Archive for the ‘Issue Comments’ Category

DGS.PR.A To Get Bigger

Thursday, November 16th, 2017

Brompton Group has announced:

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 for this overnight offering will end at 9:00 a.m. (ET) tomorrow, November 17, 2017. The offering is expected to close on or about November 29, 2017 and is subject to certain closing conditions including approval by the Toronto Stock Exchange (“TSX”).

The class A shares will be offered at a price of $8.00 for a distribution rate of 15% on the issue price, and the preferred shares will be offered at a price of $10.00 for a yield to maturity of 5.9%. The closing price on the TSX for each of the class A and preferred shares on November 15, 2017 was $8.16 and $10.15, 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 November 15, 2017), as adjusted for dividends and certain expenses to be accrued prior to or upon settlement of the offering.

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).

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

So the Whole Units are being offered at a price of $18.00, versus a NAVPU of 17.38 as of November 9. The premium of 3.6% isn’t the fattest we’ve seen recently, but it’s still a nice business to be in!

Update, 2017-11-17: The offering was 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 $76 million. The offering is expected to close on or about November 29, 2017 and is subject to certain closing conditions including approval by 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.

LB.PR.F To Be Redeemed

Tuesday, November 14th, 2017

Laurentian Bank of Canada has announced:

that it will redeem, on December 15, 2017, all of its Non-Cumulative Class A Preferred Shares Series 11 then outstanding. Such preferred shares will be redeemed at a redemption price of $25.00 per share, together with any declared and unpaid dividends.

Beneficial holders who are not the registered holders of these shares should contact the financial institution, broker or other intermediary through which they hold such shares to confirm how they will receive the redemption proceeds. Formal notices and instructions for the redemption will be forwarded to all registered shareholders.

I love that “all registered shareholders” crap. I don’t know, frankly, whether this is mumbo-jumbo forced on them by idiot regulators or whether they simply see no point in being straightforward with their investors, but as stated in the prospectus supplement for this issue (SEDAR, search for “LAURENTIAN BANK OF CANADA Oct 11 2012 19:47:26 ET Prospectus supplement – English PDF 227 K”, our beloved regulators will not permit me to link directly to this public document; probably because you’re all common investor scum and not important civil servants):

On the closing of this offering, which is expected to be on or about October 18, 2012, the aggregate number of Preferred Shares Series 11 distributed hereunder will be delivered to CDS Clearing and Depository Services Inc. (“CDS”) or its nominee in the form of an electronic deposit in accordance with the non-certificated inventory system maintained by CDS. A purchaser of Preferred Shares Series 11 will receive only a customer confirmation from the registered dealer who is a CDS participant and from or through whom the Preferred Shares Series 11 are purchased.

So there is only one registered shareholder.

LB.PR.F is a FixedReset, 4.00%+260, that commenced trading 2012-10-18 after being announced 2012-10-11. This was actually a somewhat interesting issue, because it was issued without an NVCC clause despite the fact that the NVCC rules had been announced; so it has had a “Deemed Retraction” entry in its call schedule since the first day of trading.

BCE.PR.Z To Reset At 3.904%

Tuesday, November 14th, 2017

BCE Inc. has announced:

bceprz_divrate_171114
Click for Big

The new rate of 3.904% is a little above the rate I estimated when making my recommendation, but the difference is not material. Accordingly, I reiterate that:

I recommend holders retain, or switch to, BCE.PR.Y.

For those punctilious souls out there, however, I will update the chart of Break-Even Prime Rates for this type of Strong Pair:

pairs_ff_171114
Click for Big

The average break-even Prime rate for the seven BCE pairs is 4.38%.

And the table of projected prices becomes:

Estimate of BCE.PR.Y (received in exchange for BCE.PR.Z) Trading Price In Current Conditions
  Assumed RatchetRate
Price if Implied Prime
is equal to
FixedFloater Bid Price Fixed Rate +3.75% 4.25% 4.75%
BCE.PR.Z 19.45 3.904%
Declared
19.29 19.80 20.30
  Actual bid on 11/14 is 19.55

BCE.PR.Z / BCE.PR.Y : Convert or Hold?

