PrefBlog

Dundee Corporation has announced:

that it intends to commence a substantial issuer bid (the “Offer”) to purchase for cancellation from the holders thereof who choose to participate up to 975,610 of its Cumulative Floating Rate First Preference Shares, Series 3 in the capital of the Corporation (the “Series 3 Shares”) at a purchase price of C$20.50 (the “Purchase Price”) per Series 3 Share, for a maximum aggregate purchase price of C$20,000,005.

In connection with the Offer, the Corporation has entered into lock-up agreements (the “Lock-up Agreements”) with each of Stornoway Recovery Fund LP and Ravensource Fund (the “Locked-up Shareholders”) pursuant to which, among other things, and subject to the terms and conditions set out therein, the Locked-up Shareholders have agreed to tender to the Offer all of the Series 3 Shares held by them as at the date of the Lock-up Agreements. As at the date of the Lock-up Agreements, the Locked-up Shareholders hold an aggregate of 499,650 Series 3 Shares representing approximately 30.48% of the issued and outstanding Series 3 Shares as at November 20, 2023.

The Offer is expected to commence on November 22, 2023 and will expire at 11:59 p.m. (Toronto time) on December 27, 2023 or such later time and date to which the Offer may be extended by Dundee, unless varied or withdrawn by Dundee.

“This Offer is another important step towards the ongoing streamlining of our capital structure to support the successful execution of our strategic business plan with a focus on capital allocation in the junior mining industry. Reducing the call on our capital from the preferred share dividends preserves our capital base to pursue our core strategy,” said Jonathan Goodman, President and Chief Executive Officer.

“We believe this is an effective way to simplify our balance sheet, lower our overall cost of capital, and reduce our run-rate cash outflows which benefits all classes of shareholders,” said Lila Murphy, Executive Vice President and Chief Financial Officer.

The Board of Directors will continue to review various options for the allocation of capital, including any portion of the C$20,000,005 under the Offer remaining in excess of the aggregate purchase price payable pursuant to the Offer, with such options including, but not limited to, further repurchases of the Corporation’s securities, including without limitation, its Class A Subordinate Voting Shares and Series 2 Shares (as defined below). Beginning in early 2018, the Corporation has focused on the implementation of its strategy of rationalizing its portfolio of investments and monetizing non-core assets as it exists [sic] business lines which are no longer deemed to be aligned with its longer-term mining-focused strategy. As part of this process, the Corporation has taken significant steps to streamline its capital structure and strengthen its balance sheet. In line with the Corporation’s longer-term strategy and commitment to creating value for the Corporation, the Board of Directors believes that the purchase of Series 3 Shares under the Offer represents an attractive investment opportunity for Dundee and will be welcomed by certain holders of Series 3 Shares who may wish to reduce their share ownership positions.

