been violated.

Meanwhile, Quebecor World has announced:

announced today that it has extended the deadline for the satisfaction of certain conditions precedent to the previously announced CDN$400 million rescue financing agreement with Quebecor Inc. and Tricap Partners Ltd. Quebecor Inc. and Tricap Partners Ltd. have indicated that they have made progress on the satisfaction of these conditions and have requested additional time to attempt to satisfy them. The deadline for these conditions has been moved from 9:00 p.m. on January 16, 2008 to 9:00 a.m. on January 20, 2008.

So there’s a staring contest for you! This follows apparent capitulation by the SVS holders:

Quebecor World Inc. shares crashed by 62% yesterday after the printer passed a key deadline set by its lenders without producing the new financial injection they had demanded. The stock ended at 18.5¢, down from a year-high of $17.25, as 31-million subordinate shares — 36% of the float — changed hands. The firm’s two series of preferred shares fell steeply, trading for less than one-tenth their $25 face value, and its bonds sold for 55¢ to 65¢ on the dollar.

The last installment on the continuing Great Quebecor World Saga of 2008 was published here yesterday.

DBRS has announced:

has today downgraded the Preferred Shares issued by GlobalBanc Advantaged 8 Split Corp. (the Company) from Pfd-2 to Pfd-3 (high) with a Stable trend.
…
Based on the most recent dividends paid by its underlying companies, the Bank Portfolio can generate enough yield to pay the fixed preferred distributions and other annual expenses. However, changes in dividend policy by any of the banks included in the Bank Portfolio could cause a potential grind on the NAV.

Since inception, the NAV has dropped from about $19 to $14.29 per share (as of January 10, 2008), a decline of nearly 25%. As a result, the current downside protection available to the Preferred Shareholders is approximately 30%. The decline in NAV can be attributed to the Bank Portfolio’s 100% concentration in the international banking industry. In general, the valuations of the common shares of international banks have experienced significant volatility over the last few months due to credit concerns and large writedowns.

The downgrade of the Preferred Shares is based on the lower level of asset coverage available to cover the Preferred Shares principal.

As previously announced, this issue is not tracked by HIMIPref™.

There was a post on the Globe site excitedly announcing that investors don’t much like the proposed restructuring plan … which I can’t say I find too surprising, given that indications are that it will wipe out the current equity owners. It also doesn’t surprise me much to see that IQW.PR.C is down a lot on the day … presumably, should the plan be executed, the controlling faction will first force conversion into SVS, prior to wiping out the SVS.

The IQW.PR.D, though, are more interesting, according to the prospectus:

The Series 3 Preferred Shares will not be redeemable prior to December 1, 2007. The Series 3 Preferred Shares will be redeemable, subject to applicable law and to “Restrictions on Dividends and Retirement of Shares”, on December 1, 2007 or on December 1 in every fifth year thereafter, at the option of the Company, in whole but not in part, at $25.00 per share in cash, plus an amount equal to all accrued and unpaid dividends up to but excluding the date of redemption. Notice of the redemption will be given by the Company not less than 45 days nor more than 60 days prior to the date fixed for redemption.

See that? Cash. Redeemable for cash. None of this SVS nonsense. This whole affair gets more interesting by the minute! However, the Quebecor press release states:

Completion of the recapitalization plan is subject to a number of conditions, including, but not limited to, the approval of the financing plan by holders of certain debt securities issued by Quebecor World, the conversion of all Series 5 preferred shares and Series 3 preferred shares into subordinate voting shares and receipt of all required regulatory and other approvals and settlement of definitive documentation. In addition, the rescue proposal specifically contemplates that the consent of the holders of the Company’s debt securities maturing in 2008, 2013 and 2027 must be obtained and Quebecor Inc. and Tricap Partners have informed Quebecor World that they intend to commence discussions with these holders immediately.

So my question is … how many SVS per IQW.PR.D? And what if the IQW.PR.D holders Just Say No?

More than half of the IQW.PR.C are already being converted.

Update: National Post:

As of 5:30 pm, the company hadn’t revealed the outcome of negotiations with its bankers.

