TransAlta offer riles pref holders
Tweaked plan faces big hurdles to pass vote
It doesn’t look good and gives the impression the company is making it up as it goes along.
The reality is that a few weeks after TransAlta Corp. potentially spoiled Christmas for holders of $ 1 billion of its preferred shares with a plan to pay them less than full value, the company has tweaked part of that plan: holders for one class of prefs stand to gain a fraction more.
And the other reality is that a bad deal, which comes on top of a number of recent negative situations for preferred shareholders of other companies, is still a bad deal.
“It’s a wildly opportunistic offer and holders are being asked to give up what amounts to a huge call on interest rates,” noted one financial adviser, whose clients own a chunk of the prefs in question and who won’t be supporting the plan when it comes up for a vote on Feb. 16. “The company plans to take away that upside. Why give that up?” asked the adviser.
To get over the line, the plan, which will consolidate five existing classes of preferred shares into one that comes with a higher dividend yield of 6.5 per cent and a minimum future yield, requires the support of twothirds of each class of prefs. That’s a big hurdle, though support from all five classes is not required to proceed. TransAlta can consolidate just those classes of preferreds that endorse the plan — though presumably the supposed liquidity benefits won’t be as great.
This week TransAlta, which has said the plan, if implemented, will reduce its “notional capital balance of preferred shares by approximately $ 300 million,” issued a 203- page circular for the Calgary meeting. The big change is Class A pref holders are being offered an exchange ratio of 0.530, compared with its previous offer of 0.503. (Could the correction have been caused by a typo?)
In the circular, TransAlta said the plan was hatched last October with the key objectives being to strengthen its “balance sheet and financial flexibility in a manner that is also fair to, and enhances the financial terms of the preferred shares held by, the preferred shareholders.” ( TransAlta cut the common share dividends to $ 0.04 a quarter from $0.18 last January.)
Others disagree. For instance, James Hymas, a portfolio manager at Hymas Investment Counsel and the publisher of Prefblog, called it “an appalling, abusive of- fer. TransAlta’s extant preferred shares are trading well below their call price, which gives them a lot of room to make impressive capital gains should market conditions improve.” In Hymas’s view, the plan “effectively lowers the redemption price of the preferred shares outstanding, which will allow any such gains to be scooped up by the company instead of its preferred shareholders.”
This week, Hymas weighed in again. In an interview he said the “amount of extra income being offered is not just minimal but will disappear completely on reset with only a modest rise in government of Canada five- year rates.” Accordingly if five-year Canada bonds rise “significantly, the extant issues will pay more than the ( proposed) new issue.”
Hymas also was critical of the process that will see those members of the soliciting group collect $ 0.13 per share per favourable vote — but nothing in the event the vote is unfavourable. The large difference in payments, “really makes me think they understand very well how cruddy their offer is.”
TransAlta said it “believes the proposed transaction will deliver many benefits to existing preferred shareholders and will contribute to the ongoing capital repositioning of the Corporation.”