Archive for the ‘Issue Comments’ Category

AZP Upgraded to P-4(low) by S&P

Saturday, December 14th, 2019

Standard & Poor’s has announced:

  • On Dec. 13, 2019, S&P Global Ratings raised its issuer credit rating on Atlantic Power Corp. (APC) to ‘BB-‘ from ‘B+’ based on its improving leverage profile.
  • At the same time, S&P Global Ratings raised APLP Holdings Limited Partnership’s issue-level ratings on the $400 million outstanding term loan B, $200 million revolving credit facility, and C$210 million medium-term notes to ‘BB’ from ‘BB-‘.
  • We also raised our rating on the preferred shares at Atlantic Power Preferred Equity Ltd. to ‘B-‘ from ‘CCC+’ and P-4 (Low) from P-5 (High) on the Canadian national scale.
  • The ‘2’ recovery rating on all debt tranches is unchanged, indicating our expectation for substantial recovery (70%-90%; rounded estimate: 80%) in the event of a default.
  • We revised the outlook back to stable from positive, reflecting the predictability of highly contracted cash flows and APC’s plan to continue using excess cash to pay down debt.


S&P Global Ratings today took the rating actions listed above. We forecast Atlantic Power Corp.’s adjusted debt to EBITDA to be below 4.5x in 2020 and 2021. This is supported by APC’s highly contracted cash flow profile and management’s demonstrated track record and commitment to deleveraging. We view favorably the company paying down its existing term loan B, as well as the four acquisitions of biomass plants earlier this year. APC’s portfolio contains 21 operational power generation projects across the U.S. and two provinces in Canada–with approximately 1,900 megawatts (MW) of gross electric generation capacity and about 1,400 MW of owned capacity. Following the biomass acquisitions earlier this year, we believe the company’s portfolio shows diversity across power generation and fuel type, though scale remains limited.

The stable outlook reflects our view that cash flows are predictable due to the contractual arrangements between the power assets and the respective off-takers and that APC will use excess cash to pay down the term loan. We forecast our adjusted debt to EBITDA between 4.0x-4.5x over the next 12 months.

We could lower the rating if our forecast of adjusted debt to EBITDA indicates an upward trend of above 5.0x for a protracted period. This may due to the inability to recontract expiring PPAs or obtain new PPAs, or higher-than-expected operating costs to maintain the power assets in the portfolio. Such outcomes would consequently have a detrimental effect on cash flows and create uncertainty in cash available for debt service at APC’s level.

An upgrade is unlikely at this time, even with much improved credit metrics, in the absence of a concerted effort and demonstrated track record by the company to substantially increase size and scale that is more in line with its peers.

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

In February, 2015, S&P removed its ‘Watch Negative’ on these issues. DBRS discontinued coverage in 2014 after downgrading the preferreds to Pfd-5(high) in August 2013.

POW & PWF To Combine, Redeem $350-million Preferreds; S&P Upgrades POW to P-1(low)

Saturday, December 14th, 2019

Standard & Poor’s has announced:

  • Power Corp. of Canada (PCC) announced its intent to reorganize simplifying its organizational hierarchy by acquiring the remaining public shares of Power Financial Corp. (PFC) that it does not currently own.
  • We are raising our ratings on PCC by one notch, including our long-term issuer credit rating to ‘A+’ from ‘A’, and affirming our ratings on PFC.
  • The stable outlook reflects our expectation that PCC will maintain its robust earnings and very strong financial risk profile.


S&P Global Ratings said today it raised its long-term issuer credit rating on Power Corp. of Canada (PCC) to ‘A+’ from ‘A’, its preferred stock rating to ‘A-‘ from BBB+’, and its preferred stock Canada national scale rating to ‘P-1 (Low)’ from P-2 (High). At the same time, we affirmed our ‘A+’ ratings on Power Financial Corp. (PFC). The outlook is stable.

