Preferred in name only

Judging by some recent actions, it seems that preferred shareholders are preferred in name only.

The latest example is set to play out in early March when holders of securities issued by Capstone Infrastructure Corp. gather to vote on a takeover from British- based ICON Infras t r ucture Partners — a transaction valued at $ 480 million. (Specifically, Irving Infrastructure Corp., a unit of ICON, is making the acquisition.)

All owners have been invited to the vote: Capstone’s common shareholders and holders of its Class B exchangeable units have been asked to turn up, as have holders of two lots of convertible debentures. Those investors have an incentive to attend and vote: All been offered either a premium to the stock’s recent trading price or a payment that reflects the change of control.

But the invitation to the holders of rate- reset pref erred shares must have been lost in the mail. Or, to be accurate, it was never sent. “Quarterly dividends are expected to be declared to preferred shareholders on a continuing basis and those shares will continue to be listed and trade on the Toronto Stock Exchange following closing of the arrangement,” said the release announcing ICON’s planned acquisition that came a few months after Capstone hired two firms to assist management and the board undertake a strategic review.

Holders of the rate- reset preferreds would have liked to have been invited. Given their recent trading price — during the past year the prefs have traded i n the range of $9.50 to $15.30 and closed Tuesday at $ 12.46 – they would have gladly accepted a small premium and voted to support the offer.

In July 2011, holders anted up $ 75 million to buy three million shares at $ 25. The prefs came with a fiveper- cent coupon. Under normal circumstances, this July Capstone would have either redeemed the issue ( and paid $ 25 per share) or offered holders either another fixed rate pref or a floating rate pref. The yield on the new prefs would be set at 271 basis points over either f i ve- year Canada bonds or the 91-day treasury bill rate. If the prefs remain outstanding, holders will receive a much lower coupon.

The non- invite to t he meeting and the decision to leave the prefs outstanding has upset some holders.

“It ’s unfair. Preferred shareholders are getting the short end,” noted one investor, who is not enamoured with the prospect of owning a public security in what will essentially be a private company.

“In a takeover you’d think they would deal with you as a preferred shareholder,” added the investor, who is not excited at owning a security that will have no analyst coverage and could be subject to a change in credit rating. In 2012, S& P cut the rating to P- 4 ( high) from P-3.

“We are s t uck with a piece of paper where we don’t know where the credit rating will go and where the coupon will be reset in July. There’s more uncertainty.”

Another observer noted “these securities are perpetual,” meaning the buyer is under no obligation to redeem and the holders have no ability to demand repayment. Instead the buyer will have a source of low- cost, permanent capital.

ICON said, “the rights of preferred shareholders will not be affected by the transaction, since the preferred shares will remain outstanding on their current terms. The maintenance of a public listing leaves open the potential for future capital raisings of the public entity.”