Category: Issue Comments

The yield-to-worst on POW.PR.B is now negative. It closed today at 26.46-65, but it is currently callable at $26.00:

This gives rise to: 

I’ve uploaded some graphs:

• Yield-to-Worst
• Flat Bid Price
• Modified-Duration-to-Worst

I can’t say I really understand why the price should have gone up so spectacularly recently. One can make the usual argument that since the redemption premium declines by $0.25 annually, the net cost to the company is not the coupon of 1.3375, but $0.25 less than this, or $1.0875, but this is less than the current financing cost only by half the saving. The company’s treasurer has the immediate option of reducing permanent costs by about $0.125 p.a. (gross of issuance costs), at the expense of a few years loss of charges … but this analysis assumes that the current refinancing level will be available a few years hence. It might not be.

And why should the price spike now?

The best an investor can reasonably hope for is a yield of 4.03% if it lasts until its $25.00 call; there are lots of issues with similar characterists that have such a yield without the risk of negative returns. The new RY.PR.D issue settles tomorrow and yields 4.50%. RY.PR.W has a yield to worst of 4.02%, with a 2014 call date, without the risk of an intervening call. The same can be said for POW.PR.D, pre-tax bid-YTW of 4.36% based on a call 2014-11-30, with no intervening call risk – and it’s a more active trader and the same name!

So the whole situation is very mysterious and I consider POW.PR.B to be very expensive at current levels.

Well, that’s a long headline, but I want to make sure nobody misses it!

In a press release issued today, BCE stated:

BCE also announced today that it will not move forward with the planned conversion into an income trust announced by the company on October 11, 2006. However, the company is continuing with previously announced plans to simplify its corporate structure and eliminate BCE’s holding company operations. As part of this process, BCE intends, at its next annual shareholders meeting, to change its name to Bell Canada Inc. and will have two operating businesses: Bell and Bell Aliant Regional Communications. Bell Canada also intends to change its name to Bell Inc. at the same time.

Under a plan of arrangement, and as part of the corporate simplification process, holders of Bell Canada preferred shares will be asked to exchange their shares for BCE preferred shares with the same series rights. The arrangement will also provide for a one-time special dividend of $0.20 per Bell Canada preferred share outstanding immediately prior to the exchange. The arrangement must be approved by the holders of common and preferred shares of Bell Canada, each voting as a class, at a special meeting to be held on January 23, 2007.

The previously announced offer is therefore cancelled. The market hadn’t been taking it too seriously anyway.

To summarize:

• There is no longer an offer for: BCE.PR.R, BCE.PR.S, BCE.PR.Y, BCE.PR.Z, BCE.PR.A, BCE.PR.C.
• There is no longer a cash offer for: BC.PR.B, BC.PR.C, BC.PR.E (or for the Series 15, BC.PR.A; or for the Series 16, BC.PR.D; which are not tracked by HIMIPref™)
• There is now an exchange offer with a special dividend sweetener for: BC.PR.B, BC.PR.C, BC.PR.E (and for the Series 15, BC.PR.A; and for the Series 16, BC.PR.D; which are not tracked by HIMIPref™)

Update: DBRS has confirmed the ratings of Bell Canada at Pfd-2, and of BCE at Pfd-2(low), removing them from review. They had been placed under review October 11.

Faircourt has announced that they propose to merge several of their public investment vehicles:

Faircourt Asset Management Inc. has announced that it will hold securityholder meetings on January 9, 2007 for Faircourt Income Split Trust, Faircourt Split Five Trust, Faircourt Split Seven Trust and Income & Growth Split Trust (the “Funds”). At the meetings, holders of units (“Unitholders”) and holders of preferred securities (“Preferred Securityholders”) of each of the Funds will be asked to consider the proposed merger (the “Merger”) of Income Split, Split Five and Split Seven into Income & Growth Split, to create a single trust (the “Continuing Trust”). Preferred Securityholders of the Funds will also be asked to consider the proposed exchange of preferred securities of each of Income Split, Split Five and Split Seven for preferred securities of Income & Growth Split (which will be the Continuing Trust) which, if approved, is expected to occur shortly following approval. Unitholders and Preferred Securityholders will also be asked to consider various amendments to the trust agreements and trust indentures of the Funds.

There is no indication that I can find, either on the company website or on SEDAR as to just what these “various amendments” might be.

Let’s hope the amendments include a declining premium on the preferred calls! I’ll keep everybody posted.

Yet another fine old preferred security will shortly be leaving us.

