Archive for the ‘Issue Comments’ Category

KML.PR.A & KML.PR.C On Review-Developing by DBRS

Thursday, August 22nd, 2019

DBRS has announced:

DBRS Limited (DBRS) placed the following ratings Under Review with Developing Implications:

— Kinder Morgan Canada Limited (KML), Preferred Shares – Cumulative (the Preferred Shares) rating of Pfd-3
— Kinder Morgan Cochin ULC (KMU), Issuer Rating of BBB


KMU’s Issuer Rating is based on its strong financial profile and expectation that leverage will remain reasonable for the current rating. The Preferred Shares rating of KML, which owns 30% of KMU and holds no other material assets, is based on the strength of KMU, the structural support in place for the benefit of the holders of the Preferred Shares (please see DBRS’s report on Kinder Morgan Canada Limited and Kinder Morgan Cochin ULC, dated March 25, 2019, for details) and the expectation that no debt will be issued by KML. DBRS expects to resolve the Under Review status once additional information becomes available with respect to Pembina’s intention for the Preferred Shares and the proposed capital structure at KMU post completion of the Acquisition.

This follows yesterday’s news that PPL To Acquire KML Under Proposed Plan of Arrangement.

KML.PR.A is a FixedReset 5.25%+365M525 that commenced trading 2017-8-15 after being announced 2017-8-3. It is tracked by HIMIPref™ but relegated to the Scraps-FixedReset Discount subindex on credit concerns.

KML.PR.C is a FixedReset, 5.20%+351M520, that commenced trading 2017-12-15 after being announced 2017-12-6. It is tracked by HIMIPref™ but relegated to the Scraps-FixedReset Discount subindex on credit concerns.

PPL To Acquire KML Under Proposed Plan of Arrangement

Thursday, August 22nd, 2019

Pembina Pipeline Corporation has announced:

that it has entered into agreements pursuant to which it will acquire Kinder Morgan Canada Limited (TSX: KML) (“Kinder Morgan Canada” or “KML”) (the “Corporate Acquisition”) and the U.S. portion of the Cochin Pipeline system (“Cochin US”) from Kinder Morgan, Inc. (“KMI”) (the “Cochin US Acquisition”) for a total purchase price of approximately $4.35 billion (the “Transaction”). The Transaction values Kinder Morgan Canada at approximately $2.3 billion, or $15.02 per share, based on an all-share exchange ratio of 0.3068 of a common share of Pembina per KML security and Pembina’s 30-day volume weighted average price on the date hereof; and Cochin US at approximately $2.05 billion for cash consideration.

Subject to closing of the Transaction, Pembina’s board of directors has also approved a $0.01 per common share, or approximately five percent, increase to its monthly common share dividend rate.

Through the Transaction, Pembina will acquire strategically located assets including the Cochin Pipeline System, the Edmonton storage and terminal business and Vancouver Wharves, a bulk storage and export/import business. Upon closing, the Transaction immediately provides Pembina with well-established business platforms and substantial opportunities for growth.

Under the terms of the arrangement agreement governing the Corporate Acquisition, Pembina will acquire all of the issued and outstanding restricted voting shares (the “Restricted Voting Shares”) and special voting shares (the “Special Voting Shares”) of Kinder Morgan Canada and all of the class B units (the “Class B Units”) of Kinder Morgan Canada Limited Partnership by way of a plan of arrangement under the Business Corporations Act (Alberta). Pembina is offering to acquire each of the outstanding Restricted Voting Shares and each Class B Unit in exchange for 0.3068 of a common share of Pembina, which represents a 32 percent premium, based on Pembina and Kinder Morgan Canada’s 30-day volume weighted average prices of $48.96 and $11.37, respectively, on the date hereof. The Corporate Acquisition is valued at approximately $2.3 billion including the assumption of Kinder Morgan Canada’s preferred shares and outstanding net debt.

The Corporate Acquisition is subject to approval of: (a) at least 66 2/3 percent of holders of Restricted Voting Shares and Special Voting Shares, voting together as a single class; and (b) a majority of holders of Restricted Voting Shares, in each case present in person or by proxy at a special meeting of the holders of Restricted Voting Shares and Special Voting Shares to be called to consider the Corporate Acquisition, approval of the Court of Queen’s Bench of Alberta, certain regulatory approvals in Canada, and other customary conditions.

