Category: Issue Comments

Prefblog’s prettiest Assiduous Reader wrote in pointing out that there’s a huge difference in yields among Weston’s perpetual issues … and I thought that would be an interesting topic.

This is, indeed, quite the spread – 34bp between WN.PR.A & WN.PR.D is something that would normally be arbtraged away very quickly for actively traded issues of the same name … for example

Note that the NA spread is probably influenced by proximity to call price of the higher yielding instrument – this added complexity does not exist for poor old Weston.

It should be noted that Weston is on Credit Review Negative by DBRS; I am advised that one factor in non-arbitrage of yield is that some institutional holders know very well that there is an opportunity, but are not empowered to take advantage of it. They bought WN when it was investment-grade; they have decided to keep the name despite the downgrade; but they cannot buy non-investment-grade issues; therefore they cannot execute a swap.

Update: I have uploaded graphs of the absolute Yields-to-Worst and of the differences thereof for your viewing pleasure.

Sentry Select, much to my surprise, has released no news release regarding the results of their annual redemption option – I would have thought that such an announcement would be a regulatory requirement, but I’ll admit I’m not as familiar with the reporting requirements of public companies as I’d like to be.

Anyway, thanks to Financial Webring Forum and an Assiduous Reader, I can now say that they were forced to redeem about one-sixth of their units; according to their June 30 Semi-annual report, they used to have 13,071,383 units outstanding; now, according to the TSX, they have only 10,896,968.

That’s a difference of nearly 2.2-million units; at $21 each, that means that there was selling pressure in excess of $40-million hitting the market in the last half of October … readers may know that the PerpetualDiscount index fell about 2.5% in the latter half of October … and the fund made an unfortunately early shift into this sector at that time.

The fund’s raison d’etre is to sell liquidity! There was just too much on offer!

According to Sentry Select, the NAVPU of DPS.UN was 21.07 on November 28, while the market price was $20.20. This is a discount of about 4.1% … below the 5% required to trigger Mandatory Purchases for Cancellation … but not by much!

DPS.UN is still paying out an unsustainable dividend – according to the June financials, almost 28% of the 1H07 payout was return of capital, compared to 35.2% in 2006. Redemptions of higher coupon issues may be expected to exacerbate the unsustainability as time passes.

Cyclical Split NT Corp. has announced:

that it has called 24,255 Preferred Shares, representing approximately 15.2401% of the issued and outstanding Preferred Shares, for cash redemption on December 14, 2007 as a result of the special annual retraction of 24,255 Capital Shares by the holders thereof. The 24,255 Preferred Shares shall be redeemed on a pro rata basis so that preferred shareholders of record on December 13, 2007 will have approximately 15.2401% of their Preferred Shares redeemed, with the number of Preferred Shares to be redeemed from each holder rounded to the nearest whole number. The redemption price for the Preferred Shares will be $25.00 per share.

CYC.PR.A is not rated by DBRS, as the rating was “withdrawn … at the request of the Company” in May, 2005. This would normally be a bad sign, as would their lack of a website, but according to their semi-annual financials filed on SEDAR, asset coverage as of June 30, 2007, was a very impressive 6.1+:1.

The issue is extremely small, with a market value of about $4.4-million according to the TSX. CYC.PR.A is not tracked by HIMIPref™

Energy Split Corp. II Inc. has announced:

that in relation to its reorganization, the Company has called 186,000 ROC Preferred Shares for cash redemption on December 14, 2007 representing approximately 22.245% of the outstanding ROC Preferred Shares. The ROC Preferred Shares shall be redeemed on a pro rata basis so that each holder of ROC Preferred Shares of record on December 13, 2007 will have approximately 22.245% of their ROC Preferred Shares redeemed. The redemption price of the ROC Preferred Shares will be equal to the lesser of (i) Unit Value as determined on the December 6, 2007 (the “Valuation Date”) and (ii) $25.00. As at the close of business today, Unit Value was $42.76.

Holders of ROC Preferred Shares that are on record for the dividend but have been called for redemption will be entitled to receive dividends thereon which have been declared but remain unpaid up to but not including December 16, 2007.

The Company is redeeming the 186,000 ROC Preferred Shares in order to increase the downside protection on the remaining ROC Preferred Shares to approximately 55%, as of November 30, 2007, in order to maintain the current rating of Pfd-2 (low) on the ROC Preferred Shares. There is no assurance that the rating will be maintained and the redemption and reorganization are not conditional on the rating being maintained. The redemption is taking place in accordance with the approval received from shareholders at the meeting approving the reorganization.

“Downside protection of 55%” has the same meaning as “Asset Coverage of 2.22:1” … as assets worth $2.22 can lose 55% of their value and still be worth $1.00.

This announcement is in accord with the previously announced plan.

EN.PR.A is tracked by HIMIPref™, but is not included in any of the indices due to low average volume. There are a mere 1,209,398 shares outstanding, according to the Toronto Stock Exchange.

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.

The variance of returns was even more bizarre this month than it was in October! The underperformance of the E-L Financial issues, ELF.PR.F & ELF.PR.G is very surprising.

