Archive for the ‘Issue Comments’ Category

GDV.PR.A Steady on Good Volume

Friday, June 15th, 2018

Brompton Group has announced (on June 7):

Global Dividend Growth Split Corp. (the “Company”) has determined the exchange ratios for the exchange option (the “Exchange Option”) with respect to its initial public offering. Under the Exchange Option, prospective purchasers could purchase Class A shares or Units (consisting of one Class A and one Preferred share) of the Company by an exchange of freely tradable equity securities (“Exchange Securities”) of the issuers listed below (the “Exchange Eligible Issuers”). The Exchange Option deadline was 5:00 p.m. on May 24, 2018.

The following table indicates the adjusted volume weighted average trading price (“Adjusted VWAP”) and exchange ratio for the Exchange Securities of each Exchange Eligible Issuer as calculated in the manner described in the Company’s prospectus dated May 23, 2018. The adjusted volume weighted average trading price and exchange ratios are rounded to four decimal places. Fractional Class A shares/Units will not be issued.

Company Name (Exchange Ticker Symbol) CUSIP ISIN Adjusted VWAP
(C$ Equiv.)
Exchange
Ratio Per Class A Share
Exchange Ratio Per Unit
Global Equities
APPLE INCORPORATED (AAPL) 37833100 US0378331005 $249.4883 20.7734 11.3404
BCE (BCE) 05534B760 CA05534B7604 $54.4520 4.5339 2.4751
CARNIVAL CORPORATION (CCL) 143658300 PA1436583006 $79.9122 6.6538 3.6324
CISCO SYSTEMS INCORPORATED (CSCO) 17275R102 US17275R1023 $56.6722 4.7188 2.5760
ENBRIDGE (ENB) 29250N105 CA29250N1050 $40.3859 3.3627 1.8357
HSBC HOLDINGS (HSBC) 404280406 US4042804066 $63.6714 5.3015 2.8942
IBM CORPORATION (IBM) 459200101 US4592001014 $186.5488 15.5328 8.4795
INTEL CORPORATION (INTC) 458140100 US4581401001 $73.4187 6.1131 3.3372
JOHNSON & JOHNSON (JNJ) 478160104 US4781601046 $158.4643 13.1944 7.2029
JP MORGAN CHASE & CO. (JPM) 46625H100 US46625H1005 $141.7487 11.8026 6.4431
MANULIFE FINANCIAL (MFC) 56501R106 CA56501R1064 $24.6940 2.0561 1.1225
NOVARTIS AG (NVS) 66987V109 US66987V1098 $97.7830 8.1418 4.4447
PFIZER INCORPORATED (PFE) 717081103 US7170811035 $47.2153 3.9313 2.1462
PROCTER & GAMBLE CO. (PG) 742718109 US7427181091 $96.5067 8.0355 4.3867
SANOFI SA (SNY) 80105N105 US80105N1054 $50.0553 4.1678 2.2752
SUN LIFE FINANCIAL INCORPORATED (SLF) 866796105 CA8667961053 $54.4145 4.5308 2.4734
TELUS CORPORATION (T) 87971M103 CA87971M1032 $45.4713 3.7861 2.0669
TEXAS INSTRUMENTS INCORPORATED (TXN) 882508104 US8825081040 $151.1907 12.5887 6.8723
TORONTO-DOMINION BANK (TD) 891160509 CA8911605092 $75.2690 6.2672 3.4213
Other
ALIMENTATION COUCHE-TARD INCORPORATED (ATD) 01626P403 CA01626P4033 $55.1488 4.5919 2.5068
ARC RESOURCES LIMITED (ARX) 00208D408 CA00208D4084 $13.0453 1.0862 0.5930
BARRICK GOLD CORPORATION (ABX) 67901108 CA0679011084 $16.8209 1.4006 0.7646
BLACKBERRY LIMITED (BB) 09228F103 CA09228F1036 $15.6563 1.3036 0.7117
CRESCENT POINT ENERGY CORPORATION (CPG) 22576C101 CA22576C1014 $10.0508 0.8369 0.4569
EMERA INCORPORATED (EMA) 290876101 CA2908761018 $40.1965 3.3469 1.8271
ENCANA CORPORATION (ECA) 292505104 CA2925051047 $15.9743 1.3301 0.7261
FIRST QUANTUM MINERALS LIMITED (FM) 335934105 CA3359341052 $21.5054 1.7906 0.9775
FRANCO-NEVADA CORPORATION (FNV) 351858105 CA3518581051 $91.7520 7.6396 4.1705
INTER PIPELINE FUND (IPL) 45833V109 CA45833V1094 $24.4985 2.0398 1.1136
KINROSS GOLD CORPORATION (K) 496902404 CA4969024047 $4.6261 0.3852 0.2103
PEMBINA PIPELINE CORPORATION (PPL) 706327103 CA7063271034 $44.7449 3.7256 2.0339
SHAW COMMUNICATIONS INCORPORATED (SJR.B) 82028K200 CA82028K2002 $26.5114 2.2074 1.2051
TRANSCANADA CORPORATION (TRP) 89353D107 CA89353D1078 $53.9139 4.4891 2.4506
VALEANT PHARMACEUTICALS INTERNATIONAL INCORPORATED (VRX) 91911K102 CA91911K1021 $30.8004 2.5646 1.4000
Exchange-Traded Funds
ISHARES CORE S&P 500 INDEX ETF (XUS) 46434R109 CA46434R1091 $44.7166 3.7233 2.0326
ISHARES CORE S&P/TSX CAPPED COMPOSITE INDEX ETF (XIC) 46430J101 CA46430J1012 $25.7062 2.1404 1.1685
ISHARES MSCI EAFE INDEX ETF (XIN) 46428L100 CA46428L1004 $26.7373 2.2263 1.2153
ISHARES MSCI EUROPE IMI INDEX ETF (XEU) 46434W108 CA46434W1086 $24.9395 2.0766 1.1336
ISHARES MSCI WORLD INDEX ETF (XWD) 46430Y108 CA46430Y1088 $50.5080 4.2055 2.2958
ISHARES S&P/TSX 60 INDEX ETF (XIU) 46428D108 CA46428D1087 $23.9088 1.9907 1.0868
VANGUARD S&P 500 INDEX ETF (VFV) 92205Y105 CA92205Y1051 $63.4257 5.2811 2.8830

