Archive for the ‘Press Clippings’ Category

The not-so-pleasant choices faced by RONA’s preferred shareholders [RON.PR.A]

Monday, March 28th, 2016

Barry Critchley was kind enough to quote me in his piece titled The not-so-pleasant choices faced by RONA’s preferred shareholders. First he gives some space to an argument I don’t understand:

According to some holders, agreeing to that low price would set a bad precedent given that there are a slew of rate-reset prefs which are trading at a substantial discount to their purchase price. If one issuer gets away with such a deal, others will follow suit.

Accordingly, it is not in the interests of pref share holders, who put up $25 when the issue came to market in the expectation they would get $25 of value when the time rolled around for the rates to be reset, to encourage such behaviour. So Lowe’s bid $20 – which represented a premium to the recent trading price but a total acquisition savings of $34.5 million – knowing that if it’s rejected it will be required to remain a reporting issuer.

I don’t get it. It’s a vote. You can vote yes or you can vote no. One likes to imagine that good proposals will succeed and bad proposals will fail. The above argument is equivalent to saying that you have to vote Conservative in the Federal election, because if you vote Liberal this time you’ll have to vote Liberal every time. It makes no sense.

But after that, it’s my turn:

James Hymas, of Hymas Investment Management, has a different take, arguing RONA pref shareholders could tender and redeploy the proceeds in other rate reset prefs that generate about the same cash flow.

Hymas, who does not own RONA preferreds either personally or through the funds he manages, argues that if the $20 a share offer is turned down, the price of the RONA prefs will fall below $20. In other words: make the trade.

For more detail regarding my views, see RON.PR.A Vote: Yes or No?.

Mr. Critchley also commented on the Stirling Funds joke:

Numerous attempts have been made to reach Stirling and its Swedish-based advisor ÖstVäst Advisory to find out its next steps. The first call elicited the response that it had received numerous responses from holders. Since then nothing.

He also pointed out one little nugget of information:

But there may be another twist given that as of the end of 2015, Fidelity Investments owned more than 10 per cent of the issue — more than three times what it owned at the end of the first quarter of 2015. We couldn’t reach Fidelity for a comment.

Well done Fidelity! That’s a trade that has worked out very nicely indeed!

Lowly preferred shares an intriguing bet for the brave investor

Friday, February 12th, 2016

Rob Carrick was kind enough to quote me in his recent article Lowly preferred shares an intriguing bet for the brave investor:

For some ideas on finding value in the preferred share market, let’s check in with two money managers. One is James Hymas, president of Hymas Investment Management, and the other is Dustin Van Der Hout, a portfolio manager with Richardson GMP. Both suggest investors look to the hardest-hit part of the pref market, rate resets.

Mr. Hymas’s quick and easy option for capturing a rebound in rate resets is the BMO Laddered Preferred Share Index ETF (ZPR), which has fallen almost 43 per cent over the past three years on a cumulative basis and now yields a bit over 6 per cent.

Alternative choices are the iShares S&P/TSX Canadian Preferred Share Index ETF (CPD) and the PowerShares Canadian Preferred Share Index ETF (PPS), which track an index that is dominated by rate resets but also includes other preferred types. “These ETFs are a very good alternative for somebody who does not have enough time to do a lot of research,” Mr. Hymas said.

For investors seeking individual shares, Mr. Hymas highlighted three particular preferred share issues from insurers. Each traded in the $12 to $13 range at midweek, down from their issue price of $25, and each is down for similar reasons. They have either had their dividend reset recently at levels that are much below what they were when the shares were issued, or they will in the not-too-distance future.

Why buy those hard-hit shares from Manulife, or similar issues from Sun Life Financial and Great-West Lifeco?

Mr. Hymas said there’s potential for regulators to change the rules for insurance companies so that it’s less attractive for them to issue preferred shares. If that happens, these shares could be redeemed at $25, which is close to double their current share price. “I can give you chapter and verse on why I think this rule change is going to happen,” he said. “Basically, the market is essentially ignoring the possibility.”

