Category: Issue Comments

Quebecor has announced:

the fixed dividend rate for its Series 3 Cumulative Redeemable First Preferred Shares (TSX:IQW.PR.D) (the “Series 3 Preferred Shares”) will be equal to 150% of the yield on five-year non-callable Government of Canada bonds to be determined on November 9, 2007.

150%! Given that 5-year Canadas are now yielding about 4.40%, that implies that – in the absence of market movement in the next three weeks – the reset rate will be 6.6%, or $1.65, an increase from the current level of $1.538.

It appears that Quebecor would really prefer its IQW.PR.D holders to continue to elect fixed-rate, and not to exercise their right to convert to the ratchet-rate issue … which may be expected to pay 100% of prime for the next five years, given their recent downgrade to ‘deep junk’.

The rate will be set November 9. I’ll post more then; but for now it looks as if fixed-rate is the way to go on this pair.

DBRS has announced:

DBRS has today upgraded the ratings of Xstrata plc, Xstrata (Schweiz) AG, Xstrata Capital Corporation A.V.V., Falconbridge Limited, and Xstrata Finance (Canada) Limited (collectively Xstrata or the Company) to A (low). The rating action results from the Company’s strengthening financial profile over the last twelve months, with Xstrata’s financial profile now brought in line with its business profile (which was strengthened substantially last year with the Falconbridge, Cerrejón and Tintaya acquisitions).
…
DBRS expects high commodity prices (driven by strong market demand/supply fundamentals) to allow the Company to continue generating strong cash flows from operations. Going forward, DBRS expects the Company to use its strong cash flows to finance its expansionary capex program, its acquisition program and possibly to continue to reduce its debt levels. The Company’s credit metrics are expected to remain at current levels for the mid term.

Falconbridge Preferreds continues to be rated P-2(low) by S&P.

As previously reported, Falconbridge’s dividends are “eligible”.

It was only about five weeks ago that these issues were last downgraded and now DBRS has announced:

DBRS has today downgraded the long-term debt of Quebecor World Inc. (Quebecor World or the Company) and its debt-issuing subsidiaries to B from B (high) and the preferred share ratings to Pfd-5 from Pfd-5 (high). The trend on all ratings remains Negative.

The downgrade is a result of DBRS’s concern over the significance and nature of security pledged as part of the Company’s renegotiated bank agreement, which may have reduced the future financial flexibility of Quebecor World. Additionally, DBRS notes continued concern over the Company’s near-term liquidity constraints which could restrict its ability to execute on its longer-term business and financing plans.

The issues continue to be rated P-5 (Watch Negative) by S&P.

IQW.PR.C was mentioned as an arbitrage possibility on September 11 when it closed at 23.35-50, but potential profits have been greatly reduced in the last three-weeks-odd: it closed today at 24.36-98.

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.

A much more random sample than was the case last month, although two trends stand out:

• PerpetualDiscount issues got hammered (see September Index Performance for more detail on this), and
• some of the Brookfield issues came back from their August thumping.

Faircourt Asset Management has announced:

In connection with the annual redemption of the Trust, 483,911 Trust Units were submitted for redemption without matching Preferred Securities. Based on the terms of the annual redemption as detailed in the Final Prospectus dated February 27, 2006, and in order to maintain appropriate balance in the Trust between the Trust Units and Preferred Securities, the Manager announces that $4,839,110 in aggregate principal amount of the Trust’s 5.75% outstanding Preferred Securities (the “Preferred Securities”) will be redeemed on October 22, 2007 (the “Redemption Date”) at a price of $10.5347 for each $10.00 principal amount of Securities, being equal to the aggregate of (i) $10.5000 (the “Redemption Price”), and (ii) all accrued and unpaid interest hereon to but excluding the Redemption Date. The notice date of the Preferred Securities redemption is October 3, 2007. Unitholders who submitted unmatched Trust Units will receive $10.5308 per Trust Unit ($11.0308 Net Asset Value per Trust Unit less the $0.5000 call premium on the Preferred Securities)

Not bad, considering that FCS.PR.A closed today at 9.90-05 and the amount called represents about one-sixth of the outstanding!

FCS.PR.A is not tracked by HIMIPref™.

