TransAlta Nudges TA.PR.D Offer; Hopes To Pay Sleaze Fees To Banks

TransAlta Corporation has announced:

that it has filed a Management Information Circular (the “Information Circular”) with respect to the previously announced transaction pursuant to which all the currently outstanding first preferred shares in the capital of the Corporation (the “Existing Preferred Shares”) are proposed to be exchanged (the “Preferred Share Exchange”) for shares in a single new series of cumulative redeemable minimum rate reset first preferred shares, Series 1, in the capital of the Corporation (the “New Preferred Shares” or “Series 1 Preferred Shares”) pursuant to a plan of arrangement (the “Arrangement”).

Following the announcement of the proposed Arrangement, the Corporation decided to increase the premium on the Series A preferred shares resulting in an increase in the exchange ratio for the Series A preferred shares to 0.530 which represents an implied offer premium of 10.9% relative to the December 16, 2016 closing price for the Series A preferred shares on the Toronto Stock Exchange (the “TSX”). This increase more appropriately aligns the premium offered to Series A preferred shareholders to the premium offered to holders of other series of Existing Preferred Shares. The Corporation believes this adjustment will increase preferred shareholder support of the proposed Arrangement while maintaining fairness for holders of all other series of Existing Preferred Shares.

The exchange ratios of the Series B preferred shares, Series C preferred shares, Series E preferred shares and Series G preferred shares remain unchanged at 0.550, 0.705, 0.790 and 0.820, respectively. These ratios provide premiums in the range of 13% to 17%.

In a breathtaking display of disinformation, they claim:

Implied Offer Premia Ranges from 11% to 17%. In addition to the minimum floor protection, the Arrangement also offers a premium of 11% to 17% depending on the series of Existing Preferred Shares held (based on their respective trading values on December 16, 2016, the last trading day on the TSX prior to the announcement of the Arrangement). The premia reflect the percentage increase of the deemed value of the Series 1 Preferred Shares over the trading price of the applicable series of Existing Preferred Shares after adjusting for the applicable exchange ratio. Please refer to the table at the bottom of this section for details of the calculations.

Part of the “table at the bottom of this section” is:

Series A Series B Series C Series E Series G
Number of Shares Outstanding 10,175,380 1,824,620 11,000,000 9,000,000 6,600,000
Pre-Announcement Closing Price (December 16, 2016) $11.95 $11.75 $15.57 $16.99 $18.07
Exchange Ratio 0.530 0.550 0.705 0.790 0.820
Equivalent Exchanged Price(1) $22.55 $21.36 $22.09 $21.51 $22.04
Series 1 Issue Price $25.00 $25.00 $25.00 $25.00 $25.00
Offer Premium(2) 10.9% 17.0% 13.2% 16.2% 13.4%

… with the notes, inter alia:

(1) “Equivalent Exchanged Price” is calculated by dividing the trading price of each series of Preferred Shares on December 16, 2016 by the applicable exchange ratio.

(2) Premia calculated by multiplying the $25.00 issue price of Series 1 Preferred Shares by the applicable exchange ratio for each series of Existing Preferred Shares and dividing this total by the trading price of the applicable series of Existing Preferred Share on December 16, 2016.

So their touted “Offer Premium” is dependent upon a trading price for the new shares of $25.00, a dubious proposition; this is besides the fact that – according to me – the TransAlta preferreds have been undervalued given their extant terms by far more than their “Offer Premium” and I’m perfectly happy waiting for the market to agree with me.

However, what attracted my ire about the Information Circular was on page 28 of this 203 page monstrosity:

TransAlta has engaged CIBC to form and manage a group (“Soliciting Dealer Group”) consisting of members of the Investment Industry Regulatory Organization of Canada for the purpose of soliciting votes in favour of the Arrangement. TransAlta has agreed to pay each member of the Soliciting Dealer Group (a “Soliciting Dealer”) who has entered into an agreement with CIBC, a fee of $0.13 per Preferred Share for each Preferred Share that is: (a) solicited by such member of the Soliciting Dealer Group and (i) whose name appears in the appropriate place on the proxy form or the voting instruction form, or (ii) described in the solicitation claim form or electronic file submitted by such member provided that such form or file contains adequate detail with respect to the beneficial ownership of such Preferred Share; (b) voted in favour of the applicable Arrangement Resolution; and (c) exchanged pursuant to the Arrangement, provided that the solicitation fee in respect of any beneficial owner of Preferred Shares shall not be less than $52 or more than $1,500 in respect of each beneficial owner who has voted in favour of the Arrangement. The Corporation will not pay any fee with respect to Preferred Shares held for a Soliciting Dealer’s own account as principal, and solicitation fees will not be payable in respect to votes received from an applicable series of Preferred Shares if (a) the Arrangement Resolution applicable to such series is withdrawn; (b) approval of the Arrangement Resolution is not obtained; or (c) the Arrangement is not completed with respect to such series of Preferred Shares. The solicitation fee is only payable to brokers or dealers with a Canadian address and is not payable to (a) any United States broker or dealer in respect of votes received in favour of the Arrangement Resolution from forms of proxy bearing a United States address; or (b) where the registered or beneficial owner of the Preferred Shares to which such fee applies is an institutional investor. In cases where a single beneficial owner of Preferred Shares holds such Preferred Shares in the accounts of more than one broker or dealer, the $52 minimum and $1,500 maximum amounts will be applied separately in respect of such broker or dealer.

