The old adage, “a bad deal is a bad deal is a bad deal” was reinforced Friday when Calgary-based TransAlta Corp. indicated it would not be proceeding with a previously announced consolidation of its outstanding issues of rate reset preferred shares.

That plan – whereby holders would roll their almost $1 billion of prefs into a new single class that would pay a higher current dividend, introduce a minimum reset yield for the future, offer them a slight premium to their recent trading price and hopefully lead to improved liquidity – came with one huge benefit for the company.

If the transaction was approved, it would have reduced TransAlta’s “notional capital balance of preferred shares by approximately $300 million.” That reduction it said, would strengthen the balance sheet “and improve certain financial ratios.”

But in the trade off between the promise (higher annual income) and the reality (an effective reduction in principal), holders have decided a $300 million haircut was too much of a price to pay. DBRS assigned a provisional rating of Pfd-3 with a negative trend to the new class of pref shares that were to pay a 6.50 per cent yield.

“It is a good day for shareholders. We don’t always do what the banks tell us to do,” said James Hymas, portfolio manager at Hymas Investment Management and the publisher of the PrefBlog. CIBC World Markets was TransAlta’s financial adviser while PWC provided a fairness opinion.

When TransAlta announced the plan in late December, Hymas said on the blog: “This is a rotten deal for the preferred shareholders, so rotten that we may call it a sleazy attempt by the company to pull the wool over the eyes of unsophisticated retail investors.”

Reached Friday, Hymas reiterated that it “was a bad deal. I suspect the early returns by shareholders combined with comments made to their investor relations department convinced them that it was not going to pass. Rather than be embarrassed, my guess is that they decided to cancel the deal.”

Hymas offered TransAlta, whose common share holders received a major dividend cut one year back, some advice: Get to work on improving the credit rating and spend less time on financial engineering. Last March DBRS changed the trends of all TransAlta’s long-term debt ratings – as well as on its preferred share ratings – to negative from stable.

Reached for comment, TransAlta said it “has no further comment on discussions related to this decision.”

Another money manager whose clients own the preferreds was pleased with the decision not to proceed. “It was a bad proposal and poorly thought out on many levels. There was major push back which is why they pulled the plan.”

At least one institutional money manager, with a large holding, was upset at the decision to given that it was “extra supportive” of the transaction.

The manager had little time for the view that holders were being “compromised” because they were not being offered full value, or $25 per share.

“That’s a fiction. They are perpetual securities and worth what they are worth. It’s not like a piece of debt where eventually they owe you the principal,” he added.

This professional manager said that, “when you run the arithmetic it’s a very fair proposal value for value. TransAlta was quite careful and thorough in how they approached it.”

When the other benefits – a higher yield, greater liquidity, and tax benefits to those investors who own the security outside a registered account– are combined, holders had another reason to support the transaction, he said.

Financial Post

bcritchley@nationalpost.com