Barry Critchley was kind enough to quote me in his piece TransAlta pref shareholders not happy with consolidation plan:
Others disagree. For instance, James Hymas, a portfolio manager at Hymas Investment Counsel and the publisher of Prefblog, called it “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.” In Hymas’s view, 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.”
This week, Hymas weighed in again. In an interview he said the “amount of extra income being offered is not just minimal but will disappear completely on reset with only a modest rise in government of Canada five year rates.” Accordingly if five year Canada bonds rise “significantly, the extant issues will pay more than the (proposed) new issue.”
Hymas also was critical of the process that will see those members of the soliciting group collect $0.13 per share per favorable vote — but nothing in the event the vote is unfavorable. The large difference in payments, “really makes me think they understand very well how cruddy their offer is.”
This follows previous posts on this topic:
- TA Proposes Sleazy Exchange Offer
- TransAlta plays the Grinch with its preferred share holders
- TransAlta Nudges TA.PR.D Offer; Hopes To Pay Sleaze Fees To Banks
Affected issues are TA.PR.D, TA.PR.E, TA.PR.F, TA.PR.H and TA.PR.J.
I might have thought that companies could themselves go into the public market and buy up shares that are undervalued. Oh wait, they can….
This week TransAlta, which has said the plan, if implemented, will reduce its “notional capital balance of preferred shares by approximately $300 million,” issued a 203-page circular for the Calgary meeting.
203 pages – got that covered.
The issue for me reduces to a very simple point. “[For TA.PR.D] the redemption price will drop from $25 to $12.575 ” These shares (TA.PR.E in my case) do pay a reasonable interest and are somewhat inflation protected. But they also have the potential upside of paying better than market rates at the next reset especially when purchased at stressed prices. That upside is protected by a high redemption price of $25. Lowering the redemption price erases the potential upside. The consolidation plan, basically, is a huge ripoff. It’s like taking my flush and giving me a pair of deuces.
To me it is simple. If you are so keen on maintaining your interest rate upside, sell the TA prefs at the 20% premium you got when this deal was announced, and go buy TRP prefs, or any of the other ones that are beat down and have interest rate upside. Why would you rather block the deal and end up owning 20% less TA prefs. Is TA really that special of an issuer. If you want to play interest rate upside, there are still a lot of prefs out there that allow you to do that. Please do not ruin the deal for the rest of us who are happy to take 20% premium and move on. Do you guys ever wonder why these prefs have rallied so much since announcement if it is such a shitty deal.
Different investors have different needs. I’m not looking to flip, but to hold these in perpetuity for retirement income. I’m not interested in TRP and don’t care about the market value since I’m not selling. A deal is a deal … that’s how I look at it.
I did suspect that this was a setup for those in and out for a quick buck probably including insiders. Thanks for the confirmation.
I would not suggest anyone invest in TA or Alberta energy for that matter if this is how the game is played. I just want to invest based on terms at time of purchase that companies stand behind and not have to worry that the issuer will change the rules of the game as it pleases them.
If you are so keen on maintaining your interest rate upside, sell the TA prefs at the 20% premium you got when this deal was announced
Before we get too excited about returns due to the deal, let’s look at some real numbers:
2016-12-16 to 2017-1-23
12/16
1/23
Nice returns to be sure, but nothing earth-shaking. Over the same period, we can see total returns of +17.49% from AIM.PR.G; TRP.PR.C did 13.54%; TRP.PR.I gave us 12.68%; AIM.PR.A returned +12.43%; HSE.PR.A cam in with 12.34% and BCE.PR.G did +12.07%. In all, 25 issues returned over 10% over the period (including the top two TA issues), while another 15 were in the 9%-10% range.
It is both noteworthy and indicative that the TA issues have done nothing over this period after getting an initial pop from the announcement; clearly, the market realizes there’s not much upside in the proposed new issue.
I’m also concerned that the PR.D and PR.E shares might well end up in the $15 to $20 range after conversion. They will offer a higher dividend but the risks repressing the price of the shares remain. I’d also like to see the NPV on $25 redeemed after 20 years (an arbitrary distant point) while paying 3% real return versus the NPV on $13.75 (for PR.E) redeemed after 5 years while paying 6.5% real (say) return.
go buy TRP prefs, or any of the other ones that are beat down and have interest rate upside
I already have TRP prefs. Additionally, you may remember my discussion of ‘fair value’ and Disparity in a prior comment on this issue.
According to me, the TA FixedResets are still quite cheap relative to their fair value: TA.PR.D is bid at 12.98, for instance, compared with its fair value of 14.44; TA.PR.J is bid at 19.72 compared to fair value 23.03.
By comparison, TRP.PR.A is bid at 17.45 compared to 17.02 fair value; TRP.PR.C is bid at 14.98 compared to fair value of 14.37.
Now, I will be the first to admit that these numbers are only my own estimates and I recognize that there is a great deal of uncertainty in them. However, they form a major part of my valuation of preferred shares.
Sell my TA preferreds to buy TRP’s? That’s selling cheap stuff to buy expensive stuff, which is the opposite of what I try to do on a daily basis.
Why would you rather block the deal and end up owning 20% less TA prefs.
Because day to day fluctuations in price are nothing to me, unless those fluctuations change its rich/cheap status relative to other issues.