The Toronto Stock Exchange has conditionally approved the listing of the Class A and Preferred shares, subject to the Company fulfilling all customary requirements. Trading under the symbols GDV and GDV.PR.A is expected to commence on the closing date, June 15, 2018.

The Company will invest in a diversified portfolio (the “Portfolio”) of equity securities of large capitalization global dividend growth companies selected by the Manager. In order to qualify for inclusion in the Portfolio, at the time of investment and at the time of each periodic reconstitution and/or rebalancing of the Portfolio, each global dividend growth company included in the Portfolio must (i) have a market capitalization of at least US$10 billion; and (ii) have a history of dividend growth or, in the Manager’s view, have high potential for future dividend growth.

The Manager expects that at least 20 global dividend growth companies will comprise the Portfolio. The indicative portfolio includes: Airbus SE, Apple Inc., AstraZeneca plc, BCE Inc., Carnival Corporation, Cisco Systems Inc., Deutsche Post AG, Enbridge Inc., HSBC Holdings plc, Intel Corporation, IBM Corporation, Johnson & Johnson, JP Morgan Chase & Co., Manulife Financial Corporation, Novartis AG, Pfizer Inc., Proctor & Gamble Co., Sanofi SA, Siemens AG, Sun Life Financial Inc., TELUS Corporation, Texas Instruments Inc., Toronto-Dominion Bank, UBS Group AG, and Vinci SA.

The investment objectives for the Class A shares are to provide their holders with regular monthly non-cumulative cash distributions and the opportunity for capital appreciation through exposure to the Portfolio. The monthly cash distribution is targeted to be $0.10 per Class A share representing a yield on the issue price of the Class A shares of 10.0% per annum.

The investment objectives for the Preferred shares are to provide their holders with fixed cumulative preferential quarterly cash distributions and to return the original issue price of $10.00 to holders on June 30, 2021, subject to extension for successive terms of up to five years as determined by the board of directors of the Company. The quarterly cash distribution will be $0.1250 per Preferred share ($0.50 per annum, or 5.0% per annum on the issue price of $10.00 per preferred share), until June 30, 2021. The Preferred shares have been provisionally rated Pfd-3 (high) by DBRS Limited.

The syndicate of agents for the offering is being led by RBC Capital Markets, CIBC Capital Markets, National Bank Financial Inc. and Scotiabank and includes BMO Capital Markets, TD Securities Inc., Canaccord Genuity Corp., GMP Securities L.P., Raymond James Ltd., Echelon Wealth Partners., Industrial Alliance Securities Inc., Desjardins Securities Inc., and Mackie Research Capital Corporation.

