Canadian Prefs

[Cardboard]

I agree and own them too.

[sculpin]

GMP.PR.B - T 0.8 12.75 · 12.80 0.5 12.75

GMP.PR.C - T 0.6 12.37 · 13.45 0.8 12.30

 

Would be very good for the GMP prefs as well (above)...

 

TD Bank among the bidders for Richardson GMP

 

RITA TRICHUR, ANDREW WILLIS AND NIALL MCGEE

The Globe and Mail

Published Tuesday, Sep. 06, 2016 5:00AM EDT

Last updated Tuesday, Sep. 06, 2016 5:17AM EDT

 

Wealth management firm Richardson GMP Ltd. is on the auction block with at least one major Canadian bank, Toronto-Dominion Bank, among the bidders, according to people familiar with the sale process.

 

TD, Canada’s second-largest bank by assets, made it past the second round of bidding, one of those people said. It isn’t clear how much TD offered for the asset or whether the process will result in a definitive deal. The auction process, however, has attracted other interested parties including a second domestic bank, that person added.

 

Richardson GMP is one of the largest Canadian independent wealth management companies, with $27.2-billion in assets under administration (AUA) as of June 30. A sale of the company could fetch in excess of $500-million, according to Scotia Capital Inc. It would also mark the latest in a wave of transactions that has resulted in independent wealth-management companies being acquired by new owners.

 

Although Richardson GMP is small in comparison with the retail brokerage firms owned by the major banks, its focus on high-net-worth clients makes it a valuable asset. Fees from wealthier clients are more lucrative and the overhead is lower than it is at mass-market brokers with less affluent customers. Richardson GMP has the second-highest AUA per adviser in Canada, at $137-million, trailing only Royal Bank of Canada.

 

Other bidders in the auction include two American players: San Francisco-based bank Wells Fargo & Co. and Raymond James Financial Inc.

 

Raymond James has been in the financial advisory business in Canada for 15 years and recently made a deal to acquire MacDougall MacDougall & MacTier Inc., known as 3Macs. Once that acquisition is completed, Raymond James will have more than 400 advisers and portfolio managers in the country. Wells Fargo does not offer retail financial services in Canada, but does have a banking business that caters to mid-market and large companies out of offices in Vancouver, Calgary, Toronto and Montreal.

 

"We don't comment on rumour or speculation," a TD spokeswoman said in an email late Monday night.

 

A Wells Fargo spokesperson declined to comment, and GMP Capital also declined comment, citing a company policy to decline comment on market speculation.

 

TD is the only one of the Big Six Canadian banks not to have made a large acquisition in the full-service retail brokerage sector. Deals done in the past by Canadian banks include RBC acquiring Dominion Securities, Bank of Nova Scotia taking over McLeod Young Weir and Canadian Imperial Bank of Commerce buying Wood Gundy and the retail brokerage arm of Merrill Lynch.

 

In the late 1990s and early 2000s, TD instead focused on building its online brokerage business, making acquisitions that gave it a market-leading position in Canada and a 42-per-cent stake in TD Ameritrade Holding Corp. in the United States.

 

TD chief executive officer Bharat Masrani, who assumed the top spot in November, 2014, has been relatively quiet on the acquisition front. But during the bank’s quarterly earnings call last month, he expressed a willingness to do tuck-in deals. With its sizable balance sheet and strong capital levels, TD would be able to digest an acquisition the size of Richardson GMP quite easily.

 

Earlier this year, Scotia Capital Inc. analyst Sumit Malhotra wrote an in-depth report exploring the possible outcomes of a sale process at Richardson GMP, estimating it could be sold for roughly $530-million, which would value it at about 2 per cent of assets.

 

Richardson GMP was created in 2009, when GMP Capital Inc. fused its wealth management arm with Winnipeg-based Richardson Partners Financial. GMP and Richardson Partners each own about 30 per cent, with the firm’s retail advisers owning the remaining 40 per cent. This November, a so-called “liquidity mechanism” kicks in that allows any of the three major shareholder groups to officially put Richardson GMP in play. Some on Bay Street have speculated the asset could be sold before that.

 

Although Richardson GMP is not a public company, its consolidated financial results are disclosed by GMP Capital. In the six months ended June 30, the firm earned profit of $4.5-million on revenue of $130-million. Its assets under administration declined by 1.8 per cent from a year earlier.

