Archive for the ‘Issue Comments’ Category

VNR.PR.A : Convert or Hold?

Friday, September 22nd, 2017

It will be recalled that VNR.PR.A will reset to 4.62% (paid on par) effective October 15.

Holders of VNR.PR.A have the option to convert to FloatingResets, VNR.PR.B, which will pay 3-month bills plus 281bp on the par value of $25.00, reset quarterly. The deadline for notifying the company of the intent to convert is 5:00 p.m. (Eastern Standard Time) on September 29, 2017; but note that this is a company deadline and that brokers will generally set their deadlines a day or two in advance, so there’s not much time to lose if you’re planning to convert! However, if you miss the brokerage deadline they’ll probably do it on a ‘best efforts’ basis if you grovel in a sufficiently entertaining fashion. The ticker for the new FloatingReset, if it is issued, will be VNR.PR.B.

VNR.PR.A is a FixedReset, 4.35%+281, that commenced trading 2012-6-6 after being announced 2012-5-15. The issue is tracked by HIMIPref™ and has been assigned to the FixedReset subindex.

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., VNR.PR.A and the FloatingReset, VNR.PR.B, 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_170922
Click for Big

The market appears to have a distaste at the moment for floating rate product; most of the implied rates until the next interconversion are lower than the current 3-month bill rate and the averages for investment-grade and junk issues are both well below current market rates, at +0.71% and +0.69%, 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 VNR.PR.A FixedReset, we may construct the following table showing consistent prices for its maybe-soon-to-be-issued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:

Estimate of FloatingReset (received in exchange for VNR.PR.A) Trading Price In Current Conditions
  Assumed FloatingReset
Price if Implied Bill
is equal to
FixedReset Bid Price Spread +1.00% +0.50% 0.00%
VNR.PR.A 22.92 281bp 22.10 21.60 21.09

Based on current market conditions, I suggest that the FloatingResets that will result from conversion are likely to be cheap and trading below the price of their FixedReset counterparts. Therefore, I recommend that holders of VNR.PR.A continue to hold the issue and not to convert. I will note that, given the apparent cheapness of the FloatingResets, it may be a good trade to swap the FixedReset for the FloatingReset in the market once both elements of each pair are trading and you can – presumably, according to this analysis – 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 new pair will reflect these conditions.

PVS.PR.F Soft on Modest Volume

Monday, September 18th, 2017

Partners Value Split Corp. has announced (although not yet on their website; maybe not ever on their website, since the lazy turds haven’t even published the new issue announcement yet):

the completion of its previously announced issue of 6,000,000 Class AA Preferred Shares, Series 8 (the “Series 8 Preferred Shares”) at an offering price of $25.00 per Series 8 Preferred Share, raising gross proceeds of $150,000,000. The Series 8 Preferred Shares carry quarterly fixed cumulative preferential dividends representing a 4.80% annualized yield on the offering price and have a final maturity of September 30, 2024. The Series 8 Preferred Shares have been listed and posted for trading on the Toronto Stock Exchange under the symbol PVS.PR.F. The net proceeds of the offering will be used to redeem the Company’s outstanding Class AA Preferred Shares, Series 5 (the “Series 5 Preferred Shares”) on December 10, 2017 in accordance with the terms of the Series 5 Preferred Shares and to pay a special dividend to holders of the Company’s capital shares.

Prior to the closing of the offering, the Company subdivided the existing capital shares held by Partners Value Investments Inc. so that there are an equal number of preferred shares and capital shares outstanding.

The Company owns a portfolio consisting of 79,740,966 Class A Limited Voting Shares of Brookfield Asset Management Inc. (the “Brookfield Shares”) which is expected to yield quarterly dividends that are sufficient to fund quarterly fixed cumulative preferential dividends for the holders of the Company’s preferred shares and to enable the holders of the Company’s capital shares to participate in any capital appreciation of the Brookfield Shares. Brookfield Asset Management Inc. is a global alternative asset manager with over US$250 billion in assets under management. For more than 100 years Brookfield has owned and operated assets on behalf of shareholders and clients with a focus on property, renewable energy, infrastructure and private equity. Brookfield has a range of public and private investment products and services which leverage its expertise and experience. Brookfield Shares are co-listed on the New York Stock Exchange under the symbol “BAM”, the TSX under the symbol “BAM.A” and the NYSE Euronext under the symbol “BAMA”.

