GBA.PR.A Downgraded to Pfd-4(high) by DBRS

DBRS has announced that it:

DBRS has today downgraded the Preferred Shares issued by GlobalBanc Advantaged 8 Split Corp. (the Company) to Pfd-4 (high) from Pfd-3 (high) with a Stable trend. The rating had been placed Under Review with Developing Implications on March 19, 2008.

In June 2007, the Company raised gross proceeds of $54 million by issuing 2.7 million Preferred Shares (at $10 each) and an equal amount of Class A Shares (at $10 each) to provide downside protection of approximately 47% to the Preferred Shares (after issuance costs).

The net proceeds from the initial offering were used to purchase a portfolio of Canadian securities that were pledged to the National Bank of Canada (the Counterparty) to enter a forward agreement (the Forward Agreement) in order to gain exposure to a portfolio of common shares (the Bank Portfolio) issued by eight of the world’s largest banks – Citigroup Inc., Bank of America Corporation (DE), The Royal Bank of Scotland Group plc, UBS AG, Banco Santander SA, BNP Paribas, Société Générale and Deutsche Bank AG.

Holders of the Preferred Shares receive fixed cumulative quarterly distributions equal to 4.5% per annum. The Company provides Class A Shareholders with distributions of capital gains when declared by the board of directors. Since inception, the Capital Shareholders have received a total of $0.0485 per share, a return of less than 0.5% of the initial share price.

Based on the most recent dividends paid by its underlying companies, the Bank Portfolio can generate enough yield to pay the fixed preferred distributions and other annual expenses. However, changes in dividend policy by any of the banks included in the Bank Portfolio could cause a potential grind on the net asset value (NAV).

Since inception, the NAV has dropped from about $19 to $11.95 per share (as of April 15, 2008), a decline of 37%. As a result, the current downside protection available to the Preferred Shareholders is approximately 16%. The decline in NAV can be attributed to the Bank Portfolio’s 100% concentration in the international banking industry. In general, the valuations of the common shares of international banks have experienced significant volatility over the last year due to credit concerns and large writedowns.

The downgrade of the Preferred Shares is based on the lower level of asset coverage available to cover the Preferred Shares principal.

The redemption date for both classes of shares issued is December 15, 2012.

GBA.PR.A is not tracked by HIMIPref™. The DBRS mass review of financial splits was discussed on March 19. This action follows a downgrade from Pfd-2 on 2008-1-16. That was FAST!

6 Responses to “GBA.PR.A Downgraded to Pfd-4(high) by DBRS”

  1. prefhound says:

    OK, GBA is a slightly different animal from the covered option writing beasts.
    It is “simply” a passive investment (via a portfolio swap with a counter party, which is not uncommon, though I don’t understand the rationale — taxes?) which is leveraged with the prefs.

    Nevertheless, for an 8 bank global portfolio, their timing could not have been worse, IPO was June last year at $10+10, with an immediate 90c selling agent fee. At Dec 31 the capital unit was worth $5.35; April 16 $1.98. The MER is somewhat lower due to the passive structure (1.24% nominal before pref dividends and issue expenses = $0.21 or 10.6% annually now on the capital units). After the pref share dividends of 4.5% and NO income offset, the net burn rate is $0.21 + $0.45 = $0.66 per year on the capital units.

    If I haven’t missed something about the swap somehow generating a little bit of income (only 0.01 interest in 2007), the capital units would probably evaporate in 3 years with their 33% net expense ratio. Whoops, might not make the Dec 2012 maturity.

    Rather ghastly how a “simple” sounding MER of 1.24% turns into capital erosion of 33% per year!

    Another interesting tidbit: Henry Knowles, OSC Chair from 1980-83 sits on the independent review committee. Nice to know investors are being so well protected!

  2. prefhound says:

    Now, I just realized there are 4 of this split share prefs in today’s comments. I have to admire James’ tenacity in digging them all up. I only have one more comment and will keep it brief:

    ASC.PR.A is another option-writing split share pref promising to pay 8% to the capital units. Among the option writing splits we have discussed, it had the good fortune to have a rising unit value at one time (up to $27.50 after a 10+10 IPO, I presume). Now that it has fallen, DBRS is downgrading it.

    For those hoping that rebounding markets will allow unit value to recover (or the prefs to regain asset coverage), I would note that the option writing strategy will lead to the underlying stocks being called away in a rising market, so only partial recovery can be expected, despite the leverage.

    Meanwhile, I would guess, without a detailed investigation, that the MER and expense drags are high.

    I’m surprised somebody didn’t learn from this in the last bust — option writing split shares on tech stocks went down the toilet. Banks were the “thought du jour” until Jun/07 so we saw lots of (unsuitable) product. Does that mean banks won’t recover for 8 years?

  3. jiHymas says:

    Another interesting tidbit: Henry Knowles, OSC Chair from 1980-83 sits on the independent review committee. Nice to know investors are being so well protected!

    Independent Review Committees were set up by National Instrument 81-107 to review conflicts of interest that are referred to it by the manager.

    It does not have the authority to pass judgement on the merits of any particular investment strategy, the amount of fees charged to clients and reported in accordance with legislation, or to provide lemonade to investors when they feel hot.

    I see no reason to believe that Mr. Knowles is exercising his authority in anything other than an exemplary fashion.

  4. prefhound says:

    Perhaps Mr. Knowles should have done some thoughful due diligence on the folks offering him a job. He is essentially renting his (presumably) good name to a pretty dubious product.

  5. jiHymas says:

    You may wish to write him a letter to that effect and sign your name to it.

  6. […] follows a downgrade to Pfd-4(high) on April 17. Anybody feeling like swearing at the Credit Rating Agencies? It was rated Pfd-2 until January 17, […]

Leave a Reply

You must be logged in to post a comment.