Category: Issue Comments

Manulife Financial Corporation has announced (although not yet on their website):

that after having taken into account all election notices received by the September 4, 2018 deadline for conversion of its currently outstanding 8,000,000 Non-cumulative Rate Reset Class 1 Shares Series 13 (the “Series 13 Preferred Shares”) (TSX: MFC.PR.K) into Non-cumulative Floating Rate Class 1 Shares Series 14 of Manulife (the “Series 14 Preferred Shares”), the holders of Series 13 Preferred Shares are not entitled to convert their Series 13 Preferred Shares into Series 14 Preferred Shares. There were 140,179 Series 13 Preferred Shares elected for conversion, which is less than the minimum one million shares required to give effect to conversions into Series 14 Preferred Shares.

As announced by Manulife on August 21, 2018, after September 19, 2018, holders of Series 13 Preferred Shares will be entitled to receive fixed rate non-cumulative preferential cash dividends on a quarterly basis, as and when declared by the Board of Directors of Manulife and subject to the provisions of the Insurance Companies Act (Canada). The dividend rate for the five-year period commencing on September 20, 2018, and ending on September 19, 2023, will be 4.41400% per annum or $0.275875 per share per quarter, being equal to the sum of the five-year Government of Canada bond yield as at August 21, 2018, plus 2.22%, as determined in accordance with the terms of the Series 13 Preferred Shares.

Subject to certain conditions described in the prospectus supplement dated June 17, 2013 relating to the issuance of the Series 13 Preferred Shares, Manulife may redeem the Series 13 Preferred Shares, in whole or in part, on September 19, 2023 and on September 19 every five years thereafter.

It will be recalled that MFC.PR.K will reset at 4.414% effective September 19.

MFC.PR.K is a FixedReset, 3.80%+222, that commenced trading 2013-6-21 after being announced 2013-6-17. The announcement of extension has been previously reported. The issue is tracked by HIMIPref™ and is assigned to the FixedReset subindex. Since it is an insurance holding company issue without a NVCC clause, a Deemed Maturity at par as of 2025-1-31 has been added to the redemption schedule as is my normal practice.

I previously recommended against conversion.

Tim Kiladze wrote a piece in the Globe today titled Dundee Corp. faces investor spat over preferred share repayment:

On Tuesday, Maryland-based Roumell Asset Management, which says it holds 3.6 million shares, or 6.4 per cent of Dundee, released a public letter to the company’s board of directors asking for Dundee’s preferred shares that come due in 2019 to be extended and given a new, discounted price.
…
Dundee declined to comment Tuesday, but on an August conference call, executive chairman Jonathan Goodman addressed the complexity of the matter. “We’re in the very unique position that the preferred shareholders don’t want us to give them stock and neither do a lot of the common shareholders. But I think we have to be pragmatic,” he said, alluding to the company’s cash levels.

Assiduous Readers will remember that I wrote about DC.PR.E in August – that post contains links to posts from all the huffing and puffing in 2016 about the previous arrangement that gave rise to the existence of the issue.

The Roumell letter advocates:

We believe the company should offer the current Series 5 preferred shareholders appropriately discounted (from par value), and extended, preferred shares. Dundee’s financial position has deteriorated significantly since January 2016 and the discount offered to the Series 5 preferred shareholders must reflect this new reality. In the absence of the Series 5 preferred shareholders accepting a newly discounted, and extended, security, Roumell Asset Management would support honoring the obligation by issuing common stock. While we speak only for ourselves, we believe other large shareholders view the situation similarly.

So who’s Roumell? They run a fund:

The Roumell Opportunistic Value Fund (Institutional share/RAMSX) follows the same deep-value, Opportunistic Capital Allocation (OCA) strategy that we have adhered to since 1998. The Roumell Opportunistic Value Fund seeks to achieve its objective by holding a combination of equity, debt and cash reflecting a broad mandate to pursue value where we find it. In the absence of sufficient investment opportunities, the Fund will hold cash. The Fund is managed by Jim Roumell.

