PrefBlog

Via CNW Group:

Allbanc Split Corp. (the “Company”) announced today that it has called 61,685 Preferred Shares for cash redemption on March 9, 2007 (in accordance with the Company’s Articles) representing approximately 13.389% of the outstanding Preferred Shares as a result of the special annual retraction of 61,685 Capital Shares by the holders thereof. The Preferred Shares shall be redeemed on a pro rata basis, so that each holder of Preferred Shares of record on March 8, 2007 will have approximately 13.389% of their Preferred Shares redeemed. The redemption price for the Preferred Shares will be $60.80 per share.

Not the end of the world … there’s such a fat dividend on these things that the early call is actually better for holders (in terms of yield) than the maturity 2008-3-10.

This issue doesn’t trade much and so is in the “Scraps” index. It is not eligible for recommendation by HIMIPref™ due to its short term to maturity.

I’ve uploaded three graphs from HIMIPRef™:

• flatBidPrice (one point on the graph has been removed – an absurdly low bid, presumably due to a market-maker getting some rest at the end of long day)
• yieldToWorst
• modified duration (of YTW scenario) … a highly educational graph! The presence of several recognizable downward sloping lines is indicative of different YTW scenarios …. hmm … I’ll bet there’s an article in there, somewhere!

Update : From the 2006 Annual Report:

So, after the current redemption of 61,685 shares, somewhat less than half of the original issue will have survived.

One thing I find particularly interesting is the fact that the original DBRS rating of Pfd-2 has remained unchanged throughout this time. In the original rating release, dated 2003-3-13, DBRS said:

The purchase of the shares was funded with $54.6 million of Class A Preferred Shares and $38.6 million of all outstanding Class A Capital Shares. This will provide for downside protection of 42% as of March 11, 2003 to the holders of Class A Preferred Shares.

…

The redemption date of the Class A Preferred Shares is set on March 11, 2008. The current rating of the Class A Preferred Shares is based primarily on the available downside protection and the strong credit quality of the companies represented in the Portfolio. The main constraint to the rating is the concentration of the Portfolio in the financial services industry and the Company’s dependence on the value and dividend policies of the companies in the Portfolio.

When we look at the balance sheet as of Allbanc’s Semi-Annual Report as of September 10, 2006, we find (edited somewhat):

So we calculate the asset-coverage ratio as [(57,427 + 28,011) / (28,011)]:1 gives 3.05:1.

3.05:1 is a massive number! To express it in DBRS’ terms, it means downside protection of 67.2%! And what more, it only needs to last another year, since the terms of issue state that all the prefs will be redeeemed willy-nilly on March 10, 2008. Come on, now! What are the chances that a portfolio comprised of the Big 5 Bank stocks is going to lose more than 67.2% of its value inside of a year?

By comparison, let’s look at what DBRS said about Canadian General Investments on March 28, 2006, when rating CGI.PR.C:

DBRS has also assigned a new Pfd-1 rating with a Stable trend to the 3.90% Cumulative Redeemable Class A Preference Shares, Series 3 issued by the Company. The Company is a closed-end mutual fund corporation invested primarily in the exchange-traded stock of Canadian companies (the “Portfolio”). The rating is supported primarily by the very high level of downside coverage of approximately 75%. The Portfolio is diversified; with no more than 3.4% in any single name, there is an overweight in the Financial and Energy sectors with weightings of 26.5% and 25.9%, respectively. The Company may make dividend and special distributions to common shareholders that could potentially reduce asset coverage, but only to the extent that asset coverage after giving effect to such distributions remains above 2.5 times.

.

So, sure: CGI is better diversified, the coverage is even higher than Allbanc’s and CGI.PR.C has language in the terms of issue that restrict distributions if asset coverage falls below 2.5:1. These are good things and I will not minimize them. On the other hand, CGI.PR.C doesn’t mature until 2016-6-15, which gives a lot more time for things to go wrong.

I won’t insist that the ABK.PR.C should be rated equivalent to CGI.PR.C! I won’t even insist that a Pfd-1(low) rating is the proper level (although I’d like to see some discussion of the point)! But I will say: I don’t understand why ABK.PR.C has not been upgraded to at least Pfd-2(high)!

This entry was posted on Monday, February 26th, 2007 at 11:05 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.