PrefBlog

NB Split Corp. announced today (via CCN Matthews) that “it has filed and received a receipt dated January 30, 2007, from the securities regulators of all the Canadian provinces, for the final prospectus for the initial public offering of Capital Shares and Preferred Shares of the Company”.

This is not an issue that I intend to add to the HIMIPref™ database as I do not think the preferred shares will be tradeable for long. This is irritation, because NB Split has a spiffy website, but the terms of the prefs are not quite so spiffy.

They carry a 4.75% annual dividend and have been provisionally rated Pfd-2(low) by DBRS. Closing of the offering should be on or about February 22, 2007, and the company intends to wind up Feb 15, 2012. So far so good.

BUT there is an annual redemption at par in order to match the number of Capital Units retracted as a “Special Annual Retraction”. And there are no provisions to halt (admittedly skimpy) distributions to the Capital Unitholder Scum if asset coverage declines below a threshold.

Given the high coupon attached to these things, I suggest that immediately upon issue they will rise in price to a premium above par that will leave the currentYield at an attractive level while leaving the yieldToWorst at an unattractive level. They will, at such levels, contain a huge amount of call risk – great to hold, as long as they don’t get called!

Mind you, anybody able to sweet-talk their broker into giving them an allocation of the prefs at par without having to buy Capital Units should make some good money from the flip. Send me the name of your broker!

So, unless captured by a band of marauding clients and tortured, I do not intend to add these shares to the HIMIPref™ database.

This is a new split share sponsored by Connor, Clark & Lunn Capital Markets that invests mainly in … Financials & Utilities! Mind you, about one-quarter of the indicative portfolio is REITs, but the sponsor considers them to be financial issuers and notes that they are part of the S&P/TSX Financial Sub-Index.

This split has an innovative Leveraging/De-Leveraging mechanism. If they make all kinds of money in the investment portfolio, leverage will necessarily decline. To counteract this they will, “subject to confirmation at the time from DBRS that the Pfd-1 rating of the Preferred Shares will not be impacted”, go out and borrow money to restore their leveraging factor. Conversely, if they don’t do so well, they will sell off securities so that the portfolio has cash & equivalents equal to the redemption value of the Preferred Shares.

For example, if the value of the Portfolio were to fall to approximately $15.50 per Unit … the Leverage Agent would proceed to sell Portfolio Securities having a value of $10 (for each Unit) and would invest the proceeds in cash and cash equivalents. At such time, the aggregate NAV of the Class A Shares (approximately $5.50 per Class A Share) would continue to be fully invested in the Portfolio. If the NAV per Class A Share thereafter grew to approximately $7.37, the Leverage Agent would, upon instructions from the Manager, sell the cash equivalents and the Manager would re-invest the cash and proceeds from the sale of cash equivalents in securities of the Portfolio.

A de-leveraging event will also occur in the event that the Interest Coverage Ratio is less than 1.5 for any calendar quarter. The estimated Interest Coverage Ratio at inception is approximately 1.64

As noted above, the Preferred Shares have been provisionally rated Pfd-1 by DBRS. 

There are the usual provisions for Monthly Retraction (very expensive, for idiots only) and Annual Concurrent Retraction (get the NAV for each unit [Capital Unit & Preferred] submitted, less costs). The preferreds are not callable – Capital Unit Holders wishing to redeem must either buy one themselves or get the company to do it in the marketplace for them. This is a very good feature – even better than declining call premia – and I like it!

The Preferred Shares will be redeemed by the Company on January 31, 2012. 

Anticipated closing is February 6, or a later date to be agreed by the Company and Agents that is on or before February 28.

I have not yet subjected this issue to a thorough analysis, but will post such analysis when I have done so. However, the preferred shares look very attractive at the offer price of $10.00 … 4.25% is hard to come by for any retractible, and these are Pfd-1. At the Ontario Equivalency Factor (Fat Cat Version) of 1.4, this is equivalent to a five year bond paying 5.95%.

The only downside is liquidity: A maximum of 5-million shares at $10 is being issued, so it’s not the biggest gorilla in the zoo. Still, given the redemption provisions, there should be sufficient liquidity for reasonable and patient investors for the term of the shares.

A hat-tip to the reader who brought this to my attention!

Update, 2007-02-05 According to the TSX, this will commence trading 2007-02-06 with the symbol CFS.PR.A