Update: National Post:

As of 6:20 pm, the company hadn’t revealed the outcome of negotiations with its bankers. Stay tuned for further developments this evening.

Update: Missed!

Quebecor World Inc. (TSX: IQW, NYSE: IQW) announced today that in connection with the waivers obtained from its banking syndicate and the sponsors of its securitization program announced on December 31, 2007, it has not obtained by January 15, 2008, US$125 million of new financing, as had been required under the terms of the waivers.
…
The Company had requested a one week waiver of this condition from its banking syndicate and securitization sponsors to facilitate the rescue financing initiative currently underway, but has declined to pay the significant waiver costs requested by its banking syndicate for this waiver, as the Company believes it must preserve cash and this payment would not be in the best interests of all of the Company’s stakeholders. The Company renewed its request that the banking syndicate provide a suitable waiver and is awaiting the response.

In addition, Quebecor World announced today that in light of the announced rescue initiative and its current circumstances, it will not make the US$19.5 million payment of interest due today on its outstanding US$400 million 9.75% Senior Notes due 2015.
…
Quebecor World continues to work with Quebecor Inc. and Tricap Partners Ltd. on the rescue financing plan announced on January 14, 2008 and believes that satisfaction of the conditions of such initiative would be in the best interests of the Company and all its stakeholders. There is no assurance all the consents and approvals to the completion of the rescue financing plan and recapitalization initiative will be received on a timely basis.

The Canadian Imperial Bank of Commerce (CM) has announced:

it expects to further enhance its capital position by raising a minimum of $2.75 billion of newly issued common equity.
    Specifically, CIBC has received written commitments from a group of institutional investors, including  Manulife Financial Corporation, Caisse de dépôt et placement du Québec, Cheung Kong (Holdings) Ltd. and OMERS Administration Corporation, to invest, by way of a private placement, $1.5 billion in CIBC common shares. CIBC World Markets Inc. and UBS Securities Canada Inc. acted as joint bookrunners in the private placement.
    In addition, CIBC has entered into an agreement with a syndicate of underwriters led by CIBC World Markets Inc. as bookrunner and jointly led by UBS Securities Canada Inc. under which they have agreed to purchase $1.25 billion in CIBC common shares at a price of $67.05.

The press release includes a handy table:

These are very strong numbers compared with Year-end levels; with the entry of new equity holders kindly offering to take the first loss, the credit watch should probably be cancelled. Now, if only we could be sure that the bank can avoid shooting itself in the foot for another little while!

The bank has the following series of preferred shares: 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.

Update: DBRS has announced:

CIBC’s ratings remain Under Review with Negative Implications, including all the long-term, short-term and preferred ratings, despite the equity capital injection as concentration risk of counterparty and overall risk management processes of the Bank remain concerns for DBRS.

Update: The bank has released An Investor Presentation, confirming that the private placement was done at $65.26. I have heard, with good reliability, that there was also a 4% commitment fee in that part of the deal, which would make the net price $62.65.

Update, 2008-2-9: The greenshoe was fully exercised:

CIBC (CM: TSX; NYSE) announced today that it completed its previously announced offering of 45,346,130 common shares for aggregate gross proceeds of $2,937,669,337.50.
    At today’s closing, CIBC issued 21,441,750 common shares to the public through a bought deal public offering in Canada led by CIBC World Markets Inc. as book runner and jointly led by UBS Securities Canada Inc. The public
offering included 2,796,750 common shares issued upon the exercise, in full, of an over-allotment option granted by CIBC to the underwriters.
    CIBC also issued an additional 23,904,380 common shares to a group of institutional investors by private placements.

DBRS has announced:

DBRS has today downgraded the Equity Dividend Shares (the Preferred Shares) issued by Income STREAMS III Corporation (the Company) from Pfd-4 to Pfd-5 with a Negative trend.
…
Quadravest Capital Management (the Manager) manages the Managed Portfolio, generating income from dividends, covered call option premiums and capital appreciation. The holders of the Preferred Shares receive a fixed, cumulative monthly dividend yielding 7.00% per annum on the initial share price. Excess amounts may be distributed to holders of the Capital Yield Shares if the Preferred Share dividends are not in arrears and the Managed Portfolio provides asset coverage of at least 1.20 times to the Preferred Shares.

