PrefBlog

Newgrowth Corp. has announced:

that the final condition required to extend the term of the Company for an additional five years to June 26, 2014 has been met. Holders of Class A Capital Shares previously approved the extension of the term of the Company subject to the condition that a minimum of 1,340,000 Class A Capital Shares remain outstanding after giving effect to the special retraction right (the “Special Retraction Right”).

Under the Special Retraction Right, 88,897 Class A Capital Shares have been tendered to the Company for retraction on June 26, 2009. Holders of these shares will receive a retraction price equal to the amount, if any, by which the Unit Value exceeds $18.25. Holders of the remaining 2,238,510 Class A Capital Shares will continue to enjoy the benefits of a leveraged participation in the capital appreciation of the Company’s portfolio of publicly listed common shares of selected Canadian chartered banks, telecommunication, pipeline and utility companies.

The Class B Preferred Shares will be redeemed by the Company on June 26, 2009 in accordance their terms at a price per share equal to the lesser of $18.25 and Unit Value. In order to maintain the leveraged “split share” structure of the Company, the Company will offer a new series of Class B Preferred Shares to be called the Series 2 Preferred Shares pursuant to a preliminary prospectus dated May 22, 2009.

The preliminary prospectus for the new issue does not state a dividend rate. Given that the capital units (NEW.A) have a market value of about $44-million and that coverage of at least 2:1 may be reasonably expected, it is unlikely that the new issue will be tracked by HIMIPref™.

The refunding proposal has been previously discussed on PrefBlog. NEW.PR.B is not tracked by HIMIPref™.

Moody’s has announced it has:

changed the rating outlook on the Bank of Montreal (BMO) and its subsidiaries to negative from stable. BMO is rated B for bank financial strength and Aa1 for deposits. The negative outlook applies to BMO’s Harris subsidiaries including Harris N.A. (bank financial strength rating of B-, long-term deposits of Aa3). Note that there already exists a negative outlook on Harris N.A.’s bank financial strength rating.

Senior vice president, Peter Routledge, stated that “the outlook change is the product of several factors. First, BMO’s business mix has a material weighting towards capital markets activities in general, and structured credit activities specifically, which is likely to result in continued earnings volatility, in Moody’s view. Second, the bank has entered a prolonged period of higher loan losses which will pressure earnings for several quarters. Finally, these two factors will dampen BMO’s risk-adjusted profitability, which is already low relative to its current rating level.” Partially offsetting these concerns is the bank’s strong level of capitalization and an improving risk management discipline.
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BMO’s structured credit exposures have produced approximately C$2 billion in pre-tax losses since the turmoil in the credit markets began. Although the bank has bled much of the potential losses contained in these exposures into its earnings, additional losses could accelerate rapidly in a severe economic downturn. Moody’s primary focus is on two BMO exposures: (1) credit protection vehicle — known as Apex Trust; and (2) the structured investment vehicles, Links Finance Corporation / Links Finance LLC and Parkland Finance Corporation / Parkland (USA) LLC.
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According to Mr. Routledge, “the challenge BMO faces is managing these two points of earnings pressure from a low level of risk-adjusted profitability, relative to its current ratings level.” BMO’s performance since 2007 is instructive. During that time, the bank’s capital markets charges have consumed approximately 25% of BMO’s pre-provision, pre-tax (core) earnings, and caused its already weak ratio of core earnings to risk-weighted assets to drop by 50 basis points on average (i.e., from approximately 2.2% to 1.7%). According to Mr. Routledge, “while Moody’s believes that BMO’s core earnings and capital are more than adequate to absorb prospective credit and capital markets losses, a deterioration in risk-adjusted profitability — a long-stated major ratings driver for the bank — could ultimately lead to a downgrade in BMO’s bank financial strength rating.”

As noted above, two positive credit trends offset partially the aforementioned negative rating drivers. First, the bank’s capitalization is very strong, with a Tier 1 ratio of 10.7% and a ratio of tangible common equity (adjusted for Moody’s hybrid credit) as a percent of risk-weighted assets at 9%.

BMO has seven issues of preferreds on the Toronto exchange: the PerpetualDiscounts BMO.PR.H, BMO.PR.J, BMO.PR.K & BMO.PR.L and the FixedResets BMO.PR.M (+165), BMO.PR.N (+383) & BMO.PR.O (+458).

All are tracked by HIMIPref™ and are included in their respective indices.

Standard and Poor’s has announced:

Standard & Poor’s Ratings Services today revised its outlook on Brookfield Properties Corp. (Brookfield) and its Toronto-based affiliate, BPO Properties Ltd. (BPP), to negative from stable. We continue to analytically view these two related companies as one rated entity. Brookfield retains an 89% equity interest (representing 54% of the voting securities and 100% of the non-voting securities) in BPP.

At the same time, we affirmed our ‘BBB’ long-term corporate credit rating on Brookfield and BPP and our ‘BB+’ preferred stock rating on the companies.
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The current environment of weak operating fundamentals, lower office property valuations, and more-restrictive lender underwriting in the U.S. will pose challenges to the company’s efforts to recapitalize its highly leveraged U.S. property fund (debt is due in late 2011). We would lower the rating one notch if the company does not meaningfully improve its liquidity position this year or if fixed-charge coverage measures were to decline from their current level (1.6x). We would consider revising the outlook to stable if Brookfield’s management successfully addresses the longer-term recapitalization needs of its U.S. fund while strengthening overall consolidated fixed-charge coverage measures.

BPO has the following preferred issues outstanding: BPO.PR.F, BPO.PR.H, BPO.PR.I, BPO.PR.J, BPO.PR.K.

BPP has the following preferred issues outstanding: BPP.PR.G, BPP.PR.J & BPP.PR.M. Each of these issues were mentioned on PrefBlog in the post BAM / BPP Floater Credit Inversion.

BPO.PR.F & BPO.PR.H were added to the S&P/TSX Preferred Share Index in the July 2007 rebalancing. BPO.PR.I was added and BPO.PR.J was removed in the July 2008 rebalancing.

All are tracked by HIMIPref™ all have been relegated to the Scraps index on credit concerns.

These are total returns, with dividends presumed to have been reinvested at the bid price on the ex-date. The list has been restricted to issues in the HIMIPref™ indices.

What can I say? The Floaters Index currently has three members. The top three spots in May were occupied by Floaters. That’s a change! I put a chart of the Floater index over the past year in my Market Action post of May 26.