Category: Issue Comments

DBRS has announced it has:

placed the BB long-term debt ratings and Pfd-4 preferred share rating of Quebecor World Inc. and its related subsidiaries (Quebecor World or the Company) Under Review with Negative Implications. The Under Review – Negative status reflects DBRS’s concerns over the Company’s near-term liquidity, outcome of negotiations regarding the Company’s bank agreements (the existing waiver for which expires at the end of Q3 2007) and the Company’s strategic review of its European operations – all factors that have been exacerbated by continued weakness in the Company’s operating results. DBRS expects to complete its review after the end of Q3 2007.

DBRS is concerned with Quebecor World’s near-term liquidity, which continues to be negatively impacted by declining EBITDA and cash flow from operations, pressuring existing financial covenants and significantly restricting the Company’s financial flexibility.

It hasn’t been too long since these issues were downgraded from Pfd-4(high) to Pfd-4.

S&P rates the issues P-5(high) as of Sept 28/06; Watch Negative as of August 9/07. When placing the issues on Watch Negative, S&P stated:

“The CreditWatch placement reflect Quebecor World’s ongoing weak performance and our concerns that the company’s earnings, credit measures, and financial flexibility could weaken further due to a challenging pricing environment, operating losses in its European division, and intense competition,” said Standard & Poor’s credit analyst Lori Harris. “Furthermore, Quebecor World’s waivers from its bank group for certain financial covenants are only approved through to the release of its third-quarter 2007 financial results,”

HIMIPref™ maintains the Quebecor World preferreds in its database. These issues are recorded solely for the sake of continuity and have no influence on the calculation of yield curves.

EPCOR Preferred Equity has announced (and its parent, EPCOR, has confirmed, in case anybody’s worried there’s a rogue treasurer on the loose):

its intention to redeem all of the outstanding Cumulative Redeemable First Preferred Shares, Series I (“the Preferred Shares”) on September 30, 2007 at a redemption price of $25.00 per Preferred Share. The Preferred Shares were issued to investors by EPCOR Preferred Equity Inc. on September 27, 2002.
    EPCOR will fund the redemption from cash balances and funds available under its revolving credit facilities.

Eight-million of these shares were outstanding, rated Pfd-2(low) by DBRS.

According to EPCOR, EPCOR Preferred Equity

was established for the purpose of raising equity capital, on a consolidated basis, for EPCOR Utilities Inc., its parent corporation. In turn, the capital is used to provide loan financing to other subsidiaries of EPCOR Utilities Inc.

This issue has not been included in the HIMIPref™ universe.

Update 2007-09-11: The headline previously referred to this issue as “EPE.PR.E”. This error has now been corrected.

BCE closed today on the TSX at $38.85 – down $0.25 after dipping as low as $37.55. This is way below the $42.75 takeover price – just over 9.1% below, in fact – so, given that the takeover is a matter of great pith and moment for preferred share investors, I thought I’d review what’s happened so far.

On June 30, I reported on the takeover and my puzzlement regarding the inclusion of the preferred shares in the offer. The Teachers press release trumpetted:

The purchaser has obtained a debt commitment to finance the transaction subject to usual terms for these types of financings.

It should be noted that the “Purchaser” is not Teachers, but a numbered company set up by it and its partners.

On July 17, the Great Sub-Prime Panic of ’07 got rolling in earnest:

Mind you, a little safety could be just what the doctor ordered down south! Bear Stearns has warned that the smaller of its two famous hedge funds is a total write-off, and the other one isn’t much better. Take this lesson to heart: just because a firm is good at selling investments doesn’t mean that they’re necessarily good at running investments.

On July 26, I had to admit:

I couldn’t resist checking the definitive BCE / Teachers’ Agreement: 

6.4(9): The Purchaser acknowledges and agrees that its obtaining financing is not a condition to any of its obligations hereunder, regardless of the reasons why financing is not obtained or whether such reasons are within or beyond the control of the Purchaser. For the avoidance of doubt, if any financing referred to in this Section 6.4 is not obtained, the Purchaser will continue to be obligated to consummate the Arrangement, subject to and on the terms contemplated by this Agreement.

On July 27 I reported that:

Citi Investment Research cut its recommendation, citing growing risks to its financing.

Later in that post, I speculated:

I’ve thought the issue in the context of what a massive break-fee-loss would mean to Teachers, and come to the conclusion that I don’t know enough about the issue. It would seem to me reasonable that there might be provisions regarding financing in the consortium agreement, to the effect that, if the deal fails on financing, the loss would be borne by Teachers financial partners, Providence Equity Partners Inc. and Madison Dearborn Partners, LLC. After all, they’re the financial muscle for the deal! It may be that such a provision is why Mr. Lamoureux is so sanguine … but we will just have to sit back and wait and see! In the meantime, I highly doubt that I’ll be throwing chips down on that table!

The plot thickened on July 31:

there are musings that the USD 37.2-billion takeover of TXU is at risk, with the suddenly nervous financiers tempted to pay a billion bucks to get out of the deal. Observant readers will not that both amounts are oddly reminiscent of the BCE / Teachers’ agreement, but the musings are rebutted on another news service. Trial balloon? Chatter from clerks? Who knows? There would be a big reputational hit to take. 

