Category: Issue Comments

These are total returns, with dividends presumed to have been reinvested at the bid price on the ex-date. The list has been restricted to issues in the HIMIPref™ indices.

BCE has announced:

that the company has entered into a definitive agreement for BCE to be acquired by an investor group led by Teachers Private Capital, the private investment arm of the Ontario Teachers Pension Plan, Providence Equity Partners Inc. and Madison Dearborn Partners, LLC. The all-cash transaction is valued at C$51.7 billion (US$48.5 billion), including C$16.9 billion (US$15.9 billion) of debt, preferred equity and minority interests. The BCE Board of Directors unanimously recommends that shareholders vote to accept the offer.

Under the terms of the transaction, the investor group will acquire all of the common shares of BCE not already owned by Teachers for an offer price of C$42.75 per common share and all preferred shares at the prices set forth in the attached schedule.
….
                            SCHEDULE A
                   BCE PREFERRED SHARES – PURCHASE PRICES

    The cash considerations payable to the holders of the preferred shares
    are as follows:

    ————————————————————————-
        First Preferred Shares               Consideration Per Share
    ————————————————————————-
              Series R                             $25.65 (*)
              Series S                             $25.50 (*)
              Series T                             $25.77 (*)
              Series Y                             $25.50 (*)
              Series Z                             $25.25 (*)
              Series AA                            $25.76 (*)
              Series AC                            $25.76 (*)
              Series AE                            $25.50 (*)
              Series AF                            $25.41 (*)
              Series AG                            $25.56 (*)
              Series AH                            $25.50 (*)
              Series AI                            $25.87 (*)
    ————————————————————————-    (*)Together with accrued but unpaid dividends to the Effective Date.

I’m astounded. I don’t understand why they would pay so much for the preferreds … but there is a note in the press release that states:

The transaction will be completed through a plan of arrangement, which will require the approval of two-thirds of outstanding common and preferred shares, voting as a class.

I will be fascinated to learn more of the legal intricacies which make this a viable option for the purchasers! As it is, it looks like all my gloomy prognostications will turn out wrong. Although, mind you, the preferred shareholders don’t actually have cash money in their pockets yet – and there have been tears shed over similar offers.

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

Telus has announced:

that it has elected not to submit an offer to acquire BCE as part of the strategic review process announced by BCE on April 17, 2007. The inadequacies of BCE’s bid process did not make it possible for TELUS to submit an offer.

… which could be mere posturing in order to get BCE to change their bid process, a reflection of regulatory problems … who knows? Pick your talking head, pick your explanation.

Ten year bonds for both companies widened 20bp on the news, perhaps reflecting the idea that now both will become LBO targets in shareholder-friendly ( = bondholder-hostile) events. But we will see!

I continue to think that BCE prefs are a crapshoot on credit right now and don’t want anything to do with them! There are, as yet, no words of wisdom from the ratings agencies.

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

As briefly noted yesterday, Telus has thrown its hat in the BCE takeover ring:

“TELUS believes the combination of the two businesses would represent a compelling strategic and financial opportunity for all BCE and TELUS stakeholders. It would be an all Canadian solution for both immediate and long-term value creation, whilst ensuring a vibrant player continues in this increasingly competitive industry,” said Darren Entwistle, President and CEO, TELUS. “TELUS has a unique opportunity to create a truly national Canadian enterprise with the requisite balance sheet strength as well as scale and scope to continue TELUS’ development as a global leader in the deployment of state of the art technology and innovative new services for customers.”

S&P has placed Telus on Credit Watch Negative:

Standard & Poor’s Ratings Services today said it placed its ratings, including the ‘BBB+’ long-term corporate credit rating, on Vancouver, B.C.-based communication services provider Telus Corp. on CreditWatch with negative implications.The action reflects the company’s announcement that it has entered into nonexclusive discussions to acquire BCE Inc. (A-/Watch Neg/A-2). We expect the transaction, if completed, will be funded by a combination of Telus’ shares and new debt, which would lead to pro forma debt leverage (including operating synergies) and corresponding credit metrics that would weaken the current “modest” levels. However, Telus’ management has publicly indicated its desire to maintain investment-grade ratings.

… while DBRS takes a more relaxed view:

DBRS has today placed the A (low)/R-1 (low) ratings of TELUS Corporation (TELUS or the Company) and the A (low) rating of TELUS Communications Inc. Under Review with Developing Implications. This follows the Company’s announcement that it has entered into an agreement with BCE Inc. (BCE) to discuss a possible business combination.DBRS notes that TELUS has put forth some compelling arguments for such a combination. These include significant synergies; a combined entity that would retain investment-grade ratings; a Canadian investment vehicle; and the potential for a tax deferral for BCE shareholders

Oddly, neither agency considered the campaign for par redemption worthy of ink!  

So, let’s think about S&P: the BCE credit rating A-/Watch Neg/A-2, while the Preferred Stock is P-2/Watch Neg/– on the Canadian scale, while the Telus credit rating is BBB+/Watch Neg/NR with no preferred share rating (since it has no preferreds). Therefore, if Telus becomes responsible for the BCE preferreds while at the same time being downgraded, a very major downgrade to the preferred share rating may be expected.

The situation is not quite so clear with DBRS: BCE’s unsecured debentures are A(low) and preferred stock Pfd-2(low), both on Review-Negative, and Telus is now also A(low), Review-Negative, but it still doesn’t look all that rosy for a continued Pfd-2(low) rating on the prefs.

Barring an all-stock transaction (or cash with an equity issue immediately thereafter, netting to the same thing) it would appear that the preferreds are at high risk of being downgraded … the same as current expectations have it given a private equity deal. So … not much comfort here, at least as far as preferred shareholders are concerned!

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

S&P has announced:

it raised its long-term corporate credit rating on St. John’s, Nfld.-based Fortis Inc. to ‘A-‘ from ‘BBB+’. At the same time, Standard & Poor’s raised the senior unsecured debt rating on Fortis to ‘A-‘ from ‘BBB’, the foreign scale preferred stock rating to ‘BBB’ from ‘BBB-‘, and the Canadian scale preferred stock rating to ‘P-2’ from ‘P-2(Low)’.
…
The stable outlook reflects the underlying operational and financial stability of Fortis’ operating companies. We could lower the ratings if Fortis were to materially elevate its leverage or if one of its larger subsidiaries encountered major financial or operational difficulties. A positive outlook or upgrade remains unlikely in the near term but could occur as a result of further diversification. We expect the company to remain acquisitive in the next few years; further acquisitions should not prompt a downgrade, provided they remain consistent within the company’s regulated focus and expertise and were financed consistent with current financial policies.

The potential for this upgrade has been discussed earlier. It should be noted that DBRS continues to rate the issues as Pfd-3(high), with the last confirmation of this rating on February 26.

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.