Saturday, November 11th, 2017

As previously reported, BCE has sent conversion notices for BCE.PR.Z and BCE.PR.Y. The new dividend rate on BCE.PR.Z has not yet been announced:

As of December 1, 2017, the Series Z Preferred Shares, should they remain outstanding, will pay, on a quarterly basis, as and when declared by the Board of Directors of BCE Inc., a fixed cash dividend for the following five years that will be based on a fixed rate equal to the product of: (a) the yield to maturity compounded semi-annually (the “Government of Canada Yield”), computed on November 10, 2017 by two investment dealers appointed by BCE Inc., that would be carried by non-callable Government of Canada bonds with a 5-year maturity, multiplied by (b) the “Selected Percentage Rate”. The “Selected Percentage Rate” determined by BCE Inc. is 231%. The annual dividend rate applicable to the Series Z Preferred Shares will be published on November 14, 2017 in the national edition of The Globe and Mail, the Montreal Gazette and Le Devoir and will be posted on BCE Inc.’s website at www.bce.ca.

I would greatly prefer to delay a recommendation until the announcement of the rate, but (emphasis added) …

In order to convert their shares, holders must exercise their right of conversion during the conversion period which runs from October 17, 2017 until 5:00 p.m. (Eastern time) on November 17, 2017.

… which doesn’t leave a lot of time for dissemination of my recommendation between the rate announcement and the notification deadline!

So for the purposes of this recommendation, I am assuming the five-year Canada rate, currently at 1.67%, will not change between now and the rate calculation date. Thus, since the rate will be set at 231% of the five-year Canada yield, I am assuming that BCE.PR.Z will reset at 3.858%. (note: actual rate reset to 3.904%)

In my terminology, BCE.PR.Y is a Ratchet Rate preferred, currently paying 100% of Prime, reset quarterly. BCE.PR.Z is a FixedFloater currently paying $0.788 p.a., or 3.152% of its $25 par value. The latter rate resets every Exchange Date; the next exchange date is imminent – 2017-12-1. Both issues have been 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., BCE.PR.Z and BCE.PR.Y). 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 FixedFloater / RatchetRate Strong Pair graphically by plotting the implied average Prime rate against the next Exchange Date (which is the date to which the average will be calculated).

pairs_fr_171110
Click for Big

The average break-even rate for the BCE pairs is 4.18%, while the average for all FixedFloater – RatchetRate pairs is 4.01%; the latter figure has been brought down by the very low reading for BBD.PR.D / BBD.PR.B.

Predictions are difficult, particularly when they are about the future! It will be remembered that Prime is currently at 3.20%; therefore, if we assume that future hikes are evenly sized and spaced, an average of 4.18% implies an end-value in five years of about 5.15%. I’m inclined to believe that it will turn out to be less than that, but if you disagree I won’t put up much of an argument!

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 BCE.PR.Z FixedFloater, 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 BCE.PR.Y (received in exchange for BCE.PR.Z) Trading Price In Current Conditions
  Assumed RatchetRate
Price if Implied Prime
is equal to
FixedFloater Bid Price Fixed Rate +3.75% 4.25% 4.75%
BCE.PR.Z 19.22 3.858%
Estimated
19.11 19.62 20.12
(note: actual rate reset to 3.904%)

Based on current market conditions and the estimated reset rate for the FixedFloater, I suggest that BCE.PR.Z will likely trade at somewhat less than the price of BCE.PR.Y, its RatchetRate counterpart. Therefore, I recommend holders retain, or switch to, BCE.PR.Y. Those with strong convictions regarding future movements in Prime will, of course, have an equally strong preference for one of the two issues; other investors may wish to select which of the pair they wish to hold for the next five years based on their personal circumstances (e.g., if you’re hedging a prime-linked mortgage with this issue [not a wise move], you will want to hold BCE.PR.Y).

