PrefBlog

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.

Cooperators has announced:

that it has issued an additional 600,000 Non-Cumulative 5-Year Rate Reset Class E Preference Shares, Series D (the “Series D Preference Shares”) at a price of $25.00 per Series D Preference Share for gross proceeds to the Company of $15,000,000 pursuant to the exercise by a syndicate of underwriters co-led by Scotia Capital Inc. and TD Securities Inc. and including BMO Nesbitt Burns Inc., RBC Dominion Securities Inc., Desjardins Securities Inc., National Bank Financial Inc., HSBC Securities (Canada) Inc., Blackmont Capital Inc., Dundee Securities Corporation and Industrial Alliance Securities Inc. (collectively, the “Underwriters”) of their over-allotment option, as described in the short form prospectus of the Company dated May 14, 2009. Including the over-allotment option, total gross proceeds of the Company’s public offering of Series D Preference Shares (the “Offering”) were $115,000,000.

CCS.PR.D commenced trading on May 22.

Global Resource Split Corp. has announced:

that the Corporation will redeem all of its outstanding Preferred Shares and Class A Shares (together, the “Shares”) on June 30, 2009 (the “Redemption Date”) as contemplated by the constating documents of the Corporation. The Corporation will request that its Shares be delisted from the Toronto Stock Exchange after the close of trading on June 24, 2009. Thereafter, the Corporation will pay a capital gain dividend to all Class A Shareholders of record on June 30, 2009 prior to redeeming the Class A Shares. Such capital gain dividend will reduce the redemption price per Class A Share by an equivalent amount. The capital gain dividend, together with the redemption proceeds for the Shares, will be paid by the Corporation on or about July 6, 2009 through CDS Clearing and Depository Services Inc.

In addition, the Corporation will pay on June 30, 2009 a regular quarterly distribution of $0.13125 per Preferred Share to shareholders of record on June 15, 2009.

Preferred Shares and Class A Shares are currently listed on the Toronto Stock Exchange under the symbols GSX.PR.A and GSX, respectively.

GSX.PR.A has not been tracked by HIMIPref™. There are only 586,000 shares outstanding with a $10 par value.