DBRS Downgrades MFC Prefs to Pfd-2(high)

Hard on the heels of the S&P downgrade, DBRS has announced that it:

has today downgraded its long-term debt and preferred share ratings on Manulife Financial Corporation (MFC or the Company) and its affiliates, including the Issuer Rating of its major operating subsidiary, The Manufacturers Life Insurance Company (MLI), to AA (low) from AA. The Claims Paying Ability and Commercial Paper ratings of MLI have been confirmed at IC-1 and R-1 (middle), respectively. All the trends are Stable. With earnings volatility expected to continue at elevated levels, notwithstanding the best efforts of management to contain market exposures, DBRS recognizes that the Company’s heightened risk profile and the associated adverse impact on regulatory capital and financial flexibility can no longer support the pre-existing ratings and have resulted in the negative rating action.

The Company has indicated that during the third quarter of 2010, it is expecting to complete its annual actuarial review of the morbidity assumptions embedded in the reserves held against its Long-Term Care policy liabilities. The Company expects to incur a charge of between $700 million and $800 million related to this change in assumptions, although this could be offset somewhat by in-force price adjustments.

I hadn’t seen that number before. As I noted when reporting their quarterly results in MFC Warns of Increased Capital Requirements, last week they had no idea what the number was going to be, except ‘Maybe big’.

the degree of the drop in the minimum continuing capital and surplus requirements (MCCSR) – from 250% at the end of March 2010 to 221% at the end of June 2010 – suggests that another negative quarter will force the Company to raise additional capital. In the meantime, it is DBRS’s view that the Company’s financial flexibility has become increasingly constrained, as the most readily available sources of capital have already been tapped. In addition to two major common equity issues totaling close to $5 billion in 2008 and 2009, a 50% cut in the common dividend and a corporate re-organization designed to free up regulatory capital, the Company has raised close to $1.5 billion in debt and preferred share financings, which increased its financial leverage ratios to the point where DBRS was no longer comfortable with the Company’s pre-existing ratings. At the new rating categories, the Company has at least some additional room to issue debt capital instruments.

MFC has the following preferred shares outstanding: MFC.PR.A (OpRet); MFC.PR.B & MFC.PR.C (PerpetualDiscount); MFC.PR.D & MFC.PR.E (FixedReset). All are tracked by HIMIPref™ and all are included in the noted indices.

And who knows? Perhaps DBRS mention of the “additional room to issue debt capital instruments” means that MFC has said ‘Please sir, I want some more!’

5 Responses to “DBRS Downgrades MFC Prefs to Pfd-2(high)”

  1. […] PrefBlog Canadian Preferred Shares – Data and Discussion « DBRS Downgrades MFC Prefs to Pfd-2(high) […]

  2. […] MFC issues maintained their presence in the volume highlights; probably continuing portfolio rebalancing after the DBRS downgrade. […]

  3. […] It was a solid day on the Canadian preferred share market, with PerpetualDiscounts up 5bp and FixedResets gaining 3bp on average volume. There has been a lot of volume in MFC lately, presumably due to continued rebalancing after the downgrade. […]

  4. […] downgraded. Now with a pre-tax bid-YTW of 6.23% based on a bid of 18.12 and a […]

  5. […] shift of about 11% (net) of the portfolio from Pfd-1(low) to Pfd-2(high) was set in motion by the downgrade of MFC early in the month. As at 2010-7-30, the fund held 16.2% of its portfolio in MFC issues; this […]

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