Warning: Mr. Hymas said the price of these shares is heavily influenced by the five-year Canada bond yield. If it goes up, that’s helpful. If bond yields fall further, then there will be more downside for these already hard-hit shares.

Here’s what they came up with based on a mix of dividend yield and the potential to be redeemed at a future date at the issue price of $25.

Share Issue & Ticker Recent Price ($) Curr. Yield (%)* Next Reset Dividend Reset formula is the 5-yr Canada bond yield plus this premium (% points) Yield based on current share price and projected dividend reset using a recent 5-yr Canada bond yield (%)
James Hymas, president of Hymas Investment Management
Great-West Lifeco Series N GWO.PR.N-T 12.82 4.4 Dec. 2020 1.3 3.5
Manulife Financial Series 3 MFC.PR.F-T 12.22 8.4 Jun. 2016 1.41 3.9
Sun Life Financial Series 8R SLF.PR.G-T 13 4.4 Jun. 2020 1.41 3.7
equity_prefs
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RON.PR.A: Lowe’s Offers $20 As Part Of Takeover

Thursday, February 4th, 2016

Lowe’s Companies, Inc. and RONA Inc. have announced:

that they have entered into a definitive agreement under which Lowe’s is expected to acquire all of the issued and outstanding common shares of RONA for C$24 per share in cash, and all of the issued and outstanding preferred shares of RONA for C$20 per share in cash. The total transaction value is C$3.2 billion (US$2.3 billion) (the “Transaction”). The offer represents a premium of 104 percent to RONA’s closing common share price on February 2, 2016 and a 38 percent premium to RONA’s 52-week high of C$17.36. Together, Lowe’s Canada and RONA stores will create Canada’s leading home improvement retailer with 2015 pro forma revenues from Canadian operations of approximately C$5.6 billion. Excluding transaction and integration costs, we anticipate the Transaction will be accretive to Lowe’s earnings in the first year following the close of the acquisition.

The Transaction has been unanimously approved by the Boards of Directors of Lowe’s and RONA and is supported by the management teams of both companies. The Transaction is expected to proceed by way of a plan of arrangement by which Lowe’s would acquire all of the outstanding shares of RONA, subject to RONA common shareholder approval and satisfaction of customary conditions, including the receipt of all necessary regulatory approvals. The RONA Board has received an opinion from Scotia Capital Inc. that the consideration to be received by RONA’s common and preferred shareholders pursuant to the Transaction is fair, from a financial point of view.

The RONA Board will recommend that RONA shareholders vote in favor of the plan of arrangement at a special meeting of shareholders expected to be held before the end of the first quarter of 2016. Further information regarding the Transaction will be included in RONA’s information circular to be mailed to RONA shareholders in advance of the special meeting. The arrangement agreement provides that RONA is subject to customary non-solicitation provisions.

$20 is quite the premium over yesterday’s closing quote of 12.41-05!

The consensus is that the deal will succeed – f’rinstance, Frederic Tomesco of Bloomberg:

The fact both boards agreed to the C$3.2 billion ($2.3 billion) offer, along with Lowe’s commitment to preserve head-office jobs and maintain supply agreements, will likely seal the deal. Political conditions in Canada’s second-most populous province also favor the acquisition after helping to scupper a hostile offer in 2012.

Rona’s biggest shareholder, the provincial pension fund manager Caisse de Dépôt et Placement du Québec, said Wednesday it would tender its shares to the offer. Quebec’s new economy minister indicated the government probably wouldn’t stand in the way of a deal.

“If three of the groups that were against Lowe’s last time — the board, the government and the Caisse — are saying it’s a good idea, it would be hard to see it not get the green light,” Karl Moore, a management professor at McGill University’s Desautels Faculty of Management in Montreal, said in a telephone interview. “There’ll be some squawking for sure, but that’s predictable. The opposition has to be against this deal in principle.”

Matthew Townsend and Scott Deveau of Bloomberg point out that the plunging loonie helped a lot:

The Canadian dollar’s loss is Lowe’s gain.

