PrefBlog

Standard & Poor’s has announced:

it has revised its outlooks on seven Canadian financial institution ratings to negative from stable. The financial institutions are:

• The Bank of Nova Scotia
• Central 1 Credit Union
• Home Capital Group Inc.
• Laurentian Bank of Canada
• National Bank of Canada
• Royal Bank of Canada
• Toronto-Dominion Bank

At the same time, Standard & Poor’s affirmed its ratings on all seven banks.
…
The outlook revisions are linked to our evolving views of economic risk and industry risk for banks operating in Canada. A prolonged run-up in housing prices and consumer indebtedness in Canada is in our view contributing to growing imbalances and Canada’s vulnerability to the generally weak global economy, applying negative pressure on economic risk for banks. Growing pressure on banks’ risk appetites and profitability arising from competition for loan and deposit market share could also lead to a deterioration in our view of industry risk.
…
The negative outlook recognizes the potential for deterioration of Canadian banks’ financial performance and capitalization generally, associated with consumer debt burdens proving excessive in an unfavorable economic scenario, or due to competitive pressures amplified by the shift to a consumer deleveraging phase.

Over the past decade, Canadian consumer credit market debt (including residential mortgage loans and consumer credit) has risen to more than 150% from 110% of disposable income, and relative to GDP, consumer debt has increased to more than 90% from about 70%. Over the same period, Canadian house prices have approximately doubled, with compounded real growth in housing prices estimated to be about 5% per year.
…
Bank risk profiles have benefited from Canadian banks’ underwriting practices, stable performance metrics for banks’ credit portfolios, and the sharing of mortgage risk between the banks, the borrowers (extensively based on full recourse to the consumer), and the providers of mortgage insurance, notably the Canada Mortgage and Housing Corporation (AAA/Stable/A-1+). In our view, Canadian banks’ risk tolerances and risk management capabilities are generally strong and attuned to risks inherent in the Canadian consumer and housing sectors. Even so, we believe there is currently growing potential for deterioration of Canadian bank credit profiles associated with scenarios incorporating consumer sector stress.

Systemic factors are incorporated in Standard & Poor’s rating methodology primarily through its Banking Industry Country Risk Assessment, or BICRA. The BICRA framework takes into account economic and institutional risk factors present in the environment in which banks operate. Canada’s BICRA is currently set at ‘1’ (lowest risk) on a 1 to 10 scale. The BICRA component of the analysis is intended to highlight emergent systemic risks that may not be fully apparent when viewing the sector at the level of individual banks.

The following preferred shares of the affected banks are outstanding:

BNS.PR.J, BNS.PR.K, BNS.PR.L, BNS.PR.M, BNS.PR.N, BNS.PR.O, BNS.PR.P, BNS.PR.Q, BNS.PR.R, BNS.PT.T, BNS.PR.X, BNS.PR.Y, BNS.PR.Z.

LB.PR.D, LB.PR.E.

NA.PR.K, NA.PR.L, NA.PR.M, NA.PR.N, NA.PR.O, NA.PR.P.

RY.PR.A, RY.PR.B, RY.PR.C, RY.PR.D, RY.PR.E, RY.PR.F, RY.PR.G, RY.PR.H, RY.PR.I, RY.PR.L, RY.PR.N, RY.PR.P, RY.PR.R, RY.PR.T, RY.PR.W, RY.PR.X, RY.PR.Y.

TD.PR.A, TD.PR.C, TD.PR.E, TD.PR.G, TD.PR.I, TD.PR.K, TD.PR.O, TD.PR.P, TD.PR.Q, TD.PR.R, TD.PR.S, TD.PR.Y.

Standard & Poor’s has announced:

• CNOOC Ltd. (AA-/Stable/–; cnAAA/–) has agreed to acquire Nexen Inc. in a transaction valued at about C$19.4 billion, including assumption of
  debt.

• We are placing our ratings, including our ‘BBB-‘ long-term corporate credit rating, on Nexen on CreditWatch with positive implications.
• The CreditWatch placement reflects the potential that we might raise our ratings on the company to match CNOOC’s stand-alone credit profile of ‘a’ upon the transaction’s completion.
• We expect to resolve the CreditWatch placement before the end of 2012.

S&P also announced:

that the rating on China-based CNOOC Ltd. (AA-/Stable/–; cnAAA) is not immediately affected by the company’s proposed acquisition of Nexen Inc. (BBB-/Watch Pos/–). In our view, the US$15.1-billion acquisition is larger than previous CNOOC deals in recent years and could test the company’s integration ability.