Big 8 Split Inc. has announced:

it has called 10,584 Preferred Shares for cash redemption on December 14, 2007 representing approximately 0.4% of the outstanding Preferred Shares as a result of holders of 10,584 Capital Shares exercising their special annual retraction rights. The Preferred Shares shall be redeemed on a pro rata basis, so that holders of record of Preferred Shares on the close of business on December 13, 2007 will have approximately 0.5% of their Preferred Shares redeemed. The redemption price for the Preferred Shares will be $25.00 per share. Holders of Preferred Shares that have been called for redemption will be entitled to receive dividends thereon which have been declared but remain unpaid up to and including December 14, 2007.

In addition, holders of a further 91,096 Preferred and Capital Shares have deposited such shares concurrently for retraction on December 14, 2007. As a result, a total of 101,680 Preferred and Capital Shares, or approximately 4.3% of both classes of shares currently outstanding will be redeemed.

Payment of the amount due to retracting shareholders will be made by the Company on December 14, 2007. From and after December 15, 2007 the holders of Preferred Shares that have been called for redemption will not be entitled to dividends or to exercise any right in respect of such shares except to receive the amount due on redemption.

BIG.PR.A is not tracked by HIMIPref™.

5Banc Split Inc. has announced:

it has called 1,350,696 Preferred Shares for cash redemption on December 14, 2007 representing approximately 10% of the outstanding Preferred Shares as a result of holders of 1,350,696 Capital Shares exercising their special annual retraction rights. The Preferred Shares shall be redeemed on a pro rata basis, so that holders of record of Preferred Shares on the close of business on December 13, 2007 will have approximately 10% of their Preferred Shares redeemed. The redemption price for the Preferred Shares will be $10.00 per share. Holders of Preferred Shares that have been called for redemption will be entitled to receive dividends thereon which have been declared but remain unpaid up to and including December 14, 2007.

In addition, holders of a further 585,270 Preferred and Capital Shares have deposited such shares concurrently for retraction on December 14, 2007. As a result, a total of 1,935,966 Preferred and Capital Shares, or approximately 14% of both classes of shares currently outstanding will be redeemed.

Payment of the amount due to retracting shareholders will be made by the Company on December 14, 2007. From and after December 15, 2007 the holders of Preferred Shares that have been called for redemption will not be entitled to dividends or to exercise any right in respect of such shares except to receive the amount due on redemption.

FBS.PR.B is tracked by HIMIPref™ with the securityCode A29001. It is currently included in the HIMIPref™ SplitShare Index. It is also currently included in the S&P/TSX Preferred Share Index but will be removed in January.

Last January, the company very proudly announced the underwriters’ greenshoe had been exercised … sic transit gloria mundi.

Well, it took them long enough! GWO has announced it:

is selling its U.S. health-care business to Cigna Corp. in a deal valued at US$2.25 billion, a move its CEO says is part of a strategy to focus more on the financial services sector.
…
After taxes and write-offs, Great-West Lifeco said it will have approximately US$1.6 billion from the sale that will be used to repay bridge financing related to its purchase of Boston-based Putnam Investments, LLC, which closed in August.

After a bond issue in June the refinancing of the bridge debt languished. The original intention had been to issue hybrids (probably prefs); not only has this source of supply been removed, the issuer bid for GWO.PR.E / GWO.PR.X might see a bit more activity now.

GWO has the following direct issues outstanding: GWO.PR.E, GWO.PR.F, GWO.PR.G, GWO.PR.H, GWO.PR.I & GWO.PR.X. Related issuers are POW, PWF & CL.

When writing about the recent Quebecor World downgrade I noted:

At Pfd-5, there’s not much further IQW.PR.C / IQW.PR.D can go!

Well, now they’re taking that last step:

Quebecor World Inc. (TSX: IQW, NYSE: IQW) (the “Company”) announced today that it is suspending dividend payments on its Series 3 and Series 5 Preferred Shares. While the Company has  the  funds available to pay such dividends, it has been advised by counsel that as a result of recent developments, the Company may be prevented from paying dividends to holders of its preferred shares because it may not satisfy the applicable capital adequacy test contained in the Canada Business Corporations Act («CBCA»). In order to rectify this situation, the Company intends to propose to its shareholders at its next annual shareholders meeting scheduled for May 2008 a reduction of stated capital as permitted under the CBCA to allow the Company to resume paying dividends, including accrued, unpaid dividends. The Company notes that the dividends on the Series 3 and Series 5 preferred shares (including dividends that were to be paid on December 1, 2007) are cumulative and holders will be entitled to receive unpaid dividends, when declared by the Board of Directors, at such time as the Company is permitted to resume the payment of dividends.

It is not clear to me what effect, if any, this will have on the softMaturity of the IQW.PR.C which will occur prior to the meeting; and I’m not sure why they would choose to default on the IQW.PR.C rather than convert to common.

Sure, they don’t want to dilute the common, but why is this so much worse than defaulting?

