Category: Issue Comments

Well, it’s not exactly the biggest surprise in the world … Enbridge announced today (via CCN Matthews) that:

Enbridge Inc. (TSX:ENB)(NYSE:ENB) announced today its intention to redeem all 8,000,000 of its outstanding 7.80% preferred securities, at a price of $25.00 each plus accrued interest of $0.2458 per security, for the period following the previously announced December 31, 2006 interest payment date. The redemption date is February 15, 2007, for all of the 7.80% preferred securities, originally issued in February 2002.

So there goes another one of the lovely high-coupon preferred securities!

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.