PrefBlog

Last February, Moody’s slashed bank preferred ratings by three notches, reflecting a reappraisal of the likelihood of government support, at least as far as preferreds were concerned:

Prior to the global financial crisis, Moody’s had incorporated into its ratings an assumption that support provided by national governments and central banks to shore up a troubled bank would, to some extent, benefit the holders of bank subordinated capital as well as the senior creditors. The systemic support for these instruments has not been forthcoming in many cases. The revised methodology largely removes previous assumptions of systemic support, resulting in today’s rating action. In addition, the revised methodology generally widens the notching on a bank hybrid’s rating that is based on the instrument’s features.

In that action, RY prefs were downgraded three notches, taking them from Aa2 to A2. The three notch downgrade was in line with almost every other bank. Almost.

A little while earlier, Moody’s had taken BMO prefs down four notches, due to concerns over the volatility of its capital market business.

In the RY Annual Report for 2010, they stated their strategic goals:

• In Canada, our goal is to be the undisputed leader in financial services.
• Globally, our goal is to be a leading provider of capital markets and wealth management solutions
• Intargeted markets, our goal is to be a leading provider of select financial services complementary to our core strengths.

Moody’s takes exception to the goal of growing the capital markets business:

Moody’s Investors Service has downgraded the ratings of Royal Bank of Canada, driven principally by the bank’s commitment to its sizeable and growing capital markets business, which potentially exposes bondholders to increased earnings volatility and poses significant risk management challenges .
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As part of its universal banking strategy, RBC management is selectively expanding upon its strong domestic investment banking and trading capabilities to build a global investment banking platform. Tactically, RBC has been able to exploit the continuing disarray at many of its investment banking competitors to upgrade and build out its banking, sales and trading capabilities outside Canada.

“Shareholders and bank managers are attracted to the growth potential of capital markets businesses, but these businesses can expose bank bondholders to hidden tail risks,” said Peter Nerby, a Moody’s Senior Vice-President.

Although Moody’s expects RBC’s other businesses will provide a substantial buffer against these risks, the rating agency believes the opacity and the potential volatility associated RBC’s enlarged and expanding capital markets operations are not consistent with its former B+ unsupported bank financial strength rating.

RBC already has a substantial commitment to the capital markets business. At year end 2010, the capital markets segment represented roughly 45% of the bank’s consolidated balance sheet, and management is attributing roughly 25% of the firm’s $33 billion in common equity to the capital markets segment. Over the long run, management has signaled that the contribution from capital markets businesses could be as much as 30% of overall revenue and earnings through the cycle.
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..Issuer: Royal Bank of Canada
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….Preferred Stock Preferred Stock, Downgraded to A3 from A2

Royal Bank has a host of preferreds outstanding: 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 and RY.PR.Y.

BAM Split Corp. has announced:

the completion of its previously announced issue of 5,000,000 Class AA Preferred Shares, Series 5 (the “Series 5 Preferred Shares”) at an offering price of $25.00 per Series 5 Preferred Share, raising gross proceeds of $125,000,000. The Series 5 Preferred Shares carry quarterly fixed cumulative preferential dividends representing a 4.85% annualized yield on the offering price and have a final maturity of December 10, 2017. The Series 5 Preferred Shares have been listed and posted for trading on the Toronto Stock Exchange under the symbol BNA.PR.E. The net proceeds of the offering will be used to pay a special cash dividend to holders of the Company’s Capital Shares.

Prior to the closing of the offering, the Company subdivided the existing Capital Shares held by BAM Investments so that there are an equal number of Preferred Shares and Capital Shares outstanding.

BNA.PR.E is a SplitShare issue with a 4.85% coupon and a seven year term, announced November 22. It traded 190,750 shares today in a tight range of 24.85-93, closing at 24.90-92, 2×10.

Vital statistics are:

The shares are rated Pfd-2(low) by DBRS:

The Pfd-2 (low) ratings of the Class AA Preferred Shares are primarily based on the downside protection and dividend coverage available to the Class AA Preferred Shares.

The main constraints to the rating are the following:

(1) The downside protection available to holders of the Class AA Preferred Shares depends solely on the market value of the BAM Shares held in the Portfolio, which will fluctuate over time.

(2) There is a lack of diversification as the Portfolio is entirely made up of BAM Shares.

(3) Changes in the dividend policy of BAM may result in reductions in Class AA Preferred Shares dividend coverage.

(4) The BAM Shares pay dividends in U.S. dollars, so the Company is exposed to foreign currency risk relating to the Canadian-U.S. exchange rate, which may have a negative impact on the Class AA Preferred Shares dividend coverage ratio.

This issue is ridiculously expensive. BNA.PR.C, which is the same credit with a mere one year of extra term, closed today at 22.01-06 to yield 6.30-27%.

BNS Split Corp. II has announced:

that the Company has issued one warrant for every two Capital Shares held by holders of Capital Shares of the Company of record as at the close of business on December 9, 2010.