Today, Brompton announced:

Brompton Funds Limited (the “Manager”) is pleased to announce that Global Dividend Growth Split Corp. (the “Company”) has completed its initial public offering of 3,550,000 Class A shares and 3,550,000 Preferred shares for total gross proceeds of $78.1 million. The Class A and Preferred shares will commence trading today on the Toronto Stock Exchange under the symbols GDV and GDV.PR.A, respectively.

The Company will invest in a diversified portfolio (the “Portfolio”) of equity securities of large capitalization global dividend growth companies selected by the Manager. In order to qualify for inclusion in the Portfolio, at the time of investment and at the time of each periodic reconstitution and/or rebalancing of the Portfolio, each global dividend growth company included in the Portfolio must (i) have a market capitalization of at least US$10 billion; and (ii) have a history of dividend growth or, in the Manager’s view, have high potential for future dividend growth.
The investment objectives for the Class A shares are to provide their holders with regular monthly non-cumulative cash distributions and the opportunity for capital appreciation through exposure to the Portfolio. The monthly cash distribution is targeted to be $0.10 per Class A share representing a yield on the issue price of the Class A shares of 10.0% per annum.

The investment objectives for the Preferred shares are to provide their holders with fixed cumulative preferential quarterly cash distributions and to return the original issue price of $10.00 to holders on June 30, 2021, subject to extension for successive terms of up to five years as determined by the board of directors of the Company. The quarterly cash distribution will be $0.1250 per Preferred share ($0.50 per annum, or 5.0% per annum) on the issue price of $10.00 per Preferred share, until June 30, 2021. The Preferred shares have been provisionally rated Pfd-3 (high) by DBRS Limited.

Brompton Funds Limited acts as the manager and portfolio manager of the Company. The Manager currently manages five split share corporations with combined assets of over $1.3 billion.

The syndicate of agents for the offering was led by RBC Capital Markets, CIBC Capital Markets, National Bank Financial Inc. and Scotiabank and includes BMO Capital Markets, TD Securities Inc., Canaccord Genuity Corp., GMP Securities L.P., Raymond James Ltd., Echelon Wealth Partners., Industrial Alliance Securities Inc., Desjardins Securities Inc., and Mackie Research Capital Corporation.

DBRS has finalized the Pfd-3(high) rating:

DBRS Limited (DBRS) finalized the provisional rating of Pfd-3 (high) assigned to the Preferred Shares issued by Global Dividend Growth Split Corp. (the Company). The Company issued an equal number (3,550,000) of the Preferred Shares and the Class A Shares at an issue price of $10.00 per Preferred Share and $12.00 per Class A Share. From to time or during the events of issuance and redemption, the number of the Class A Shares outstanding may exceed the number of the Preferred Shares outstanding. It is expected that such excess will not be more than 10% and the excess of over 10% should not be outstanding for more than 15 days. Both classes of shares are scheduled to mature on June 30, 2021. The term of the Company may be extended beyond the maturity date for additional terms of five years each as determined by the Company’s board of directors.

Based on the initial asset coverage of 2.1x, the net asset value of the Company would have to fall by approximately 53% for the holders of the Preferred Shares to be in a loss position. The initial dividend coverage ratio is 0.6x.

GDV.PR.A commenced marketing in late April and issued a final prospectus on May 24. It is a 5% three-year SplitShare and will be tracked by HIMIPref™ but has been relegated to the Scraps subindex on credit concerns.

The issue traded 154,447 shares today in a range of 9.90-00 before closing at 10.00-01. Vital statistics are:

GDV.PR.A SplitShare YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2021-06-30
Maturity Price : 10.00
Evaluated at bid price : 10.00
Bid-YTW : 4.98 %

NA.PR.G Holds Its Own on Decent Volume

Monday, June 11th, 2018

National Bank of Canada has announced:

that it has closed its domestic public offering of non-cumulative 5-year rate reset first preferred shares series 42 (non-viability contingent capital (NVCC)) (the “Series 42 Preferred Shares”). National Bank issued 12 million Series 42 Preferred Shares at a price of $25.00 per share to raise gross proceeds of $300 million.

The offering was underwritten by a syndicate led by National Bank Financial Inc.

The Series 42 Preferred Shares will commence trading on the Toronto Stock Exchange today under the ticker symbol NA.PR.G.