KMI, who holds all of the Special Voting Shares (an approximate 70 percent of the voting rights of KML) and a corresponding 70 percent economic interest in Kinder Morgan Canada’s business and assets (by way of its ownership of all the Class B Units), has entered into a support agreement pursuant to which it has agreed to vote its Special Voting Shares in favor of the Corporate Acquisition. The Corporate Acquisition is also subject to clearance under the Competition Act (Canada) and the Canada Transportation Act.

The Corporate Acquisition is valued at approximately $2.3 billion including the assumption of Kinder Morgan Canada’s preferred shares and outstanding net debt. is the crucial phrase for preferred shareholders. There is no huge change in credit quality – KML was downgraded to Pfd-3 by DBRS in March, 2019, while PPL was confirmed at Pfd-3 in April, 2019. Meanwhile, S&P shows both KML and PPL at P-3(high).

The press release does not specify that preferred shareholders will be voting on this arrangement; I have checked with and been told:

The transaction requires 2 votes: (1) a favorable 66 2/3 vote by KML common shareholders in total (KMI will vote its shares in support of the transaction) and (2) a majority approval from holders of the restricted voting shares. So no, the pref holders will not be voting.

I confess I’m a little surprised by this. It may be because this is a plan of arrangement under the Business Corporations Act (Alberta) and we more often see a plan of arrangement under the Canada Business Corporations Act.

Following receipt of the eMail above, I received another one:

There will be a vote of preferred shareholders on whether or not they wish to convert the pref shares to PPL pref shares (under the same terms) if not they will remain as is (KML pref shares under the same terms).

Should you have any further question please reach out.

Thanks,

DBRS comments:

DBRS views the proposed Transaction as having a modestly positive impact on Pembina’s business risk profile,

Based on the current proposed financing plan, DBRS expects a modestly negative impact on Pembina’s credit metrics because of the issuance of incremental debt of approximately $2.05 billion for the Transaction. Although Pembina’s credit metrics are expected to weaken, the impact is modest and would not affect the current ratings. Pembina’s financial profile remained strong in 2018 and during the LTM 2019 with solid liquidity and strong credit metrics. For the LTM 2019, the cash flow-to-debt ratio was approximately 26%, EBIT interest coverage was approximately 6.65 times, and debt-to-capital (adjusted for the debt treatment of preferred shares) was under 40%. DBRS has done a pro forma assessment on the impact of the $2.05 billion acquisition debt on the three above-mentioned metrics and is satisfied that these metrics would still solidly support the BBB ratings.

Affected issues are KML.PR.A and KML.PR.C. Both issues were up smartly on the day; KML.PR.A up $0.68 to 22.35 (close/close) and KML.PR.C up $0.80 to 22.25 (close/close).

KML.PR.A is a FixedReset 5.25%+365M525 that commenced trading 2017-8-15 after being announced 2017-8-3. It is tracked by HIMIPref™ but relegated to the Scraps-FixedReset Discount subindex on credit concerns.

KML.PR.C is a FixedReset, 5.20%+351M520, that commenced trading 2017-12-15 after being announced 2017-12-6. It is tracked by HIMIPref™ but relegated to the Scraps-FixedReset Discount subindex on credit concerns.

Update, 2019-08-22: KML.PR.A & KML.PR.C On Review-Developing by DBRS until additional information becomes available with respect to Pembina’s intention for the Preferred Shares and the proposed capital structure at KMU post completion of the Acquisition.

PIC.PR.A To Get Bigger

Tuesday, August 20th, 2019

Strathbridge Asset Management Inc. has announced:

Premium Income Corporation (the “Fund”) is pleased to announce that it is undertaking an overnight treasury offering of Preferred Shares and Class A Shares.

The sales period for the overnight offering will end at 9:00 am EST tomorrow, August 21, 2019. The offering is expected to close on or about August 28, 2019 and is subject to certain conditions including approval by the Toronto Stock Exchange (“TSX”). The Preferred Shares will be offered at an indicative price of $14.70 per Preferred Share to yield 5.97% and the Class A Shares will be offered at an indicative price of $6.10 per Class A Share to yield 13.3%. The trading price on the TSX for the Preferred Shares and Class A Shares as at 2:30 pm EST on August 20, 2019 was $14.70 and $6.27, respectively.

