PrefBlog

Assiduous Reader liketoretire gives me a well-deserved kick for not reporting yesterday’s announcement from Morgan Meighan:

as a result of market conditions and a dividend payment restriction contained in its Class A, Series 2 and Series 3 Preference Share provisions, it was not certain at today’s date whether the Company would be permitted to pay the $0.06 per common share dividend declared on October 15, 2008 to shareholders of record on November 28, 2008 and payable on December 15, 2008. The common shares will commence trading on the Toronto Stock Exchange (TSX) on an “ex dividend” basis at the opening of trading on Wednesday, November 26, 2008.

The dividend payment restriction provides that the Company shall not pay a dividend on its common shares unless after giving effect thereto, the ratio of its Assets to Obligations (both as defined in the Preference Share provisions) exceeds 2.5 times. As at the close of business on November 24, 2008, such ratio was approximately 2.6 times.
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The restriction does not affect the scheduled payment of dividends on the Series 2 and Series 3 Preference Shares on December 15, 2008, which will proceed as previously announced.

The two series of preferreds are of high quality, as might be deduced from the very high level of asset coverage required in order to maintain the common dividend.

At one point I was greater consternated to find that I had classified some of the CGI preferred issues as SplitShares and others as OperatingRetractibles. After some thought, I decided they were split shares – they don’t have an actual business, after all, and they’re backed by a portfolio of investments … ergo, SplitShares. There was one Assiduous Reader who strongly disagreed, but I held firm.

CGI.PR.A was redeemed.

CGI.PR.B & CGI.PR.C are both in the “Scraps” index, due to volume concerns.

BCE has announced:

the company has received a preliminary view from KPMG that, based on current market conditions, its analysis to date and the amount of indebtedness involved in the LBO financing, it does not expect to be in a position to deliver on the scheduled effective date of BCE’s privatization, December 11,2008, an opinion that BCE would meet the solvency tests as defined in the definitive agreement, as amended. The receipt at the effective time of a positive solvency opinion is a condition to the closing of the transaction. At the same time, KPMG indicated that BCE would meet all solvency tests under its current capital structure.

“BCE today enjoys solid investment grade credit ratings, has $2.8 billion of cash on hand, a low level of mid-term debt maturities, and continues to deliver solid operating results,” said George Cope, President and CEO of BCE and Bell.

“We are disappointed with KPMG’s preliminary view of post-transaction solvency, which is based on numerous assumptions and methodologies that we are currently reviewing. The company disagrees that the addition of the LBO debt would result in BCE not meeting the technical solvency definition,” said Siim Vanaselja, BCE’s Chief Financial Officer. The company continues to work with KPMG and the Purchaser to seek to satisfy all closing conditions. Should KPMG be unable to deliver a favourable opinion on December 11, 2008, however, the transaction is unlikely to proceed.

That gust of wind you just felt was a sigh of relief from the purchasers and financers. Bloomberg notes:

“The chances of any deal getting done are very low now,” said Sachin Shah, a merger arbitrage analyst with ICAP Corporates LLC in Jersey City, New Jersey. “Having BCE’s auditor call the deal insolvent is what’s surprising here. The market had been expecting that the banks would balk.”
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Citigroup Inc., Deutsche Bank AG, Toronto-Dominion Bank and Royal Bank of Scotland Group Plc are on the hook for about $34 billion for BCE, according to regulatory filings. The banks have sold debt that backed buyouts at discounts to face value to get the debt off their books. In the case of BCE, it would cost billions of dollars.

The average high-yield, high-risk loan is trading at about 66.6 cents on the dollar, just shy of the record, according to Standard & Poor’s LCD. Prices have plummeted almost 9 cents since Nov. 6 and 28.3 cents this year as investors in the debt have been forced to liquidate funds.

Preferred shares have plunged on light volume. I have uploaded a noon evaluation of the FixedFloater index which, unfortunately, could be more accurately referred to as the BCE index.

BCE has the following preferred shares outstanding: BCE.PR.A, BCE.PR.C, BCE.PR.D, BCE.PR.E, BCE.PR.F, BCE.PR.G, BCE.PR.H, BCE.PR.I, BCE.PR.R, BCE.PR.S, BCE.PR.T, BCE.PR.Y & BCE.PR.Z

The last dedicated post in this series was BCE / Teachers’ : A Giant Step Closer.

Update:DBRS has announced:

has today placed its ratings of BCE Acquisition Inc. (BAI), BCE Inc. and Bell Canada, a wholly owned subsidiary of BCE Inc. (BCE or the Company) Under Review with Developing Implications. This action follows BCE’s announcement today that based on preliminary indications it is unlikely that a condition – specifically, a positive solvency opinion – that was required upon closing the privatization of BCE on December 11, 2008, will be met.