After being rebuffed in its attempt to buy Quebec-based retailer Rona Inc. in 2012, Lowe’s Cos. reached agreement on Wednesday to buy it for C$3.2 billion ($2.3 billion). Two big changes in the past four years made the transaction possible: The Parti Quebecois, which opposed the original deal, is out of power, and the loonie fell to its lowest level against the dollar in more than a decade.

Lowe’s withdrew the $1.8 billion unsolicited bid for Rona in 2012 after the board and some Quebec politicians opposed the offer, concerned about a loss of jobs and local control in the French-speaking province. The withdrawal came just 12 days after the separatist Parti Quebecois won elections.

Since then, the Liberals have taken power in Quebec, and the loonie has dropped to 72 cents versus the U.S. dollar, compared with parity when Lowe’s pulled its bid, making it cheaper for Lowe’s to offer a richer premium. So while the C$24 a share bid in Canadian dollar terms is about 65 percent higher than the C$14.50 a share bid that was rejected, in U.S. dollar terms the offer is just 16 percent higher.

CADUSD
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… and Bloomberg’s Brooke Sutherland suggests it’s all about footprint:

Focusing on Canada may be a distraction, but it’s a distraction that could pay off for Lowe’s. While the home-improvement company has benefited from a rebounding real estate market, the maturing U.S. retail landscape and the rise of online shopping puts a cap on the growth opportunities for big-box vendors. Many are shuttering stores, or at least slowing down expansion.

Lowe’s, for example, had 1,793 U.S. locations as of January 2015 — a gain of about 76 from a year earlier, much of which could be explained by the acquisition of Orchard Supply Hardware. The way to keep growing its store base is to make more acquisitions and push harder into adjacent markets such as Canada, where Home Depot currently has almost five times as many locations as Lowe’s. With Canada’s home improvement industry valued at C$45 billion, Lowe’s can’t really afford to sit on the sidelines.

feetPrints
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John Heinzl was kind enough to quote me when discussing the preferred share part of the deal:

Rona Inc.’s battered preferred-share investors may not be getting as fat a premium as common shareholders in the $3.2-billion takeover by Lowe’s Cos. Inc., but they should be thrilled with what they’re being offered, money managers say.

As part of the deal, the U.S. home-improvements chain is offering $20 for each Class A rate-reset preferred share of Quebec-based Rona. The offer, which is based on a fairness opinion from Scotia Capital, represents a 59-per-cent premium to the closing price of Rona’s preferred shares before the deal was announced.

Some Rona preferred shareholders said it’s possible Lowe’s might make a higher offer for the preferreds. “Perhaps they could be persuaded to offer more money. Perhaps. I’m not banking on it but not discounting it either,” said Benj Gallander, co-editor of Contra the Heard Investment Letter. “These are early days.”

Don’t hold your breath, said preferred-share fund manager James Hymas, president of Hymas Investment Management. Rona’s preferred shareholders don’t have the leverage to squeeze more money out of Lowe’s, he said.

“They can always try, but I don’t know how far they’ll get,” said Mr. Hymas, who does not own Rona’s preferred shares.

After all the suffering Rona’s preferred investors have endured, they should be happy that Lowe’s is willing to take them out at $20, Mr. Hymas said.

“You don’t want to kill the goose that lays the golden egg,” he said. “They’re not going to sweeten that deal. There is no reason to.”

I base this view on the fact that during the conference call the following statements were made:

what’s important to understand that a positive vote from the pref holders is not a condition precedent to the closing of the transaction.

If you don’t have a majority acceptance from the prefs, does RONA continue to report its financial results? … Yes. So the entity would need to continue to report as a public listed entity. Yes.