Since the inception of the Fund, the aggregate dividends declared on the Preferred Shares have been $19.83 per share and the aggregate dividends declared on the Class A Shares have been $25.21 per share, for a combined total of $45.04 per unit.

The Fund invests in a portfolio consisting principally of common shares of Bank of Montreal, The Bank of Nova Scotia, Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada and The Toronto-Dominion Bank. To generate additional returns above the dividend income earned on the Fund’s portfolio, the Fund will selectively write covered call and put options in respect of some or all of the common shares in the Fund’s portfolio. The manager and investment manager of the Fund is Strathbridge Asset Management Inc.

The Preferred Shares pay fixed cumulative preferential quarterly cash distributions in the amount of $0.215625 ($0.8625 per annum) per Preferred Share representing a yield of 5.75% on the original issue price of $15.00. The Class A Shares currently pay quarterly distributions in the amount $0.20319 ($0.81276 per annum) per Class A Share.

The syndicate of agents for the offering is being co-led by RBC Capital Markets, CIBC Capital Markets, National Bank Financial Inc. and Scotiabank.

For further information, please contact Investor Relations at 416.681.3966, toll free at 1.800.725.7172, email at info@strathbridge.com or visit www.strathbridge.com

John Germain, Senior VP & CFO

So they’re offering Whole Units at an “indicative” price (I don’t know what that means) of 20.80, whereas the NAVPU on August 19 was 19.41. A premium of 7.2% is good business!

They last got bigger about ten weeks ago.

BAM Renews Real NCIB

Sunday, August 18th, 2019

Brookfield Asset Management Inc. has announced:

it has received approval from the Toronto Stock Exchange (“TSX”) for its proposed normal course issuer bid to purchase up to 10% of the public float of each series of the company’s outstanding Class A Preference Shares that are listed on the TSX (the “Preferred Shares”). Purchases under the bid will be made through the facilities of the TSX and/or alternative Canadian trading systems. The period of the normal course issuer bid will extend from August 20, 2019 to August 19, 2020, or an earlier date should Brookfield complete its purchases. Brookfield will pay the market price at the time of acquisition for any Preferred Shares purchased. All Preferred Shares acquired by Brookfield under this bid will be cancelled.

Under the normal course issuer bid, Brookfield is authorized to repurchase each respective series of the Preferred Shares as follows:

Series Ticker Issued and outstanding shares1 Public float1 Average daily trading volume2 Maximum number of shares subject to Purchase
Total Daily
Series 2 BAM.PR.B 10,457,685 10,220,175 6,171 1,022,017 1,542
Series 4 BAM.PR.C 3,995,910 3,983,910 3,339 398,391 1,000
Series 8 BAM.PR.E 2,476,185 2,475,185 928 247,518 1,000
Series 9 BAM.PR.G 5,515,981 2,022,881 691 202,288 1,000
Series 13 BAM.PR.K 9,640,096 8,792,596 12,049 879,259 3,012
Series 17 BAM.PR.M 7,840,204 7,840,204 2,913 784,020 1,000
Series 18 BAM.PR.N 7,866,749 7,681,088 3,555 768,108 1,000
Series 24 BAM.PR.R 9,282,910 9,281,610 6,314 928,161 1,578
Series 25 BAM.PR.S 1,529,133 1,529,133 976 152,913 1,000
Series 26 BAM.PR.T 9,774,812 9,774,012 7,764 977,401 1,941
Series 28 BAM.PR.X 9,241,457 9,237,347 10,008 923,734 2,502
Series 30 BAM.PR.Z 9,790,374 9,790,274 9,037 979,027 2,259
Series 32 BAM.PF.A 11,754,099 11,754,099 11,858 1,175,409 2,964
Series 34 BAM.PF.B 9,879,277 9,879,277 8,901 987,927 2,225
Series 36 BAM.PF.C 7,842,909 7,842,909 4,384 784,290 1,096
Series 37 BAM.PF.D 7,830,091 7,830,091 3,488 783,009 1,000
Series 38 BAM.PF.E 7,914,556 7,908,396 5,742 790,839 1,435
Series 40 BAM.PF.F 11,848,165 11,845,195 10,856 1,184,519 2,714
Series 42 BAM.PF.G 11,899,900 11,890,300 7,938 1,189,030 1,984
Series 44 BAM.PF.H 9,831,929 9,831,929 8,357 983,192 2,089
Series 46 BAM.PF.I 11,740,797 11,740,797 15,201 1,174,079 3,800
Series 48 BAM.PF.J 11,885,972 11,885,972 9,161 1,188,597 2,290

