Category: Issue Comments

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on the final report provided by the depositary for the Offer, 224,644 preferred shares have been deposited and not withdrawn.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.

S Split Corp announced today:

that it has completed an issuance of additional Shares at prices of $15.00 per Class A Share and $10.00 per Preferred Share for additional gross proceeds of $6.25 million pursuant to the exercise of the over-allotment option granted to the Company’s agents in its recently completed initial public offering. All together, the Company has raised total gross proceeds of $118.75 million under the offering. The Class A Shares and the Preferred Shares are listed on the Toronto Stock Exchange under the symbols SBN and SBN.PR.A, respectively.

SBN.PR.A commenced trading May 17.

As I predicted last week, EPP.PR.A crashed on opening today.

There were only six, count ’em, six trades in the entire day, for a whopping volume of 7,300 shares, closing at 23.75-99, 5×50. Even BAM.PR.N’s opening day was better, which is really saying a mouthful.

Five Million Shares. Somebody’s lost $5-million. Glad it’s not me!

On a cheerier note, the issue does appear to have found a fair level. The curve price is $23.94:

Price due to base-rate :  23.30
Price due to short-term :  -0.44
Price due to long-term :   1.76
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 :   0.83
Price due to Floating Rate :   0.00
Price due to Credit Spread (3) :  -1.71
Price due to error :   0.17
Price due to Credit Spread (High) :   0.03
Price due to Credit Spread (Low) :   0.00

Although the price is now estimated to be fair, I won’t be rushing to buy this one. I suspect the underwriters are stuck with a big pile of these and there will be a blow-out sale before the end of June … and why would I buy something at a price I think is “fair”, anyway?

Well, well, well! The boys at Quadravest, fresh from extending the term of DFN.PR.A, are proving they haven’t run out of ideas!

In a press release today, they announced:

The Company intends to declare a special capital gains dividend, payable partially in cash and partially in Class A Shares, to holders of Class A Shares of record on June 4, 2007, which dividend will be payable on the date the Preferred Shares are issued under the short form prospectus. The number of Class A Shares being issued as a result of this special dividend will be equal to the number of Preferred Shares expected to be issued in the offering.

This is not particularly good news, but it isn’t necessarily bad, either. The NAVPU as of May 15, 2007 was $31.95, implying that the preferred shares had an extremely good asset coverage ratio of almost 3.2:1 – which DBRS wasn’t really giving them a lot of credit for, since the rating hadn’t changed from its initial setting of Pfd-2 on the initial coverage ratio of about 2.4:1.

How much will coverage deteriorate? Well, from the prospectus:

No regular monthly dividends will be paid in any year on the Class A Shares so long as any dividends on the Preferred Shares are then in arrears or so long as the Net Asset Value per Unit is equal to or less than $15.00 (calculated as described under ‘‘Details of the Offering — Valuation of Assets’’). Additionally, no special year-end dividends will be paid if after payment of such a special dividend the Net Asset Value per Unit (calculated as described under ‘‘Details of the Offering — Valuation of Assets’’) would be less than $25.00.

So how bad will it be? I wouldn’t think that they’ll take the NAVPU down below $25 … but I do worry. They’re being rather coy about how they will be calculating the amount of the special dividend … and some of the more cynical souls among us might want to point out that the fund’s year end is November 30 … therefore the special dividend June 4 is not a year-end special dividend … therefore not restricted by the prospectus language.

In favour of the preferred shareholders is the idea that Quadravest has quite a nice little business going, packaging the flavour of the month into a split share corporation and flogging it through an established pipeline.  I wouldn’t think they would contemplate doing anything that would jeopardize that goose and its bonus-filled eggs. Additionally, it won’t take much more than a rounding error to get the issue size over $100-million, and anything that improves liquidity is all right by me. It should also be noted that FFN.PR.A also experienced a term extension, has a NAVPU of $28.03 as of May 15, but did not have such a press release issued today.

But, until the point is cleared up, I recommend that no purchases of DFN.PR.A be made. I wouldn’t recommend a sale of existing positions (based on dilution risk, anyway … obviously, if DFN.PR.A rockets in price for some reason a sale should be contemplated) either. We’ll just have to wait and see.