Standard & Poor’s sees the acquisition as consistent with CNOOC Ltd.’s strategy to expand outside China. The transaction, once completed, would increase CNOOC Ltd.’s proven reserves by about 30% and production by about 20%. More importantly, it provides a good opportunity for CNOOC Ltd. to diversify its operations materially in the low-risk member countries of the Organization for Economic Cooperation and Development (OECD). At the end of 2011, more than 71% of CNOOC Ltd.’s reserves are off the coast of China, and over 20% of reserves are in countries with high sovereign risks. After the acquisition, CNOOC Ltd.’s reserves in China will fall to 56% and its reserves in OECD countries would increase to above 28%.

NXY has issued a single preferred share issue, NXY.PR.A, which is tracked by HIMIPref™.

DBRS has announced that it:

has today downgraded the rating of the Preferred Shares issued by Prime Dividend Corp. (the Company) to Pfd-3 from Pfd-3 (high).

In November 2005, the Company issued 2.2 million Preferred Shares (at $10 each) and an equal number of Class A Shares (at $15 each). The redemption date for both classes of shares issued was originally December 1, 2012, but was extended to December 1, 2018, after holders of 96.1% of Class A Shares and 90.2% of Preferred Shares voted in favour of the extension.

The Company holds a portfolio consisting primarily of common shares (the Portfolio) of the six major Canadian banks, life insurance companies (Great-West Lifeco Inc., Manulife Financial Corporation, Sun Life Financial Inc.), investment management companies (AGF Management Limited, CI Financial Corp., IGM Financial Inc.) and a few other companies (BCE Inc., TransAlta Corporation, TransCanada Corporation, Power Financial Corporation, TSX Group Inc.). The common shares of each Portfolio company represent between 4% and 8% of the total NAV of the Company, and no more than 20% of the NAV of the Company may be invested in securities issued by financial services or utilities firms other than those listed above. The Portfolio is actively managed by Quadravest Capital Management Inc.

Dividends received from the Portfolio are used to pay to each Preferred Share a monthly floating-rate distribution equal to the prevailing prime rate in Canada (the Prime Rate) plus 0.75% per annum, with a minimum of 5% per annum and maximum of 7% per annum. Holders of Class A Shares are targeted to receive a monthly floating-rate distribution equal to the Prime Rate plus 2% per annum, with a minimum targeted rate of 5% per annum and a maximum targeted rate of 10% per annum. Holders of the Preferred Shares have been receiving the minimum monthly payment of $0.04167 per share (yielding 5% per annum) since November 2008.

On September 6, 2011, DBRS confirmed the ratings on the Preferred Shares at Pfd-3 (high) based on the sufficient level of downside protection available to holders of the Preferred Shares at the time. The NAV was fairly volatile in the months following the rating confirmation, with downside protection falling to 39.7% in November 2011 before recovering slightly over the first quarter of 2012. Since April 2012, the NAV declined again, dropping to $15.89 as of June 29, 2012. The current dividend coverage ratio is around 0.87 times and the downside protection available is approximately 37.1%, which fails to reach levels commensurate with a Pfd-3 (high) rating. As a result of the insufficient downside protection and dividend coverage ratio on the Portfolio, the Preferred Shares have been downgraded to Pfd-3 from Pfd-3 (high).

PDV.PR.A was last mentioned on PrefBlog in connection with its outstanding warrants. PDV.PR.A is not tracked by HIMIPref™, as there are only about 1.5-million of the $10-par-value shares outstanding.

DBRS has announced that it:

has today removed Fortis Inc.’s (Fortis or the Company) ratings from Under Review with Developing Implications (following the announced acquisition (the Acquisition) of CH Energy Group Inc. (CHG) on February 21, 2012). DBRS has also confirmed the ratings of Unsecured Debentures and Preferred Shares of the Company at A (low) and Pdf-2 (low), respectively, with Stable trend. The confirmation is based on the closing of subscription receipt offering (approximately $600 million) in June 2012 and further review of the Company’s financing plan. DBRS is comfortable that Fortis’s funding strategy includes appropriate measures to maintain a reasonable financial profile while executing its growth strategy, particularly the Acquisition (approximately $1.0 billion, plus $500 million in debt assumption) and the Waneta hydro power project (total $450 million in investment, $250 million required in 2012).