Treatment of Declared Dividend

The Corporation previously announced on November 8, 2023, that the Board of Directors approved the payment of a quarterly cash dividend for the quarter ended December 31, 2023 of C$0.58351 per Series 3 Share, which is payable on January 2, 2024 to shareholders of record on December 19, 2023 (the “Series 3 Dividend Record Date”). Shareholders of record on the Series 3 Dividend Record Date will be entitled to receive the quarterly cash dividend declared by the Board of Directors for each Series 3 Share held on the Series 3 Dividend Record Date, whether or not such shareholders decide to deposit their Series 3 Shares under the Offer and whether or not all or any portion of their Series 3 Shares are taken up and paid for by the Corporation pursuant to the Offer, and whether or not such shareholders continue to hold some or all of such Series 3 Shares following the Series 3 Dividend Record Date. Such quarterly cash dividend will be paid by the Corporation on January 2, 2024 to shareholders of record on the Series 3 Dividend Record Date (less any tax required to be deducted or withheld by the Corporation) in accordance with the restated articles of the Corporation. Any shareholder who acquires Series 3 Shares after the Series 3 Dividend Record Date will not, in respect of such Series 3 Shares acquired by them after the Series 3 Dividend Record Date, under any circumstances be entitled to receive from the Corporation the quarterly cash dividend declared by the Board of Directors for the quarter ended December 31, 2023, nor will such shareholder be entitled to receive any pro-rata portion of such quarterly cash dividend, irrespective of whether or not such shareholder decides to deposit such Series 3 Shares under the Offer and whether or not all or any portion of such Series 3 Shares are taken up and paid for by the Corporation pursuant to the Offer. The terms of the Offer reflect and take into account that the quarterly cash dividend for the quarter ended December 31, 2023 of C$0.58351 per Series 3 Share will be paid by the Corporation to shareholders of record on the Series 3 Dividend Record Date on January 2, 2024 (less any tax required to be deducted or withheld by the Corporation) in accordance with the restated articles of the Corporation. Holders of record of Cumulative 5-Year Rate Reset First Preference Shares, Series 2 (the “Series 2 Shares”) on the dividend record date for the quarterly cash dividend declared by the Board of Directors on such Series 2 Shares for the quarter ended December 31, 2023 will be entitled to receive such quarterly cash dividend, with such quarterly cash dividend to be paid by the Corporation on January 2, 2024 (less any tax required to be deducted or withheld by the Corporation) in accordance with the restated articles of the Corporation. In accordance with the restated articles of the Corporation, the Corporation has set aside for payment out of cash on hand sufficient funds to satisfy all declared and unpaid dividends on outstanding Series 3 Shares and outstanding Series 2 Shares.

Additional Details of the Offer

The Corporation expects to fund any purchases of Series 3 Shares under the Offer using first the funds advanced under the Loan (as defined below) and then as necessary using the Corporation’s available cash on hand, and expects to fund any fees and expenses related to the Offer using the Corporation’s available cash on hand. All Series 3 Shares purchased by the Corporation under the Offer will be cancelled in due course.

If 975,610 or fewer Series 3 Shares are validly deposited on or before the expiry time of the Offer (and not properly withdrawn), then Dundee will, upon the terms and subject to the conditions of the Offer, purchase at the Purchase Price all such Series 3 Shares deposited. If more than 975,610 Series 3 Shares are validly deposited on or before the expiry time of the Offer (and not properly withdrawn), then upon the terms and subject to the conditions of the Offer, the Corporation will purchase the Series 3 Shares on a pro rata basis after giving effect to “odd lot” tenders (of holders beneficially owning fewer than 100 Series 3 Shares), which will not be subject to pro-ration. Series 3 Shares that are not purchased will be returned to shareholders.

The Offer and all deposits of Series 3 Shares are subject to the terms and conditions set forth in the offer to purchase, the accompanying issuer bid circular and the related letter of transmittal and notice of guaranteed delivery (all such documents, as amended or supplemented from time to time, collectively constitute and are herein referred to as, the “Offer Documents”). Further details of the Offer, including the terms and conditions thereof and instructions for tendering Series 3 Shares, will be included in the Offer Documents. The Offer Documents will be mailed to holders of Series 3 Shares, filed with the applicable Canadian securities regulatory authorities and made available without charge on SEDAR+ at www.sedarplus.ca in accordance with applicable securities laws, as well as being posted on the Corporation’s website at www.dundeecorporation.com, on November 22, 2023.

As of November 20, 2023, the Corporation had 1,639,022 Series 3 Shares issued and outstanding. The Series 3 Shares are listed and posted for trading on the Toronto Stock Exchange (the “TSX”) under the symbol “DC.PR.D”. On November 17, 2023, the last full trading day prior to the day the terms of the Offer were publicly announced, the closing price of the Series 3 Shares on the TSX was C$20.20.

The Offer will not be conditional upon any minimum number of Series 3 Shares being deposited. However, the Offer will be subject to certain conditions that are customary for transactions of this nature and as will be set out in more detail in the Offer Documents.