Update: The quote from the prospectus regarding restrictions on dividends paid to capital shareholders was taken from the Summary. In the Details, we find (emphasis added):

Although there can be no assurance that the Company will be able to pay dividends to holders of Class A Shares, the initial policy of the Company will be to endeavour to declare and pay regular monthly dividends, initially targeted to be $0.10 per month to yield a minimum of 8.0% per annum on the original issue price, to holders of Class A Shares plus, if any amounts remain available for the payment of dividends, a special year-end dividend of such amount as of the November Dividend Record Date in each year.

No regular monthly dividends will be paid on the Class A Shares in any month as long as any dividends on the Preferred Shares are then in arrears or so long as the Net Asset Value per Unit is equal to or less than $15.00 (calculated as described under ‘‘Details of the Offering — Valuation of Assets’’). Additionally, it is currently intended that no special year-end dividends will be paid if after payment of such a dividend the Net Asset Value per Unit (calculated as described under ‘‘Details of the Offering — Valuation of Assets’’) would be less than $25.00.

So … it looks like there are no restrictions at all on the size of this dividend, other than a hope that Quadravest will wish to keep that split-share pipeline throbbing (and remember that first, selling the prefs is rarely a problem, since they generally come with fat coupons; and that second, if the customers had any brains or memory at all, they wouldn’t be buying the capital units in the first place.

Fingers crossed!

Co-operators General Insurance has announced (via CCN Matthews) that:

it has decided to redeem all of its 4 million Series A Shares on July 2, 2007 (with an effective date of June 30, 2007). The redemption price for each Series A Share will be $25.00 plus declared, but unpaid dividends of $0.34375 per share. The redemption of the Series A Shares is subject to approval of the Superintendent of Financial Institutions.

I’m glad of it! It may be just my bookkeeperish soul interfering with innovative finance, but the terms of this issue (paying “Greater of 90% of index and Flat Rate 5.5%”) were unique and hard to value as part of a homogeneous class. Sometimes, it was difficult even to determine dividend dates!

Update: I now observe that the PrefInfo description of this issue did not account for the once-every-five-years redemption at $25.00 – it only noted the at-all-other-times redemption at $25.50. My apologies – this has been corrected. The prospectus for this issue, dated May 29, 1997, is available through SEDAR.

Update 2007-6-21: Cooperators, with all their usual concern for precision, predictability and the convenience of those who lend them money has decided to change the redemption procedure, under the guise of a confirmation:

Co-operators General Insurance Company (“Co-operators General” or the “Company”) confirmed today the arrangements relating to the payment for the previously announced dividend on the Class E Preference Shares, Series A (the “Series A Series”) (TSX: CCS.PR.A) and the redemption of all of the Series A Shares. Notice of redemption was mailed to registered holders on May 31, 2007.

The dividend in the amount of $0.34375 per Series A Shares for the quarter ending June 30, 2007 was previously declared and will be payable on July 3, 2007 (with an effective date of June 30, 2007) to holders of record on June 1, 2007.

The redemption price of $25.00 per Series A Shares will be payable on July 3, 2007 (with an effective date of June 30, 2007) upon presentation of certificates and required letters of transmittal. The declared dividend of $0.34375 per Class A Share for the quarter ended June 30, 2007 will not be included in the redemption price as such dividend will be paid separately to holders of record on June 1, 2007 immediately prior to payment of the redemption price. The Company does not expect to declare any further dividends on the Series A Shares.

To me, that looks just a tiny little bit different from what was announced before … but you be the judge!

Following the S&P downgrade, the DBRS downgrade of Loblaw and the Weston Credit Watch Negative by DBRS, DBRS has announced that it:

today downgraded the long-term ratings of George Weston Limited (Weston or the Company). The Notes and Debentures have been downgraded to BBB (high), the Exchangeable Debentures to BBB and the Preferred Shares to Pfd-3 (high), all with a Stable trend. At the same time, DBRS has confirmed the short-term rating of Weston at R-1 (low), but revised the trend to Negative.