The appropriate benchmark for this kind of fund is difficult to determine, but they mention the Russell 2000 Value Index in their quarterly fact sheet, so let’s go with that until we’re told differently. The fund has achieved an “Average Annual Total Return as of Quarter Ending 6/30/2018” of 0.77% over the past five years compared to 11.72% for the Vanguard Russell 2000 Value Index Fund Institutional Shares VRTVX in the five years to 2018-8-31. Sorry about the period mismatch, but it seems we’re not talking about fractions of a basis point here! Let’s just say I’m not busy mortgaging my house so I can place money with Roumell! They do give returns for other strategies in the 18Q2 Investors’ Letter … you can decide for yourselves whether you want to mortgage your houses.

DC.PR.E closed at 18.47 today … a good bounce off the lows, but hardly a vote of confidence in the company’s ability to redeem at par next year.

It will be recalled that MFC.PR.K will reset at 4.414% effective September 19.

MFC.PR.K is a FixedReset, 3.80%+222, that commenced trading 2013-6-21 after being announced 2013-6-17. The announcement of extension has been previously reported. The issue is tracked by HIMIPref™ and is assigned to the FixedReset subindex. Since it is an insurance holding company issue without a NVCC clause, a Deemed Maturity at par as of 2025-1-31 has been added to the redemption schedule as is my normal practice.

The most logical way to analyze the question of whether or not to convert is through the theory of Preferred Pairs, for which a calculator is available. Briefly, a Strong Pair is defined as a pair of securities that can be interconverted in the future (e.g., MFC.PR.K and the FloatingReset, MFC.PR.S, that will exist if enough holders convert). Since they will be interconvertible on this future date, it may be assumed that they will be priced identically on this date (if they aren’t then holders will simply convert en masse to the higher-priced issue). And since they will be priced identically on a given date in the future, any current difference in price must be offset by expectations of an equal and opposite value of dividends to be received in the interim. And since the dividend rate on one element of the pair is both fixed and known, the implied average rate of the other, floating rate, instrument can be determined. Finally, we say, we may compare these average rates and take a view regarding the actual future course of that rate relative to the implied rate, which will provide us with guidance on which element of the pair is likely to outperform the other until the next interconversion date, at which time the process will be repeated.

We can show the break-even rates for each FixedReset / FloatingReset Strong Pair graphically by plotting the implied average 3-month bill rate against the next Exchange Date (which is the date to which the average will be calculated).

Click for Big

The market appears to be relatively uninterested in floating rate product; most of the implied rates until the next interconversion are scattered around the current 3-month bill rate and the averages for investment-grade and junk issues are similar, at +1.58% and +1.29%, respectively – pretty close to the market rate. Whatever might be the result of the next few Bank of Canada overnight rate decisions, I suggest that it is unlikely that the average rate over the next five years will be lower than current – but if you disagree, of course, you may interpret the data any way you like.

Since credit quality of each element of the pair is equal to the other element, it should not make any difference whether the pair examined is investment-grade or junk, although we might expect greater variation of implied rates between junk issues on grounds of lower liquidity, and this is just what we see.

If we plug in the current bid price of the MFC.PR.K FixedReset, we may construct the following table showing consistent prices for its soon-may-be-issued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:

Based on current market conditions, I suggest that the FloatingResets that will result from conversion are likely to be cheap and trading below the price of their FixedReset counterparts. Therefore, I recommend that holders of MFC.PR.K continue to hold the issue and not to convert.

If you do wish to convert, note that the deadline for notifying the company is 5:00 p.m. (Toronto time) on September 4, 2018. Brokerages and other intermediaries will normally set their internal deadlines a few days prior to this, so if you want to convert don’t waste any time! Such intermediaries may accept instructions after their internal deadline (but prior to the company deadline, of course) if you grovel in a sufficiently entertaining fashion, but this will only be done on a ‘best efforts’ basis.