CI Financial has announced an unsolicited bid for Dundee Wealth:

for a price equal to $20.25 per share, representing a premium of approximately $6.94 or 52% per common share based on today’s closing price of DundeeWealth of $13.31.

The preferred shares are not mentioned in the press release.

DW.PR.A soared on September 18, presumably on the grounds that the deal with Scotiabank made them a much better credit than their current Pfd-3 rating from DBRS.

DC.PR.A (which used to be DBC.PR.A) has not moved much in the past week, but that might change – Dundee (DC) owns 50% of Dundee Wealth (DW). Making a fat chunk of change on DW and monetizing the asset could possibly affect the current Pfd-3(low) [DBRS] credit rating on DC.PR.A.

Who knows? It’s certainly not the kind of thing I like to bet on, but the Credit Anticipation players will be sharpening their pencils tonight. The following language from the prospectus of DW.PR.A is interesting:

On and after March 13, 2007, the Company may, at its option, upon not less than 30 days and not more than 60 days prior written notice, redeem for cash the Series 1 Shares, in whole at any time or in part from time to time, at $27.25 per share if redeemed on or after March 13, 2007, but before March 13, 2008, at $27.00 per share if redeemed on or after March 13, 2008, but before March 13, 2009, at $26.75 per share if redeemed on or after March 13, 2009, but before March 13, 2010, at $26.50 per share if redeemed on or after March 13, 2010, but before March 13, 2011, at $26.25 per share if redeemed on or after March 13, 2011, but before March 13, 2012, at $26.00 per share if redeemed on or after March 13, 2012, but before March 13, 2013, at $25.75 per share if redeemed on or after March 13, 2013, but before March 13, 2014, at $25.50 per share if redeemed on or after March 13, 2014, but before March 13, 2015, at $25.25 per share if redeemed on or after March 13, 2015, but before March 13, 2016 and at $25.00 thereafter (each, a “Redemption Price”), plus, in each case, all accrued and unpaid dividends up to but excluding the date fixed for redemption, provided that any redemptions prior to March 13, 2012 shall be limited to circumstances in which the Series 1 Shares are entitled to vote separately as a class or series by law. Notice of any such redemption to occur prior to March 13, 2012 may be provided by the Company at any time and from time to time prior to a meeting of shareholders of the Company at which holders of Series 1 Shares are entitled to vote separately as a class or series and for which a record date has been established, and during the period of 10 days following the holding of such meeting. On and after March 13, 2007 and prior to March 13, 2017, the Company may, at its option, upon not less than 30 days and not more than 60 days prior written notice, subject, if required, to regulatory approvals, convert the outstanding Series 1 Shares into freely tradeable Common Shares, provided that any conversions rior to March 13, 2012 shall be limited to circumstances in which the Series 1 Shares are entitled to vote separately as a class or series by law.

I do not believe the preferred shareholders will be entitled to vote separately on anything that has been announced to date … but I am neither a lawyer nor a clairvoyant!

S&P has announced:

it lowered its long-term corporate credit ratings on Montreal, Que.-based holding company BCE Inc. and wholly owned subsidiary Bell Canada to ‘BB-‘ from ‘A-‘. The ratings on both companies remain on CreditWatch with negative implications where they were placed April 17, 2007.
…
The ratings on BCE’s C$2.77 billion preferred shares are also unchanged because we expect these to be redeemed as well. Once the tender is completed, we will withdraw these ratings. However, the ratings on these securities could
be lowered if they are not redeemed as planned.
…
In addition, we lowered the ratings on about C$4.9 billion of Bell Canada senior unsecured debentures outstanding (which we do not expect will be redeemed) to ‘BB+’ from ‘A-‘, reflecting what we think is the best possible outcome based on publicly available information on the LBO.
…
The multinotch downgrade reflects our view that BCE no longer possesses an investment-grade financial policy given the high degree of certainty that the LBO will be finalized shortly. On a pro forma basis, the company will have a highly leveraged capital structure, weakened credit measures, and significantly reduced cash flow-generating capability owing to its LBO and associated heavy interest burden.

S&P has had BCE on Credit Watch negative for quite some time. The BCE/Teachers deal was last reviewed here on August 10.