The upgrade of PCC and alignment with the ratings on PFC reflects our favorable view that the proposal to acquire the remaining 35.9% of common shares of PFC that it does not currently own will remove structural subordination and enable greater capital fungibility between the two companies. Our issuer credit ratings on PCC and PFC are aligned with that on Great-West Lifeco (the ultimate holding company of the insurance operation). We believe PCC has less regulatory restriction and a more reliable earnings stream from the additional unregulated cash flows through dividends from IGM and Pargesa that are available to support its obligations.

The stable outlook reflects our expectation that PCC will continue to generate robust earnings, as well as maintain solid capitalization without meaningfully increasing financial leverage. Great-West Lifeco Inc.’s dominant market position (PFC owns a total of 70.8% of Great-West Lifeco, including cross-ownership through IGM Financial Inc.) in multiple life insurance product lines, along with its vast geographic presence, should continue to translate into a stable source of earnings and dividends for PCC. IGM, which provides an additional source of earnings for the group, will continue to augment the group’s funds.

However, higher financial leverage (compared with ‘AA’ rated life insurance groups, which we consider peers of Great-West Lifeco) somewhat offsets these strengths. In our base-case scenario, we expect total financial leverage will remain between 35%-40%.

We could lower the ratings over the next 18-24 months if we believe the company’s financial risk profile will deteriorate, either as a result of the funding structure posing a risk because of significantly elevated leverage or weak fixed-charge coverage on a sustained basis, or materially declining capital adequacy.

At this time, we believe an upgrade is unlikely given PCC’s acquisitive nature, which precludes us from having certainty in forecasting capital at the extremely strong level.

Power Corporation and Power Financial have announced:

  • Power Financial Minority Shareholders to receive 1.05 Power Corporation Subordinate Voting Shares and nominal cash consideration in exchange for each Power Financial Common Share.
  • Power Financial Minority Shareholders to receive Power Corporation shares with Net Asset Value that is $4.50 higher than the Net Asset Value of each Power Financial Common Share, an increase of 11% (calculated without accounting for any exercise of Pre-Emptive Rights (as defined herein)).
  • Power Corporation to undertake further initiatives to benefit shareholders in conjunction with the Reorganization, including implementation of a significant near-term operating cost reduction plan, reduced financing costs and a dividend increase.
  • Paul Desmarais, Jr. and André Desmarais to retire as Co-Chief Executive Officers of Power Corporation after 23 years in the roles and to continue to serve as Chairman and Deputy Chairman, respectively, of Power Corporation’s Board of Directors. R. Jeffrey Orr, President and Chief Executive Officer of Power Financial, to become President and Chief Executive Officer of Power Corporation.


Upon completion of the Reorganization, PCC will own all of the PFC Common Shares, while PFC preferred shares and debt securities will remain outstanding.

Financing Expense Reduction – PCC and PFC intend to redeem an aggregate of $350 million of First Preferred Shares with available cash, resulting in reduced annual financing costs of approximately $15 million per year.

As a result of such securities remaining outstanding, PFC currently anticipates that it will remain a reporting issuer in each of the provinces and territories of Canada.

DBRS comments:

While the announced preferred share redemption will decrease the cash held at POW and PWF, the companies will continue to benefit from significant cash balances and other liquid assets. The decline in cash is offset by lower annual preferred dividend payments and operating costs resulting in a pro forma fixed charge coverage for POW of 16.0 times (x) and PWF of 16.3x, an improvement from 14.2x and 15.0x as at Q3 2019, respectively. The redemption of preferred shares and issuance of new Subordinated Voting Shares will also result in improved financial leverage for both companies, with a decrease to 7.1% from 11.1% for POW and 14.2% from 15.1% for PWF. This improves capitalization assessments for both companies. Other than the redemption of preferred shares, large cash outlays are not expected in the foreseeable future as the earliest debt maturity is in 2033 for PWF and 2039 for POW. These actions are viewed as management’s effective cash utilization during a calmer period for the organization and reflects the strong credit profile of the companies.

