Category: Issue Comments

DBRS has announced it has:

placed the ratings of The Thomson Corporation (Thomson or the Company) – long-term debt rated A (low), Commercial Paper rated R-1 (low) and Preferred Shares rated Pfd-2 (low) – Under Review with Negative Implications following the Company’s announcement today that it has initiated discussions which are expected to lead to a transaction to acquire Reuters Group PLC (Reuters) in a cash and equity transaction (50%/50%) for roughly $19 billion ($14.09 or £7.05 per Reuters share).

…

DBRS expects to finalize the ratings of Thomson once its review has been completed, with the final rating expected to remain within the investment-grade range.

The Thomson 7-year bonds, mentioned in the previous post on this issue, have rebounded to +85bp after spiking to +110bp when the rumours started.

Thomson preferreds continue to be rated P-2 with a developing outlook by S&P.

Update : Moodys has joined in:

Moody’s Investors Service placed The Thomson Corporation’s (“Thomson”) A3 senior unsecured ratings on review for possible downgrade following the company’s announcement that it is in merger discussions with Reuters Group PLC (“Reuters”) for a combination of the two businesses for an approximate $19.4 billion purchase price, including assumed debt.

Note that Moodys does not explicitly rate the prefs, just the Senior Unsecured Regular Bond/Debenture (and associated shelf), which they currently rate A3 ((P) A3)

Update, 2007-09-14: Moody’s has downgrade the USD debt from A3 to Baa1

Update, 2007-11-15: DBRS has affirmed the preferreds at Pfd-2(low) because:

During the course of the review, Thomson announced that the proceeds from the sale of its Learning division would exceed previously expected levels by more than $1 billion and that these proceeds would be used to reduce the incremental debt taken on by the Company to complete the Reuters acquisition. DBRS now expects net debt-to-EBITDA to increase from just over 2.0 times in 2006 to approximately 2.5 times (pro forma 2007), a range that is within DBRS’s expectations for an A (low) rating.

In response to Alcoa’s hostile bid for Alcan, DBRS has

placed the ratings of Alcan Inc. (Alcan or the Company) Under Review with Developing Implications … However, the financial profile of New Alcoa would be much more aggressive relative to that of stand-alone Alcan, given the debt incurred to finance the proposed acquisition. DBRS notes that Alcoa’s offer has an allocation of 20% stock and 80% cash. Accordingly, New Alcoa’s pro forma leverage (gross debt-to-capital) would be 64% versus 33% for stand-alone Alcan. Similarly, pro forma cash flow-to-total debt would be at 0.14 times for New Alcoa versus 0.56 times for stand-alone Alcan. DBRS notes that these financial metrics are very aggressive for the currently assigned ratings.

DBRS will continue to monitor the proposed acquisition. In the event that this transaction is completed based on the current structure of Alcoa’s offer, a downgrade in the ratings would likely result due to the aggressive financial profile. However, DBRS notes that the ratings in all likelihood would remain investment grade.

What with the BCE problem and the TOC problem, there soon won’t be any high quality floating rate issues of any description! Then … perhaps … a fund creating high-quality synthetic floaters will attract more attention!

I don’t think my regular readers will be surprised if I mention that I have something of a philosophical disdain for floating rate issues. They trade with lower yields (generally!) than their fixed-rate cousins and there’s not really a lot of reason for that. Sure, there is a certain amount of interest rate protection built into the concept of a floating rate, which is very nice to have – but, as I pointed out in an article last August one very big reason why short rates are lower than long rates is credit risk … and with a floating rate preferred share, you have perpetual credit risk.

So anyway, Reuters announced today:

it has received a preliminary approach from a third party which may or may not lead to an offer being made for Reuters. There is no certainty an offer will be made or necessary approvals, including those required under Reuters constitution, will be received.

It has been mooted that the suitor is Thomson:

News and financial data provider Reuters said it had received a takeover approach from an unidentified bidder, sending its shares up almost a third, with Canadian publisher Thomson widely touted as the suitor.

Canada’s Globe and Mail newspaper reported on its Web site on Friday that Thomson was in talks to buy London-based Reuters, citing sources close to both companies.

Reuters and Thomson both declined to comment.

There is more speculation on Bloomberg.

Thomson has some CAD denominated bonds outstanding, maturing in 2014. I have been advised that the spread on these bonds has moved from +48bp to +110bp, which is a hell of a move for a seven year bond. Let’s see … modified duration is, oh, call it 6 years, yield change 62bp, 6×0.62 = 3.72 … that’s a 3.7% price change on the bond. And I don’t mean the price went up! It would appear that the bond market – or, at the very least, a few trigger-happy participants thereof – are concerned about the financing of the deal.

The preferreds will be on the volume charts for today’s market action report! 245,800 shares traded, including a block of 41,800 at 25.50 crossed by National Bank; 96,300 crossed by Scotia at the same price; and another 103,700 crossed by Scotia at the same price again.

TOC.PR.B has been around since the beginning of time, drifting in and out of the HIMI Preferred Indices as the volume waxes and wanes. The last change was removal at the end of February.

