PIC.PR.A Proposes Term Extension

Premium Income Corporation has announced:

that its Board of Directors has approved a proposal to extend the term of the Fund for an additional seven years.

The final redemption date for the Class A Shares and Preferred Shares of the Fund is currently November 1, 2010 and the Fund proposes to implement a reorganization (“Reorganization”) that will allow shareholders to retain their investment in the Fund until at least November 1, 2017.

In connection with the Reorganization, holders of Class A Shares will continue to receive ongoing leveraged exposure to a high-quality portfolio consisting principally of common shares of Bank of Montreal, The Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Royal Bank of Canada and The Toronto-Dominion Bank, as well as attractive quarterly cash distributions. Currently, the Fund is paying quarterly distributions at a rate of $0.60 per year. The Fund intends to continue to pay distributions at this rate until the net asset value (“NAV”) per Unit (a “Unit” being considered to consist of one Class A Share and one Preferred Share) reaches $22.50. At such time, quarterly distributions paid by the Fund will vary and will be calculated as approximately 8.0% per annum of the NAV of a Class A Share. If the Reorganization is approved and implemented, holders of Preferred Shares are expected to continue to benefit from fixed cumulative preferential quarterly cash dividends in the amount of $0.215625 per Preferred Share ($0.8625 per year) representing a yield of 5.75% per annum on the original issue price of $15.00.

As part of the Reorganization, the Fund is also proposing other changes including changing its authorized share capital by adding new classes of shares issuable in series, changing the monthly retraction prices for the Class A Shares and the Preferred Shares so that they are calculated by reference to market price in addition to NAV and changing the dates by which notice of monthly retractions needs to be provided and by which the retraction amount will be paid. The Fund will also allow for the calculation of a diluted NAV in the event the Fund should ever issue warrants or rights to acquire additional Class A Shares or Preferred Shares.

The Fund believes that the Reorganization will allow shareholders to maintain their investment in the Fund on a basis that will better enable it to meet its investment objectives for both classes of shares.

If the Reorganization is approved and implemented, shareholders will be given a special retraction right to retract their Class A Shares or Preferred Shares at NAV on November 1, 2010. The redemption date of the shares will automatically be extended for successive seven-year terms after November 1, 2017, the Board of Directors will be authorized to set the dividend rate on the Preferred Shares for any such extension of term and shareholders will be able to retract their Class A Shares or Preferred Shares at NAV prior to any such extension.

A special meeting of holders of Class A Shares and Preferred Shares has been called and will be held on September 29, 2010 to consider and vote upon the proposal. Further details of the proposal will be outlined in an information circular to be prepared and delivered to holders of Class A Shares and Preferred Shares in connection with the special meeting. The Reorganization is also subject to all required regulatory approvals.

A fascinating part of this press release is the section As part of the Reorganization, the Fund is also proposing other changes including changing its authorized share capital by adding new classes of shares issuable in series, changing the monthly retraction prices for the Class A Shares and the Preferred Shares so that they are calculated by reference to market price in addition to NAV and changing the dates by which notice of monthly retractions needs to be provided and by which the retraction amount will be paid.

So it sounds like they want to go the route taken by CGI and BNA (there may be others) and have what is essentially permanent capital units leveraged by a variety of preferreds. Changing the monthly retraction price sounds like it could be scary, but we will just have to wait for details.

Another item of interest is their intention to provide a partial NAV test on capital unit distributions, so that these distributions will be relatively low until Asset Coverage exceeds 1.5x.

However, the problem with this proposal is that preferred shareholders are being asked to provide a term extension for junk. The NAV on August 12 is only $19.94 implying Asset Coverage of only 1.3+:1. That’s pretty skimpy. On the other hand, the promoters are proposing to continue the dividend rate of 5.75%, which is relatively good.

