Archive for the ‘Issue Comments’ Category

DGS.PR.A To Get Bigger

Monday, March 27th, 2017

Brompton Group has announced (although not yet on their website and they didn’t send me the usual eMail):

Dividend Growth Split Corp. (the “Company”) is pleased to announce it is undertaking an overnight treasury offering of class A and preferred shares.

The sales period of this overnight offering will end at 9:00 a.m. (ET) tomorrow, March 28, 2017. The offering is expected to close on or about April 6, 2017 and is subject to certain closing conditions including approval by the TSX.

The class A shares will be offered at a price of $8.00 for a distribution rate of 15.0% on the issue price, and the preferred shares will be offered at a price of $10.00 for a yield to maturity of 5.45%. The closing price on the Toronto Stock Exchange (“TSX”) for each of the class A and preferred shares on March 24, 2017 was $8.26 and $10.33, respectively. The class A and preferred share offering prices were determined so as to be non-dilutive to the most recently calculated net asset value per unit of the Company (calculated as at March 24, 2017), as adjusted for dividends and certain expenses to be accrued prior to or upon settlement of the offering.

The syndicate of agents for the offering is being led by RBC Capital Markets, CIBC and Scotiabank.

The Company invests in a portfolio of common shares of high quality, large capitalization companies, which have among the highest dividend growth rates of those companies included in the S&P/TSX Composite Index. Currently, the portfolio consists of common shares of the following 20 companies:

Great-West Lifeco Inc. The Bank of Nova Scotia CI Financial Corp. Shaw Communications Inc.
Industrial Alliance Insurance and Financial Services Inc. Canadian Imperial Bank of Commerce IGM Financial Inc. TELUS Corporation
Manulife Financial Corporation National Bank of Canada Power Corporation of Canada Canadian Utilities Limited
Sun Life Financial Inc. Royal Bank of Canada BCE Inc. Enbridge Inc.
Bank of Montreal The Toronto-Dominion Bank Rogers Communications Inc. TransCanada Corporation

The investment objectives for the class A shares are to provide holders with regular monthly cash distributions targeted to be $0.10 per class A share and to provide the opportunity for growth in the net asset value per class A share.

The investment objectives for the preferred shares are to provide holders with fixed cumulative preferential quarterly cash distributions, currently in the amount of $0.13125 per preferred share, and to return the original issue price to holders of preferred shares on the Company’s maturity date (November 28, 2019).

It’s getting to be quite the size, with assets of $415-million as of February month-end. Their previous treasury offering was in September 2016.

Update, 2017-03-29: The offering was very successful:

Dividend Growth Split Corp. (the “Company”) is pleased to announce a successful overnight treasury offering of class A and preferred shares. Gross proceeds of the offering are expected to be approximately $86 million. The offering is expected to close on or about April 6, 2017 and is subject to customary closing conditions including approval from the Toronto Stock Exchange (the “TSX”). The Company has granted the Agents (as defined below) an over-allotment option, exercisable for 30 days following the closing date of the offering, to purchase up to an additional 15% of the number of class A and preferred shares issued at the closing of the offering.

The class A shares were offered at a price of $8.00 for a distribution rate of 15.0% on the issue price, and the preferred shares were offered at a price of $10.00 for a yield to maturity of 5.45%. The class A and preferred share offering prices were determined so as to be non-dilutive to the most recently calculated net asset value per unit of the Company (calculated as at March 24, 2017), as adjusted for dividends and certain expenses to be accrued prior to or upon settlement of the offering.

BAM.PR.T : No Conversion to FloatingReset

Wednesday, March 22nd, 2017

Brookfield Asset Management Inc. has announced:

that after having taken into account all election notices received by the March 16, 2017 deadline for the conversion of the Cumulative Class A Preference Shares, Series 26 (the “Series 26 Shares”) (TSX: BAM.PR.T) into Cumulative Class A Preference Shares, Series 27 (the “Series 27 Shares”), the holders of Series 26 Shares are not entitled to convert their Series 26 Shares into Series 27 Shares. There were 183,036 Series 26 Shares tendered for conversion, which is less than the one million shares required to give effect to conversions into Series 27 Shares.

