Category: Issue Comments

Lawrence Asset Management has released its Dec. 31/06 Financials for this split-share. This is a small-ish split-share corporation in which I take an inordinate amount of interest, which I can only attempt to justify by its unusual structure and my feeling that DBRS has got the credit rating on it wrong. Really wrong, as I argued in my previous post on the topic. So .. let’s have a quick look at some simplified financials:

Note the balance sheet value of the Junior Prefs. 18,523 (thousand). This is less than the redemption value of 1,322,726 (shares) x $14.70 (per share) = 19,444,072, because they don’t have the money. However, it has improved a little since last time!

Looking at the income statement, we simplify it to:

Note that the “Increase in Carrying Value of Junior Prefs” is a bookkeeping identity: All profit and loss that would otherwise accrue to equity holders will be charged or credited to the Junior Prefs’ carrying value until such time as this carrying value (i) is equal to the redemption value, or (ii) is wiped out.

So there’s some good news in the above to the Junior Pref Holders! Their carrying value increased, since the company was able to make more money from investments than it paid out in distributions.

In fact, distributions + change = $1,958M on total assets (at June 30, 2005) of $52,085M, so we can ballpark the investment return as +3.8% over the six month period. Which isn’t bad, until you look at their investment mandate:

To provide the Company with the means to meet its investment objectives with respect to the Series 2 Shares and the Equity Shares, the proceeds of the Offering, net of Offering expenses and the amount used to acquire the Series 1 Repayment Portfolio, will be invested in a diversified portfolio (the ‘‘Managed Portfolio’’) consisting of shares of American companies that have a market capitalization of greater than U.S.$2 billion or companies which form part of the S&P 500 Index, and shares of Canadian public companies which form part of the S&P/TSX 60 Index. The direct holding of shares of American companies is limited so that the Offered Shares will not be foreign property under the Tax Act. Up to 25% of the Managed Portfolio may be invested in units or similar equity securities of Income Funds as the Investment Manager deems appropriate. In addition, up to 15% of the Managed Portfolio may be invested in debt securities which are rated to be at least investment grade.

Over the same six month period, the S&P/TSX composite increased by 12.54% and the S&P 500 increased by 12.74% (in USD) or 17.88% (in CAD). You make the call as to whether these guys had a good six months or not!

When we look at asset coverage in the DBRS manner, we just cross off the pledged portfolio against the senior prefs (and completely ignore the fact that dividends have to be paid on the seniors in the interim) to get an asset coverage ratio changing over the last six months from 1.37:1 to 1.30:1. In other words, there is some reason to deprecate the apparent improvement in asset coverage as meaningless, because of the $1,236M in Gains over the period, $1,556M occurred in the Series 1 Repayment Portfolio, which is guaranteed anyway! The Managed Portfolio, which is supposed to pay off the Junior Prefs, took a loss of $320M!

Looking at the asset coverage in a more usual fashion, we find that (Total Assets) – (Misc Liabilities) – (Senior Prefs) = $18,523M which is supposed to cover the $19,444M Junior Pref Redemption Value, for coverage of 0.95:1, which is an improvement over the Jun 05 value … until, of course, one remembers the Forward Agreement, which kills off any such change since the increase in value was derived from the wrong pigeonhole.

According to me, this investment is just getting worse every time it’s looked at. And, according to Lawrence Asset, the NAVPS of the Juniors is $13.67, a coverage of 0.93:1 as of March 2 … although they report a coverage of 1.27x presumably due to incorporation of the Forward Agreement.

Which leads to a funny thought … say the pattern set by the last six months continues, and they make so much money in the Repayment Portfolio that it covers the Senior Prefs exactly, while the Managed Portfolio doesn’t move. In such a case, their reported asset coverage will go down, since the forward won’t be worth anything! Now, that would be funny!

HPF.PR.B closed today at $15.25-35, 112×14 – a nice sized bid! Not a bid I understand very well, though.