Dundee previously received approval from the TSX for normal course issuer bids (“NCIBs”) for its Series 2 Shares and Series 3 Shares through the facilities of the TSX from April 12, 2023 to April 11, 2024. The Corporation has suspended share repurchases under its NCIBs and the NCIBs will remain suspended until at least the day following the expiration of the Offer or the termination of the Offer.

Dundee has appointed Computershare Investor Services Inc. (the “Depositary”) to act as depositary for the Offer. Any questions or requests for information or assistance regarding the Offer may be directed to the Depositary at the contact details set out in the Offer Documents.

Additional Details of the Loan

In connection with the Offer, the Corporation has entered into a loan agreement dated November 17, 2023 (the “Loan Agreement”) among the Corporation, as borrower, Dundee Resources Limited, as guarantor, and Earlston Investments Corp., as lender. The loan, to be advanced by the lender, will be in a principal amount of up to C$20,000,000 and will be available to the Corporation upon satisfaction of certain customary conditions precedent (the “Loan”). The Loan will be guaranteed by Dundee Resources Limited and secured by a security interest over all present and after-acquired personal property of the Corporation and Dundee Resources Limited, including a pledge of the shares of Reunion Gold Corporation held by Dundee Resources Limited (such shares of Reunion Gold Corporation, the “Collateral”). The Loan Agreement provides that the Corporation shall use the proceeds of the Loan to repurchase all or any portion of the Series 3 Shares pursuant to the Offer, and for no other purpose, except with the prior written consent of the lender. Interest on the Loan will accrue: (i) at a rate equal to the greater of (a) The Toronto-Dominion Bank prime rate plus 1.95% per annum, and (b) 9.15% per annum, during the first 24 months of the Loan; and (ii) thereafter, at a rate equal to The Toronto-Dominion Bank prime rate plus 6.50% per annum. The Loan will be repayable on February 27, 2026. At any time after June 28, 2024, the Corporation may voluntarily prepay all or any portion of the Loan together with all interest accrued thereon without premium or penalty. The Corporation must repay (i) any portion of the Loan not used to fund the purchase of Series 3 Shares under the Offer, (ii) periodically, if the value of the Collateral is not at least 250% of the outstanding principal amount of the Loan plus overdue interest (if any), such amount as required to ensure the value of the Collateral is at least 250% of the outstanding principal amount of the Loan plus overdue interest (if any), and (iii) if Dundee Resources Limited sells any of the Collateral in certain circumstances as set out in the Loan Agreement, an amount equal to the net proceeds of such sale.

This news release is for informational purposes only and does not constitute an offer to buy or the solicitation of an offer to sell any Series 3 Shares. The solicitation and the offer to buy Series 3 Shares will only be made pursuant to the Offer Documents filed with the Canadian securities regulatory authorities. The Offer will not be made to, nor will deposits be accepted from or on behalf of, shareholders in any jurisdiction in which the making or acceptance of the Offer would not be in compliance with the laws of any such jurisdiction. However, Dundee may, in its sole discretion, take such action as it may deem necessary to make the Offer in any such jurisdiction and to extend the Offer to shareholders in any such jurisdiction.

The Board of Directors has authorized and approved the Offer. However, none of Dundee, the Board of Directors or the Depositary makes any recommendation to any shareholder as to whether to deposit or refrain from depositing any or all of such shareholder’s Series 3 Shares pursuant to the Offer. Shareholders are strongly urged to carefully review and evaluate all information provided in the Offer Documents, to consult with their own financial, legal, investment, tax and other professional advisors and to make their own decisions as to whether to deposit Series 3 Shares under the Offer and, if so, how many Series 3 Shares to deposit.

The affected issue is DC.PR.D, although the company may buy back other shares if there’s any money left over from the loan following the purchase of tendered shares.

Thanks to Assiduous Reader Dan Good for bringing this to my attention, to Avoid the Herd for foreshadowing the announcement and to DR, niagara and skeptical for helping me understand how this can make financial sense.

