Preferred shareholders, but in name only

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

The latest example is set to play in early March when holders of securities from Capstone Infrastructure Corp. gather to vote on the takeover from British-based ICON Infrastructure Partners C a transaction worth $480 million. (Specifically, Irving Infrastructure Corp., one of ICON, is making the acquisition.)

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

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

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Holders from the rate-reset preferreds might have liked to possess been invited. Given their recent trading price – during the past year the prefs have traded within the selection of $9.50 to $15.30 and closed Tuesday at $12.46 C they’d have gladly accepted a little premium and voted to offer the offer.



In July 2011, holders anted up $75 million to buy three million shares at $25. The prefs included a five percent coupon. Under normal circumstances, this July, Capstone might have either redeemed the problem (and paid $25 per share) or offered holders either another fixed rate pref or a floating rate pref. The yield on the new prefs could be set at 271 basis points over either five-year Canada bonds or 91-day treasury bill rate. If the prefs remain outstanding, holders will get a much lower coupon.

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

“It’s unfair. Preferred shareholders are becoming the short end,” noted one investor, who is not enamored using the prospect of owning a public security in what’s going to essentially be a private company.

“In a takeover you’d think they’d deal with you like a preferred shareholder,” added the investor, who isn’t excited of owing a burglar that will have no analyst coverage and could be subject to a general change in credit score. In 2012, S&P cut the rating to P-4 (high) from P-3.

“We are stuck with certificates where we do not know where the credit score goes and where the coupon is going to be reset in July. There’s more uncertainty.”

Another observer noted “these securities are perpetual,” meaning the buyer is not obliged to redeem and the holders don’t have any capability to demand repayment. Instead the buyer have a supply of low cost permanent capital.

ICON said, “the rights of preferred shareholders won’t be affected by the transaction, because 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.”

bcritchley@nationalpost.com