Sixty-Split Corp announced today :

that it has called 638,503 Preferred Shares for cash redemption on March 15, 2007 (in accordance with the Company’s Articles) representing approximately 41.578% of the outstanding Preferred Shares as a result of the special annual retraction of 1,277,422 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 March 14, 2007 will have approximately 41.578% of their Preferred Shares redeemed. The redemption price for the Preferred Shares will be $25.00 per share.
    Holders of Preferred Shares that are on record for the dividend but have been called for redemption will be entitled to receive dividends thereon which have been declared but remain unpaid up to but not including March 15, 2007.

I highlighted the possibility some time ago and warned again, but the price just stayed high. The issue closed today at 25.93-15, 10×3; dividends paid 3/15 will be $0.3563. So there’s a loss coming in two weeks of nearly $0.60 on nearly half the holdings. Ouch.

DBRS has announced:

DBRS has today placed all the long and short-term ratings of Canadian Imperial Bank of Commerce (CIBC or the Bank) Under Review with Positive Implications. The Under Review with Positive Implications status reflects ongoing actions CIBC has taken to address DBRS’s concerns regarding capital levels and the Bank’s ability to manage reputation-related risk which had caused rating pressure in 2005.

DBRS’s preliminary view is that the Bank has raised capital ratios to levels comparable to peers as a result of growth in retained earnings, increase in the amount of preferred shares allowed to be included in Tier 1 capital and management of risk-weighted assets.

See Preferreds & Tier 1 Capital (Part 3) for a very brief discussion of CIBC’s Tier 1 capital in relation to its peers.

Meanwhile S&P said:

Standard & Poor’s Ratings Services today said it revised its outlook on Canadian Imperial Bank of Commerce (CIBC) and selected subsidiaries to stable from negative. At the same time, Standard & Poor’s affirmed all ratings on CIBC and its subsidiaries, including the ‘A+’ long-term counterparty credit rating on CIBC. (A full report on CIBC will be published on RatingsDirect following this media release.)

The affected issues are: CM.PR.A / CM.PR.C / CM.PR.D / CM.PR.E / CM.PR.G / CM.PR.H / CM.PR.I / CM.PR.J / CM.PR.P / CM.PR.R.

Via CNW Group:

Allbanc Split Corp. (the “Company”) announced today that it has called 61,685 Preferred Shares for cash redemption on March 9, 2007 (in accordance with the Company’s Articles) representing approximately 13.389% of the outstanding Preferred Shares as a result of the special annual retraction of 61,685 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 March 8, 2007 will have approximately 13.389% of their Preferred Shares redeemed. The redemption price for the Preferred Shares will be $60.80 per share.

Not the end of the world … there’s such a fat dividend on these things that the early call is actually better for holders (in terms of yield) than the maturity 2008-3-10.

This issue doesn’t trade much and so is in the “Scraps” index. It is not eligible for recommendation by HIMIPref™ due to its short term to maturity.

I’ve uploaded three graphs from HIMIPRef™:

• flatBidPrice (one point on the graph has been removed – an absurdly low bid, presumably due to a market-maker getting some rest at the end of long day)
• yieldToWorst
• modified duration (of YTW scenario) … a highly educational graph! The presence of several recognizable downward sloping lines is indicative of different YTW scenarios …. hmm … I’ll bet there’s an article in there, somewhere!

Update : From the 2006 Annual Report:

So, after the current redemption of 61,685 shares, somewhat less than half of the original issue will have survived.

One thing I find particularly interesting is the fact that the original DBRS rating of Pfd-2 has remained unchanged throughout this time. In the original rating release, dated 2003-3-13, DBRS said:

The purchase of the shares was funded with $54.6 million of Class A Preferred Shares and $38.6 million of all outstanding Class A Capital Shares. This will provide for downside protection of 42% as of March 11, 2003 to the holders of Class A Preferred Shares.

…

The redemption date of the Class A Preferred Shares is set on March 11, 2008. The current rating of the Class A Preferred Shares is based primarily on the available downside protection and the strong credit quality of the companies represented in the Portfolio. The main constraint to the rating is the concentration of the Portfolio in the financial services industry and the Company’s dependence on the value and dividend policies of the companies in the Portfolio.

When we look at the balance sheet as of Allbanc’s Semi-Annual Report as of September 10, 2006, we find (edited somewhat):

So we calculate the asset-coverage ratio as [(57,427 + 28,011) / (28,011)]:1 gives 3.05:1.