In a press release dated November 22, Transalta announced:

TransAlta Corporation (TSX: TA; NYSE: TAC) today announced it will redeem all of its 7.75% Preferred Securities (the “7.75% Preferred Securities”), which have an aggregate principal amount of $175,000,000, on Jan. 2, 2007 (the “Redemption Date”).  The redemption will be funded with short-term debt and is expected to reduce interest costs.

.

I’ll just bet that’s the expectation! By more than 3% absolute, I’d guess or $5-million-plus annually!

It has been a long time since this paper was investment-grade … DBRS downgraded it from Pfd-2(low)y (the “y” meaning “hybrid”) to Pfd-3(high)y on December 12, 2002, but for a little while it was a fine trader. It will be missed, and it will be a long time before investment grade paper pays 7.75% again!

In a press release, Brascan Soundvest Rising Distribution Split Trust…

…announced that following the annual redemption of Capital Units (TSX: BSD.UN) by holders of such units, the Trust purchased in the market a sufficient number of its Preferred Securities (TSX: BSD.PR.A) to ensure that the number of Preferred Securities that remain outstanding is equal to the number of Capital Units outstanding. As a result, the Trust will not exercise its Call Right, as described in the prospectus of the Trust dated February 25, 2005, to call any Preferred Securities for redemption in connection with the annual redemption of Capital Units.

And that was it! There is no indication of just how many Capital Units were retracted.

This is the way it should work. BSD.PR.A has a declining call premium feature: according to the prospectus:

Preferred Securities may be called by the Trust and purchased prior to the Maturity Date (the “Call Right”) if, as a result of the redemption of Capital Units, the aggregate number of outstanding Preferred Securities would exceed the aggregate number of outstanding Capital Units. In such case, Preferred Securities will be redeemed at a price per Preferred Security which until March 31, 2006 will be equal to $11.00 and which will decline by $0.10 each year thereafter to $10.10 after March, 31, 2014, plus any accrued and unpaid interest. Notice of the exercise of the Call Right will be given by the Trust to Securityholders whose Preferred Securities will be redeemed.

So those who wanted to keep their prefs, kept them, and those who wanted to sell, sold.

The capital units market price crept up to the NAV just prior to the redemption deadline, but are now reported to have fallen out of bed:

BSD.PR.A is rated Pfd-2 by DBRS. For some reason it was left off the list of income-trust backed prefs put under review after the Hallowe’en Massacre.

What’s up with this issue? It’s not in the HIMI Preferred Indices (at the moment, anyway) due to volume considerations, but today it traded 41,832 shares and closed at 25.90-95, 78×20. AND it went ex-dividend today. Maybe to you and me, that means the price should go down, but not this time!

What makes this strange is that the pre-tax YTW on this issue is now -4.66% [that’s NEGATIVE 4.66% if the word-wrap on your browser is misbehaving!], based on the bid of $25.90 and a redemption call 2007-4-14 at $25.00. If it lasts until its scheduled hardMaturity 2011-3-15, then it will have yielded +4.76%, but just how likely is this contingency, anyway?

When we look at the financials, available via Scotia Managed Companies, we find the following history of units outstanding:

Which in the first place goes a long way towards explaining why the issue no longer qualifies for index inclusion on volume considerations and in the second place demonstrates that the capital unit holders aren’t exactly shy about redeeming units. Scotia says that the SXT Capital Units had a NAVPS of $19.61 as of December 5 … the market didn’t do much today, so say that’s constant … SXT closed at $19.23-84, 40×50.

There will always be those who disagree, of course, but it seems to me that the increase in the Capital Units’ intrinsic value from about $17 last March to the current figure, together with the fact that the Capital Units were trading at a discount to intrinsic value of about 7-8% immediately following the last redemption, that has now been reduced to about 2%, makes the probability of redemption extremely high. Scotia has a great little feature on their website whereby a user can plot the intrinsic value and the market value and the discount over time. Have a look. Same pattern: discount goes to about 8% following the redemption period, increases gradually to about the current figure, then there’s a whacking great redemption.

Given that, I wouldn’t be paying $25.90 for these shares!

As I’ve said before, the world would be a better place if more split share corporations’ preferred shares had some degree of call protection via premia on early-call prices.

I’ve attached two graphs of data over the past year: Flat Bid Price and Yield-to-Worst. Check the glossary for explanations of flatBidPrice and yieldToWorst.

This is BG Income + Growth Split Trust, a preferred security not tracked by HIMIPref™ … but I’ll report on its partial redemption call just for fun anyway!