FTN.PR.A To Get Bigger – Again!

Tuesday, November 7th, 2017

Quadravest has announced:

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

The Preferred Shares will be offered at a price of $9.90 per Preferred Share to yield 5.30% and the Class A Shares will be offered at a price of $10.50 per Class A Share to yield 14.40%.

The closing price on the TSX of each of the Preferred Shares and the Class A Shares on November 6, 2017 was $10.08 and $10.70, respectively.

Since inception of the Company, the aggregate dividends declared on the Preferred Shares have been $7.33 per share and the aggregate dividends paid on the Class A Shares have been $17.14 per share, for a combined total of $24.47. All distributions to date have been made in tax advantage eligible Canadian dividends or capital gains dividends.

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

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

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

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

The sales period of this overnight offering will end at 9:00 a.m. EST on November 8, 2017. The offering is expected to close on or about November 15, 2017 and is subject to certain closing conditions including approval by the TSX.

So the Whole Units are being flogged for $20.40, not bad when you consider that the Whole Unit NAVPU was 17.95 as of October 31. It’s a lovely business when it works!

This offering comes hard on the heels of their September, 2017, offering which raised 79.1-million

I am a little surprised that the summary of investment objectives given in press release did not mention the one year dividend boost to 5.50% for the preferreds that was recently announced.

There’s a thread on Financial Webring Forum which has attracted the attention of one big fan who is putting money into these things, although not directly. I admit, I cannot think of a reason for buying the capital units at such a large premium over intrinsic value other than a belief that the distributions will go on forever … in which case an investor would be much better off buying the underlying issues on margin.

Update, 2017-11-8: The offering was quite successful:

Financial 15 Split Corp. (the “Company”) is pleased to announce it has completed the overnight marketing of up to 5,361,000 Preferred Shares and up to 5,361,000 Class A Shares of the Company. The total proceeds of the offering are expected to be approximately $109.4 million.

HSB.PR.C & HSB.PR.D To Be Redeemed

Monday, November 6th, 2017

HSBC Bank Canada has announced (2017-11-6):

its intention to redeem all of its issued and outstanding Non-Cumulative Redeemable Class 1 Preferred Shares Series C (“Series C Preferred Shares”) and Non-Cumulative Class 1 Preferred Shares Series D (“Series D Preferred Shares”) in accordance with their terms, on 31 December 2017, for a cash redemption price of $25.00 per share.

There are 7,000,000 Series C Preferred Shares and 7,000,000 Series D Preferred Shares outstanding, representing $350,000,000 of capital. The redemption will be financed out of the general corporate funds of HSBC Bank Canada.

Separately from the redemption price, the final quarterly dividend of $0.31875 and $0.3125 for each of the Series C Preferred Shares and Series D Preferred Shares will be paid in accordance with their terms in the usual manner on 31 December 2017 or the first business day thereafter to shareholders of record on 15 December 2017.

All the issued and outstanding Series C Preferred Shares and Series D Preferred Shares will be cancelled following their redemption.

Both of these issues have been around for a while – HSB.PR.C since 2005-4-19 and HSB.PR.D since 2005-11-9. Both were Straight Perpetuals and have been treated as DeemedRetractibles since OSFI brought in the NVCC rules. HSB.PR.C paid 1.275, or 5.10%; HSB.PR.D paid 1.25, or 5.00%.

INE Placed on CreditWatch Positive by S&P

Thursday, November 2nd, 2017

Standard & Poor’s has announced:

  • •Innergex Renewable Energy Inc. has announced it intends to acquire Alterra Power Corp. for approximately C$1.1 billion.
  • •We expect Innergex to finance the transaction via a combination of common share exchange and cash.
  • •We are placing our ratings, including our ‘BBB-‘ long-term corporate credit rating, on the company on CreditWatch with positive implications.
  • •The CreditWatch placement reflects our view that the transaction, once complete, will increase Innergex’s scale and diversity by geography and fuel-type, and accelerate the company’s growth profile.


