Category: Issue Comments

It has just been announced that:

Kinder Morgan, Inc. (NYSE: KMI – News) today announced it has entered into a definitive agreement to sell Terasen Inc. to Fortis Inc. (Toronto: FTS – News), a Canadian-based company with investments in regulated distribution utilities, for approximately C$3.7 billion including cash and assumed debt.

Fortis has the three captioned preferred issues rated Pfd-3(high) by DBRS and P-2(low) by S&P. No reaction to the news from the agencies as yet, but I’ll keep everyone posted!

Update & Bump : Standard and Poors have placed Fortis on Credit Watch Positive, due to a (virtually?) simultaneous sale of equity subscription receipts:

Terasen’s petroleum pipeline business will not be included in the acquisition. Fortis also announced that it has agreed to a bought deal that will result in at least C$1 billion in new equity being issued via subscription receipts. The equity will be used to finance the C$1.4 billion cash portion of the acquisition.
     “We believe the acquisition, if completed, will not deteriorate and could even improve Fortis’ credit quality,” said Standard & Poor’s credit analyst Kenton Freitag.

Update: DBRS has confirmed Fortis at Pfd-3(high):

From a financial risk perspective, DBRS would anticipate a modest decline in consolidated interest coverage metrics, given the existing levels of debt at the acquired entities; however, DBRS anticipates a modest improvement in non-consolidated credit metrics, given that the transaction is predominantly equity financed, coupled with the historical strength of TGI’s dividends. 

Overall, DBRS views the predominantly equity-financed acquisition of regulated assets as a good strategic fit for Fortis. Given the financial and business risk impacts described above, DBRS views the proposed transaction as credit neutral to slightly credit positive, as reflected in the confirmation of the ratings.

Update (for navigation purposes) : FTS.PR.F is a relatively recent issue.

Update and bump: Fortis has announced:

that it has closed its bought deal offering of Subscription Receipts (the “Offering”) underwritten by a syndicate of underwriters led by CIBC World Markets Inc., Scotia Capital Inc. and TD Securities Inc. (the “Underwriters”), resulting in gross proceeds to the Corporation of $1,151,150,000.

Fortis entered into an agreement, on February 26, 2007, with the Underwriters under which they agreed to purchase from Fortis and sell to the public 38,500,000 Subscription Receipts at $26.00 each for gross proceeds to the Corporation of $1,001,000,000. The Underwriters have exercised their over-allotment option and purchased an additional 5,775,000 Subscription Receipts at a purchase price of $26.00 each for gross proceeds from the over-allotment option to the Corporation of $150,150,000.

So … maybe we will be seeing an upgrade!

S&P has upgraded TD Bank … upgrading banks seems to have become something of a habit for ratings agencies lately!

The credit rating has been improved to “AA−/Stable/A−1+” from “A+/Positive/A−1”. Canadian Dollar preferred shares have been improved to “A” from “A-“. It’s not entirely clear to me whether the Preferred Share National Scale Ratings (P-1(low), currently) have been changed or not, but I suspect not.

More later.

Later, more: S&P have issued their press release:

(Standard & Poor’s) March 15, 2007–Standard & Poor’s Ratings Services today said it raised its ratings on The Toronto-Dominion Bank (TD Bank), including the long-term counterparty credit rating to ‘AA-‘ from ‘A+’. At the same time, Standard & Poor’s raised its counterparty credit rating on TD Banknorth, NA to ‘AA-‘ from ‘A’ and its counterparty credit rating on TD Banknorth Inc. to ‘AA-‘ from ‘A-‘. The proposed privatization of TD Banknorth and its strong strategically important status resulted in the lift in the rating notching. The equalization of the ratings on TD Banknorth, NA and TD Banknorth Inc. reflects the expectation that TD Bank would support the holding company, TD Banknorth Inc., as much as the operating bank. The outlook is stable.

It does not appear that the NSR Preferred Share Rating has changed.

As has been noted, BCE.PR.G is the new symbol for BC.PR.B, and there have been technical problems within HIMIPref™ over the conversion.

The reorgDataRecord for this conversion has been set up with the reorgType REORG_TERMCHANGE. This decision was made due to the lower credit rating on the new shares, as discussed by DBRS:

DBRS notes that prior to this exchange, the Bell preferreds were rated at Pfd-2 with a Stable trend. However, upon exchanging for new BCE preferred shares, the former holders of the Bell preferreds will now have a security that is rated lower resulting from the structural subordination that legally still exists between Bell and BCE. This exchange will now result in approximately $2.7 billion of preferred securities at the BCE holding level.

It was decided that the change in credit rating was significant enough that prior data regarding the trading of this issue should be discarded, just as it is when embeddedOptions or annualDividend gets changed … which happens seldom enough that there is little way of testing any procedures.

On its initial day of trading, volume of BCE.PR.G was 19,081 shares, which set its initial liquidityMeasure to a value greater than the YIELD_CURVE_COMPONENT_CALCULATION_LIQUIDITY_MAXIMUM; that is, HIMIPref™ now thinks that this is a highly liquid instrument, with liquidity for which the market will pay a hefty premium. This state of affairs will last until (and assuming!) the liquidityAverage is reduced through the operation of the instrumentVolumeInfoDecay. This process will probably take about a month at current settings.

