PrefBlog

First National Financial Corporation has announced:

that 1,112,853 of its 4,000,000 issued and outstanding cumulative 5-year rate reset Class A Preference Shares, Series 1 (“Series 1 Preference Shares”) were tendered for conversion, on a one-for-one basis, into cumulative floating rate Class A Preference Shares, Series 2 (“Series 2 Preference Shares”). Effective April 1, 2016, the Company will have 2,887,147 Series 1 Preference Shares and 1,112,853 Series 2 Preference Shares outstanding and issued. The Series 1 Preference Shares will continue to be listed on the Toronto Stock Exchange (“TSX”) under the symbol FN.PR.A. The Series 2 Preference Shares will be listed on the TSX under the symbol FN.PR.B.

Assiduous Readers will remember that FN.PR.A will reset to 2.79%, while the FloatingReset issue, FN.PR.B, will pay 3-Month T-Bills + 207bp, reset quarterly. I recommended against conversion.

RONA Inc. has announced:

that holders of its Cumulative 5-Year Rate Reset Series 6 Class A Preferred Shares of RONA (the “Series 6 Shares”) have elected to convert 2,222,137 of the 6,900,000 Series 6 Shares currently outstanding, on a one-for-one basis, into Cumulative Floating Rate Series 7 Class A Preferred Shares of RONA (the “Series 7 Shares”) on March 31, 2016. Consequently, on March 31, 2016, RONA will have 4,677,863 Series 6 Shares and 2,222,137 Series 7 Shares issued and outstanding. The Series 6 Shares will continue to be listed and the Series 7 Shares will be listed and start trading at market open on March 31, 2016 on the Toronto Stock Exchange under the symbols RON.PR.A and RON.PR.B, respectively.

As previously announced, on February 3, 2016, RONA entered into an arrangement agreement (the “Arrangement Agreement”) under which a subsidiary of Lowe’s Companies, Inc. (“Lowe’s”) has agreed to acquire all of the issued and outstanding common shares of RONA at a price of $24.00 per share in cash by way of a statutory plan of arrangement (the “Arrangement”). Under the terms of the Arrangement Agreement, a subsidiary of Lowe’s has also agreed to acquire all of the outstanding Series 6 Shares and any then outstanding Series 7 Shares for $20.00 per share in cash (plus any accrued but unpaid dividends thereon up to, but excluding, the date of the closing of the Arrangement), which represents a premium of approximately 59% to the closing price of the Series 6 Shares on the TSX on February 2, 2016, the day prior to the announcement of the Arrangement. RONA’s board of directors has unanimously approved the Arrangement Agreement and unanimously recommends that the holders of RONA’ common shares, Series 6 Shares and Series 7 Shares vote FOR the Arrangement at the special meeting to be held on March 31, 2016 concerning the Arrangement (the “Meeting”).

Completion of the Arrangement is conditional upon approval of at least 66⅔% of the votes cast by the common shareholders at the Meeting and satisfaction of other customary conditions. Preferred shareholders will vote on the Arrangement as a separate class of securities and their participation in the Arrangement will require the approval of 66⅔% of the votes cast by holders of preferred shares represented in person or by proxy at the Meeting. However, completion of the Arrangement is not conditional on approval by the preferred shareholders and, if the requisite approval of the preferred shareholders is not obtained, the Series 6 Shares and Series 7 Shares will be excluded from the Arrangement and will remain outstanding in accordance with their terms. It is expected that the Arrangement will be completed in the second half of 2016.

A copy of the Arrangement Agreement, the information circular and related documents have been filed with Canadian securities regulators and are available on RONA’s profile at www.sedar.com.

Assiduous Readers will remember that RON.PR.A will reset to 3.324%, while the FloatingReset issue, RON.PR.B, will pay 3-Month T-Bills + 265bp, reset quarterly. I recommended against conversion.

