PrefBlog

Standard & Poor’s has announced:

• We are placing our ratings on Loblaw Cos. Ltd., Shoppers Drug Mart Corp., George Weston Ltd., and Choice Properties REIT on CreditWatch with negative implications after Loblaw announced its intention to acquire Shoppers for C$12.4 billion.
• We believe this could strengthen Loblaw’s business risk profile by combining Canada’s largest supermarket and pharmacy chains.
• On the other hand, we expect that new debt to fund the acquisition would strain Loblaw’s “intermediate” financial risk profile.
• Pro forma fully adjusted debt to EBITDA of 3.5x-4.0x would be high for the investment-grade rating, but we expect that free operating cash flow will be available for debt reduction in the next few years.

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In resolving this CreditWatch, we will assess the following key factors:

• Capital structure. We estimate that high fully adjusted pro forma 2013 debt to EBITDA of 3.5x-4.0x would necessitate almost C$2 billion of debt reduction within our two-year rating horizon to return adjusted leverage to the 3x that would be consistent with the intermediate financial risk
  profile;

• Business risk profile. The addition of Shoppers’ “strong” business risk profile should improve Loblaw’s satisfactory score, adding faster-growing and higher-margin pharmacy and cosmetics sales to its mature and competitive food revenue. We expect that realizing the estimated C$300 million of annual synergies would support improved profitability and cash flow, which should further contribute to deleveraging; and
• Group links. We will review the parent-subsidiary links between the four companies, particularly considering that this transaction would reduce George Weston’s Loblaw ownership to below 50%. That said, we believe the four companies’ credit profiles would remain strongly linked by virtue of their strategic integration, further supported by George Weston’s continuing “strong” liquidity and good financial flexibility.

This move follows the moves by DBRS to place both WN and L on Review-Developing.

Loblaws has a single preferred share issue outstanding, L.PR.A, an OperatingRetractible.

Weston has four preferred share issues outstanding, WN.PR.A, WN.PR.C, WN.PR.D and WN.PR.E, all Straight Perpetuals.

DBRS has announced that it:

has today placed the ratings of George Weston Limited (GWL or the Company) Under Review with Developing Implications.

The action on GWL’s ratings is directly related to DBRS’s review of the ratings of Loblaw Companies Limited (Loblaw; see separate press release), which follows Loblaw’s announcement of an offer to acquire the shares of Shoppers Drug Mart Corporation (Shoppers) for $12.4 billion and the assumption of approximately $1 billion of debt (the Transaction).

The proposed financing, including GWL’s $500 million investment in Loblaw, would effectively reduce GWL’s voting ownership of Loblaw to approximately 46% from 63% at the end of F2012. That said, GWL intends to subsequently increase its ownership in Loblaw going forward.

GWL’s ratings reflect its holding in Loblaw and the Company’s own strong bakery brands and efficient operations, balanced by a continuing volatile input cost environment and the mature nature of the bakery industry.

DBRS will resolve its review of GWL at the same time as its review on Loblaw’s ratings. Should Loblaw’s ratings be confirmed or downgraded, similar rating action would likely follow for GWL. Any positive rating action for Loblaw in the medium to longer term would not necessarily result in the same for GWL.

The bid for Shoppers was reported this morning.

Weston has four preferred share issues outstanding, WN.PR.A, WN.PR.C, WN.PR.D and WN.PR.E, all Straight Perpetuals.

DBRS has announced that it:

has today placed all ratings of Loblaw Companies Limited (Loblaw or the Company) Under Review with Developing Implications following the Company’s announcement of an offer to acquire the shares of Shoppers Drug Mart Corporation (Shoppers; see separate press release) for $12.4 billion and the assumption of approximately $1 billion of debt (the Transaction). The closing of the Transaction is subject to the approval of the shareholders of Shoppers and Loblaw, which is expected in September 2013.

The consideration offered for the equity consists of up to $6.7 billion in cash and up to 119.9 million Loblaw shares. The Transaction is expected to be financed through the combination of: (1) approximately $1.6 billion of cash, (2) $5.1 billion of fully committed bank facilities (including a $1.6 billion bridge loan), and (3) a subscription of $500 million additional Loblaw common shares from George Weston Limited (Weston).

On a pro forma basis, the combined company generated over $42 billion in revenue, $3 billion in EBITDA, and $1 billion in free cash flow. DBRS expects Loblaw to realize significant synergies by leveraging the strengths of both organizations, including the private label and loyalty programs, supply chain, and marketing. The Company believes it can achieve annual cost synergies of $300 million by year three. DBRS notes that these synergies are not dependent on any store closings.

