Four special-situation preferred stocks: if you are willing to take a calculated risk, you might find these preferred stocks appealing

Money Digest, Nov, 1996

On occasion, preferred share "special situations" stand out as interesting opportunities for investors. In such cases, the normal agency credit rating is not available or is well below what we consider to be investment grade for income-generating securities.

We view these special situations to be worthy of a "businessman's risk." In other words, while they are not suitable for highly conservative accounts, we feel they meet the criteria of a prudent though aggressive equity investment. Investors may want to consider the following:

Alcan Preferred Series E (AL.PR.F, $22.55). This is a "floater," which pays a dividend set at 75% of the prime interest rate of the Canadian chartered banks averaged over the preceding three-month period. The Alcan Series E pays a dividend, which is accorded preferential tax treatment in Ottawa.

Trilon Financial Corp. Preferred A (TFC.PR.A., $17.75). Trilon is the controlling shareholder in London Insurance Group, one of Canada's most highly rated insurers. Other assets include 55% of Royal LePage, and 46% of Gentra, the company formed from the collapse of Royal Trust. The Trilon Preferred A is a floater, with a $25 par value, which pays a dividend based on 70% of the prime interest rate. The stock ranks ahead of the other series of Trilon preferreds in the event of financial distress.

Gulf Canada Resources Preferred A (GOU.PR.A., $4.40). The Gulf Preferred A pays dividends based on 80% of the Canadian prime interest rate (when the preferred trades below par value). But the special situation is that Gulf has $0.44 per share in arrears that is being paid to shareholders on a penny-per-month basis. While Gulf is not considered a conservative investment, TGCL has a buy recommendation on the common stock.

Hees International Preferred E (HIL.PR.E, $16.50). Hees is a merchant bank with direct and indirect holdings in some of Canada's largest public corporations, including Norand, London Insurance, Royal LePage, Gentra, Great Lakes Power, Norcen Energy, Hemlo Gold, and Falconbridge. The Series E Preferreds pay a dividend equal to 70% of prime. Though in previous years Hees has disappointed investors, the improved confidence of the independent rating agencies has given us the confidence to add the preferreds to our list.