 

This year has brought a number of takeovers in the wealth management sector. In addition to the Raymond James deal for 3Macs, Echelon Wealth Partners Inc. bought Dundee Goodman Private Wealth, the retail brokerage arm of Dundee Corp., for $13.5-million.

[nodnub]

thanks sculpin. very interesting.

 

At first I wondered if the pref may be redeemed by TD after purchase, but the prefs look like an obligation of GMP Capital not of Richardson GMP (the unit which is in play).  If Richardson GMP is acquired, what impact do you see on the prefs?  Do you think they will re-rate higher due to more liquidity at GMP Capital.  GMP Capital sounds concentrated on oil and gas sector.  Do you think that makes this a bet on recovery in energy sector?

 

thanks for posting this.

 

 

 

 

[SharperDingaan]

You have be sure that you fully understand the 2nd and 3rd level drivers when you buy these things - and how you should be using them.

 

Already pointed out is that these things are marginable.

If/when you need money for personal use, you should be margining against them and taking the cash out of the account. After tax deductibility (Canada) the net interest cost is usually well below what you might have paid elsewhere. It’s the portfolios ATM.

 

1st level valuation is straightforward – simply plug the variables into your calculator. If it trades for less it should be either because dividend payments, or the principal repayment is under threat; if it’s true, by & large there will be a ratings downgrade before the event(s) actually occur. If you think this is unlikely, the pref is an opportunity.

 

There are 4 2nd level returns; spread (pref yield – interest cost) on the margin used, pref yield on the equity contribution you’ve put up, discounted capital appreciation (face value – purchase price), and cash yield (dividend/purchase price). This is what you are managing.

 

There are 2 3rd level returns; 1st level valuation, plus speculative spread (your view versus the market view on 1st level valuation). If the bulk of the pref buyers are primarily income seeking retail investors - with limited investment knowledge/experience; most of this board’s membership would have a positive spread. If the other side of the trade is primarily professionals (i.e.: GS in distressed prefs), the spread will be negative. Expertise/Experience pays.

 

The good news is that the expertise/experience developed here, also helps on the equity side – where the same type of 3rd level spread is common. Look no further than many of todays oil/gas equities.

 

SD

 

[petec]

Good post SD, although I used a different framework to own a couple of these (not using margin).

 

1. I bought at a substantial discount to par, implying a good chance of capital uplift if something goes seriously wrong with the company.  Why?  Because both have significant cash flows with which to pay down debt if equity holders pressure them to do so.  There's a solid chance the prefs are money good and in a liquidation I get paid back up to par, not up to my purchase price.  The possibility of doubling your money in a bankruptcy represents decent downside protection.

 

2. I bought at a yield that exceeds the long run historical (and in my opinion the likely long run future) total return of the broad *common* stock market.  These yields can't drop much because they are calculated as spreads over government rates that a) are already low, and b) can't go negative because in both cases I own (or can convert into) prefs that pay a spread over the 3-month T-bill, which is too short term to have a significantly negative yield.  Of course, that assumes that the prefs are money good and again in my opinion they are.

 

3. I bought two of the very few securities available globally that are genuinely positively geared to inflation.  Inflation will hurt nominal bonds and also stock multiples.  However, it will also allow interest rates to rise.  When that happens my yield is very levered, because the dividends are calculated as rate*par, and par exceeds my purchase price.  For example, a 1% rate rise on par value of $25 gives a 2% yield increase on a purchase price of $12.50.  The capital is likely levered too, as the price would rise towards par as the payout rises.  Both companies would also likely/possibly benefit in a general inflation too, so their ability to pay would not be impaired.

 

Overall, so long as I'm right that the prefs are money good, I get:

1. Good downside protection.

2. A very solid return whether monetary and economic conditions turn deflationary, remain stable, or turn inflationary.

 

Clearly the "money good" caveat is a huge one but I don't spend a lot of time worrying about why I've seen an opportunity before others have.  To be a value investor you have to believe this is possible, and so I'm not too sceptical when, every now and again, it happens.  These are slightly esoteric securities belonging to complex companies that aren't very liquid and that have seen payouts drop a lot as rates have reset, so I don't find it hard to see why they might have been sold off too far.

