Archive for the ‘Issue Comments’ Category

BMO.PR.T : Convert or Hold?

Friday, August 2nd, 2019

It will be recalled that BMO.PR.T will reset at 3.624% effective August 25, 2019

BMO.PR.T is a FixedReset, 3.90%+224, NVCC-compliant issue that commenced trading 2014-6-6 after being announced 2019-05-28. It is tracked by HIMIPref™ and is assigned to the FixedReset (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. BMO.PR.T and the FloatingReset 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_190802
Click for Big

The market appears to have lost its fleeting interest in floating rate product; the implied rates until the next interconversion are well below the current 3-month bill rate as the averages for investment-grade and junk issues are at +1.07% and +1.18%, 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 BMO.PR.T 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 BMO.PR.T) Trading Price In Current Conditions
  Assumed FloatingReset
Price if Implied Bill
is equal to
FixedReset Bid Price Spread 1.50% 1.00% 0.50%
BMO.PR.T 17.57 224bp 17.69 17.18 16.68

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, BMO.PR.T. Therefore, I recommend that holders of BMO.PR.T 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. (EDT) on August 12, 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.

RY.PR.H : Convert or Hold?

Friday, August 2nd, 2019

It will be recalled that RY.PR.H will reset At 3.65% effective August 24, 2019.

RY.PR.H is a FixedReset, 3.90%+226, NVCC-Compliant issue that commenced trading 2014-6-3 after being announced 2014-5-23. The bank gave notice of extension on 2019-7-22. The issue is tracked by HIMIPref™ and has been assigned to the FixedReset-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. RY.PR.H and the FloatingReset 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_190802
Click for Big

The market appears to have lost its fleeting interest in floating rate product; the implied rates until the next interconversion are well below the current 3-month bill rate as the averages for investment-grade and junk issues are at +1.07% and +1.18%, 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 RY.PR.H 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 RY.PR.H) Trading Price In Current Conditions
  Assumed FloatingReset
Price if Implied Bill
is equal to
FixedReset Bid Price Spread 1.50% 1.00% 0.50%
RY.PR.H 17.95 226bp 18.06 17.56 17.05

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, RY.PR.H. Therefore, I recommend that holders of RY.PR.H 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. (EST) on August 9, 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.

ENB.PR.Y To Reset to 3.737%

Friday, August 2nd, 2019

Enbridge Inc. has announced:

that it does not intend to exercise its right to redeem its currently outstanding Cumulative Redeemable Preference Shares, Series 3 (Series 3 Shares) (TSX: ENB.PR.Y) on September 1, 2019. As a result, subject to certain conditions, the holders of the Series 3 Shares have the right to convert all or part of their Series 3 Shares on a one-for-one basis into Cumulative Redeemable Preference Shares, Series 4 of Enbridge (Series 4 Shares) on September 1, 2019. Holders who do not exercise their right to convert their Series 3 Shares into Series 4 Shares will retain their Series 3 Shares.

The foregoing conversion right is subject to the conditions that: (i) if Enbridge determines that there would be less than 1,000,000 Series 3 Shares outstanding after September 1, 2019, then all remaining Series 3 Shares will automatically be converted into Series 4 Shares on a one-for-one basis on September 1, 2019; and (ii) alternatively, if Enbridge determines that there would be less than 1,000,000 Series 4 Shares outstanding after September 1, 2019, no Series 3 Shares will be converted into Series 4 Shares. There are currently 24,000,000 Series 3 Shares outstanding.

With respect to any Series 3 Shares that remain outstanding after September 1, 2019, holders thereof will be entitled to receive quarterly fixed cumulative preferential cash dividends, as and when declared by the Board of Directors of Enbridge. The new annual dividend rate applicable to the Series 3 Shares for the five-year period commencing on September 1, 2019 to, but excluding, September 1, 2024 will be 3.737 percent, being equal to the five-year Government of Canada bond yield of 1.357 percent determined as of today plus 2.38 percent in accordance with the terms of the Series 3 Shares.