Affected issues are (deep breath): POW.PR.A, POW.PR.B, POW.PR.C, POW.PR.D, POW.PR.F, POW.PR.G

PWF.PR.A, PWF.PR.E, PWF.PR.F, PWF.PR.G, PWF.PR.H, PWF.PR.I, PWF.PR.K, PWF.PR.L, PWF.PR.O, PWF.PR.P, PWF.PR.Q, PWF.PR.R, PWF.PR.S, PWF.PR.T, PWF.PR.Z

As noted by Assiduous Reader skeptical in the comments to an unrelated post, it seems likely that PWF.PR.I (Straight Perpetual, 6%, issued 2003-3-11, 8-million shares) and PWF.PR.G (Straight Perpetual, 5.9%, issued 2002-7-16, 6-million shares) will be redeemed. Both were down significantly on the day on much higher than normal volume.

HSE.PR.C : Convert or Hold?

Thursday, December 12th, 2019

It will be recalled that HSE.PR.C will reset at 4.689% effective December 31, 2019.

HSE.PR.C is a FixedReset, 4.50%+313, that commenced trading 2014-12-9 after being announced 2014-12-1. The initial reset rate announcement was quickly determined to be anomalous and eventually corrected. The issue is tracked by HIMIPref™ and is been assigned to the FixedResets-Discount subindex.

The most logical way to analyze the question of whether or not to convert is through the theory of Preferred Pairs, for which a calculator is available. Briefly, a Strong Pair is defined as a pair of securities that can be interconverted in the future (e.g. HSE.PR.C and the FloatingReset that will arise 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_191211
Click for Big

The market appears to have lost its fleeting interest in floating rate product; the implied rates until the next interconversion are below the current 3-month bill rate as the averages for investment-grade and junk issues are at +0.86% and +1.22%, 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 HSE.PR.C FixedReset, we may construct the following table showing consistent prices for its soon-may-be-issued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:

Estimate of FloatingReset (received in exchange for HSE.PR.C) Trading Price In Current Conditions
  Assumed FloatingReset
Price if Implied Bill
is equal to
FixedReset Bid Price Spread 1.50% 1.00% 0.50%
HSE.PR.C 16.45 313bp 16.40 15.93 15.47

Based on current market conditions, I suggest that the FloatingResets that will result from conversion are likely to trade below the price of their FixedReset counterparts, HSE.PR.C. Therefore, I recommend that holders of HSE.PR.C continue to hold the issue and not to convert. I will note that once the FloatingResets commence trading (if, in fact, they do) it may be a good trade to swap one issue for the other in the market once both elements of each pair are trading and you can – hopefully – 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.

Those who wish to convert are advised that the deadline for notifying the company of such a desire is 5 p.m. ET on December 16, 2019. Brokers and other intermediaries generally set their internal deadlines a day or two in advance of this date, so if you wish to convert there’s no time to waste! Note that brokers will, in general, try to execute the instruction on a ‘best efforts’ basis if received between the two deadlines, provided that the procrastinating shareholder grovels entertainingly enough.

TRP.PR.A & TRP.PR.F : Convert or Hold?

Thursday, December 12th, 2019

It will be recalled that TRP.PR.A will reset at 3.479% effective December 31, 2019.

TRP.PR.A commenced trading 2009-9-30 after being announced 2009-9-22. It commenced life as a FixedReset, 4.60%+192, that reset to 3.266% effective 2014-12-31. Assiduous Readers may recall that I have blamed the 2014 reset of TRP.PR.A for what we might now call ‘the first half’ of the current bear market. I recommended conversion to TRP.PR.F in 2014 and there was a conversion rate of about 62%. The company announced the extension to 2024 on 2019-11-21.

TRP.PR.F commenced trading 2014-12-31 after a partial conversion from TRP.PR.A.

