Category: Issue Comments

Mulvihill has announced:

MCM Split Share Corp. (the “Company”) announced today that its Board of Directors has approved a proposal to extend the life of the Company for an additional 5 years to February 1, 2013.
    The final redemption date for the Class A Shares and Preferred Shares of the Company is currently February 1, 2008 and the Company proposes to implement a reorganization (“Reorganization”) which will allow shareholders to retain their investment in the Company for up to an additional five years. As part of the Reorganization, the Preferred Shares will be renamed the “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 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. The Company believes that the Reorganization will allow shareholders to maintain their investment in the Company for up to a further five years on a basis which will better enable it to meet its investment objectives for both classes of shares.
    Holders of Class A Shares and Preferred Shares will retain their annual and monthly retraction rights originally provided to them. In addition, if the Reorganization is approved, shareholders will be given a special retraction right to cause the Company to redeem their Class A Shares and/or Preferred Shares at net asset value on January 31, 2008.
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A special meeting of holders of Class A Shares and Preferred Shares has been called and will be held on December 12, 2007 to consider and vote upon the proposal. Further details of the proposal will be outlined in an information circular to be prepared and delivered to holders of Class A Shares and Preferred Shares in connection with the special meeting. The Reorganization is also subject to all required regulatory approvals.

The shares are tracked by HIMIPref™ and are a constituent of the SplitShare Index. Asset coverage, which has been discussed before, is a pretty skimpy 1.5+:1 as of October 31, according to Mulvihill. DBRS hasn’t published a single word about the issue in over five years … they’re currently rated at Pfd-2, but according to me they’re Pfd-2(low) with a negative trend AT BEST and should probably be Pfd-3 or Pfd-3(high).

DBRS has announced:

DBRS has confirmed the ratings on the Medium-Term Notes & Unsecured Debentures (long-term debt) and Cumulative Redeemable Preferred Shares (preferred shares) of Enbridge Inc. (Enbridge or the Company) at “A” and Pfd-2 (low), respectively, with the trends changed to Negative from Stable.
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The rating confirmations and trend changes to Negative on the long-term debt and preferred share ratings reflect the following:

(1) The Company’s ongoing capital expenditure program (including $6.5 billion of committed and $2.5 billion of “in development” liquids pipelines projects over the 2007 to 2011 period, and the potential for additional projects that would raise the total to $12.2 billion) continues to increase, reflecting principally higher costs than originally anticipated and the addition of new projects. This will require substantial external funding, including debt issuance, potential asset monetization and equity financing over the medium term.
…

The preferreds continue to be rated P-2 by S&P.

The bonds are at A (negative trend) by DBRS, A- by S&P. Moody’s doesn’t rate the prefs, but downgraded the bonds from A3 to Baa1 in March 2007. Fitch rates neither.

Update: ENB.PR.A has been previously noted as an issue occasionally trading at a negative Yield-to-Worst. At its current quote of 24.96-08, this isn’t a major concern – but it is callable at par commencing December 2, so there’s not much upside to the issue.

Against all odds, the new TD issues, announced October 9, managed to make it through its first trading day without embarrassment. From the press release announcing closing, it does not appear that the underwriters’ greenshoe option was exercised.

It closed at 24.60-70, 7×10, on volume of 75,785 shares.

It may be compared with the other two recent new issues:

So I don’t get it. Comparing to the most recent (and much lower coupon) issues for each issuer:

Yields are basically comparable, although the TD issue looks expensive even on this basis. So:

• If yields go up and prices go down, old & new will return about the same.
• If yields are unchanged, old and new will return about the same.
• If yields go down, the new issues will get called away just as things start to get fun, while the old issues will rack up big gains.

Doesn’t anybody do scenario analysis any more?

The issue has been added to the HIMIPref™ database with the securityCode A49008, replacing the preIssue code of P75006. A reorgDataEntry reflects the change.

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 September!

