PrefBlog

Quebecor World has announced:

that, on or prior to December 27, 2007, it received notices in respect of 3,975,663 of its 7,000,000 issued and outstanding Series 5 Cumulative Redeemable First Preferred Shares (TSX: IQW.PR.C) (the “Series 5 Preferred Shares”) requesting conversion into the Company’s Subordinate Voting Shares.

In accordance with the provisions governing the Series 5 Preferred Shares, registered holders of such shares are entitled to convert all or any number of their Series 5 Preferred Shares into a number of Subordinate Voting Shares effective as of March 1, 2008 (the “First Conversion Date”), provided such holders gave notice of their intention to convert at least 65 days prior to the First Conversion Date. The next conversion date on which registered holders of the Series 5 Preferred Shares will be entitled to convert all or any number of such shares into Subordinate Voting Shares is June 1, 2008, and notices of conversion in respect thereof must be deposited with the Company’s transfer agent, Computershare Investor Services Inc., on or before March 27, 2008. The Series 5 Preferred Shares are convertible into that number of the Company’s Subordinate Voting Shares determined by dividing Cdn$25.00 together with all accrued and unpaid dividends on such shares up to February 29, 2008 by the greater of (i) Cdn$2.00 and (ii) 95% of the weighted average trading price of the Series 5 Preferred Shares on the Toronto Stock Exchange during the period of twenty trading days ending on February 26, 2008. Notwithstanding the notices of conversion received in respect of the Series 5 Preferred Shares, the Company retains the right under the provisions governing the Series 5 Preferred Shares to redeem all or any number of such Series 5 Preferred Shares in respect of which a notice of conversion was received. In the event Quebecor World were to decide to avail itself of its right to redeem all or any number of such Series 5 Preferred Shares in respect of which a notice of conversion was received, it would be required to provide notice to the holders of Series 5 Preferred Shares that submitted a notice of conversion by January 21, 2008.

Dividends on this issue have been suspended.

IQW SVSs closed today at $1.75, so assuming that the conversion is performed at the $2 minimum, four million (roughly) shares of IQW.PR.C will convert to fifty-million shares of IQW … since there are only about eighty-five-million of these shares outstanding, the converters will own over one-third of the company.

At the close of $15.75 for IQW.PR.C, the effective price of the new shares is $1.26, providing a nifty fifty-cent profit per IQW share to the converters (or, to put it another way, $21 worth of IQW stock – given current prices – will be received for every IQW.PR.C share.

One risk to the converters who are attempting to arbitrage is a rise in the price of the SVS; since the conversion price is 95% of the calculated price (if this is over $2), then if they have shorted now on a 12.5:1 basis for proceeds of $21, then:

Profit = proceeds of short sale – cost of IQW.PR.C – (number of shares actually received – 12.5)*price of shares

where “number of shares actually received” = 25 / (price of shares * 0.95)

so

Profit = proceeds of short sale – cost of IQW.PR.C – ((25 / (price of shares * 0.95)) – 12.5) * price of shares)

and ((25 / (price of shares * 0.95)) – 12.5) * price of shares)

= ((26.04 / price of shares) – 12.5) * price of shares

= 26.04 – 12.5*price of shares

So

Profit = proceeds of short sale – cost of IQW.PR.C + 26.04 – 12.5*price of shares

= 1.75*12.5 – 15.75 + 26.04 – 12.5*price of shares

= 21.875 – 15.75 + 26.04 – 12.5*price of shares

= 32.525 – 12.5*price of shares

Implying that the “risk arbitrage” will be profitable provided that, in the simplest scenario:

(i) shares are converted at 95% of the calculated market price of $2.60 or lower

(ii) the resultant short can be covered at that price (if necessary)

… assuming as well that IQW has been shorted at a ratio of 12.5:1 at a price of 1.75 and the IQW.PR.C was purchased at 15.75

Update, 2007-12-30: An Assiduous Reader who is in the unfortunate position of holding this issue, writes in and says:

The second one is the dreaded IQW.PR.C.  I read today on the RBC Action Direct web site that Quebecor has received notice to convert a large number of this outstanding preferred to subordinate voting shares (I’m assuming I should have done the same but I missed the March 1st date because I wasn’t aware I had to provide 65 days notice).  I don’t own a lot of it but I assume I should be doing the same as to preserve some capital before the
company goes bankrupt?  Thoughts on this?

Well, actually I don’t have a lot of thoughts on this, because IQW is junk and I don’t trade junk. I’m a fixed-income guy; junk requires equity-style analysis. That being said:

The case for conversion relies on current prices. At the current conversion rate of 12.5 IQW for 1 IQW.PR.C, the common is more valuable. Going by this, you would wait until the last possible moment before the next conversion date, examine prices at that time and request conversion if the terms are still favourable. Then, after having waited out the notice period and received your common, you would treat the IQW in the same manner as every other equity in your portfolio.

The case for retaining IQW.PR.C relies on their seniority. At the time the dividend was suspended, the company stated that it had cash on hand to make the payments, but was prevented from doing so by the Corporations Act, which prevents them from paying dividends when their shareholders’ equity is so low. They stated at that time that the annual meeting would rejig the balance sheet – through a few bookkeeping entries – to allow the resumption of dividends on their preferreds. If the company should ever pay any dividends ever again, the preferreds will be taken care of first! Should you keep the issue over the next notice date, you will retain the option to request conversion on the following date, and so on ad infinitum … or ad bankruptcy, anyway!

IQW is in a bad way. They’re not making any money, nobody seems to want their assets and they can’t find new financing. All I can really suggest is that you get their latest regulatory filings (SEDAR), perhaps discuss the company on Financial Webring Forum, develop a few potential scenarios for the company’s future … and make your own decision.

This entry was posted on Saturday, December 29th, 2007 at 1:30 am and is filed under Issue Comments. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.