Category: Issue Comments

In a dismal opening session even by recent standards, CCS.PR.C, announced May 23, commenced trading today.

Three trades.

Four hundred shares.

Closed at 23.00-99, 2×5.

So, I suspect the underwriters still have most of this on their books. This issue wasn’t priced too horribly to begin with, but arrived when the market was in a downturn. It may even have contributed to the downturn, if the underwriters were frantically shorting tradable shares to hedge their position (which would tie in with the observation that more liquid issues got hurt most in May), but that’s merely speculation.

If the underwriters do, in fact, have a lot on their books, there might well be an inventory blow-out sale on the horizon … but I keep looking for a sale on BAM.PR.N that hasn’t arrived yet, so don’t go by what I say!

The curve price for this issue of $22.63 is derived as follows:

Price due to base-rate :  22.80
Price due to short-term :  -0.50
Price due to long-term :   1.90
Price due to Interest Income :   0.00
Price to to Cumulative Dividends :   0.00
Price due to SplitShareCorp :   0.00
Price due to Retractibility :   0.00
Price due to Credit Spread (2) :   0.00
Price due to Liquidity :   0.00
Price due to Floating Rate :   0.00
Price due to Credit Spread (3) :  -1.75
Price due to error :   0.18
Price due to Credit Spread (High) :   0.00
Price due to Credit Spread (Low) :   0.00

CCS.PR.C has been added to the HIMIPref™ universe with the securityCode A43031, replacing the preIssue code of P28000. A reorgDataEntry has been processed to reflect the change.

GWO has announced:

that an affiliated Delaware Limited Partnership, Great-West Lifeco Finance (Delaware) LP (GWLP), has today filed a preliminary short form prospectus for an offering by GWLP of subordinated debentures. The obligations of GWLP under the debentures will be guaranteed by Lifeco on a subordinated basis.

The subordinated debentures will be offered through a syndicate of underwriters jointly led by BMO Capital Markets, Merrill Lynch Canada and Scotia Capital. The amount and yield of the Debentures will be determined prior to the filing of the final prospectus. The net proceeds will be used by GWLP to provide funding to subsidiaries of Lifeco for general corporate purposes, including to finance the previously announced acquisition of Putnam Investments Trust.

The short-form preliminary prospectus is available on SEDAR. Most of the good stuff – issue size, interest rate – has been left blank, but basically it’s fixed for ten years, floating thereafter. It sort-of matures in 2047, but really matures in 2067. There is also a “replacement capital” covenant that governs how fast they can pay it back.

Frankly issue terms are ferociously complex and quite a bit of time will be required to understand the provisions of this debt. However, one way or another, it looks like the funding push is underway and GWO may now start clarifying the situation with respect to preferreds.

GWO has the following direct issues outstanding: GWO.PR.E, GWO.PR.F, GWO.PR.G, GWO.PR.H, GWO.PR.I & GWO.PR.X. Related issuers are POW, PWF & CL.

S&P earlier placed BMO’s ratings under Credit-Watch Negative, following revelations that management had not heard of the concept of “Separation of Function”.

S&P has now:

lowered its short- and long-term counterparty credit ratings on Bank of Montreal (BMO; TSX: BMO) and its related subsidiaries to ‘A+/A-1’ from ‘AA-/A-1+’. At the same time, Standard & Poor’s removed the ratings from CreditWatch with negative implications, where they were placed May 17, 2007. The outlook is stable.

The downgrade reflects the weaknesses Standard & Poor’s found within the bank’s risk management functions, the impact of competitive pressures on its domestic and U.S. personal and commercial (P&C) bank, the bank’s lower level of risk-adjusted earnings as compared with its North American peers, and smaller retail funding base which incrementally increased the bank’s liquidity risk position.

BMO has the following preferred share issues outstanding: BMO.PR.G, BMO.PR.H, BMO.PR.I, BMO.PR.J & BMO.PR.V.

The preferred share ratings were left unchanged, but this is a major and permanent (well … long-lasting!) black eye for the bank – and unless management quickly reviews its internal controls, could be indicative of worse losses to come. Which will, of course, be blamed on Rogue Traders … not management.