Comparators are:

PIC.PR.A Comparators
Ticker Asset Coverage Yield Notes
FFN.PR.A 1.4-:1 5.42% Full NAV Test
LFE.PR.A 1.3+:1 5.45% Full NAV Test
WFS.PR.A 1.1+:1 16.27%
to June 30, 2011
Full NAV Test
LCS.PR.A 1.2+:1 5.25% Full NAV Test
BSD.PR.A 1.2+:1 9.51%
Interest
Abusive management

Well, you can make what you like of it, but I say that a measly 5.75% isn’t enough to compensate seven-year money for low Asset Coverage and the lack of a full NAV test (in which Capital Unitholders get NOTHING, zip, zero, zilch, for as long as Asset Coverage is below 1.5:1).

This is particularly true since Income Coverage in 1H10 was only 0.8-:1 … coverage of the distributions to both preferred share and capital unitholders was 0.5-:1.

We want more! At least one of:

  • Full NAV Test
  • Higher Coupon
  • Higher Asset Coverage (by consolidation of Capital units / partial redemption of preferreds)

Otherwise – and subject to the potential for very pleasant, but unlikely, surprises in the final documents … VOTE NO!

PIC.PR.A was last mentioned on PrefBlog when it was Upgraded to Pfd-4(high) by DBRS. PIC.PR.A is tracked by HIMIPref™, but is relegated to the Scraps index on credit concerns.

10 Responses to “PIC.PR.A Proposes Term Extension”

  1. like_to_retire says:

    On a different note – James, I’m surprised that you didn’t even mention the new S&P/TSX North American Preferred Stock Index that was launched this week.

    It does seem a bit of an odd index, given the differences in the way preferreds are handled (tax-wise) in Canada and the USA, but I thought you would at least poo-poo it?

    ltr

  2. jiHymas says:

    To be frank, I thought it was just another marketting gimmick, not even worth the effort of poo-pooing.

    But you’re the second Assiduous Reader to bring it to my attention, so I’ll mock it on Monday.

  3. cowboylutrell says:

    While Mulvihill, a while ago, succeeded in extending the term for MUH.PR.A, which, at the time, was, and still is, a junk issue, I’m surprised that they’re trying this for PIC.PR.A under the current market conditions. I’d rather see them issue a brand new split share corporation with adequate asset coverage for the preferred shareholders. There must be a stock market subsector that would currently be sufficiently attractive to be marketable through a split share structure. To my knowledge, the last time a split share corporation was issued was in late 2008. The split share market is shrinking fast.

  4. jiHymas says:

    I’m surprised that they’re trying this for PIC.PR.A under the current market conditions. I’d rather see them issue a brand new split share corporation with adequate asset coverage for the preferred shareholders.

    Premium Income is quite a large concern, as split share corporations go, with 14.2-million units outstanding – about $280-million worth. If they don’t extend term and the corporation winds up as scheduled, that’s a big hit to Assets Under Management … and fees.

    There must be a stock market subsector that would currently be sufficiently attractive to be marketable through a split share structure.

    It costs about $750,000 to bring a new issue to market, from what I understand, and that is without any guarantee that the issue will succeed. The established players are busily trying to create moats, increasing their issue sizes with warrants and treasury offerings; it’s a risky business.

    The split share market is shrinking fast.

    And isn’t of all that great credit quality, either.

  5. cowboylutrell says:

    Thanks for your informative answer. I wish the good old days of 2004-2007 with lots of new split share issues will be back someday!

  6. realboomer says:

    The Management Information Circular is now posted on the Mulvihill website. Current holders of preferreds can redeem their shares on Nov 1, 2010 at $15. Shares must be surrendered for redemption by October 15, 2010.

  7. jiHymas says:

    Perhaps I’m a little stupid tonight, but I can’t find it – either on the Mulvihill site or on SEDAR. Do you have a link?

  8. realboomer says:

    It’s located under the “News” tab on the Mulvihill website. The direct link is http://www.mulvihill.com/pr/PIC.A/PIC.A_Aug26_10b.pdf

  9. […] I reported the proposal in PIC.PR.A Proposes Term Extension I decried the poor credit quality of the shares and suggested that holders might wish to redeem if […]

  10. […] will remember the recent proposal to extend term for PIC.PR.A which was eventually approved. I didn’t think much of that plan either, given the […]

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