So a negative vote from RONA preferred shareholders will mean just that the shares will continue to be outstanding. Since RON.PR.A is a FixedReset, 5.25%+265, that commenced trading 2011-2-22 after being announced 2011-2-1, it has a relatively low reset. Absurdly low for junk, albeit more reasonable for investment grade. Investment-grade issues with comparable resets are:

  • MFC.PR.J, +261, bid at 17.89
  • RY.PR.M, +262, bid at 18.45
  • TD.PF.D, +279, bid at 19.00
  • SLF.PR.I, +273, bid at 17.45
  • BAM.PF.B, +263, bid at 16.46
  • BMO.PR.Y, +271, bid at 19.35

So it’s a decent premium over fair value even given an upgrade in credit quality. I’ll suggest that Lowe’s takes the view that they’re willing to give that premium to the preferred shareholders if they’re co-operative, or give it to the lawyers, bookkeepers, auditors and accountants if that’s what the preferred shareholders decide they want. Since the takeover deal is not conditional on preferred shareholder approval they’ve got no reason to pay an extortionate premium for the prefs.

And yes, the credit quality will almost certainly go up if the deal is approved. DBRS confirmed Lowe’s at A(low):

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Unsecured Debt rating of Lowe’s Companies, Inc. (Lowe’s or the Company) at A (low) as well as its Short-Term Rating at R-1 (low), all with Stable trends. This action follows the Company’s announcement that it has entered into a definitive agreement under which Lowe’s is expected to acquire all issued and outstanding common shares of RONA inc. (RONA) for CAD 24 per share in cash and all issued and outstanding preferred shares of RONA for CAD 20 per share in cash. The total transaction value including the assumption of RONA’s debt is CAD 3.2 billion ($2.3 billion; the Transaction or Acquisition).

Despite the risks associated with the effective integration of RONA, DBRS believes that the relatively modest magnitude of the Transaction and the temporary increase in financial leverage keep Lowe’s credit risk profile in a range acceptable for the current rating category. Should Lowe’s be challenged to maintain credit metrics in a range acceptable for the current A (low) rating because of weaker-than-expected consolidated operating performance or more aggressive-than-expected financial management (i.e., slower deleveraging), the current ratings could be pressured.

…. while putting RONA on Review-Positive:

DBRS Limited (DBRS) has today placed the ratings of RONA inc. (RONA or the Company) Under Review with Positive Implications following the Company’s announcement that it has entered into a definitive agreement under which RONA will be acquired by Lowe’s Companies, Inc. (Lowe’s; please see separate DBRS press release) for a total transaction value of $3.2 billion (the Transaction). The total transaction value comprises Lowe’s offer to acquire RONA’s issued and outstanding common shares for $24 per share in cash as well as its issued and outstanding preferred shares for $20 per share, plus RONA’s outstanding debt.

Rona’s Under Review – Positive Implications status reflects Lowe’s current ratings (A (low) and R-1 (low) as rated by DBRS), the intention to purchase RONA’s outstanding preferred shares and the assumption of RONA’s outstanding senior unsecured debt. As of September 27, 2015, RONA had approximately $313 million of senior unsecured debt outstanding, consisting of $116 million of senior unsecured debentures and $197 million drawn on its revolving credit facility (maximum limit of $700 million). DBRS notes that the Company’s senior unsecured debentures will mature in October 2016.

S&P has also taken a positive view regarding RONA’s ratings:

  • •Home improvement retailers Lowe’s Cos. Inc. and RONA Inc. announced today that they have entered into a definitive agreement under which Lowe’s is expected to acquire RONA for about C$3.2 billion
  • •As a result, we are placing our ratings on RONA Inc., including our ‘BB+ long-term corporate credit rating on the company, on CreditWatch with positive implications.
  • •We intend to resolve the CreditWatch placement on the acquisition’s closing, which we expect by the third quarter of 2016. At that time, we would likely equalize our long-term corporate credit rating on RONA with that on Lowe’s.


The CreditWatch placement follows Lowe’s Cos. Inc.’s and RONA Inc.’s announcement that they have entered into a definitive agreement under which Lowe’s is expected to acquire RONA for about C$3.2 billion. As part of the transaction, we expect Lowe’s to purchase all of the issued and outstanding preferred shares of RONA for C$20 per share in cash and assume its C$116.6 million of unsecured notes that mature in 2016.