Since inception, the net asset value (NAV) of the Managed Portfolio has declined about 46% to $14.54 per share (as of December 31, 2007), providing negative downside protection to the Preferred Share principal of $15. The Managed Portfolio would have to generate a return of about 10% in the next year for the Managed Portfolio NAV to maintain its current level.

The downgrade of the Preferred Shares is based on the lack of downside protection currently available to the Preferred Shareholders, as well as on the grind on the Managed Portfolio relative to its current NAV.

The DBRS Rating History of STQ.E is:

STQ.E is included in the HIMIPref™ universe but is not included in the SplitShares index due to credit concerns.

YLD.PR.A is the 5.5% Class I Cumulative Preferred Shares; YLD.PR.B is the 7.0% Class II Cumulative Preferred Shares.

DBRS has announced:

DBRS has today downgraded the 5.5% Class I Cumulative Preferred Shares (the Class I Shares) issued by Split Yield Corporation (the Company) from Pfd-2 (low) to Pfd-3 with a Negative trend. Also, DBRS has confirmed the rating of the 7.0% Class II Cumulative Preferred Shares (the Class II Shares) at D.
…
Quadravest Capital Management (the Manager) manages the Portfolio, generating income from dividends, covered call option premiums and capital appreciation. The holders of the Class I Shares and the Class II Shares receive fixed, cumulative quarterly dividends yielding 5.50% and 7.00% per annum, respectively. The Class I Shares rank in priority to the Class II Shares with respect to the payment of dividends and repayment of capital on the Termination Date. Excess income, if any, is distributed on a quarterly basis to the Capital Shareholders.

Since inception, the net asset value (NAV) of the Portfolio has declined from $47.57 to $28.40 per share (as of December 31, 2007), a decline of about 40%. The current NAV provides downside protection of about 29.6% to the Class I Shares. If the portfolio was liquidated and proceeds distributed, the Class II Shareholders would experience a loss of about 44% of their initial principal. The Portfolio would have to generate a return of about 9% in the next year in order for the NAV to maintain its current level.

The downgrade of the Class I Shares is based on the current NAV of the Portfolio, as well as the annual grind on the Portfolio relative to its current NAV.

The rating history of these issues is:

Both issues are tracked by HIMIPref™ but neither is included in the SplitShare index – YLD.PR.A because of volume concerns, YLD.PR.B due to credit concerns.

BAM Split Corp has announced:

that, in anticipation of the special dividend of units of Brookfield Infrastructure Partners L.P. to be paid by Brookfield Asset Management Inc. (“Brookfield”) to the holders of its Class A Limited Voting shares (the “Brookfield Class A Shares”), BAM Split’s board of directors has declared a corresponding special dividend to be paid on its capital shares on the same payment date as for the Brookfield dividend.  The special dividend will be paid to BAM Investments Corp. (“BAM Investments”), the only holder of BAM Split’s capital shares.

In addition, BAM Split has agreed that, following the payment of the special dividend, it will acquire from BAM Investments additional Brookfield Class A Shares with the same value as the special dividend.  The Brookfield Class A Shares will be acquired in exchange for a new series of non-dividend bearing subordinate preferred shares.  The rating for BAM Split’s outstanding preferred shares will not be affected by this transaction.

As a result of these transactions, BAM Split’s investment portfolio will continue to consist entirely of Brookfield Class A Shares.  BAM Investments will continue to directly and indirectly own the same number of securities of Brookfield and Brookfield Infrastructure Partners as before the transactions.

The BAM Split preferreds are regularly referred to on this blog as they have been very volatile – especially BNA.PR.C, which was discussed in detail last November.