The Series 42 Preferred Shares were issued under a prospectus supplement dated June 4, 2018 to National Bank’s short form base shelf prospectus dated November 21, 2016.

NA.PR.G is a FixedReset, 4.95%+277, NVCC compliant, announced 2018-05-31. It will be tracked by HIMIPref™ and has been assigned to the FixedResets subindex.

The issue traded 711,342 shares today in a range of 24.85-96 before closing at 24.94-95. The slight discount to par isn’t bad, given that TXPR is down about 0.25% from the close immediately prior to the announcement date. Vital statistics are:

NA.PR.G FixedReset YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-06-11
Maturity Price : 23.12
Evaluated at bid price : 24.94
Bid-YTW : 4.85 %

The new issue is ridiculously expensive according to Implied Volatility Analysis:

impvol_na_180611
Click for Big

According to this analysis, the fair value of the new issue on June 11 is 23.86.

AIM Preferreds Have Defaulted, says S&P

Monday, June 11th, 2018

Standard & Poor’s has announced:

S&P Global Ratings today said it has lowered its global scale and Canada scale issue-level ratings on Aimia Inc.’s preferred shares to ‘D’ from ‘B-‘ and ‘P-4(Low)’, respectively, on the company’s continued deferral of preferred dividend payments. The company’s ability to meet the dividend payments in full and on schedule remains restricted by Aimia’s inability to pass the capital impairment test set forth under the CBCA (Canada Business Corporations Act). S&P Global Ratings views this as a breach of the “imputed promise” on the preferred shares’ timely payment of dividends, and characterize it as a payment default.

Aimia had suspended the dividend payments on its preferred and common shares almost a year ago, on June 14, 2017, due to its inability to satisfy the capital impairment test as set forth under the CBCA. As per our criteria (see “Use Of ‘C’ And ‘D’ Issue Credit Ratings For Hybrid Capital And Payment-In-Kind Instruments,” published Oct. 24, 2013, on RatingsDirect), we lower the issue-level ratings on a hybrid capital instrument to a ‘D’ if the company is unable to repay the dividends within one year of the deferral date and is unable to pay future dividend payments in full and on time.

The above rating action does not have any impact on our corporate credit rating on Aimia (BB-/Negative/–) or our ‘BB’ issue-level rating on the company’s senior secured debt, because the deferral of payments on the preferred shares is allowed in the instrument’s terms and conditions.

Affected issues are AIM.PR.A, AIM.PR.B and AIM.PR.C.

DBRS has muttered darkly about AIMIA after downgrading the preferreds to Pfd-5(high) in August 2017, following the suspension of preferred share dividends by the company and the subsequent downgrade to P-4(high) by S&P.

OSP.PR.A : Annual Report 2017

Saturday, June 9th, 2018

Brompton Oil Split Corp. has released its Annual Report to December 31, 2017.

OSP / OSP.PR.A Performance
Instrument One
Year
Since
Inception
Whole Unit -15.7% -6.4%
OSP.PR.A +5.1% +5.1%
OSP -37.8% -18.1%
S&P/TSX Capped Energy Index -10.6% -2.6%

Figures of interest are:

Average Net Assets: We need this to calculate portfolio yield and MER. NAV of 49.6-million in 2017, 52.2-million in 2016, average is 50.9-million.

MER: Expenses of 695,795 (not including amortization of the cost of issuance of preferred shares) on Average Net Assets of 50.9-million is 1.37% of the whole unit value.

Underlying Portfolio Yield: Dividends, interest and lending revenue(net of withholding) of 1.120-million divided by average net assets of 50.9-million is 2.20%

Income Coverage: Investment Income (as defined in “Underlying …”) of 1.120-million less expenses (as defined in “MER”) of 695,795 is 424,520 divided by Preferred Share Distributions of 1.606-million is 26%.

WFS.PR.A To Be Extended

Saturday, June 9th, 2018

Strathbridge Asset Management Inc. has announced (on May 28):

World Financial Split Corp. (the “Company”) is pleased to announce that the board of directors has approved an extension of the maturity date of the Class A and Preferred shares of the Company for an additional seven year period beyond June 30, 2018 to June 30, 2025 as provided for in its articles of incorporation.

