GWO.PR.X Called for Redemption

Great-West Lifeco has announced:

that it intends to redeem all of its outstanding Series E First Preferred Shares on December 31, 2009. The redemption price will be $26.00 for each Series E First Preferred Share plus an amount equal to all declared and unpaid dividends, less any tax required to be deducted and withheld by the Corporation. The paid-up capital of the Series E First Preferred Shares is $22.78 per share.

A formal notice and instructions for the redemption of the Series E First Preferred Shares will be sent to shareholders in accordance with the rights, privileges, restrictions and conditions attached to the Series E First Preferred Shares.

There’s a shocker! They closed last night at 26.60-63, so some players have found out the hard way that purchasing issues with a negative yield-to-worst is playing with fire.

As of August 18, GWO.PR.X was held in CPD with a weight of 3.82%; as of June 30, it was held in DPS.UN with a weight on August 18 (assuming that it was not sold in the interim) of 0.8%; and as of September 30 it was in the BMO-CM “50” index to the tune of 4.42%.

This is a monster issue, by the way, with the TSX reporting 22.09-million shares outstanding. Holders should also take note that the difference between the redemption price of 26.00 and the paid-up capital of 22.78 is a deemed dividend, while the capital gain or loss is determined by the difference between the holder’s ACB and the 22.78 figure … but check with your personal tax advisor before taking action on the basis of tax commentary from a portfolio manager!

GWO.PR.X was last mentioned on PrefBlog in the post Potential for Buy-Backs and Unscheduled Exchanges. GWO.PR.X is tracked by HIMIPref™ and is currently included in the Operating Retractible subindex.

13 Responses to “GWO.PR.X Called for Redemption”

  1. prefhound says:

    OK, am I missing something? Why did they do it?

    GWO.PR.X has a non-cumlative dividend of only $1.20 — less than they would be paying these days for a new issue. It is not retractible for another 4 years and even then would be for common shares.

    Is this somehow counted as “debt” and not equity with these terms? Even so, these days I would have thought all capital was good at lifecos.

    Also, don’t they need OSFI’s permission to redeem?

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  3. jiHymas says:

    Well, they’d be slightly discounted common shares; it’s normal for an Operating Retractible to be called the day before holders get the conversion right.

    It is indeed counted as debt, as are all Operating Retractibles – this is required by the CICA handbook, which has resulted in the demise of this class of share. It doesn’t make any logical sense – it would still be a retractible preferred share with with defined properties even if the accountants decided it should be classified as depreciation on office equipment – but that’s the modern world for you.

    GWO has been bragging / complaining for the past several quarters that it has all kinds of cash at the Holdco level that is not required at the OpCo level. I can only imagine that they now think they can see far enough ahead to redeem these early.

    They do need OSFI permission to redeem, but I would think this would be automatic. GWO is an insurer, but it’s an insurer with no policy-holders and no requirement to file MCCSR reports – all that’s done at the OpCo level, GWL.

    According to the yield calculator, the yield achieved by “buying” the issue at 26 in December and holding ’til presumed maturity in September 2013 is 3.65%, compounded quarterly, equivalent to 3.67% with semi-annual compounding, equivalent to 5.14% interest at the standard factor of 1.4x. The GWO bond, 5.995% of 2012-12-31, is currently quoted at 107.70b to yield 3.39%. They can pick up about 175bp by refinancing on the bond market, without impairing their computed capital ratios.

  4. like_to_retire says:

    I was surprised to see bidding on this preferred at $26 on Friday (after the announcement) considering the holder would be subject to tax on a whopping $3.22 deemed dividend per share when its redeemed.

    I must be missing some brilliant strategy.


  5. jiHymas says:

    The dividend/capital gain gross-up won’t matter to non-taxable investors; and there may be some taxable players for whom the gross-up is attractive (perhaps in terms of income-shifting; perhaps because of dividend-capture considerations).

    The issue may now be considered money-market paper, with the yield formula:
    P = 26.30 / (1 + YD/365)

    (the redemption price is not 100, as for ordinary MM instruments; it’s the flat redemption price of $26.00 plus the dividend. I might be a day off on the dividend amount, and can only console myself with the thought that GWO didn’t know what it is either.)

    where D = 49 (days from settlement 11/12 to redemption 12/31. Note that this assumes the investor gets his money bang on the nail 12/31, which is not necessarily the case).

    If we assume that Y = 2% (2-month commercial paper is only 0.37%), then P works out to 26.23.

    At a price of 26.00 (which ignores commission and other expenses) the yield works out to 8.59% money-market equivalent [subject to all the assumptions noted above]. Haven’t seen those yields on prime paper for a while! There will be huge tax effects for taxable investors, of course; but as noted some of them might consider that a good thing.

  6. like_to_retire says:

    OK thanks James. I guess I didn’t think of the non-taxable investors, or income splitters, etc. Makes sense.

    I only saw the small regular dividend payable in December compared against the taxes for the rather large deemed dividend and thought the market price would have been lower.

    I’m not convinced that there wouldn’t be a portion of buyers that figure they’ll snag the dividend without being aware of the paid-up capital ramifications.


  7. jiHymas says:

    I’m not convinced that there wouldn’t be a portion of buyers that figure they’ll snag the dividend without being aware of the paid-up capital ramifications.

    You have more faith in investors’ knowledge than I do! I am absolutely sure that there will be many, many howls of outraged shock when people get their T3s next spring.

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  9. blue says:

    For a taxable holder, there must be a breakeven formula , if your cost is x sell over this y…?

  10. jiHymas says:

    For a taxable holder, there must be a breakeven formula

    Sure, but it will be highly dependent upon the holder’s tax situation and discounting rate.

    If, for example, the capital loss can be used right away, then most of the effect will be a wash.

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