DBRS released its official rating of Pfd-2(low) for this issue today:

The Company will aim to provide the Class A Shareholders with regular monthly cash distributions in an amount targeted to be 6.00% per annum on the net asset value (NAV) of the Class A Shares. No distributions will be paid to the Class A Shares if the asset coverage available to the Preferred Shares drops below 1.65. Furthermore, no special distributions will be paid to the Class A Shares if the payment would drop the Company NAV to less than $25 per unit; however, special distributions may be made to mitigate any potential tax liabilities to the Company.

The Pfd-2 (low) rating of the Preferred Shares is based on the downside protection available to the Preferred Shareholders, the credit quality and consistency of the BNS Shares dividend distributions, the dividend coverage for the Preferred Shares and the asset coverage test.

The main constraints to the rating are the following:

(1) The downside protection available to holders of the Preferred Shares depends totally on the value of the BNS Shares.

(2) The concentration of the entire portfolio in the BNS Shares.

(3) Changes in price and dividend policies of Bank of Nova Scotia may result in significantly less downside protection being available to the Preferred Shareholders.

Now, I don’t want to get into an endless game of ‘outguess the rating agency’, but the Pfd-2(low) rating looks a little low to me, compared with the other constituents of the SplitShare index. Or, perhaps, some of the Pfd-2 issues are due for a one-notch downgrade …

Update: The Asset Coverage ratio in the chart has been corrected for ALB.PR.A – the ratio originally shown was incorrect. Thanks to cowboylutrell in the comments who pointed out this outbreak of boneheadism on my part.

Well, we all know that IQW.PR.C was recently downgraded. But there are still people buying the common, which gives rise to a kind-of interesting arbitrage possibility.

According to the prospectus:

On and after December 1, 2007, Quebecor World Inc. (“Quebecor World” or the “Company”) may on 30 days’ prior notice redeem for cash the Series 5 Preferred Shares, in whole or in part, at the option of the Company, at $25.00 per share plus accrued and unpaid dividends or may, on 40 days’ prior notice, subject to stock exchange approvals, convert all or any of the Series 5 Preferred Shares into fully paid and non-assessable subordinate voting shares of the Company (the “Subordinate Voting Shares”). The number of Subordinate Voting Shares into which each Series 5 Preferred Shares may be so converted will be determined by dividing $25.00 together with all accrued and unpaid dividends at the date of conversion by the greater of $2.00 and 95% of the then Current Market Price (as defined herein) of the Subordinate Voting Shares. See “Details of the Offering”.

On and after March 1, 2008, each Series 5 Preferred Shares will be convertible at the option of the holder on the first day of March, June, September and December of each year on at least 65 days’ prior notice into that number of fully paid and non-assessable Subordinate Voting Shares determined by dividing $25.00 together with all accrued and unpaid dividends to the date of conversion by the greater of $2.00 and 95% of the then Current Market Price of the Subordinate Voting Shares. If a holder of Series 5 Preferred Shares elects to convert any of such shares to Subordinate Voting Shares, the Company may on at least 40 days’ notice prior to the conversion date elect to redeem such shares for cash and/or arrange for the sale of such shares to substitute purchasers. See “Details of the Offering”

The Current Market Price is the weighted average trading price for the 20 trading days which ends on the fourth day prior to the date specified for conversion or, if that fourth day is not a trading day, on the immediately preceding trading day.

The thing that makes this situation so fraught with interest is that IQW.PR.C is currently quoted at $23.35-50 and has actually declined in price recently (it was trading just under $25.00 a month ago). Note that 23.50 is 94% of par value.

We can assume the company will convert to common. They don’t have any money and they don’t want to pay the pref dividends. If I’m wrong on that one and they convert to cash, well, that’s $1.50 profit to today’s buyer, so don’t complain to me. If they don’t do anything, the holder can convert next March, assuming the company still exists at that point.

And then you get common shares based on PAR VALUE of the prefs. So, assuming you don’t mind a little uncertainty, you’re either getting par value in cash, or you’re getting common at 95% of market against par value; and the current price of the prefs is 94% of par value. When I do the math, that’s 10+% right there. And a dividend until conversion. Not entirely risk free but awfully tempting!

Read the prospectus. Check it out for yourselves. This is not a recommendation to DO it, it’s a recommendation to LOOK AT it.