Category: Issue Comments

A rather sad press release today:

Equitable Group Inc. (“EGI”) (TSX:ETC) announced today that it currently holds, as part of its investment portfolio, 207,000 preferred shares Series 5 of Quebecor World Inc. (IQW.PR.5). The book value of the holding is $5.2 million. EGI anticipates an impairment charge will be taken on this investment for the period ended December 31, 2007 due to the recent market activity of the IQW.PR.5 preferred shares. The impact on net income of a full write down of this investment is estimated to be $3.1 million ($0.24 per share). EGI’s total preferred share investment portfolio as at September 30, 2007 was $170.3 million.

So they had a book value of $5.2-million and are taking a write-down of $3.1-million, with 207,000 shares held. The $3.1-million must be after tax, because if it’s pre-tax, they’re keeping them on the books at $10 per share, which – to me – sounds pretty hard to justify.

In other news today, Andrew Willis of the Globe has posted some gossip:

Sources close to the deal said Quebecor and Tricap are giving ground on demands that their new loans rank ahead of the company’s bank debt, and are showing a willingness to refinance the company on terms that put them on more equal footing with long-time lenders. There is also talk that a new bank may be willing to step in and help refinance the company, which is staggering under $2.5-billion of debt.
“The original rescue package was never going to fly. It gave too much to Quebecor and Tricap. There are now more palatable options being discussed,” said one source working on the deal. However, other fixed income experts said Tricap will only make minor concessions before walking away.

The prior PrefBlog post regarding this saga was regarding the possible TSX delisting.

BCE has sent a reminder to holders of its Series AC preferreds (BCE.PR.C) that there is a conversion option to the as-yet non-existent BCE.PR.D to take effect March 1.

They advise:

Holders wishing to convert their shares will have to exercise their conversion privilege between January 16, 2008 and February 20, 2008.
…
BCE Inc. will, by January 16, 2008, communicate in writing with holders of Series AC Preferred Shares additional information pertaining to the manner of exercising the conversion privilege and to the method of computing the fixed dividend rate that will be payable on the Series AC Preferred Shares for the five year period beginning March 1, 2008.
…
Under and subject to the terms and conditions of the Definitive Agreement entered into by BCE Inc. in connection with its acquisition by an investor group led by Teachers’ Private Capital, the private investment arm of the Ontario Teachers’ Pension Plan, Providence Equity Partners Inc. and Madison Dearborn Partners, LLC, the purchaser has agreed to purchase all outstanding Series AC Preferred Shares for a price of $25.76 per share, together with accrued but unpaid dividends to the Effective Date (as such term is defined in the Definitive Agreement). The purchaser has also agreed, on and subject to the terms and conditions of the Definitive Agreement, to purchase all outstanding Series AD Preferred Shares for a price of $25.50 per share, together with accrued but unpaid dividends to the Effective Date.

I do not have any information regarding the fixed rate to be paid for the five years commencing 2008-03-01 on the BCE.PR.C. All there is to go on at the moment is the prospectus:

BCE Inc. shall determine on the 25th day prior to the first day of each Subsequent Fixed Rate Period the annual dividend rate for each Subsequent Fixed Rate Period, which shall not be less than 80% of the five-year Government of Canada Yield, and give notice thereof. See “Details of the Offering”.

A decision regarding the attractiveness of the conversion privilege requires a certain amount of scenario analysis! The first consideration is whether or not the Teachers’ deal will proceed.

According to the notice, if the deal proceeds then holders will receive $0.26 more for the currently outstanding BCE.PR.C than they will for the potential conversion proceeds of BCE.PR.D. So mark this scenario as a (narrow) win for BCE.PR.C.

There is not enough information available to make a good decision possible for the alternative scenario, that the deal does not go through – we don’t even know the rate that will be paid on the BCE.PR.C. The rate offered on the last conversion of this type, BCE.PR.Y / BCE.PR.Z was 4.331% – note that five-year Canadas now yield under 3.5%, so any kind of reasonable rate on the prefs will have to greatly exceed the 80%-of-Canadas minimum.

However, I offer the following argument: if the deal fails, I believe that the credit quality of BCE will be seen as impaired. While BCE bonds may rally on a failure (they are currently pricing in, as far as I can tell, a dramatic loss of quality should the deal succeed), I do not think the preferreds are pricing in the full implications of everything that has happened to BCE over the past year that will be felt if they remain outstanding. Also, floating rate issues (and fixed floaters) have been hurt over the past few months as Bank of Canada credit-crunch-inspired easings have diminished the attractiveness of floaters versus fixed-rate perpetuals.

Thus, I suspect, BCE.PR.D (if issued) will trade below par. Therefore, I suspect, BCE.PR.D will pay 100% of Canada Prime, currently 6.00%.

What will prime average over the next five years? I don’t know. But I suspect that it will average well over 5.00% and that the rate offered on the BCE.PR.C reset will be well under 5.00%.

Therefore, I suspect, most holders will elect to convert their BCE.PR.C to BCE.PR.D on the grounds that, on a balance of risks, they should have a higher return.

Geez, you know, downgrades are just like peanuts! It hasn’t been too long since the last downgrade of these issues.

DBRS has announced it has:

downgraded two series of Preferred Shares issued by High Income Preferred Shares Corporation (the Company). The Series 1 Shares have been downgraded from Pfd-2 to Pfd-2 (low) and the Series 2 Shares have been downgraded from Pfd-3 to Pfd-4. Both series of shares maintain a Negative trend.

At inception, the Company issued 1.26 million Series 1 Shares at $25 per share, 1.26 million Series 2 Shares at $14.70 per share and privately placed 1.26 million Equity Shares at $3.54 per share. The termination date for each series of shares is June 29, 2012 (the Redemption Date).

Approximately 33% of the gross proceeds from the initial offering were used to enter into a forward agreement with the Canadian Imperial Bank of Commerce (the Counterparty) to provide for the full repayment of the Series 1 Shares principal on the Redemption Date. The remaining net proceeds from the initial offering were invested in a portfolio of common shares (the Managed Portfolio), which initially provided asset coverage to the Series 2 Shares of about 1.8 (downside protection of 44%). 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).

Since inception, the Managed Portfolio’s net asset value (NAV) has declined 39% from about $27 to $16.36 per share (as of January 11, 2008), providing downside protection of 10% to the Series 2 Shareholders. Using a covered call option approach, the Managed Portfolio’s NAV has suffered in recent months due to high volatility in equity markets.

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.