PrefBlog

First Asset has announced:

Global 45 Split Corp. (TSX:GFV) the “Company”) announces that it will not pay a monthly distribution on its Class A Shares for the month-ended November 30, 2008.

As set out in the Company’s articles of incorporation, the Company may not pay a distribution on the Class A Shares if, after the payment of the distribution by the Company, the Net Asset Value per Unit would be less than $15.00.

The Manager will assess the ability to pay distributions, and the amount thereof, on a monthly basis.

GFV.PR.A had asset coverage of 1.5+:1 as of November 13. The issue has a monthly retraction feature:

Preferred Shares may be surrendered at any time for retraction by the Company and will be retracted on a monthly basis on the second last business day of each month (a “Valuation Date”). Preferred Shares surrendered for retraction by a holder of Preferred Shares at least ten business days prior to a Valuation Date will be retracted on such Valuation Date and payment of proceeds will be made on or before the tenth business day following such Valuation Date. Except in the case
of the Annual Concurrent Retraction described below, holders retracting a Preferred Share will be entitled to receive an amount per Preferred Share equal to the lesser of: (i) 96% of the Net Asset Value per Unit (as defined herein) determined as of the relevant Valuation Date less the cost to the Company of the purchase of a Class A Share in the market for cancellation; and (ii) $10.00. The cost of the purchase of a Class A Share will include the purchase price of the Class A Share, commission and such other costs, if any, related to the liquidation of any portion of the Portfolio required to fund such purchase (not exceeding 1% of Net Asset Value per Unit). See “Details of the Offering – Certain Provisions of the Preferred Shares – Retraction
Privileges”.

The Annual Concurrent Retraction is in September.

The first trade of the Capital Units after the November 13 NAV was on Nov. 17, when they closed at 5.01. The Preferred Shares closed at $8.75 on November 14.

The estimated monthly retraction price using the last valuation data is:
R = 96% (NAV – C)
R = 96% (15.42 – 5.01)
R = 96% (10) … [Maximum Value]
R = $9.60

The monthly retraction feature is supportive … but mind you, the capital units closed today at 4.95-65, 62×2 and presumably the NAV is now below $15.00. The Preferreds closed at 8.86-54, 7×5.

GFV.PR.A was last mentioned on PrefBlog in the report that it had been caught up in the DBRS Mass Review of Splits. GFV.PR.A is not tracked by HIMIPref™.

Assiduous readers will be well aware of my disdain for market timing. The market goes up, the market goes down … the characteristics of the asset class don’t change very quickly and the steady drip, drip, drip of dividends eventually overwhelms the transient excitement of day to day noise. You just have to make sure you’re well diversified, invest in companies of good, solid investment grade, don’t get excited … and did I mention diversification? Lightning can strike at any time and you should never be in a position where it can wipe you out.

Up, down, piffle, that’s what I say!

But I do get highly annoyed when I see the market behaving in a stupid way. You wan’t to say a proper risk premium is 20bp – that’s fine. You want to say the risk premium should be 1000bp – that’s fine too. I don’t have any problems with that. We all have our individual investment objectives, risk tolerances, views on predicted apocalypses … overall market spreads, their proper levels and interpretation are always open for discussion and analysis.

But let’s not be stupid, OK? Let’s not be like the June 2008 market when it appeared that the market assigned a negative value to embedded call options. And let’s have similar issues from a single issuer at least trade within shouting distance of each other!

Almost a year ago, I wrote a post on yield differences, amazed that the market for Weston Prefs could be so inefficient. It’s true, of course, that there are fewer players in the Pfd-3 playground and so a certain lack of efficiency is to be expected … but never-the-less, a 34bp spread between the high- and low-yielding Weston Pref was rather extreme. I also looked at the spreads on investment-grade issuers at that time, just to show what a more efficient market looked like.

And now I’m going to update that table to last night’s close:

The fund I manage, Malachite Aggressive Preferred Fund, has been doing quite a bit of intra-issuer trading in the past several months – I highlighted an example of this for August 2008. These wide intra-issuer spreads are symptiomatic of a market starved for liquidity – suppliers of that liquidity can (if patient) very often get an extremely good price for it.

Financial 15 Split Corp. II has announced:

its regular monthly distribution of $0.04375 for each Preferred share ($0.525 annually). Distributions are payable December 10, 2008 to shareholders on record as at November 28, 2008. There will not be a distribution paid to Financial 15 II Class A Shares for November 28, 2008 as per the Prospectus which states no regular monthly dividends or other distributions will be paid on the Class A Shares in any month as long as the net asset value per unit is equal to or less than $15.00. The Net Asset Value as of November 14, 2008 was $14.06.

