PrefBlog

Aimia Inc. has announced:

that its Board of Directors has authorized the launch of a substantial issuer bid (the “Offer”) pursuant to which Aimia will offer to purchase for cancellation up to 100% of its Cumulative Rate Reset Preferred Shares, Series 1 (the “Series 1 Shares”), Cumulative Rate Reset Preferred Shares, Series 3 (the “Series 3 Shares”) and Cumulative Floating Rate Preferred Shares, Series 4 (the “Series 4 Shares” and collectively with the Series 1 Shares and the Series 3 Shares, the “Preferred Shares”) in consideration for senior unsecured notes (the “Notes”). The Company further announces the execution of a support agreement (the “Support Agreement”) with Phillips Hager and North (“PH&N”), the largest holder of Preferred Shares, to tender all of its 7.2 million Preferred Shares under the Offer.

The launch of Offer will mark the first initiative introduced as a result of Aimia’s strategic review process designed to unlock the Company’s value.

As agreed with PH&N under the Support Agreement:
(i) The Offer will be based on the following exchange considerations:
• Series 1 Shares: $17.00 per Series 1 Share;
• Series 3 Shares: $17.50 per Series 3 Share; and
• Series 4 Shares: $18.4375 per Series 4 Share.
(ii) The Notes will:
• Have a par value of $100, and be issued at a value of 97% to par;
• Bear interest at a coupon of 9.75%, payable semi-annually; and
• Mature in five years with no annual amortization payments.
(iii) Subject to limited conditions, Aimia will have the option to pay interest in kind, for a premium of 150 basis points to the cash coupon interest rate, any time.
(iv) The Notes will be senior unsecured obligations of the Company

Assuming that all preferred shareholders tender to the Offer, the Offer will result in (i) approximately $8 million in annual cash savings when comparing the annual preferred dividends and Part VI.1 tax to the annual cash coupon interest payments, and (ii) approximately $65 million gain on the transaction, based on the exchange value of the Notes and the carrying value of the Preferred Shares exchanged net of transaction fees. Aimia considers this transaction as accretive to Common shareholders as (i) it reduces cash outflows on an annual basis, (ii) it increases the net asset value for Common shareholders and (iii) provides a payment in kind option on the interest related to Notes.

TD Securities Inc. is acting as financial advisor to Aimia with respect to the Offer.

The Offer referred to in this news release has not yet commenced. This news release is for informational purposes only and does not constitute an offer to buy or the solicitation of an offer to sell Preferred Shares. An offer to purchase the Preferred Shares in consideration for Notes will only be made pursuant to a formal offer to purchase and issuer bid circular, together with the related letter of transmittal and notice of guaranteed delivery (the “Offer Documents”). The Offer Documents, which will contain the terms and conditions of the Offer and instructions for tendering Preferred Shares, are expected to be sent to shareholders and filed with the applicable Canadian securities regulatory authorities and made available on SEDAR+ at www.sedarplus.ca within the next 30 days. The Offer will not be made to, nor will tenders be accepted from or on behalf of, holders of Preferred Shares in any jurisdiction in which the making or acceptance of offers to purchase Preferred Shares for Notes would not be in compliance with the laws of that jurisdiction. None of Aimia, its Board of Directors or TD Securities Inc. makes any recommendation to shareholders as to whether to tender or refrain from tendering any or all of their Preferred Shares to the Offer. Shareholders are urged to read the Offer Documents, when available, carefully and in their entirety, and to consult their own financial, tax and legal advisors and to make their own decisions with respect to participation in the Offer.

Affected issues are AIM.PR.A, AIM.PR.C and AIM.PR.D.

