Archive for the ‘Issue Comments’ Category

EIT.PR.B Firm on Good Volume

Tuesday, April 17th, 2018

Canoe Financial has announced (bolding from original):

Canoe EIT Income Fund (the “Fund”) (TSX – EIT.UN, EIT.PR.A, EIT.PR.B) announced today that it has closed the previously announced offering of 4.80% Cumulative Redeemable Series 2 Preferred Units (the “Series 2 Preferred Units”). The Series 2 Preferred Units were offered to the public through a syndicate of underwriters led by Scotiabank which also included CIBC Capital Markets, RBC Capital Markets, BMO Capital Markets, TD Securities Inc., National Bank Financial Inc., Industrial Alliance Securities Inc., Canaccord Genuity Corp., and Manulife Securities Incorporated.

The Fund issued 2,800,000 Series 2 Preferred Units at a price of $25.00 per Series 2 Preferred Unit for gross proceeds of $70,000,000. The Fund has also granted the underwriters an option, exercisable at the offering price for a period of 30 days from today’s date, to purchase up to an additional 420,000 Series 2 Preferred Units to cover over-allotments, if any. Holders of the Series 2 Preferred Units will be entitled to fixed cumulative preferential cash distributions of $1.20 per Series 2 Preferred Unit per annum, as and when declared, which will accrue from the date of issue and will be payable quarterly on the 15th day of March, June, September and December in each year with the initial distribution, if declared, payable on June 15, 2018. The Series 2 Preferred Units are listed for trading on the Toronto Stock Exchange under the symbol “EIT.PR.B”.

The Fund intends to use the proceeds from the Offering in accordance with the investment objectives and investment strategies of the Fund, subject to the investment restrictions of the Fund.

The Fund’s regular monthly distribution of $0.10 per unit for unitholders of EIT.UN units remains unchanged. The Fund has maintained the $0.10 per unit monthly distribution since August 2009, through varying market conditions. The Fund’s annual voluntary redemption feature for unitholders of EIT.UN units remains unchanged. Once a date has been set for the 2018 annual redemption, the Fund will issue a news release with the details.

A final short form prospectus dated April 10, 2018 containing important information relating to the Series 2 Preferred Units has been filed with securities commissions or similar authorities in all provinces and territories of Canada. Copies of the final short form prospectus may be obtained from your registered financial advisor using the contact information for such advisor, or from representatives of the underwriters listed above.

EIT.PR.B is a 7-year Retractible, 4.80%, issue. I consider it to be a Split Share since it’s value is derived from an underlying portfolio of equities – it is not an operating company.

The prospectus is not (yet) available on the Canoe Financial website and I am not permitted to link to the public filing directly by the notoriously secretive Canadian Securities Administrators; those who want to see it will have to go through the ‘search’ rigamarole on SEDAR to find “Canoe EIT Income Fund Apr 10 2018 15:34:35 ET Final short form prospectus – English PDF 608 K”.

The prospectus is important because of the unusual tax treatment of distributions for this issue:

Historical Distributions
Set out below are the tax classifications of the historical distributions on the Units of the Fund (which were $0.10 per Unit per month for the entire period presented) for the past five years, and the Manager expects the Series 2 Preferred Units to have a similar breakdown:
% 2017 2016 2015 2014 2013
Capital gain 46.79% 53.10% 60.92% 59.89% 32.73%
Actual amount of eligible dividends 4.75% 8.89% 9.29% 5.33% 18.18%
Actual amount of ineligible dividends
Foreign income, net of tax
Other income
Return of Capital(1) 48.46% 38.01% 29.79% 34.78% 49.09%
Total 100.00% 100.00% 100.00% 100.00% 100.00%
(1) Includes warrants from 2013-2017.

Distributions in any given period may consist of net income, net capital gains and/or returns of capital. The Fund’s 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. See “Principal Canadian Federal Income Tax Considerations”.

DBRS has rated the preferreds at Pfd-2(high):

DBRS Limited (DBRS) finalized the provisional rating of Pfd-2 (high) assigned to the Cumulative Redeemable Series 2 Preferred Units (the Series 2 Preferred Units) issued by Canoe EIT Income Fund (the Fund) and confirmed the rating of the previously issued Cumulative Redeemable Series 1 Preferred Units (the Series 1 Preferred Units, collectively with the Series 2 Preferred Units, the Preferred Units).

