Category: Issue Comments

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.

Scotia Managed Companies has announced that BNS Split Corp II:

has called 192,141 Preferred Shares for cash redemption on September 21, 2007 (in accordance with the Company’s Articles) as a result of the special annual retraction of 1,296,280 Capital Shares by the holders thereof. The Preferred Shares shall be redeemed on a pro rata basis, so that each holder of Preferred Shares of record on September 20, 2007 will have approximately 6.863% of their Preferred Shares redeemed. The redemption price for the Preferred Shares will be $20.83 per share.

The underlying security for BSC.PR.A is shares in the Bank of Nova Scotia. Asset coverage is 2.5:1.

The issue is rated Pfd-2(low) by DBRS, which looks very low to me. Their initial and as yet unchanged rating report for the company dated October 11, 2005, states:

The rating of the Preferred Shares is based on:
(1) The available downside protection, which is approximately 50% to the principal amount of the outstanding Preferred Shares at closing;
(2) The credit quality and consistency of BNS’s dividend distributions; and
(3) Portfolio shares that could be sold to provide liquidity and certainty of dividends to Preferred Shares.

The main constraint to the rating is the dependence of the entire portfolio on the shares of BNS for downside protection and dividend income.

The redemption date for both classes of shares will be September 22, 2010.

ScotiaBank preferreds are rated Pfd-1, this represents the upper limit for a split share corporation based on the common. As of last year’s Tier 1 analysis, Scotiabank had … call it $4,000-million of non-equity tier 1 capital covered by $16,000-million-odd equity. So call it 4:1 on the Scotiabank preferreds that are issued directly.

I don’t think Pfd-1 is appropriate until coverage exceeds 3:1 in any event … but I would be comfortable with a Pfd-2(high) rating on BSC.PR.A, given the 2.5:1 coverage.

BSC.PR.A is not tracked by HIMIPref™

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.

Not a stellar month for the BAM issues! These issues were discussed in the comments to the August 15 Market Action report; the basic story is that to a certain extent the BAM issues will trade as Pfd-3’s, a notch or two below their actual credit ratings of Pfd-2(low) (DBRS) and P-2 (S&P).

There are various explanations of why they should trade this way:

• BAM simply has too many issues on the market. There will be some participants who are attracted by the risk/reward profile, but have already bought all the BAM that they’re comfortable with having in the name [Note: This is very often a situation that applies to MAPF]
• The issue suffers from a conglomerate discount. Not very sensible, perhaps, but who ever told you the markets have to be sensible?
• Credit Anticipation. Some people believe that BAM is over-rated by the ratings agencies and explicitly trade it as a Pfd-3

Evidence from the world of bonds is available in some indications I have of 5-year CDS levels (see the Primer Links if you don’t know how a Credit Default Swap works). BAM is quoted at 39-44bp, +11 on the month; Enbridge (issuer of ENB.PR.A) is at 48-54bp (+1); Bombardier (BBD.PR.B / C / D) at 162-179 (-62); Alcan (until recently AL.PR.E / F) at 24-28 (+5); TransCanada (TCA.PR.X / Y) at 23-27 (-1); and finally BCE (lots!) at 397-418 (+54). Make of this what you will!

Update: It should be noted that there were a lot of Pfd-3 and other issues that did worse than the BAM issues. The list, as noted above, was restricted to issues included in the HIMIPref™ issues.

DBRS has announced it:

has today downgraded the Class B, Preferred Shares (the Preferred Shares) issued by Energy Split Corporation (the Corporation) from Pfd-2 (low) to Pfd-3 (high) with a Stable trend and has removed the Preferred Shares from Under Review with Developing Implications where the rating was placed on November 8, 2006.

The net asset value (NAV) of the Corporation decreased significantly shortly after its reorganization. The quick decline can be attributed to the Canadian government’s October 31, 2006, announcement relating to the change in taxation on income trusts and to the sensitivity of the Royalty Trust Portfolio, consisting of oil and gas income trusts, relative to the price of oil. Downside protection decreased from 54% at reorganization to 42% on November 2, 2006. Since then, the downside protection fluctuated in a band from 35% to 45% before falling to 34% on August 30, 2007, the low point since reorganization.
…
The redemption date for both classes of shares will be September 16, 2011.