[SafetyinNumbers]

Pete C,

 

Did you buy the GMP pref?

 

I own some of the TA pref on the potential lift from a takeover but I'm also cognizant that any takeover might leave the pref orphaned. Most buyers, however, will have a better credit rating so the spread may tighten anyway resulting in capital appreciation.

[petec]

 

Did you buy the GMP pref?

 

 

No but I might look if I have time.

[sculpin]

thanks sculpin. very interesting.

 

At first I wondered if the pref may be redeemed by TD after purchase, but the prefs look like an obligation of GMP Capital not of Richardson GMP (the unit which is in play).  If Richardson GMP is acquired, what impact do you see on the prefs?  Do you think they will re-rate higher due to more liquidity at GMP Capital.  GMP Capital sounds concentrated on oil and gas sector.  Do you think that makes this a bet on recovery in energy sector?

 

thanks for posting this.

 

Yes the sale of Richardson GMP will not affect the ownership structure of GMP itself so there would not be any change of control. They would receive 30% of the proceeds of the sale of that business unit (rough guess about $150mm cash at the value that is being discussed). Just would be a very major rerating of their balance sheet such that the prefs would be much better credit. Perhaps the prefs would go from 7%+ yield down to 4% yield perhaps on the sale of this business unit. Perhaps GMP will try to buy back some or all of the outstanding prefs with the proceeds.

 

The balance sheet is not too bad but the broker/underwriting biz in Canada has been very weak due to poor resource markets for last several years. Recently they merged with First Energy Capital (energy only Inv bank). Great counter cyclical move I think. 

Sale of their 30% RichardsonGMP stake will make them very solid.

 

[sculpin]

BNN yesterday...

 

2016-10-04 TOP PICK

 

Jerome Hass

 

Preferred Series B.

 

He likes the preferreds, because there is a potential catalyst coming up where Richardson GMP is the wealth arm of it, and is owned by the Richardson family, GMP Capital and the investment advisors. There is an agreement amongst them where, after Nov 15/16, any one of the 3 parties can trigger a sale. From what he understands, all 3 parties want to sell the business. If there is a change in control, there are provisions within the Pref B shares that they get taken out at par value, which is $25. On top of that, you are getting paid 7% to wait.

[intothebreach]

If there is a change in control, there are provisions within the Pref B shares that they get taken out at par value, which is $25.

 

Sculpin,

 

Have you seen this provision? or is it something that was mentioned on the BNN segment? I'm asking because I took a rapid look at the prospectus, and it does not seem to be the case (limited to winding down of business.)

 

I'd much prefer being wrong here, so do not hesitate to point out if I misread or missed something altogether. And thank you for the opportunity in the first place.

 

Edit: Missed the "If" in Sculpin's post, so I think I have my answer. I probably should also point out that they seem to be able to recall the prefs only every five years. Again let me know if I err, not that familiar with preferred shares.

[sculpin]

If there is a change in control, there are provisions within the Pref B shares that they get taken out at par value, which is $25.

 

Sculpin,

 

Have you seen this provision? or is it something that was mentioned on the BNN segment? I'm asking because I took a rapid look at the prospectus, and it does not seem to be the case (limited to winding down of business.)

 

I'd much prefer being wrong here, so do not hesitate to point out if I misread or missed something altogether. And thank you for the opportunity in the first place.

 

Edit: Missed the "If" in Sculpin's post, so I think I have my answer. I probably should also point out that they seem to be able to recall the prefs only every five years. Again let me know if I err, not that familiar with preferred shares.

 

He's wrong about the change of control because of the fact that they are only selling a 30% owned subsidiary (Richardson GMP). In any case there is also no change of control for these preferreds either if GMP Capital were to be sold or merged or whatever (one of the weaknesses of Cdn prefs that I would like to see changed) --- Look at what happened to the Capstone preferreds and the Rona ones.  I pointed this out a couple of posts ago. Surprised that a hedge fund portfolio manager would go on TV, make this his top pick and have such a cursory knowledge of what he owns. Any comments or corrections to my understanding of this?