With respect to any Series 4 Shares that may be issued on September 1, 2019, holders thereof will be entitled to receive quarterly floating rate cumulative preferential cash dividends, as and when declared by the Board of Directors of Enbridge. The dividend rate applicable to the Series 4 Shares for the three-month floating rate period commencing on September 1, 2019 to, but excluding, December 1, 2019 will be 1.00474 percent, based on the annual rate on three month Government of Canada treasury bills for the most recent treasury bills auction of 1.65 percent plus 2.38 percent in accordance with the terms of the Series 4 Shares (the Floating Quarterly Dividend Rate). The Floating Quarterly Dividend Rate will be reset every quarter.

Beneficial holders of Series 3 Shares who wish to exercise their right of conversion during the conversion period, which runs from August 2, 2019 until 5:00 p.m. (EST) on August 19, 2019, should communicate as soon as possible with their broker or other intermediary for more information. It is recommended that this be done well in advance of the deadline in order to provide the broker or other intermediary time to complete the necessary steps. Any notices received after this deadline will not be valid.

ENB.PR.Y is a FixedReset, 4.00%+238, that commenced trading 2013-6-6 after being announced 2013-5-28. It is tracked by HIMIPref™ but relegated to the Scraps – FixedReset (Discount) 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., ENB.PR.Y and the FloatingReset 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). Inspection of the graph and the overall average break-even rates for extant pairs will provide a guide for estimating the break-even rate for the pair now under consideration assuming, of course, that enough conversions occur so that the pair is in fact created.

pairs_fr_190802
Click for Big

The market has lost enthusiasm for floating rate product; the implied rates until the next interconversion are generally well below the current 3-month bill rate as the averages for investment-grade and junk issues are at +1.07% and +1.18%, 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 ENB.PR.Y 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 ENB.PR.Y) Trading Price In Current Conditions
  Assumed FloatingReset
Price if Implied Bill
is equal to
FixedReset Bid Price Spread 1.50% 1.00% 0.50%
ENB.PR.Y 14.76 238bp 14.90 14.42 13.94

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, ENB.PR.Y. Therefore, it seems likely that I will recommend that holders of ENB.PR.Y continue to hold the issue and not to convert, but I will wait until it’s closer to the August 19 notification deadline before making a final pronouncement. I will note that once the FloatingResets commence trading (if, in fact, they do) it may be a good trade to swap 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.

NA : Trend Upgraded to Positive by DBRS

Monday, July 29th, 2019

DBRS has announced that it:

changed the trend on all ratings of National Bank of Canada (National or the Bank) and its related entities to Positive from Stable, as well as confirmed all ratings, including the Bank’s Long-Term Issuer Rating at AA (low) and Short-Term Issuer Rating at R-1 (middle). National’s Long-Term Issuer Rating is composed of an Intrinsic Assessment of A (high) and a Support Assessment of SA2, reflecting the expectation of timely systemic support from the Government of Canada (rated AAA with a Stable trend by DBRS). The SA2 designation results in a one-notch uplift to the Long-Term Issuer Rating. Under the Canadian Bank Recapitalization Regime, DBRS expects to eventually remove the uplift from systemic support once the Bank has issued a sufficient level of bail-inable senior debt, which would provide an adequate buffer for non-bail-inable obligations and is expected to offset the removal of systemic support.

KEY RATING CONSIDERATIONS
The Positive trend and confirmation of the ratings recognize National’s dominance in its home province, the Province of Québec (Québec; rated A (high) with a Positive trend by DBRS), which continues to experience strong economic growth, in addition to the successful expansion of the Bank’s footprint in targeted markets across the rest of Canada, especially in Wealth Management (WM) and Financial Markets (FM). Furthermore, the Bank benefits from strong earnings, to which Personal and Commercial (P&C) and WM are now larger contributors, while transformation efforts in its P&C business and growth of its WM business have driven growth in client deposit capture.

