Category: Issue Comments

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.
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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.
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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.
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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.

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).
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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™.