[intothebreach]

Same here. And here is the part of the prospectus I found less than enticing:

 

The Series B Shares will not be redeemable by the Corporation prior to March 31, 2016. On March 31, 2016 and on March 31 every five years thereafter (or, if such date is not a business day, the immediately following business day), and subject to certain other restrictions set out in “Description of the Series B Shares — Restrictions on Dividends and Retirement and Issue of Shares”, the Corporation may, at its option, on at least 30 days and not more than 60 days prior written notice, redeem all or from time to time any number of the then outstanding Series B

 

Am I reading this right in that they can only redeem the preferred once every five years? With the next window being March 31st 2021.

[longlake95]

If there is a change in control, there are provisions within the Pref B shares that they get taken out at par value, which is $25.

 

Sculpin,

 

Have you seen this provision? or is it something that was mentioned on the BNN segment? I'm asking because I took a rapid look at the prospectus, and it does not seem to be the case (limited to winding down of business.)

 

I'd much prefer being wrong here, so do not hesitate to point out if I misread or missed something altogether. And thank you for the opportunity in the first place.

 

Edit: Missed the "If" in Sculpin's post, so I think I have my answer. I probably should also point out that they seem to be able to recall the prefs only every five years. Again let me know if I err, not that familiar with preferred shares.

 

He's wrong about the change of control because of the fact that they are only selling a 30% owned subsidiary (Richardson GMP). In any case there is also no change of control for these preferreds either if GMP Capital were to be sold or merged or whatever (one of the weaknesses of Cdn prefs that I would like to see changed) --- Look at what happened to the Capstone preferreds and the Rona ones.  I pointed this out a couple of posts ago. Surprised that a hedge fund portfolio manager would go on TV, make this his top pick and have such a cursory knowledge of what he owns. Any comments or corrections to my understanding of this?

 

This same guy also said Reitmans is going into the gas station business....hmmm... ???  ???

[krazeenyc]

I don't know my way around SEDAR very well. I've been looking for AIMIA Series 2 Preferred Prospectus. Can anyone help? Thanks.

[misterkrusty]

here you go

Aimia_Series_2_preferred_prospectus.pdf

[sculpin]

Lowe’s Offers $24.00 for RON.PR.A / RON.PR.B

 

This is from James Hymas' Pref Blog site - a great Cdn pref resource.....http://prefblog.com/

 

October 7th, 2016

 

Lowe’s Companies, Inc. and its subsidiary RONA inc. have announced:

 

that Lowe’s, through a wholly owned subsidiary, and RONA have entered into a definitive agreement for the acquisition of RONA’s outstanding Cumulative 5-Year Rate Reset Series 6 Class A Preferred Shares and Cumulative Floating Rate Series 7 Class A Preferred Shares (collectively, the “Preferred Shares”) for C$24 per share in cash pursuant to a plan of arrangement under the Business Corporations Act (Québec).

 

The board of directors of RONA, after consultation with its financial and legal advisors, has unanimously approved the transaction and has resolved to unanimously recommend that holders of the Preferred Shares (the “Preferred Shareholders”) vote in favour of the transaction at a meeting of Preferred Shareholders to be held to consider the transaction. RBC Capital Markets has provided a fairness opinion to RONA’s board of directors that, subject to the assumptions, limitations and qualifications set out in such fairness opinion, and as of the date of such opinion, the consideration under the transaction is fair from a financial point of view to the Preferred Shareholders.

 

The transaction is subject to court approval and the requisite approval of the Preferred Shareholders. Assuming the required approvals are received, the transaction is expected to be consummated before the end of the year.

 

Fidelity Investments Canada ULC, a large institutional investor that owns a significant portion of the Preferred Shares, has agreed to vote its Preferred Shares in favour of the transaction.

 

The terms and conditions of the transaction will be disclosed in further detail in the information circular to be mailed to Preferred Shareholders in advance of their meeting to approve the transaction. In addition, a copy of the definitive agreement and the information circular and certain related documents will be filed with the Canadian securities regulatory authorities and will be available under RONA’s profile at www.sedar.com.

 

So first of all: mea culpa. It looks like my recommendation at the time of the takeover was not optimal:

 

I don’t understand the rationale that might support a higher offer. The post suggests it is because of “emails and phone calls from pissed off retail investors making a big stink about the whole situation.” Now, in this day and age of governance by Internet meme it may well be that the Public Relations department is perturbed. But from a hard-headed point of view, who cares? RON.PR.A represents cheap financing, it is unlikely that Lowe’s will be issuing equity of any kind in Canada in the future, and the $34.5-million additional cost to acquire at par isn’t chump change.

