February 2, 2016

Tuesday was a weak day in the markets with the S&P 500 down 1.9% and Toronto down 1.8%. And oil was down to $29.55.

Notable decliners includes AutoCanada down 10.3% to $17.18, possibly due to reports showing that vehicle sales in the U.S. have slowed. One bright spot for Canadian auto dealers may turn out to be American wholesale buyers that are reportedly buying used vehicles in Canada to ship across the border and take advantage of the currency difference.

TransForce was down 6.9%. Element Financial was down 6.6%. Stantec was down 6.7%.

Hopefully some of the companies on our list, including these, can surprise to the upside with their Q4 earnings as they report this month.

One very interesting and unexpected bright spot was the RioCan preferred Share on our list which closed up 57% after RioCan made the surprise announcement that it would redeem (buy back) these preferred shares at $25.00. Absent this redemption these shares had been set to be reset on March 31 from a yearly distribution of $1.3125 to something closer to 80 cents (depending on the level of the 5 year Canada bond on March 31).

I have not seen any news on why RioCan chose to do this. But we do know that RioCan had the ability to do it since it recently agreed to the sale of its U.S. properties for about $2.7 billion Canadian dollars and it already had a strong balance sheet before that sale. Also these preferred shares represent a small dollar amount compared to the common equity.

Riocan’s management may have simply concluded that this was the fair thing to do. Those who bought the rate reset preferred shares from RioCan when they were issued did so in good faith. Basically no one was expecting interest rates to continue to fall such that these shares would be trading at $16 or anything close to that. Instead, the company and investors generally thought that these shares would protect investors from an interest rate rise.

Possibly RioCan could have bought these shares back on the market and booked a gain in doing so. (Each share bought back at say $18 would have wiped out a “liability” of $25). But maybe that would not have been feasible.

In any case this is a most welcome move by RioCan for those who owned these preferred shares. (I own a small amount).

The question now is whether any other issuer of rate reset shares will do something similar as their rate reset shares come up to the reset date. The difficulty is that some of the other issuers may not have the balance sheet strength and cash on hand to simply redeem their rate reset preferred shares. In some cases there might be a concern that doing so would be unfair to the common share owners since they would be forgoing the opportunity to benefit from below market yield rates on their preferred shares. Or perhaps they would decide to instead buy back their preferred shares on the market and book a gain in doing so.

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