1. Calculated as at August 6, 2019.
2. Calculated for the six months prior to July 31, 2019.
3. In accordance with TSX rules, any daily repurchases with respect to: (i) the Series 4, Series 8, Series 9, Series 17, Series 18, Series 25 and Series 36 Preferred Shares will be limited to 1,000 shares of the respective series and (ii) each of the other series of Preferred Shares (excluding the Series 4, Series 8, Series 9, Series 17, Series 25 and Series 36 Preferred Shares) will be limited to 25% of the average daily trading volume on the TSX of the respective series.

As of August 6, 2019, under its current normal course issuer bid that commenced on August 20, 2018 and will expire on August 19, 2019, and which the company sought and received approval from the TSX, Brookfield purchased Preferred Shares as follows

Series Number of shares purchased Maximum number of shares subject to purchase Weighted average price paid per purchased share (C$)
Series 2 7,415 1,022,759 13.79
Series 4 4,090 398,800 13.68
Series 8 3,400 247,858 19.54
Series 9 3,134 202,601 18.92
Series 13 7,604 880,020 13.85
Series 17 110,552 795,075 20.45
Series 18 99,409 778,049 20.42
Series 24 112,640 939,425 18.38
Series 25 4,000 153,313 16.96
Series 26 129,336 990,334 18.30
Series 28 122,040 935,938 16.69
Series 30 143,776 993,405 22.68
Series 32 228,469 1,198,256 23.02
Series 34 98,612 997,788 21.09
Series 36 106,115 794,902 20.90
Series 37 118,992 794,908 21.21
Series 38 91,604 800,000 20.40
Series 40 154,805 1,200,000 21.80
Series 42 109,700 1,200,000 21.50
Series 44 113,260 994,518 25.71
Series 46 154,993 1,189,579 25.44
Series 48 114,028 1,200,000 24.44

Brookfield is renewing its normal course issuer bid because it believes that, from time to time, the Preferred Shares may trade in price ranges that do not fully reflect their value. Brookfield believes that, in such circumstances, acquiring the Preferred Shares represents an attractive and desirable use of its available funds.

Brookfield will enter into an automatic purchase plan on or about the week of September 23, 2019 in relation to the normal course issuer bid. The automatic purchase plan will allow for the purchase of Preferred Shares, subject to certain trading parameters, at times when Brookfield ordinarily would not be active in the market due to its own internal trading black-out period, insider trading rules or otherwise. Outside of these periods, Preferred Shares will be repurchased in accordance with management’s discretion and in compliance with applicable law.

Brookfield Asset Management Inc. is a leading global alternative asset manager with over $385 billion in assets under management. The company has more than a 120-year history of owning and operating assets with a focus on real estate, renewable power, infrastructure and private equity. Brookfield offers a range of public and private investment products and services, and is co-listed on the New York, Toronto and Euronext stock exchanges under the symbol BAM, BAM.A and BAMA, respectively.

For more information, please visit our website at www.brookfield.com or contact:

Claire Holland
Communications & Media
Tel: (416) 369-8236
Email: claire.holland@brookfield.com

Linda Northwood
Investor Relations
Tel: (416) 359-8647
Email: linda.northwood@brookfield.com

This is significant because Brookfield spent just under $44-million over the year. So, OK, $44-million isn’t going to turn the market around. Its effect can be cancelled simply by the exercise of a greenshoe option on a normal-sized new issue. But monny a mickle maks a muckle, as we say in Glasgow, or would say if we ever went there, and since the average price paid per share is a hair under $21.50, that’s a profit on cancellation of $3.50 per share, or a total of a little over $7-million, which is always a nice thing to have.

I note that last year’s NCIB release stated:

Under its current normal course issuer bid that commenced on August 18, 2017 and expired on August 17, 2018, under which Company sought and received approval from the TSX, Brookfield purchased 34,986 Series 28 Preferred Shares, 2,587 Series 30 Preferred Shares, 30,625 Series 44 Preferred Shares and 104,210 Series 46 Preferred Shares at weighted average prices of C$17.59, C$24.50, C$26.31 and C$26.14 per Preferred Share, respectively. No other Preferred Shares were purchased by Brookfield under the normal course issuer bid.