Assiduous Readers will remember that I recommended against conversion after the reset to 3.471% for BAM.PR.T.

So BAM.PR.T is now a FixedReset, 3.471%+231. It is tracked by HIMIPref™ and is assigned to the FixedReset subindex.

BPO.PR.P : No Conversion to FloatingReset

Tuesday, March 21st, 2017

Brookfield Office Properties Inc. has announced:

that after having taken into account all election notices following the March 16, 2017 conversion deadline for the Class AAA Preference Shares, Series P (the “Series P Shares”) (TSX: BPO.PR.P) tendered for conversion into Class AAA Preference Shares, Series Q (the “Series Q Shares”), the holders of Series P Shares are not entitled to convert their Series P Shares into Series Q Shares. There were 488,396 Series P Shares tendered for conversion, which is less than the 1,000,000 shares required to give effect to conversions into Series Q Shares.

The Series P Shares will pay on a quarterly basis, for the five-year period beginning on April 1, 2017, as and when declared by the board of directors of Brookfield, a fixed dividend based on an annual dividend rate of 4.161% per annum (C$0.260063 per share per quarter).

Assiduous Readers will remember that I recommended against conversion after the reset to 4.161% for BPO.PR.P.

So BPO.PR.P is now a FixedReset, 4.161%+300. It is tracked by HIMIPref™ but relegated to the Scraps index on credit concerns.

BCE.PR.O: No Conversion to FloatingReset

Friday, March 17th, 2017

BCE Inc. has announced:

that none of its fixed-rate Cumulative Redeemable First Preferred Shares, Series AO (Series AO Preferred Shares) will be converted into floating-rate Cumulative Redeemable First Preferred Shares, Series AP (Series AP Preferred Shares) on March 31, 2017.

On March 1, 2017, BCE notified holders of Series AO Preferred Shares that they could elect to convert their shares into Series AP Preferred Shares subject to the terms and conditions attached to those shares. Only 104,631 of BCE’s 4,600,000 Series AO Preferred Shares were tendered for conversion on March 31, 2017 into Series AP Preferred Shares. As this would result in there being less than one million Series AP Preferred Shares outstanding, no Series AO Preferred Shares will, as per the terms and conditions attached to those shares, be converted on March 31, 2017 into Series AP Preferred Shares.

The Series AO Preferred Shares will continue to be listed on the Toronto Stock Exchange under the symbol BCE.PR.O. The Series AO Preferred Shares will pay on a quarterly basis, for the 5-year period beginning on March 31, 2017, as and when declared by the Board of Directors of BCE, a fixed quarterly cash dividend based on an annual dividend rate of 4.260%.

Assiduous Readers will remember that I recommended against conversion after the reset to 4.26% for BCE.PR.O.

BSD.PR.A : DBRS Upgrades To Pfd-5(high)

Tuesday, March 14th, 2017

DBRS has announced that it:

has today upgraded the rating on the Preferred Securities issued by Brookfield Soundvest Split Trust (the Trust) to Pfd-5 (high) from Pfd-5.

In March 2005, the Trust raised gross proceeds of $180 million by issuing 7.2 million Preferred Securities (at $10 each) and an equal number of Capital Units (at $15 each). On March 27, 2015, unitholders of the Trust voted to extend the term of the fund by five years. The new maturity is March 31, 2020.

Based on the latest Portfolio’s yield, the Preferred Securities distribution coverage ratio is approximately 0.4 times. The insufficient amount of Portfolio dividends to cover Preferred Security distributions is projected to create an average annual grind on the Portfolio of approximately 3.3% in the next three years.

As at March 2, 2017, the downside protection available to the Preferred Securities was approximately 17.4%, which represents a gain of about 10% compared to the downside protection amount recorded a year ago. The downside protection has exhibited relative stability in the past four months, settling in the high-teens figures. Nevertheless, it remains subject to volatility, as it depends on the value of underlying securities of the Portfolio. The amount of downside protection and projected grind until the expected end of the term warrant an upgrade of the rating on the Preferred Securities issued by the Trust to Pfd-5 (high).