Allbanc Split Corp. has announced:

The Company is scheduled to terminate on March 10, 2008. The Board of Directors is currently reviewing alternatives to termination, including a possible extension of the term of the Company, but there can be no assurance that any alternative will materialize.

Allbanc has been discussed here before and the same things previously written still apply: the NAV per Unit is $205.35 as of October 18, giving an asset coverage ratio of just under 3.4:1. Slightly more than half of the original issue has been retracted since their issuance in 2003; but a unit was worth only $102.81 back then.

Geez, the banks in their underlying portfolio have done well in the past five years, eh? DBRS continues to rate the issue as only Pfd-2; presumably the rating is constrained due to the focus on the financial sector, but the asset coverage suggests to me that Pfd-2(high) would be more appropriate.

The split-share vehicle has actually been around since 1998; after the first five year term they reorganized and:

redeemed all of its outstanding Capital and Preferred Shares for an aggregate redemption amount of approximately $92 million and has completed its public offering of Class A Preferred Shares, raising approximately $55 million through the issuance of 897,444 Class A Preferred Shares. The Class A Preferred Shares were offered to the public by a syndicate of agents led by Scotia Capital Inc.

Pursuant to a capital reorganization approved by shareholders on January 14, 2003, the holders of 897,444 Capital Shares converted such shares into 897,444 Class A Capital Shares on January 17, 2003. The Class A Preferred Shares were offered in order to fund in part, the redemption of Capital and Preferred Shares and to maintain the leveraged “split share” structure of the Company.

More details regarding the potential for another reorganization will be forthcoming. The capital unit-holders of long standing will be sitting on such ridiculously large unrealized capital gains that there will be a strong incentive for them to support a continuation of the company. Given that the preferreds pay a dividend of 5% of par, any extension might have to sweeten the deal a little to get preferred shareholder support, if current market levels persist until decision time.

DBRS:

has today downgraded two series of Preferred Shares issued by High Income Preferred Shares Corporation (the Company). The Series 1 Shares have been downgraded from Pfd-1 (low) to Pfd-2 with a Negative trend, and the Series 2 Shares have been downgraded from Pfd-2 (low) to Pfd-3 with a Negative trend.
…
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 28% from about $27 to $19.38 per share (as of October 19, 2007), providing downside protection of 24% to the Series 2 Shareholders. It is the Company’s intention to suspend both Series 1 and Series 2 dividend payments if the Managed Portfolio’s NAV drops below $14.70 per share. On the Redemption Date, the holders of the Series 1 and Series 2 Shares will be entitled to receive all cumulative dividends in arrears before the principal repayment to the Series 2 Shareholders. As a result, the ultimate payment of cumulative dividends to the Series 1 and 2 Shareholders is likely, but the timing of those payments is uncertain.

The downgrade of the Series 1 Shares is based on the risk that not all Series 1 dividends will be paid in a timely manner. The downgrade of the Series 2 Shares is based on the risk that dividends will not all be paid in a timely manner, as well as the eroding asset coverage available to cover the repayment of the Series 2 principal.

What can I say? I’ve complained about these issues’ ratings in the past. The vehicle has performed extremely well over the past year, with the Managed Portfolio providing returns of over 10% (which is not really such a wonderful accomplishment, given that the S&P/TSX 60 Index benchmark returned 22.5%) … so … one has to wonder … if it’s being downgraded now, after a year of great (absolute) performance, why wasn’t it downgraded earlier?

I haven’t pulled the numbers apart yet, but the rating on HPF.PR.B still looks pretty high to me. Yes, asset coverage is about 1.32:1, which in and of itself isn’t the worst ratio in the world. But, as DBRS points out: 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).