The term extension allows holders of Class A shares to continue to receive ongoing leveraged exposure to a high-quality portfolio consisting principally of common equity securities selected from the ten largest (by market capitalization) financial services companies in each of Canada, the United States and the rest of the world. Holders of the preferred shares are expected to continue to benefit from fixed cumulative preferential quarterly distributions in the amount of $0.13125 ($0.525 per annum) per preferred share representing a yield of 5.25% on the original issue price of $10.00. Since the inception to April 30, 2018, the Preferred shareholders have received cash distributions of $7.41 per share.

In connection with the extension of the term, holders of class A shares and preferred shares have a special retraction right (“Special Retraction Right”) on June 30, 2018. In order to exercise the Special Retraction Right, the shares must be surrendered for retraction on or prior to 5:00 p.m. (Toronto time) on June 15, 2018.

There was shareholder approval for the previous extension in 2011, but a change of terms means that the directors have discretion now. The 2011 extension was met with massive exercise of the Special Retraction Right.

Time has been good to the fund and the NAVPU is 14.36 as of June 7, compared to a mere 10.58 in June 2011, so the decision on whether or not to retract is more difficult than it was then.

Historical performance of the fund, as reported by management in the 2017 Annual Report isn’t anything to write home about:

(In Canadian Dollars unless otherwise noted) One Year Three Years Five Years Ten Years
World Financial Split Corp. 12.12 % 6.21 % 10.45 % 1.50 %
World Financial Split Corp. – Preferred Share 5.35 % 5.35 % 5.35 % 5.36 %
World Financial Split Corp. – Class A 29.65 % 7.32 % 36.46 % (10.16)%
MSCI World/Financials Index(1) 14.94 % 13.53 % 17.77 % 4.53 %
MSCI World/Financials Index(1) (US$) 23.41 % 10.70 % 12.47 % 2.11 %
(1) The MSCI World/Financials Index is a capitalization-weighted index that monitors the performance of financial stocks from around the world.

On the one hand, the NAVPU of 14.36 isn’t very good; it’s below the Asset Coverage of 1.5:1 that I like to see when making recommendations and the volatility of global financial common shares also dampens my enthusiasm. All in all, I’d say investors can do better elsewhere in the endless struggle between risk and return – given that the issue is trading very close to par, the decision regarding whether to sell on the market or retract will be dependent upon convenience, transaction charges at your brokerage, market depth and settlement details. Don’t forget the final dividend in your calculations!

CPX.PR.E : Convert or Hold?

Friday, June 8th, 2018

It will be recalled that CPX.PR.E will reset at 5.238% effective June 30.

CPX.PR.E is a FixedReset, 4.50%+315, that commenced trading 2013-3-14 after being announced 2013-3-5. It is tracked by HIMIPref™ but relegated to the Scraps 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., CPX.PR.E and the FloatingReset, CPX.PR.F, 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_180608
Click for Big

The market appears to be relatively uninterested in floating rate product; most of the implied rates until the next interconversion are scattered around the current 3-month bill rate and the averages for investment-grade and junk issues are similar, at +1.25% and +1.23%, respectively – although these break-even rates are much closer to the market rate than has often been the case! 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 CPX.PR.E 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 CPX.PR.F (received in exchange for CPX.PR.E) Trading Price In Current Conditions
  Assumed FloatingReset
Price if Implied Bill
is equal to
FixedReset Bid Price Spread 1.75% 1.25% 0.75%
CPX.PR.E 22.48 315bp 22.15 21.66 21.17

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 CPX.PR.E continue to hold the issue and not to convert.

If you do wish to convert, note that the deadline for notifying the company is 3:00 p.m. (MDT) / 5:00 p.m. (EDT) on June 15, 2018.. Brokerages and other intermediaries will normally set their internal deadlines a few days prior to this, so if you want to convert don’t waste any time! Such intermediaries may accept instructions after their internal deadline (but prior to the company deadline, of course) if you grovel in a sufficiently entertaining fashion, but this will only be done on a ‘best efforts’ basis.

I will note that once the FloatingResets commence trading (if, in fact, they do) 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.

TD.PR.S & TD.PR.T To Be Redeemed

Friday, June 8th, 2018

The Toronto-Dominion Bank has announced (on June 5):

that it will exercise its right to redeem all of its 5,387,491 outstanding Non-cumulative Class A First Preferred Shares, Series S (the “Series S Shares”) on July 31, 2018 at the price of $25.00 per Series S Share, for an aggregate total of approximately $135 million.