DBRS notes that should the privatization not proceed as planned, DBRS expects to re-evaluate BCE and Bell Canada’s credit profiles and likely move the ratings of these entities to a strong investment-grade level.

Alternatively, should the privatization proceed as planned, DBRS’s current BB (low) issuer ratings on BAI and Bell Canada would remain in place. (See press release dated October 7, 2008.) However, should any element of the privatization change, DBRS would re-evaluate the appropriateness of these BB (low) issuer ratings.

DBRS notes that the $52 billion privatization of BCE was originally announced on June 30, 2007, and led by Ontario Teachers’ Pension Plan Board, Providence Equity Partners Inc. and Madison Dearborn Partners, LLC. Subsequently, Merrill Lynch took up an equity commitment as a principal investor. Collectively, as part of the agreement, as amended, the sponsors will invest approximately $7.75 billion in equity (possibly lower due to cash accumulation at BCE) to fund this privatization, with the remainder in debt.

Update: The agreement is available as a “Material Document” in the BCE filings on SEDAR, dated July 5, 2007.

“Solvent” when used with respect to the Company, means that, as of any date of determination (a) the amount of the “fair saleable value” of the assets of the Company will, as of such date, exceed (i) the value of all “liabilities of the Company, including contingent and other liabilities,” as of such date, as such quoted terms are generally determined in accordance with Applicable Laws governing determinations of the insolvency of debtors, and (ii) the amount that will be required to pay the probable liabilities of the Company on its existing debts (including contingent and other liabilities) as such debts become absolute and mature, (b) the Company will not have, as of such date, an unreasonably small amount of capital for the operation of the businesses and
transactions in which it intends to engage or proposes to be engaged following the Effective Date, (c) the Company will be able to meet its obligations as they generally become due and to pay its liabilities, including contingent and other liabilities, as they mature, and (d) the aggregate of the property of the Company is, at a fair valuation, sufficient, or, if disposed of at a fairly conducted sale under legal process, would be sufficient, to enable payment of all its obligations, due and accruing due. For purposes of this definition, “not have an unreasonably small amount of capital for the operation of the businesses in which it is engaged or proposed to be engaged” and “able to pay its liabilities, including contingent and other liabilities, as they mature” means that the Company will be able to generate enough cash from operations, asset dispositions or refinancing, or a combination thereof, to meet its obligations as they become due;
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[Section 8.1 “Mutual Conditions Precedent”, (f), emphasis added] the Purchaser and the Company shall have received an opinion at the Effective Time from a nationally recognized valuation firm engaged by the Purchaser and agreed to by the Company, acting reasonably to the effect that the Company will, subject to certain qualifications, be Solvent as of the Effective Time and immediately after the consummation of the transactions contemplated by the Plan of Arrangement.

Industrial Alliance has announced:

Industrial Alliance Insurance and Financial Services Inc. (“Industrial Alliance” or the “Company”) announced today the successful completion of a Canadian public offering of 4 million of Non-Cumulative 5-Year Rate Reset Class A Preferred Shares Series C (the “Series C Preferred Shares”) from Industrial Alliance for sale to the public at a price of $25.00 per preferred share, representing aggregate gross proceeds of $100 million.

The offering was underwritten by a syndicate of investment dealers led by Scotia Capital Inc. The Series C Preferred Shares commence trading on the Toronto Stock Exchange today under the symbol IAG.PR.C.

It would appear that no additional shares were sold by way of the greenshoe noted in the original announcement

The issue traded 115,300 shares in a range of 23.90-40, indicating that at least some of the issue made it off the underwriter’s shelves. It closed at 23.80-90, 100×4.

At the bid price, the YTW is 6.38% based on a Canada Five-Year rate of 2.57% and a limitMaturity. The “5-Year Yield” is 7.38%, based on a hoped for, but currently unlikely, call at par 2014-1-30.

The perpetual, IAG.PR.A, closed at 12.75-71 to yield 9.26% based on the bid price of 12.75 and a limitMaturity (yield from the ask is 8.54%). However you slice it, the spread vs. the straight is well over 200bp. Given that the 5-to-Long spread on Canadas is currently about 150bp I’d say the spreads between the straight perpetual yield and the Fixed-Reset’s Yield to Worst (not the five-year-call-yield) should be 100bp absolute maximum, and – I’m guessing, I can’t point to any analysis here and suspect that any such analysis would be … er … suspect – probably more like 60bp.

So, to me, these are still expensive. But I was saying that last spring and then look what happened!

