PrefBlog

STRATA Income Fund has announced:

its intention to make a normal course issuer bid for its Capital Units and Preferred Securities through the facilities of the Toronto Stock Exchange (the “TSX”). This normal course issuer bid is intended to commence on March 8, 2007 and will terminate on March 7, 2008. In accordance with the Declaration of Trust by which STRATA is governed, market purchases pursuant to its normal course issuer bid may be effected by the Fund.
    At February 27, 2007 there were 9,215,056 Capital Units and 6,214,711 Preferred Securities issued and outstanding including 9,211,056 Capital Units and 6,209,696 Preferred Securities in the public float. STRATA may, during the 12 month period commencing March 8, 2007 purchase on the TSX up to 921,105 Capital Units and 620,969 Preferred Securities, being 10% of the respective public floats. Since March 8, 2006, STRATA has purchased 6,100 Capital Units at an average price of $8.40 per Capital Unit under its previously approved normal course issuer bid. STRATA believes that its Capital Units and Preferred Securities represent good value for the Fund and purchases under the normal course issuer bid may serve to enhance returns to securityholders.

A reasonable course of action, given that the capital units’ NAV is $9.30 and the capital units closed on the TSX at $8.00!

We shall see how far (if at all!) the price of preferred securities goes up in response to the bid … the recent partial redemption at $10.60 has already been a windfall to holders!

Lawrence Asset Management has released its Dec. 31/06 Financials for this split-share. This is a small-ish split-share corporation in which I take an inordinate amount of interest, which I can only attempt to justify by its unusual structure and my feeling that DBRS has got the credit rating on it wrong. Really wrong, as I argued in my previous post on the topic. So .. let’s have a quick look at some simplified financials:

Note the balance sheet value of the Junior Prefs. 18,523 (thousand). This is less than the redemption value of 1,322,726 (shares) x $14.70 (per share) = 19,444,072, because they don’t have the money. However, it has improved a little since last time!

Looking at the income statement, we simplify it to:

Note that the “Increase in Carrying Value of Junior Prefs” is a bookkeeping identity: All profit and loss that would otherwise accrue to equity holders will be charged or credited to the Junior Prefs’ carrying value until such time as this carrying value (i) is equal to the redemption value, or (ii) is wiped out.

So there’s some good news in the above to the Junior Pref Holders! Their carrying value increased, since the company was able to make more money from investments than it paid out in distributions.

In fact, distributions + change = $1,958M on total assets (at June 30, 2005) of $52,085M, so we can ballpark the investment return as +3.8% over the six month period. Which isn’t bad, until you look at their investment mandate:

To provide the Company with the means to meet its investment objectives with respect to the Series 2 Shares and the Equity Shares, the proceeds of the Offering, net of Offering expenses and the amount used to acquire the Series 1 Repayment Portfolio, will be invested in a diversified portfolio (the ‘‘Managed Portfolio’’) consisting of shares of American companies that have a market capitalization of greater than U.S.$2 billion or companies which form part of the S&P 500 Index, and shares of Canadian public companies which form part of the S&P/TSX 60 Index. The direct holding of shares of American companies is limited so that the Offered Shares will not be foreign property under the Tax Act. Up to 25% of the Managed Portfolio may be invested in units or similar equity securities of Income Funds as the Investment Manager deems appropriate. In addition, up to 15% of the Managed Portfolio may be invested in debt securities which are rated to be at least investment grade.

Over the same six month period, the S&P/TSX composite increased by 12.54% and the S&P 500 increased by 12.74% (in USD) or 17.88% (in CAD). You make the call as to whether these guys had a good six months or not!

When we look at asset coverage in the DBRS manner, we just cross off the pledged portfolio against the senior prefs (and completely ignore the fact that dividends have to be paid on the seniors in the interim) to get an asset coverage ratio changing over the last six months from 1.37:1 to 1.30:1. In other words, there is some reason to deprecate the apparent improvement in asset coverage as meaningless, because of the $1,236M in Gains over the period, $1,556M occurred in the Series 1 Repayment Portfolio, which is guaranteed anyway! The Managed Portfolio, which is supposed to pay off the Junior Prefs, took a loss of $320M!

Looking at the asset coverage in a more usual fashion, we find that (Total Assets) – (Misc Liabilities) – (Senior Prefs) = $18,523M which is supposed to cover the $19,444M Junior Pref Redemption Value, for coverage of 0.95:1, which is an improvement over the Jun 05 value … until, of course, one remembers the Forward Agreement, which kills off any such change since the increase in value was derived from the wrong pigeonhole.

According to me, this investment is just getting worse every time it’s looked at. And, according to Lawrence Asset, the NAVPS of the Juniors is $13.67, a coverage of 0.93:1 as of March 2 … although they report a coverage of 1.27x presumably due to incorporation of the Forward Agreement.

Which leads to a funny thought … say the pattern set by the last six months continues, and they make so much money in the Repayment Portfolio that it covers the Senior Prefs exactly, while the Managed Portfolio doesn’t move. In such a case, their reported asset coverage will go down, since the forward won’t be worth anything! Now, that would be funny!

HPF.PR.B closed today at $15.25-35, 112×14 – a nice sized bid! Not a bid I understand very well, though.