Following the new issue and assuming no capital distributions or special dividends paid, the net asset value of the Fund would have to fall by approximately 77% for the holders of the Preferred Units to be in a loss position. Considering the expected level of downside protection available to holders of the Preferred Units and the composition and diversification of the Fund’s portfolio, DBRS has finalized the provisional rating of Pfd-2 (high) assigned to the Series 2 Preferred Units and confirmed the Series 1 Preferred Units at Pfd-2 (high).

The main constraints to the rating are the following:

(1) The potential grind on the Portfolio arising from redemption rights and distributions to the Units.
(2) The foreign-exchange risk due to the absence of a hedge on some investments in foreign currencies.
(3) The priority of the lenders under the Credit Facility over the Fund’s assets up to the amount of credit outstanding.

The issue traded 330,753 shares today in a range of 24.96-05 before closing at 24.99-00. Vital statistics are:

Maturity Type : Soft Maturity
Maturity Date : 2025-03-14
Maturity Price : 25.00
Evaluated at bid price : 24.99
Bid-YTW : 4.83 %

SBC.PR.A : Annual Report 2017

Saturday, April 14th, 2018

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

SBC / SBC.PR.A Performance
Instrument One
SBC +20.3% +16.4% +20.6% +14.1%
SBC.PR.A +4.6% +4.6% +4.6% +5.0%
Whole Unit +14.1% +11.5% +13.5% +10.0%
S&P/TSX Capped Financials Index +13.3% +10.9% +14.3% +8.3%
S&P/TSX Composite +9.1% +6.6% +8.6% +4.6%

Figures of interest are:

MER: “The MER per unit, excluding Preferred share distributions, was 0.97% in 2017 and 0.99% for 2016. This
ratio is more representative of the ongoing efficiency of the administration of the Fund.”

Average Net Assets: We need this to calculate portfolio yield. MER of 0.97% Total Expenses of 2,160,416 implies $223-million net assets. Preferred Share distributions of 3,414,174 @ 0.50 / share implies 6.828-million shares out on average. Average Unit Value (beginning & end of year) = (24.46 + 23.10) / 2 = 23,67. Therefore 6.828-million @ 23.67 = 234-million average net assets. Good agreement – call it 228-million.

Underlying Portfolio Yield: Dividends received of 6.982-million divided by average net assets of 228-million is 3.06%

Income Coverage: Net Investment Income of 4.833-million divided by Preferred Share Distributions of 3.414-million is 142%.

FTN To Get Bigger by Exchange Offer

Saturday, April 14th, 2018

Quadravest has announced:

Financial 15 Split Corp. (the “Company”) is pleased to announce it will undertake an exchange offering for holders of units of SCITI Trust whereby one Class A Share of the Company will be offered in exchange for 1.17614 freely-tradable listed units of SCITI Trust (the “Exchange Offer”). The maximum number of Class A Shares to be issued by the Company in the Exchange Offer will be 2,917,000.

In conjunction with the Exchange Offer, the Company will also undertake to offer up to 2,917,000 Preferred Shares of the Company at a price of $9.90 per Preferred Share to yield 5.55%. The offering will be led by National Bank Financial Inc., CIBC Capital Markets and BMO Capital Markets.

The closing price on the TSX of each of the Preferred Shares and the Class A Shares on April 6, 2018 was $10.11 and $10.36, respectively. The closing price on the TSX of the SCITI Trust units on April 5, 2018 was $7.52.

Since inception of the Company, the aggregate dividends paid on the Preferred Shares have been $7.51 per share and the aggregate dividends paid on the Class A Shares have been $17.64 per share, for a combined total of $25.15. All distributions to date have been made in tax advantaged eligible Canadian dividends or capital gains dividends.

The Company will not receive cash proceeds from the issuance of the Class A Shares. In consideration for issuing each Class A Share, the Company will receive 1.17614 units of SCITI Trust. The investment fund manager of SCITI Trust confirmed on March 21, 2018 that SCITI Trust would be terminating on its scheduled termination date of April 30, 2018. At that time, SCITI Trust will distribute to its unitholders, including the Company to the extent it acquires SCITI Trust units under the Exchange Offer, the net asset value of SCITI Trust in cash.

The net proceeds of the offering, consisting of the net cash proceeds from the issuance of the Preferred Shares, and the net cash proceeds received on the wind-up of SCITI Trust in respect of the SCITI Trust units received as consideration for the issuance of the Class A Shares, 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 5.50% 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 the Exchange Offer will end at 5:00 p.m. EST on April 16, 2018. The Exchange Offer is expected to close on or about April 24, 2018 and is subject to certain closing conditions including approval by the TSX.

