Category: Issue Comments

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.

Assiduous readers of this blog may remember my my previous post on this issue and be having trouble sleeping at night due to curiosity regarding my current views.

For the benefit of these readers, and of a FWF member who asked about forward rate agreements in general, let’s have another look.

The June 30, 2006 Annual Report isn’t on the manager’s website yet, so you have to get it from SEDAR. Once you do, the previously shown simplified balance sheet can be revised to:

Note the balance sheet value of the Junior Prefs. 18,237 (thousand). This has been reduced from the 2005-12-31 value of 19,445 BECAUSE THEY DON’T HAVE THE MONEY.

The reason they don’t have the money is best understood through the Statement of Operations, which may be simplified as:

The net loss wiped out the share-holders equity.

Now, maybe to you and me this looks appalling. The Junior Prefs are supposed to mature  2012-06-29  and pay holders $14.70. There are 1,322,726 outstanding, so that’s a total amount due on maturity of $19,444,072 and the company only has about $18,237,000 in the kitty. To you and me, maybe, that means the asset coverage ratio is about 0.94:1 and it’s time to exit, stage left.

But!

 On the most recent fact sheet the manager trumpets asset coverage on the Juniors of 1.29:1.

On their listing of NAVs the manager says the $14.70 is covered by the “managed portfolio”, which has a value of $20.16 as of June 30, and the coverage is 1.37:1.

Mind you, though, they also say the NAV of the Juniors is $13.74, not $14.70, so that should at least ring some alarm bells for some holders.

The difference between $20.16 & $13.74, when multiplied by 1,322,726 shares is $8,491,900.90, and the difference between the Series 1 Repayment Portfolio and the redemption value of the Series 1 Shares is … $8,425,407. However, their “Coverage ratio” publication shows a June 30 NAV of $13.77 for the Junior prefs, which is not in agreement with their financials, so let’s assume that we’ve found the explanation – their published coverage ratio includes an allowance for the forward contract.

As I asserted in my prior post, this is absurd. If you want to defease the principal for coverage calculation purposes, you’ve also got to defease the related payments, and this hasn’t been done. Let’s not count too much on investment gains in the future … in the year prior to 2006-6-30, the S&P/TSX 60 Index was up 17.6% and the company did not cover its dividends.

 Even more excitingly, the Managed Portfolio was about 1/3 invested in income trusts at June 30, 2006. The manager claims a Series 2 (Junior Pref) NAV of $13.66 on November 3, 2006, so we’ll just have to see how that goes.

I would dearly love to see an explicit calculation of how the company calculates a coverage ratio of 1.29:1 on 2006-11-3. I would also dearly love to see an explanation of how the company intends to maintain distributions of $3.3-Million p.a. from gross Dividends and Interest of $782,538 (which basically, in 2006, covered the Management Fee and the Forward Agreement Fee, full stop.).

In the meantime, though, I’ll just concentrate on being grateful I don’t own any of these things … and wondering why DBRS still has them at Pfd-2(low).

The HPF.PR.B closed today on the TSX at $15.00-69, 17×4. We’ll just have to see how long that lasts.

All good things must come to an end.

BAM.PR.S has been a wonderful issue, paying $2.0875 interest every year but it’s time to wave farewell to the old friend.

Brookfield called it for redemption:

Brookfield Asset Management Inc. (NYSE/TSX: BAM) announced today that it intends to redeem its 8.35% Preferred Securities (“Securities”) on January 2, 2007 for C$25.00 per Security plus accrued interest of C$0.01144, representing a total Redemption Price of C$25.01144 per Security.

Enjoy the company of BAM.PR.T while you can, because it’s going to get called shortly as well (or, at least, so I predict). These were all issued during a small craze for interest-bearing prefs … they were a bit expensive compared to regular bonds, but these things had a stated term of 50-years. Not only could Brookfield not issue 50-year regular bonds (at least, I don’t think they could) but still get away with offering the preferred securities, but I believe there is some accounting convention whereby a 50-year bond is considered equity for at least some capital adequacy purposes.

Update 2007-01-05 : This post has been singled out for spamming for some odd reason; I have therefore disabled the comment function.

DBRS announced on November 8 that they will be reviewing the ratings of Income-trust based split shares:

This recent announcement has placed downward pressure on the net-asset value of portfolios containing income trusts and consequently the downside protection available to the Split Shares. Income trusts that plan to reduce the level of distributions to unitholders to reflect the additional tax burden may influence the ability for static and managed portfolios to generate sufficient yields to meet distributions to the Split Shares. In addition to the risk that this announcement may represent for distributions from any single trusts, the risk of a number of income trusts reverting back to corporate status may limit the number of eligible names for certain portfolios with a defined investment criteria and thereby increasing concentration risk.

Issues affected by this announcement are:

Two Income-trust-based split share corporations tracked by HIMIPref™ and included in the “InterestBearing” index are BSD.PR.A and MST.PR.A. Presumably their omission from the review list is a simple oversight.

BSD.PR.A is interesting: according to the manager the NAV of BSD.UN was $8.061 on November 10 (compared with $11.479 on October 31! Ouch!). It is currently quoted at $7.66-99 on the TSX – some have traded as low as $7.62 today (the 52-week low is $6.71! We can assume that’s recent!). According to their prospectus (available on the manager’s site! Good for them!):

Concurrent Annual Redemption. A Unitholder who surrenders Capital Units together with Preferred Securities for redemption in the month of November of each year at least 15 Business Days prior to a Redemption Date will receive payment for each Combined Security equal to the Combined Value determined as of the Redemption Date, less redemption costs.

Annual Redemption of Capital Units. A Unitholder who surrenders Capital Units alone for redemption at least 15 Business Days prior to a Redemption Date will receive an amount equal to Combined Value determined as of the Redemption Date, less redemption costs and the costs incurred by the Trust in purchasing a Preferred Security either in the market or pursuant to the Call Right.

 The interesting part comes when we look at the BSD.PR.A redemption schedule:

There were spikes in BSD.PR.A volume on November 1 (wonder why!) and yesterday, November 16. BSD.PR.A is currently quoted at $9.60-80 3×5 with no shares traded today. It will be most (most, most!) interesting to see if there’s a price spike towards month-end, as the manager seeks to match capital units submitted bare for redemption, scrambling to purchase the prefs in order to avoid the punitive redemption price.

Yes, yes, I know that we are now 15 days prior to the Redemption Date and all capital unit redemption requests have been made. But the November 16 volume spike was only 50,000 shares, out of 6,842,341 outstanding. Somehow, I suspect that there were more redemption requests than that … but we will see!