July 21, 2011

Here’s an interesting snippet on the Yellow / Apax / Traders’ deal:

Apax-owned Trader Media, which publishes Auto Trader, will take on £150m of additional debt to fund a dividend for the private equity firm. The new loan is the first covenant-lite package to be issued in Europe for four years, according to law firm Eversheds.

In order to secure lender support for its dividend, Apax has also offered to defer £50m of its dividend strip until Trader Media’s gearing –or net debt to earnings before interest, taxes, depreciation and amortisation ratio- falls below about five times, according to Mark Spinner, a partner at Eversheds.

He added that leveraged buyouts currently have an average gearing multiple in the region of three and a half to four times.

Another Apax Partners portfolio company, Dutch directories publisher Truvo, which the firm acquired alongside Cinven in 2004, issued one of the first covenant-lite debt structures in Europe in 2007. Truvo filed for bankruptcy protection last year, following two years of declining sales. The firm posted a net loss of €260.8m in 2009.

Spinner said Trader Media was not as risky an investment for banks. “Trader Media is clearly a very good company and as such is almost certainly seen as a good credit risk for the banks prepared to inject an additional £150m..

Yesterday’s rant on water prices was timely, since Willem Buiter thinks water will be bigger than oil:

I expect to see a globally integrated market for fresh water within 25 to 30 years. Once the spot markets for water are integrated, futures markets and other derivative water-based financial instruments — puts, calls, swaps — both exchange-traded and OTC will follow. There will be different grades and types of fresh water, just the way we have light sweet and heavy sour crude oil today. Water as an asset class will, in my view, become eventually the single most important physical-commodity based asset class, dwarfing oil, copper, agricultural commodities and precious metals.

Possible, but it’s equally likely that Mohammed must go to the mountain. If I were a Big Noise at one of the huge asset management shops – with so many hundreds of billions under management that it becomes possible to put serious money into tail event scenarios while retaining a prudent portfolio – I’d be looking seriously at Cleveland. Buy lots of land and water rights in Cleveland, hope to stay cash flow neutral through rentals to farmers, and wait. Detroit, too, is a place where vast quantities of Great Lakes real-estate are available at depressed prices.

Rumour are swirling that the Europeans may face reality:

Euro-area leaders may accept a temporary Greek default and widen the scope of their rescue fund as officials intensify efforts to resolve the region’s 21-month sovereign debt crisis.

With Greece being charged about 35 percent to borrow for two years, government chiefs meeting in Brussels are devising a second aid package that could tip it into default for a few days. They may also cut interest rates on loans to Greece, Portugal and Ireland to about 3.5 percent and could double the repayment time to at least 15 years.

Europe’s main rescue fund, boosted just last month to 440 billion euros ($632 billion), may be allowed to buy bonds directly from investors, help recapitalize banks and offer International Monetary Fund-style precautionary credit-lines to repel speculative attacks.

What, no subsidized daycare or aid for farmers? What kind of European rescue fund is that?

Further details are slowly coming out:

The Greek financing package will consist of 109 billion euros from the euro region and the IMF. Financial institutions will contribute 50 billion euros after agreeing to a series of bond exchanges and buybacks that will also cut Greece’s debt load, the leaders’ communiqué said.

The European Commission plans to brief reporters on the package’s technical details at 1 p.m. in Brussels.

The leaders sought to regain the initiative after market turmoil intensified amid a spat between ECB President Jean- Claude Trichet and German Chancellor Angela Merkel over how to manage the crisis. The outlook was worsened by signs that Greece was backsliding on axing its budget deficit as it struggles to cut a debt of 143 percent of gross domestic product. A Bank of America Merrill Lynch poll this week showed investors trimming their European stock holdings to the lowest in more than a year.

Banks will reduce Greece’s debt by 13.5 billion euros by exchanging bonds and “potentially much more” through a buyback program still to be outlined by governments, said the Institute of International Finance, a Washington-based group representing banks.

Investors will have the option to exchange existing Greek debt into four instruments. Three will be fully collateralized by AAA-rated zero-coupon securities and have a 30-year maturity, and the fourth will be for 15 years and partially collateralized by funds held in an escrow account.