AIM.PR.A is a FixedReset, 4.50%+375, assigned to the Scraps-FixedReset (Discount) subindex. It commenced trading as AER.PR.A with an initial dividend rate of 6.50% on 2010-1-20 after being announced 2010-1-12. AIM.PR.A changed its ticker from AER.PR.A in October, 2011. The first extension was reported on PrefBlog and the reset to 4.50% was announced 2015-3-2. I recommended against conversion. There was a 43% conversion to the FloatingReset, AIM.PR.B in 2015. The 2020 extension was announced 2020-2-25. AIM.PR.A will reset to 4.802% effective 2020-3-31; at that time I opined that a decision on whether to convert or hold should be made according to each investor’s circumstances.

AIM.PR.B commenced trading 2015-3-31 as the result of the 43% conversion from AIM.PR.A noted above. I opined that a decision on whether to convert or hold should be made according to each investor’s circumstances. AIM.PR.B ceased to exist on 2020-3-31 as there was a total conversion back to AIM.PR.A.

AIM.PR.C was issued as a FixedReset, 6.25%+420, that commenced trading 2014-1-15 after being announced 2014-1-6. The extension was announced 2019-2-26. AIM.PR.C reset at 6.011% effective 2019-3-31 (not 6.01%, as stated in the original press release) I recommended against conversion and there was no conversion. Notice of extension was provided in 2024. The issue is tracked by HIMIPref™ but relegated to the Scraps-FixedReset (Discount) subindex on credit concerns.

AIM.PR.D is a FloatingReset, Bills+420, that arose from a 2024 conversion from AIM.PR.C:

Aimia Inc. (TSX: AIM) (“Aimia” or the “Company”) announced today that 2,706,112 of its 4,355,263 currently outstanding Cumulative Redeemable Rate Reset First Preferred Shares, Series 3 (“Series 3 Shares”) were tendered for conversion, on a one-for-one basis, into Cumulative Redeemable Floating Rate First Preferred Shares, Series 4 (“Series 4 Shares”) after having taken into account all election notices following the March 18, 2024 conversion deadline. As a result, on April 1, 2024, the Company will have 1,649,151 Series 3 Shares issued and outstanding and 2,706,112 Series 4 Shares issued and outstanding.

The Series 3 Shares will continue to be listed on the Toronto Stock Exchange (“TSX”) under the symbol AIM.PR.C. The Series 4 Shares will begin trading on the TSX on April 1, 2024 under the symbol AIM.PR.D, subject to the Company fulfilling all the listing requirements of the TSX. The TSX has conditionally approved the listing of the Series 4 Shares effective upon conversion.

The Series 3 Shares will pay fixed cumulative preferential cash dividends on a quarterly basis, for the five-year period from and including March 31, 2024 to but excluding March 31, 2029, if, as when declared by the Board of Directors of Aimia based on the annual fixed dividend rate of 7.773%, being equal to the five-year Government of Canada bond yield plus 4.20%, as determined in accordance with the rights, privileges, restrictions and conditions attaching to the Series 3 Shares.

The Series 4 Shares will pay quarterly floating rate cumulative preferential cash dividends for the five-year period from and including March 31, 2024 to but excluding June 30, 2024, if, as when declared by the Board of Directors of Aimia at the dividend rate of 9.181%, being equal to the three-month Government of Canada Treasury Bill yield plus 4.20% per annum, calculated on the basis of the actual number of days in such quarterly period divided by 365, as determined in accordance with the rights, privileges, restrictions and conditions attaching to the Series 4 Shares (the “Floating Quarterly Dividend Rate”). The Floating Quarterly Dividend Rate will be reset every quarter.

For more information on the terms and risks associated with an investment in the Series 3 Shares and the Series 4 Shares, please refer to Aimia’s prospectus supplement dated January 8, 2014, which is available on SEDAR+.

All inquiries regarding the conversion of Aimia’s Series 3 Shares should be directed to the Company’s Transfer Agent, TSX Trust Company at 1-800-387-0825 or
shareholderinquiries@tmx.com.