 

I’ve been wrong before and I’ll be wrong again, but in this case I suggest that the rational course of action is to vote in favour of the Preferred Share Resolution. Be quick though, voting closes very soon! The safest course of action is, however, to sell on the market – the price is very close to $20 and such a sale would eliminate the potential for nasty consequences should either the common or preferred shareholders vote against their respective resolutions.

 

When we take another look at the comparators I cited in that post:

 

Ticker Issue

Reset

Spread Bid

2016-2-3 Bid

2016-3-8 Bid

2016-3-24 Bid

2016-10-8

MFC.PR.J +261 17.89 17.00 17.95 19.15

RY.PR.M 262 18.45 17.70 19.25 19.95

TD.PF.D 279 19.00 18.85 19.45 20.14

SLF.PR.I 273 17.45 17.10 18.00 18.99

BAM.PF.B 263 16.46 16.88 17.47 17.51

BMO.PR.Y 271 19.35 18.56 19.90 20.93

 

So, while there have been gains in the market since 2016-3-24, these pale beside the $4 pickup in the price of RON.PR.A.

 

What I don’t understand is why Lowe’s is doing this. At today’s closing bid of 23.95, RON.PR.A yield 3.34% to perpetuity, the equivalent of 4.34% interest at the standard conversion factor of 1.3x. Perhaps the requirement to be a reporting issuer in Canada adds enough cost to make this a good financing play for them; perhaps there is also concern about not having a capital structure that US investors will consider ‘clean’. I don’t know.

 

But one way or another, RON.PR.A (and the FloatingReset RON.PR.B) has provided a great deal of entertainment and food for thought this year!

[longlake95]

Nice catalyst for the Transalta series G's

 

http://calgaryherald.com/business/energy/alberta-reaches-1-36b-deal-to-shut-down-coal-plants

 

 

[longlake95]

Sculpin - thanks for the info u posted on the prefs.  :D

[valcont]

What do you guys think of GMP.PR.B now? Yielding 7% at $12.65. Came down quite a bit after they confirmed keeping the Richardson GMP so that catalyst is gone.

[sculpin]

What do you guys think of GMP.PR.B now? Yielding 7% at $12.65. Came down quite a bit after they confirmed keeping the Richardson GMP so that catalyst is gone.

 

Moved into the GMP.PR.C which is the floater. I would prefer the Aimia or Dundee 5 year resets to the GMP.PR.B.

[valcont]

What do you guys think of GMP.PR.B now? Yielding 7% at $12.65. Came down quite a bit after they confirmed keeping the Richardson GMP so that catalyst is gone.

 

Moved into the GMP.PR.C which is the floater. I would prefer the Aimia or Dundee 5 year resets to the GMP.PR.B.

 

Yeah I liked the VIC writeup about the Aimia preferreds and am thinking of buying some. Waiting for the rate increase next week to get a better USD/CDN rate.

[lessthaniv]

Rate increases could have the affect of lifting the price on the preferred.

[Cardboard]

10.6% available on DC.PR.B right now. Some weird selloff has occured or see my post on the Dundee thread.

[SafetyinNumbers]

I've anecdotally noticed the narrowing of spreads between some floaters and their rate-reset pair but others have remained stubbornly wide. As I think rates likely don't go lower I like the idea of being long a floater with the option to convert to fixed for 5 years. With the spreads being so wide in some cases that it adds 3% to your annual returns.

 

I'm long AZP.PR.C, FTS.PR.I and AIM.PR.B with that strategy in mind. I used own DC.PR.D as well but I'm so frustrated with their performance (the underlying company, not the pref), I sold it, perhaps irrationally.

[valcont]

10.6% available on DC.PR.B right now. Some weird selloff has occured or see my post on the Dundee thread.

 

Could the sell off be related to the DC.PR.B being a rate reset compared to the floaters DC.PR.D? I can see the market expecting a premium on a floater if rates are going to increase. What's weird is if you look at both price charts, the D's were sold off last year around this time even though the interest rate picture was more or less the same.