Category: Issue Comments

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.

Brookfield Funds has announced:

The monthly distribution rate for the Brascan SoundVest Rising Distribution Split Trust (capital units) is being decreased to $0.084 per unit, or $1.008 on an annual basis, effective with the January 2008 distribution (payable February 2008). The reduction is partly due to distribution decreases by certain trusts in the portfolio, fewer distribution increases by other trusts due to regulatory changes in the income trust sector, and increased borrowing costs due to higher interest rates relative to last year.

“While we are disappointed to record our first ever distribution reduction, the new rate still represents an attractive yield of 17.2% based on the current unit price. Moreover, we believe it is more sustainable in the current environment, provides a greater margin of safety and better reflects the income-generating ability of the portfolio,” said Kevin Charlebois, President and Chief Executive Officer of SoundVest Capital Management. The $0.15 quarterly payment on the Rising Distribution Split Trust preferred securities (BSD.PR.A) will remain unchanged from 2007 levels.

The former rate of distribution on the capital units, BSD.UN, was $0.1167 monthly, or $1.40 annually, according to their semi-annual financials. It is to be hoped that this distribution reduction to the capital stock holders will help to end the decline in NAV; asset coverage on the preferreds has declined from 1.8+:1 as at January 5, 2007, to 1.6+:1 on December 14 according to the company. No distributions to capital stock holders are allowed if asset coverage declines below 1.4:1, according to the prospectus:

The payment of interest on the Preferred Securities will be made in priority to any distributions on the Capital Units. The Trust may not make any cash distributions on the Capital Units if, after giving effect to the proposed distribution, the Combined Value would be less than 1.4 times the Repayment Price. Distributions on the Capital Units are conditional upon the Trust being current in its obligation to pay interest on the Preferred Securities. See ‘‘Details of the Offering — Certain Provisions of the Capital Units— Distributions’’.

Interest payments on the preferred securities, BSD.PR.A, remain unaffected.

Mulvhill Premium Split Share Corp. has announced:

its shareholders have approved a reorganization permitting the Company to extend the life of the Company for an additional 5 years to February 1, 2013. As part of the reorganization, the Preferred Shares will be renamed “Priority Equity Shares” and the Company will adopt a portfolio protection plan for the benefit of the holders of such shares. The dividend entitlement of the shares will remain unchanged at 5.50% per annum (on the $15.00 original issue price). Class A Shareholders will continue to benefit from a unique, highly leveraged investment in a blue-chip portfolio, and will receive distributions initially set at approximately 10% per annum on the net asset value of the Class A Shares.

Holders of Class A Shares and Preferred Shares will retain their annual and monthly retraction rights originally provided to them. In addition, under the reorganization, shareholders will be given a special retraction right to cause the Company to redeem their Class A Shares at net asset value of a Class A Share and Preferred Shares for $15.00 per share on January 31, 2008. The reorganization will only be implemented if holders of at least 2,000,000 Class A Shares elect not to retract their shares under the special retraction right.

Note that the Prefs will be renamed Priority Equity Shares and no longer rated by DBRS:

The change of name of the Preferred Shares to Priority Equity Shares is intended to more accurately describe the attributes of such shares and to more closely align them with similar shares recently offered in the market. The Priority Equity Shares will not be rated by DBRS and the Company will no longer be subject to DBRS’ additional requirements relating to the investments it may acquire and hold.

The Company proposes to adopt a strategy (the ‘‘Priority Equity Portfolio Protection Plan’’) to protect holders of the Priority Equity Shares in order to assist the Company to pay in full the original issue price of $15.00 per share (the amount so required to effect such payment from time to time being the ‘‘Priority Equity Share Repayment Amount’’) on the final redemption date of February 1, 2013 (the ‘‘Final Redemption Date’’).