Crisis managers are aiming for a 90 percent participation rate from Greek bondholders.

One wonders what the participation rate will be in bond funds sponsored by the banks!
And:

Participating investors would see on average a 21 percent reduction in the net present value of their existing Greek bonds, the IIF estimates. [ Institute of International Finance Managing Director Charles] Dallara said the effects on bank profits, balance sheets and capital structure will be handled on an institution-by-institution basis.

S&P confirmed Brookfield Renewable Power the operator and 34% owner of Brookfield Renewable Power Fund, which is the sole owner of Brookfield Renewable Power Preferred Equity Inc., which is the issuer of BRF.PR.A:

  • We are affirming our ‘BBB’ long-term rating on Brookfield Renewable Power
    Inc. (BRPI).

  • At the same time, we are revising our short-term rating on BRPI to ‘A-2’ from ‘A-3’, based on the ‘BBB’ long-term rating and the company’s adequate liquidity.
  • The rating action follows our assessment that the company’s cash flows remain in line with our expectations despite challenging hydrology in
    2010.

  • The stable outlook reflects our view that BRPI’s improved business risk profile and strong financial flexibility support the ratings despite our concerns about its high debt and resulting weak coverage measures for the ratings.

Although financial measures (both consolidated and at the company level) are weak for the ratings, we believe strong financial flexibility and its strategic relationship with its corporate
parent, Brookfield Asset Management Inc. (Brookfield; A-/Negative/A-2), mitigate this. The weak financial measures reflect BRPI’s practice of using substantial project-level debt in its operating companies or investments. Although these debts are nonrecourse to the company, they increase the variability of cash flows distributable to BRPI, as they are available only after operating needs and debt servicing requirements at the operating company level are satisfied. Exposure to hydrological risk and wholesale power price volatility, albeit reducing, also constrain the ratings.

It was a good day for the Canadian preferred share market, with PerpetualDiscounts winning 29bp, FixedResets gaining 5bp and DeemedRetractibles up 7bp. Volume was very light.

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices

Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)
Median
YTW
Median
Average
Trading
Value
Median
Mod Dur
(YTW)
Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 -0.3624 % 2,447.1
FixedFloater 0.00 % 0.00 % 0 0.00 0 -0.3624 % 3,680.4
Floater 2.48 % 2.28 % 38,888 21.59 4 -0.3624 % 2,642.2
OpRet 4.85 % 2.61 % 62,103 0.19 9 -0.0641 % 2,450.6
SplitShare 5.23 % 1.41 % 54,329 0.60 6 -0.0964 % 2,512.6
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0641 % 2,240.9
Perpetual-Premium 5.68 % 5.00 % 136,955 0.60 13 -0.0716 % 2,091.5
Perpetual-Discount 5.43 % 5.43 % 108,258 14.64 17 0.2947 % 2,206.1
FixedReset 5.14 % 3.11 % 201,804 2.65 58 0.0489 % 2,325.4
Deemed-Retractible 5.07 % 4.74 % 256,134 8.07 47 0.0721 % 2,167.9
Performance Highlights
Issue Index Change Notes
PWF.PR.A Floater -1.42 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-07-21
Maturity Price : 22.38
Evaluated at bid price : 22.64
Bid-YTW : 2.28 %
FTS.PR.F Perpetual-Discount 1.28 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-07-21
Maturity Price : 24.23
Evaluated at bid price : 24.52
Bid-YTW : 5.05 %
RY.PR.W Perpetual-Discount 1.68 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-02-24
Maturity Price : 25.00
Evaluated at bid price : 24.93
Bid-YTW : 4.85 %
BNS.PR.Z FixedReset 3.38 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.45
Bid-YTW : 3.75 %
Volume Highlights
Issue Index Shares
Traded
Notes
GWO.PR.H Deemed-Retractible 57,527 RBC crossed 16,400 at 23.35; Scotia and TD crossed 20,000 each at 23.38.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.38
Bid-YTW : 5.75 %
RY.PR.D Deemed-Retractible 53,320 RBC crossed 46,000 at 24.67.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.74
Bid-YTW : 4.74 %
RY.PR.G Deemed-Retractible 38,252 RBC crossed 10,700 at 24.61; then 14,400 at 24.65.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.66
Bid-YTW : 4.78 %
RY.PR.F Deemed-Retractible 30,326 RBC crossed 11,700 at 24.64.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.64
Bid-YTW : 4.74 %
RY.PR.W Perpetual-Discount 29,323 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-02-24
Maturity Price : 25.00
Evaluated at bid price : 24.93
Bid-YTW : 4.85 %
CM.PR.G Perpetual-Premium 23,300 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-05-01
Maturity Price : 25.00
Evaluated at bid price : 25.09
Bid-YTW : 5.22 %
There were 14 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
GWO.PR.N FixedReset Quote: 25.02 – 25.50
Spot Rate : 0.4800
Average : 0.3003

