TransAlta talks up pref offer
If precedent plays out at TransAlta Corp., the company’s plan to offer holders of about $1 billion of its preferred shares a higher income stream in return for not getting the full return of their principal may require some work.
Over the past year at least three i ssuers have been forced to either revise the terms of a proposal they made to their pref shareholders — or to engage in more explanation and still not achieve the desired result.
The most recent example involved Rona Inc. to purchase its outstanding pref erred shares: i nvestors balked at the original $20-ashare offer but endorsed a $24-a-share offer made a few months later — in part because Fidelity Investments got involved.
At the end of 2015, Dundee Corp. was f orced to amend the terms of a preferred share exchange transaction because it had “heard from a broader group of beneficial shareholders, including large institutional holders, who have expressed concern.” After a bump in consideration, the plan was supported.
The third situation involved Brookfield Renewable Energy Partners, which near the end of 2015 offered to exchange Class A Series 5 pref shares for a higher coupon preferred unit. That offer was extended twice ( under the same terms) before the issuer indicated that holders of a mere 41.22 per cent of the seven million shares outstanding agreed to the offer.
All of which brings us to TransAlta which held a conference call Tuesday on its offer to consolidate its five classes of preferred share into one that comes with a higher dividend ( 6.50 per cent), a higher reset spread and a minimum reset yield.
The only rub is that if the deal is approved by shareholders next month ( and two- thirds support is required), TransAlta will be able to reduce the “notional capital balance of preferred shares by approximately $ 300 million.” That reduction “strengthens the balance sheet and improves certain financial ratios.” One year back, TransAlta slashed its common dividend while last March DBRS added a negative trend to its triple-B credit rating.
Some financial advisers, and at least one portfolio manager, argue the higher yield and better terms aren’t enough to make up for the potential capital loss investors are being asked to take.
James Hymas, portfolio manager at Hymas Investment Counsel, said, “That’s the crux of the issue. The reduction in the effective redemption price ( f rom $ 25), is an incredibly major change, an incredibly valuable feature to be given up, and TransAlta is not even close to matching that value on the income side.”
Noted one adviser who tuned in: “They should withdraw the offer before they endure further embarrassment.” The adviser’s reasoning runs this way: in return for slightly higher annual income the capital value of the prefs falls substantially.
The $ 300- million matter did arise in the conference call when one questioner asked whether TransAlta “was benefiting more” than the pref shareholders from the transaction.
In response, the company said it didn’t “believe there was more benefit to one party versus the other. We worked with PwC (the firm retained to provide a fairness opinion on the transaction), which issued its fairness opinion for all the series (of prefs). That was important to us,” added the company, which noted the market, has responded favourably to the news because trades have been done at higher prices.
“We believe that when you combine all the benefits, the higher cash dividend, the protection because of the minimum floor it’s a very attractive offer for the pref shareholders,” it added.