M-Split Corp has announced (emphasis added):

Since the inception of the Company on April 18, 2007 the price of Manulife has declined 52% from $41.08 to $19.75 as of November 24, 2008. This sharp decline in Manulife has resulted in the Company’s net asset value being reduced significantly and as mentioned in the previous update, has required the Company to implement the Priority Equity Portfolio Protection Plan in accordance with the prospectus. The plan’s objective was to provide that the Priority Equity Share Repayment amount would be paid in full on the termination date (December 1, 2014). Due to the recent decline in Manulife’s share price of 20% during the week ended November 21, the Company has dramatically decreased its exposure to Manulife under the requirements of the plan.

The Company’s total net asset value is approximately $9.01 per unit as at November 24, 2008, consisting of $6.43 per unit in cash and permitted repayment securities (current value) and $2.58 in Manulife exposure per Unit. The permitted repayment securities have an estimated forward value of approximately $8.04 at maturity in 2014. The reduced exposure to Manulife will materially limit the future impact of price movements of Manulife shares on the net asset value of the Company and lower the ability of the Company to generate income from dividends and its covered call option writing program.

The combined trading prices of both classes of the Company’s shares are trading at a substantial discount to the current net asset value per unit. In addition, the significant price decline in Manulife shares since inception of the Company has made it difficult to achieve the original stated objectives for both classes of shares. As a result, the Company is reviewing options to maximize shareholder value that may include but not limited to establishing a normal course issuer’s bid and initiating proposals (subject to shareholder vote) to reorganize the Company.

The Company’s portfolio is continually rebalanced and adjusted based on market conditions to provide both security for Priority Equity shareholders and upside potential for Class A shareholders. The Company may buy or sell additional shares of Manulife, the permitted repayment securities, and or option positions based on market conditions and provided that the Company remains in compliance with the Priority Equity Protection Plan.

With respect to the net value of the firm, they have stroked the nail right on the button. XMF closed today at 0.91-1.15, 10×2. XMF.PR.A closed at 6.88-49, 51×28; which may be compared to “total net asset value is approximately $9.01 per unit as at November 24, 2008, consisting of $6.43 per unit in cash and permitted repayment securities (current value) and $2.58 in Manulife exposure per Unit.”. I confess I haven’t checked to see what retraction options there might be; nor have I looked at the effects of fees and expenses on NAV over time.

The previous mention of XMF.PR.A on PrefBlog noted the suspension of dividends on capital units. XMF.PR.A is not tracked by HIMIPref™.

Commerce Split Corp has announced (emphasis added):

Since the inception of the Company on February 16, 2007 the price of CIBC has declined 58% from $102.15 to $43.19 as of November 24, 2008. This sharp decline in CIBC has resulted in the Company’s net asset value being reduced significantly and as mentioned in previous updates, has required the Company to implement the Priority Equity Portfolio Protection Plan in accordance with the prospectus. The plan’s objective was to provide that the Priority Equity Share Repayment amount would be paid in full on the termination date (December 1, 2014). Due to the recent decline in CIBC’s share price of 21% during the week ended November 21, the Company has dramatically decreased its exposure to CIBC under the requirements of the plan.

The Company’s total net asset value is approximately $8.80 per unit as at November 24, 2008, consisting of $7.25 per unit in cash and permitted repayment securities (current value) and $1.55 in CIBC exposure per Unit. The permitted repayment securities have an estimated forward value of approximately $9.06 at maturity in 2014. The reduced exposure to CIBC will materially limit the future impact of price movements of CIBC shares on the net asset value of the Company and lower the ability of the Company to generate income from dividends and its covered call option writing program.

The combined trading prices of both classes of the Company’s shares are trading at a substantial discount to the current net asset value per unit. In addition, the significant price decline in CIBC shares since inception of the Fund has made it difficult to achieve the original stated objectives for both classes of shares. As a result, the Company is reviewing options to maximize shareholder value that may include but not limited to establishing a normal course issuer’s bid and initiating proposals (subject to shareholder vote) to reorganize the Company.

The Company’s portfolio is continually rebalanced and adjusted based on market conditions to provide both security for Priority Equity shareholders and upside potential for Class A shareholders. The Company may buy or sell additional shares of CIBC, the permitted repayment securities, and or option positions based on market conditions and provided that the Company remains in compliance with the Priority Equity Protection Plan.

They’re right, you know. XCM closed today with a quote of $1.11-29, 10×4; XCM.PR.A closed at $6.02-24, 5×3, compared to “total net asset value is approximately $8.80 per unit as at November 24, 2008, consisting of $7.25 per unit in cash and permitted repayment securities (current value) and $1.55 in CIBC exposure per Unit”

There are 8.667-million units outstanding, according to the TSX.

XCM.PR.A’s Protection-Plan Status has been previously reported on PrefBlog. XCM.PR.A is not tracked by HIMIPref™.