Assiduous Readers will remember that BSD.PR.A adopted some pretty dubious tactics while getting their term extension, has awful performance and suspended redemptions during the Credit Crunch without giving a reason.

EIT.PR.A Achieves Premium On Good Volume

Tuesday, March 14th, 2017

Canoe EIT Income Fund has announced:

that it has closed the previously announced offering of 4.80% Cumulative Redeemable Series 1 Preferred Units (the “Series 1 Preferred Units”). The Series 1 Preferred Units were offered to the public through a syndicate of underwriters led by Scotiabank and RBC Capital Markets which also included BMO Capital Markets, CIBC Capital Markets, National Bank Financial Inc., TD Securities Inc., Canaccord Genuity Corp., Industrial Alliance Securities Inc. and Manulife Securities Incorporated.

The Fund issued 4,900,000 Series 1 Preferred Units at a price of $25.00 per Series 1 Preferred Unit for gross proceeds of $122,500,000. 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 735,000 Series 1 Preferred Units to cover over-allotments, if any. Holders of the Series 1 Preferred Units will be entitled to fixed cumulative preferential cash distributions of $1.20 per Series 1 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, 2017. The Series 1 Preferred Units are listed for trading on the Toronto Stock Exchange under the symbol EIT.PR.A.

The proceeds from the Offering will be invested by the Fund in accordance with its investment objectives and strategies. The Offering is expected to ensure the sustainability of the Fund by increasing the earning capacity of the units. The Series 1 Preferred Units are rated Pfd – 2 (high) by Dominion Bond Rating Service Limited.

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 2017 annual redemption, the Fund will issue a news release with the details.

EIT.PR.A is a 4.80% Seven Year Retractible that was announced 2017-3-8 after marketting began 2017-2-22. It will be tracked by HIMIPref™ and has been assigned to the Split Share subindex.

Note that according to the prospectus, to which I am not permitted to link because Canadian Securities Administrators take the view that you are all stupid, filthy, ignorant investor scum and do not deserve the slightest consideration whatsoever. You will have to go to SEDAR and look for “Canoe EIT Income Fund Mar 8 2017 14:21:01 ET Final short form prospectus – English PDF 266 K”.

Distributions in any given period may consist of net income, net capital gains and/or returns of capital.

The issue traded 213,320 shares today in a range of 24.90-25 before closing at 25.25-30, 5×10. Vital statistics are:

EIT.PR.A SplitShare YTW SCENARIO
Maturity Type : Soft Maturity
Maturity Date : 2024-03-14
Maturity Price : 25.00
Evaluated at bid price : 25.25
Bid-YTW : 4.66 %

EIT.PR.A is rated Pfd-2(high) by DBRS:

DBRS Limited (DBRS) has today finalized its provisional rating of Pfd-2 (high) on the Cumulative Redeemable Series 1 Preferred Units (the Series 1 Preferred Units) issued by Canoe EIT Income Fund (the Fund).

The Fund is a closed-end investment trust focused on a broad range of income-producing investments in various industries and geographic regions. The Fund can issue an unlimited number of capital units (the Units) and can also issue in-series Preferred Units up to a maximum aggregate amount equal to 25% of the Fund’s total assets after giving effect to the proposed offering of the Preferred Units. The Series 1 Preferred Units were issued at a price of $25.00 per Series 1 Preferred Unit. The Series 1 Preferred Units are retractable for cash at the option of the holder on or after March 15, 2024.

The Fund has a credit facility (the Credit Facility) with a Tier 1 Canadian bank, but is restricted by its Declaration of Trust from borrowing in excess of 20% of the Fund’s total assets at the time of borrowing, after giving effect to the borrowing. The Credit Facility is secured by all of the Fund’s present and after-acquired personal property, undertaking and assets as well as all proceeds thereof. Distributions on the Series 1 Preferred Units are restricted if a default or event of default occurs under the Credit Facility or if the outstanding amount borrowed exceeds the available credit at any time.

Net proceeds from the offering of the Series 1 Preferred Units, after deducting the fees and expenses incurred as a result of the offering, are expected to be invested by the Fund to grow its portfolio in accordance with its investment objectives and investment strategies.