David Clare, Vice President, will be available at (647) 503-6516 to answer any questions regarding the offering.

PVS.PR.F is a SplitShare, 4.80%, maturing 2024-9-30, announced 2017-09-07. It will be tracked by HIMIPref™ and has been assigned to the SplitShare subindex.

The issue traded 234,295 shares today in a range of 24.79-98 before closing at 24.93-94. Vital statistics are:

PVS.PR.F SplitShare YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2024-09-30
Maturity Price : 25.00
Evaluated at bid price : 24.93
Bid-YTW : 4.86 %

The issue’s rating has been finalized at Pfd-2(low) by DBRS:

DBRS Limited (DBRS) assigned a new rating of Pfd-2 (low) to the Class AA Preferred Shares, Series 8 (the Series 8 Preferred Shares) to be issued by Partners Value Split Corp. (the Company) and confirmed the ratings of the previously issued Class AA Preferred Shares, Series 3 (the Series 3 Preferred Shares); Class AA Preferred Shares, Series 5 (the Series 5 Preferred Shares); Class AA Preferred Shares, Series 6 (the Series 6 Preferred Shares); Class AA Preferred Shares, Series 7 (the Series 7 Preferred Shares; collectively, the Class AA Preferred Shares) at Pfd-2 (low).

Proceeds from the Series 8 Preferred Share offering will be used to fund the redemptions of the previously issued Series 5 Preferred Shares no later than their scheduled maturity date of December 10, 2017. To the extent that net proceeds from the offering exceed funding requirements associated with the redemptions, the Company will distribute such net proceeds to holders of the Capital Shares as a special dividend.

AX.PR.A : No Conversion to FloatingReset

Monday, September 18th, 2017

Artis Real Estate Investment Trust has announced:

that it has determined, based upon the election of holders of Preferred Units, Series A (“Series A Units”) (AX.PR.A), that less than 500,000 Series B Units would be issued on September 30, 2017 and consequently, no holders of Series A Units are entitled to reclassify their Series A Units to Series B Units on September 30, 2017.

Accordingly, all 3,450,000 Series A Units will remain issued and outstanding following September 30, 2017 and during the subsequent five year period commencing October 1, 2017, holders will be entitled to receive distributions, if, as and when declared by the Board of Trustees of Artis, in an annual amount per Series A Unit determined by multiplying the Annual Fixed Distribution Rate of 5.662% per annum by $25.00, payable quarterly on the last business day of each of March, June, September and December in each year during such period.

It will be recalled that AX.PR.A will reset to 5.662% and that I recommended against conversion.

As a result of all this AX.PR.A is a FixedReset, 5.662%+406, that was announced 2012-7-24 with a 5.25% coupon but only added to HIMIPref™ when the issue was rated by DBRS in 2013. It is tracked by HIMIPref™ but relegated to the Scraps subindex on credit concerns.

It is important to note that according to the prospectus supplement (available at SEDAR dated July 25, 2012; I am not permitted to link to it directly due to the cosy little contract the soon-to-be-bank-owned CDS has signed with regulators), taxation is complicated: “Artis’ income and net taxable gains for the purposes of the Tax Act will be allocated to the holders of Units and Preferred Units in the same proportion as the distributions received by such holders.” Particulars of the tax status of Artis’ distributions are published by Artis on their website.

TA.PR.H : No Conversion to FloatingReset

Monday, September 18th, 2017

TransAlta Corporation has announced:

that after taking into account all election notices received by the September 15, 2017 deadline for the conversion of the Cumulative Redeemable Rate Reset Preferred Shares, Series E (the “Series E Shares”) into Cumulative Redeemable Floating Rate Preferred Shares, Series F (the “Series F Shares”), there were 133,969 Series E Shares tendered for conversion, which is less than the one million shares required to give effect to conversions into Series F Shares. As a result, none of the Series E Shares will be converted into Series F Shares on September 30, 2017.

