PrefBlog

Dundee Corporation has announced [although not yet on their website]:

that it is proposing a preferred share exchange transaction pursuant to which each of its First Preference Shares, Series 4 par value $17.84 (the “Series 4 Preferred Shares”) would be exchanged for 0.7136 of a First Preference Share, Series 5 par value $25.00 (the “Series 5 Preferred Shares”) pursuant to a statutory plan of arrangement under the Business Corporations Act (Ontario) (the “Arrangement” or the “Transaction”).

The Company has called a special meeting (the “Meeting”) of the holders of Series 4 Preferred Shares (the “Series 4 Preferred Shareholders”) to consider the Arrangement for 9:00 a.m. (Toronto time) on January 7, 2016, at the offices of Dundee Corporation, 1 Adelaide St. East, Suite 2100, Toronto, Ontario, Canada, M5C 2V9. The Management Information Circular of the Company (the “Circular”) for the Meeting will be mailed to the Series 4 Preferred Shareholders and filed on SEDAR in due course.

The Company has engaged GMP Securities L.P. (“GMP”) as its financial advisor and dealer manager, and Shorecrest Group Ltd. as its proxy advisor and paying agent in connection with the Transaction.

The board of directors of Dundee (the “Board of Directors”) has unanimously determined that the Arrangement is fair to the Series 4 Preferred Shareholders (as well as to the holders of all other classes and series of shares) and is in the best interests of Dundee, and unanimously recommends that the Series 4 Preferred Shareholders vote FOR the Arrangement Resolution (as defined below). The determination of the Board of Directors is based on various factors, including a fairness opinion of GMP.

The Company has received substantial support for the Arrangement based on confidential consultations with representatives of significant holders of the Series 4 Preferred Shares. To be effective, the Arrangement must be approved by a resolution (the “Arrangement Resolution”) passed at the Meeting by not less than two-thirds (66 2/3%) of the votes validly cast by the Series 4 Preferred Shareholders present in person or represented by proxy.

The completion of the Arrangement is conditional on, among other things, the holders of the Series 4 Preferred Shares approving the Arrangement, the approval of the Toronto Stock Exchange, dissent rights not having been exercised with respect to more than 10% of the issued and outstanding Series 4 Preferred Shares, any required lender approvals and other customary conditions.

Series 4 Preferred Shareholders who vote in favour of the Arrangement and their brokers may be entitled to certain consent payments, depending on when their vote is received among other things. See “Consent Payments” below. Series 4 Preferred Shareholders are encouraged to vote regardless of how many Series 4 Preferred Shares they own. Series 4 Preferred Shareholders should follow the instructions provided on the voting instruction form to be provided by their broker, investment dealer, bank, trust company or other intermediary to ensure their vote is counted at the Meeting.

Details of the Transaction

Reasons for the Arrangement

By recommending the Arrangement Resolution to the Series 4 Preferred Shareholders, the Board of Directors believes the Arrangement Resolution provides a number of anticipated benefits to the Series 4 Preferred Shareholders, including, without limitation, the following:

(a) the Series 5 Preferred Shares will have a dividend rate of 6% per annum, which is greater than the current dividend rate on the Series 4 Preferred Shares of 5% per annum;

(b) each Series 4 Preferred Share (each having a par value and redemption price of $17.84 per Series 4 Preferred Share) will be exchanged for 0.7136 of a Series 5 Preferred Share, which will adjust the par value and redemption price to $25.00 per Series 5 Preferred Share, aligning with standard market convention;

(c) the Series 5 Preferred Shares will be redeemable by the Company at its option by the payment of an amount in cash for each Series 5 Preferred Share so redeemed as outlined below. Currently, the Series 4 Preferred Shares are redeemable by the Company at its option at par, together with any accrued and unpaid dividends to but excluding the redemption date. As a result, until June 30, 2019, the Company will not be able to redeem the Series 5 Preferred Shares at its option unless it pays a redemption premium over par, and the Series 5 Preferred Shares will not be callable at the par value of $25.00 per share until the date at which the holder of a Series 5 Preferred Share may require the Company to redeem such share at $25.00 per share; and

(d) the Series 4 Preferred Shareholders will have the opportunity to receive the Consent Payments outlined below.