I mentioned their 2015-2016 NCIB on August 12, 2015 – the final effects of that were much smaller:

Under its current normal course issuer bid that commenced on August 12, 2015 and expired on August 11, 2016, Brookfield purchased 1,000 Series 9 Preferred Shares, 72,617 Series 24 Preferred Shares, 96,652 Series 26 Preferred Shares, 5,627 Series 28 Preferred Shares, 49,548 Series 30 Preferred Shares, 17,432 Series 32 Preferred Shares and 22,111 Series 34 Preferred Shares at weighted average prices of C$15.19, C$15.22, C$15.27, C$14.19, C$18.86, C$18.63 and C$17.77 per Preferred Share, respectively. No other Preferred Shares were purchased by Brookfield under the normal course issuer bid.

I like to see these buy-backs – they show that the company is not worried about being able to find cheaper financing elsewhere and also shows that the Treasury department is watching for opportunities. It’s always nice to see that somebody’s really thinking about what they’re doing – it’s sometimes a little dubious.

Thanks to Assiduous Reader mbarbon for bringing this to my attention.

DC.PR.B & DC.PR.D To Be Extended

Friday, August 16th, 2019

Dundee Corporation has announced (although not yet on their website):

that it does not intend to exercise its right to redeem any currently outstanding cumulative 5-year rate reset first preference shares, series 2 (the “Series 2 Shares”) or cumulative floating rate first preference shares, series 3 (the “Series 3 Shares”) on September 30, 2019. As a result, subject to certain conditions, the holders of the Series 2 Shares have the right, at their option, to convert all or part of their Series 2 Shares on a one for one basis into Series 3 Shares and, the holders of Series 3 Shares have the right at their option, to convert all or a part of their Series 3 Shares on a one for one basis into Series 2 Shares, as at September 30, 2019. Holders who do not exercise their right to convert will retain their existing Series 2 Shares or Series 3 Shares, as applicable, unless automatically converted in accordance with the conditions below.

The foregoing conversions are subject to the conditions that: (i) if, after September 16, 2019, the Company determines that there would be less than 500,000 Series 2 Shares outstanding on September 30, 2019, then all remaining Series 2 Shares will automatically be converted into an equal number of Series 3 Shares on September 30, 2019, and (ii) alternatively, if the Company determines that there would be less than 500,000 Series 3 Shares outstanding on September 30, 2019, then all remaining Series 3 Shares will be automatically converted into an equal number of Series 2 Shares on September 30, 2019. In either case, Dundee will give written notice to that effect to holders of the Series 2 Shares or Series 3 Shares, as applicable, affected by the preceding minimums on or before September 23, 2019.

The dividend rate applicable to the Series 2 Shares for the 5-year period commencing on September 30, 2019 to, but excluding September 30, 2024, and the dividend rate applicable to the Series 3 Shares for the 3-month period commencing on September 30, 2019 to, but excluding December 31, 2019, will be determined and announced by way of a news release on September 3, 2019.

The deadline for the registered shareholder, CDS & Co., to provide notice of the exercise of its right to convert all or any part of the Series 2 Shares into Series 3 Shares or Series 3 Shares into Series 2 Shares is 5:00 p.m. (Toronto time) on September 16, 2019 and, once received, is irrevocable. Beneficial owners of Series 2 Shares or Series 3 Shares who wish to exercise their right of conversion should communicate as soon as possible with their broker or other intermediary for more information. It is recommended that this be done well in advance of the deadline in order to provide the broker or other intermediary with time to complete the necessary steps.

Holders will again have the opportunity to convert their Series 2 Shares into Series 3 or to convert their Series 3 Shares into Series 2 Shares on September 30, 2024, and every five years thereafter as long as the Series 2 Shares and Series 3 Shares remain outstanding.

I will have more to say when the reset rate is announced September 3.

LCS.PR.A : Correction & Apology for Comment

Friday, August 16th, 2019

In the post LCS.PR.A Seeks Mandate Change to Broaden Portfolio, I misinterpreted the paragraph in the press release that stated:

In keeping with industry trends over the past several years to lower investor costs and in connection with the proposed changes to the Fund, the Manager will discontinue the service fee paid to dealers based on the number of Class A Shares held by dealers’ clients of 0.40% per annum of the Class A Share net asset value beginning January 1, 2020. In addition, the management fee will not be increased for the Fund as a result of the additional work associated with the aforementioned enhancements.