“The positive CreditWatch placement reflects our view of the potential uplift for RONA creditors from the possible acquisition of the company by the higher-rated Lowe’s,” said Standard & Poor’s credit analyst Alessio Di Francesco.

So, assuming the common shareholders vote in favour of the deal, holders of RON.PR.A will wind up in one of two positions:

  • Owning a perfectly normal investment-grade preferred share trading somewhere around $17-$19, or
  • Getting $20 cash.

I’d rather take the cash and deploy it into something else! However, a formal recommendation will have to await receipt of the management information circular.

At today’s closing bid of 19.95, RON.PR.A yields 4.22% to perpetuity.

Update, 2016-3-3: RONA has filed the Management Proxy Circular with respect to the two offers.

DC.PR.C: The Debate Continues

Friday, January 8th, 2016

Niall McGee of the Globe was kind enough to quote me in his piece Daily Deals: Dundee sweetens preferreds offer and Canaccord hires bankers:

“Since launching our initial proposal, we have learned who our larger holders are and have sought input from a broader group in coming to our revised proposal,” David Goodman, chief executive officer of Dundee, said in an e-mail.

“We listened to the position of others and responded with a proposal that we believe is in everyone’s best interest.”

Preferred share fund manager James Hymas, president of Hymas Investment Management Inc., who didn’t care for the original offer, doesn’t like the revised offer much either – calling it “abusive” in a published note on his website, partly because of the omission of a “special retraction right” that allows shareholders to cash out under the original terms.

“Virtually every preferred share term extension voted on by shareholders provides for a special retraction right,” Mr. Hymas wrote.

“No such provision implies that the company is afraid of a mass retraction, which indicates that the company knows its offer is no good.”

Barry Critchley of the Financial Post has declared victory:

The people have spoken and the people, in this case holders of Series 4 preferred shares issued by Dundee Corp. who responded negatively to an initial proposal, have emerged victorious.

But they only won because Dundee listened and changed a plan that seemed destined to be shot down at a meeting originally scheduled for Jan. 7. Put it down as a victory for shareholders and common sense, a victory reflected by the market’s reaction: the prefs shares closed at $16.60 Thursday, up 15 per cent on the news.

“We have consulted and we responded with what we think is a win-win solution,” said David Goodman, chief executive of Dundee.

And I’ll also quote Sacha Peter of the Divestor blog. I don’t normally quote blog posts by those who are not market professionals … but Mr. Peter uses his own name, is a professional in another field [and therefore has something to lose if he says something stupid] and, most importantly, says nice things about me, so why not? His post is titled Dundee Corporation – DC.PR.C – Series 4 Preferred Shares – Amended Exchange Offer:

My own quick summary is: the deal stinks less compared to the original offer, but it still stinks.

By far and away the most important provision is the removal of the $0.223/share consent payment. This consent payment introduced the concept of a prisoner’s dilemma where if you believe the deal was going to pass, you would be incentivized to vote in favour of the deal despite how bad it was.

Without a prisoner’s dilemma, there is no incentive to voting yes for a marginal or mildly adverse offering (which was the only way the previous offering had any chance of passing).

This deal still stinks, but the removal of the $0.223/share carrot will remove votes in favour because (and this is my personal speculation) most of the shareholders are angling for the June 30, 2016 redemption.

Using Black-Scholes valuation (which is not the best way to value long-dated options, but is good enough for paper napkin purposes such as this post) we get an option value of $1.84/share, or about 46 cents per preferred share (as each share would receive a quarter warrant).

Using some more formal methods involves different results – if you are that bullish on Dundee’s common stock, why bother playing around with the preferred shares when you can simply buy the common shares or even the other preferred shares?

Preferred shareholders have an even easier decision this time around – vote against the offer. It is still terrible compared to the existing Series 4 preferred shares.

