PrefBlog

Dominion Bond Rating Service has announced that it:

has today updated the ratings of preferred shares issued by three split share companies and trusts (the Issuers): Energy Split Corporation, SNP Split Corp. and Utility Split Trust. The preferred shares of Energy Split Corporation have been upgraded to Pfd-3 from Pfd-3 (low), and the preferred shares/securities of SNP Split Corp. and Utility Split Trust have been confirmed at Pfd-3 (high) and Pfd-2 (low), respectively.

Each of the Issuers has invested in a portfolio of securities funded by the issuance of two classes of shares – dividend-yielding preferred shares (or securities) and capital shares (or units). The main form of credit enhancement available to preferred shares is a buffer of downside protection. Downside protection corresponds to the percentage decline in market value of a portfolio that must be experienced before the preferred shares would be in a loss position. The amount of downside protection available to preferred shares will fluctuate over time based on changes in the market value of the portfolio.

Today’s rating actions reflect generally upward trends in the net asset value (NAV) of the respective portfolios over the past year. In its surveillance of split share funds, DBRS reviews historical trends in downside protection and assigns greater weighting to more recent Issuer NAVs. Each of the Issuers has a scheduled termination date in 2011.

Energy Split Corporation is ES.PR.B, last mentioned on PrefBlog when it was upgraded to Pfd-3(low) by DBRS. ES.PR.B is not tracked by HIMIPref™, but it will be considered for inclusion in the database if they go for a term extension.

Doug Alexander of Bloomberg reports:

Canadian Imperial Bank of Commerce plans to spend any extra capital to redeem C$3.16 billion ($3.32 billion) in preferred shares that won’t count as regulatory capital under new banking rules, Chief Executive Officer Gerald McCaughey said.

“We do have an excess of Tier 1 capital today and in the future,” McCaughey, 55, said in an interview today. “A first step in terms of our usage of excess resources will be to reduce instruments that we have that are ineffective in the new environment.”

Canada’s fifth-biggest bank had a so-called Tier 1 capital ratio of 14.3 percent as of Jan. 31, second only to National Bank of Canada. The Toronto-based bank sold more than C$2.4 billion in preferred shares and other notes since August 2008 to shore up its balance sheet during the financial crisis.
…
“We will be looking at our non-common Tier 1 instruments in the near future,” McCaughey said in Winnipeg, Manitoba, after the bank’s annual meeting. “That allows us to deploy a certain amount of excess resources in a fashion that does help earnings per share.”

Share buybacks aren’t a priority for the Toronto-based bank, McCaughey said.

“We do not expect in the near term to be deploying that capital in activities such as buybacks,” he said.

This is fascinating. On the surface, it sounds as if they don’t intend any issuance of non-common Tier 1 at all – but I find that very hard to believe.

National Bank has announced:

the expiry of the Bank’s offers to purchase (the “Offers”) all of the issued and outstanding Non-Cumulative 5-Year Rate Reset First Preferred Shares Series 21 (the “Preferred Shares Series 21”), all of the issued and outstanding Non-Cumulative 5-Year Rate Reset First Preferred Shares Series 24 (the “Preferred Shares Series 24”), and all of the issued and outstanding Non-Cumulative 5-Year Rate Reset First Preferred Shares Series 26 (the “Preferred Shares Series 26”, and together with the Preferred Shares Series 21 and the Preferred Shares Series 24, the “Preferred Shares”).

The Bank announced that all of the Preferred Shares validly deposited under the Offers and not withdrawn as of April 26, 2011 have been taken up and accepted for payment by the Bank. As a result, the Bank has taken up a total of 4,639,139 Preferred Shares Series 21, 4,374,120 Preferred Shares Series 24 and 4,075,165 Preferred Shares Series 26 under the Offers for an aggregate consideration of $361,208,775.14.

The Preferred Shares taken up under the Offers represent approximately (i) 57.63% of the outstanding Preferred Shares Series 21, (ii) 64.33% of the outstanding Preferred Shares Series 24, and (iii) 70.26% of the outstanding Preferred Shares Series 26.

The extension of the offer was reported on PrefBlog on April 12.

Series 21 is NA.PR.N; series 24 is NA.PR.O; and series 26 is NA.PR.P.

World Financial Split Corp. has released its Annual Report to December 31, 2010.

Figures of interest are:

MER: 1.51% of the whole unit value, excluding one time initial offering expenses.

Average Net Assets: We need this to calculate portfolio yield; unfortunately the number of units changesd, which makes it more approximate. The Total Assets of the fund at year end was $76.6-million, compared to $107.3-million a year prior, so call it an average of $92.0-million. Total Preferred Share Distribution in 2010 was $3.888-million, at $0.525/share implies an average of 7.41-million units, at an average NAV of ((11.57 + 13.11) / 2 = 12.34, so call it $91.4-million. Close enough! Call the Average Net Assets $92-million.

Underlying Portfolio Yield: Investment income (sum of interest, dividends and withholding taxes) of $1.964-million received divided by average net assets of $92-million is 2.13%.

Income Coverage: Net investment income of $1.964-million less expenses before issuance fees of $1.743-million is $0.221-million, to cover preferred dividends of 3.888-million is just under 6%.