The sales period for the offering of Preferred Shares will end at 9:00 a.m. EST on April 24, 2018. The offering of Preferred Shares is expected to close on or about April 30, 2018. The offering is subject to certain closing conditions including approval by the TSX.

The press release issued by SCITI Trust on March 21 makes no mention of the potential for an exchange offer.

Scotia Managed Companies Administration Inc. (the “Manager”) confirmed today that SCITI Trust (the “Trust”) (TSX: SIN.UN) will terminate on its scheduled termination date of April 30, 2018 (the “Termination Date”). The last day on which the Trust’s units will trade on the Toronto Stock Exchange (the “TSX”) is April 26, 2018.

After the close of business on the Termination Date, the Trust will distribute to its unitholders their pro rata share of the net assets of the Trust, being the net asset value per unit as of the close of business on the Termination Date after paying its final distribution. Prior to the Termination Date, the Trust will liquidate all of its assets.

EIT.PR.A : Annual Report 2017

Saturday, April 14th, 2018

Canoe EIT Income Fund has released its Annual Report to December 31, 2017.

EIT Performance
Instrument One
(based on NAV)
+10.1% +10.6% +10.3% +8.7%
S&P/TSX Composite Total Return Index +9.1% +6.6% +8.6% +4.7%

Sadly, they did not publish a “whole fund” return.

Figures of interest are:

MER: “Management expense ratio excluding issue costs, interest, and distributions to preferred redeemable units” “as a percentage of net asset value” (which I take to mean, based only on the equity represented by the Capital Units).
1.63% “as a percentage of net asset value” (which I take to mean, based only on the equity represented by the Capital Units).

Average Net Assets: There was no particularly enormous change in either the number of capital units outstanding or of the net asset value per capital unit, so let’s just take the average of the year-beginning and year-ending NAVs: )(1,073-million + 1,151-million) / 2 = 1,112-million

Underlying Portfolio Yield: Dividends received of 32.122-million + interest of 1.084-million is 33.206-million divided by average net assets of 1,112-million is 3.00%

Income Coverage: Net Investment Income of 8.227-million divided by Preferred Share Distributions (annualized) of 6.544-million is 126%.

Asset Coverage: NET ASSETS ATTRIBUTABLE TO HOLDERS OF COMMON REDEEMABLE UNITS of 1,073-million + Preferred redeemable units of 136.3-million, all divided by Preferred redeemable units of 136.3-million is 8.9x.

BNS.PR.P & BNS.PR.A To Be Redeemed

Friday, March 23rd, 2018

The Bank of Nova Scotia has announced:

that it intends to exercise its right to redeem all outstanding Non-cumulative Preferred Shares Series 18 of Scotiabank (the “Series 18 Shares”) and Non-cumulative Preferred Shares Series 19 of Scotiabank (the “Series 19 Shares”) on April 26, 2018, at a price equal to $25.00 per share, together with all declared and unpaid dividends. Formal notice will be issued to holders of the Series 18 Shares and Series 19 Shares in accordance with the share conditions.

The redemption has been approved by the Office of the Superintendent of Financial Institutions and will be financed out of the general funds of Scotiabank.

On February 27, 2018, the Board of Directors of Scotiabank announced a quarterly dividend of $0.209375 per Series 18 Share, and $0.181788 per Series 19 Share. This will be the final dividend on the Series 18 Shares and Series 19 Shares, and will be paid in the usual manner on April 26, 2018, to shareholders of record at the close of business on April 3, 2018, as previously announced. After April 26, 2018, the Series 18 Shares and Series 19 Shares will cease to be entitled to dividends.

BNS.PR.P is a FixedReset, that commenced trading 2008-03-26 as a 5.00%+205 issue after being announced 2008-03-06. At the 2013 Exchange Date it reset to 3.35%.

BNS.PR.A is the FloatingReset that resulted from the 2013 partial exchange from BNS.PR.P, and hence paid 3-month bills +205bp, reset quarterly.

Neither issue was NVCC-compliant.