I was under the mistaken impression that the manager was currently paying the fees, but this is not the case.

According to an eMail from an officer of Brompton:

Erm, no. We’re proposing to end the Class A trailer fee, but Brompton doesn’t pay the trailer fee, LCS does, so the Class A shareholders will end up with a lower MER after cancellation of this fee. No cash stuffed in pockets. I would appreciate a correction / retraction of this comment.

My apologies for my misdirected ire.

BMO.PR.T : No Conversion to FloatingReset

Thursday, August 15th, 2019

Bank of Montreal has announced:

that none of its 16 million Non-Cumulative 5-Year Rate Reset Class B Preferred Shares, Series 29 (the “Preferred Shares Series 29”) will be converted on August 26, 2019, being the first business day following the conversion date of August 25, 2019, into Non-Cumulative Floating Rate Class B Preferred Shares, Series 30 of the Bank (the “Preferred Shares Series 30”).

During the conversion period which ran from July 26, 2019 to August 12, 2019, 223,098 Preferred Shares Series 29 were tendered for conversion into Preferred Shares Series 30, which is less than the minimum 1,000,000 required to give effect to the conversion, as described in the Preferred Shares Series 29 prospectus supplement dated May 30, 2014. As a result, no Preferred Shares Series 30 will be issued on August 26, 2019 and holders of Preferred Shares Series 29 will retain their shares.

The Preferred Shares Series 29 are currently listed on the Toronto Stock Exchange under the symbol BMO.PR.T. As previously announced on July 26, 2019, the dividend rate for the five-year period commencing on August 25, 2019, and ending on August 24, 2024, will be 3.624%.

BMO.PR.T is a FixedReset, 3.90%+224, NVCC-compliant issue that commenced trading 2014-6-6 after being announced 2019-05-28. BMO.PR.T will reset at 3.624% effective August 25, 2019. I recommended against conversion. It is tracked by HIMIPref™ and is assigned to the FixedReset (Discount) subindex.

RY.PR.H : No Conversion to FloatingReset

Thursday, August 15th, 2019

Royal Bank of Canada has announced:

that during the conversion notice period, which ran from July 25, 2019 to August 9, 2019, 210,844 Non-Viability Contingent Capital (NVCC) Non-Cumulative 5-Year Rate Reset First Preferred Shares, Series BB (the “Series BB shares”) were tendered for conversion, on a one-for-one basis, into NVCC Non-Cumulative Floating Rate First Preferred Shares, Series BC (the “Series BC shares”). As per the conditions set out in the prospectus supplement dated May 27, 2014, since less than 1,000,000 Series BC shares would be outstanding after August 24, 2019, holders of Series BB shares will not be entitled to convert their shares into Series BC shares. As a result, Series BC shares will not be issued at this time and holders of Series BB shares will retain their shares.

On August 24, 2019, Royal Bank of Canada will have 20,000,000 Series BB shares issued and outstanding. The Series BB shares are currently listed on the Toronto Stock Exchange under the symbol RY.PR.H.

RY.PR.H is a FixedReset, 3.90%+226, NVCC-Compliant issue that commenced trading 2014-6-3 after being announced 2014-5-23. The bank gave notice of extension on 2019-7-22. RY.PR.H will reset At 3.65% effective August 24, 2019. I recommended against conversion. The issue is tracked by HIMIPref™ and has been assigned to the FixedReset-Discount subindex.

ENB.PR.Y : Convert or Hold?

Tuesday, August 13th, 2019

It will be recalled that ENB.PR.Y will reset at 3.737% effective September 1, 2019

ENB.PR.Y is a FixedReset, 4.00%+238, that commenced trading 2013-6-6 after being announced 2013-5-28. It is tracked by HIMIPref™ but relegated to the Scraps – FixedReset (Discount) subindex on credit concerns.