WFS.PR.A was last mentioned on PrefBlog when a term extension proposal was announced.

Well, this wasn’t particularly hard to see coming, after the company’s warrant issue expired less than six months before dissolution! Mulvihill’s World Financial Split Corp. has announced:

its Board of Directors has approved a proposal to extend the term of the Fund for an additional seven years. The final redemption date for the Class A Shares and Preferred Shares of the Fund is currently June 30, 2011 and the Fund proposes to implement a reorganization (“Reorganization”) that will allow shareholders to retain their investment in the Fund until at least June 30, 2018.

In connection with the Reorganization, holders of Class A Shares will continue to benefit from the potential for leveraged capital appreciation in a high quality portfolio consisting principally of copmmon shares of the ten largest financial services companies in each of Canada, the United States of America and the rest of the world. If the Reorganization is approved and implemented, holders of Preferred Shares will continue to enjoy preferential quarterly cash dividends in the amount of $0.13125 per Preferred Share representing a yield of 5.25% per annum on the original issue price of $10.00 per Preferred Share.

As part of the Reorganization, the Fund is also proposing other changes including changing the monthly retraction prices for the Class A Shares and the Preferred Shares so that they are calculated by reference to market price in addition to NAV and changing the dates by which notice of monthly retractions needs to be provided and by which the retraction amount will be paid. The Fund will also allow for the calculation of a diluted NAV in the event the Fund should ever issue warrants or rights to acquire additional Class A Shares or Preferred Shares.

Mulvihill Capital Management Inc. the manager of the Fund (the “Manager”), believes the global financial services sector is poised for strong returns over the next several years after experiencing one of the worst financial crises in history over the 2007 – 2009 time period. Subsequently, regulatory oversight and capital requirements increased in order to reduce the risk of another crisis from happening. Despite a decline in 2010 due to the concerns regarding European Sovereign defaults, many of the companies within the Fund’s portfolio universe are well capitalized and are expected to return capital to shareholders in the form of increased dividends and share repurchases which the Manager believes should benefit share prices. The Manager also believes that the Reorganization will allow the Fund to increase in value as the global economy recovers and financial services companies around the world grow stronger.

If the Reorganization is approved and implemented, shareholders will be given a special retraction right to retract their Class A Shares or Preferred Shares at NAV on June 30, 2011 on the same terms had the final redemption date of the Fund not been extended. The redemption date of the shares will automatically be extended for successive seven-year terms after June 30, 2018 and shareholders will be able to retract their Class A Shares or Preferred Shares at NAV prior to any such extension.

A special meeting of holders of Class A Shares and Preferred Shares has been called and will be held on May 31, 2011 to consider and vote upon the proposal. Further details of the proposal will be outlined in an information circular to be prepared and delivered to holders of Class A Shares and Preferred Shares in connection with the special meeting. The Reorganization is also subject to all required regulatory approvals.

The warrants’ exercise price was $11.43 and the Whole Unit NAV is now about $11.47, so those who exercised their warrants have, basically, earned the coupon. The company raised $12.8-million on warrant exercise, implying that take-up was about 15%.

WFS.PR.A no longer has a credit rating, since DBRS withdrew the Pfd-4(low) rating last November at the request of the company.

I applaud Mulvihill for their conduct in making a special retraction right part of the reorganization package. Such a feature cost them considerable AUM when it became exercisable with the PIC / PIC.PR.A term extension. Granting of such a right should be automatic; but for as long as there are sponsors in the market with less sterling ethical standards, such as Manulife Asset Management (as shown in the ASC.PR.A term extension proposal) and such people remaining in the business as Paul Lorentz, Sheila Hart, Jennifer Mercanti and Warren Law (the directors of ASC, who approved the terms of the proposal and recommended that preferred shareholders vote in favour), I will give credit where credit is due.

The company’s prospectus specifies a NAV test for capital unit distributions:

No distributions will be paid on the Class A Shares if (i) the distributions payable on the Preferred Shares are in arrears; or (ii) after the payment of the distribution by the Company, the NAV per Unit would be less than $15.00. In addition, the Company will not pay special distributions, meaning distributions in excess of the targeted 8% distributions, on the Class A Shares if after payment of the distribution the NAV per Unit would be less than $23.50 unless the Company would need to make such distributions so as to fully recover refundable taxes.

Despite these good things I am recommending a No vote on the term extension. With an Asset Coverage ratio of only 1.1+:1, the credit quality of the preferreds is simply insufficient to accept a term extension.

If the reorganization is approved anyway, I recommend exercising the special retraction right, while cognizant of the fact that, as in the case of the PIC.PR.A term extension, it is entirely possible that there might be sufficient preferred shares retracted that, on consolidation of the capital units, credit quality is restored to more acceptable levels. We can’t count on that, though!

It is my hope that, through voting No, preferred shareholders will get some kind of sweetener in a revised proposal. Most obvious, and perhaps least likely (and perhaps, given the extraordinarly low level of income coverage at present values, least desirable), is an increase in coupon. However, if a revised reorganization proposal provided, for example, for the forced redemption of a large number of preferred shares and the subsequent consolidation of the corresponding capital units with the combined effect of restoring Asset Coverage to more traditional levels, I would be very happy to recommend a favourable vote.