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. TRP.PR.A and the FloatingReset TRP.PR.F). 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_191211
Click for Big

The market appears to have lost its fleeting interest in floating rate product; the implied rates until the next interconversion are below the current 3-month bill rate as the averages for investment-grade and junk issues are at +0.86% and +1.22%, 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 TRP.PR.A FixedReset, we may construct the following table showing consistent prices for its soon-may-be-issued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:

Estimate of FloatingReset TRP.PR.F (received in exchange for TRP.PR.A) Trading Price In Current Conditions
  Assumed FloatingReset
Price if Implied Bill
is equal to
FixedReset Bid Price Spread 1.50% 1.00% 0.50%
TRP.PR.A 14.06 192bp 14.00 13.52 13.04

Before I get eviscerated in the comments, please note that I am well aware that TRP.PR.F is trading and is quoted with a bid of 14.00. Who cares? At the moment, both issues are ex-dividend and are interconvertible effective December 31 and are therefore exactly same thing from an investment perspective. We are interested in predicting what might happen after the potential for conversion has passed.

Based on current market conditions, I suggest that the FloatingResets, TRP.PR.F, that will result from conversion are likely to trade below the price of their FixedReset counterparts, TRP.PR.A. Therefore, I recommend that holders of TRP.PR.A continue to hold the issue and not to convert. Similarly, I recommend that holders of TRP.PR.F convert to TRP.PR.A. I will note that once the FloatingResets commence trading (if, in fact, they do) it may be a good trade to swap one issue for the other in the market once both elements of each pair are trading and you can – hopefully – 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.

Those who wish to convert are advised that the deadline for notifying the company of such a desire is 5 p.m. (EST) on December 16, 2019. Brokers and other intermediaries generally set their internal deadlines a day or two in advance of this date, so if you wish to convert there’s no time to waste! Note that brokers will, in general, try to execute the instruction on a ‘best efforts’ basis if received between the two deadlines, provided that the procrastinating shareholder grovels entertainingly enough.

AZP.PR.B & AZP.PR.C : Convert or Hold?

Thursday, December 12th, 2019

It will be recalled that AZP.PR.B will reset at 5.739% effective January 1, 2020.

AZP.PR.B used to be CZP.PR.B, which used to be EPP.PR.B, and throughout these changes was a FixedReset, 7.00%+418, which commenced trading 2009-11-2 after being announced 2009-10-13. You can’t tell your players without a programme! Notice of extension was provided in November, 2014, and it reset to 5.57% effective 2014-12-31. I recommended in favour of conversion and the conversion rate was 42%. The company announced the extension to 2024 on 2019-11-14. An erroneous announcement of a reset to 5.67% was announced 2019-12-2.

AZP.PR.C resulted from the partial conversion of AZP.PR.B and commenced trading 2014-12-31.

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. AZP.PR.B and the FloatingReset AZP.PR.C). 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_191211
Click for Big

The market appears to have lost its fleeting interest in floating rate product; the implied rates until the next interconversion are below the current 3-month bill rate as the averages for investment-grade and junk issues are at +0.86% and +1.22%, 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 AZP.PR.B FixedReset, we may construct the following table showing consistent prices for its soon-may-be-issued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:

Estimate of FloatingReset AZP.PR.C (received in exchange for AZP.PR.B) Trading Price In Current Conditions
  Assumed FloatingReset
Price if Implied Bill
is equal to
FixedReset Bid Price Spread 1.50% 1.00% 0.50%
AZP.PR.B 18.30 418bp 18.31 17.86 17.40

Before I get eviscerated in the comments, please note that I am well aware that AZP.PR.C is trading and is quoted with a bid of 18.50. Who cares? At the moment, both issues are cum-dividend and are interconvertible effective December 31 and are therefore differ from being the exactly same thing from an investment perspective only by the difference in one dividend payment, about two cents. We are interested in predicting what might happen after the potential for conversion has passed.

Based on current market conditions, I suggest that the FloatingResets, AZP.PR.C, that will result from conversion are likely to trade below the price of their FixedReset counterparts, AZP.PR.B. Therefore, I recommend that holders of AZP.PR.B continue to hold the issue and not to convert. Similarly, I recommend that holders of AZP.PR.C convert to AZP.PR.B I will note that once the FloatingResets commence trading (if, in fact, they do) it may be a good trade to swap one issue for the other in the market once both elements of each pair are trading and you can – hopefully – 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.