It will be recalled that TA.PR.H will reset at 5.194% and that I recommended against conversion.

As a result of all this TA.PR.H is now a FixedReset, 5.194%+365, that commenced trading 2012-8-10 with a 5.00% coupon after being announced 2012-8-2. The issue is tracked by HIMIPref™ but has been assigned to the Scraps index on credit concerns.

VSN.PR.A : No Conversion to FloatingReset

Monday, September 18th, 2017

Veresen Inc. has announced:

that, after having taken into account all conversion notices received from holders of its outstanding Cumulative Redeemable Preferred Shares, Series A (“Series A Shares”) by the September 15, 2017 deadline for the conversion of the Series A Shares into Cumulative Redeemable Preferred Shares, Series B (“Series B Shares”), less than the 1,000,000 Series A Shares required to give effect to conversions into Series B Shares were tendered for conversion. As a result, none of Veresen’s Series A Shares will be converted into Series B Shares on September 30, 2017.

It will be recalled that VSN.PR.A will reset at 4.464% and that I recommended against conversion.

After all of this, VSN.PR.A is a FixedReset, 4.464%+292, that commenced trading 2012-2-14 with a 4.40% coupon after being announced 2012-2-3. The issue is tracked by HIMIPref™ but has been assigned to the Scraps index on credit concerns. As noted in the earlier press release, there is an exchange offer from PPL outstanding that will take effect on closing of the Plan of Arrangement between the companies.

VNR.PR.A to Reset at 4.62%

Friday, September 15th, 2017

Valener Inc. has announced:

Following the August 8, 2017 decision of the Board of directors of Valener Inc. (“Valener” or the “Corporation”) (TSX: VNR), Valener reiterated today that it does not intend to exercise its right to redeem all or any part of the currently outstanding Cumulative Rate Reset Preferred Shares, Series A of the Corporation (“Series A shares”) (TSX: VNR.PR.A) on October 15, 2017. There are currently 4,000,000 Series A shares outstanding.

As a result, subject to certain conditions, the holders of the Series A shares have the right to convert all or part of their Series A shares, on a one-for-one basis, into Cumulative Floating Rate Preferred Shares, Series B of the Corporation (“Series B shares”) (TSX: VNR.PR.B) on October 15, 2017 (the “Conversion Date”). A formal notice of the right to convert Series A Shares into Series B Shares will be sent to the registered holders of the Series A Shares, subject to certain conditions.

Holders who do not exercise their right to convert their Series A shares into Series B shares will continue to hold their Series A shares and will have the opportunity to convert their shares again on October 15, 2022, and every five years thereafter as long as the shares remain outstanding.

The above conversion right is subject to the following conditions:

i. if the Corporation determines that there would be less than 1,000,000 Series B shares outstanding after the Conversion Date, then holders of Series A shares will not be entitled to convert their shares into Series B shares, and alternatively

ii. if the Corporation determines that there would remain outstanding less than 1,000,000 Series A shares after the Conversion Date, then all remaining Series A shares will automatically be converted into Series B shares on a one-for-one basis on the Conversion Date.

In either case, the Corporation will give written notice to that effect to any registered holders affected by the preceding condition no later than October 6, 2017.

The dividend rate applicable for the Series A shares for the five-year period from and including October 15, 2017 and ending on and excluding October 15, 2022, and the dividend rate applicable to the Series B shares for the 3-month period from and including October 15, 2017 and ending on and excluding January 15, 2018, are respectively 4.62% and 3.71%.

Beneficial owners of Series A shares who wish to exercise their conversion right should communicate with their broker or other nominee to obtain instructions for exercising such right during the conversion period, which runs from September 15, 2017 until 5:00 p.m. (Eastern Standard Time) on September 29, 2017.

According to the conditions of the Series A and Series B Shares, Valener may redeem the Series A Shares, in whole or in part, on October 15, 2022 and on October 15 every five years thereafter for $25.00 per share plus declared and unpaid dividends and may redeem the Series B Shares, in whole or in part, after October 15, 2017 for $25.50 per share plus declared and unpaid dividends, unless such Series B Shares are redeemed on October 15, 2022 or on October 15 every five years thereafter, in which case the redemption price will be $25.00 per share plus declared and unpaid dividends.