The Priority Equity Portfolio Protection Plan provides that if the net asset value of the Company declines below a specific level, the Company will liquidate a portion of its portfolio and use the net proceeds to acquire (i) qualifying debt securities or (ii) certain securities and enter into a forward agreement (collectively, the ‘‘Permitted Repayment Securities’’) in order to cover the Priority Equity Share Repayment Amount in the event of further declines in the net asset value of the Company. To qualify as Permitted Repayment Securities, debt securities must have a remaining term to maturity of less than one year and be issued or guaranteed by the government of Canada or a province or the government of the United States, or be other cash equivalents with a rating of at least R-1 (mid) by DBRS or the equivalent rating from another rating organization.

The HIMIPref™ database has been updated with a reorgDataEntry reflecting a 1:1 transformation from securityCode A43200 to A43201.

The new security has the following characteristics representing my interpretation of the current investment terms:

• listed as “Not Rated”
• Callable 2008-01-31 at $15
• Maturity 2013-2-1 at $15.00

Update: I have uploaded the current SplitShare index after having given effect to the change. Note that MUH.PR.A will remain in the index until the December month-end rebalancing.

CM.PR.G is a bit of a funny issue – the prospectus dated June 4, 2004 offered Series 28 Prefs that came attached to warrants to purchase Series 29 (which is CM.PR.G) after November 1, 2004.

I don’t know why they did it this way … I’ll have to do some more digging at some point. It may be somewhere in the files!

If the conversion was not exercised, the dividend dropped to less than 1% of par, so the Series 28 is best thought of as an installment receipt for the “real” issue, CM.PR.G, Series 29, which is exchange traded. Series 28 is not exchange traded.

Anyway, the 2007 financials disclose (page 115) that there are still 2,500 Series 28 shares outstanding … $25-thousand worth. In 2007, they purchased 558 shares for cancellation.

But they’re still trying! Got to get this ridiculous item off the books somehow!

Allbanc Split Corp has announced:

that its Board of Directors has approved a proposal to reorganize the Company. The reorganization will permit holders of Class A Capital Shares to extend their investment in the Company beyond the redemption date of March 10, 2008 for up to an additional 5 years. The Class A Preferred Shares will be redeemed on the same terms originally contemplated in their share provisions. Holders of Class A Capital Shares who do not wish to extend their investment and all holders of Class A Preferred Shares will have their shares redeemed on March 10, 2008.

The reorganization will involve (i) the extension of the originally scheduled redemption date, (ii) a special retraction right to enable holders of Class A Capital Shares to retract their shares as originally contemplated should they not wish to extend their investment and (iii) the creation of a new class of shares to be known as the Class B Preferred Shares in order to provide continuing leverage for the Class A Capital Shares. The reorganization will be subject to receipt of all necessary regulatory approvals.

A special meeting of holders of Class A Capital Shares has been called and will be held on January 25, 2008 to consider and vote upon the reorganization. Details of the proposed reorganization will be outlined in an information circular to be prepared and delivered to holders of Class A Capital Shares in connection with the special meeting.

So – the pondering that commenced October 25 has resulted in a proposed term-extension for the Capital Shares, but not for the preferreds – given that the NAVPU is $196.93 as of December 6, giving asset coverage of 3.23:1, they should be able to issue a larger amount of preferreds while maintaining asset coverage in the 2.2:1 area.

ABK.PR.C is tracked by HIMIPref™ with the securityCode A33000. It is not included in the SplitShare index due to volume concerns.

Many thanks to the Assiduous Reader who brought this news release to my attention!

Financial Preferred Securities Corporation has announced:

Financial Preferred Securities Corporation (TSX:FPR.PR.A)announces the redemption price of $18.90 Cdn per share in respect of the most recent redemption date of November 30, 2007. The redemption amount will be paid to redeeming unitholders on December 21, 2007, the 15th business day in December.

Shares of Financial Preferred Securities Corporation may be surrendered for redemption in November of any year, but must be surrendered at least 20 business days prior to the redemption date. Shares surrendered for redemption are redeemed on the redemption date at a redemption price per unit equal to the Net Realized Proceeds per share calculated as of the annual redemption date.

For the redemption date of November 30, 2007, approximately 14% of the outstanding shares were tendered for redemption representing 235,462 units. The net asset value on November 30, 2007 was also $18.90 per share.

FPR.PR.A is not tracked by HIMIPref™.