Those who wish to convert are advised that the deadline for notifying the company of such a desire is 5:00 p.m. (Toronto time) on December 16, 2019.. Brokers and other intermediaries generally set their internal deadlines a day or two in advance of this date, so if you wish to convert there’s no time to waste! Note that brokers will, in general, try to execute the instruction on a ‘best efforts’ basis if received between the two deadlines, provided that the procrastinating shareholder grovels entertainingly enough.

BPO.PR.A : Convert or Hold?

Thursday, December 12th, 2019

It will be recalled that BPO.PR.A will reset at 4.709% effective January 1, 2020.

BPO.PR.A is a FixedReset, 4.75%+315, that commenced trading 2014-10-23 after being announced 2014-10-7. The issue is tracked by HIMIPref™ but relegated to the Scraps index on credit concerns.

The most logical way to analyze the question of whether or not to convert is through the theory of Preferred Pairs, for which a calculator is available. Briefly, a Strong Pair is defined as a pair of securities that can be interconverted in the future (e.g. BPO.PR.A and the FloatingReset that may exist if enough holders elect to 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_191211
Click for Big

The market appears to have lost its fleeting interest in floating rate product; the implied rates until the next interconversion are below the current 3-month bill rate as the averages for investment-grade and junk issues are at +0.86% and +1.22%, 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 BPO.PR.A FixedReset, we may construct the following table showing consistent prices for its soon-may-be-issued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:

Estimate of FloatingReset (received in exchange for BPO.PR.A) Trading Price In Current Conditions
  Assumed FloatingReset
Price if Implied Bill
is equal to
FixedReset Bid Price Spread 1.50% 1.00% 0.50%
BPO.PR.A 17.71 315bp 17.65 17.18 16.71

Based on current market conditions, I suggest that the FloatingResets that will result from conversion are likely to trade below the price of their FixedReset counterparts, BPO.PR.A. Therefore, I recommend that holders of BPO.PR.A continue to hold the issue and not to convert. I will note that once the FloatingResets commence trading (if, in fact, they do) it may be a good trade to swap one issue for the other in the market once both elements of each pair are trading and you can – hopefully – 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.

Those who wish to convert are advised that the deadline for notifying the company of such a desire is 5:00 p.m. (Toronto time) on December 16, 2019. Brokers and other intermediaries generally set their internal deadlines a day or two in advance of this date, so if you wish to convert there’s no time to waste! Note that brokers will, in general, try to execute the instruction on a ‘best efforts’ basis if received between the two deadlines, provided that the procrastinating shareholder grovels entertainingly enough.

FFH.PR.C & FFH.PR.D : Convert or Hold?

Thursday, December 12th, 2019

It will be recalled that FFH.PR.C will reset at 4.709% effective January 1, 2020.

FFH.PR.C was issued as a cumulative FixedReset issue, 5.75%+315 that commenced trading 2009-10-5 after being announced 2009-9-29. It reset to 4.578% in 2014. I recommended in favour of conversion to FloatingResets. The conversion rate was about 40%.

FFH.PR.D resulted from 40% conversion from FFH.PR.C in 2014 and commenced trading 2014-12-31.

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.C and the FloatingReset FFH.PR.D). 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_191211
Click for Big

The market appears to have lost its fleeting interest in floating rate product; the implied rates until the next interconversion are below the current 3-month bill rate as the averages for investment-grade and junk issues are at +0.86% and +1.22%, 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.C FixedReset, we may construct the following table showing consistent prices for its soon-may-be-issued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:

Estimate of FloatingReset FFH.PR.D (received in exchange for FFH.PR.C) Trading Price In Current Conditions
  Assumed FloatingReset
Price if Implied Bill
is equal to
FixedReset Bid Price Spread 1.50% 1.00% 0.50%
FFH.PR.C 17.60 248bp 17.54 17.07 16.60

Before I get eviscerated in the comments, please note that I am well aware that FFH.PR.D is trading and is quoted with a bid of 17.60. Who cares? At the moment, both issues are cum-dividend and are interconvertible effective December 31 and therefore differ from being the exactly same thing from an investment perspective only by the difference in one dividend payment, less than two cents. We are interested in predicting what might happen after the potential for conversion has passed.