Each warrant will entitle the holder to purchase one Unit, each Unit consisting of two Capital Shares and one Preferred Share, for a subscription price of $50.84 per Unit. Commencing December 10, 2010, warrants may be exercised at any time on or before 5:00 p.m. (Toronto time) on July 7, 2011. The warrants are listed on The Toronto Stock Exchange under the ticker symbol BSC.WT.

Holders of Preferred Shares are entitled to receive quarterly fixed cumulative distributions equal to $0.2003 per Preferred Share. The Company’s Capital Share dividend policy is to pay a quarterly dividend on the Capital Shares equal to the dividends received by the Company on the BNS Shares minus the dividends payable on the Preferred Shares and all administrative and operating expenses provided the net asset value per Unit at the time of declaration, after giving effect to the dividend, would be greater than the original issue price of the Preferred Shares.

BNS Split Corp. II is a mutual fund corporation created to hold a portfolio of common shares of The Bank of Nova Scotia. Capital Shares and Preferred Shares of BNS Split Corp. II are listed for trading on The Toronto Stock Exchange under the symbols BSC and BSC.PR.B respectively.

BSC.PR.B was last mentioned on PrefBlog when it was issued in September. BSC.PR.B is not tracked by HIMIPref™.

TransAlta Corp. has announced:

it has completed its public offering of 10,000,000 Cumulative Rate Reset First Preferred Shares, Series A (the “Series A Shares”). In addition, the full option granted to the syndicate of underwriters led by CIBC World Markets Inc., RBC Dominion Securities Inc. and Scotia Capital Inc., as bookrunners, was exercised for an additional 2,000,000 Series A Shares also at a price of $25.00 per Series A Share.

The offering, previously announced on December 2, 2010, resulted in gross proceeds to TransAlta of Cdn $300 million. The net proceeds of the offering will be used to partially fund capital projects, for other general corporate purposes and to reduce short term indebtedness of the company and its affiliates, which short term indebtedness was used to fund TransAlta’s capital program and for general corporate purposes. TransAlta may invest funds that it does not immediately require in short term marketable debt securities.

The Series A Shares were offered to the public in Canada through the underwriters or their affiliates by way of a prospectus supplement that was filed with securities regulatory authorities in Canada under TransAlta’s short form base shelf prospectus, which was previously filed with securities regulatory authorities in Canada.

Holders of Series A Shares are entitled to receive a cumulative quarterly fixed dividend yielding 4.60% annually for the initial period ending March 31, 2016. Thereafter, the dividend rate will be reset every five years at a rate equal to the 5-year Government of Canada bond yield plus 2.03%. Holders of Series A Shares will have the right, at their option, to convert their shares into Cumulative Rate Reset First Preferred Shares, Series B (the “Series B Shares”), subject to certain conditions, on March 31, 2016 and on March 31 every five years thereafter. Holders of Series B Shares will be entitled to receive cumulative quarterly floating dividends at a rate equal to the three-month Government of Canada Treasury Bill yield plus 2.03%. The Series A Shares are listed on the Toronto Stock Exchange under the ticker symbol TA.PR.D.

The 4.60%+203 FixedReset was announced on December 2.

The issue traded 591,764 shares today in a range of 24.80-97 before closing at 24.93-94, 50×80. Vital statistics are:

Dividend Growth Split Corp. has announced:

that it has completed its treasury offering of 1,100,000 class A shares and 1,100,000 preferred shares for aggregate gross proceeds of $21,230,000. Shares will continue to trade on the Toronto Stock Exchange under the existing symbols DGS (class A shares) and DGS.PR.A (preferred shares).

Dividend Growth Split Corp. invests in a portfolio of common shares of high quality, large capitalization companies, which have among the highest dividend growth rates of those companies included in the S&P/TSX Composite Index.
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The preferred shares were offered at a price of $10.00 per share. The investment objectives for the preferred shares are to provide their holders with fixed cumulative preferential quarterly cash distributions in the amount of $0.13125 per preferred share to yield 5.25% per annum on the original issue price, and to return the original issue price at the time of redemption on November 30, 2014.

The class A shares were offered at a price of $9.30 per share. The investment objectives for the class A shares are to provide their holders with regular monthly cash distributions targeted to be $0.10 per class A share, and to provide the opportunity for growth in net asset value per class A share.

The offering was placed through a group of agents co-led by RBC Capital Markets and CIBC World Markets Inc., and included TD Securities Inc., BMO Nesbitt Burns Inc., National Bank Financial Inc., Scotia Capital Inc., GMP Securities L.P., HSBC Securities (Canada) Inc., Mackie Research Capital Corporation, Macquarie Private Wealth Inc., Manulife Securities Incorporated, Raymond James Ltd., Canaccord Genuity Corp., Dundee Securities Corporation, Desjardins Securities Inc., and Wellington West Capital Markets Inc

DGS.PR.A was last mentioned on PrefBlog when the offering was announced. DGS.PR.A is not tracked by HIMIPref™ as it is too small … but that excuse won’t hold up for much longer if they keep up the pace of treasury offerings!