Update, 2023-11-24: The discussion initiated by Dan Good included some questioning regarding why DC.PR.B was not included in the SIB, given that it is interconvertible with DC.PR.D at the next Exchange Date, 2024-9-30. My guess is that the lock-up agreements referred to in the second paragraph of the press release played a role in this: the locked-up shareholeders, I presume, hold lots of DC.PR.D and want to dispose of them all at the favourable price they have negotiated; including DC.PR.B in the SIB would increase the chance that their tender would be pro-rated on closing.

DBRS has announced that it:

downgraded its credit rating on the Preferred Shares issued by Canadian Banc Corp. (the Company) to Pfd-3 (low) from Pfd-3. The Preferred Shares have experienced a reduction in downside protection. Macroeconomic factors, including central banks’ responses to inflation levels and geopolitical tensions like the Russia-Ukraine war, have led to increased volatility in equity markets for most of 2023. In addition, the closures of certain U.S. regional banks because of liquidity and solvency concerns led to widespread and significant declines in the equity market prices of financial services companies in the United States and Canada. Consequently, this affected both the Company’s net asset value (NAV) and downside protection, especially in 2023.

As of August 31, 2023, the Company invested in a portfolio of common shares of the six largest Canadian banks representing approximately 57.7% of the portfolio: Royal Bank of Canada (16.5%), The Toronto-Dominion Bank (13.3%), National Bank of Canada (9.2%), Bank of Montreal (8.8%), Canadian Imperial Bank of Commerce (5.0%), and Bank of Nova Scotia (4.9%). The Company may invest up to 20% of the NAV in equity securities of Canadian or foreign financial services corporations other than the core holdings mentioned above. As of August 31, 2023, 16.1% of the portfolio was invested in five well-known U.S. financial services companies (Morgan Stanley, JP Morgan Chase, Bank of America, Goldman Sachs, and Citigroup Inc.) and 26.0% was held in cash and cash equivalents. As mentioned above, 16.1% of the portfolio was invested in U.S. financial services entities and denominated in U.S dollar (USD). The Company has not hedged its USD exposure to currency fluctuations; however, it closely monitors USD/Canadian dollar currency movements.

Holders of the Preferred Shares receive monthly distributions at a rate of Prime + 1.5% per annum (minimum 5.0%, maximum 8.0%), currently 8.0%. Holders of the Class A Shares are entitled to receive monthly cash distributions targeted to be at a rate of 15% annually based on the volume weighted-average market price of the Class A Shares for the last three trading days of the preceding month. The Company announced the extension of the termination date for a further five-year period to December 1, 2028, from December 1, 2023. In connection with the term extension, the Company decided to maintain the distribution rate for the Preferred Shares at the existing rates. No monthly distributions to the Class A Shares will be made if the dividends of the Preferred Shares are in arrears or the NAV of the portfolio falls below $15 per unit.

Over the past 12 months, downside protection has been volatile. As of October 31, 2023, downside protection stood at 44.8%, down from 51.7% as of October 31, 2022. The Preferred Shares’ dividend coverage based on the current dividend yield on the portfolio was 0.6 times (x). Without giving consideration to the capital appreciation potential or any source of income other than the dividends earned by the portfolio, the targeted monthly distributions to the Class A Shares along with the Preferred Shares’ dividend coverage shortfall are likely to create an average annual grind on the portfolio’s NAV equivalent to 5.4% over the remaining term to maturity. To supplement portfolio income, the Manager may engage in covered call option writing on all, or a portion of, the securities held in the portfolio or rely on realized capital gains.

DBRS Morningstar notes the following announcements from the Company during the past 12 months:

The Company:

(1) On January 31, 2023
Completed an overnight treasury offering of Class A and Preferred Shares, raising approximately $45.1 million in gross proceeds. The Class A Shares were offered at a price of $13.75 per share for a yield to maturity of 14.47%, and the Preferred Shares were offered at a price of $10.00 per share for a yield to maturity of 7.95%.