Based on current market conditions, I suggest that the FloatingResets, FFH.PR.D, that will result from conversion are likely to trade below the price of their FixedReset counterparts, FFH.PR.C. Therefore, I recommend that holders of FFH.PR.C continue to hold the issue and not to convert. Similarly, I recommend that holders of FFH.PR.D convert to FFH.PR.C I will note that once the FloatingResets commence trading (if, in fact, they do) it may be a good trade to swap one issue for the other in the market once both elements of each pair are trading and you can – hopefully – 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.

Those who wish to convert are advised that the deadline for notifying the company of such a desire is 5:00 p.m. (Toronto time) on December 16, 2019. Brokers and other intermediaries generally set their internal deadlines a day or two in advance of this date, so if you wish to convert there’s no time to waste! Note that brokers will, in general, try to execute the instruction on a ‘best efforts’ basis if received between the two deadlines, provided that the procrastinating shareholder grovels entertainingly enough.

HSE.PR.C Resets Reset to 4.689%

Thursday, December 12th, 2019

Husky Energy has announced:

the fixed-rate quarterly dividend applicable to its Cumulative Redeemable Preferred Shares, Series 3 (Series 3 Shares) for the five-year period commencing December 31, 2019.

The fixed-rate dividend for the Series 3 Shares announced on December 2, 2019 was calculated on November 29, 2019 as 4.636%, representing the sum of the Canadian Government five-year bond yield of 1.506% plus 3.13%.

The new fixed-rate dividend for Series 3 Shares, based on a calculation as of December 2, 2019, is 4.689%, representing the sum of the Canadian Government five-year bond yield of 1.559% plus 3.13%.

The dividend rate applicable to the Cumulative Redeemable Preferred Shares, Series 4 for the three-month period commencing December 31, 2019 to, but excluding, March 31, 2020 remains unchanged at 4.782%, being equal to the annual rate for the most recent auction of 90-day Government of Canada Treasury Bills as of December 2, 2019 of 1.652% plus 3.13%.

This announcement cancels and corrects the previous announcement of a reset rate of 4.636%.

HSE.PR.C is a FixedReset, 4.50%+313, that commenced trading 2014-12-9 after being announced 2014-12-1. The issue is tracked by HIMIPref™ and is been assigned to the FixedResets-Discount subindex.

The initial announcement was quickly determined to be anomalous, but in contrast with the swift correction to AZP.PR.B, getting Husky to fix its error was something of a struggle. On December 9 I noted:

I sent another eMail via Husky Energy’s on-line form about their anomalous reset calculation for HSE.PR.C. Still no answer, but I’m not the only one querying them.

Yesterday I used their on-line form to submit the question again, and used the form to ask “General Inquiries” if their Investor Relations department was functional, and used Facebook to ask their social media people whether their on-line form and Investor Relations were functional. Social Media got back to me very quickly, by both eMail and FB Messenger, telling me that they’d forwarded my message. Whether or not it was this action that sparked a flurry of activity today, I’ll never know!

Many thanks are due to all those who sent other queries to Husky when it became apparent that they couldn’t be bothered to answer mine; particularly those who kept me abreast of their own progress: Assiduous Readers Avocado and peet and correspondents LC, JD and WP.

XTD.PR.A To Get Bigger

Tuesday, December 10th, 2019

Quadravest has announced:

TDb Split Corp. (the “Company”) is pleased to announce it has filed a preliminary short form prospectus in each of the provinces of Canada with respect to an offering of Priority Equity Shares and Class A Shares of the Company.

The offering will be co-led by National Bank Financial Inc., CIBC World Markets Inc., Scotia Capital Inc. and will also include a syndicate of dealers.