It will also be remembered that RON.PR.A is the subject of a Plan of Arrangement that is part of the proposed acquisition of RONA by Lowe’s Companies. This has been discussed several times on PrefBlog:

• RON.PR.A: Lowe’s Offers $20 As Part Of Takeover
• RON.PR.A Grumblers Get An Ally
• RON.PR.A Vote: Yes or No?
• The not-so-pleasant choices faced by RONA’s preferred shareholders [RON.PR.A]

If the acquisition of RON.PR.A by Lowe’s under the plan of arrangement succeeds, then the conversion will become moot.

BCE Inc. has mailed its Notice to Holders of BCE Inc. Series AG Preferred Shares:

Beginning on March 17, 2016 and ending on April 21, 2016, holders of Series AG Preferred Shares will have the right to choose one of the following options with regards to their shares:
1. To retain any or all of their Series AG Preferred Shares and continue to receive a fixed quarterly dividend; or
2. To convert, on a one-for-one basis, any or all of their Series AG Preferred Shares into BCE Inc. Cumulative Redeemable First Preferred Shares, Series AH (the “Series AH Preferred Shares”) and receive a floating monthly dividend.

Effective May 1, 2016, the fixed dividend rate for the Series AG Preferred Shares will be set for a five-year period as explained in more detail in paragraph 5 of the attached Notice of Conversion Privilege.
…
As of May 1, 2016, the Series AG Preferred Shares, should they remain outstanding, will pay, on a quarterly basis, as and when declared by the Board of Directors of BCE Inc., a fixed cash dividend for the following five years that will be determined by BCE Inc. on April 6, 2016 but which shall not be less than 80% of the five-year Government of Canada Yield (as defined in BCE Inc.’s articles) compounded semi-annually and computed on April 6, 2016 by two investment dealers appointed by BCE Inc. The annual dividend rate applicable to the Series AG Preferred Shares will be published on April 8, 2016 in the national edition of The Globe and Mail, the Montreal Gazette and Le Devoir and will be posted on BCE Inc.’s website at www.bce.ca.

A similar notice has been sent to the Holders of BCE Inc. Series AH Preferred Shares.

The new dividend rate for BCE.PR.G is not yet known, but I will pass on the information when it becomes available. The observed relationship of reset rates to market rates has been discussed in comments fairly recently.

BCE.PR.G currently pays 4.50% after having been reset in 2011. At that time, holders overwhelmingly preferred BCE.PR.G the FixedFloater, over BCE.PR.H, the Ratchet Rate preferred. As these issues are interconvertible every five years, they comprise a Strong Pair.

The Bank of Nova Scotia has announced:

that it intends to exercise its right to redeem all outstanding Non-cumulative Preferred Shares Series 14 of Scotiabank (the “Series 14 Shares”) on April 27, 2016, at a price equal to $25.00 per share, together with all declared and unpaid dividends. Formal notice will be issued to shareholders in accordance with the share conditions.

The redemption has been approved by the Office of the Superintendent of Financial Institutions and will be financed out of the general funds of Scotiabank.

On February 29, 2016, the Board of Directors of Scotiabank approved a quarterly dividend of $0.28125 per Series 14 Share. This will be the final dividend on the Series 14 Shares and will be paid in the usual manner on April 27, 2016, to shareholders of record at the close of business on April 5, 2016, as previously announced. After April 27, 2016, the Series 14 Shares will cease to be entitled to dividends.

BNS.PR.L is a Straight Perpetual, 4.50%, that commenced trading 2007-1-24 after being announced 2007-1-8. It has been tracked by HIMIPref™ throughout its existence; since the announcement of the NVCC Rules it has been assigned to the DeemedRetractibles subindex.

Assiduous Readers will remember that my post regarding the proposed RON.PR.A arrangement sparked a fair amount of comment – by PrefBlog standards – with several commenters expressing horror at the idea of a preferred share being taken out below par and heaping me with opprobrium for suggesting it was a pretty good deal for holders.

I based that opinion on a comparison with similar issues and reiterated that opinion when the grumblers got an ally.I’ll take the opportunity to update prices for that list one last time:

So the preferred share market has made a valiant effort to muddy the waters since the February 3 announcement date, but on the whole I’d say it has still come short.