I will note that once the FloatingResets commence trading (if, in fact, they do) it may be a good trade to swap the FixedReset for the FloatingReset in the market once both elements of each pair are trading and you can – presumably, according to this analysis – do it with a reasonably good take-out in price, rather than doing it through the company on a 1:1 basis. But that, of course, will depend on the prices at that time and your forecast for the path of policy rates over the next five years. There are no guarantees – my recommendation is based on the assumption that current market conditions with respect to the pairs will continue until the FloatingResets commence trading and that the relative pricing of the two new pairs will reflect these conditions.

Artis Real Estate Investment Trust has announced:

that it does not intend to exercise its right to redeem all or any part of the currently outstanding Preferred Units, Series E (“Series E Units”) (AX.PR.E) on September 30, 2018.

As a result, and subject to certain conditions set forth in the certificate of preferred units terms relating to the Series E Units dated effective March 21, 2013 (the “Certificate of Series E Unit Terms”), the holders of Series E Units will have the right to elect to reclassify all or any of their Series E Units into Preferred Units, Series F (“Series F Units”) of Artis on the basis of one Series F Unit for each Series E Unit on September 30, 2018.

With respect to any Series E Units that remain outstanding after September 30, 2018, holders thereof will be entitled to receive distributions, if, as and when declared by the Board of Trustees of Artis, in an annual amount per Series E Unit determined by multiplying the Annual Fixed Distribution Rate for such subsequent fixed rate period by $25.00, and shall be payable quarterly on the last business day of each of March, June, September and December in each year during such subsequent fixed rate period. For the initial subsequent fixed rate period commencing on October 1, 2018, the Annual Fixed Distribution Rate is 5.472% per annum.

With respect to any Series F Units that may be issued on September 30, 2018, holders thereof will be entitled to receive distributions, if, as and when declared by the Board of Trustees of Artis, in an amount per Series F Unit determined by multiplying the Floating Quarterly Distribution Rate (calculated on the basis of the actual number of days elapsed in such quarterly floating rate period, divided by 365) by $25.00, which shall be payable quarterly on the last business day of such quarterly floating rate period. For the initial quarterly floating rate period commencing October 1, 2018, the Floating Quarterly Distribution Rate is 4.809% per annum.

As provided in the Certificate of Series E Unit Terms: (i) if Artis determines that there would remain outstanding on September 30, 2018 less than 500,000 Series E Units, all remaining Series E Units shall be reclassified automatically into Series F Units on a one-for-one basis, effective September 30, 2018; or (ii) if Artis determines that less than 500,000 Series F Units would be issued based upon the elections of holders, then holders of Series E Units shall not be entitled to reclassify their Series E Units into Series F Units.

As at the date hereof, there are an aggregate of 4,000,000 Series E Units issued and outstanding.

The Series E Units are issued in “book entry only” form and must be purchased or transferred through a participant in the CDS depository service (each, a “CDS Participant”). All rights of holders of Series E Units must be exercised through CDS or the CDS Participant through which the Series E Units are held. The deadline for the registered holder of Series E Units to provide notice of exercise of the right to reclassify Series E Units into Series F Units is 5:00 p.m. (Toronto time) on September 17, 2018. Any notices received after this deadline will not be valid. As such, holders of Series E Units who wish to exercise their right to reclassify their Series E Units into Series F Units should contact their broker or intermediary for more information and it is recommended that this be done well in advance of the deadline in order to provide the broker or other intermediary with time to complete the necessary steps.

If Artis does not receive an election notice from a holder of Series E Units during the time fixed therefor, then the Series E Units shall be deemed not to have been reclassified (other than pursuant to an automatic reclassification). Holders of Series E Units and Series F Units will have the opportunity to reclassify their units again on September 30, 2023, and every five years thereafter as long as such units remain outstanding.

The Toronto Stock Exchange (TSX) has conditionally approved the listing of the Series F Units effective upon reclassification. Listing of the Series F Units is subject to Artis fulfilling all the listing requirements of the TSX.

AX.PR.E is a FixedReset, 4.75%+330, that commenced trading 2013-3-31 after being announced 2013-3-12. It must be remembered that these are not actually preferred shares, as the term is usually used; they are preferred units and the distributions will be characterized in the same manner as distributions to the Capital units. The company publishes the characterization of the distributions on its website. Because of the company’s structure, conversion between the FixedReset and FloatingReset is probably (!) a taxable event; i.e., investors will take a capital gain or loss for tax purposes on conversion and reset the Adjusted Cost Base on their new position.