Dividend 15 Split Corp. has announced that it:

has completed its Offering of 841,476 Preferred Shares at $10.35 per share for aggregate gross proceeds of $8,709,276. The Preferred Shares will begin trading on the Toronto Stock Exchange on June 6, 2007 under the symbol DFN.PR.A.

In a related news release regarding the stock dividend that triggered the issue, the company stated:

special capital gains cash dividend of $0.50 per Class A share and a special capital gains stock dividend of $1.75 per Class A share. The dividends on the Class A share are payable June 6, 2007 to shareholders on record as of June 4, 2007.
…
The Class A share reinvestment price will be $19.55 per share.

I had been worried that the issue of units would dilute the asset coverage of the prefs substantially, but these fears were not realized. A reinvestment price of $19.55 ties in nicely with the May 31 NAV of $29.79 for the unit (which includes $10.00 for the prefs), given that the record date of June 4 implies an ex-date of May 31. Both values agree well with the May 15 NAV of $31.95, given a total dividend of $2.25.

So … DFN.PR.A continues to have very good asset coverage, currently just under 3.0:1 which, if anything, exceeds the normal range for an issue rated Pfd-2 by DBRS.

Well – I said it was pretty certain and every now and then I get something right! CIBC has announced:

its intention to redeem all of its issued and outstanding Non-cumulative Class A Preferred Shares Series 25 for cash. The redemptions will occur on July 31, 2007. The redemption price is $26.00 per Series 25 share.
    The $0.375 per share quarterly dividend declared on May 31, 2007 will be the final dividend on the Series 25 shares and will be paid on July 27, 2007 to shareholders of record on June 28, 2007, as previously announced.

CM.PR.C closed yesterday at 26.10-24.

Charterhouse Preferred Share Index Corporation, which I reviewed last year, is introducing a rather odd shareholders’ resolution:

with respect to the Corporation, a special resolution approving an amendment to the Articles of Incorporation to permit the Corporation without obtaining approval of the Securityholders, to issue Securities at a price per Security that is less than the net asset value per Security at such time.

Their rationale for seeking such authority is:

The Manager is of the view, in respect of each Fund and the Corporation, that the issuance of Securities at a price which may be less than the net asset value per Security of the Fund or the Corporation may, in certain circumstances, be in the best interest of the Fund or Corporation and the Securityholders. For example, the ability to take advantage of certain investment opportunities may depend, in part, on the availability of additional capital to employ at opportune times. By providing the Funds and the Corporation with the ability to issue securities at less than net asset value, without the delay and cost of obtaining Securityholder approval, the Funds and the Corporation would have the ability to efficiently raise additional capital through, for instance, a rights offering, allowing the Funds and the Corporation to take advantage of these time-sensitive investment opportunities, thereby capturing additional returns for Securityholders.

Quite frankly, I’m puzzled. PFD.PR.A is an index fund. Just what “investment opportunities” do they expect to see? To quote from their web page:

The Charterhouse Preferred Share Index Corporation provides holders of the Preferred Shares with:

1. cost-efficient exposure to an indexed portfolio (the “Portfolio”) that is representative of the universe of fixed rate preferred shares and preferred securities of Canadian issuers (“Portfolio Securities”) listed on the Toronto Stock Exchange (“TSX”); and
2. return of capital distributions, paid quarterly

The meeting is set for June 11, full details and the management circular are available on SEDAR, under “Public Companies” – search for “Charterhouse Preferred Share Index Corporation”. If I were a shareholder, I’d have a lot of questions to ask about these “investment opportunities” and I would be voting against the resolution if I didn’t like the answers. My fear would be a rights offering priced significantly under market …. as of May 31, for instance, the NAV was $22.01 and the trading price was $21.70. Now, I’m not sure exactly what limits the TSX puts on rights offerings, but it seems to me that they could issue rights to shareholders allowing the purchase of more stock at $21.00. Now, in a perfectly efficient capital market, I’m basically indifferent as to whether I sell the rights or exercise them. We are not blessed with perfectly efficient capital markets, however, so commissions on the rights sales could leave me worse off, let alone my market risk on the sale.