Update, 2007-05-07: Thomson has issued a press release:

The Thomson Corporation (NYSE: TOC; TSX:TOC) confirmed today that it has made a preliminary approach to the Board of Directors of Reuters Group Plc. that may or may not lead to an offer being made for Reuters.

A further announcement will be made in due course.

DBRS has announced:

has downgraded the rating of BAM Split Corp. (the Company) to Pfd-2 (low) from Pfd-2, with a Stable trend, with respect to the 6.25% Class A Preferred Shares; the 4.95% Class AA Preferred Shares, Series 1; and the 4.35% Class AA Preferred Shares, Series 3 (collectively, the Preference Shares).

The entire portfolio (the Portfolio) owned by the Company is composed solely of Class A Limited Voting Shares of Brookfield Asset Management Inc. The downgrade reflects DBRS’s revisions to its rating approach for single name split share issuers. Pursuant to DBRS’s publication of January 31, 2007 (Split Share Issuers: A Performance Overview), the rating assigned for a preferred share issued by a single name split share company will generally be limited to the rating applicable to the corporate preferred shares related to those shares in the supporting Portfolio, unless there are structural or other features built into the split share issuer which serve to further enhance its credit quality. Brookfield Asset Management Inc.’s Preferred Shares are currently rated Pfd-2 (low) with a Stable trend by DBRS.

Notwithstanding the rating adjustment, the Portfolio has continued to perform well, having appreciated 11% since January 31, 2007. The current downside protection of over 77% provides significant capital protection to the holders of the Preference Shares. The Portfolio generates a sufficient yield (after expenses) to provide 1.21 coverage times over the distribution of dividends to the Preference Shares. If necessary, the Company may write covered calls or sell a portion of the Portfolio to fund the dividend on the Preference Shares.

So in other words, the rating is limited by the rating on the underlying securities, in the absence of mitigating factors. The publication they are referring is on their site.

The announcement does not appear to be related to BAM’s asset spin-off … but you never know!

BNA.PR.C is a recent new issue. The company changed its name last year, when the ticker symbol of the underlying shares changed from BNN to BAM.

OK, so now that Weston has been downgraded by S&P (with DBRS still considering the possibility) and now that the shares have started to get hit, I thought it would be fun to look at some comparables:

Not many comparables, eh?

Great-West has released its 1Q07 report. There are two issues I was looking forward to hearing about:

(i) GWO.PR.X / GWO.PR.E Issuer Bid: Nothing happened! The company did not purchase any shares of either target on the open market in the first quarter. There was also no announcement regarding the possible redemption of CL.PR.B … I suspect they’re still getting their ducks in a row for …

(ii) Financing of the Putnam Acquisition: There was no announcement, just a reiteration that financing will include issues of equity, debentures and hybrids [probably preferred shares – JH], bank credit and securitization of the tax benefits.

S&P has announced:

it lowered its long-term corporate credit and senior unsecured debt ratings on Toronto-based Loblaw Companies Ltd. by one notch, to ‘BBB+’ from ‘A-‘. Standard & Poor’s also lowered its long-term corporate credit and senior unsecured debt ratings on parent company George Weston Ltd. by one notch, to ‘BBB’ from ‘BBB+’. In addition, the Canadian scale CP rating on George Weston was lowered to ‘A-2’ from ‘A-1(Low)’, and the preferred stock rating on George Weston was lowered to ‘P-3(High)’ from ‘P-2(Low)’. At the same time, the ratings on both companies were removed from CreditWatch with negative implications, where they were placed Feb. 8, 2007, following Loblaw’s much weaker-than-expected earnings in the fourth quarter (ended Dec. 30, 2006). The outlook on both companies is stable.

This follows the earlier downgrade of Loblaw by DBRS, who have not yet announced a decision regarding Weston, and the Credit Watch Negative announcement by S&P.

Weston has the following preferred issues outstanding: WN.PR.A WN.PR.B WN.PR.C WN.PR.D & WN.PR.E

Brookfield Asset Management has announced:

Brookfield intends to distribute to its Class A shareholders a direct interest in its infrastructure operations through a newly created publicly traded partnership to be named Brookfield Infrastructure Partners L.P. (“Brookfield Infrastructure”). … Subject to receipt of the various required approvals, Brookfield will implement the spin-off by way of a special dividend currently estimated to be approximately US$1.00 per Brookfield Class A Share, taking into account the pending three-for-two stock split, or approximately $600 million in aggregate.

Based on their March 31, 2007, Balance Sheet, $600-million is about 10% of common equity. This is not good news for debt-holders or preferred share holders – whether it is sufficiently bad to warrant a downgrade awaits a detailed analysis by more specialized practitioners than I.

BAM currently has the following preferred share issues outstanding : BAM.PR.B BAM.PR.C BAM.PR.E BAM.PR.G BAM.PR.H BAM.PR.I BAM.PR.J BAM.PR.K BAM.PR.L BAM.PR.M BAM.PR.T and there is a new perpetual coming out soon.

Update: One source of uncertainty in the meaning of this is the book-value vs. the market-value of the assets spun out. BAM has a P/B ratio of 4.13:1. If the assets spun out have a market value of $1 and a book value of $0.25, then this will be a relatively minor change to the balance sheet.