FTS : Outlook Negative, says S&P

Wednesday, March 21st, 2018

Standard & Poor’s has announced:

  • •We reviewed the impact of the U.S. tax reform on Fortis Inc. (Fortis), and the company’s consolidated credit metrics are weaker than expected.
  • •There are key pending regulatory decisions that add to the downside risk and could further stress credit metrics.
  • •As a result, we are revising our outlook on Fortis and subsidiaries ITC Holdings Corp., Tucson Electric Power Co., FortisAlberta Inc., and Caribbean Utilities Co. Ltd. to negative from stable.
  • •We are also affirming our ratings on the companies, including our ‘A-‘ long-term issuer credit ratings.

The negative outlook reflects S&P Global Ratings’ view of Fortis’ weak financial metrics over the next 12-24 months and the U.S. tax reform pushing back our expectation for financial improvement. In addition, the outlook reflects the risk that any adverse outcomes from pending regulatory decisions could further depress credit metrics. During our two-year outlook period, we forecast the company’s FFO-to-debt at about 9.5% in 2018 before improving to about 10.5% by 2020.

We could take a negative rating action on Fortis if the company’s FFO-to-debt were projected to stay below 10%. This could happen if the company experiences material delays and cost overruns in executing its capital programs, material adverse regulatory decisions, and significant debt-funded acquisitions or operational difficulties that lead to unexpected cost and debt increase. Any deterioration of business risk, including expansion of unregulated operations or acquisitions that increase the compnay’s reliance on generation within its integrated utility operations, could also lead to a downgrade.

We could revise the outlook to stable if Fortis improves its financial position, with FFO-to-debt remaining consistently around 11% or above, without any increase in business risk. This could happen if Fortis were to gradually improve its cash flow metrics with the benefit of favorable regulatory outcomes while maintaining its current business strategy.

Affected issues are FTS.PR.F, FTS.PR.G, FTS.PR.H, FTS.PR.I, FTS.PR.J, FTS.PR.K and FTS.PR.M.

ENB : DBRS Nervous, Market Nervouser

Wednesday, March 21st, 2018

DBRS has announced (on March 20) that it:

notes the impact of the announcement by the Federal Energy Regulatory Commission (FERC) that it will no longer allow master limited partnership (MLP) interstate natural gas and oil pipelines to recover an income tax allowance in cost of service (COS) rates on the following ratings of Enbridge Energy Partners, L.P. (EEP):

— Issuer Rating of BBB, Stable trend
— Senior Unsecured Notes rating of BBB, Stable trend
— Junior Subordinated Notes rating of BB (high), Stable trend
— Commercial Paper rating of R-2 (middle), Stable trend

DBRS estimates that the potential financial impact of the FERC decision and U.S. Tax Reform noted below would likely reduce EEP’s financial risk profile (on a DBRS modified-consolidated basis) to the low end of the BBB range in the absence of corrective measures. However, DBRS’s current business risk assessment of EEP as well as Enbridge Inc.’s (ENB; rated BBB (high) with a Stable trend by DBRS) history of supporting EEP through various measures are both supportive of the current ratings.

As an MLP, EEP’s credit metrics would be negatively affected by the implementation of the FERC decision, as some of the rates applicable to its expansion projects are tolled annually on a COS basis via the Lakehead Facility Surcharge Mechanism (FSM). EEP has indicated that, should FERC’s new policy be announced with an assumed implementation date of March 31, 2018, the 2018 financial impact to EEP is expected to be an approximate $100 million reduction in revenues and a $60 million reduction to distributable cash flow (DCF), net of non-controlling interests. Consequently, EEP has adjusted its 2018 DCF guidance range to $650 million — $700 million and 2018 total distribution coverage to approximately 1.0 times (x) from approximately 1.15x.

DBRS notes that the current 2018 Guidance adjustments follow previous 2018 Guidance adjustments announced on February 15, 2018 (concurrently with the Q4 2017 results announcement). In that case, as a result of U.S. Tax Reform, EEP adjusted its 2018 DCF guidance range to $720 million – $770 million from $775 million – $825 million and 2018 total distribution coverage to approximately 1.15x from approximately 1.2x.

On a combined basis, the impact of these 2018 Guidance adjustments would be to reduce mid-point 2018 DCF guidance by approximately 15.6%, eliminate the approximate 20% cushion on 2018 total distribution coverage (or, stated differently, to increase EEP’s payout ratio to 100% from 80%) and, in the absence of corrective measures, significantly weaken EEP’s key credit metrics. This would eliminate a significant portion of the remaining cushion currently embedded in EEP’s ratings. Please see DBRS’s rating report on EEP dated September 29, 2017, for further information.