FFN.PR.A was last mentioned on PrefBlog when it implored unitholders NOT TO PANIC!!!!. There was a query regarding possible suspension of dividends on this thread; I concurred with the querant’s suggestion; both comments were posted *ahem* after the time-stamp of the press release. Well, it still hasn’t been posted on the fund’s website as of noon, that’s all I can say!

The monthly retraction feature for FFN.PR.A is supportive:

Holders retracting a Preferred Share will be entitled to receive an amount per Preferred Share equal to the lesser of (a) $10.00 and (b) 96% of the Net Asset Value per Unit determined as of the Retraction Date less the cost to the Company of the purchase of a Class A Share in the market for cancellation and less any related commissions and other costs (to a maximum of 1% of the Net Asset Value per Unit). Payment for any shares so retracted will be made within 15 days of the Retraction Date.

NAV on November 14 was $14.06. The capital units closed that day at $7.01; the preferreds closed at $7.00. Support was only mild as of that day’s prices (what on earth were the capital units doing, trading at a 75% premium to their NAV?) but today looks much better.

As I write this, FFN is quoted at 4.75-99 (still way above NAV!) and FFN.PR.A is quoted at $6.06-24. Using XFN as a proxy (not a particularly good proxy, since it’s all Canadian, and FFN is 1/3 American) … it closed at $18.60 on the 14th and is now trading at $17.12. That’s a loss on XFN of 8% in the period, so estimate the current NAV of FFN + FFN.PR.A units at $14.06 * 0.92 = 12.93.

Estimated Retraction Price:
R = 96% (NAV – C)
R = 96% (12.93 – 4.93) …. [cheating on the price a little bit!]
R = 96% (8.00)
R = $7.68.

So even with grossly over-valued capital units (although option players might have something to say about the value of the capital unitholders’ options) the monthly retraction is now looking extremely profitable.

Update, 2008-11-20: I have received the following communication from a very nervous Assiduous Reader:

I noticed your post on prefblog.com yesterday about FFN.PR.A. With coverage of the preferreds at 1.4:1 now and with today’s sharp declines in the price of Canadian financials, which make up the bulk of FFN’s assets, isn’t there a danger that it won’t pay dividends on the preferreds next month? Wouldn’t that also lead to a downward revision of
the NAV for the next monthly retraction?

Asset coverage of 1.4:1 is a lot. Maybe not when considering the long term, and maybe not when the underlying security is Consolidated Internet Mines & Telecom, Inc., but when the time scale is a matter of days and the underlying is blue-chip (well … as blue as they get, nowadays!) financials, it’s a lot. Asset coverage of 1.4:1 means the the underlying has to drop by 1 – (1/1.4) = 29% before the preferred shareholders become exposed to loss … and remember, that’s EXPOSED to loss, I’m talking about! At that point (asset coverage of 1:1), they basically own the portfolio of underlying equities.

My XFN proxy is now trading at 15.66, down a lot from the 17.12 I used above. That’s a loss of
about 8.5%, so estimate the current NAV of FFN + FFN.PR.A units at $12.93 * 0.915 = 11.83. This is incredible. Look at the 10-day chart:

This is epic. I pointed out the epic nature of this crash on October 31 and now it’s even … um … more epic.

And you STILL have asset coverage of just under 1.2:1; the underlying can STILL go down ANOTHER 15%-odd; the capital unit-holders can lose even more money – before the preferred shareholders even have direct exposure. They haven’t lost anything at that point, not even on paper; but it takes all this before they can even become exposed.

So while the cushion is being eroded, there’s still a cushion.

As far as the preferred share dividends are concerned … well, the company can suspend them any time they like. That would be an enormous step and I consider it highly unlikely. Now that the capital unit dividends have been suspended, the company is cash-flow positive after expenses and dividends (assuming constancy of incoming dividends) and their assets are easy to sell if they need some money. I can remember only one case in which a split-shares’ preferred dividends were suspended … that was GT.PR.A a few years back. I suspect that they wanted to suspend dividends to the capital units when their NAV got low, but there was no mechanism in the prospectus regarding an NAV test – so they left one single dividend on the preferreds unpaid, restarted preferred payments and left capital units hanging out to dry … because capital unitholders, under the terms of GT.PR.A’s prospectus, could not receive dividends if the company was in default to the preferreds.