Innergex has announced it intends to acquire Alterra Power Corp. for approximately C$1.1 billion. We expect Innergex to finance the transaction via a combination of common share exchange and cash. Giving full effect to the proration, the Alterra shareholders can expect to receive approximately 25% in cash and 75% in Innergex common shares. Based on Innergex’s common share closing price of C$14.83 on the Toronto Stock Exchange Oct. 27, 2017, the consideration of each Alterra common share represents C$2.06 in cash and 0.4172 Innergex common shares. A five-year, C$150 million subordinated unsecured term loan from Caisse de depot et placement du Quebec will fund the cash portion of the deal. We expect the incremental debt’s impact on credit ratios to be neutral, because the incremental cash flow from the operating assets offsets this.

Innergex has set up a page devoted to the deal.

Affected issues are INE.PR.A and INE.PR.C

FCS.PR.C To Get Bigger

Thursday, November 2nd, 2017

Faircourt Asset Management Inc., has announced (although not yet on their website):

it has filed a preliminary short form prospectus in each of the provinces of Canada with respect to an offering of 6.00% preferred securities (“Preferred Securities”) and trust units (“Units”) of the Trust (the “Offering”). The syndicate of underwriters will be co-led by National Bank Financial Inc., CIBC, BMO Nesbitt Burns Inc. and TD Securities Inc. and will include Canaccord Genuity Corp., GMP Securities L.P., Raymond James, Desjardins Securities Inc., Echelon Wealth Partners, Industrial Alliance Securities Inc., Mackie Research Capital Corporation and Manulife Securities.

The Preferred Securities will be offered at a price of $10.08 per Preferred Security to yield 6.00% on the issue price and will form part of the same series as the Trust’s existing 6.00% preferred securities. The Preferred Securities have been rated Pfd-3 (low) by DBRS Limited. The Units will be offered at a price of $6.50 per Unit.

The sales period of this overnight Offering will end at 9:00 a.m. ET on November 3, 2017. The Offering is expected to close on or about November 17, 2017 and is subject to certain closing conditions including approval by the TSX.

A preliminary prospectus containing important information relating to the Offering has been filed with securities commissions or similar authorities in each of the provinces of Canada. The preliminary prospectus is still subject to completion or amendment. Copies of the preliminary prospectus may be obtained from a financial advisor or at www.sedar.com under the Trust’s profile. There will not be any sale or any acceptance of an offer to buy the Preferred Securities or the Units until a receipt for the final prospectus has been issued.

The NAV of the Capital Units was 5.73 on October 27, but this does not mean that the Whole Unit NAV is 15.73; the fund has different numbers of preferreds and capital units outstanding.

Performance for the fund has not been stellar:

  Since Merger Past 5 Years Past 3 Years Past 1 Year
Faircourt Split Trust 5.41% 3.88% 3.85% 19.24%
Blended Index 10.18% 12.11% 10.23% 17.18%
S&P/TSX Composite Total Return Index 6.52% 8.24% 7.06% 21.08%
S&P 500 – CDN$ Total Return Index 18.73% 21.14% 17.64% 8.09%
The Blended Index for the Trust is comprised of a 70% weight in the S&P/TSX Composite Total Return Index and a 30% weight in the S&P 500 – CDN$ Total Return Index.

FCS.PR.C is a SplitShare paying 6% p.a. (interest) on a par value of $10, maturing 2019-6-30, that commenced trading 2014-12-30. It is tracked by HIMIPref™ but is relegated to the Scraps index on credit concerns. It was last mentioned in connection with a partial redemption in 2016.