The Toronto Stock Exchange (“TSX”) has conditionally approved the listing of the Series B shares effective upon conversion. Listing of the Series B shares is subject to the Corporation fulfilling all the listing requirements of the TSX and upon approval, the Series B shares will be listed on the TSX under the trading symbol VNR.PR.B.

The Series A and Series B shares have not been and will not be registered under the United States Securities Act of 1933, as amended, or any state securities laws. The Series A and the Series B shares may not be offered, sold or delivered, directly or indirectly, in the United States of America for the account or benefit of U.S. persons. This press release does not constitute an offer to sell or a solicitation of an offer to buy such securities in the United States.

For more information on the terms and risks associated with an investment in the Series A and the Series B shares, please see the Corporation’s prospectus dated May 30, 2012 which is available on sedar.com.

VNR.PR.A is a FixedReset, 4.35%+281, that commenced trading 2012-6-6 after being announced 2012-5-15. The issue is tracked by HIMIPref™ and has been assigned to the FixedReset subindex.

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., VNR.PR.A and the FloatingReset VNR.PR.B 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_170915
Click for Big

The market appears to have a distaste at the moment for floating rate product; most of the implied rates until the next interconversion are lower than the current 3-month bill rate and the averages for investment-grade and junk issues are both below current market rates, at +0.67% and +0.51%, 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 VNR.PR.A FixedReset, we may construct the following table showing consistent prices for its soon-may-be-issued FloatingReset counterpart VNR.PR.B given a variety of Implied Breakeven yields consistent with issues currently trading:

Estimate of FloatingReset VNR.PR.B (received in exchange for VNR.PR.A) Trading Price In Current Conditions
  Assumed FloatingReset
Price if Implied Bill
is equal to
FixedReset Bid Price Spread 1.00% 0.50% 0.00%
VNR.PR.A 22.59 281bp 21.77 21.26 20.76

Based on current market conditions, I suggest that the FloatingResets that will result from conversion are likely to be cheap and trading below the price of their FixedReset counterparts. Therefore, it seems likely that I will recommend that holders of VNR.PR.A continue to hold the issue and not to convert, but I will wait until it’s closer to the September 29 notification deadline before making a final pronouncement. I will note that, given the apparent cheapness of the FloatingResets, it may be a good trade to swap the FixedReset for the FloatingReset in the market once both elements of each pair are trading and you can – presumably, according to this analysis – 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.

BAM.PF.J Firm on Excellent Volume

Thursday, September 14th, 2017

I should have posted this on September 13, but … well, better late than never!

Brookfield Asset Management Inc. has announced:

the completion of its previously announced Class A Preference Shares, Series 48 issue in the amount of C$300,000,000. The offering was underwritten on a bought deal basis by a syndicate led by CIBC Capital Markets, RBC Capital Markets, Scotiabank and TD Securities Inc.

The Preferred Shares, Series 48 were issued at a price of C$25.00 per share, for gross proceeds of C$300,000,000. Holders of the Preferred Shares, Series 48 will be entitled to receive a cumulative quarterly fixed dividend yielding 4.75% annually for the initial period ending December 31, 2022. Thereafter, the dividend rate will be reset every five years at a rate equal to the greater of: (i) the 5-year Government of Canada bond yield plus 3.10%, and (ii) 4.75%. The Preferred Shares, Series 48 will commence trading on the Toronto Stock Exchange this morning under the ticker symbol BAM.PF.J. The Preferred Shares, Series 48 may not be offered or sold in the United States or to U.S. persons absent registration or an applicable exemption from the registration requirements under the U.S. Securities Act.

BAM.PF.J is a FixedReset, 4.75%+310M475, announced 2017-09-06. It will be tracked by HIMIPref™ and has been assigned to the FixedReset subindex.

