Category: Issue Comments

I have been advised that the underwriters are seeking to get this issue off their books at $21.50.

I mentioned this issue’s new low on July 23. It commenced trading May 25 … bang smack in the middle of the decline in the overall preferred share market.

At 21.50, this issue has a yield in excess of 5.75% … very attractive, but remember that it is rated only Pfd-3(high) by DBRS and should not comprise more than about 5% of a diversified preferred share portfolio.

Update: It should be noted that the issue is rated by S&P as BBB-, or P-2(low) on their Canadian Preferred Share Scale.

Update #2, 3:40pm: I don’t think the underwriters are having a very nice time. Now quoted at 20.30-00, 3×5, with 9,550 shares traded, new low of 20.10. Ouch! CIBC has been on the sell side of the last ten trades. With an annual dividend of $1.2125, a price of 20.21 corresponds to a yield of 6% … grossed up, that’s the equivalent of 8.4% interest!

The Bank of Montreal has announced:

on August 27, 2007, it will redeem all of its Non-Cumulative Class B Preferred Shares Series 4. The redemption price, as provided for in the terms of the issue, is $25.00 per share, together with declared and unpaid dividends to the date of redemption. As the normal quarterly dividend is due on August 25, 2007, the Bank has declared a 2-day stub dividend of $0.006575 per Series 4 share. This results in a total redemption price of $25.006575 per Series 4 share.

This redemption comes at the first opportunity the bank has had to call the issue at par. It was retractible for shares commencing 2008-5-25 and paid $1.20 on $25.00 par value … BMO doesn’t need to pay 4.8% Dividends for its funding.

This issue has been included in the HIMIPref™ “Operating Retractible” index. It was highlighted 2006-10-25 for having a negative Yield-to-Worst

The Great-West Life Assurance Company has announced:

its intention to redeem all 2,093,032 Non-Cumulative Preferred Shares, Series L on October 31, 2007 for the cash redemption price of $25.00 per share. The Series L Preferred Shares were issued on November 13, 1997.

GWL.PR.L is a relatively small issue (only 2,093,032 shares outstanding, according to the TSX), but this is an interesting development nevertheless.

This is a fixed-floater that was issued as consideration for the shares of London Insurance Group and have a paid-up capital of only $2.74. There will be a significant Deemed Dividend realized on the redemption of these shares – so holders should consult their personal tax advisors and figure out – pronto! – whether they should be sold instantly or not.

This deemed dividend WILL BE LIABLE FOR TAX irrespective of whether the holder actually got them in exchange for London Insurance shares or bought them yesterday, so pay attention and don’t waste any time before figuring out what this means for you! I’m only saying this once! Those who hold the shares on the redemption date will be putting a massive dividend on their tax returns. If the shares were bought at, say, $25, they will also be entitled to claim an equally massive capital loss. These effects might offset … they might not. CONSULT A TAX ADVISOR!

The timing of the call is not accidental – from the Takeover Document:

Until October 31, 2007, the holders of the GWL Preferred Shares, Series L will be entitled to receive quarterly non-cumulative preferential cash dividends, as and when declared by the Board of Directors of GWL, payable on the last day of January, April, July and October in each year at a rate equal to $0.325 per share to initially yield 5.20 %. The first such dividend, if declared, will be payable on January 31, 1998 in an amount per share equal to $1.30 multiplied by a fraction, the numerator of which is the number of days in the initial dividend period and the denominator of which is 365.

From October 31, 2007 (the ‘‘Floating Rate Period’’), the holders of the GWL Preferred Shares, Series L will be entitled to receive floating non-cumulative cash dividends, as and when declared by the Board of Directors of GWL, payable on the last day of January, April, July and October in each year at a rate in respect of each quarterly dividend period equal to one quarter of the greater of (a) 75% of Prime and (b) 4.50%.

October 31, 2007 was to have been an Exchange Date and these were to have been exchangeable into Series M, a fixed-reset issue … but none of this is applicable any more.

As mentioned by GWO on their site, full details of GWO.PR.L are available on SEDAR – look for “The Great-West Life Assurance Company” “Take-over Bid Circular” date September 11, 1997.

Great-West Lifeco, the parent, will announce second quarter results on August 1. I do hope they will announce the redemption of CL.PR.B … the continued existence of this issue is making my life miserable.
GWL.PR.L is not tracked by HIMIPref™.

BCX Split Corp. has announced:

that it has called 1,521,805 Preferred Shares for cash redemption on August 3, 2007 (in accordance with the Company’s Articles) representing approximately 71.183% of the outstanding Preferred Shares as a result of the special annual retraction of 1,642,307 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 71.183% of their Preferred Shares redeemed. The redemption price for the Preferred Shares will be $15.71 per share.

This issue has not been tracked by HIMIPref™.

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.
…
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