The high calculated volume has set the curvePriceComponent corresponding to yieldCurvePremiumLiquidity to a very high value, that is almost certainly spurious – I do not expect the issue to trade 19,081 shares every day just because it’s now a borderline credit.

Therefore, Users of HIMIPref™ are urged to disregard valuations and trade recommendations for BCE.PR.G until the situation has normalized.

I find it fascinating that this warning is not necessary for users of the portfolio method, which has been discussed recently. This is because the optimizableParameter instrumentPriceDisparityValuation has a much lower value in the portfolioMethod (0.086) than in the issueMethod (1.035).

Update & Bump, 2007-03-14 : In response to the comment/query from Drew, I have uploaded the following charts prepared by HIMIPref™:

• Spot Volume
• Average Volume
• Spot Volume with outlier removed

The outlier confused things and the recent relatively heavy volume has confused things even more! I believe the indicated averageTradingValue is too high at the moment and will require a little more time to determine whether the reasonable value. We should know by month-end.

Note that this caution only applies to users of the issueMethod, which trades like crazy and for which liquidity is very important (since it’s not just enough to get into a position, you have to get out!). Users of the portfolioMethod may use the HIMIPref™ values without a qualm.

Financial 15 Split II Corp. has not had many of its preferred shares redeemed since issue:

The shares are not redeemable by the company (the “Redemption” in the table above is actually Shareholder Retraction, but I’m following the language of the Annual Report): capital unitholders who wish to retract must tender a pref, or get the company to buy one in the market on their behalf.
The company has announced that:

they will hold a special meeting of the shareholders on April 24, 2007. Shareholders of each Fund are being asked to consider a special resolution to amend the articles of Fund to extend the mandatory redemption date for the Class A Shares and the Preferred Shares of each Corp. to December 1, 2014.

This will be a good deal if the 5.25% dividend isn’t decreased simultaneously! I’ll write more as details become available.

Financial 15 Split Corp. is in the happy position of having increased its preferred shares outstanding since issue:

The shares are not redeemable by the company (the “Redemption” in the table above is actually Shareholder Retraction, but I’m following the language of the Annual Report): capital unitholders who wish to retract must tender a pref, or get the company to buy one in the market on their behalf.

The company has announced that:

they will hold a special meeting of the shareholders on April 24, 2007. Shareholders of each Fund are being asked to consider a special resolution to amend the articles of Fund to extend the mandatory redemption date for the Class A Shares and the Preferred Shares of each Corp. to December 1, 2014.

This will be a good deal if the 5.25% dividend isn’t decreased simultaneously! I’ll write more as details become available.

Dividend 15 Split Corp. is a fairly unusual split-share corporation, in that they have been able to increase the number of shares outstanding since they were first traded 2004-3-16:

This issue has redemption terms I like: there ain’t none. Just the maturity 2009-12-1. Capital unitholders who wish to retract have to go out and buy a matching pref (or have the company do so on their behalf). 

The company has now announced that

it will hold a special meeting of the shareholders on April 24, 2007. Shareholders of each Fund are being asked to consider a special resolution to amend the articles of Fund to extend the mandatory redemption date for the Class A Shares and the Preferred Shares to December 1, 2014.

No word on whether there will be a simultaneous decrease in the dividends payable – but if there isn’t, then the annual dividend of $0.525 (5.25% of par) makes this seem like a good deal!

I’ll write more when the details of the resolutions are release on SEDAR.

The new issue from Dundee Wealth Management, announced February 22, settled with a sigh today, closing at 24.80-90 on volume of 125,850 shares. It opened at 24.75 and managed to recover to 24.95 before finding its level. Scotia provided an afternoon flourish by crossing 50,000 shares at 24.90.

The issue has been entered into the HIMIPref™ database with a securityCode of A45150, replacing the preIssue code of P25007. A reorgDataEntry has been processed.

More later.

Later, more: I have updated the table of comparatives:

STRATA Income Fund has announced:

its intention to make a normal course issuer bid for its Capital Units and Preferred Securities through the facilities of the Toronto Stock Exchange (the “TSX”). This normal course issuer bid is intended to commence on March 8, 2007 and will terminate on March 7, 2008. In accordance with the Declaration of Trust by which STRATA is governed, market purchases pursuant to its normal course issuer bid may be effected by the Fund.
    At February 27, 2007 there were 9,215,056 Capital Units and 6,214,711 Preferred Securities issued and outstanding including 9,211,056 Capital Units and 6,209,696 Preferred Securities in the public float. STRATA may, during the 12 month period commencing March 8, 2007 purchase on the TSX up to 921,105 Capital Units and 620,969 Preferred Securities, being 10% of the respective public floats. Since March 8, 2006, STRATA has purchased 6,100 Capital Units at an average price of $8.40 per Capital Unit under its previously approved normal course issuer bid. STRATA believes that its Capital Units and Preferred Securities represent good value for the Fund and purchases under the normal course issuer bid may serve to enhance returns to securityholders.

A reasonable course of action, given that the capital units’ NAV is $9.30 and the capital units closed on the TSX at $8.00!

We shall see how far (if at all!) the price of preferred securities goes up in response to the bid … the recent partial redemption at $10.60 has already been a windfall to holders!