According to their prospectus, the prefs had good call protection:

Preferred Securities also may be called by the Trust and purchased prior to the Maturity Date (the “”Call Right”), at a price per Preferred Security which until May 31, 2005 will be equal to $10.40 and which will decline by $0.10 each year thereafter to $10.00 after May 31, 2008, plus any accrued and unpaid interest thereon.

Now some of them have been called:

The call of Preferred Securities represents approximately 18.3% of the outstanding Preferred Securities. The Preferred Securities will be called on a pro rata basis such that each holder of Preferred Securities of record on December 6, 2006, as per the records of the Canadian Depository for Securities Limited (CDS), will have approximately 18.3% of their Preferred Securities redeemed. The total redemption amount for the Preferred Securities will be $10.33587 per security, which represents a price of $10.30 plus interest from the date of the last distribution to December 6, 2006.

Given that the maturity is May 31,2009 … call it 2.5 years away … we can say, roughly that a price of 10.30 equates to a call yield of 4.7%. So – the pref holders did fine.

Some of the holders did really well! I see a volume spike – such as it is! – on November 13, when the closing price was over $10.60, and a close of over $10.80 on November 24.

Definately, the world would be a better place if all split-share preferred had some call-protection via premia on the call price.

I will admit to being fascinated at the prospect of client retractions of income-trust-based split share corporations over the next few months.

Energy Split II Corporation has announced that only about 1.547% of the preferred shares outstanding will be redeemed in order to match Capital Units tendered separately.

This is much less than I would have expected; as shown on the company’s website, the NAV got hammered in the aftermath of the Hallowe’en Massacre, with the Capital Units losing almost 28% of their NAV from the October 26 valuation to November 30. They mature next December anyway; it is interesting to note that the only prior redemption possibility, in 2005 after a year on the market, called only about 5.4% of the shares outstanding.

However, they somehow managed to continue trading at a premium to NAV – as much as 33% as measured on November 2 – and so it was in the interest of Capital Unitholders to sell in the marketplace rather than retract – to the tune of almost 5% on November 30.

The prefs don’t trade much (averageTradingValue of just over $5,000) and are not eligible for recommendation by HIMIPref™ since pseudoModifiedDuration (Cost) of buy side less than minimum setting : the pseudoModifiedDurationCost is 0.886 and the minimum setting in the current parameterization is 1.020.

Still, y’know: These things have a pre-tax bid-YTW of 5.22% based on their hard-maturity on 2007-12-16 at $25 (because those who buy prior to the ex-date of 2006-12-12 will be getting five dividend payments in a year-and-a-few-days) so some hopeful souls may wish to put in a bid at $25.01, given that the current quotation is $25.00-$26.00, 54×1.

This issue was specifically queried on Financial Webring, which prompted my update of HPF.PR.B.

PAY.PR.A had a listingDate of 2002-3-19 and were quoted at the close 2006-11-22 at 25.57-84. They continue to be rated at their initial level of Pfd-1(low) by DBRS. The intent of the company is that they will be redeemed 2008-7-31 … about 20 months from now.

The balance sheet is reasonably solid:

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!

The guarantee of the principal on PAY.PR.A means we don’t really have to worry about Asset Coverage: our major concern is whether the company will be able to pay the dividends in the intervening period. The revenue statement dated 2006-3-31 looked like this (simplified from the annual report):

It should also be noted that the company, after achieving this loss, went on to distribute $3,211 (thousand) to Equity & Subordinate shareholders as a return of capital.

A mess! The equity shares had a NAV of $11.59 as of 2006-3-31 and currently, according to the manager (on a table that doesn’t tie in to the Annual report, just like with the HPF.PR.B), as of 2006-11-17, are down to $10.71. Not all that hot compared to the issue price of $20.00 … but the distributions have been nice! The whole thing just goes to show what happens when salesmen try to play Investment Manager … the biographies in the prospectus make the backgrounds of the principals pretty clear!

But what do we care? Split share corporations are a complicated way for greedy investors (who buy the capital units) to transfer money to conservative investors (who buy the prefs) and salesmen (who are generally the big winners in these things), and the company is serving its purpose admirably.

Since return of the preferred share principal is guaranteed (well, almost … there’s a few weasel words in the prospectus regarding possible cancellation of the agreement) the major issue is the dividends due between now and maturity in 20 months. Twenty payments of $0.1146 is $2.29 and this is covered reasonably well by the balance sheet since the capital units haven’t had any distributions since October 2005. Ha ha!

This issue is too short term to make a calculation of curvePrice meaningful, so don’t look to this post for advice on buying or selling the prefs! PAY.PR.A has a pre-tax bid-YTW of 4.05%, based on the 2006-11-22 closing bid of $25.57 and a maturity at $25.00 2008-7-31.