3.05:1 is a massive number! To express it in DBRS’ terms, it means downside protection of 67.2%! And what more, it only needs to last another year, since the terms of issue state that all the prefs will be redeeemed willy-nilly on March 10, 2008. Come on, now! What are the chances that a portfolio comprised of the Big 5 Bank stocks is going to lose more than 67.2% of its value inside of a year?

By comparison, let’s look at what DBRS said about Canadian General Investments on March 28, 2006, when rating CGI.PR.C:

DBRS has also assigned a new Pfd-1 rating with a Stable trend to the 3.90% Cumulative Redeemable Class A Preference Shares, Series 3 issued by the Company. The Company is a closed-end mutual fund corporation invested primarily in the exchange-traded stock of Canadian companies (the “Portfolio”). The rating is supported primarily by the very high level of downside coverage of approximately 75%. The Portfolio is diversified; with no more than 3.4% in any single name, there is an overweight in the Financial and Energy sectors with weightings of 26.5% and 25.9%, respectively. The Company may make dividend and special distributions to common shareholders that could potentially reduce asset coverage, but only to the extent that asset coverage after giving effect to such distributions remains above 2.5 times.

.

So, sure: CGI is better diversified, the coverage is even higher than Allbanc’s and CGI.PR.C has language in the terms of issue that restrict distributions if asset coverage falls below 2.5:1. These are good things and I will not minimize them. On the other hand, CGI.PR.C doesn’t mature until 2016-6-15, which gives a lot more time for things to go wrong.

I won’t insist that the ABK.PR.C should be rated equivalent to CGI.PR.C! I won’t even insist that a Pfd-1(low) rating is the proper level (although I’d like to see some discussion of the point)! But I will say: I don’t understand why ABK.PR.C has not been upgraded to at least Pfd-2(high)!

With the release of the Great-West Lifeco full year financials we can have a look at the progress of the issuer bid on their retractible preferreds – a bid which, I repeat ad nauseum, casts considerable doubt as to whether these issues will survive past their first redemption date.

…which allows us to calculate the changes…

We can also look at some graphs of GWO.PR.X data over the past year:

• Yield to Worst
• Average volume
• Flat Bid Price

These shares pay $1.20 p.a.; if we assume that the average “accrued dividend” was $0.15, then the average price Great-West actually paid ($27.39) can be reduced to $27.24 flat-bid-price equivalent – which I find surprisingly high, given that the FBP was well below this level from about May 15 to August 31, as shown on the FBP graph. This was the same period in which average volume declined from its high for the year of about 8,000 shares per day to about 4,000.

All that aside, it seems that GWO has shown a clear intention to get these shares off its books at the first opportunity – the only surprise is that they are willing to buy them at such a paltry YTW. Why not stick the money in something else and save it for the (extremely big!) redemption at $26.00?  

Update : I forgot the links to aid navigation! The issuer bid was last discussed January 25; it remains to be seen how the cash required for the Putnam Purchase will affect the buyback.

DBRS today confirmed that TransCanada Pipeline’s preferred issues will remain rated Pfd-2(low), as foreshadowed when equity financing was announced.

The rating confirmations reflect the realization of TCPL’s intention as stated at the time of the proposal to finance the acquisitions with substantial amount of equity to maintain its current credit standing. The recent subscription receipt issuance of C$1.5 billion will result in TCPL’s key credit metrics being maintained at similar levels as at December 31, 2006. DBRS estimates consolidated debt-to-capital ratio of approximately 63% to 64% and cash flow debt ratio of 0.17 times on a pro-forma basis (DBRS adjusted). These credit ratios are based on TC Pipe being consolidated into TCPL as in the prior year. The equity issuance removes the previous concern of potential weakening of TCPL’s financial profile during the interim debt financing of the acquisitions at closing.

I previously noted that DBRS had placed a number of Income-Trust-Based Split-Share Corporations under review, following the Hallowe’en Massacre. They announced on February 1 that some of these reviews are now completed.

Update, 2007-09-05: After posting regarding the downgrade of ES.PR.B, I realized that the original table (now shown with strikethroughs) was incorrect. The correct ticker symbols have been inserted in bold