The Priority Equity Shares will be offered at a price of $10.00 per Share to yield 5.25% and the Class A Shares will be offered at a price of $6.15 per Class A Share to yield 9.75%.

The closing price on the TSX of each of the Priority Equity Shares and the Class A Shares on December 6, 2019 was $10.23 and $6.34, respectively.

Since inception of the Company, the aggregate dividends declared on the Priority Equity Shares have been $6.47 per share and the aggregate dividends declared on the Class A Shares have been $6.25 per share, for a combined total of $12.72 per unit. 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 common shares of Toronto-Dominion Bank, a leading Canadian Financial institution.

The Company’s investment objectives are:
Priority Equity Shares:
i. to provide holders of the Priority Equity Shares with fixed, cumulative preferential monthly cash dividends currently in the amount of $0.04375 ($0.525 annually); and
ii. on or about the termination date, currently December 1, 2024 (subject to further 5 year extensions thereafter), to pay the holders of the Priority Equity Shares $10.00 per Priority Equity Share.

Class A Shares:
i. to provide holders of the Class A Shares with regular monthly cash dividends currently in the amount of $0.05 monthly ($0.60 annually); 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, 2024 (subject to further 5 year extensions thereafter) such amounts as remain in the Company after paying $10 per Priority Equity Share.

The sales period of this overnight offering will end at 9:00 a.m. EST on December 10, 2019. The offering is expected to close on or about December 23, 2019 and is subject to certain closing conditions including approval by the TSX.

XTD.PR.A was last mentioned on PrefBlog when it got bigger in 2014. The issue is not tracked by HIMIPref™ since it is too small for efficient trading – total assets (including Capital Units) were only 54-million as of November 30.

On November 29, the NAVPU was 15.84 and Whole Units are being offered at 16.15 – a premium of just under 2%, but still a good piece of business.

MFC.PR.M : No Conversion To FloatingReset

Friday, December 6th, 2019

Manulife Financial Corporation has announced:

that after having taken into account all election notices received by the December 4, 2019 deadline for conversion of its currently outstanding 14,000,000 Non-cumulative Rate Reset Class 1 Shares Series 17 (the “Series 17 Preferred Shares”) (TSX: MFC.PR.M) into Non-cumulative Floating Rate Class 1 Shares Series 18 of Manulife (the “Series 18 Preferred Shares”), the holders of Series 17 Preferred Shares are not entitled to convert their Series 17 Preferred Shares into Series 18 Preferred Shares. There were 227,435 Series 17 Preferred Shares elected for conversion, which is less than the minimum one million shares required to give effect to conversions into Series 18 Preferred Shares.

As announced by Manulife on November 20, 2019, after December 19, 2019, holders of Series 17 Preferred Shares will be entitled to receive fixed rate non-cumulative preferential cash dividends on a quarterly basis, as and when declared by the Board of Directors of Manulife and subject to the provisions of the Insurance Companies Act (Canada). The dividend rate for the five-year period commencing on December 20, 2019, and ending on December 19, 2024, will be 3.8000% per annum or $0.23750 per share per quarter, being equal to the sum of the five-year Government of Canada bond yield as at November 20, 2019, plus 2.36%, as determined in accordance with the terms of the Series 17 Preferred Shares.

Subject to certain conditions described in the prospectus supplement dated August 11, 2014 relating to the issuance of the Series 17 Preferred Shares, Manulife may redeem the Series 17 Preferred Shares, in whole or in part, on December 19, 2024 and on December 19 every five years thereafter.

MFC.PR.M is a FixedReset, 3.90%+236, that commenced trading 2014-8-15 after being announced 2014-8-11. Notice of extension was published 2019-11-8. MFC.PR.M will reset at 3.800% effective December 20, 2019. I recommended against conversion. It is tracked by HIMIPref™ and has been assigned to the FixedReset (Insurance non-NVCC) subindex, but will move shortly to the FixedReset (Discount) subindex as the imposition of NVCC rules for insurers can no longer be considered probable.