This commentary has been picked up by the Financial Post:

Credit ratings agency DBRS Ltd. is warning that one of Enbridge Inc. subsidiary’s revenues could tumble by $100 million this year and its credit ratings hurt by new policies in the U.S., which have led to a sector-wide stock selloff.

DBRS said in a note Tuesday that said a recent decision by the U.S. Federal Regulatory Commission could “significantly weaken” the key credit metrics of Enbridge Energy Partners L.P. (EEP), a subsidiary of Calgary-based Enbridge.

Last week, the FERC announced that master limited partnerships (MLPs) — a tax-friendly corporate structure popular with pipeline firms — would no longer be able to recover an income tax allowance in certain pipeline service contracts.

… which printed a Canadian Press story on last week’s damage to the common after the ruling was announced:

Shares in Canadian pipeline companies Enbridge Inc. and TransCanada Corp. failed to recover fully Friday [March 16] from a steep sell-off on Thursday [March 15] after the U.S. said it would eliminate a tax break for owners of certain interstate pipelines.

Both Calgary-based companies hold such pipelines in the United States through master limited partnerships or MLPs.

The decision by the U.S. Federal Energy Regulatory Commission to no longer allow MLPs to recover an income tax allowance from cost of service tariffs came in response to a 2016 court ruling that found its long-standing tax policy could result in double recovery of costs.

Enbridge shares fell by 4.2 per cent to $41.06 on Thursday but recovered to close at $41.28 on Friday, up 22 cents, after it issued a statement that says it is not expecting a “material change” to its financial guidance over the next three years because of the FERC ruling.

The Globe also printed the CP story, and published three different perspectives on ENB common following the drop:

Enbridge Inc. shares skidded 4.2 per cent Thursday, adding to the frustration of shareholders who have seen more than a quarter of the company’s market capitalization wiped out in just the past year.

Investors have been worried about Enbridge’s high debt load – which sits at around $60-billion after the $37-billion acquisition of Spectra Energy Corp. that closed last year. The stock has also been pressured by a move out of dividend-paying stocks in a rising interest rate environment.

The Globe and Mail earlier this month talked to three portfolio managers with different views of Enbridge, as well as with the company about investors’ concerns.

ENB.PR.H (to pick one of their issues at random) has significantly underperformed the TXPR index in the past while:

Click for Big

The fall in ENB preferreds generally has attracted comment on PrefBlog.

This is significant, because Enbridge’s issuance frenzy of about five years ago made them a very significant part of the market … they have about $7.25-billion (face value) of preferreds outstanding (including USD issues), call it about $5.8-billion market value, compared to a total estimated market capitalization of $76.1-billion. Their issues have a weight of just under 10% of the BMO-CM “50” Preferred Share Index (as of February, 2018) and just under 9% of TXPR (as of 2017-7-31).

Affected issues are (deep breath): ENB.PF.A, ENB.PF.C, ENB.PF.E, ENB.PF.G, ENB.PF.I, ENB.PF.K, ENB.PR.A, ENB.PR.B, ENB.PR.C, ENB.PR.D, ENB.PR.F, ENB.PR.H, ENB.PR.J, ENB.PR.N, ENB.PR.P, ENB.PR.T, ENB.PR.Y and the USD-denominated issues, ENB.PR.U, ENB.PR.V, ENB.PF.U and ENB.PF.V.

EFN : DBRS Has No Worries

Monday, March 19th, 2018

DBRS has announced:

that the ratings of Element Fleet Management Corp. (Element or the Company), including its Long-Term Issuer Rating of BBB (high) are not impacted by the quarterly loss reported for 4Q17, or by the underlying drivers for the loss. For 4Q17, Element reported, on an IFRS basis, a net loss of $1.5 million in 4Q17, down from net income of $67.2 million in the prior quarter. While DBRS sees no impact to the current ratings from the quarter’s results, DBRS would view unfavorably additional material losses at 19th Capital. Also, DBRS would view negatively a sustained deterioration in origination volume growth or should customer retention rates not return to their historically strong levels, indicating that management efforts to address customer related issues from the integration have not been successful.

Results were impacted by charges related to ongoing challenges at the Company’s 19th Capital Group LLC joint venture (19th Capital or the JV), as well as an elevated level of operating expenses. Also, the Company’s results were impacted by $11.9 million of strategic review related costs that are not expected to reoccur.

