PrefBlog

BMO has announced:

that on November 25, 2008, it will redeem all of its Non-Cumulative Class B Preferred Shares Series 6. The redemption price, as provided for in the terms of the issue, is $25.00 per share.

Separately from the redemption price, the final quarterly dividend of $0.296875 per share for the Series 6 shares will be paid in the usual manner on November 25, 2008 to shareholders of record on October 31, 2008.

Formal notice will be issued to shareholders in accordance with the share conditions. The redemption of the Series 6 shares is part of the Bank’s ongoing management of its Tier 1 capital.

BMO.PR.I was added to the TXPR index in July 2007. The issue was discussed at length in November 2006. It is tracked by HIMIPref™ and (volume permitting, which is almost certain) will continue to be included in the Operating Retractible index until redemption.

WFS.PR.A is an interesting issue and the fund was long at the end of August (current position not disclosed). With nearly 12.8-million shares outstanding (par value $10), it’s one of the bigger issues included in the SplitShare index.

It’s currently quoted at 8.55-04, 6×10. Some trades have gone through today at 8.50. The capital units are quoted at 4.62-84, 10×4. It’s hard to get a big position in these things, but patience is a virtue.

As with many split-share corporations, the prospectus for WFS describes a monthly retraction feature:

Regular Retraction: Preferred Shares may be surrendered at any time for retraction by the Company but will be retracted only on a monthly Valuation Date (as defined below). Preferred Shares surrendered for retraction by a holder of Preferred Shares at least five (5) business days prior to the last day of the month (a ‘‘Valuation Date’’) will be retracted on such Valuation Date and such shareholder will receive payment on or before the eighth business day following such Valuation Date. Shareholders whose Preferred Shares are retracted on a Valuation Date will be entitled to receive a retraction price per share equal to 96% of the lesser of (i) the NAV per Unit 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. See ‘‘Details of the Offering — Certain Provisions of the Preferred Shares — Retraction Privileges.’’

These monthly retractions are, in normal times, of very little interest to preferred shareholders and are neither noted on PrefInfo nor accounted for by HIMIPref™. But these are not normal times.

According to Mulvihill the NAV for WFS as of September 11 was $15.93.

Given the quote on WFS, there’s a pretty good chance (but only a chance!) that a preferred shareholder tendering for monthly retraction would find that the company had purchased the matching capital unit for less than $5.93 and that he would therefore receive (96% of $10.00) less liquidation costs; call it $9.50. There are lots of them trading now for less than $9.00 … this wouldn’t be a bad return at all for two weeks work!

There are risks, of course. There are always risks.

• The NAV could decline precipituously between the Sep 11 valuation noted and the Valuation Date. I think that the Valuation Date will be September 23, but anybody trying this should check with the company
• The company might pay more than net-NAV to purchase the matching capital unit (though the last trade was about 24% less than net-NAV).

It should be noted that as of June 30, the fund’s portfolio was 23.1% cash. I do not know whether more recent information is available.

There are risks, to be sure. But some investors might calculate that the risk/reward profile of taking a position below $9.00 and tendering for monthly retraction is worthwhile.

I have not checked the mechanics of such a move. It might be too late to initiate this for the September Valuation Date, given settlement times and delivery times … but, perhaps, an investor with a position in WFS.PR.A that he likes might buy additional shares in the next few days and tender out of his extant holdings. Or, to look at things arsey-versey, if he has an investment in WFS.PR.A that he doesn’t like, there is the potential for tendering rather than selling.

An Assiduous Reader wrote in:

Hi James: I have been tracking your recommendations supplied through Cdn Moneysaver.
I know you had covered this interest bearing preferred and wondered if it is still on your recommended list.
I was especially concerned with the EPS of negative 3.51 on this stock.

Thank you for the Moneysaver articles’ and your educational blog site.

Negative 3.51? That doesn’t tie in with anything I remember! So I asked for the source:

this is the GlobeInvestor site I referenced…

http://www.globeinvestor.com/servlet/Page/document/v5/data/stock?id=BSD.PR.A-T&pi_sponsor=

Thank you.

And hey, looky looky! He’s right! It says right there: EPS -3.51. There’s even a graph:

This is very odd, and not just because I don’t understand how the x-axis of the graph is labelled. I don’t understand this -3.51 business at all … which seems to be tied in (somehow) with a gross loss of 23.96-million, except that I don’t really understand how they labelled their table, either.

