Two tales of preferred redemption
Big difference is how they unfolded
The parallels between the 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 to the announcements the two preferreds — like most other pref issues — were trading at a deep discount to their issue price and to their maturity value. After the announcements the price of both rose sharply, indeed both traded above the price holders are being offered.
In one case, a U. S. company, Lowe’s Cos. Inc. — which recently struck a deal to purchase Rona — agreed to acquire all the outstanding preferred shares for $ 20 cash. The day before that announcement, the prefs closed at $12.61.
In February 2011, Rona raised $ 172.5 million via the sale of 6.9 million pref shares each priced at $ 25. The shares came with a 5.25- per- cent dividend. Offering $ 20 a share means a saving of almost $35 million to Lowe’s — if it’s successful.
Rona’s original offering featured a base rate (the five year Canada bond rate of 2.60 per cent) plus a spread of 265 basis points. The prefs were trading at low prices because in the event they weren’t redeemed, holders would have then been offered a new rate reset pref security with a fixed rate yield in the range of 3.20 per cent to 3.40 per cent. ( Hold- ers would also be offered a floating rate option.) In the event Rona redeemed the prefs, holders would have received $25 per share.
According to its most recent management circular, none of the directors own any preferred shares. Instead they own common shares, options, restricted stock units ( RSUs) and performance share units (PSUs.)
The second case concerns RioCan REIT, which announced this month it was redeeming a $ 125- million issue of rate reset preferred units when it matures next month. RioCan, the first REIT to i ssue 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 its most recent management circular, ( prepared April 20, 2015) one insider, Edward Sonshine, owns 15,700 preferred units. Sonshine, the founder and chief executive, holds them through 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 t he company redeemed because: It gets no equity credit for the security; it has made debt reduction a priority; and it can borrow at a lower rate than it would be required to pay for extending the pref shares another five years.
On Friday, Devine said RioCan “did look at that (a tender offer below $ 25) but there was a chance that not all of them would be taken out of circulation. Some (investors) may not tender, so you have a series outstanding.”
Devine said the situations are different: Given that Lowe’s didn’t issue the prefs “it might be more appropriate to make an offer in the market. We did issue at $ 25, so from that standpoint there is no event that would make a difference,” she said, adding that “we clearly wanted it out of our structure.”