TD also announced that it will exercise its right to redeem all of its 4,612,509 outstanding Non-cumulative Class A First Preferred Shares, Series T (the “Series T Shares”) on July 31, 2018 at the price of $25.00 per Series T Share, for an aggregate total of approximately $115 million.

On May 24, 2018, TD announced that dividends of $0.2106875 per Series S Share and $0.16787500 per Series T Share had been declared. These will be the final dividends on the Series S Shares and Series T Shares, respectively, and will be paid in the usual manner on July 31, 2018 to shareholders of record on July 10, 2018, as previously announced. After July 31, 2018, the Series S Shares and Series T Shares will cease to be entitled to dividends and the only remaining rights of holders of such shares will be to receive payment of the redemption amount.

With the announcement of the redemption of the Series S Shares and Series T Shares, the right of any holder of Series S Shares or Series T Shares to convert such shares will cease and terminate.

Beneficial holders who are not directly the registered holder of Series S Shares or Series T Shares should contact the financial institution, broker or other intermediary through which they hold these shares to confirm how they will receive their redemption proceeds. Inquiries should be directed to our Registrar and Transfer Agent, AST Trust Company (Canada), at 1-800-387-0825 (or in Toronto 416-682-3860).

TD.PR.S was announced on 2008-5-29 as a FixedReset, 5.00%+160, just the fourth FixedReset to be announced. It reset to 3.371% in 2013 and there was a 46% conversion to the FloatingReset TD.PR.T.

As these issues are NVCC non-compliant the redemption comes as no surprise, although there has always been a slim chance that the very low Issue Reset Spread would tempt the bank into leaving them outstanding past the time during which they could claim the issues as Tier 1 Capital.

DFN.PR.A To Get Bigger

Thursday, June 7th, 2018

Quadravest has announced:

Dividend 15 Split Corp. (the “Company”) is pleased to announce it will undertake an exchange offer for holders of BCE Inc. or TransCanada Corporation whereby the Company will offer 5.55 Class A Shares in exchange for each freely-tradable common share of BCE Inc. and 5.55 Class A Shares for each freely tradable common share of TransCanada Corporation (the “Exchange Offer”). The current market value of the Class A Shares to be received via the Exchange Offer is $57.33 per share. The Company will take up to a maximum combined value of $25mm of BCE Inc. and TransCanada Corporation shares in this Exchange Offer.

The Company currently holds 936,800 shares of BCE Inc. and 1,013,400 shares of TransCanada Corporation in its investment portfolio and any shares taken up in this exchange will be added to the portfolio for investment purposes only. The closing price on the TSX of DFN Class A Shares on June 6, 2018 was $10.33 and the current yield is 11.6%. As of the same date the closing prices on the TSX of BCE Inc. and TransCanada Corporation were $54.40 and $53.57, respectively.

Dividend 15 is an investment corporation that invests in a portfolio consisting of high dividend paying Canadian companies. The Company’s investment manager actively manages the Company’s investment portfolio in order to meet the Company’s investment objectives. The manager supplements the dividends received on portfolio investments by writing options in respect to some or all of the portfolio.

Since inception of the Company, distribution objectives have been met and exceeded:
• 170 consecutive regular monthly dividend payments declared
• aggregate dividends declared on the Class A Shares have been $20.50 per share (includes five special distributions of $0.25 per share, one special distribution of $0.50 per share and one special stock dividend of $1.75 per share)
• all distributions to date made in tax advantaged eligible Canadian dividends or capital gains dividends

The Company’s investment portfolio is an actively managed, high quality portfolio consisting of 15 dividend yielding Canadian companies as follows:
Bank of Montreal
Bank of Nova Scotia
BCE Inc.
CI Financial Corp.
CIBC
Enbridge Inc.
Manulife Financial
National Bank of Canada
Royal Bank
Sun Life Financial
TELUS Corporation
Thomson Reuters Corporation
Toronto-Dominion Bank
TransAlta Corporation
TransCanada Corporation

The sales period of the Exchange Offer will end at 5:00 p.m. EST on June 15, 2018. The Exchange Offer is expected to close on or about June 28, 2018 and is subject to certain closing conditions including approval by the TSX. In conjunction with the Exchange Offer, the Company anticipates issuing an equal number of Preferred Shares to the number of Class A Shares issued under this Exchange Offer.

Given that the NAVPU as of May 31 was 18.06, assigning a $10.00 value to the preferreds and calculating a value of 9.87 to the DFN Capital Units based on today’s close of BCE and TRP, we can estimate that the premium to NAV on this offer is somewhere close to 10%. Wow!