This looks like a pretty skimpy offer and the market wasn’t particularly impressed, with the TMX reporting that AIM.PR.A (Series 1) traded 1,900 shares at a VWAP of 16.74 and AIM.PR.C (Series 3) trading 1,700 at VWAP 18.14. AIM.PR.D didn’t trade at all. Maybe PH&N has been desperately trying to dump these puppies for years and has finally given up!

Thanks to Assiduous Reader stusclues for bringing this to my attention!

DBRS has announced that it:

downgraded its credit ratings on Laurentian Bank of Canada (LBC or the Bank), including the Bank’s Long-Term Issuer Rating to BBB from BBB (high) and Short-Term Issuer Rating to R-2 (high) from R-1 (low). Morningstar DBRS changed the trends for all credit ratings to Stable from Negative. The Bank’s Intrinsic Assessment (IA) is BBB with a Support Assessment (SA) of SA3. The SA3 designation reflects no expectation of timely external support and results in the Bank’s Long-Term Issuer Rating being equivalent to the IA.

KEY CREDIT RATING CONSIDERATIONS
The credit rating downgrades reflect LBC’s weak earnings performance, which also affects Morningstar DBRS’ view of LBC’s competitive position and franchise strength. Earnings have remained under pressure in the first nine months of 2024 ended July 31, 2024 (9M 2024), and Morningstar DBRS expects continued weakness in earnings in the short to medium term as the new leadership team embarks on its turnaround strategy. Moreover, because of lack of scale, LBC has divested assets under administration to two different entities as part of its strategy to focus on areas of business where it can win and be more competitive. Other aspects of the new strategic plan include revamping its leadership team, simplifying the Capital Markets segment, and accelerating investments to improve operational and technological resiliency. Nevertheless, in Morningstar DBRS’ view, these initiatives could take some time to realize material benefits, considering the Bank’s previous transformations, which yielded less than desired levels of success. The Stable trends reflect Morningstar DBRS’ expectations that LBC’s new leadership will implement the strategic initiatives without operational missteps, while demonstrating a gradual improvement in earnings and franchise strength over time.

Supporting the credit ratings, LBC continues to demonstrate good credit quality with low impairments and loan losses; however, Morningstar DBRS expects asset quality metrics to modestly deteriorate from current levels in F2025 because of elevated debt-servicing costs for borrowers. The Bank’s balance sheet fundamentals remain stable with good levels of liquidity and capital buffers to deal with potential deposit outflows and absorb a stressed level of loan losses.

CREDIT RATING DRIVERS
Over the longer term, Morningstar DBRS would upgrade the credit ratings, if LBC demonstrates a material and sustained improvement in its franchise position and financial performance while maintaining a similar risk profile.

Conversely, additional missteps and/or a failure to execute on the Bank’s strategic initiatives would result in another credit ratings downgrade. In addition, pressure on funding and liquidity or a significant deterioration in asset quality would also result in another credit ratings downgrade.

CREDIT RATING RATIONALE
Franchise Combined Building Block (BB) Assessment: Moderate
LBC is Canada’s eighth-largest Schedule I bank with assets of $47.5 billion as at July 31, 2024. The Bank offers retail services in Québec through its branch network as well as commercial lending across Canada and in the U.S. LBC also distributes financial products to brokers and financial advisors across Canada through its wholesale arm, B2B Bank. During its Investor Day on May 31, 2024, LBC unveiled its new strategic plan developed by recently appointed President and Chief Executive Officer (CEO) Éric Provost. The plan lays out a path to profitability-driven growth, which includes improved efficiency in the Personal Banking part of the Personal and Commercial Banking segment through digitalization and simplification as well as a continued focus on commercial lending as the key growth engine. Furthermore, the Bank will be focusing on funding optimization, strengthening core retail deposit gathering, and expanding the Bank’s fixed income and foreign exchange specialization capabilities in its Capital Markets segment. As part of the revamped strategy, LBC has divested its full-service and discount brokerage divisions and equity research businesses, while accelerating investments to improve operational and technological resiliency.