Your concerns about a dividend cut on the preferreds are … well, nothing’s impossible, but the probability is miniscule. And anyway, the dividends are cumulative. On windup of the company, the preferred shareholders would get their $10 principal and all unpaid dividends before the capital unitholders saw a single penny.

However, non-payment of preferred dividends would have no effect on NAV. The cash would remain in the company, but so would a liability for unpaid dividends. There could well be an effect on market price, however!

You seem extremely worried about the FFN.PR.A position you hold. Although your worries seem overblown to me, it’s your money, not mine! You may wish to consider reducing your position to the point where you can sleep again … but I earnestly suggest that if you do reduce, you give consideration to retraction rather than market sale, because selling into this market is a highly unpleasant experience.

Sentry Select has announced:

that, in accordance with its initial terms, the Trust’s capital units and preferred securities will be delisted from the Toronto Stock Exchange at the close of business on Monday, November 24, 2008. The delisting of the capital units and preferred securities is being done in preparation for the conversion of the Trust into an open-ended mutual fund (the “Conversion”), which is expected to occur on December 2, 2008. The Trust’s preferred securities will mature prior to the Conversion, on December 1, 2008 (the “Maturity Date”). The Manager currently has sufficient cash on hand to repay the preferred securities and any other payment obligations on the Maturity Date.

It is Sentry Select’s current intention to merge the converted Trust with Sentry Select Canadian Income Fund (“CIF”) in early 2009 (the “Merger”). The Merger would be subject to any applicable unitholder and regulatory approvals. Following the Conversion and until further notice, Sentry Select anticipates that the Trust will pay a monthly distribution of $0.027 per unit, which, based on the net asset value per capital unit of $4.13 at the close of business on November 17, 2008, will provide unitholders with a yield of 7.85%. This yield would be similar to the yield of CIF, which was approximately 7.88% as of the close of business on November 17, 2008.

SFO was mentioned on PrefBlog when dividends on capital units were suspended. SFO.PR.A is not tracked by HIMIPref™.

CIX Split Corp. has announced:

that it will seek the approval of its shareholders to change the investment objectives, strategies and restrictions of the Corporation (the “Mandate Change”) to reflect that the Corporation will invest substantially all of its assets in common shares of the corporate successor (“CI Financial”) to CI Financial Income Fund (the “Income Fund”) if the Income Fund is successful in converting to a corporation. On October 15, 2008, the Income Fund announced its intention to convert its structure from an income trust to a corporation at the end of 2008, subject to receipt of all necessary unitholder, court and other approvals.

Currently, the Corporation has invested part of its assets in trust units of the Income Fund and the balance of its assets in a portfolio of common shares of Canadian public companies which, under a forward purchase and sale agreement, the Corporation has agreed to sell to a counterparty for a purchase price calculated by reference to the market value of a reference number of trust units of the Income Fund. As part of the Mandate Change, the Corporation also will complete the early settlement of the sale of its common share portfolio to the counterparty. The Corporation will invest the proceeds from such sale in common shares of CI Financial.

The Mandate Change also will include deleting from the Corporation’s investment objectives respecting its Class A Shares the reference to targeted monthly cash distributions. The Corporation is precluded by the terms of the Class A Shares from paying distributions thereon when the net asset value per unit (one Class A Share and one Priority Equity Share, together) is equal to or less than $15.00. Due to prevailing market conditions, it is no longer realistic for the Corporation to pursue an objective of targeted monthly cash distributions on the Class A Shares.

If the Mandate Change is not approved, the Corporation also will seek the approval of its shareholders to terminate the Corporation on or about December 31, 2008 since the Corporation will be unable to comply with its current investment objectives, strategies and restrictions after the Income Fund completes its reorganization into CI Financial.

A meeting of the shareholders of the Corporation will be held on or about December 23, 2008 to approve either the Mandate Change or the early termination of the Corporation. Shareholders of record at the close of business on November 22, 2008 will be entitled to receive notice of the
meeting. If the Mandate Change is approved and implemented, shareholders who do not wish to continue holding their shares of the Corporation may either dispose of their shares or exercise one of the retraction rights attached to their shares. Shareholders will not have a right under corporate laws to dissent from the Mandate Change.

CXC.PR.A had Asset Coverage of 1.2+:1 as of November 18, according to CI Investments, and closed today at 8.71-00, 1×5, while the capital units closed at 2.52-69.