Of the six comparators – chosen for having a ‘similar’ credit quality as will the issue when it’s part of Lowe’s and for having similar Issue Reset Spreads – three are trading in excess of $19.00. If they were all like that, I’d probably just throw up my hands and tell you to flip a coin. But if we look at these issues with a (tiny) bit more care, we see that the issues trading north of $19.00 are all banks, which continue to exhibit a decent funding advantage over non-banks in the Canadian preferred share market (this is discussed in PrefLetter). The three non-banks are trading at or below $18.00 and I suggest they are more indicative of where RON.PR.A might be expected to trade assuming that the common is acquired and the preferred isn’t. I will say additionally that adjustment to the new price might happen very swiftly if the Plan is rejected, since disappointed arbitrageurs will be dumping the stock, which will suddenly reset to a markedly lower dividend at the same time.

As noted in the March 9 update to the post about the grumblers’ ally, there were rumours that:

This week, and possibly as early as Thursday, more information is expected to be released about the extent of the opposition to the terms offered to the pref shareholders. “We have had lots of emails and calls from retail investors about the situation and we will be responding,” said an adviser with knowledge of what’s being planned.

All I can say is: I ain’t seen nuthin’ ’bout this t’ing.

What I have seen is some support from the regulatory parasites:

RONA inc. (TSX: RON, RON.PR.A) (“RONA” or the “Corporation”) is pleased to announce that leading advisory firm Glass, Lewis & Co., LLC (“Glass Lewis”) has recommended that common and preferred shareholders of RONA vote in favour of the previously announced statutory arrangement (the “Arrangement”) involving RONA and Lowe’s Companies, Inc. at the special meeting of common and preferred shareholders to be held on March 31, 2016 (the “Meeting”). The other leading advisory firm Institutional Shareholder Services Inc. (“ISS”) has also recommended that common shareholders of RONA vote in favour of the Arrangement at the Meeting. Per its policy, ISS does not make recommendations to preferred shareholders.

Under the statutory arrangement, holders of common shares of RONA will receive $24.00 in cash per share, representing a premium of 104% to the closing price of the common shares on the Toronto Stock Exchange (the “TSX”) on February 2, 2016, the day prior to the announcement of the Arrangement. Holders of preferred shares of RONA will receive $20.00 in cash per share, representing a premium of 59% to the closing price of the preferred shares on the TSX on February 2, 2016.

Glass Lewis has recommended that RONA common and preferred shareholders vote FOR the Arrangement, which allows common and preferred shareholders to cash out their investment and immediately realize an assured value at a substantial premium. In addition, Glass Lewis considers the price for preferred shares to be fair and attractive to preferred shareholders considering, among other factors, the limited liquidity of the preferred shares.

ISS has recommended that RONA common shareholders vote FOR the Arrangement for a number of reasons, including the substantial cash premium and the fact that RONA’s largest shareholder, Caisse de dépôt et placement du Québec, supports the Arrangement.

RONA shareholders are encouraged to read the Corporation’s management proxy circular with respect to the Arrangement which is available on SEDAR at www.sedar.com. The circular contains a detailed description of the Arrangement. RONA’s Board unanimously recommends that all RONA common and preferred shareholders vote FOR the Arrangement to be considered at the Meeting.

RONA shareholders are reminded to vote before the proxy cut-off time at 10:30 a.m. (Montreal Time) on Tuesday, March 29, 2016.

I’m not inclined to put too much weight on the Glass, Lewis recommendation. The quoted rationale is just a touch on the skimpy side and I have no intention of paying an extortionate price for the full report. I would not give Glass Lewis or ISS benefit of any doubt, either, because their business model is a joke. The only reason proxy advisory firms exist is because regulators insist that investment funds vote their shares with lots of written rationale. Ain’t nobody got time for that. Significant votes, such as acquisitions, or an attempted coup d’état by a respected activist firm, will be examined closely by Portfolio Managers, but most votes have historically been determined by the Wall Street Rule: If you like the company, vote with management. If you don’t like the company, sell the stock. End of story. But that’s not allowed any more, so the firms will happily pay the proxy advisory firms a bit of money to generate the required weight of paperwork for them, which will free up some time for application of more useful and sophisticated portfolio management techniques such as having lunch with clients.