Earnings Combined Building Block (BB) Assessment: Weak
LBC has experienced further earnings deterioration and continues to report weaker profitability relative to its peers, with reported adjusted net income declining by about 21.9% year over year (YOY) to $127.7 million for 9M 2024. Adjusted return on common equity, as reported by the Bank, fell to 6.1% in 9M 2024 from 8.1% for the same period of the prior fiscal year. Lower adjusted net earnings were largely driven by a 3.2% YOY reduction in net interest income on the back of lower commercial loan volumes and a 4.6% YOY increase in noninterest expenses largely reflecting technology costs and a higher provision for credit losses. As a result, the adjusted efficiency ratio, as reported by the Bank, deteriorated by 42 basis points (bps) YOY to 73.4% in 9M 2024, while the reported net interest margin remained stable at 1.8% for the same period. Of note, the Bank reported a net loss of $46.2 million in 9M 2024 (on an unadjusted basis) largely associated with the impairment and restructuring charges of $212.0 million ($166.8 million after income taxes) related to the Bank’s operations and the impairment of the Personal and Commercial Banking segment recorded in Q2 2024.

Risk Combined Building Block (BB) Assessment: Good
Amounting to $35.1 billion as at Q3 2024, gross loans contracted by 5.1% YOY, largely because of reductions in commercial and nonmortgage personal loans of 7.2% and 20.2%, respectively. The bulk of credit risk lies in the commercial book, which accounted for about 47% of total loans as at Q3 2024 and has concentrations in commercial real estate and inventory financing. The Bank’s asset quality is still good with low impairments and loan losses, although the gross impaired loans ratio increased by 53 bps YOY to 1.1% at the end of Q3 2024, largely because of increased impairments in commercial loans, including commercial mortgages. Morningstar DBRS expects asset quality metrics to further deteriorate from their current levels in F2025 despite the declining interest rate environment. Furthermore, Morningstar DBRS remains cautious that if not managed prudently, the Bank’s continued realignment of the loan portfolio and geographic expansion, as well as potential challenges with the execution of the revamped strategy, could expose LBC to heightened levels of operational and credit risk.

Funding and Liquidity Combined Building Block (BB) Assessment: Good/Moderate
LBC’s overall funding and liquidity position remains stable. The Bank has maintained a good branch-raised deposit base in Québec and also funds its operations through broker-sourced deposits. Accounting for about 65% of LBC’s total funding base, total deposits, including capital markets deposits, declined by 11.3% YOY to $23.3 billion in Q3 2024, in line with the contraction in the loan book. The decrease was largely driven by personal deposits, which represented 86% of total deposits as at Q3 2024. Meanwhile, deposits from the broker channel totalled $10.0 billion and accounted for about 43% of total deposits as at Q3 2024. As part of its revamped strategy, the Bank is seeking to attract additional deposits across Canada, especially direct retail deposits through expansion of its digital capabilities, which Morningstar DBRS views positively.

Capitalization Combined Building Block (BB) Assessment: Good/Moderate
LBC’s capital ratios under the standardized approach are above regulatory minimums and provide appropriate buffers to absorb stressed levels of loan losses. Morningstar DBRS would view favourably a larger capital buffer, sufficient to absorb significant losses, especially as the Bank is focused on commercial lending, which may be more susceptible to weakness in the event of a sustained economic downturn. The CET1 capital ratio increased by 110 bps YOY to 10.9% as at Q3 2024, primarily reflecting lower risk-weighted assets on the back of lower loan balances. The Bank reported a leverage ratio of 5.2% in Q3 2024 (compared with 4.8% as at Q3 2023) that was also above the regulatory minimum of 3.0%.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/442469.

The issue was downgraded to Pfd-3(low), Trend Negative last December. This downgrade does not affect the level of the rating, but changes the trend to stable.