The most logical way to analyze the question of whether or not to convert is through the theory of Preferred Pairs, for which a calculator is available. Briefly, a Strong Pair is defined as a pair of securities that can be interconverted in the future (e.g., AX.PR.E and the FloatingReset that will exist if enough holders convert). Since they will be interconvertible on this future date, it may be assumed that they will be priced identically on this date (if they aren’t then holders will simply convert en masse to the higher-priced issue). And since they will be priced identically on a given date in the future, any current difference in price must be offset by expectations of an equal and opposite value of dividends to be received in the interim. And since the dividend rate on one element of the pair is both fixed and known, the implied average rate of the other, floating rate, instrument can be determined. Finally, we say, we may compare these average rates and take a view regarding the actual future course of that rate relative to the implied rate, which will provide us with guidance on which element of the pair is likely to outperform the other until the next interconversion date, at which time the process will be repeated.

We can show the break-even rates for each FixedReset / FloatingReset Strong Pair graphically by plotting the implied average 3-month bill rate against the next Exchange Date (which is the date to which the average will be calculated).

Click for Big

The market appears to be relatively uninterested in floating rate product; the implied rates until the next interconversion bracket the current 3-month bill rate as the averages for investment-grade and junk issues are at +1.58% and +1.33%, respectively. Whatever might be the result of the next few Bank of Canada overnight rate decisions, I suggest that it is unlikely that the average rate over the next five years will be lower than current – but if you disagree, of course, you may interpret the data any way you like.

Since credit quality of each element of the pair is equal to the other element, it should not make any difference whether the pair examined is investment-grade or junk, although we might expect greater variation of implied rates between junk issues on grounds of lower liquidity, and this is just what we see.

If we plug in the current bid price of the AX.PR.E FixedReset, we may construct the following table showing consistent prices for its soon-may-be-issued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:

Based on current market conditions, I suggest that the FloatingResets that will result from conversion are likely to be cheap and trading below the price of their FixedReset counterparts. Therefore, it seems likely that I will recommend that holders of AX.PR.E continue to hold the issue and not to convert, but I will wait until it’s closer to the September 17 notification deadline before making a final pronouncement. I will note that once the FloatingResets commence trading (if, in fact, they do) it may be a good trade to swap the FixedReset for the FloatingReset in the market once both elements of each pair are trading and you can – presumably, according to this analysis – do it with a reasonably good take-out in price, rather than doing it through the company on a 1:1 basis. But that, of course, will depend on the prices at that time and your forecast for the path of policy rates over the next five years. There are no guarantees – my recommendation is based on the assumption that current market conditions with respect to the pairs will continue until the FloatingResets commence trading and that the relative pricing of the two new pairs will reflect these conditions.

PerpetualDiscounts now yield 5.54%, equivalent to 7.20% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 3.95%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 325bp, a slight (and perhaps spurious) narrowing from the 330bp reported August 22.

Brompton Funds Limited has announced:

that at special meetings of preferred and class A shareholders (“Shareholders”) of Dividend Growth Split Corp. (“DGS”) and Brompton Split Banc Corp. (“SBC”) held today, Shareholders approved special resolutions to implement amendments to update and modernize the investment objectives, investment strategies and investment restrictions of DGS and SBC as well as certain other matters set out in the joint management information circular dated July 27, 2018 (the “Circular”).

For DGS, the changes to the investment objectives, strategy and restrictions are primarily designed to accomplish the following:
i) expand the investable universe of high quality dividend growth companies from which the portfolio manager can select by expanding the financial metrics that may be used to analyze the portfolio constituents, including forward-looking metrics;
ii) provide for up to 20% of the portfolio to be invested, from time to time, in global dividend growth companies; and
iii) allow the Manager to rebalance and/or reconstitute the portfolio more frequently than annually, at its discretion, for reasons other than the suspension of dividends, mergers or fundamental corporate actions or exceptional circumstances, so that DGS may respond to security or market developments on a timely basis.
…
Further information relating to these and other changes are described in more detail in the Circular. These changes are expected to be implemented as soon as reasonably possible.