Additionally, TransAlta may use Broadridge’s QuickVote™ service to assist beneficial Preferred Shareholders with voting their Preferred Shares. Beneficial Preferred Shareholders may be contacted by Kingsdale to conveniently obtain a vote directly over the telephone. Members of the Soliciting Dealer Group can direct shareholders to Kingsdale for assistance with voting. Broadridge then tabulates the results of all instructions received and provides the appropriate instructions respecting the Preferred Shares to be represented at the Meetings.

Thirteen cents a share for a favourable vote and nothing for an unfavourable one! It’s an absolute disgrace and a disgrace that’s been obvious for years, but that’s life in Canada. At least it removes any uncertainty regarding what the banks’ employees are going to tell their clients.

TransAlta does not appear to have put the Information Circular on their website and, of course, the Canadian Securities Administrators do not allow stinking investor scum to link directly to the public documents that are filed on their website in accordance with the law. Go to SEDAR and find the document “TransAlta Corporation Jan 16 2017 22:20:08 ET Management information circular – English PDF 1585 K”.

I’ll have more to say about this on the weekend. In a nutshell, as I wrote in PrefLetter:

TransAlta has proposed a Plan of Arrangement whereby its extant preferred shares will be converted into fractional shares of a new series of FixedReset preferreds with an initial rate of 6.50% paid until December 31, 2021, which will then reset to GOC-5 + 529bp if not called (with a minimum of 6.50%). This is an appalling, abusive offer. TransAlta’s extant preferred shares are trading well below their call price, which gives them a lot of room to make impressive capital gains should market conditions improve (e.g., narrowing FixedReset spreads to GOC-5, increases in the GOC-5 yield, and improvements in the perceived credit quality of the company). The plan effectively lowers the redemption price of the preferred shares outstanding, which will allow any such gains to be scooped up by the company instead of its preferred shareholders. The pathetic amount of extra income offered by the company (which will disappear on reset with even a small increase in the GOC-5 yield) does not even begin to compensate for the huge asymmetry in investment outcomes that will be imposed if the Plan is approved.

For more commentary regarding the Plan, see and The table below shows the effective change in redemption price for each outstanding issue; this is determined by multiplying the new issue’s redemption price of $25.00 by the fractional consideration of these shares offered for each extant series.

Ticker Current Dividend Spread on Reset Next Reset Date Fractional Consideration Effective Redemption Price if Plan Approved
TA.PR.D 0.67725 203 2021-3-31 0.503 12.58
TA.PR.E Floating 203 2021-3-31 0.550 13.75
TA.PR.F 1.15 310 2017-6-30 0.705 17.62
TA.PR.H 1.25 365 2017-9-30 0.790 19.75
TA.PR.J 1.325 380 2019-9-30 0.820 20.50

The shareholder meeting to vote on the Plan is currently scheduled for February 16. I recommend that shareholders vote “No” to this appalling plan.

Note that the table above now needs an adjustment: the proposed Fractional Consideration for TA.PR.D is now 0.530 and the Effective Redemption Price is therefore 13.25.

Affected issues are TA.PR.D, TA.PR.E, TA.PR.F, TA.PR.H and TA.PR.J.

5 Responses to “TransAlta Nudges TA.PR.D Offer; Hopes To Pay Sleaze Fees To Banks”

  1. stusclues says:

    Hi James (and Prefblog contributers) – given that TA capitulated and announced in February 2017 that this abusive offer was being pulled, I find it hard to understand the persistent mis-pricing of the extant TA prefs. Specifically, TA.PR.D/E are way too expensive and TA.PR.F is too cheap. Your implied volatility calculator tells me so as does my own more simplistic analysis which is based on views of current vs future yield and the CAGR of a possible price uplift from current pricing to a target price resulting from assumptions of future required spreads.

    Any ideas what is going on here?

  2. dodoi says:

    Market inefficiency explained in James’ post could be, and I think would be, an answer though not sure if there are not other explanations too.

  3. dodoi says:

    Also it seems the market overprices the lowest fixed reset preferred shares, in this case TA.PR.D. The same thing happens with other preferred shares like MFC.PR.F, SLF.PR.G, BAM.PR.X probably because there is a remote chance they will ever be recalled.

  4. stusclues says:

    Market inefficiency indeed, although that is a good point on call risk. Definitely can see your observation at work with many issues (CPX and ENB to add to your list) however it persists also with the ALA issues which I would argue are not at risk of being called. James’ explanation in that post is pretty darn good and I’m inclined to agree unless some other theory is afoot.

  5. jiHymas says:

    Also it seems the market overprices the lowest fixed reset preferred shares, in this case TA.PR.D. The same thing happens with other preferred shares like MFC.PR.F, SLF.PR.G, BAM.PR.X probably because there is a remote chance they will ever be recalled.

    Another possible rationale for mispricing of low-spread preferreds (when it occurs) is their leverage against Canadas – an issue may be priced at 12.50, but it will reset against Canadas paid on par; therefore, a 1bp change in the GOC-5 yield will translate to a 2bp change in dividend.

    Remember the ‘coiled spring’ comment?

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