Today’s closing price of 16.60 allows us to estimate the packages total yield, ignoring the warrant value.

Analysis of DC.PR.C Yield
If Plan Succeeds
At Current Price of 16.60
Note: Faulty Analysis
Revised: see comments
Maturity Proportion of Shares Yield to Call
2016-6-30 15% 23.60%
2018-1-31 14.45% 11.41%
2019-6-30 70.55% 9.94%
Total 100% 12.20%

But, as stated in the title of the table, this analysis is wrong. Portfolio Yield is not the mean average of the yield of the individual securities, although it is usually presented this way as being close enough. In this particular case, the total portfolio cash flows are simple enough that we can calculate the Portfolio Yield from first principles, thus:

Date Face Value Cash Flow Div Cash Flow Rdpt Total Cash Flow
2016-01-07 -16.6
2016-03-31 17.84 0.3345 0 0.3345
2016-06-30 17.84 0.3345 2.676 3.0105
2016-09-30 15.164 0.284325 0 0.284325
2016-12-31 15.164 0.284325 0 0.284325
2017-03-31 15.164 0.284325 0 0.284325
2017-06-30 15.164 0.284325 0 0.284325
2017-09-30 15.164 0.284325 0 0.284325
2017-12-31 15.164 0.284325 0 0.284325
2018-01-31 15.164 0.094775 2.57788 2.672655
2018-03-31 12.58612 0.1573265 0 0.1573265
2018-06-30 12.58612 0.23598975 0 0.23598975
2018-09-30 12.58612 0.23598975 0 0.23598975
2018-09-30 12.58612 0.23598975 0 0.23598975
2018-12-31 12.58612 0.23598975 0 0.23598975
2019-03-31 12.58612 0.23598975 0 0.23598975
2019-06-30 12.58612 0.23598975 12.58612 12.82210975
XIRR 11.39%
Compounded Q’ly 10.94%

So that’s a bit of a difference, eh? An xlsx spreadsheet for the calculation is available: DCPRC_YieldAnalysis_160107 [Revised – see comments] and varying the price as it might be today allows us to construct the following chart:

DCPRC_PackageYield_varyPx_Rev
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So, from looking at this, and making a ballpark allowance for the value of the warrants which I don’t want and are only offered to provide a little bit of flim-flam for advisors eager to collect their unconscionable proxy-solicitation fees, I’d say that the coupon needs to be 10% or so for the package to trade at par, based on today’s market reaction [in which 67,625 shares traded, mostly at a very steady price of 16.60 and a VWAP of 16.55. This was good volume and a steady price!].

So, I will reiterate my previous recommendation, with a slight alteration to the desired coupon:

I recommend holders of DC.PR.C vote No to the deal and, as before, seriously consider exercising right of dissent. What we want is:

  • A Special Retraction Right allowing holders to cash out in June on the original terms [which may involve being paid in discounted DC.A shares]
  • an offered dividend rate that allows a reasonable prospect of the issue trading near par; at the moment, I estimate this at about 13% 11% to 12%
  • a commitment from the company to maintain a credit rating from two major agencies until the retraction date of the issue

DC.PR.C: Coercive Offer Attracts Wider Notice

Friday, December 4th, 2015

Assiduous Readers will recall that I harshly criticized Dundee’s recent proposal in the post DC.PR.C: Coercive Exchange Offer.

Now Niall McGee of the Globe has penned a piece titled Dundee faces backlash over new share-exchange plan:

Dundee’s share-exchange plan has raised the ire of a prominent fund manager, a high-profile shareholder rights group and – according to multiple sources – has caused consternation among the company’s institutional shareholder base.

Dundee is under financial pressure, having lost more than $400-million in the year to date, primarily due to heavy exposure to the cratering resource sector. Last week, the company unveiled a proposal designed to take pressure off its balance sheet.

Mr. McGee was kind enough to quote me in the article:

James Hymas, president of Hymas Investment Management Inc., says these payments, which are roughly eight times higher than average, represent “a huge conflict of interest” for brokers and are “coercive” to shareholders.