The Board of Directors also believes that the Arrangement Resolution provides a number of anticipated benefits to the Company and indirect benefits to the holders of the other classes (and series) of shares of the Company as follows:

(a) by extending the retraction date of the Series 4 Preferred Shares through the issuance of the Series 5 Preferred Shares from June 30, 2016 to June 30, 2019, the Company can repurpose up to $107,040,000 that would have been needed should the holders have required the Company to redeem the Series 4 Preferred Shares on or after June 30, 2016 at the par price of $17.84 per Series 4 Preferred Share;

(b) the Company will maintain financial flexibility for future opportunistic business developments; and

(c) the Series 5 Preferred Shares will continue to be serviceable at an attractive cost of capital.

Series 5 Preferred Shares

The rights, privileges, restrictions and conditions of the Series 5 Preferred Shares will be similar to those of the Series 4 Preferred Shares, except that:
•the cumulative dividend rate will be 6% per annum, being an annual dividend of $1.50 per Series 5 Preferred Share, or a quarterly dividend of $0.3750 per Series 5 Preferred Share. This is greater than the current cumulative dividend rate on the Series 4 Preferred Shares of 5% per annum;
•the Series 5 Preferred Shares will be redeemable by Dundee by the payment of an amount in cash for each Series 5 Preferred Share so redeemed of (i) $25.75 per share if redeemed prior to June 30, 2017, (ii) $25.50 per share if redeemed on or after June 30, 2017 and prior to June 30, 2018, (iii) $25.25 per share if redeemed on or after June 30, 2018 and prior to June 30, 2019, and (iv) $25.00 per share if redeemed on or after June 30, 2019, plus, in each case, an amount equal to all accrued and unpaid dividends thereon to but excluding the date fixed for redemption. Currently, the Series 4 Preferred Shares are redeemable by Dundee at par, together with any accrued and unpaid dividends to but excluding the redemption date; and
•the date after which holders may require Dundee to redeem the Series 5 Preferred Shares for cash and before which Dundee may convert the Series 5 Preferred Shares into Dundee’s Class A Subordinate Voting Shares will be June 30, 2019, as opposed to June 30, 2016, which is the date after which holders of Series 4 Preferred Shares may require Dundee to redeem the Series 4 Preferred Shares for cash or before which Dundee may convert the Series 4 Preferred Shares into Dundee’s Class A Subordinate Voting Shares.

Dividends

Series 4 Preferred Shareholders as at the close of business on the anticipated dividend record date of December 17, 2015 are expected to receive a final dividend in respect of their Series 4 Preferred Shares in the amount of $0.2230 per share, which is expected to be paid on the dividend payment date of December 31, 2015. After that, if the Arrangement is completed, holders of Series 5 Preferred Shares will be entitled to receive a quarterly dividend of $0.3750 per Series 5 Preferred Share in accordance with the terms of the Series 5 Preferred Shares.

Series 4 Preferred Shareholders are urged to carefully review the Circular once it is available as it will contain further details on the terms and conditions of the Arrangement, including the Series 5 Preferred Shares.

Consent Payments

If the Arrangement is completed, Dundee will make certain payments (“Consent Payments”) to the Series 4 Preferred Shareholders and their brokers, investment dealers, banks, trust companies or other intermediaries (collectively, “Intermediaries”), subject to certain procedures and conditions which will be outlined in the Circular:
•a Consent Payment of an aggregate of $0.4014 per Series 4 Preferred Share (the “Early Consent Payment”) (representing 2.25% of the par value of the Series 4 Preferred Shares) will be paid by Dundee in respect of each Series 4 Preferred Share that is voted FOR the Arrangement Resolution on or prior to December 31, 2015 (the “Early Deadline”), provided such vote is valid and is not subsequently withdrawn. The Intermediary will be entitled to receive and retain $0.1784 of such amount (representing 1.00% of the par value of the Series 4 Preferred Shares) and the holder of the Series 4 Preferred Share will be entitled to receive $0.2230 of such amount from its Intermediary (representing 1.25% of the par value of the Series 4 Preferred Shares); and
•a Consent Payment of $0.2676 per Series 4 Preferred Share (the “Later Consent Payment”) (representing 1.50% of the par value of the Series 4 Preferred Shares) will be paid by Dundee in respect of each Series 4 Preferred Share that is voted FOR the Arrangement Resolution after the Early Deadline but on or prior to the proxy cut off of 9:00 a.m. (Toronto time) on January 5, 2016, provided such vote is valid and is not subsequently withdrawn. The Intermediary will be entitled to receive and retain $0.0892 of such amount (representing 0.50% of the par value of the Series 4 Preferred Shares) and the holder of the Series 4 Preferred Share will be entitled to receive $0.1784 of such amount from its Intermediary (representing 1.00% of the par value of the Series 4 Preferred Shares).