CPX.PR.E To Reset at 5.238%

Monday, June 4th, 2018

Capital Power Corporation has announced (on May 31):

that it has notified registered shareholders of its Cumulative Rate Reset Preference Shares, Series 5 (Series 5 Shares) (TSX: CPX.PR.E) of the Conversion Privilege and Dividend Rate Notice.

Subject to certain conditions, beginning on May 31, 2018 and ending at 5:00 p.m. (Toronto time) on June 15, 2018, each registered holder of Series 5 Shares will have the right to elect to convert any or all of their Series 5 Shares into an equal number of Cumulative Floating Rate Preference Shares, Series 6 (Series 6 Shares) by delivering an Election Notice to the Corporation.

If Capital Power does not receive an Election Notice from a holder of Series 5 Shares during the time fixed therefor, then the Series 5 Shares shall be deemed not to have been converted (except in the case of an Automatic Conversion, see below). Holders of the Series 5 Shares and the Series 6 Shares will have the opportunity to convert their shares again on June 30, 2023, and every five years thereafter as long as the shares remain outstanding.

Effective June 30, 2018, on May 31, 2018, the Annual Fixed Dividend Rate for the Series 5 Shares was set for the next five-year period at 5.23800%. Effective June 30, 2018, on May 31, 2018, the Floating Quarterly Dividend for the Series 6 Shares was set for the first Quarterly Floating Rate Period (being the period from and including June 30, 2018, to but excluding September 30, 2018) at 1.12164%. The Floating Quarterly Dividend Rate will be reset every quarter.

The Series 5 Shares are issued in “book entry only” form and, as such, the sole registered holder of the Series 5 Shares is CDS Clearing and Depository Services Inc. (CDS). All rights of beneficial holders of Series 5 Shares must be exercised through CDS or the CDS participant through which the Series 5 Shares are held. The deadline for the registered shareholder to provide notice of exercise of the right to convert Series 5 Shares into Series 6 Shares is 3:00 p.m. (MDT) / 5:00 p.m. (EDT) on June 15, 2018. Any Election Notices received after this deadline will not be valid. As such, beneficial holders of Series 5 Shares who wish to exercise their rights to convert their shares should contact their broker or other intermediary for more information and 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.

After June 15, 2018, (i) if Capital Power determines that there would remain outstanding on June 30, 2018, less than 1,000,000 Series 5 Shares, all remaining Series 5 Shares will be automatically converted into Series 6 Shares on a one-for one basis effective June 30, 2018 (an Automatic Conversion); or (ii) if Capital Power determines that there would remain outstanding after June 30, 2018, less than 1,000,000 Series 6 Shares, no Series 5 Shares will be permitted to be converted into Series 6 Shares effective June 30, 2018. There are currently 8,000,000 Series 5 Shares outstanding.

The Toronto Stock Exchange (TSX) has conditionally approved the listing of the Series 6 Shares effective upon conversion. Listing of the Series 6 Shares is subject to the Capital Power fulfilling all the listing requirements of the TSX and upon approval, the Series 6 Shares will be listed on the TSX under the trading symbol CPX.PR.F.

CPX.PR.E is a FixedReset, 4.50%+315, that commenced trading 2013-3-14 after being announced 2013-3-5. It is tracked by HIMIPref™ but relegated to the Scraps 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., CPX.PR.E and the FloatingReset, CPX.PR.F, 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_180604
Click for Big

The market appears to be relatively uninterested in floating rate product; the implied rates until the next interconversion bracket the current 3-month bill rate as the averages for investment-grade and junk issues are at +1.01% and +1.34%, 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 CPX.PR.E FixedReset, we may construct the following table showing consistent prices for its soon-may-be-issued FloatingReset counterpart, CPX.PR.F, given a variety of Implied Breakeven yields consistent with issues currently trading:

Estimate of FloatingReset CPX.PR.F (received in exchange for CPX.PR.E) Trading Price In Current Conditions
  Assumed FloatingReset
Price if Implied Bill
is equal to
FixedReset Bid Price Spread 1.50% 1.00% 0.50%
CPX.PR.E 22.60 315bp 22.02 21.53 21.04

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 CPX.PR.E continue to hold the issue and not to convert, but I will wait until it’s closer to the June 15 notification deadline before making a final pronouncement. I will note that once the FloatingResets commence trading (if, in fact, they do) 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.