The issue traded 1,280,452 shares on September 13 in a range of 24.97-04 before closing at 25.02-03. Vital statistics are:

BAM.PF.J FixedReset YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-09-13
Maturity Price : 23.15
Evaluated at bid price : 25.02
Bid-YTW : 4.70 %

Implied Volatility analysis continues to indicate that this issue is expensive:

impvol_bam_170914
Click for Big

With the parameters shown, the theoretical value of the new issue is 24.19, compared to 24.20 on announcement day. Critics will be quick to point out that in this calculation there is zero value assigned to the minimum rate guarantee … but I’d say that’s about right!

FTN.PR.A To Get Bigger

Wednesday, September 13th, 2017

Quadravest Capital Management Inc. has announced:

Financial 15 Split Corp. (the “Company”) is pleased to announce it has filed a preliminary short form prospectus in each of the provinces of Canada with respect to an offering of Preferred Shares and Class A Shares of the Company. The offering will be co-led by National Bank Financial Inc., CIBC, Scotia Capital Inc., RBC Capital Markets and will also include BMO Capital Markets, GMP Securities L.P., Canaccord Genuity Corp., Raymond James, Desjardins Securities Inc., Echelon Wealth Partners, Mackie Research Capital Corporation, Manulife Securities Incorporated and Industrial Alliance Securities Inc.

The Preferred Shares will be offered at a price of $9.90 per Preferred Share to yield 5.30% and the Class A Shares will be offered at a price of $10.40 per Class A Share to yield 14.50%.

The closing price on the TSX of each of the Preferred Shares and the Class A Shares on September 12, 2017 was $10.16 and $10.64, respectively.

Since inception of the Company, the aggregate dividends paid on the Preferred Shares have been $7.24 per share and the aggregate dividends paid on the Class A Shares have been $16.88 per share, for a combined total of $24.12. All distributions to date have been made in tax advantage eligible Canadian dividends or capital gains dividends.

The net proceeds of the offering will be used by the Company to invest in an actively managed, high quality portfolio consisting of 15 financial services companies made up of Canadian and U.S. issuers as follows:

Bank of Montreal National Bank of Canada Bank of America Corp.
The Bank of Nova Scotia Manulife Financial Corporation Citigroup Inc.
Canadian Imperial Bank of Commerce Sun Life Financial Services of Canada Inc. Goldman Sachs Group Inc.
Royal Bank of Canada Great-West Lifeco Inc. JP Morgan Chase & Co.
The Toronto-Dominion Bank CI Financial Corp. Wells Fargo & Co.

The Company’s investment objectives are:
Preferred Shares:
i. to provide holders of the Preferred Shares with fixed, cumulative preferential monthly cash dividends currently in the amount of 5.25% annually, to be set by the Board of Directors annually subject to a minimum of 5.25% until
2020; and
ii. on or about the termination date, currently December 1, 2020 (subject to further 5 year extensions thereafter), to pay the holders of the Preferred Shares $10.00 per Preferred Share.

Class A Shares:
i. to provide holders of the Class A Shares with regular monthly cash dividends in an amount to be determined by the Board of the Directors; and
ii. to permit holders to participate in all growth in the net asset value of the Company above $10 per Unit, by paying holders on or about the termination date of December 1, 2020 (subject to further 5 year extensions thereafter) such amounts as remain in the Company after paying $10 per Preferred Share.

The sales period of this overnight offering will end at 9:00 a.m. EST on September 14, 2017. The offering is expected to close on or about September 28, 2017 and is subject to certain closing conditions including approval by the TSX.

So the Whole Unit price is $20.30 versus a NAV of $16.39 as of August 31. Oh, it’s a great business when it works!

Update, 2017-09-14: The offering was successful!

Financial 15 Split Corp. (the “Company”) is pleased to announce it has completed the overnight marketing of up to 3,897,000 Preferred Shares and up to 3,897,000 Class A Shares of the Company. The total proceeds of the offering are expected to be approximately $79.1 million.

VSN.PR.A : Convert or Hold?

Friday, September 8th, 2017

It will be recalled that VSN.PR.A will reset to 4.464% (paid on par) effective September 30.

