Category: Issue Comments

Bombardier has announced:

In the case of the Series 3 Preferred Shares, starting as of August 1, 2007, holders will receive a quarterly fixed cash dividend for the following five years, as and when declared by the Board of Directors of Bombardier Inc, based on a fixed rate equal to 115% of the yield on five-year non-callable Government of Canada bonds determined as at July 11, 2007, in accordance with the terms of such shares. The annual dividend rate applicable to the Series 3 Preferred Shares will be published on July 12, 2007 in several newspapers.

At 115% of Five-Year Canadas, the fixed rate may be estimated to be just a hair over 5.25% to be paid on BBD.PR.D following August 1, while the BBD.PR.B will probably continue to pay 100% of Canada Prime. The latter prediction assumes that a Pfd-4 (trend negative) [DBRS] or P-4 (stable) [S&P] issue will not trade above par in the near future, which would start ratcheting down the percentage.

These issues have been discussed in the context of arbitrage. The Bs (ratchet) closed today at 20.63-75, the Ds (fixed) closed at 19.83-11.

Rob Carrick of the Globe & Mail has published an article on BCE Prefs in today’s paper, that has a few interesting snippets in it.

Apparently,

a recent report from Desjardins Securities urged people to write to BCE to request that the company’s preferred shares be redeemed at par value. “Our buyers, both individual and institutional, purchased these shares because of the company’s reputation, the comfort of a regulated utility, the safety of cash flow and suitable dividend coverage, good corporate governance, and recent favourable changes by the Minister of Finance to the dividend tax credit,” the report said.

A bit of a desperation move, but doubtless popular with their clients. I’m certainly not going to alter my views regarding the BCE prefs based on some chance of the company making an enormous goodwill payment to investors.

There was some interview with Douglas Berry, a portfolio manager with Three Macs in Montreal – unfortunately, Mr. Berry’s long term track record was not disclosed. He outlined some arguments favouring an investment in the BCE prefs, although his final judgement regarding the investment was also not disclosed. Arguments in favour are:

• The (potential) new owners may redeem the shares.. Well, I won’t hold my breath! All I can really say is that three issuers with similar issues in the sub-investment-grade category have not found it advantageous to refinance: Quebecor (IQW.PR.D), Nortel (NTL.PR.F, NTL.PR.G) and Bombardier (BBD.PR.B, BBD.PR.D). The price of the financing is steep, to be sure, but the deeply subordinated nature of preferred share debt helps out the credit ratings of senior debt.
• most of the shares are owned by banks, insurance companies and other institutions that are unhappy about how the price has fallen lately. I may be a little slow, but I fail to see how this is relevant. Even if these institutions are disingenuous enough to showboat with calls for redemption at par (as Desjardins is doing), who really cares what a pack of rinky-dink Canadian banks and two-bit Canadian insurance companies think anyway? Financing requirements for the deal are sufficently large and sufficiently junky that funds required will have to be raised in the States anyway.
• the (potential) new owners have lots of money. Again, I fail to understand the relevance of this point. A BCE buy-out may or may not be a good deal. Give me three months, a staff of 20 and a few million dollars, and I’ll come back to you with a more definitive opinion on the value of the firm, but let’s just assume they buy it out. And then … the worst happens. After performing as expected for a few years, there’s a vicious recession, perhaps coupled with extreme technological change requiring huge capital investment just to remain a player … and BCE comes near bankruptcy. The (potential) new owners have no obligation to throw good money after bad. Like Telesat, like BCE Developments, like Air Canada, it will be … ‘So long! Been nice – but not all that nice!’.

The bottom line? I consider these issues to be more in the nature of “equity substitutes” than “fixed income”. Not only that, but there is zero information available on the structure of the firm going forward. How can there be, when there’s three bidders in the ring?

Update, 2007-6-28: In the commentary regarding all the money the (potential) new owners have, I referred to Telesat. Oops! I meant to refer to Teleglobe, a failed investment cut loose by BCE. Telesat actually did reasonably well.

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!