I do not view this loosening of restrictions as being material.

Brompton Funds Limited has announced:

that at special meetings of preferred and class A shareholders (“Shareholders”) of Dividend Growth Split Corp. (“DGS”) and Brompton Split Banc Corp. (“SBC”) held today, Shareholders approved special resolutions to implement amendments to update and modernize the investment objectives, investment strategies and investment restrictions of DGS and SBC as well as certain other matters set out in the joint management information circular dated July 27, 2018 (the “Circular”).
…
For SBC, the changes to the investment objectives, strategy and restrictions are primarily designed to accomplish the following:
i) allow the Manager to rebalance and/or reconstitute the portfolio more frequently than annually, at its discretion, for reasons other than mergers or fundamental corporate actions, so that SBC may respond to security or market developments on a timely basis; and
ii) provide for up to 10% of the portfolio to be invested, from time to time, in global financial companies.

Further information relating to these and other changes are described in more detail in the Circular. These changes are expected to be implemented as soon as reasonably possible.

I do not view this loosening of restrictions as being material.

Manulife Financial Corporation has announced (although not yet on their website):

the applicable dividend rates for its Non-cumulative Rate Reset Class 1 Shares Series 13 (the “Series 13 Preferred Shares”) (TSX: MFC.PR.K) and Non-cumulative Floating Rate Class 1 Shares Series 14 (the “Series 14 Preferred Shares”).

With respect to any Series 13 Preferred Shares that remain outstanding after September 19, 2018, holders thereof will be entitled to receive fixed rate non-cumulative preferential cash dividends on a quarterly basis, as and when declared by the Board of Directors of Manulife and subject to the provisions of the Insurance Companies Act (Canada). The dividend rate for the five-year period commencing on September 20, 2018, and ending on September 19, 2023, will be 4.41400% per annum or $0.275875 per share per quarter, being equal to the sum of the five-year Government of Canada bond yield as at August 21, 2018, plus 2.22%, as determined in accordance with the terms of the Series 13 Preferred Shares.

With respect to any Series 14 Preferred Shares that may be issued on September 19, 2018 in connection with the conversion of the Series 13 Preferred Shares into the Series 14 Preferred Shares, holders thereof will be entitled to receive floating rate non-cumulative preferential cash dividends on a quarterly basis, calculated on the basis of actual number of days elapsed in each quarterly floating rate period divided by 365, as and when declared by the Board of Directors of Manulife and subject to the provisions of the Insurance Companies Act (Canada). The dividend rate for the three-month period commencing on September 20, 2018, and ending on December 19, 2018, will be 0.91773% (3.68100% on an annualized basis) or $0.229433 per share, being equal to the sum of the three-month Government of Canada Treasury bill yield as at August 21, 2018, plus 2.22%, as determined in accordance with the terms of the Series 14 Preferred Shares.

Beneficial owners of Series 13 Preferred Shares who wish to exercise their right of conversion should instruct their broker or other nominee to exercise such right before 5:00 p.m. (Toronto time) on September 4, 2018. The news release announcing such conversion right was issued on August 10, 2018 and can be viewed on SEDAR or Manulife’s website. Conversion inquiries should be directed to Manulife’s Registrar and Transfer Agent, AST Trust Company (Canada), at 1‑800-783-9495.

The Toronto Stock Exchange (“TSX”) has conditionally approved the listing of the Series 14 Preferred Shares effective upon conversion. Listing of the Series 14 Preferred Shares is subject to Manulife fulfilling all the listing requirements of the TSX and, upon approval, the Series 14 Preferred Shares will be listed on the TSX under the trading symbol “MFC.PR.S”.

MFC.PR.K is a FixedReset, 3.80%+222, that commenced trading 2013-6-21 after being announced 2013-6-17. The announcement of extension has been previously reported. The issue is tracked by HIMIPref™ and is assigned to the FixedReset subindex. Since it is an insurance holding company issue without a NVCC clause, a Deemed Maturity at par as of 2025-1-31 has been added to the redemption schedule as is my normal practice.