Loblaw intends to operate Shoppers as a separate operating division. The Acquisition will increase Loblaw’s scale and improve its position in the growing health and wellness space in Canada.

The Developing Implications of the Under Review status reflects DBRS’s view that Loblaw’s business profile should benefit from increased scale, more diverse product offering, and potential synergies, which combined with the Company’s intended deleveraging plan, should largely offset the risks associated with the initial increase in financial leverage.

In its review, DBRS will focus on: (1) assessing the business risk profile of the combined entity as well as the risks associated with integration and realization of synergy potential, (2) Loblaw’s financial risk profile on a pro forma basis, including free cash flow generating capacity of the combined entity, a key indicator in the Company’s ability to reduce financial leverage within a reasonable time frame, and (3) the Company’s longer-term business strategy and financial management intentions.

Should the transaction close according to the proposed terms and provided that DBRS gains comfort with the Company’s ability and willingness to de-lever such that lease-adjusted debt-to-EBITDAR is below 3.50 times within 18 to 24 months, the ratings would likely be confirmed. DBRS will proceed with its review as more information becomes available and aims to resolve the Under Review status by the closing of the transaction.

The bid for Shoppers was announced this morning.

Loblaws has a single preferred share issue outstanding, L.PR.A, an OperatingRetractible.

Update, 2013-7-17: DBRS has announced a correction:

In terms of placing the ratings of Loblaw Companies Limited Under Review with Developing Implications yesterday, DBRS would like to clarify that the calculation of the lease-adjusted debt-to-EBITDAR ratio excludes Loblaw’s Financial Services division; that is, it would be adjusted to exclude PC Bank securitization and GICs. The complete text of the revised press release follows.

Fitch Ratings has announced (on July 2):

The Negative Outlook reflects the historical volatility in SLF’s earnings and the possibility it may continue at run-rate operating earnings and debt service that is not supportive of the current rating level.

Fitch believes SLF’s ability to improve its run-rate operating earnings will depend in part on how the company deploys the proceeds from the pending sale of Sun Life Assurance Company of Canada (U.S.) and Sun Life Insurance & Annuity Co. of New York to Delaware Life Holdings, a company owned by shareholders of Guggenheim Partners. The two Sun Life companies contain SLF’s U.S. variable annuity (VA) and certain life insurance businesses which have in recent history been a drag on overall earnings and a significant consumer of capital. The sale has been delayed due to regulatory review but Fitch expects it will be successfully completed.
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The IFS ratings of SLF’s U.S. life subsidiaries remain on Rating Watch Negative. Resolution of the Rating Watch will occur following further discussions with management and completion of the sale, and will likely result in a downgrade of the IFS ratings by at least one notch. Absent discussions with Guggenheim Partners, the ratings will be withdrawn. Assuming no material changes to the credit of the entities involved Fitch may not comment further until completion of the sale.

The key rating triggers that could result in a downgrade include:
–Failure to complete the sale of the company’s run-off U.S. operations;
–A decline in adjusted fixed-charge coverage, excluding equity market and interest rate impacts below 6x;
–A sustained drop in the company’s risk-adjusted capital position with no plans or ability to rectify; this would include the MCCSR ratio falling below 200%;
–An increase in financial leverage to over 25%;
–A large acquisition that involves execution and integration risk or impacts the company’s leverage and capitalization.

The key rating triggers that could result in a return to a Stable Outlook include:
–Completion of the sale of run-off U.S. operations;
–Consistent maintenance of adjusted fixed-charge coverage, excluding equity market and interest rate impacts, of over 6x.

SLF has numerous preferred share issues outstanding: SLF.PR.A, SLF.PR.B, SLF.PR.C, SLF.PR.D and SLF.PR.E (all DeemedRetractible) and SLF.PR.F, SLF.PR.G, SLF.PR.H and SLF.PR.I (all FixedReset).

Dividend Growth Split Corp. has released its Annual Report to December 31, 2012.

I think a dividend-tilting index would have been a more appropriate benchmark for this fund than the Composite, but we’ll let that go.

Figures of interest are:

MER: 1.06% of the whole unit value

Average Net Assets: The Net Asset Value at year end was $106.7-million, compared to $104.7-million a year prior, so call it an average of $105.7-million.

Underlying Portfolio Yield: Dividends and interest received of $4.77-million divided by average net assets of $105.7-million is 4.5%.

Income Coverage: Dividends and Securities Lending Income of $4.77-million less expenses of $1.11-million is $3.66-million, to cover preferred dividends of $3.35-million is 109%.