DC.PR.C was last mentioned on PrefBlog when it was created through conversion of DC.PR.A. It is tracked by HIMIPref™ but relegated to the Scraps index on credit concerns.

Woo-hoo, how about them consent payments, eh? I’m sure glad that the regulators are considering eliminating mutual fund trailers, thus ensuring complete objectivity by advisors! Consent payments to advisors are always suspect, and when they reach the proportions of this offer (1% of par to the advisor, for early tender) become disgraceful and coercive. In addition, the 1.25% of par to holders voting in favour is yet another disgrace. Yes, it’s legal. That doesn’t mean I have to approve.

It will be recalled that Dundee discontinued its credit rating in 2012 [prior to the DC.PR.A conversion to DC.PR.C]. I do not generally track unrated preferred issues, but the issue that I presume will result from this conversion will be tracked, as I consider it to be grandfathered.

I expect the conversion offer will succeed due to the high consent payments and increased dividend; although some [such as myself] might say that a mere 100bp increase to go from a retractible issue to a perpetual would be pretty skinny for investment-grade and is basically laughable considering that Dundee isn’t just junk, it’s unrated junk. As support for my expectation, I will point out that the issue traded 39,456 shares today in a range of 16.90-19 before closing at 17.13-20, 98×36. The volume is very good for this issue; the price is well above recent averages.

The touted 6% yield isn’t really all that hot. Junk Straight Perpetuals are rare, but the Weston issues trade at a significant [but not huge] discount to par [which is good, remember! Calls are Bad!] to yield in the 5.60-70% range, so you’re only getting 30-40bp of spread for an unrated issue from a lesser credit. In addition, the par call commences June 30, 2019, which isn’t much of a lock-out period.

I don’t like this. I think holders should sell; perhaps not immediately, but wait for the news of the consent payments to get out, together with the headline coupon number. There was a bump in price today; maybe there will be more once the proceeds from tax-loss selling need to find a home.

Update, 2015-11-25: As pointed out in the comments by Assiduous (and Careful!) Readers SafetyInNumbers and prefman, the issue is actually retractible in about three-and-a-half years; it is not a perpetual, as I originally mistakenly said.

So what’s the yield? For every DC.PR.C share converted, the holder will get 0.7136 new shares, which will pay 6% quarterly; there will also be a Consent Payment of $0.4014 (if tendered early), of which $0.1784 will go to the advisor as a trailer solicitation fee and $0.2230 will be retained by the rightful owner. $25.00 * 0.7136 = $17.84, so assuming that fair value of DC.PR.C is its retraction price of $17.84 means that

Plugging in the numbers on the Yield-to-Call Calculator results in a conclusion that the company is paying 6.53% for funds, of which the holder gets 6.21%. These humbers are dependent upon the current price we use for DC.PR.C, of course; I have used its pare value of $17.84, but this does not account for accumulated dividend, which it should since I have also used the current date as the purchase date.

Using 2015-12-31 as the purchase date (when payments for DC.PR.C will stop and payments for the new issue will commence accumulating, assuming the deal goes through) result in the holder getting 6.40% compared to the company’s cost of 6.73%.

This is the equivalent of 8.32% interest for three-and-a-half year money! Rich indeed, but the question is – how much should the company be paying given its credit quality? I will note that DC.PR.B, FixedReset, 5.688%+410 was bid yesterday at 17.75 to yield 7.50%, while its Strong Pair DC.PR.D, FloatingReset+410 was bid at 13.61 to yield 8.50%.

This entry was posted on Wednesday, November 25th, 2015 at 3:50 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.