For the quarter, Element’s results were impacted by a $60.8 million share of loss and equity charge related to its 19th Capital JV. Within the share of loss charge is operational losses of $14.1 million, as well as a $17.8 million loss on the disposition of certain assets in the JV. These losses were primarily driven by the JV’s ongoing execution of its strategic plan to improve operating performance. The strategic plan includes the shifting of the customer base to smaller corporate fleets from riskier owner-operators, optimizing the fleet mix, and accelerating the trade-in or sale of certain out of favor older truck models.

Also, included in the overall loss and charges related to 19th Capital was a $29.0 million provision for impairment by Element against its investment in the JV. While the overall U.S. trucking industry has begun to recover from the down cycle that began in 2015, Element considered it prudent to take a charge against the value of the investment given the expectations that an improvement in the JV’s operating performance may not be visible until late 2018 and with execution risks in the strategic plan still present. DBRS views the impairment provision as a conservative action by management, but is concerned about the ongoing losses at the JV, as well as the potential for the investment to be a distraction to Element’s management at a time when operational issues at the core fleet management business need to be addressed.

During 4Q17, Element experienced a higher than normal degree of customer attrition that included three large customers. The attrition was attributable to IT integration issues experienced during 1H17. The Company expects actions taken to address these customer concerns to return the retention rate to the historical level of approximately 97% in 2018. DBRS notes that volumes in the quarter were up slightly on a sequential basis and that management noted a good pipeline of new customers for 2018, suggesting that the issues from 1H17 are being addressed. DBRS will closely monitor volumes and customer retention in 2018.

Adjusted operating expenses were 6.1% higher sequentially in the quarter to $127.1 million. This resulted in the Company’s net efficiency ratio to weaken to 55.3% from 50.7% in the prior quarter and 48.6% in the comparable period a year ago. Element announced that it has initiated cost reduction actions during the current quarter, including headcount reduction, office space optimization, and the limiting of discretionary expenses. Thus, the Company expects to incur a charge of approximately $40 million in 1Q18 related to these actions. The actions are anticipated to produce an annual run rate savings of approximately $20 million. DBRS views the actions favorably should the savings be fully realized and result in an improved operating efficiency.

While total net revenues were 2.7% lower quarter-on-quarter in 4Q17 at $229.8 million, DBRS sees positives in the continuing strengthening of service and other related revenue. On a sequential basis, core fleet service and other revenue improved 4.5% to $141.0 million, and comprises 64% of total net revenue.

Element’s balance sheet fundamentals remain acceptable. The asset quality of the core fleet business remains sound and supportive of the ratings. Impaired finance receivables at December 31, 2017, were stable at a very low 0.04%. Tangible leverage was higher at 7.7x at quarter-end, which is slightly above management’s target range of 7.0x to 7.5x. Importantly, tangible leverage remains inside the bank facility covenant. Meanwhile, Element continues to maintain sufficient available liquidity. At December 31, 2017, the Company had total available liquidity of $4.7 billion, which is more than sufficient to meet debt maturities and expected new originations over the next 12 months.

Affected issues are EFN.PR.A, EFN.PR.C, EFN.PR.E, EFN.PR.G and EFN.PR.I, which haven’t been doing too well lately:

EFN Preferreds Plunge
Ticker Quote
Total Return
EFN.PR.A 24.85-97 18.23-38 -25.03%
EFN.PR.C 24.47-05 18.07-22 -24.54%
EFN.PR.E 24.51-65 17.12-42 -28.57%
EFN.PR.G 25.00-06 17.91-00 -26.79%
EFN.PR.I 24.35-50 16.67-90 -30.14%

The fun began on February 6:

As global markets gyrate, shares of Element Fleet Management Corp., the brainchild of company founder and Bay Street financier Steve Hudson, plummeted 29 per cent in a single day after it announced the departure of its chief executive officer and the loss of a crucial customer.

It is a stunning fall for what was, until recently, a high-flying company. The newly revealed woes have also changed the narrative around Mr. Hudson’s comeback, a long march to regain investors’ trust after the downfall of his previous venture.

Element has not named a new chief to replace outgoing CEO Brad Nullmeyer, who is one of Mr. Hudson’s closest associates, and the company is now conducting an external search. But the board did reveal that it expects earnings from its core fleet business to fall by three to five per cent in fiscal 2018 after losing the servicing business of a large client, which the company didn’t name, in recent months.

