The parallels between your situations are very striking. What’s decidedly different is the way in which the scenarios – two about-to-be-maturing issues of rate-reset preferred shares – unfolded.
Prior towards the announcements the two preferreds – like the majority of other pref issues – were trading at a deep discount to their issue price and also to their maturity value. After the announcements the cost of both rose sharply, indeed both traded above the price holders are being offered.
In one case, a U.S. company, Lowe’s – which recently struck a deal to buy Rona – agreed to acquire all of the outstanding preferred shares for $20 cash. Yesterday that announcement, the prefs closed at $12.61.
In February 2011, Rona raised $172.5 million through the sale of 6.9 million pref shares each costing $25. The shares included a 5.25 per cent dividend. Offering $20 a share means a saving of almost $35 million to Lowe’s – if it’s successful.
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Rona’s original offering featured a base rate (the five-year Canada bond rate of two.60 per cent) along with a spread of 265 basis points. The prefs were trading at affordable prices because in the event they weren’t redeemed, holders would have then been offered a brand new rate reset pref security with a fixed rate yield in the range 3.20 per cent to three.40 percent. (Holders would be also offered a floating rate option.) In case Rona redeemed the prefs, holders might have received $25 per share.
According to its newest management circular, no directors own any preferred shares. Instead they own common shares, options, restricted stock units (RSU’s) and performance share units (PSU’s.)
The second case concerns RioCan REIT, which announced this month it had been redeeming a $125 million issue of rate reset preferred units when it matures next month. RioCan, the very first REIT to issue rate reset prefs, offered to pay the full redemption price of $25 a share – plus the distribution that comes due on March 31.
According to the newest management circular, (prepared April 20, 2015) one insider, Edward Sonshine, owns 15,700 preferred units. Sonshine, the founder and chief executive holds them with the Sonshine Family Trust. Sonshine also owns 400,000 trust units.
The market seemed surprised: the day before the news the shares closed at $16.
Cynthia Devine, RioCan’s chief financial officer said the organization redeemed because: It gets no equity credit for that security; it’s made credit card debt reduction a priority; also it can borrow at a lower rate of computer would be necessary to pay for extending the pref shares another five years.
On Friday, Devine said RioCan “did see that [a tender offer below $25] but there was a chance that not these could be taken out of circulation. Some [investors] might not tender so you’ve a series outstanding.”
Devine said the situations are different: Given that Lowe’s didn’t issue the prefs “it is much more appropriate to create an offer on the market. We did issue at $25 so from that standpoint there is no event that would make a difference,” she added that “we clearly wanted it of our structure.”
bcritchley@nationalpost.com