On August 2, BCE announced:

that all necessary filings have now been made for regulatory approval of the proposed acquisition of BCE by an investor group led by Teachers’ Private Capital, the private investment arm of the Ontario Teachers’ Pension Plan, Providence Equity Partners Inc. and Madison Dearborn Partners, LLC. These include filings with Industry Canada, the Canadian Radio-television and Telecommunications Commission, the Canadian Competition Bureau, the U.S. Department of Justice and Federal Communications Commission and six U.S. states.

On August 3, I reported: 

Speaking of Telus, they released their quarterlies today, and noted:

TELUS in July continued its assessment of whether it should potentially make a competing offer for BCE. TELUS has concluded this assessment and it does not intend to submit a competing offer to acquire BCE.

On August 8, BCE announced:

that a special shareholder meeting will be held on Friday, September 21, 2007, at 9:30 a.m. in Montreal. At the special meeting, holders of common and preferred shares registered at the close of business on August 10, 2007 will be asked to vote on the privatization of BCE by, among others, Ontario Teachers’ Pension Plan Board and affiliates of Providence Equity Partners Inc. and Madison Dearborn Partners, LLP.

Which brings us, basically, to today, with speculation on other buy-outs, the common 9.1% below the take-over price and a press release from Teachers:

In response to media inquires, officials at Ontario Teachers’ Pension Plan and their partners Providence Equity Partners Inc. and Madison Dearborn Partners, LLC, stated today that they remain committed to the terms of the definitive agreement reached on June 30, under which the investment partners would acquire BCE. The transaction is subject to shareholder and regulatory approvals.

The press release has been picked up by Reuters and Bloomberg. Bloomberg also reports that

• Edward Jones & Co. has cut the BCE rating to “Sell” from “Hold”
• An analyst at Three Macs said BCE “has definitely become higher risk than it was even two weeks ago because of the transaction risk,”
• A National Bank Financial analyst said “I still think this deal has lower than average risk of breaking” and rates the shares “Sector Perform”

Bloomberg did not disclose long-term track records for any of these analysts.

What do I say? I say BCE Prefs are a crapshoot on credit. I don’t play craps with investment money.

BCE has the following preferred shares outstanding: BCE.PR.A, BCE.PR.C, BCE.PR.E, BCE.PR.F, BCE.PR.G, BCE.PR.H, BCE.PR.I, BCE.PR.R, BCE.PR.S, BCE.PR.T, BCE.PR.Y & BCE.PR.Z

BCE has announced:

BCE Inc. will, on September 1, 2007, continue to have Cumulative Redeemable First Preferred Shares, Series AA (“Series AA Preferred Shares”) outstanding if holders of at least 2.5 million of its Series AA Preferred Shares elect not to convert such shares into Cumulative Redeemable First Preferred Shares, Series AB by August 22, 2007. In such a case, as of September 1, 2007, the Series AA Preferred Shares will pay, on a quarterly basis, as and when declared by the Board of Directors of BCE Inc., a fixed cash dividend of $0.300000 based on an annual dividend rate of 4.800% for the five-year period beginning on September 1, 2007.

As previously discussed, the Teachers’ bid includes cancellation of BCE.PR.A (the fixed rate) for $25.76 and of BCE.PR.B (the ratchet rate) for $25.50.

BCE.PR.B does not currently exist; according to the prospectus the initial rate will be 80% of prime, ratcheted. If we assume that two dividends will be paid prior to cancellation and that this rate increases at the maximum speed of 4% per month and that prime continues to be 6.25%, then we arrive at an average rate of 90% of prime, which is 5.625%, which is dividends per share of about $0.70.

Two dividends on the “A” at 4.80% will come to $0.60.

Thus, if one were absolutely sure that the Teachers bid will take be consumated as advertised, one would stick with the BCE.PR.A at 4.80%.

I’m not convinced, though. I think there is a significant chance that the bid will not be completed as currently envisaged and that the preferred shares will continue to exist in some form or another at a reduced credit rating. Should this come to pass, a ratcheting floater will almost certainly be much more valuable than a 4.80% fixed rate to be reset/exchange in 2012. Given that the potential reward for keeping the BCE.PR.A issue is so low – only sixteen cents per share, net – I believe that the risk/reward profile makes conversion to BCE.PR.B the path of prudence.

Others may disagree!

Better late than never! In a press release dated July 4, Faircourt Income & Growth Split Trust announced:

After giving effect to the redemption of the Trust Units, and in order to maintain appropriate balance in the fund between the Trust Units and Preferred Securities, the Manager announces that $45,000,000 in aggregate principal amount of the Trust’s 6.25% outstanding Preferred Securities (the “Preferred Securities”) will be redeemed on August 3, 2007 (the “Redemption Date”).

Interestingly, this press release is not to be found on the fund’s website.

The proportion of preferred securities redeemed is slightly over 25% of the total.

I noted the high yield available on this issue in the June Index Review – with the redemption, a lot of that yield has been received earlier than anticipated!