…

Although management of Loblaw and Weston are separate, and there is no cross-default or cross collateralization covenants on the respective debt, Weston’s ratings reflect the investment in Loblaw, as it is a significant portion of the group’s consolidated operations. Weston’s long-term rating has historically been notched lower to reflect Weston’s own financial profile and the implicit structural subordination, given Loblaw’s minority public float.

Weston’s rating also reflects the underlying, albeit lower, credit rating of the bakery business. For the past few years, the bakery operations have stabilized/improved enough to limit further declines in the long-term rating, leading to the Stable trend. As such, any further deterioration in Loblaw’s long-term rating would not necessarily affect the long-term rating of Weston – i.e., ratings could potentially be the same.

Weston has the following preferred issues trading on the TSX: WN.PR.A WN.PR.B WN.PR.C WN.PR.D & WN.PR.E. All except WN.PR.B are fixed-rate perpetual; WN.PR.B is retractible.

This issue was announced May 7. It seemed reasonable – if aggressive – at the time … but the credit ratings aren’t all that great AND it’s a perp.

The HIMI PerpetualDiscount index is down 0.66% since the announcement date AND credit spreads have widened.

The curvePrice of this issue, measured against the taxable curve, is now $24.34.

Price due to base-rate :  23.52
Price due to short-term :  -0.50
Price due to long-term :   1.63
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 :   1.21
Price due to Floating Rate :   0.00
Price due to Credit Spread (3) :  -1.69
Price due to error :   0.17
Price due to Credit Spread (High) :   0.00
Price due to Credit Spread (Low) :   0.00

Now, Pfd-3 issues are very hard to analyze … they behave less like fixed-income instruments than higher rated issues. And this issue has a “split rating” – S&P rates them P-2(low), higher than does DBRS (Pfd-3(high)) – which makes things even more difficult.

When the issue was announced, the curve price was $24.66:

Price due to base-rate :  23.43
Price due to short-term :  -0.24
Price due to long-term :   1.42
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 :   1.48
Price due to Floating Rate :   0.00
Price due to Credit Spread (3) :  -1.57
Price due to error :   0.14
Price due to Credit Spread (High) :   0.00
Price due to Credit Spread (Low) :   0.00

I will be glued to my screen on the projected closing date of May 25, eager to see how this one plays out!

Update, 2007-5-22: Curve Price now 24.22.

Update, 2007-5-23: Curve Price now 24.08.

Update, 2007-5-24: Will commence trading tomorrow, with the symbol EPP.PR.A. Curve Price now 23.81. We shall see!

S&P today:

placed the ratings on Bank of Montreal (BMO) and its related subsidiaries, including the ‘AA-‘ long-term counterparty credit rating on BMO, on CreditWatch with negative implications.

…

The absolute size of the estimated commodity trading losses far exceeds the bank’s average market value exposure to commodities risk, is disproportionate to its total trading revenues, and does not reflect BMO’s stated strategy of being a low-risk bank.

Standard & Poor’s will be conducting a full review of BMO’s trading risk management and trading operations within the next 30 days, with a particular focus on its commodities trading operations, and its back and middle offices.

Following our review, should the bank’s trading risk and enterprise risk management not meet our expectations, both the short- and long-term ratings could be lowered by one notch.

This follows revelations of trading losses of $680-million. The $680-million figure cannot be taken too seriously – three weeks ago it was somewhere between $350-million and $450-million.

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

The rogue (or simply incompetent) managers at BMO are going to have to have a lot of lunches with each other to fix this one up! Expect to see a few clerks thrown to the wolves.

R Split II Corp. is not part of the HIMIPref™ universe, but I’ll pass along this announcement:

R Split II Corp. (the “Company”) announced today that it has called 104,517 Preferred Shares for cash redemption on May 31, 2007 (in accordance with the Company’s Articles) representing approximately 17.927% of the outstanding Preferred Shares as a result of the special annual retraction of 281,824 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 May 30, 2007 will have approximately 17.927% of their Preferred Shares redeemed. The redemption price for the Preferred Shares will be $30.50 per share.

…

R Split II Corp. is a mutual fund corporation created to hold a portfolio of common shares of Royal Bank of Canada. Capital Shares and Preferred Shares of R Split II Corp. are listed for trading on The Toronto Stock Exchange under the symbols RBT and RBT.PR.A respectively.