Pref shareholders get an incentive in Barbados but the cold shoulder in Canada

At month end a meeting will be held in Barbados involving a Canadian company that demonstrates one way to deal with an outstanding issue of preferred shares. And that plan, which is very positive for the owners of those preferred shares, stands in contrast to some of the tough luck their counterparts have experienced in this part of the world.

Emera (Caribbean) Inc., the holding company for several of Emera's investments in the Caribbean region, has called a meeting to amend the terms of an issue of preferred shares that comes with a 5.50 per cent coupon. That meeting is one of the final acts in Emera's acquisition of the remaining 4.4 per cent of Emera (Caribbean).

The wrinkle: Emera Caribbean's pref shareholders are being offered an incentive to make the switch: a 20 per cent premium to their issue price. Either way the holders are being offered a choice: a cash payment or a depository receipt or a combination of both. Emera Caribbean common shareholders were given the same choice and most of them chose the depository receipt option.

Meanwhile the situation in Barbados is decidedly different to what happened to preferred shareholders when foreign buyers acquired two Canadian issuers. In both those cases — the acquisition by Lowe's of Rona Inc. and the purchase of Capstone Infrastructure Corp. by London-based iCON Infrastructure Partners — the buyers opted to let the perpetual pref shares remain outstanding. In this way the two acquirers get the benefit of cheap five year financing.

In the case of RONA, Lowe's offered the holders $20 to relieve them of their ownership, $5 per share less than they paid for them five years earlier. (The first reset period for the prefs was set to occur at the same time as the offer for the common shares expired.) At the time the prefs were trading in the $12 a share range – so $20 looked attractive.


But when the meeting came around, the holders rejected (by a healthy margin) the $20 a share offer. Instead the holders elected to receive either another fixed rate pref or a floating rate pref — with the owners of about one-third of the 6.9 million pref shares outstanding opting for the floaters. The new fixed rate prefs will pay 3.324 per cent. Previously they came with a 5.25 per cent coupon

Since the takeover, the prefs have consistently traded above $20 a share. They closed Friday at $20.60.

Market participants argue that part of the reason for trading above $20 is (the hope) that Lowe's will one day make a fair value offer for the 6.9-million pref shares that are outstanding. “Just buy us out,” one adviser noted Friday, when adding that the cost — at $25 a share — would be a mere $34.5 million.

At Capstone, the situation is even worse: the prefs which pay 5 per cent a year, trade in the $12-$13 a share range. And more tough news is in store for those holders as of July 31 2016, when the new yield will be reset at the five-year Canada yield plus 271 basis points — or about 3.34 per cent at current levels.

One adviser, when noting what Emera had done, also expressed the hope the banks will be reasonable when it comes to some of their outstanding preferreds given that most of the “old-style” one are trading below the $25 issue price and given that the holders are largely retail investors.

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