Shareholders should be looking for answers on this one.

Hat-tip to a Canadian Moneysaver reader for bringing this to my attention!

Well, I wanted to do a little attribution analysis for my own purposes and now find that I have the same viewpoint as a publish-or-perish academic: publish everything! If you have a good laundry list, publish that!

The worst performers of May (of the issues included in the HIMIPref™ Universe) were:

As of May 31, CM.PR.J was quoted at 22.85-90 with a curvePrice of 23.06; GWO.PR.I was quoted at 22.83-85, curvePrice 22.86. These issues are very similar, having the same annual coupon and the same credit rating. It is because these issues now appear reasonably fairly priced that I have characterized the probable cause as “Rationalization”. However, I could just as easily – and perhaps better – characterized the probable cause as simply “Vanishing Liquidity Premium”.

Let’s have a closer look at those curve Prices:

…and…

I discussed the yield curve and the collapse of the liquidity premium in the post HIMI Index Performance, May 2007:

One very interesting thing that happened this month is that a lot of the yieldCurvePremiumLiquidity disappeared, as shown in this graph. I interpret the change in the premium as reflecting a desire by some holders, at least, to get out of the sector in size and quickly; such holders might simply sell their most liquid holdings to adjust portfolio exposures; this will affect the prices of these issues; hence, liquidity will become a lot less expensive. The PerpetualDiscount index is the most liquid of all the sub-indices – it’s dominated by recent issues, apart from anything else – and thus a portion of the decline in this index might be attributed to this factor rather than the intrinsic characteristics of the investment.

Such a hypothesis gains some support from examination of the changes in the yield curve, which I found a little surprising. The long-end hasn’t moved by nearly as much as one might have expected. Note that this graph is of the TAXABLE curve and refers to SPOT YIELDS … therefore, the x-axis shows the yield one might expect on a “stripped dividend”, after tax.

Hopefully, the tables above will make my meaning a bit more clear. However, I should advise explicitly that the huge importance of liquidity in the above tables is probably over-stated. It comes out of the math, all right, and I have no problems with the mechanical correctness of the math … but as I’ve re-stated above, liquidity is not distributed homogeneously across the HIMIPref™ universe – it is highly concentrated in the PerpetualDiscount segment and this can lead to a confounding of the analysis.

In the comments to the June 1 Market Action Report, assiduous reader tobyone posted:

RE: 5.25% LFE.PR.A bid @10.26 indicates yield of over 5% according to Globeinvestor and TDW yield calculators vs. your table. I hope this is an error because I hold this one but don’t want it @4.73%

Well, Globeinvestor and TDW are enormous companies, with an excellent record of sticking their brand name on various things, but I’ll see what I can do.

I stand by my calculation of 4.73%. First, the details, in all their glory, from the HIMIPref™ cashFlowDiscountingAnalysisBox:

A3555025 0138
2007-07-10        DIVIDEND   0.04   0.995022   0.04
2007-08-10        DIVIDEND   0.04   0.991082   0.04
2007-09-10        DIVIDEND   0.04   0.987158   0.04
2007-10-10        DIVIDEND   0.04   0.983376   0.04
2007-11-10        DIVIDEND   0.04   0.979482   0.04
2007-12-10        DIVIDEND   0.04   0.975729   0.04
2008-01-10        DIVIDEND   0.04   0.971866   0.04
2008-02-10        DIVIDEND   0.04   0.968018   0.04
2008-03-10        DIVIDEND   0.04   0.964433   0.04
2008-04-10        DIVIDEND   0.04   0.960614   0.04
2008-05-10        DIVIDEND   0.04   0.956933   0.04
2008-06-10        DIVIDEND   0.04   0.953145   0.04
2008-07-10        DIVIDEND   0.04   0.949493   0.04
2008-08-10        DIVIDEND   0.04   0.945733   0.04
2008-09-10        DIVIDEND   0.04   0.941989   0.04
2008-10-10        DIVIDEND   0.04   0.938380   0.04
2008-11-10        DIVIDEND   0.04   0.934664   0.04
2008-12-10        DIVIDEND   0.04   0.931083   0.04
2009-01-10        DIVIDEND   0.04   0.927397   0.04
2009-02-10        DIVIDEND   0.04   0.923725   0.04
2009-03-10        DIVIDEND   0.04   0.920421   0.04
2009-04-10        DIVIDEND   0.04   0.916777   0.04
2009-05-10        DIVIDEND   0.04   0.913264   0.04
2009-06-10        DIVIDEND   0.04   0.909648   0.04
2009-07-10        DIVIDEND   0.04   0.906163   0.04
2009-08-10        DIVIDEND   0.04   0.902575   0.04
2009-09-10        DIVIDEND   0.04   0.899002   0.04
2009-10-10        DIVIDEND   0.04   0.895557   0.04
2009-11-10        DIVIDEND   0.04   0.892011   0.04
2009-12-10        DIVIDEND   0.04   0.888593   0.04
2010-01-10        DIVIDEND   0.04   0.885075   0.04
2010-02-10        DIVIDEND   0.04   0.881571   0.04
2010-03-10        DIVIDEND   0.04   0.878418   0.04
2010-04-10        DIVIDEND   0.04   0.874940   0.04
2010-05-10        DIVIDEND   0.04   0.871587   0.04
2010-06-10        DIVIDEND   0.04   0.868137   0.04
2010-07-10        DIVIDEND   0.04   0.864810   0.04
2010-08-10        DIVIDEND   0.04   0.861386   0.04
2010-09-10        DIVIDEND   0.04   0.857976   0.04
2010-10-10        DIVIDEND   0.04   0.854688   0.04
2010-11-10        DIVIDEND   0.04   0.851304   0.04
2010-12-10        DIVIDEND   0.04   0.848043   0.04
2011-01-10        DIVIDEND   0.04   0.844685   0.04
2011-02-10        DIVIDEND   0.04   0.841341   0.04
2011-03-10        DIVIDEND   0.04   0.838331   0.04
2011-04-10        DIVIDEND   0.04   0.835012   0.04
2011-05-10        DIVIDEND   0.04   0.831813   0.04
2011-06-10        DIVIDEND   0.04   0.828520   0.04
2011-07-10        DIVIDEND   0.04   0.825345   0.04
2011-08-10        DIVIDEND   0.04   0.822077   0.04
2011-09-10        DIVIDEND   0.04   0.818822   0.04
2011-10-10        DIVIDEND   0.04   0.815685   0.04
2011-11-10        DIVIDEND   0.04   0.812455   0.04
2011-12-10        DIVIDEND   0.04   0.809342   0.04
2012-01-10        DIVIDEND   0.04   0.806138   0.04
2012-02-10        DIVIDEND   0.04   0.802946   0.04
2012-03-10        DIVIDEND   0.04   0.799972   0.03
2012-04-10        DIVIDEND   0.04   0.796805   0.03
2012-05-10        DIVIDEND   0.04   0.793752   0.03
2012-06-10        DIVIDEND   0.04   0.790609   0.03
2012-07-10        DIVIDEND   0.04   0.787580   0.03
2012-08-10        DIVIDEND   0.04   0.784461   0.03
2012-09-10        DIVIDEND   0.04   0.781356   0.03
2012-10-10        DIVIDEND   0.04   0.778362   0.03
2012-11-10        DIVIDEND   0.04   0.775280   0.03
2012-12-01  FINAL DIVIDEND   0.03   0.773199   0.02
2012-12-01        MATURITY  10.00   0.773199   7.73
Total Cash Flows    12.8739
Total Present Value    10.2597
Discounting Rate 4.7291 % (Annual rate compounded semi-annually)

More simply, I’ll say: OK, this thing pays $0.525 p.a. At a price of $10.26, it will give rise to a $0.26 capital loss on its maturity 2012-12-1. That’s 5.5 years away so call the annual capital loss $0.05 (for the sake of an argument). Therefore, of the $0.525 dividends received every year, $0.475 is income and $0.05 is return of capital. Over the period, my average capital invested is (10.26 + 10.00) / 2 = 10.13. Therefore, my (very roughly calculated) yield is $0.475/$10.13, or 4.69%, which is close enough to my precisely calculated yield of 4.73% that I’m not going to panic.