According to the prospectus:

The following matters require the approval of the holders of Priority Equity Shares and Class A Shares by a two thirds majority vote (other than matters referred to in paragraphs (c), (f) and (g), which require approval of a simple majority vote) at a meeting called and held for such purpose:
(a) a change to the fundamental investment objectives and strategy of the Company;
…
Each Priority Equity Share and Class A Share will have one vote at such a meeting and will not vote separately as a class in respect of any vote taken (except for a vote in respect of the matters referred to in paragraphs (a), (b), (g) and (h) above and any other matters referred to above if a class is affected by the matter in a manner different from the other classes of shares of the Company). Ten per cent of the outstanding Priority Equity Shares and Class A Shares, as a group, or, where shares of a class vote separately, ten percent of the outstanding shares of that class, represented in person or by proxy at the meeting will constitute a quorum. If no quorum is present, the holders of Priority Equity Shares and Class A Shares then present will constitute a quorum at an adjourned meeting.

Given that monthly retraction rights are:

Holders retracting a Priority Equity Share on a Monthly Retraction Date will be entitled to receive an amount per Priority Equity Share equal to the lesser of: (i) $10.00; and (ii) 96% of the amount, if any, by which the net asset value per Unit on the relevant Monthly Retraction Date exceeds the cost to the Company of acquiring a Class A Share for cancellation. The cost of acquiring a Class A Share will include the price of the Class A Share, commission, and such other costs, if any, related to the partial ettlement of the Forward Agreement to fund such retraction.

… it is clearly in the interest of the preferred shareholders to vote no, have the company wound up and (almost certainly? very probably?) receive par value for their shares.

CXC.PR.A was last mentioned on PrefBlog when distributions to capital unitholders were suspended. CXC.PR.A is not tracked by HIMIPref™.

Faircourt Asset Management has announced:

that the Trust has received a receipt for the final short form prospectus in each of the provinces of Canada in connection with the previously announced distribution of rights to its unitholders (the “Rights Offering”).

Under the Rights Offering, holders of units of the Trust as of November 25, 2008 (the “Record Date”) will receive one right for each trust unit held. Each right will entitle the holder thereof to purchase one trust unit at a price (the “Subscription Price”) of $3.00 per trust unit, being 86.0% of the net asset value of a trust unit as at November 14, 2008 and 93.2% of the volume weighted average price of a trust unit on the Toronto Stock Exchange (the “TSX”) during the five trading days ended November 14, 2008 (both rounded to the nearest cent). The rights may be exercised for a period commencing on November 26, 2008 and ending at 4:00pm (Toronto time) on December 19, 2008.

The Rights will be listed on the TSX under the symbol FIG.RT and will commence trading on November 21, 2008.

Each holder of rights who subscribed for all of the trust units to which the holder is entitled under the basis subscription privilege may subscribe for any number of additional trust units, if available, at a price equal to the Subscription Price for each additional trust unit, subject to
availability.

The Trust will use the net proceeds of this issue to increase capital for investment and reduce leverage associated with the preferred securities of the Trust.

The NAV of the Fund’s Capital Units was $3.07 as of November 17, and there were 0.71 Capital Units per Preferred. Successful completion of the entire offering – by no means a given – would imply asset coverage of 1.4+:1 for the preferreds – still not very good!

Very strange. I’ve received two inquiries from investors recently via intermediaries regarding Quebecor World preferred shares (IQW.PR.C & IQW.PR.D). There are probably others who are wondering … so I’ll review the situation:

I regret that I must advise that the Quebecor World preferred shares are almost certainly worthless.

Dividends on the preferreds were suspended in November 2007. They entered bankruptcy protection in January after defaulting on an interest payment to senior bonds; an auction held on Credit Default Swaps referencing that debt indicated that the market valued senior bonds at 41.25 cents on the dollar.

The company continues to operate. The next date of interest is December 5, when all claims from creditors must be received but continues to have a negative net worth of about $1-billion.

The company notes:

In light of the Insolvency Proceedings, it is unlikely that the Company’s existing Multiple Voting Shares, Redeemable First Preferred Shares and Subordinate Voting Shares will have any material value following the approval of a Plan. There is a risk such shares could be cancelled.

HIMIPref™ no longer tracks IQW.PR.C or IQW.PR.D, as the low price was causing “sanity checks” in the programming to indicate errors.