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.02
Bid-YTW : 3.47 %

FTS.PR.H FixedReset Quote: 25.32 – 26.00
Spot Rate : 0.6800
Average : 0.5324

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-07-21
Maturity Price : 23.37
Evaluated at bid price : 25.32
Bid-YTW : 3.41 %

PWF.PR.O Perpetual-Premium Quote: 25.31 – 25.75
Spot Rate : 0.4400
Average : 0.3132

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2018-10-31
Maturity Price : 25.00
Evaluated at bid price : 25.31
Bid-YTW : 5.60 %

PWF.PR.F Perpetual-Discount Quote: 23.81 – 24.46
Spot Rate : 0.6500
Average : 0.5480

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-07-21
Maturity Price : 23.54
Evaluated at bid price : 23.81
Bid-YTW : 5.52 %

CM.PR.P Deemed-Retractible Quote: 25.60 – 25.92
Spot Rate : 0.3200
Average : 0.2264

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2012-10-29
Maturity Price : 25.00
Evaluated at bid price : 25.60
Bid-YTW : 3.44 %

NA.PR.P FixedReset Quote: 27.01 – 27.37
Spot Rate : 0.3600
Average : 0.2727

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-02-15
Maturity Price : 25.00
Evaluated at bid price : 27.01
Bid-YTW : 3.16 %

5 Responses to “July 21, 2011”

  1. longterminvestor says:

    hello, I have a question regarding possible redemption dates for two specific preferred shares. I’m currently a holder of RY.PR.W and royal bank has the option to redeem these shares at $25.75 anytime. However I have noticed that it’s counterpart RY.PR.B has been performing better that the W series lately. Royal has the option to redeem it this august at $26. My question is does Royal have to redeem the W’s before the B’s since it is an older issue? Or does that not matter?

  2. jiHymas says:

    Nope, the date of issue doesn’t matter at all.

    Since the end of May, there has been a significant difference in the risk profiles of RY.PR.B and RY.PR.W, as the latter is exchangeable into common shares at the option of the bank. See CM.PR.D, CM.PR.E, CM.PR.G: Seeking NVCC Status for some discussion of this change.

    See the comments to the post RY.PR.F & RY.PR.W & the Swoon in June for some recent discussion of the merits of these two issues.

  3. longterminvestor says:

    I have been trying to figure out what the value of the exchange would be if I owned 1000 shares based on this calculation in the prospectus.

    “determined by dividing the then applicable redemption price per Preferred Share Series W, together with declared and unpaid dividends to the date fixed for conversion, by the greater of $2.50 and 95% of the weighted average trading price of the Common Shares on the TSX for the 20 trading days ending on the last trading day ending on or before the fourth day prior to the date fixed for conversion.”

    Based on this what would my return be if they converted today? thanks for your help its greatly appreciated.

  4. jiHymas says:

    Assuming you were able to sell the common shares received at the conversion price, your profit would be 5% of total capital (on the common) plus either a profit or loss based on the difference between the market value RY.PR.W and par value.

    This would be very profitable for you, which is why they won’t do it. However, the ability to do it means that RY.PR.W cannot be considered a DeemedRetractible.

  5. longterminvestor says:

    thanks, that is the reason why I thought my calculation was wrong. Have a great weekend

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