Update, 2007-08-11: The last commentary regarding this issue had to do with the DBRS credit review. There appears to have been some kind of oversight at DBRS – the issue is still “Under Review – Developing”

As fanatical devotees of the preferred share market will know, the two captioned issues are exchangeable into each other every five years … which gives rise to opportunities for arbitrage.

There are tax and liquidity headaches associated with this arbitrage, but it can be profitable – I have, for instance, received the following communication:

I can finally report that the BBD Pref B/D Arbitrage trades have finally closed.  I received the Pref B floating rate shares yesterday and swapped them into my shorting accounts to close out the positions today.  For 8-9 months, these trades returned a little over 10% annualized after costs — exactly as expected.  I see there are still 2.4M Pref D shares still outstanding, so we might get other arbitrage chances in the future.  Unlike my previous arbitrage trades of a couple of years ago when a $2.00 price difference evaporated in 2-3 months, this trade took the full period.  Indeed, the Aug 2 closing price difference of $1.60 is basically the same as when I started, so you could say the market is a wonderful forecaster!

So which pension fund wants to be first to give me a $50-million hedge fund mandate?

Update, 2007-08-10: The dividend going forward on the BBD.PR.D has been previously reported as 5.267%.

Update, 2007-08-12: I note from the Bombardier website that:

Following the conversion privilege of August 1, 2007, 82,736 Series 2 preferred shares were converted into 82,736 Series 3 preferred shares and 6,949,749 Series 3 preferred shares were converted into 6,949,749 Series 2 preferred shares.

Series 3 is BBD.PR.D, the Fixed-Rate element of the pair.

I have mentioned earlier that I was looking forward to today’s GWO Earnings Release for hints of what they will be doing with preferreds.

No news! And no purchases through the GWO.PR.E / GWO.PR.X Issuer Bid so far this year either. These two issues are currently trading at what I consider to be elevated levels, with pre-tax bid-YTWs in the 3.8% range. This is an interest equivalent (at a factor of 1.4x) of about 5.3%, which in turn is about where Great-West bond paper is trading. Given all the current uncertainty in the credit markets, there is not much incentive for them to purchase on the open market from a strictly financial point of view – there may be regulatory considerations of which I am not aware), so I think we can write off the next few months in terms of hoping for purchases and cancellations of these issues.

As far as CL.PR.B is concerned … who knows? It pays $1.5625, is currently callable at $26.00 and the redemption price declines by $0.25 p.a. every December 1 until 2010-12-31, after which it is callable at $25.00. Thus, net cost to the company of leaving it out is only $1.3125 p.a., which is 5.25% of par, which is probably what it would take to issue a new perpetual in size in this market. I suspect the window of opportunity for redemption of this issue has closed – at least for now.

Energy Split Corp. II has announced:

that its Board of Directors has approved a proposal to reorganize the Company. The reorganization will permit current holders of both Capital Yield Shares and ROC Preferred Shares to extend their investment in the Company beyond the scheduled redemption date of December 16, 2007 for up to an additional 3 years. Under the proposed reorganization, holders of ROC Preferred Shares will be entitled to receive a new coupon rate which will be fixed prior to the time of the shareholder meeting described below in the context of market conditions at that time. In approving the proposal to reorganize the Company, the Board received and relied on the financial advice and recommendations of Scotia Capital Inc.
    A special meeting of holders of Capital Yield Shares and ROC Preferred Shares will be held on October 23, 2007 to consider and vote upon the proposed reorganization. Details of the proposed reorganization will be outlined in an information circular to be prepared and delivered to holders of Capital Yield Shares and ROC Preferred Shares in connection with the special meeting and will be available on www.sedar.com.

It is, of course, impossible to comment meaningfully on this proposal until the “new coupon rate” has been disclosed.

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.

Term extensions this year have been approved for DFN.PR.A and FFN.PR.A; the proposal for FTN.PR.A was denied by the capital stockholders.

Alcan has announced:

the redemption of its Floating Rate Cumulative Redeemable Preference Shares, Series C, 1984 Issue and 1985 Issue, and its Cumulative Redeemable Preference Shares, Series E, on September 3, 2007.

The redemption price is CAD25.00 per Preference Share.

There are 4,199,900 Preference Share, Series C, 1984 Issue, 1,500,000 Preference Shares, Series C, 1985 Issue and 2,999,900 Preference Shares, Series E outstanding.

About time they got rid of those silly things, that’s what I say! This announcement is, presumably, related to the Rio Tinto agreement.

Thanks to assiduous reader SE for bringing this to my attention while the ink was still drying on the press release!

I thought it would be fun to look at the valuation of EPP.PR.A, given what I’ve heard about the underwriters getting impatient.

For those who are curious … Pfd-3 (& (high)) issues (using DBRS ratings) trading above their curve price are from BPO, FTS & LB.

As always with issues of this quality, choice of investment is as much a matter of credit anticipation as it is of cash-flow analysis … so before jumping in, do the work and make your own mind up! HIMIPref™’s accuracy is nothing special with these lower-grade credits … but I thought it would be fun to look!