EMA.PR.H Holds Its Own on Excellent Volume

Sunday, June 3rd, 2018

Emera Incorporated has announced (on May 31):

that it has completed its bought deal offering of 12,000,000 Cumulative Minimum Rate Reset First Preferred Shares, Series H at a price of $25.00 per share for aggregate gross proceeds of $300 million. The syndicate of underwriters was led by Scotiabank, CIBC Capital Markets, RBC Capital Markets and TD Securities Inc., as joint bookrunners, and also included BMO Capital Markets, National Bank Financial Inc., Industrial Alliance Securities Inc. and Raymond James Ltd. The net proceeds of the offering will be used for general corporate purposes.

EMA.PR.H is a FixedReset, 4.90%+254M490, announced May 17. It will be tracked by HIMIPref™ and has been assigned to the FixedReset subindex.

The issue traded 1,345,583 shares on its May 31 opening day in a range of 24.65-95 before closing at 24.88-92. Vital Statistics are:

EMA.PR.H FixedReset YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-05-31
Maturity Price : 23.11
Evaluated at bid price : 24.88
Bid-YTW : 4.85 %

The new issue is somewhat expensive according to Implied Volatility Analysis:

impvol_ema_180531
Click for Big

According to the analysis above, the fair value is $24.50 … note, however, that complainers will triumphantly point out that this assigns a value of zero to the Floor Rate Guarantee. But as I stated in the February, 2018, edition of PrefLetter:

It is often asserted that a horrific fall of FixedReset prices is a completely logical expectation; that the 2014-16 bear market was completely justified; that similar experiences will happen again; and that floor rates are an excellent way to protect investors from the decline in income.

This assertion does not make a lot of sense to me. Suppose an investor holds a FixedReset with a coupon rate of 5% and that a decline in government yields makes a reduction to 4% seem both likely and imminent. If the bear market scenario is to play out, this investor and many like him will be selling to avoid experiencing the reset.

But where is this money to be deployed? Yields are already down in the government market and all other fixed income markets will be affected to some degree; corporate-government spreads increased during the recent episode (see Chart FR-63 ), but corporate yields did decline – they just didn’t decline as much. I see no reason for an expectation that FixedReset yields should magically remain constant if the face of global interest rate declines.

However, any increase in the price of the floor-rate issue is capped by the call price. In the simplest scenario, the non-floor issue will remain priced at par and reset to a 4% distribution, while the floored issue will be called; the investor will then have to reinvest his funds … and find that he is reinvesting at contemporary rates and experiencing transaction costs that are not borne by the investor in the non-floored issue. It’s not much of a win!

In order for the floor rate to have value, both issues must be trading at a discount to par; this will give the floored issue room to rise in price on the secondary market. Such a price rise will be determined by the excess yield to be gained over the next five years until the next reset plus, perhaps, an allowance for the possibility that current conditions will persist and give the holder another chance to reset. The benefit will be capped by the distribution rate difference multiplied by the Modified Duration of the issues (which will normally be in the range of 20 to 25), so a price difference of between 20% and 25% for a one percent decline in government yields. However, this potential gain is capped by the potential for a call, so the issues must already be trading at a 20%-25% discount to par for this maximum to be reached … and to work out the value of this scenario, we must then calculate the probability of such a decline in government yields.

Once we see floor-rate issues trading at large discounts in an environment in which a significant decline in government rates has a reasonable probability, I will revisit my opinion of the value of such guarantees. I’m not holding my breath.

Now, against the above we have actual empirical data regarding the prices of the EMA FixedResets since the announcement date:

Issue Issue
Reset
Spread
Total Return
5/17 – 5/31
EMA.PR.A 184 +0.05%
EMA.PR.C 265 -2.76%
EMA.PR.F 263 -2.33%

This has accompanied the fall in the GOC-5 yield from 2.33% on May 17 to 2.10% on May 31 (which, proponents will gleefully point out, has made the floor rate on the new issue a matter of great interest). For now, the situation remains murky.

However, even those unimpressed by all that “Implied Volatility” blather and tiresome pettifogging regarding Floor Guarantees should be, at the very least, tempted by EMA.PR.A in preference to the new issue. Sure, it only pays 2.555% at present … but it will reset on 2020-8-15 at GOC-5 + 184, or – given the May 31 GOC-5 yield of 2.10% – 3.94%. It was quoted May 31 at 19.10-31, an Expected Future Current Yield of 5.16%, which ain’t bad for investment grade!