The most logical way to analyze the question of whether or not to convert is through the theory of Preferred Pairs, for which a calculator is available. Briefly, a Strong Pair is defined as a pair of securities that can be interconverted in the future (e.g., MFC.PR.K and the FloatingReset, MFC.PR.S, that will exist if enough holders convert). Since they will be interconvertible on this future date, it may be assumed that they will be priced identically on this date (if they aren’t then holders will simply convert en masse to the higher-priced issue). And since they will be priced identically on a given date in the future, any current difference in price must be offset by expectations of an equal and opposite value of dividends to be received in the interim. And since the dividend rate on one element of the pair is both fixed and known, the implied average rate of the other, floating rate, instrument can be determined. Finally, we say, we may compare these average rates and take a view regarding the actual future course of that rate relative to the implied rate, which will provide us with guidance on which element of the pair is likely to outperform the other until the next interconversion date, at which time the process will be repeated.

We can show the break-even rates for each FixedReset / FloatingReset Strong Pair graphically by plotting the implied average 3-month bill rate against the next Exchange Date (which is the date to which the average will be calculated).

Click for Big

The market appears to be relatively uninterested in floating rate product; the implied rates until the next interconversion bracket the current 3-month bill rate as the averages for investment-grade and junk issues are at +1.32% and +1.45%, respectively. Whatever might be the result of the next few Bank of Canada overnight rate decisions, I suggest that it is unlikely that the average rate over the next five years will be lower than current – but if you disagree, of course, you may interpret the data any way you like.

Since credit quality of each element of the pair is equal to the other element, it should not make any difference whether the pair examined is investment-grade or junk, although we might expect greater variation of implied rates between junk issues on grounds of lower liquidity, and this is just what we see.

If we plug in the current bid price of the MFC.PR.K FixedReset, we may construct the following table showing consistent prices for its soon-may-be-issued FloatingReset counterpart, MFC.PR.S, given a variety of Implied Breakeven yields consistent with issues currently trading:

Based on current market conditions, I suggest that the FloatingResets that will result from conversion are likely to be cheap and trading below the price of their FixedReset counterparts. Therefore, it seems likely that I will recommend that holders of MFC.PR.K continue to hold the issue and not to convert, but I will wait until it’s closer to the September 4 notification deadline before making a final pronouncement. I will note that once the FloatingResets commence trading (if, in fact, they do) it may be a good trade to swap the FixedReset for the FloatingReset in the market once both elements of each pair are trading and you can – presumably, according to this analysis – do it with a reasonably good take-out in price, rather than doing it through the company on a 1:1 basis. But that, of course, will depend on the prices at that time and your forecast for the path of policy rates over the next five years. There are no guarantees – my recommendation is based on the assumption that current market conditions with respect to the pairs will continue until the FloatingResets commence trading and that the relative pricing of the two new pairs will reflect these conditions.

Enbridge Inc. has announced:

that none of Enbridge’s outstanding Cumulative Redeemable Preference Shares, Series H (Series H Shares) will be converted into Cumulative Redeemable Preference Shares, Series I of Enbridge (Series I Shares) on September 1, 2018.

After taking into account all conversion notices received from holders of its outstanding Series H Shares by the August 17, 2018 deadline for the conversion of the Series H Shares into Series I Shares, less than the 1,000,000 Series H Shares required to give effect to conversions into Series I Shares were tendered for conversion.

ENB.PR.H is a FixedReset, 4.00%+212, that commenced trading 2012-3-29 after being announced 2012-3-20. It will reset to 4.376% effective 2018-9-1. The issue is tracked by HIMIPref™ but relegated to the Scraps index on credit concerns.