The Series 1 Preferred Unit holders will be entitled to receive quarterly cumulative preferential cash distributions of $0.30 (or $1.20 annually), representing a 4.80% per annum return on the issue price of $25.00. The holders of the Units currently receive targeted monthly cash distributions amounting to $1.20 per annum. In addition, up to 10% of the aggregate outstanding Units may be redeemed at the option of the Unit holders each calendar year on a date determined by the Fund.

The risks relating to the Unit distributions and redemptions are partially mitigated by restrictions on distributions, purchases and redemptions in the Fund’s Declaration of Trust as the Fund cannot pay or declare payable any distribution amount to the Unitholders (other than amounts that are paid solely through the issuance of additional Units, which would not affect the downside protection, or annual redemption amounts at the option of the holders of Units as described above), purchase for cancellation or otherwise redeem the Units, unless and until the distribution entitlements of the Series 1 Preferred Units have been paid in full or moneys are set aside for such payment.

The Fund’s portfolio initially provides downside protection of approximately 84% to holders of the Series 1 Preferred Unit and an asset coverage of approximately 10.0 times (x). The Series 1 Preferred Unit distributions are expected to be mainly funded through income received from the income-generating securities in the Portfolio. The Fund may also engage in writing covered call options to supplement the income. The Series 1 Preferred Units dividend coverage is expected to be approximately 1.7x.

The Pfd-2 (high) rating assigned by DBRS is based on the level of downside protection available to holders of the Series 1 Preferred Units, the distribution coverage ratio and the diversification of the Fund’s portfolio. In addition, DBRS has taken into account the potential grind on the portfolio arising from (1) distributions to the Units and redemption rights, (2) potential foreign-exchange risk because some investments in foreign currencies are not hedged and (3) the fact that lenders under the Credit Facility have priority over the Fund’s assets up to the amount of credit outstanding. Considering the Credit Facility amount compared with the current total assets, DBRS does not view the latter risk to be significant.

Update, 2017-3-22: Canoe Financial has announced:

Canoe EIT Income Fund (the “Fund”) (TSX – EIT.UN, EIT.PR.A) announced today that the syndicate of underwriters for the offering (the “Offering”) of 4.80% Cumulative Redeemable Series 1 Preferred Units (the “Series 1 Preferred Units”) of the Fund has fully exercised its over-allotment option. As a result of the exercise of the over-allotment option, the Fund raised additional gross proceeds of $18,375,000 from the sale of 735,000 Series 1 Preferred Units. Inclusive of the over-allotment option, the Fund raised gross proceeds of $140,875,000 from the sale of 5,635,000 Series 1 Preferred Units. The Series 1 Preferred Units are listed on the Toronto Stock Exchange under the symbol EIT.PR.A.

SLF : S&P Improves Outlook to Positive

Monday, March 13th, 2017

Standard & Poor’s has announced:

  • •We are revising our outlook on Sun Life Financial to positive, reflecting our belief that the company will maintain AAA capital adequacy post-LICAT rollout, which would lead to an upgrade within the next 24 months.
  • •We also expect the company to maintain modestly growing net income over the next two years.
  • •At the same time, we affirmed our ‘AA-‘ratings on SLF and its core subsidiaries.


“Over the last five years, the company has successfully executed its four-pillar strategy, focusing on its Canadian, Asian, Investment Management and US group benefits businesses.” said S&P Global Ratings credit analyst Peggy Poon. Given the significantly de-risked business risk profile following the successful sale of the U.S. individual annuity business in 2013 and our forecast for Canada’s macroeconomic environment, we believe the company will maintain ‘AAA’ capital adequacy as measured by our model prospectively in addition to modestly growing its net income over the next few years.

Affected issues are SLF.PR.A, SLF.PR.B, SLF.PR.C, SLF.PR.D, SLF.PR.E, SLF.PR.G, SLF.PR.H, SLF.PR.I, SLF.PR.J and SLF.PR.K.

The FixedResets of the company exhibit an Implied Volatility of 18% … which is higher than the high-single-digits I would consider normal for an investment-grade company, but lower than I would expect if the market fully subscribed to my theory that these issues will eventually be subject to a Deemed Retraction.

impvol_slf_170313
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FTN.PR.A : Annual Report, 2016

Sunday, March 12th, 2017

Financial 15 Split Inc. has released its Annual Report to November 30, 2016.

