PrefBlog

I’m astonished at the latest DBRS action:

DBRS has today confirmed two series of cumulative Preferred Shares issued by High Income Preferred Shares Corporation (the Company) following the March 19, 2008 announcement that monthly dividends to both the Series 1 Shares and Series 2 Shares have been suspended following the previously announced March 31, 2008 distribution.

Full repayment of Series 1 Shares principal will be provided via a forward agreement with the Canadian Imperial Bank of Commerce (CIBC). The Series 2 Shares principal relies fully on the Managed Portfolio for repayment of principal. In addition to providing coverage to the Series 2 Shares principal, the Managed Portfolio is used to pay annual fees and expenses, as well as monthly distributions to the Series 1 and Series 2 Shares (5.85% and 7.25% per annum, respectively). The Series 1 and Series 2 distributions rank pari passu to each other. The downside protection available to the Series 2 Shares principal is 12%, based on the current net asset value (NAV) of the Managed Portfolio.

Before dividends were suspended, the Managed Portfolio would be required to generate an annual return of over 20% to maintain its current NAV. The decision to suspend dividends will significantly reduce this annual grind to approximately 5% per annum.

The confirmation of the Series 1 Shares is based on CIBC providing full principal repayment via the forward agreement, as well as the risk that not all Series 1 dividends will be repaid, based on the NAV coverage over the remaining dividends. The confirmation of the Series 2 Shares is based on the current asset coverage available to cover the repayment of the Series 2 principal. The trend for both series of shares remains Negative due to the annual grind on the Managed Portfolio, as well as the additional remaining distribution payments that will now need to be made at maturity.

The termination date for each series of shares is June 29, 2012.

The suspension of dividends was reported on PrefBlog on March 19.

One may compare the insouciant nature of DBRS’ release with their attitude towards Quebecor:

DBRS notes preferred shareholders maintain a level of expectation that these dividends will be paid in a timely manner, and this expectation is reflected in the preferred share ratings. Having not met the expectation of preferred shareholders, DBRS notes the preferred shares are more reflective of a “D” rating.

I will also note that the dividends are cumulative. Given that, the “annual grind” of 20% noted by DBRS might – possibly – be reduced somewhat due to the time value of money, but if all the dividends are to be paid eventually, the reduction will be minimal.

This entry was posted on Wednesday, March 26th, 2008 at 5:32 pm 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.