So who cares, really, what Glass Lewis thinks? It simply doesn’t matter.

The only other thing I’ve seen is a post on the unsigned blog “Canadian Value Investing” titled Rona Merger Arbitrage: Heads I Win, Tails I Don’t Lose Much. Actually, the blog isn’t quite as unsigned as appears to be intended, because GoDaddy provides the following information:

Registrant Name: Nelson Smith
Registrant Organization:
Registrant Street: 414 14th Street East
Registrant City: Drumheller
Registrant State/Province: Alberta
Registrant Postal Code: T0J 0Y5
Registrant Country: CA
Registrant Phone: +1.4033345555
Registrant Phone Ext:
Registrant Fax:
Registrant Fax Ext:
Registrant Email: nsmith1983@gmail.com

It might be that Mr. Smith, if he exists at all, is merely an intermediary, but I suppose those in dire need of entertainment could follow up the clue. There is a Nelson Smith from Drumheller on LinkedIn with a consistent biography, for what that’s worth.

Anyway, the blog post suggests:

There are a number of reasons why people suspect a higher bid for the preferred shares are coming. Rona’s investor relations department is reportedly swamped with emails and phone calls from pissed off retail investors making a big stink about the whole situation.

According to at least two different articles I’ve read, insiders with a close knowledge of the situation say the two companies are working on some sort of alternative plan to make things right with the preferred shareholders.

I haven’t seen those articles – unless you count the Grumblers’ Ally and the Critchley column referenced therein – and Canadian Value Investing did not see fit to link them. Anyway, these mysterious stories are used to justify the investment thesis:

Say the deal closes on April 30th. Investors who buy today at $20.25 would get approximately $0.28 in dividends between now and the closing date, which pushes their cost down to $19.97 per share. If shareholders agree to the $20, you get your money back.

But if a higher offer comes, there’s potential for a maximum of 25% upside. Even a 10% upside would be spectacular over a period of a few weeks. You could then hold until the transaction date, saving yourself the commission on selling. That’s not much these days, but hey, every few bucks helps.

The market is clearly pricing in a higher offer coming for the preferreds, or else they’d be trading at a slight discount like the common shares. I’ll gladly take a shot at a 25% upside with very little risk to the downside. Worse case scenario I can see is I just get my money back.

There’s one rather important scenario missing from the list: No change to preferred plan, common is acquired, preferred isn’t, preferred trades like its comparables, which I suggest is something like 10% below $20. I suggest this scenario is the main alternative to an acquisition at $20, but hey … it takes two to make a market!

It should also be noted that there is a small, but finite chance that the common shareholders will reject the deal they are offered – in which case the credit quality of RON.PR.A returns to its prior state of ‘horrible’ and the trading price can be generously predicted to return to the low teens.

I don’t understand the rationale that might support a higher offer. The post suggests it is because of “emails and phone calls from pissed off retail investors making a big stink about the whole situation.” Now, in this day and age of governance by Internet meme it may well be that the Public Relations department is perturbed. But from a hard-headed point of view, who cares? RON.PR.A represents cheap financing, it is unlikely that Lowe’s will be issuing equity of any kind in Canada in the future, and the $34.5-million additional cost to acquire at par isn’t chump change.

I’ve been wrong before and I’ll be wrong again, but in this case I suggest that the rational course of action is to vote in favour of the Preferred Share Resolution. Be quick though, voting closes very soon! The safest course of action is, however, to sell on the market – the price is very close to $20 and such a sale would eliminate the potential for nasty consequences should either the common or preferred shareholders vote against their respective resolutions.