As noted above, it is my belief that the TA preferreds are worth far more than their current market value. I’m happy to wait until either the market agrees with me, or I change my mind, because right now I’m getting a disproportionately high income stream from the capital invested – which is simply another way of saying the same thing.
Is TA really that special of an issuer.
No. But its preferreds are significantly undervalued.
Please do not ruin the deal for the rest of us who are happy to take 20% premium and move on.
If all you’re seeking to do is to take the “20% premium you got when this deal was announced”, then you can sell your holdings into the market right now. Nobody’s stopping you.
If you continue to hold them now and support the deal, then presumably you believe that the new issue will trade above its equivalent price – for TA.PR.D, the current price of 12.92 implies a new issue price of 24.38.
Why do you believe the new issue will trade materially higher than 24.38?
Do you guys ever wonder why these prefs have rallied so much since announcement if it is such a shitty deal.
There will always be people willing to believe the flim-flam. I’m not one of them (usually!).
I’m also concerned that the PR.D and PR.E shares might well end up in the $15 to $20 range after conversion.
Yes, the company’s figures all rely on a $25 trading price for the new issue, but just what level it will find in the short term remains a mystery.
I don’t understand why TA.PR.D’s conversation ratio is 0.53. Based on prices of PR.D and PR.E going into the conversation, a more rational ratio is 0.60. It almost feels like they inverted PR.D and PR.E’s ratios by mistake when they announced the deal (i.e. PR.D should be 0.55 and PR.E should be 0.503).
Also given the ongoing rally in all preferreds, the premium they are “paying” has definitely disappeared.
I guess your outlook depends on how you invest. I think the prefs will fall if the deal is blocked and rally if the vote is a yes. For me is it as simple as that. There are many other alternatives to participate in the Canadian pref market so I would prefer a gain to a loss. I do see where you guys are coming from though. I do have a question, nevermind what should happen, what do you think WILL happen? What probability do you assign to the vote going through? Is it 50/50 at this stage….or still more likely to go through?
I don’t understand why TA.PR.D’s conversation ratio is 0.53.
The information circular is not particularly forthcoming on this issue:
Also given the ongoing rally in all preferreds, the premium they are “paying” has definitely disappeared.
I agree.
what do you think WILL happen? What probability do you assign to the vote going through? Is it 50/50 at this stage….or still more likely to go through?
No idea, really. On the one hand, retail has a visceral distaste for any reduction in redemption value, which I will assume extends to this deal – you may recall that the initial RONA deal, (which I quite liked) was rejected by an overwhelming majority. On the other hand, retail brokers are being offered $0.13 / share to bring about a positive vote.
“what do you think WILL happen?”
Whether the vote is yes or no, there’s not much more capital gain to be had, given all preferred series are already trading at 97.4%-98.3% of new par. If converted, the long term holders will get their ~6.5%+ yield in perpetuity (until management finds another way to screw shareholders). I have higher aspiration and smaller stomach for potential downside.
If converted, the long term holders will get their ~6.5%+ yield in perpetuity
Not necessarily.
In the event that market spreads decline (e.g., market conditions and/or TA’s credit quality improve) then the new issue will be called and, probably, replaced with new series of lower-spread, lower-yielding preferreds.
This is the danger of call risk and is why this is such a bad deal – the extant preferreds can give their holders quite a bit of benefit from improving conditions before call risk becomes a significant concern.
“In the event that market spreads decline (e.g., market conditions and/or TA’s credit quality improve) then the new issue will be called and, probably, replaced with new series of lower-spread, lower-yielding preferreds.”
This falls under my “until management finds another way to screw shareholders”. 🙂
There is one way the company could please everyone is to convert the shares tendered to the new issue without forcing the ones that don’t want to to do so. Obviously all the issues would continue to trade. I find that using a plan of arragement is disrespectful of the existing shareholders who should have the right to retain the original deal for as long as the company exist. Using other shareholders and brokers to change the terms of a deal is just not right and I wonder why this should be legal. Maybe we should get a MLA to propose a private bill on the subject, it was quite effective in forcing Airmiles to change its expiry policy.
That being said, as an investor, I don’t like this new trend where companies are forcing shareholders into a different deal that they agreed to when they bought their shares. In the last year we had Dundee, Rona and now these guys. If we keep seeing more of those, investors will start asking for better terms to compensate for this additionnal risk.
I received my Voting Instructions in the mail today. No big surprise. Voted AGAINST the Plan of Arrangement. Super easy to vote online via ProxyVote.com. Literally took 30 seconds. If you don’t vote, it’s automatically voted with Management to screw the preferred shareholders. Ensure you get your AGAINST vote in! Every vote counts!
I am with TD and have not received the proxy card yet. Today I received a “Corporate Action Notice” dated Feb 2nd that is about opting for a capital gain or loss. Called TD and they do not know why I have not received the proxy card. I was told to call in tomorrow and they will generate a key for me. I will but am wondering how many others have not received a proxy card (conspiracy theory 😏). The deadline seems to be Feb 16th (at least this was what they told me after being put on hold several times)
Looks like we got the message over to TA, they announced today suspension of the Special AGM after withdrawal of the consolidation proposal.
BRIEF-Transalta Corp determines not to proceed with preferred share exchange
Reuters · 1 hour ago