“You get money for voting yes. But if you vote no and the offer goes through anyway, then you get squat. That makes it coercive,” Mr. Hymas said. He runs a preferred share mutual fund and publishes a daily commentary on preferred shares. Neither he nor his clients have any position in Dundee’s preferred shares.

And a regulators’ puppet group has joined the fray:

“These types of payments are deeply troubling,” said Neil Gross, executive director of FAIR Canada, an independent shareholder rights advocacy firm.

“It’s not just that they give advisers a financial incentive to bias their advice. It’s that they do it so overtly – revealing that the financial industry still hasn’t internalized the principle that conflicts of interest are incompatible with investment professionalism.”

It always makes me laugh to hear those guys talk about conflicts of interest!

You can make up your own minds about Dundee’s defence:

Dundee chief executive officer David Goodman defended the proposal.

“I believe our structure is fair. It’s transparent. It’s in the best interest of Dundee Corporation and it’s consistent with industry custom,” he said in an interview.

Mr. Goodman says one of the reasons the payments are necessary is that Dundee needs brokers to get the word out about the vote. He also said he has no concerns about advisers giving biased advice in this instance.

“I have a very high appreciation for the integrity and value that the financial advisers provide and I don’t believe that the receipt of a solicitation fee for their services is going to compromise their ability to properly advise their clients.”

We’ll see how it goes!

Why preferred shares just got pounded – again

Tuesday, September 29th, 2015

John Heinzl was kind enough to quote me in his recent Globe piece, Why preferred shares just got pounded – again:

When Brookfield Asset Management (a.k.a. BAM) announced a $250-million rate-reset preferred-share issue last week, the sell-off that ensued was extreme, even for the beaten-up preferred-share space.

“It was total carnage,” said preferred-share expert James Hymas, president of Hymas Investment Management in Toronto.

“A big fat yield like that could well have caused some repricing of the market as a whole,” Mr. Hymas wrote on his PrefBlog.com.

In an interview, Mr. Hymas said it’s unlikely the provision will even come into play because he expects the five-year Canada yield will rise – not fall – from its current depressed levels. Still, given the jangled nerves of investors who have watched the S&P/TSX preferred-share index plunge about 24 per cent this year (excluding dividends), Brookfield and Canadian Utilities may well have set a precedent.

“I think it’s going to be very difficult for the next while to come out with an issue that does not offer a floor,” he said.

After such an extended drop, is it finally safe to invest in preferreds? Certainly, the market has fooled everyone who has called a bottom so far. Given the unpredictable and complex nature of many preferred shares and the propensity for retail investors (who dominate the preferred space) to panic at the first hint of volatility, the market could well tumble again.

But with prices down so sharply – and yields up as a result – Mr. Hymas is seeing some compelling values emerge among rate-resets and straight perpetuals, particularly when the dividend tax credit is taken into account. His advice to anyone thinking about buying preferred shares: Allocate no more than half of your fixed-income holdings to preferreds, and focus on the long-term income they produce, not the price.

Enbridge shares are popular – but heavily shorted

Thursday, September 17th, 2015

Many thanks to Larry MacDonald, who very kindly quoted me (via PrefBlog) in his recent article Enbridge shares are popular – but heavily shorted:

The floating of preferred shares has been particularly substantial. As James Hymas, manager of the Malachite Aggressive Preferred Fund, noted in his blog (prefblog.com) in late 2014, Enbridge’s issuance “comprises roughly 10 per cent of the Canadian preferred share market, virtually all of which has come out since … [2011].”

The post quoted was Rating Agencies Unhappy With Enbridge.

Why you can’t trust the yields on preferred ETFs

Friday, September 4th, 2015

John Heinzl was kind enough to quote me in Why you can’t trust the yields on preferred ETFs:

Both CPD and ZPR have also cut their distributions recently. ZPR trimmed its distribution by about 6 per cent in July, and CPD reduced its monthly payout by about 10 per cent in August. That may be just a taste of what’s to come.

