Two tales of preferred redemption, Rona and RioCan REIT

The parallels between your situations are very striking. What’s decidedly different may be the manner in which the scenarios – two about-to-be-maturing issues of rate-reset preferred shares – unfolded.

Prior to the announcements the 2 preferreds – like most other pref issues – were trading in a deep discount for their issue price and also to their maturity value. Following 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 – which recently struck an offer to buy Rona – agreed to acquire all of 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 costing $25. The shares included a 5.25 % dividend. Offering $20 a share means a saving of just about $35 million to Lowe’s – if it’s successful.

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Rona’s original offering featured basics rate (the five-year Canada bond rate of 2.60 per cent) along with a spread of 265 basis points. The prefs were trading at affordable prices because in case they weren’t redeemed, holders would have then been offered a new rate reset pref security with a fixed interest rate yield within the range 3.20 percent to three.40 percent. (Holders would be also offered a floating rate option.) In the event Rona redeemed the prefs, holders might have received $25 per share.



According to its newest management circular, none of the directors own any preferred shares. Instead they own common shares, options, restricted stock units (RSU’s) and gratifaction share units (PSU’s.)

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 issue rate reset prefs, offered to pay the full redemption price of $25 a share – as well as the distribution that comes due on March 31.

According to the newest 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: yesterday the news the shares closed at $16.

Cynthia Devine, RioCan’s chief financial officer said the organization redeemed because: It gets no equity credit for the security; it has made credit card debt reduction important; and it can borrow at a lower rate of computer could be required to purchase extending the pref shares another 5 years.

On Friday, Devine said RioCan “did look at that [a tender offer below $25] but there was an opportunity that does not these could be taken out of circulation. Some [investors] may not tender so you’ve a series outstanding.”

Devine said the the situation is different: Given that Lowe’s didn’t issue the prefs “it might be more appropriate to create a deal in the market. We did issue at $25 so from that standpoint there isn’t any event that would make a difference,” she added that “we clearly wanted it out in our structure.”

bcritchley@nationalpost.com