Brookfield Infrastructure Partners (BIP) is being spun out on the basis of 1 BIP for every 25 BAM.A held; according to Brookfield, the intended dividend on BIP is $1.06 annually, implying that the spin-out represents dividends of about 4.25 cents per BAM.A share. BAM.A currently pays USD 0.48 annually, so there should not be a huge effect on BNA’s income coverage.

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 December 27, 2007, it received notices in respect of 3,975,663 of its 7,000,000 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.

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 March 1, 2008 (the “First Conversion Date”), provided such holders gave notice of their intention to convert at least 65 days prior to the First Conversion Date. 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 June 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 March 27, 2008. 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 February 29, 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 February 26, 2008. Notwithstanding the notices of conversion received in respect of the Series 5 Preferred Shares, the Company retains the right under the provisions governing the Series 5 Preferred Shares to redeem all or any number of such Series 5 Preferred Shares in respect of which a notice of conversion was received. In the event Quebecor World were to decide to avail itself of its right to redeem all or any number of such Series 5 Preferred Shares in respect of which a notice of conversion was received, it would be required to provide notice to the holders of Series 5 Preferred Shares that submitted a notice of conversion by January 21, 2008.

Dividends on this issue have been suspended.

IQW SVSs closed today at $1.75, so assuming that the conversion is performed at the $2 minimum, four million (roughly) shares of IQW.PR.C will convert to fifty-million shares of IQW … since there are only about eighty-five-million of these shares outstanding, the converters will own over one-third of the company.

At the close of $15.75 for IQW.PR.C, the effective price of the new shares is $1.26, providing a nifty fifty-cent profit per IQW share to the converters (or, to put it another way, $21 worth of IQW stock – given current prices – will be received for every IQW.PR.C share.

One risk to the converters who are attempting to arbitrage is a rise in the price of the SVS; since the conversion price is 95% of the calculated price (if this is over $2), then if they have shorted now on a 12.5:1 basis for proceeds of $21, then:

Profit = proceeds of short sale – cost of IQW.PR.C – (number of shares actually received – 12.5)*price of shares

where “number of shares actually received” = 25 / (price of shares * 0.95)

so

Profit = proceeds of short sale – cost of IQW.PR.C – ((25 / (price of shares * 0.95)) – 12.5) * price of shares)

and ((25 / (price of shares * 0.95)) – 12.5) * price of shares)

= ((26.04 / price of shares) – 12.5) * price of shares

= 26.04 – 12.5*price of shares

So

Profit = proceeds of short sale – cost of IQW.PR.C + 26.04 – 12.5*price of shares

= 1.75*12.5 – 15.75 + 26.04 – 12.5*price of shares

= 21.875 – 15.75 + 26.04 – 12.5*price of shares

= 32.525 – 12.5*price of shares

Implying that the “risk arbitrage” will be profitable provided that, in the simplest scenario:

(i) shares are converted at 95% of the calculated market price of $2.60 or lower

(ii) the resultant short can be covered at that price (if necessary)

… assuming as well that IQW has been shorted at a ratio of 12.5:1 at a price of 1.75 and the IQW.PR.C was purchased at 15.75

Update, 2007-12-30: An Assiduous Reader who is in the unfortunate position of holding this issue, writes in and says:

The second one is the dreaded IQW.PR.C.  I read today on the RBC Action Direct web site that Quebecor has received notice to convert a large number of this outstanding preferred to subordinate voting shares (I’m assuming I should have done the same but I missed the March 1st date because I wasn’t aware I had to provide 65 days notice).  I don’t own a lot of it but I assume I should be doing the same as to preserve some capital before the
company goes bankrupt?  Thoughts on this?

Well, actually I don’t have a lot of thoughts on this, because IQW is junk and I don’t trade junk. I’m a fixed-income guy; junk requires equity-style analysis. That being said:

The case for conversion relies on current prices. At the current conversion rate of 12.5 IQW for 1 IQW.PR.C, the common is more valuable. Going by this, you would wait until the last possible moment before the next conversion date, examine prices at that time and request conversion if the terms are still favourable. Then, after having waited out the notice period and received your common, you would treat the IQW in the same manner as every other equity in your portfolio.