Distributions & Expenses come to a little over $4.4-million annually, including a doubtlessly richly deserved management fee of over half a million. This is $3.33 per Series 2 share. So the $19.38 per share assets are being eroded by $3.33 fees/expenses/distributions (FED). Five years until termination. Total FED $16.65, after which you’ve got to pay $14.70 principal on the Series 2 shares. So … that $19.38 has to grow to $14.70 + $16.65 = $31.35 in five years if default is to be avoided. That’s a total return of 61% over the five years; that’s 10% p.a. portfolio return just to avoid default by a penny.

Pfd-3 is way too high for these turkeys.

HPF.PR.A & HPF.PR.B are both tracked by HIMIPref™ with the security codes A46300 and A46301, respectively. Entries have been made to the creditRatings table to reflect today’s change.

DBRS announced today that it:

has today downgraded the Class A Shares issued by Mulvihill Pro-AMS RSP Split Share Corp. (the Company) from Pfd-3 to Pfd-4 with a Negative trend.
…
The rest of the net proceeds from the initial offering were invested in a diversified portfolio of Canadian and U.S. equities (the Managed Portfolio). After offering expenses, the Managed Portfolio provided asset coverage of approximately 1.8 times to the Class A Shares (downside protection of about 44%). In addition to providing principal protection for the Class A Shares, the Managed Portfolio is used to make distributions to the Class A Shares equal to 6.5% per annum and pay annual fees and expenses. Also, the Company has been making semi-annual contributions of $0.43 per Class A Share from the Managed Portfolio to a forward agreement with the Counterparty for the repayment of the Class A Shares principal on the Termination Date. Currently, 75.6% of the Class A principal is guaranteed by the Counterparty on the Termination Date.

The Managed Portfolio has declined about 79% since inception. About one-third of the decline has resulted from the semi-annual contributions to the Class A Forward Account.
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The main constraints to the rating are the following:

(1) The Managed Portfolio’s NAV is currently $3.83 per share, providing very little dividend income

(2) The Company’s annual expenses, dividend commitments and forward contributions cause a severe grind on the Managed Portfolio’s NAV

(3) Reliance on management to effectively budget the Managed Portfolio’s NAV

SPL.A is tracked by HIMIPref™ with a securityCode of A43400. The creditRatings table of the permanentDatabase has been updated to reflect the new information.

Further to the previously noted proposal Energy Split II Corporation has announced:

that holders of its Capital Yield Shares and holders of its ROC Preferred Shares have approved amendments to the articles of the Company extending the termination date of the Company for an additional three years to December 16, 2010.
…
Holders of ROC Preferred Shares will be able to continue to enjoy quarterly fixed cumulative preferential tax efficient distributions on the ROC Preferred Shares for an additional three years at an increased rate equal to the greater of (i) 5.00% and (ii) the Government of Canada three year bond rate as at November 9, 2007 plus 0.75%, rounded down to the nearest 0.05%. The Company will announce the actual rate on the ROC Preferred Share on November 9, 2007.
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The reorganization will only be implemented if a minimum of 1,280,000 Capital Yield Shares remain issued and outstanding following exercise of the Special Retraction Right by holders on or before November 16, 2007. If this condition is not satisfied, the Company will redeem the Capital Yield Shares and the ROC Preferred Shares on December 16, 2007 as originally contemplated.

If the reorganization is implemented the ratio of Capital Yield Shares to ROC Preferred Shares will continue to be two-to-one and the asset coverage on the ROC Preferred Shares will be set at approximately 2.2 times to extend the current Pfd-2(low) rating. In order to achieve this, the Company may redeem ROC Preferred Shares which are not surrendered for retraction pursuant to the Special Retraction Right. The reorganization is not conditional on the rating being maintained.

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.

HIMIPref™ and PrefInfo information will not be updated until it is known whether the reorganization has been effected. This should be announced on or just after November 16.

The new BNS 5.25% Perp, announced September 25, which immediately caused a repricing in the market, held up well on opening day, closing at $24.81-82 on heavy volume.

The greenshoe option of 1.8-million shares was fully exercised; thus, this issue has a size of 13.8-million shares.