PrefBlog

Connor Clark & Lunn has announced:

that Tribune Company’s decision to voluntarily restructure its debt obligations under the protection of Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware is expected to constitute a credit event under the credit linked note (“CLN”) issued by their respective counterparties.

When it was chosen for inclusion in the Reference Portfolios, Tribune was in a stable industry with ample cash flow generation and rated A- by Standard & Poor’s. In December 2007, Tribune was acquired in a leveraged buy-out which reduced its rating to B- and it needed to sell off assets in order to raise cash to pay down its large debt load. Following the acquisition, a precipitous decline in revenue and a tough economy coupled with the credit crisis that makes it extremely difficult to support its current level of debt.

When Connor, Clark & Lunn Capital Markets Inc. receives further information regarding the credit event and the recovery rate we will provide an update on the impact on the companies.

A very defensive sounding press release! Bloomberg has a story on the Tribune filing.

Guys, guys, guys! I’m an old bond guy. I’ve been there. Bad things happen. The problem is not your selection of Tribune Company as one of your 125-odd names. The problem is your decision to concentrate your investment (by the terms of the credit note) to such an extent that a single default becomes a major problem. Such a note can make sense to both the buyer and the seller, as long as both realize that it’s disaster insurance; the buyer of the note gets a small premium and assumes the very small risk of a very large payout. But … that risk is increasing.

RPQ.PR.A was last mentioned on PrefBlog when the dividend was suspended and the rating withdrawn.

RPB.PR.A was last mentioned on PrefBlog when the dividend was suspended and the rating withdrawn.

RPA.PR.A was last mentioned on PrefBlog when S&P downgraded it to P-2.

PRF.PR.A was last mentioned on PrefBlog with respect to the Lehman credit event.

None of these issues is tracked by HIMIPref™.

DBRS has announced that it:

has today downgraded the Preferred Shares issued by SL Split Corp. (the Company) to Pfd-4 (low), with a Stable trend, from Pfd-2 (low). The rating has been removed from Under Review with Negative Implications, where it was placed on October 24, 2008.

In November 2007, the Company raised gross proceeds of $59.4 million by issuing 1.055 million Preferred Shares (at $25.78 each) and 2.11 million Capital Shares (at $15.26 each). The initial split share structure provided downside protection of 52% to the Preferred Shares (after expenses).

The net proceeds from the initial offering were invested in a portfolio of common shares (the Sun Life Shares) of Sun Life Financial Inc. (Sun Life). Dividends received from the Sun Life Shares are used to pay a fixed, cumulative quarterly dividend to the holders of the Preferred Shares yielding 5.00% annually. Excess dividends net of all expenses of the Company may be paid as dividends on the Capital Shares. The current dividend income on the Sun Life Shares less administration fees and other Company expenses is approximately equal to the cost of the Preferred Shares distributions.

The value of the Sun Life Shares has declined significantly since inception. Sun Life announced a third-quarter loss due to writedowns of $636 million from holdings in Lehman Brothers Holdings Inc., Washington Mutual, Inc. and American International Group, Inc (AIG), as well as $326 million in charges from the decline in equity markets. From November 7, 2007, to December 3, 2008, the net asset value (NAV) of the Company dropped from $53.31 to $24.87, a decline of about 53%. As a result, all of the initial downside protection available to the Preferred Shares has eroded. As of December 3, 2008, holders of the Preferred Shares would have experienced a loss of approximately 3.5% of their initial issuance price if the Sun Life Shares had been liquidated and proceeds distributed. However, the credit quality of Sun Life remains strong as DBRS confirmed its senior unsecured debt rating at AA (low) with a Stable trend on July 9, 2008.

As a result of the large decline in asset coverage, DBRS has downgraded the rating of the Preferred Shares to Pfd-4 (low) with a Stable trend. A main constraint to the rating is that volatility of the common share price and changes in the dividend policies of Sun Life may result in reductions in asset coverage or dividend coverage from time to time.

The redemption date for both classes of shares issued is January 31, 2013.

SLS.PR.A was part of the DBRS Mass Review of Splits. It is not tracked by HIMIPref™.