I’m not familiar with the GlobeInvestor or TDW yield calculators – if you will send me a link, I’ll take a look at them. The most common errors with such things are:

• Are they calculating current yield = $0.525 / $10.26 = 5.12%? This is wrong, since it ignores the capital loss on maturity.
• Are all the dividends incorporated? Ex-dates can be a little tricky.
• Monthly dividends can be a little tricky to jam in to some calculators. Has this been done properly?

I recommend Keith Betty’s Yield Calculator.

Now I have another question … you indicated that you didn’t want to own this thing at 4.73%, but you didn’t indicate precisely why. Now, I’m not going to take a public position on the merits of LFE.PR.A as an investment at the current price (and please, don’t spend hours parsing everything I write from here on in trying to decide what I really think!), but the comment makes me suspect that you think a sale at a 4.73% yield is a slam-dunk … and whatever the verdict is, I don’t think it’s a slam-dunk-sell.

In your comment, you mentioned CM.PR.J as a possible buying opportunity, given its closing pre-tax bid-YTW of 5.03%. Now, this is more than LFE.PR.A, but CM.PR.J is a perpetual and there are other differences besides. In terms of the riskAttributes examined by HIMIPref™, the major differences are:

• Credit Quality: CM.PR.J is better.
• Retractible:LFE.PR.A is better.
• SplitShare: CM.PR.J is better
• Various Duration & Convexity Measures: Well, they’re different!
• Cumulative Dividends: LFE.PR.A is better.
• Liquidity: (not a formal risk measure, but it is important) CM.PR.J is better

Anything you can tell me about how you value LFE.PR.A will, at the very least, give me some ideas regarding what to write about!

This is something both interesting and complicated – it would have to happen at month-end! PAY.PR.A announced today:

the final results of its modified Dutch auction-type substantial issuer bid to repurchase (the “Offer”) up to 300,000 of its preferred shares (TSX: “PAY.PR.A”) which expired at 5:00 p.m. (EST) on May 30, 2007

    Based on the final report provided by the depositary for the Offer, 224,644 preferred shares have been deposited and not withdrawn. Pursuant to the terms of the Offer, HIPAYS determined the purchase price to be $25.90 per preferred share (the “Purchase Price”) to put it in a position to take up the maximum number of preferred shares deposited to the Offer for an aggregate purchase amount of $5,818,279.60.
    All preferred shares properly deposited to the Offer at auction tender prices below the Purchase Price will be purchased at the Purchase Price. Payment to holders of preferred shares tendered and accepted for purchase will be made as soon as practicable, but otherwise in compliance with the Offer.
    The purchased preferred shares represent approximately 10.8% of the preferred shares outstanding as of May 30, 2007. After the purchase, approximately 1,860,752 preferred shares will remain outstanding.

According to the press release that announced the offer:

On July 31, 2008 (the “Termination Date”) the preferred shares will be redeemed for $25.00 and the remaining 15 distributions from the expiry of the Offer to the Termination Date will amount to $1.719. Accordingly, the yield to maturity of a preferred share at $25.50 to the Termination Date is 3.86% and the yield to maturity of a preferred share at $25.90 to the Termination Date is 2.57%.

Now, at first glance, this doesn’t seem to make much sense. Why would the company purchase its own prefs at a premium to par and at a lousy yield-to-maturity? 

I suspect the key may be found in my last comment on this issue:

As far as I can make out from the prospectus, the “Preferred Repayment Portfolio” will be delivered in its entirety to CIBC on the termination date in exchange for the amount due on maturity of the prefs. This is a bit of bad new for the Capital Unit Holders (because it means the current excess value of $3,901,000 will be lost), but the pref holders don’t care!

So I suspect that this is worthwhile for the Capital Unit Holders because they will now capture the excess value … or, at least, a fraction of it! I’m not sure about this, though, so confirmation or denial of this hypothesis is left as an exercise for the student.