Aimia Inc. has announced:

Air Canada, TD, CIBC, Visa and Aimia Reach Agreement in Principle for Acquisition of Aeroplan Loyalty Business

•Purchase price consists of $450 million in cash and the assumption of approximately $1.9 billion of Aeroplan Miles liability
•Agreement in principle was unanimously approved by Aimia’s Board of Directors and is supported by Mittleman Brothers
•Transaction would provide value for Aimia and its shareholders and continuity for Aeroplan members and customers of Air Canada, TD, CIBC and Visa
•Transaction subject to negotiation of definitive agreements and other conditions; completion expected fall 2018

TORONTO, Aug. 21, 2018 /CNW Telbec/ – Air Canada, The Toronto-Dominion Bank (“TD”), Canadian Imperial Bank of Commerce (“CIBC”), Visa Canada Corporation (“Visa”) (collectively, “the Consortium”) and Aimia Inc. (“Aimia”) announced today that they have entered into an agreement in principle for the acquisition of Aimia’s Aeroplan loyalty business.
…
Mittleman Brothers, LLC, Aimia’s largest shareholder who owns approximately 17.6% of Aimia’s common shares, has provided a lock-up and support agreement under which it has agreed to vote in favour of the proposed transaction.

The aggregate purchase price consists of $450 million in cash and is on a cash-free, debt-free basis and includes the assumption of approximately $1.9 billion of Aeroplan Miles liability.

The Canadian Press points out:

Aimia’s recent Aeroplan partnership agreements with three Canadian airlines — Air Transat, Flair Airlines and Porter Airlines — are now up in the air.

“Those were perhaps part of the negotiations and trying to build the pressure on getting a transaction,” said AltaCorp Capital analyst Chris Murray.

Aimia had also been in discussions with the Oneworld airline alliance, whose members include British Airways, American Airlines and Cathay Pacific.

Gabor Forgacs, associate professor at the Ted Rogers School of Management at Ryerson University, said the key incentive for Canada’s largest airline is customer data that can be used to encourage more member spending.

“Every time a member of the loyalty program goes to make a purchase and taps or swipes that card, he or she would earn points — however, they will agree to give away the information,” Forgacs said. “They will know where I was, what I bought, how much I spent.”

AIM preferreds jumped on the news:

All three issues are tracked by HIMIPref™ but are relegated to the Scraps index on credit concerns.

Aimia’s been in the news quite a bit lately … it began when preferred dividends were suspended in June, 2017, continued through dark muttering from DBRS in February, 2018, reached a nadir when S&P declared the preferreds in default, but then got happier when the initial bid for Aeroplan was followed by a bid for the Mexican assets.

Note that the bids are not for the company, just for most of its assets. If successful, the bid will change the balance sheet significantly – and just how good the preferreds will look at that point will be the topic of much speculation and puzzling over the balance sheet.

Update, 2018-08-22: DBRS comments:

DBRS notes that although the Consortium’s proposal is not for Aimia shares, the sale of the Aeroplan program could be sufficient in size to trigger a change-of-control provision in Aimia’s Senior Secured Debt that requires the occurrence of both a change of control and a rating event (i.e., a rating downgrade of the Senior Secured Debt). If triggered, the provision requires that an offer be made to repurchase at a price equal to 101% of the outstanding Senior Secured Debt of the Company.

DBRS notes that as of Q2 2018, Aimia had approximately $329 million of debt, $249 million of cash, $22 million of restricted cash and $260 million invested in corporate and government bonds. The debt consists of $250 million of Senior Secured Notes due May 2019 and $80 million (including $9 million of letters of credit) drawn on the credit facility, which matures in 2020. Following the Transaction, Aimia would be meaningfully smaller in size and consist of Proprietary Loyalty Canada and Insights & Loyalty Solutions (which includes Air Miles Middle East), along with investments in PLM Premier, S.A.P.1. de C.V.; Cardlytics; and Think Big Digital. The Company would have approximately $720 million of cash and $260 million of bond investments that would be sufficient to repay the outstanding debt.

DBRS will proceed with its review as more information becomes available.

In addition, it will be noted that the company has $315.8-million worth (par value) of preferreds outstanding, which have so far accumulated $17-million of unpaid cumulative dividends, which continue to accumulate at $17-million p.a.

In addition, the company reports a pension funding deficit of $21.3-million, and “Other Employee Future Benefits” of $21.6-million.