Category: Issue Comments

BMONT Split Corp. has announced:

that it has called 180,051 Preferred Shares for cash redemption on August 3, 2007 (in accordance with the Company’s Articles) representing approximately 36.364% of the outstanding Preferred Shares as a result of the special annual retraction of 413,492 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 August 2, 2007 will have approximately 36.364% of their Preferred Shares redeemed. The redemption price for the Preferred Shares will be $27.45 per share.

This issue is tracked by HIMIPref™ but is such a low-volume issue that it is included only in the “Scraps” index.

DBRS has announced that it:

has today downgraded the long-term debt rating of Empire Company Ltd. (Empire or the Company) to BB (high) from BBB, the Preferred Share rating to Pfd-4 (high) from Pfd-3, and discontinued the short-term rating. The trends remain Negative for the long-term and Preferred Shares ratings.

DBRS placed Empire’s ratings Under Review with Negative Implications on April 27, 2007 following the announcement that Empire and Sobeys Inc. (Sobeys or the Company) had entered into an agreement by which Empire would acquire all of the outstanding common shares of Sobeys that it did not already own for approximately $1.06 billion. Empire previously owned 72.1% of the issued and outstanding shares of Sobeys.
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The significant increase in financial leverage, combined with a weaker profitability at Sobeys, has led to DBRS’s two-notch reduction in long-term ratings. The negative trend reflects the challenges involved with reversing the declining profitability and cash flow at Sobeys. DBRS is also concerned with the high level of budgeted capex and/or additional acquisitions that could result in further increases to debt for the consolidated group.

EMP.PR.B is a tiny little issue with 331,900 shares outstanding, total par value $8.3 million, according to the 2006 Annual Report. They pay 75% of prime. The TSX indicates a listing date of July 9, 1982, which illustrates one of my hobby-horses: with floaters you get short-term rates and long-term credit risk.

This issue is not, has not been, and will not be tracked by HIMIPref™ – too small!

John Nagel, who was last mentioned in this blog touting BCE Prefs to the National Post, is now doing the same for the Globe and Mail:

Desjardins doesn’t believe another bid will hurt the BCE preferred shareholders. Here’s why. BCE’s board has issued conditions that must be met for it to approve a superior bid, including the condition that another bid must be “more favourable from a financial point of view to the affected shareholders.”

Furthermore, the definitive agreement over the takeover defines affected shareholders as common and preferred shareholders (see Article 1: Interpretation, Section 1.1: Definitions).

“From a preferred share perspective, we feel that any additional bid(s) that may surface in the future for BCE Inc. will likely include a bid for the preferred share issues – as anything short of this would be a lower quality bid,” Desjardins said in a recent report.Even in a scenario where Telus Corp. counters with a hostile bid for BCE Inc., preferred shareholders should be reminded that Telus stated in its initial conference call that it would not sacrifice itsinvestment grade credit rating, Desjardins said. “This would mean that BCE Inc. preferred share credit ratings would not be changed, and should continue to trade as they had pre-takeover rumours (adjusted for recent interest rate effects).

Well – as I have said previously: he may well be right. And as I have also said previously: these shares cannot be analyzed as fixed income investments – there is event risk up the wazoo here and a position in the shares amounts to a speculation on the course of near term events outside the control of – and beyond the knowledge of – investors.

With respect to the points made in this particular column – and remembering that I am not so much disagreeing with Mr. Nagel as I am being a devil’s advocate and a properly gloomy fixed income analyst:

• With respect to the protection for “Affected Shareholders” … in the first place, the definition refers to Affected Shareholders as a group. It does not say anything about each particular class of Affected Shareholder. So if, for instance, common shareholders get an extra $1.50 and preferred shareholders get to keep their wonderful preferreds, how confident are you that the board will turn it down? Are you prepared to fight it out in court if you disagree with their decision?
• The board only has to approve a friendly bid. That’s what will make it friendly. A hostile bidder, focussing on the common, won’t care two hoots about silly agreements and funny definitions.
• Telus has indeed stated that it would not sacrifice its investment grade rating. Well, that’s a fine ambition, but I’m not sure how much I want to bet on that.

Mr. Nagel’s long term track record was not disclosed.

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

Bombardier has announced:

As of August 1, 2007, the Series 3 Preferred Shares will pay, on a quarterly basis, as and when declared by the Board of Directors of Bombardier Inc., cash dividends for the following five years that will be based on a fixed rate equal to the product of (a) the average of the yield to maturity, designated on July 11, 2007 by CIBC World Markets Inc. and National Bank Financial, that would be carried by a Government of Canada bond with a 5-year maturity, multiplied by (b) 115%.