The most logical way to analyze the question of whether or not to convert is through the theory of Preferred Pairs, for which a calculator is available. Briefly, a Strong Pair is defined as a pair of securities that can be interconverted in the future (e.g. ENB.PR.Y and the FloatingReset that will exist if enough holders convert). Since they will be interconvertible on this future date, it may be assumed that they will be priced identically on this date (if they aren’t then holders will simply convert en masse to the higher-priced issue). And since they will be priced identically on a given date in the future, any current difference in price must be offset by expectations of an equal and opposite value of dividends to be received in the interim. And since the dividend rate on one element of the pair is both fixed and known, the implied average rate of the other, floating rate, instrument can be determined. Finally, we say, we may compare these average rates and take a view regarding the actual future course of that rate relative to the implied rate, which will provide us with guidance on which element of the pair is likely to outperform the other until the next interconversion date, at which time the process will be repeated.

We can show the break-even rates for each FixedReset / FloatingReset Strong Pair graphically by plotting the implied average 3-month bill rate against the next Exchange Date (which is the date to which the average will be calculated).

pairs_fr_190813
Click for Big

The market appears to have lost its fleeting interest in floating rate product; the implied rates until the next interconversion are well below the current 3-month bill rate as the averages for investment-grade and junk issues are at +1.14% and +1.26%, respectively. Whatever might be the result of the next few Bank of Canada overnight rate decisions, I suggest that it is unlikely that the average rate over the next five years will be lower than current – but if you disagree, of course, you may interpret the data any way you like.

Since credit quality of each element of the pair is equal to the other element, it should not make any difference whether the pair examined is investment-grade or junk, although we might expect greater variation of implied rates between junk issues on grounds of lower liquidity, and this is just what we see.

If we plug in the current bid price of the ENB.PR.Y FixedReset, we may construct the following table showing consistent prices for its soon-may-be-issued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:

Estimate of FloatingReset (received in exchange for ENB.PR.Y) Trading Price In Current Conditions
  Assumed FloatingReset
Price if Implied Bill
is equal to
FixedReset Bid Price Spread 1.50% 1.00% 0.50%
ENB.PR.Y 14.05 238bp 14.19 13.71 13.24

Based on current market conditions, I suggest that the FloatingResets that will result from conversion are likely to trade below the price of their FixedReset counterparts, ENB.PR.Y. Therefore, I recommend that holders of ENB.PR.Y continue to hold the issue and not to convert. I will note that once the FloatingResets commence trading (if, in fact, they do) it may be a good trade to swap one issue for the other in the market once both elements of each pair are trading and you can – hopefully – do it with a reasonably good take-out in price, rather than doing it through the company on a 1:1 basis. But that, of course, will depend on the prices at that time and your forecast for the path of policy rates over the next five years. There are no guarantees – my recommendation is based on the assumption that current market conditions with respect to the pairs will continue until the FloatingResets commence trading and that the relative pricing of the two new pairs will reflect these conditions.

Those who wish to convert are advised that the deadline for notifying the company of such a desire is 5:00 p.m. (EST) on August 19, 2019. Brokers and other intermediaries generally set their internal deadlines a day or two in advance of this date, so if you wish to convert there’s no time to waste! Note that brokers will, in general, try to execute the instruction on a ‘best efforts’ basis if received between the two deadlines, provided that the procrastinating shareholder grovels entertainingly enough.

FTN.PR.A : Semi-Annual Report, 2019

Sunday, August 11th, 2019

Financial 15 Split Corp has released its Semi-Annual Report to May 31, 2019.

Figures of interest are:

MER: 1.01% of the whole unit value, adjusted “to reflect the normal operating expenses of the Company excluding any one time offering expenses. ”

Average Net Assets: We need this to calculate portfolio yield. The Total Assets of the fund at year end was $643.9-million, compared to $647.0-million on May 31, so call it an average of $645.5-million. Preferred share dividends of $11,380,883 were paid over the half year at 0.55 p.a. (a temporary boost from the required 0.525), implying average units outstanding 41.39-million, at an average NAVPU of (15.90 + 18.32 14.99)/2 = 17.11 15.44, implies net assets of $708.2-million $639.1-million. Say the Average Net Assets are the average of the two estimates, $676.8-million $642.3-million.

Underlying Portfolio Yield: Income received of $11,120,161 divided by average net assets of $676.8-million $642.3-million, multiplied by two because it’s semiannual is 3.29% 3.46%.

Income Coverage: Net investment income of $7,331,482 (before capital gains) divided by preferred share dividends of $11,380,883 is 64%.

The income coverage calculated is equal to the 0.64 times calculated by DBRS in April 2019.

Update, 2019-8-12: Figures struck out and replaced have been changed as the wrong end-value for 2018 was used initially. See comments.