Fortis’s non-consolidated balance sheet leverage is expected to increase notably. However, given its current financial flexibility with non-consolidated debt-to-capital at near 14% and strong cash flow coverage, DBRS believes that Fortis’s financing plan is reasonable, such that the debt leverage within the 20% range can be maintained in-line with DBRS’s rating guidelines for notching a holding company relative to its subsidiaries. (See DBRS Criteria: Rating Parent/Holding Companies and Their Subsidiaries, dated March 2010.) Following the Acquisition and the financing of the Waneta project, cash flow coverage is expected to weaken temporarily but should still remain within the current rating category.

With the proposed Acquisition, Fortis’ business risk profile is expected to improve moderately, as approximately 97% of CHG’s earnings are generated from its regulated electric and gas businesses. This regulated earnings mix is higher than the Company’s current mix at approximately 90%. The remaining 10% of Fortis’s consolidated earnings are generated from higher-risk hotel properties and non-regulated generation businesses. The regulatory framework in New York is viewed as reasonable, as CHG is allowed to recover prudently incurred operating, capital and commodity costs and earn good returns on investment.

Fortis is currently rated the same as some of its subsidiaries (FortisBC Inc. and FortisAlberta Inc.) despite the structural subordination and double leverage at the parent. DBRS believes that Fortis’s ratings are supported by strong and stable cash flows from diversified sources, with a significant portion of dividends coming from its regulated subsidiaries with “A” ratings (FortisBC Energy Inc. and Newfoundland Power Inc.).

The acquisition of CH Energy Group caused S&P to place FTS on Review-Negative but that review was resolved in May:

• We are affirming our ratings, including our ‘A-‘ long-term corporate credit rating, on Fortis Inc. and subsidiary FortisAlberta Inc.
• We are also removing the ratings from CreditWatch with negative implications, where they were placed Feb. 22, 2012.
• The affirmation reflects Fortis’ financing plan for the proposed C$1.5 billion acquisition of CH Energy Group Inc. and the completion of its C$900 million Waneta hydroelectric construction project, on time and on budget in 2015.
• We expect that the company’s diversified portfolio should generate adequate and stable cash flow at or above our consolidated targets.
• The stable outlook reflects our assessment of the operating companies’ underlying operational and financial stability, which mitigates the relatively weak financial measures for the ratings.

Fortis has a number of preferred shares outstanding: FTS.PR.C, FTS.PR.E, FTS.PR.F, FTS.PR.G and FTS.PR.H.

DBRS has announced that it:

DBRS has today downgraded Yellow Media Inc.’s (Yellow Media or the Company) Issuer Rating to C (high) from CCC; its Medium-Term Notes rating to C (high) from CCC, with an RR4 recovery rating; and its Exchangeable Subordinated Debentures rating to C (low) from CC (high), with a recovery rating of RR6. DBRS has also placed these ratings and Yellow Media’s Cumulative Preferred Shares rating of Pfd-5 (low) (already at the lowest rating on the scale) Under Review with Negative Implications.

The downgrade follows the Company’s announcement of a recapitalization plan (the Recapitalization), which is intended to restructure the balance sheet in a manner that would better enable Yellow Media to focus on the transformation of its business from print to digital. DBRS notes the recapitalization proposal (see key components below) would result in a default, based on the fact that lenders would receive less than originally intended interest and principal repayment if the offer is approved in a vote on September 6, 2012.

The revised ratings have been placed Under Review with Negative Implications in consideration of the pending stakeholder vote on September 6, 2012. Should the proposal be approved, Yellow Media’s exchanged securities would be placed in default status in accordance with DBRS policy.

S&P has announced:

• Montreal-based classified directory publisher Yellow Media Inc. announced an offer to exchange its existing unsecured debt (credit facilities and medium-term notes) for new senior secured notes and subordinated unsecured exchangeable debentures, as well as cash and common shares.
• The company has also offered holders of existing convertible subordinated debentures, preferred shares, and common shares an exchange for 17.5% of the new common shares as well as warrants representing 10% of the new shares.
• We view the offer as a distressed exchange under our criteria and have therefore lowered our long-term corporate credit rating on Yellow Media to ‘CC’ from ‘CCC’.
• At the same, we lowered our issue-level rating on the company’s senior unsecured debt to ‘CC’ from ‘CCC’ and lowered the issue-level rating on its convertible subordinated debentures to ‘C’ from ‘CC’. The recovery ratings on these securities are unchanged at ‘4’ and ‘6’, respectively.
• We are removing the ratings from CreditWatch.
• Should the company complete the exchange as proposed, we would lower all ratings to ‘D’.

YLO has the following preferred shares outstanding: YLO.PR.A, YLO.PR.B, YLO.PR.C and YLO.PR.D. The proposed recapitalization has been discussed on PrefBlog.