When in doubt, go to source documents! On the fund’s report page are annuals and quarterlies to 2Q08. After poking around a while, we open the full annual report for 2007 … and there it is. A loss of 23.96-million. In 2006.

The Globe & Mail – or their data supplier – might wish to update their figures.

Incidentally, looking at the 2Q08 Report, we derive the following table:

Note that in addition to the $1,359 return of capital, the capital unitholders also got $1,505 from net investment income.

The important thing to take from the table, however, is that Income after fees & expenses, but before Preferred Share distributions was $5,200 – $805, or $4,395. Since preferred share distributions are $1,705, income coverage is about 2.6:1, a very good figure. It’s not just a fluke – the figure for 2007 was 2.8:1.

There’s no guarantees this will continue to be the case, especially since the fund has a heavy weighting in resources. But that’s an excellent figure for Income Coverage.

Asset coverage has been bruised over the past year, but remains at just under 1.5:1 as of September 12, according to the company. Besides the layer of capital protection, preferred shares are protected by a covenant that there will be no distributions to Capital Unit Holders if the asset coverage thereby becomes less than 1.4.

Bottom line? Check source documents and make up your own minds (or subscribe to PrefLetter!). At the close last night, BSD.PR.A was bid at 8.88 to yield 8.33% (mostly as interest) until hardMaturity 2015-3-31 at 10.00.

BSD.PR.A is tracked by HIMIPref™ and incorporated in the InterestBearing index.

DBRS has announced:

has today changed the trend for the B (low) Issuer Rating and Pfd-5 (low) preferred share ratings of Nortel Networks Limited, Nortel Networks Corporation, and Nortel Networks Capital Corporation (collectively, Nortel or the Company), to Stable from Positive.

The rating action follows Nortel’s announcement today that: (1) a sustained and expanding economic downturn will pressure the Company’s operating and financial performance, (2) the Company will undergo further restructuring and cost reduction initiatives, and (3) the Company intends to explore a divestiture of its Metro Ethernet Networks (MEN) business.

DBRS had placed Nortel on Positive trend in July 2008. At the time, DBRS expected the Company could reasonably grow revenue in the low single-digit range, achieve gross margins comfortably above 40%, and grow and sustain operating margins above 8% (see separate press release dated July 14, 2008). DBRS had expected Nortel’s Enterprise Solutions and MEN businesses to be the primary drivers of expected operating improvement.

In light of Nortel’s revised business outlook, DBRS expects that the time horizon in which the Company can comfortably achieve these operating metrics has extended beyond what may be reasonable for the trend to remain Positive. Despite expected improvements in the gross margins (which are expected to remain above 40% at the end of the year), DBRS now anticipates that revenue growth and operating margin improvements will fall well short of previous expectations.

For the full year of 2008, DBRS now expects Nortel’s revenue to decline by just under 4% on a year-over-year basis, to roughly $10.6 billion, and operating margins are expected to remain well below 8% at the end of the year. DBRS expects Nortel’s liquidity to deteriorate slightly from historic levels, with the Company’s overall cash position declining to roughly $2.7 billion at the end of 2008.

With respect to its MEN business, while the impact of a divestiture on the Company’s consolidated financial and business risk profiles may be moderate, DBRS notes that exiting this business will remove the Company from a higher-growth segment, expected to be a partial driver of the Company’s overall operating improvement.

DBRS expects the long-term trend to remain Stable until DBRS can gain comfort on: (1) the relative mix in terms of the competitive and economic forces affecting the Company’s ability to achieve its long-term financial targets, (2) the impact on the Company’s financial and business risk profiles following any divestiture of the Company’s MEN business, and (3) Nortel’s long-term strategy to achieve meaningful and sustainable operating improvements in an intensely competitive and challenging operating environment.

Nortel prefs got hammered today, but not as badly as the stock:

Nortel, based in Toronto, fell $2.62, or 49 percent, to $2.68 at 4 p.m. in New York Stock Exchange composite trading, the biggest decline since July 1980, according to Bloomberg data.

The stock price has led to suggestions that a takeover is in order:

“The most likely option is that it will be acquired, either before or after a financial crisis,” suggested Duncan Stewart, president of Duncan Stewart Asset Management.

Stewart added that a deal might come before third-quarter earnings are released.

These issues were last mentioned on PrefBlog on March 10 in connection with their price differential:

NTL.PR.F closed today at 11.40-59, 10×7

NTL.PR.G closed today at 10.00-48, 15×10

Today,

• NTL.PR.F : 6.75-00, 10×5
• NTL.PR.G : 6.75-00, 3×15