FTN / FTN.PR.A Performance
Instrument One
Year
Three
Years
Five
Years
Ten
Years
Whole Unit +16.17% +13.08% +17.33% +3.49%
FTN.PR.A +5.38% +5.38% +5.38% +5.38%
FTN +37.86% +26.24% +42.92% +4.51%
S&P/TSX Financial Index +16.11% +10.73% +14.90% +7.02%
S&P 500 Financial Index +16.49% +20.17% +25.71% +1.27%

Figures of interest are:

MER: 1.16% of the whole unit value, excluding one time initial offering expenses.

Average Net Assets: We need this to calculate portfolio yield. MER of 1.16% Total Expenses of 3,834,619 implies $331-million net assets. Preferred Share distributions of 9,986,252 @ 0.525 / share implies 19.0-million shares out on average. Average Unit Value (beginning & end of year) = (16.85 + 17.18) / 2 = 17.02. Therefore 19.0-million @ 17.02 = 323-million average net assets. Good agreement between these two methods! Call it 327-million average.

Underlying Portfolio Yield: Dividends received (net of withholding) of 9,514,391 divided by average net assets of 327-million is 2.91%

Income Coverage: Net Investment Income of 5,990,665 divided by Preferred Share Distributions of 9,986,252 is 60%.

BAM.PR.T : Convert or Hold?

Friday, March 10th, 2017

It will be recalled that BAM.PR.T will reset to 3.471% effective April 1.

Holders of BAM.PR.T have the option to convert to FloatingResets, which will pay 3-month bills plus 231bp 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. (Toronto time) on March 16, 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 BAM.PR.W

BAM.PR.T is a FixedReset, 4.50%+231, that commenced trading 2010-10-29 after being announced 2010-10-21.

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., BAM.PR.T and the FloatingReset BAM.PR.W 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_170310a
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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 -0.42% and -0.47%, 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 BAM.PR.T FixedReset, we may construct the following table showing consistent prices for its soon-to-be-issued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:

Estimate of FloatingReset BAM.PR.W (received in exchange for BAM.PR.T) Trading Price In Current Conditions
  Assumed FloatingReset
Price if Implied Bill
is equal to
FixedReset Bid Price Spread 0.00% -0.50% -1.00%
BAM.PR.T 19.00 231bp 17.81 17.29 16.78

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 BAM.PR.T 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 two new pairs will reflect these conditions.

Insofar as the relative valuation of BAM.PR.T is concerned, Implied Volatility analysis indicates it’s quite cheap relative to other BAM issues:

impvol_bam_170310
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FFH.PR.K : Convert or Hold?

Friday, March 10th, 2017

It will be recalled that FFH.PR.K will reset to 4.671% effective April 1.

Holders of FFH.PR.K have the option to convert to FloatingResets, which will pay 3-month bills plus 351bp on the par value of $25.00, reset quarterly. The deadline for notifying the company of the intent to convert is 5:00pm (Toronto time) on March 16, 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 FFH.PR.L.

FFH.PR.K is a FixedReset, 5.00%+351, that commenced trading 2012-3-21 after being announced 2012-3-12.

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., FFH.PR.K and the FloatingReset FFH.PR.L 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_170310a
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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 -0.42% and -0.47%, 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 FFH.PR.K FixedReset, we may construct the following table showing consistent prices for its soon-to-be-issued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:

Estimate of FloatingReset FFH.PR.L (received in exchange for FFH.PR.K) Trading Price In Current Conditions
  Assumed FloatingReset
Price if Implied Bill
is equal to
FixedReset Bid Price Spread 0.00% -0.50% -1.00%
FFH.PR.K 22.69 351bp 21.52 21.02 20.52

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 FFH.PR.K 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 two new pairs will reflect these conditions.

Insofar as the relative valuation of FFH.PR.K is concerned, Implied Volatility analysis indicates it’s reasonably priced relative to other FFH issues, although FFH.PR.C seems so expensive it may be distorting the results:

impvol_ffh_170310
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