Update: For those who are interested, here is the DBRS rating history of Quebecor World (and its predecessor corporation):

Update #2, 2007-11-26: DBRS has downgraded the preferreds to “D” (surprise!):

While the cumulative nature of the Series 3 and Series 5 preferred shares affords Quebecor World the flexibility to suspend dividends, provided dividends are paid in arrears, 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.
…
DBRS expects the conversion feature on the Series 5 preferred shares, which become convertible at the option of the Company on December 1, 2007, and at the holder’s option on March 1, 2008, will not be affected by the dividend suspension, and the conversion calculation will adjust to include accrued and unpaid dividends in the numerator of the equation, as per the Series 5 prospectus document dated August 3, 2001.

The following has been copied from November 23, 2007 

I continue to be utterly amazed by the yield on BNA.PR.C, which had yet another rough ride today, down 0.9444% to close at 17.83 bid, yield 8.39% to maturity. 8.39%! Basically, 11.75% interest equivalent!

I confess, I thought for a fleeting moment today that it might be inventory overhang from a barely successful underwriting … but that doesn’t seem to fit the data. They started trading January 10 and hung around at the $25.00 level until early May, when they – quite reasonably – got caught up in the downdraft. Markets were strong in the first part of the year – if the dealers had been left holding the baby, surely they would have, and could have, blown it out the door at $24.00 in, say, March.

The fund has a position in this issue and I’m getting killed on it. But how can it possibly be fairly valued at 160bp over the similar-and-parri-passu BNA.PR.B? On the bright side, looking at the price chart is highly entertaining … I’ve found a new illustration for the word “parabola”.

This ends the copy. The rest is new!

I have thought of a perfectly appalling possibility, predicated by my bewilderment at the difference in yields between BNA.PR.B and BNA.PR.C … is it possible that the market has forgetten that they will mature?

It should be noted that Current Yield is a thoroughly bogus calculation – it ignores the amortization of the discount until maturity.

On the basis of Current Yield, the issues are much more equal …. is it at all possible that this is how they’re being traded? I’m grasping at straws here!

I should also note that while the price of the issue suffered on the first trading day, the volume was heavy. This indicates that the underwriting, in terms of getting the issue out the door, was a success, which makes the whole “overhang” theory even more unlikely.

Prefhound in the comments has some interesting things to say, as always. I will be responding in the comments, so stay tuned!

Update, 2007-11-24: Note that there is more discussion about Split-Shares in general and BNA.PR.C in particular in the post (and comments) : SplitShare & OpRet Yields.

Update #2, 2007-11-24: Sometimes I despair. I looked on Hank Cunningham’s blog, In Your Best Interest, and found Blackmont Capital’s Preferred Share Report, which – in the absence of any copyright notice telling me not to – I have uploaded here for wider distribution. Blackmont makes two rather surprising claims in this report:

• that BNA.PR.B is a Perp. False. The prospectus (March 13, 2004 on SEDAR) clearly states: The Company will redeem all outstanding Series 1 Preferred Shares on March 25, 2016 (the ‘‘Redemption Date’’).
• that the yield on BNA.PR.C is 5.85%. False. It appears that they have reported the current yield, being the annual dividend of 1.088 divided by the “last” price of $18.60. They have not accounted for the fact that the issue’s redemption price is $25.00.

The Blackmont report is riddled with errors – just looking at it very casually, I note that they list GWO.PR.E and GWO.PR.X as perpetuals.

Update, 2008-1-23 I have received an inquiry from a Canadian Moneysaver subscriber who asks if the dividends on this issue are cumulative.

First off … let’s check my “information summary site”, PrefInfo … yes they are.

Now, I think this is a well-researched and well-proofread site that dispenses highly accurate information to the yearning masses …. but I still recommend looking at the prospectus before actually plunking any money down. The prospectus is on SEDAR, company name “BAM Split”, dated January, 2007 and we see on the front page:

Holders of the Series 3 Preferred Shares will be entitled to receive quarterly fixed cumulative preferential dividends of $0.2719 per Series 3 Preferred Share.

… and on page four of the PDF (which is also page four of the prospectus):

Holders of the Series 3 Preferred Shares will be entitled to receive quarterly fixed cumulative preferential dividends equal to $0.2719 per Series 3 Preferred Share.
…
Series 3 Preferred Share dividends will be funded from the dividends received on the BAM Shares. Based on the current dividends paid on the BAM Shares, it is expected that the Company will have approximately 1.08 times coverage on the dividends to be paid on all Preferred Shares. As such, the dividends paid on the Series 3 Preferred Shares will constitute ordinary dividends to the holders of the Series 3 Preferred Shares. If for any reason, the dividends received by the Company on the BAM Shares are insufficient to fully fund the Preferred Share dividends, the Company will sell BAM Shares or write covered call options on its BAM Shares to the extent necessary to fund any shortfall.
See ‘‘Dividend Policy’’ and ‘‘Details of Offering — Series 3 Preferred Shares —
Dividends’’.

…. so …. I think it’s fair to say: “Yes. The dividends are cumulative.”