(2) On March 2, 2023
Extended the termination date of the Company for a further five-year period to December 1, 2028, from December 1, 2023.

(3) On May 19, 2023
Renewed its at-the-market (ATM) Program effective until June 18, 2025, which allows maximum gross proceeds of $140 million. The ATM Program allows the Company to issue Class A Shares and Preferred Shares from time to time at the Company’s discretion.

(4) On May 25, 2023
Announced that the Toronto Stock Exchange (the TSX) has accepted its notice of intention to make a Normal Course Issuer Bid (the NCIB) to purchase its Preferred Shares and Class A Shares through the facilities of the TSX and/or alternative Canadian trading systems. The NCIB commenced on May 29, 2023, and will terminate on May 28, 2024.

(5) On September 21, 2023
Announced that it will maintain the distribution rates for both the Class A Shares and Preferred Shares at existing levels.

Giving consideration to the decline in downside protection, the extension of the Company’s termination date for a further five-year term, the projected grind in the portfolio from expected distributions on the Class A Shares and the Preferred Shares’ dividend coverage shortfall, concentration of the portfolio in one industry and the unhedged foreign exchange exposure, DBRS Morningstar downgraded the credit rating on the Preferred Shares to Pfd-3 (low) from Pfd-3.

The main constraints to the credit rating are the following:

(1) Market fluctuations resulting from high inflation and interest rate hikes could affect the Company’s NAV. Resulting volatility in prices along with changes in the dividend policies of the underlying issuers may result in significant reductions in the Preferred Shares’ dividend coverage or downside protection from time to time.

(2) Reliance on the Portfolio Manager to generate additional income, through option writing, to meet distributions and other trust expenses without having to liquidate the portfolio’s securities.

(3) The high concentration of the portfolio in one industry (banking).

(4) Potential foreign exchange risk because the income received on the portfolio is not hedged all the time.

(5) Stated monthly distributions on the Class A Shares may create a grind on the portfolio. This risk is mitigated by an asset coverage test of 1.5x that ensures sufficient levels of downside protection to the holders of the Preferred Shares.

This action was ‘preannounced’ by Quadravest yesterday.

The affected issue is BK.PR.A.

Quadravest has announced (emphasis added):

Canadian Banc Corp. (the “Company’) is pleased to announce it will undertake an offering of Preferred Shares (TSX: BK.PR.A) of the Company. The offering will be led by National Bank Financial Inc.

The sales period of this overnight offering will end at 9:00 a.m. EST on November 16, 2023. The offering is expected to close on or about November 23, 2023 and is subject to certain closing conditions including approval by the TSX.

The Preferred Shares will be offered at a price of $9.80 per Preferred Share to yield 8.16%.

The closing price on the TSX of the Preferred Shares on November 14, 2023 was $9.97.

Since the inception of the Company, 219 consecutive dividends have been declared for the Preferred shares. The aggregate dividends declared on the Preferred Shares total $9.97 per share. All distributions to date have been made in tax advantaged eligible Canadian dividends.

The Company has been advised by DBRS that effective November 17, 2023, the rating on the Preferred shares will be Pfd-3 (low).

The net proceeds of the offering will be used by the Company to invest in a portfolio consisting primarily of six publicly traded Canadian Banks as follows:

Bank of Montreal	Canadian Imperial Bank of Commerce	Royal Bank of Canada
The Bank of Nova Scotia	National Bank of Canada	The Toronto-Dominion Bank

The Company’s Preferred Share investment objectives are to:
i. provide holders with cumulative preferential floating rate monthly cash dividends at a rate per annum equal to the prevailing Canadian prime rate plus 1.50% (minimum annual rate of 5.0% and maximum annual rate of 8.0%) based on original $10 issue price; and
ii. on or about the termination date, currently December 1, 2028 (subject to further 5 year extensions and it has been extended in the past) to pay holders the original $10 issue price of those shares.

The affected issue is BK.PR.A.

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