DBRS has announced that it:

has today downgraded the Preferred Shares issued by SNP Health Split Corp. (the Company) to Pfd-5 (high), with a Stable trend, from Pfd-3 (high). The rating has been removed from Under Review with Negative Implications, where it was placed on October 24, 2008.

In February 2002, the Company raised gross proceeds of approximately US$156 million by issuing 3.3 million Preferred Shares (at US$25 each) and 6.6 million Capital Shares (at US$11.15 each). The initial split share structure provided downside protection of 47% to the Preferred Shares (after expenses).

The net proceeds from the initial offering were invested in a portfolio of common shares (the Portfolio) of companies that make up the S&P Health Care Sector Index of the S&P 500 Index. Holders of the Preferred Shares receive a fixed, cumulative quarterly dividend yielding 6% annually. The distributions are funded from dividends received on the Portfolio holdings as well as from income generated by writing covered call options and cash-covered put options. The Capital Shareholders do not receive distributions.

The redemption date for both classes of shares issued is February 11, 2009, so there are less than three months remaining until maturity. However, the value of the Portfolio has declined significantly in the last few months, putting full repayment of the Preferred Shares principal at risk. From August 28, 2008, to December 3, 2008, the net asset value (NAV) of the Company dropped from $36.80 to $26.34 due to market volatility, a decline of approximately 28%. As a result, most of the initial downside protection available to the Preferred Shares has eroded; the current downside protection is 5% (as of December 3, 2008).

As a result of the volatility in the current equity markets and the lower asset coverage available, DBRS has downgraded the rating of the Preferred Shares to Pfd-5 (high) with a Stable trend.

SNH.PR.U was part of the DBRS Mass Review of Splits. It is not tracked by HIMIPref™.

DBRS has announced that it:

has today downgraded the Preferred Securities issued by Brascan SoundVest Rising Distribution Split Trust (the Trust) to Pfd-5, with a Negative trend, from Pfd-2. The rating has been removed from Under Review with Negative Implications, where it was placed on October 24, 2008.

In March 2005, the Trust raised gross proceeds of $180 million by issuing 7.2 million Preferred Securities (at $10 each) and an equal number of Capital Units (at $15 each). The initial split share structure provided downside protection of 58% to the Preferred Securities (after expenses).

The net proceeds from the initial offering were invested in a diversified portfolio of Canadian income trusts (the Portfolio). Holders of the Preferred Securities receive fixed quarterly interest payments yielding 6% annually. The Capital Units received regular monthly cash distributions from April 2005 to September 2008. The Trust may not make any cash distributions on the Capital Units if the asset coverage available to the Preferred Securities would be less than 1.4 times after giving effect to the proposed distribution. Due to a large decline in the net asset value (NAV) during September and October, the Capital Unit distribution was suspended for the first time in October 2008.

Based on the 2008 interim financial statements, the interest coverage ratio available to the holders of the Preferred Securities was over 2.5 times. This ratio will vary depending on the distributions from the Trust’s underlying holdings.

The NAV of the Trust has declined significantly in the last few months. From August 29, 2008, to November 28, 2008, the NAV of the Trust dropped from $16.35 to $8.72, a decline of about 47%. As a result, all of the initial downside protection available to the Preferred Securities has been eroded. As of November 28, 2008, holders of the Preferred Securities would have experienced a loss of approximately 13% of their initial issuance price if the Portfolio holdings had been liquidated and proceeds distributed. As a result of the large decline in asset coverage, DBRS has downgraded the rating of the Preferred Securities to Pfd-5 with a Negative trend.

The redemption date for the Preferred Securities is March 31, 2015.

BSD.PR.A was part of the DBRS Mass Review of Splits. Retractions and the Capital Unit dividend were suspended in October. The reported NAV has been extremely volatile lately.

BSD.PR.A is tracked by HIMIPref™ and is part of the InterestBearing subIndex. Given the downgrade, it will be relegated to “Scraps” at the December month-end rebalancing.

This issue has been the topic of much discussion on PrefBlog over the past few months. Assiduous Reader prefhound takes the view that the vaunted income coverage will decline considerably in the near future.