Asset coverage is 1.52:1 as of August 30, according to Scotia Managed Companies. Thus, the underlying portfolio can lose 34% of its value before eating into the value set aside on the balance sheet for preferred shareholders, which is what DBRS means by “downside protection”.

ES.PR.B is not tracked by HIMIPref™.

DBRS has announced that it:

has today downgraded the long-term debt ratings of Quebecor World Inc. (Quebecor World or the Company) to B (high) from BB, and downgraded the preferred share rating to Pfd-5 (high) from Pfd-4. The trend on all ratings is Negative. Commensurate with the ratings downgrade, the ratings have been removed from Under Review with Negative Implications.

These issues were put on Review-Negative on August 14, 2007. They were downgraded from Pfd-4(high) on August 9, 2006.

It ain’t because of sub-prime, at least not directly:

DBRS had placed the ratings of Quebecor World Under Review with Negative Implications on August 14, 2007, as a result of concerns over the Company’s near-term liquidity, the uncertainty in terms of the outcome of negotiations regarding the Company’s bank agreements and the Company’s strategic review of its European printing operations. (Please see separate DBRS press release dated August 14, 2007.)

The downgrade reflects DBRS’s heightened concern over the Company’s near-term financial health which has been materially impacted by liquidity constraints and increased pressure on existing financial covenants.

Quebecor World’s liquidity continues to be adversely impacted by declining EBITDA and cash flow from operations, and could be further constrained should the Company violate debt covenants which could result in early debt redemption. Additionally, DBRS notes the Company’s near-term liquidity issues could be further impacted by restricted access to financing as a result of current capital market conditions.

S&P downgraded these issues to P-5(Watch Negative) from P-5(high)(Watch Negative) on August 28, 2007.

BCE has announced:

that 9,918,414 of its 20,000,000 Cumulative Redeemable First Preferred Shares, Series AA (“Series AA Preferred Shares”) have been tendered for conversion, on a one-for-one basis, into Cumulative Redeemable First Preferred Shares, Series AB (“Series AB Preferred Shares”). Consequently, BCE will issue 9,918,414 new Series AB Preferred Shares on September 1, 2007. The balance of the Series AA Preferred Shares that will not have been converted will remain outstanding and will continue to be listed on The Toronto Stock Exchange under the symbol BCE.PR.A.
    The Series AA Preferred Shares will pay on a quarterly basis, for the five-year period beginning on September 1, 2007, as and when declared by the Board of Directors of BCE, a fixed dividend based on an annual dividend rate of 4.800%.
    The Series AB Preferred Shares will pay a monthly floating adjustable cash dividend for the five-year period beginning on September 1, 2007, as and when declared by the Board of Directors of BCE. The Series AB Preferred Shares will be listed on The Toronto Stock Exchange under the symbol BCE.PR.B and should start trading on a when-issued basis at the opening of the market on August 28, 2007.
…
Under and subject to the terms of the definitive agreement, as amended, the investor group has agreed to acquire all of the outstanding Series AA Preferred Shares at a price of $25.76 per share and all of the outstanding Series AB Preferred Shares at a price of $25.50 per share, together, in each case, with accrued but unpaid dividends to the Effective Date (as such term is defined in the definitive agreement).

I previously recommended conversion into the AB shares … the difference in take-over price is minimal after accounting for interim dividends and the difference in expected dividends should the deal not go through is enormous.

The results of this conversion are excellent for traders, should the BCE prefs survive … two very large issues that convert into each other every five years should provide ample opportunity for arbitrage.

It has been a long time coming – and  the fund invested too early, as I can now tell with benefit of hindsight – but as of noonish today, 80,669 shares of BAM.PR.N have traded; it’s currently quoted at 19.46-60, 3×81.

It’s either a blow-out sale or a panic-stricken margin call!

BAM.PR.M has traded 1,700 and is quoted at 20.85-86, 5×18 … so investors can now swap virtually identical instruments and take out $1.25 … although, admittedly, the potential volume that could be done on the M side at these levels is probably extremely limited.