… and the other shoe dropped March 15:

Shares of Element Fleet Management Corp. plummeted for the second time in five weeks as the struggling Bay Street finance company said it will take a restructuring charge, cut staff and close offices as part of a recovery plan that will take the rest of 2018 to implement.

The Toronto-based company, founded by financier Steve Hudson, who is one of its largest individual shareholders, warned that earnings will fall short of investor expectations. The stock dropped by as much as 36 per cent on Thursday morning before closing down 24 per cent. Element has lost more than $3.5-billion in stock market value in the past year.

And, for what it’s worth, here’s the Implied Volatility Analysis:

Click for Big

TD.PF.J Closes Firm on Decent Volume

Wednesday, March 14th, 2018

The Toronto-Dominion Bank’s new issue closed today without a formal announcement from the bank.

TD.PF.J is a FixedReset, 4.70%+270, announced 2018-3-5. It will be tracked by HIMIPref™ and has been assigned to the FixedReset sub-index.

The issue traded 605,636 shares today in a range of 24.94-00 before closing at 24.98-99. Vital statistics are:

Maturity Type : Limit Maturity
Maturity Date : 2048-03-14
Maturity Price : 23.15
Evaluated at bid price : 24.98
Bid-YTW : 4.65 %

This issue looks quite expensive to me, according to Implied Volatility Analysis:

Click for Big

We see in this chart many of the same features we saw when reviewing the recent BIP.PR.E, BEP.PR.M, CM.PR.S, NA.PR.E and MFC.PR.Q: the curve is very steep, with Implied Volatility equal to 40% (a ridiculously large figure).

The ludicrously high figure of Implied Volatility is something I take to mean that the underlying assumption of the Black-Scholes model, that of no directionality of prices, is not accepted by the market; the market seems to be taking the view that since things seem rosy now, they will always be rosy and everything will trade near par in the future.

I balk at ascribing a 100% probability to the ‘all issues will be called, or at least exhibit price stability’ hypothesis. There may still be a few old geezers amongst the Assiduous Readers of this blog who can still (faintly) remember the Great Bear Market of 2014-16, in which quite a few similar assumptions made earlier turned out to be slightly inaccurate. The extra cushion implied by an Issue Reset Spread that is well over the market spread is worth something, even if nothing gets called.

According to the analysis shown above, the fair value of this issue is 24.31 (compared to 24.17 on announcement day). Careful Assiduous Readers will note that TD.PF.I, a FixedReset 4.50%+301 that commenced trading 2017-7-14, closed today at 25.24-32 (compared to 25.04-20 on announcement day). The extra 20bp of initial dividend rate is worth $0.05 annually, or a total of a little over $0.20 extra for the new issue … but if they both reset then TD.PF.I will get – to the extent reset rates nine months apart are the same – $0.0775 p.a. more than the new issue. According to the Implied Volatility analysis above, the fair value of TD.PF.I is 25.02 (compared to 24.91 on announcement day).

FTN.PR.A : Annual Report 2017

Saturday, March 10th, 2018

Financial 15 Split Inc. has released its Annual Report to November 30, 2017.

FTN / FTN.PR.A Performance
Instrument One
Whole Unit +19.84% +14.12% +18.38% +5.78%
FTN.PR.A +5.38% +5.38% +5.38% +5.38%
FTN +42.22% +28.79% +42.44% +9.25%
S&P/TSX Financial Index +16.50% +10.02% +14.64% +7.97%
S&P 500 Financial Index +19.52% +18.50% +25.21% +5.64%

Figures of interest are:

MER: 1.19% of the whole unit value, excluding one time initial offering expenses.

Average Net Assets: We need this to calculate portfolio yield. MER of 1.19% Total Expenses of 5,868,070 implies $493-million net assets. Preferred Share distributions of 12,976,652 @ 0.525 / share implies 24.7-million shares out on average. Average Unit Value (beginning & end of year) = (18.32 + 17.18) / 2 = 17.75. Therefore 24.7-million @ 17.75 = 438-million average net assets. Rotten agreement between these two methods, but they did have a lot of treasury offerings this year. Give 75% weight to the first calculation and call it 479-million average.

Underlying Portfolio Yield: Dividends received (net of withholding) of 11,739,373 divided by average net assets of 479-million is 2.45%

Income Coverage: Net Investment Income of 5,871,303 divided by Preferred Share Distributions of 12,976,652 is 45%.