DBRS has announced:

has today downgraded the Series 2 Shares issued by High Income Preferred Shares Corporation (the Company) to Pfd-5 (low) , with a Negative trend, from Pfd-4. The Series 1 Shares have been confirmed at Pfd-2 (low) with a Negative trend. Both ratings have been removed from Under Review with Negative Implications, where they were placed on October 24, 2008.

At inception, the Company issued 1.26 million Series 1 Shares at $25 per share, 1.26 million Series 2 Shares at $14.70 per share and privately placed 1.26 million Equity Shares at $3.54 per share. The termination date for each series of shares is June 29, 2012 (the Redemption Date).

Approximately 33% of the gross proceeds from the initial offering were used to enter into a forward agreement with Canadian Imperial Bank of Commerce (the Counterparty) to provide for the full repayment of the Series 1 Shares principal on the Redemption Date. The remaining net proceeds from the initial offering were invested in a portfolio of common shares (the Managed Portfolio), which initially provided asset coverage to the Series 2 Shares of about 1.8 times (downside protection of 44%). In addition to providing coverage to the Series 2 Shares principal, the Managed Portfolio is used to pay annual fees and expenses, as well as cumulative monthly distributions to the Series 1 Shares and Series 2 Shares (5.85% and 7.25% per annum, respectively). The Series 1 Shares dividends rank equally (pari passu) with the Series 2 Shares dividends.

The Managed Portfolio is actively managed by Lawrence Asset Management Inc. (the Manager). The Manager has the ability to engage in option writing to generate additional income. Since inception, the Managed Portfolio’s net asset value (NAV) has declined 48%, from about $27 to $13.94 per share (as of November 28, 2008), which is less than the Series 2 Shares principal amount of $14.70 per share.

Both Series 1 Shares and Series 2 Shares dividends have been suspended subsequent to the March 31, 2008, distribution. Assuming that the dividends continue to be suspended until the Redemption Date, the Company will owe $6.22 per Series 1 Share and $4.53 per Series 2 Share in unpaid dividends on the Redemption Date. Currently, there are 377,000 Series 1 Shares outstanding and 655,000 Series 2 Shares outstanding (0.576 Series 1 Shares for every Series 2 Share). As a result, a total of $8.11 in combined Series 1 Shares and Series 2 Shares dividends will be owed on the Redemption Date for every Series 2 Share outstanding.

On the Redemption Date, the holders of the Series 1 Shares and Series 2 Shares will be entitled to receive all cumulative dividends that are in arrears in priority over the Series 2 Shareholders’ principal repayment. The Managed Portfolio NAV of $13.94 provides downside protection of 42% over the remaining Series 1 Shares and Series 2 Shares dividends of $8.11 per Series 2 Share. As a result, the ultimate payment of cumulative dividends to the Series 1 Shareholders and Series 2 Shareholders is likely.

The full Series 1 Shares principal is guaranteed, subject to the Counterparty meeting its obligations as part of the Series 1 Shares Forward Agreement. The DBRS rating confirmation of the Series 1 Shares is based on the full principal protection, as well as the current likelihood that all Series 1 Shares cumulative dividends will be repaid, based on the NAV coverage over the remaining Series 1 Shares and Series 2 Shares dividends. The Series 1 Shares rating trend is Negative due to the risk of further deterioration in the NAV from the active management and option writing on the Managed Portfolio’s holdings.

The downgrade of the Series 2 Shares is based on the level of capital appreciation required over the remaining term of the Company in order to fully cover the repayment of the Series 2 Shares unpaid dividends and initial principal. The probability of the holders of the Series 2 Shares not receiving full principal on the Redemption Date is significantly high. A total annualized return of approximately 15% is required from the Managed Portfolio in order for the Series 2 Shareholders to receive full principal and unpaid dividends.

These issues were both reviewed as part of the DBRS Mass Review of Splits. The prior mention of them on PrefBlog was with respect to a massive retraction in June.

HPF.PR.A & HPF.PR.B are both tracked by HIMIPref™. They would both normally be in the SplitShares index, but are relegated to “Scraps”; the former due to volume concerns, the latter due to credit concerns.