Update, 2017-11-3: They raised about $5-million:

Faircourt Asset Management Inc., as manager of Faircourt Split Trust (the “Trust”) (TSX:FCS.UN)(TSX:FCS.PR.C) is pleased to announce it has completed its previously announced overnight marketing of 302,100 6.00% preferred securities (“Preferred Securities”) and 302,100 trust units (“Units”) of the Trust (the “Offering”). Total proceeds of the Offering are expected to be approximately $5 million. The syndicate of underwriters is being co-led by National Bank Financial Inc., CIBC, BMO Nesbitt Burns Inc. and TD Securities Inc. and includes Canaccord Genuity Corp., GMP Securities L.P., Raymond James, Desjardins Securities Inc., Echelon Wealth Partners, Industrial Alliance Securities Inc., Mackie Research Capital Corporation and Manulife Securities.

The Preferred Securities were offered at a price of $10.08 per Preferred Security to yield 6.00% on the issue price and will form part of the same series as the Trust’s existing 6.00% preferred securities. The Preferred Securities have been rated Pfd-3 (low) by DBRS Limited. The Units were offered at a price of $6.50 per Unit.

The sales period of the overnight marketing has now ended.

The Offering is expected to close on or about November 17, 2017 and is subject to certain closing conditions including approval by the TSX.

They tout this as a success, but it seems like a pretty small amount for a prospectussed issue with underwriters and all.

BCE.PR.Z / BCE.PR.Y Conversion Notice Sent

Wednesday, November 1st, 2017

BCE Inc. has released the conversion notice for BCE.PR.Z (Fixed-Floater) and a matching notice for BCE.PR.Y (Ratchet Rate).

These issues constitute a Strong Pair.

The effective date of the interconversion is 2017-12-1. The deadline for instructing the company to convert shares is 5:00 p.m. (Eastern time) on November 17, 2017 – but note that brokers serving the public will probably have internal deadlines a day or two in advance of this. The new dividend rate on BCE.PR.Z will be published 2017-11-14.

The outstanding shares of BCE.PR.Z have paid 3.152% since the last conversion in 2012. Prime was at 3.00% when the last conversion was effective … just 20bp lower than the current rate!

These shares are trading at very nearly the same price … alas, there isn’t much of an arbitrage possibility here!

I will post more when the fixed rate (for the next five years) is known.

LCS.PR.A Upgraded to Pfd-3(low) by DBRS

Thursday, October 19th, 2017

DBRS has announced that it has:

upgraded the rating of the Preferred Shares issued by Brompton Lifeco Split Corp. (the Company) to Pfd-3 (low) from Pfd-4 (high).

Based on the dividend yields of the underlying companies in the Portfolio and after management fees and other expenses have been paid, the dividend coverage ratio stands at 0.6x.

The main form of credit enhancement available to the Preferred Shares is a buffer of downside protection. Downside protection corresponds to the percentage decline in market value of the Portfolio that must be experienced before the Preferred Shares would be in a loss position. Since the last review, the amount of downside protection available to the Preferred Shares has increased to 39.8% posting a 5.4% gain as of October 12, 2017. The growth in downside protection was a combination of a price appreciation and a dividend payout increase of the underlying shares of the Portfolio as well as additional income generated from option writing.

Brompton Group was quick to highlight the upgrade:

As a result of improving portfolio performance, DBRS Limited (“DBRS”) issued a press release on Thursday, October 19, 2017 announcing that the preferred share rating for Brompton Lifeco Split Corp. has been upgraded from Pfd-4(high) to Pfd-3(low). For a full copy of the DBRS press release please visit their website at www.dbrs.com.

This is quite the turnaround from the dark days of 2012 when the issue was downgraded to Pfd-5(high) and a notch better than its December 2013 upgrade to Pfd-4(high).

The Whole Unit NAVPU as of 2017-10-12 was 16.71. Income coverage in 2016 was, by my calculation, 65%. The total assets of the fund, including Capital Units, were $86-million as of 2017-9-30.

LCS.PR.A is tracked by HIMIPref™ but relegated to the Scraps index on both credit concerns and volume concerns.