The average yield of this Government of Canada bond is 4.580%. Accordingly, the annual dividend rate applicable to the Series 3 Preferred Shares for the period of five years beginning on August 1, 2007 will be 5.267%

As discussed earlier, the BBD.PR.B will continue to pay a ratcheted floating rate that may be expected to be 100% of Canadian Prime, currently 6.25%. Given that the issues are both rated Pfd-4 by DBRS, I do not recommend them for inclusion in fixed-income portfolios – they’re equity-substitutes for heavens’ sake! If you must hold either of them, I recommend the BBD.PR.B –  I consider the chance that Canadian Prime will average less than 5.25% over the next five years to be pretty slim.

BCE has announced:

that in accordance with the terms of its articles, it has sent a conversion notice to the holders of its Series AA Cumulative Redeemable First Preferred Shares. A copy of this notice has been publicly filed by BCE on SEDAR.

It’s not entirely clear to me whether this release, dated July 13, refers to the Reminder Notice dated June 28. I think they had other things to worry about at that time!

Anyway … the conversion is effective September 1, 2007.

I’ll post more on this as news trickles in. Most people will, I think, be better served by converting to ‘B’ …. the Teachers’ bid price is less, but not much less, but the dividends will probably be much greater in the event that the Teachers’ bid does not close.

It is interesting to note that BCE.PR.A is included in the S&P/TSX Preferred Share Index. Those who are historically inclined will remember that the long-dead Income Trust related offer bid 25.65 for BCE.PR.A.

The Falconbridge preferreds, FAL.PR.A, FAL.PR.B & FAL.PR.H, don’t get mentioned on this blog very much – and I have even complained about them.

However, investors should know of the Xstrata 2007-06-19 Press Release which states:

On February 21, 2007, the Parliament of Canada enacted amendments to the Income Tax Act (Canada) which are intended to reduce the personal tax rate on “eligible dividends” paid after 2005. Falconbridge hereby notifies its holders of preferred shares that the full amounts of the dividends to be paid on the respective series of preferred shares set out above are designated as eligible dividends for purposes of these amendments and any applicable corresponding provincial provisions

Alcan has announced:

they have reached an agreement for Rio Tinto to make an offer to acquire all of Alcan’s outstanding common shares for US$101 per common share in a recommended, all cash transaction.

There is no mention of the preferred shares ( AL.PR.E & AL.PR.F ) or whether Rio Tinto will take the necessary steps to ensure that the dividends thereon are considered “eligible dividends”.

The preferreds are currently on “Credit Watch – Developing” by DBRS.

Update: DBRS is maintaining the “Credit Watch – Developing”:

DBRS is maintaining the ratings of Alcan Inc. (Alcan) Under Review with Developing Implications following Rio Tinto Plc’s (Rio) announcement today to acquire Alcan in a friendly takeover for $38.1 billion.
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In the event that this transaction is completed based on the current structure of Rio’s offer, DBRS would expect Rio’s rating to flow through to Alcan’s rating. Currently, Rio’s rating is AA (low), Under Review with Negative Implications. DBRS notes that other mining conglomerates may yet elect to make a higher bid for Alcan.

Note that Alcan’s bond rating is A(low), so unless Rio was severely downgraded, a flowthrough would improve credit quality.

Update: Alcoa’s offer has been withdrawn, amid speculation that it has become a target itself.

I just noticed this National Post article from July 4:

“If any other consortium is going to do a privatization, I think a precedent has been set by Teachers and the board of BCE,” said John Nagel, an analyst at Desjardins Securities who specializes in preferred shares. “The common, preferred and minority interests will have to be looked after in any subsequent deal.”Even if Telus Corp., a rival telecommunications company, makes a subsequent bid for Bell, it will also feel pressured to redeem the preferred shares rather than leave them trading below par

John Nagel’s long term track record was not disclosed. He might be right … but I’ll stick to my guns and say these issues are far too risky to be held in a fixed income portfolio. 

Link for browsing purposes: S&P Leaves BCE on Credit Watch Negative.

Each of the headlined issues has been redeemed as advertised: BAM.PR.T and CCS.PR.A were specifically noted on this blog, while CAC.PR.A was a scheduled maturity.

BAM.PR.T has been removed from the InterestBearing Index, while the other two were assigned to “Scraps” at the time of their redemption.