The case for retaining IQW.PR.C relies on their seniority. At the time the dividend was suspended, the company stated that it had cash on hand to make the payments, but was prevented from doing so by the Corporations Act, which prevents them from paying dividends when their shareholders’ equity is so low. They stated at that time that the annual meeting would rejig the balance sheet – through a few bookkeeping entries – to allow the resumption of dividends on their preferreds. If the company should ever pay any dividends ever again, the preferreds will be taken care of first! Should you keep the issue over the next notice date, you will retain the option to request conversion on the following date, and so on ad infinitum … or ad bankruptcy, anyway!

IQW is in a bad way. They’re not making any money, nobody seems to want their assets and they can’t find new financing. All I can really suggest is that you get their latest regulatory filings (SEDAR), perhaps discuss the company on Financial Webring Forum, develop a few potential scenarios for the company’s future … and make your own decision.

DBRS placed the Canadian Imperial Bank of Commerce under Credit Review Negative today:

DBRS has today placed all ratings of Canadian Imperial Bank of Commerce (CIBC or the Bank) Under Review with Negative Implications including its long-term, short-term and preferred ratings. This rating action is a result of concentration risk to some hedge counterparties that have and continue to experience credit weakness. With the meaningful downgrade action today of ACA Financial Guarantee Corporation, CIBC would be expected to take a pre-tax charge in Q1 2008. As of November 30, 2007 the mark was USD2.0 billion. If the charge were to be USD2.0 billion (USD1.3 billion after tax), CIBC expects its Tier 1 capital ratio will remain above 9% at the end of Q1 2008.

The Under Review with Negative Implications action considers:

(1) A higher than expected concentration risk of counterparty exposure, which does not reflect positively on the overall risk management ability of the Bank.
(2) With ongoing deterioration in the U.S. subprime market, the long-term viability of some of CIBC’s other hedge counterparties will remain uncertain. As such capital ratios will be under pressure if further negative events were to occur.
(3) The reputational related damage could have negative implications on CIBC’s business activities.

Fitch does not rate the preferreds, but has put the debt on Rating Watch Negative:

Fitch Ratings-New York-19 December 2007: Fitch Ratings has placed Canadian Imperial Bank of Commerce’s (CIBC) ‘AA-/F1+’ long- and short-term Issuer Default Ratings (IDRs) on Rating Watch Negative. CIBC has significant exposure to U.S. CDOs comprised of largely subprime RMBS. This portfolio had been hedged with credit default swaps (CDS) from either highly rated banks or financial guarantors. However, a significant portion of the CDS protection ($3.5 billion) was written by a now weak financial guarantor. As disclosed today, CIBC’s mark against this exposure was $2 billion at Nov. 30, 2007. This means CIBC will most likely take a significant charge in the current quarter (first quarter-2008) against this exposure. CIBC has previously taken significant marks ($777 million, net of ABX hedge gains), in fiscal 2007, against its unhedged CDO/RMBS exposures.

Aside from this exposure, CIBC’s recent earnings have exhibited improving trends, with a strong performance from the Retail Markets business. Traditional asset quality measures remain quite good and liquidity is prudently managed. CIBC’s Tier I risk adjusted capital ratio was comfortably in excess of regulatory requirements at 9.7% at fiscal year-end.

Fitch expects CIBC to be able to manage through this situation, despite the potentially significant earnings charges. With a good capital cushion at the present time, to the extent that any charges erode capital, Fitch expects that capital would be rebuilt quickly. In fact, this management team has already established a track record in this regard. Nevertheless, the capital markets have been challenging since the summer. CIBC previously expressed its intent to build capital, starting with the cessation of share repurchases. However, CIBC continues to rely heavily on hybrid forms of capital. Tangible common equity represented 2.74% of tangible assets (down from 2.96% at Oct. 31, 2006) and 7.31% of risk-weighted assets as of Oct. 31, 2007.

It hasn’t been too long since the bank was on Credit Watch Positive! What a difference nine months makes, as the Bishop said to the actress. 

The bank has the following series of preferred shares: 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.