“We’ll be seeing more cuts, almost certainly,” preferred share specialist James Hymas, president of Hymas Investment Management, said in an interview. “Any mutual fund with a significant position in fixed resets will be cutting its dividend. You can take that as near a certainty as you ever get in this business.”

If the trailing yields of preferred share ETFs are misleading, what sort of future yields can investors realistically expect? Assuming the five-year Canada bond yield stays well under 1 per cent, Mr. Hymas estimates that CPD’s projected yield is 4.2 per cent. It could be higher or lower than that, depending on what happens to bond yields.

If there’s a silver lining, it’s this: Rate-reset preferreds have been beaten up so badly that they could produce some handsome returns if bond yields start heading back up, Mr. Hymas said. And he believes they will – eventually – given that the five-year yield is now below the inflation rate, meaning that government bond investors are losing money on a real basis.

“It is simply not sustainable for a five-year Canada to trade below inflation forever,” he said. “That simply cannot go on.”

Plenty of bruised preferred share investors are hoping he’s right.

Think preferred dividends are safe? Not these ones

Wednesday, April 1st, 2015

John Heinzl of the Globe and Mail was kind enough to quote me extensively in his latest piece, Think preferred dividends are safe? Not these ones:

Well, don’t look now but a whole whack of preferred shares – specifically rate-reset preferreds that have come to dominate the market – could soon take a hatchet to their payments.

Some of these dividend cuts will be “absolutely massive,” said preferred share expert James Hymas, president of Hymas Investment Management in Toronto.

This will come as a surprise to investors who depend on the predictable cash flow of preferreds, but Mr. Hymas has done the calculations and they paint a grim picture. In the next year or so, he expects many rate-reset preferreds to slash their dividends by 25 to 45 per cent. Depending on what happens to bond yields, many more rate-reset preferreds will likely reduce their dividends in coming years.

Here’s a chart that I published in the March edition of PrefLetter, showing the expected change in dividends, given a constant GOC-5 rate of 0.84%, as related to each issue’s next Exchange Date:

PL_150313_App_FR_Chart_26
Click for Big

Update, 2015-05-03: There was a steep decline in FixedResets at the beginning of April, 2015. One commenter attributed at least part of the descent to this article.

BSD.PR.A: Critchley Cites PrefBlog in Financial Post

Thursday, March 12th, 2015

As kindly pointed out by Assiduous Reader adriandunn in the comments to the post BSD.PR.A Term Extension Proposal: More Sleaze From Company, Barry Critchley has cited PrefBlog in his Financial Post piece PrefBlog doesn’t like the choices offered at Brookfield Soundvest Split Trust:

The website PrefBlog has weighed in on the matter of the upcoming vote by preferred shareholders of Brookfield Soundvest Split Trust on the extension of the term of the securities.

And the website, whose focus is Canadian Preferred Shares: Data and Discussion, is not a big fan of what has been proposed.

For example, it notes that “Brookfield Asset Management is a fine company. I find it very difficult to understand why they are mixed up in this.” BAM owns 50% of the manager.

This isn’t the first time Mr. Critchley has written about BSD.PR.A. On February 27, the Financial Post published No mood for five more years of negative returns from Brookfield Soundvest Split Trust:

We are referring to the situation at Brookfield Soundvest Split Trust, a company with a market cap of $9 million, which has been around for about a decade, and which over the past five years has generated a total return of -5.79% or more than 50 percentage points worse than the composite. By any measure, the fund, whose manager and investment adviser is an affiliate of Brookfield Asset Management, is a dog and Brookfield couldn’t confirm if any of its executives have a stake.

Brookfield declined to comment.

And on March 2 there was Giving the Brookfield Soundvest owners choices on extensions and redemptions:

“It’s been a disappointment for us here,” said Kevin Charlebois, the fund’s chief executive, speaking about the performance, especially for the unitholders who haven’t received distributions nor enjoyed redemption rights for more than three years, and who own a security that trades at a discount to its net asset value.