Holders of VSN.PR.A have the option to convert to FloatingResets, which will pay 3-month bills plus 292bp on the par value of $25.00, reset quarterly. The deadline for notifying the company of the intent to convert is 3:00 p.m. (MST) / 5:00 p.m. (EST) on September 15, 2017; but note that this is a company deadline and that brokers will generally set their deadlines a day or two in advance, so there’s not much time to lose if you’re planning to convert! However, if you miss the brokerage deadline they’ll probably do it on a ‘best efforts’ basis if you grovel in a sufficiently entertaining fashion. The ticker for the new FloatingReset, if it is issued, has not been announced.

VSN.PR.A is a FixedReset, 4.40%+292, that commenced trading 2012-2-14 after being announced 2012-2-3. The issue is tracked by HIMIPref™ but has been assigned to the Scraps index on credit concerns. As noted in the press release, there is an exchange offer from PPL outstanding that will take effect on closing of the Plan of Arrangement between the companies.

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., VSN.PR.A 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_170908
Click for Big

The market appears to have a distaste at the moment for floating rate product; most of the implied rates until the next interconversion are lower than the current 3-month bill rate and the averages for investment-grade and junk issues are both well below current market rates, at +0.61% and +0.68%, 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 TA.PR.H FixedReset, we may construct the following table showing consistent prices for its maybe-soon-to-be-issued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:

Estimate of FloatingReset (received in exchange for VSN.PR.A) Trading Price In Current Conditions
  Assumed FloatingReset
Price if Implied Bill
is equal to
FixedReset Bid Price Spread +1.00% +0.50% 0.00%
VSN.PR.A 21.75 292bp 21.20 20.70 20.20

Based on current market conditions, I suggest that the FloatingResets that will result from conversion are likely to be cheap and trading below the price of their FixedReset counterparts. Therefore, I recommend that holders of VSN.PR.A continue to hold the issue and not to convert. I will note that, given the apparent cheapness of the FloatingResets, it may be a good trade to swap the FixedReset for the FloatingReset in the market once both elements of each pair are trading and you can – presumably, according to this analysis – 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 new pair will reflect these conditions.

TA.PR.H : Convert or Hold?

Friday, September 8th, 2017

It will be recalled that TA.PR.H will reset to 5.194% (paid on par) effective September 30.

Holders of TA.PR.H have the option to convert to FloatingResets, which will pay 3-month bills plus 365bp on the par value of $25.00, reset quarterly. The deadline for notifying the company of the intent to convert is 3:00 p.m. (MST) / 5:00 p.m. (EST) on September 15, 2017; but note that this is a company deadline and that brokers will generally set their deadlines a day or two in advance, so there’s not much time to lose if you’re planning to convert! However, if you miss the brokerage deadline they’ll probably do it on a ‘best efforts’ basis if you grovel in a sufficiently entertaining fashion. The ticker for the new FloatingReset, if it is issued, has not been announced.

TA.PR.H is a FixedReset, 5.00%+365, that commenced trading 2012-8-10 after being announced 2012-8-2. The issue is tracked by HIMIPref™ but has been assigned to the Scraps index 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., TA.PR.H 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_170908
Click for Big

The market appears to have a distaste at the moment for floating rate product; most of the implied rates until the next interconversion are lower than the current 3-month bill rate and the averages for investment-grade and junk issues are both well below current market rates, at +0.61% and +0.68%, 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 TA.PR.H FixedReset, we may construct the following table showing consistent prices for its maybe-soon-to-be-issued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:

Estimate of FloatingReset (received in exchange for TA.PR.H) Trading Price In Current Conditions
  Assumed FloatingReset
Price if Implied Bill
is equal to
FixedReset Bid Price Spread +1.00% +0.50% 0.00%
TA.PR.H 21.35 365bp 20.82 20.34 19.86

Based on current market conditions, I suggest that the FloatingResets that will result from conversion are likely to be cheap and trading below the price of their FixedReset counterparts. Therefore, I recommend that holders of TA.PR.H continue to hold the issue and not to convert. I will note that, given the apparent cheapness of the FloatingResets, it may be a good trade to swap the FixedReset for the FloatingReset in the market once both elements of each pair are trading and you can – presumably, according to this analysis – 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 new pair will reflect these conditions.