The ratings also consider the longevity of the current credit cycle and the potential negative impacts on the Québec economy that might arise due to escalations in trade disputes between Canada, the United States and China. Lastly, DBRS notes that National’s FM business segment is an important contributor to the Bank’s franchise. Although the majority of transactions are client driven, which DBRS views positively, the segment’s activities do expose the Bank to increased capital markets risk from significant market downturns or other adverse events.

Affected issues are: NA.PR.A, NA.PR.C, NA.PR.E, NA.PR.G, NA.PR.S, NA.PR.W and NA.PR.X.

BMO.PR.T To Reset To 3.624%

Friday, July 26th, 2019

Bank of Montreal has announced:

the applicable dividend rates for its Non-Cumulative 5-Year Rate Reset Class B Preferred Shares, Series 29 (the “Preferred Shares Series 29”) and Non-Cumulative Floating Rate Class B Preferred Shares, Series 30 (the “Preferred Shares Series 30”).

With respect to any Preferred Shares Series 29 that remain outstanding after August 25, 2019, commencing as of such date, holders thereof 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 the Bank and subject to the provisions of the Bank Act (Canada). The dividend rate for the five-year period commencing on August 25, 2019, and ending on August 24, 2024, will be 3.624 per cent, being equal to the sum of the five-year Government of Canada bond yield as at July 26, 2019, plus 2.24 per cent, as determined in accordance with the terms of the Preferred Shares Series 29.

With respect to any Preferred Shares Series 30 that may be issued on August 26, 2019, being the first business day following the conversion date of August 25, 2019, identified in the Preferred Shares Series 29 prospectus, which falls on a Sunday, holders thereof will be entitled to receive floating rate non-cumulative preferential cash dividends on a quarterly basis, calculated on the basis of the actual number of days elapsed in each quarterly floating rate period divided by 365, as and when declared by the Board of Directors of the Bank and subject to the provisions of the Bank Act (Canada). The dividend rate for the three-month period commencing on August 25, 2019, and ending on November 24, 2019, will be 3.885 per cent, being equal to the sum of the three-month Government of Canada Treasury bill yield as at July 26, 2019, plus 2.24 per cent, as determined in accordance with the terms of the Preferred Shares Series 30.

Beneficial owners of Preferred Shares Series 29 who wish to exercise their right of conversion should communicate as soon as possible with their broker or other nominee and ensure that they follow their instructions in order to ensure that they meet the deadline to exercise such right, which is 5:00 p.m. (EDT) on August 12, 2019.

They previously announced (on 2019-6-27):

that it does not intend to exercise its right to redeem the currently outstanding Non-Cumulative 5-Year Rate Reset Class B Preferred Shares, Series 29 of the Bank (the “Preferred Shares Series 29”) on August 25, 2019. As a result, subject to certain conditions, the holders of Preferred Shares Series 29 have the right, at their option, to convert all or part of their Preferred Shares Series 29 on a one-for-one basis into Non-Cumulative Floating Rate Class B Preferred Shares, Series 30 of the Bank (the “Preferred Shares Series 30”) on August 26, 2019. This date is the first business day following the conversion date of August 25, 2019, identified in the Preferred Shares Series 29 prospectus, which falls on a Sunday. Holders who do not exercise their right to convert their Preferred Shares Series 29 into Preferred Shares Series 30 on such date will retain their Preferred Shares Series 29, unless automatically converted in accordance with the conditions below.

The foregoing conversions are subject to the conditions that: (i) if, after August 12, 2019, the Bank determines that there would be less than 1,000,000 Preferred Shares Series 29 outstanding on August 25, 2019, then all remaining Preferred Shares Series 29 will automatically be converted into an equal number of Preferred Shares Series 30 on August 25, 2019; and (ii) alternatively, if the Bank determines that there would be less than 1,000,000 Preferred Shares Series 30 outstanding on August 25, 2019, no Preferred Shares Series 29 will be converted into Preferred Shares Series 30. In either case, the Bank will give written notice to that effect to any registered holders of Preferred Shares Series 29 affected by the preceding minimums on or before August 16, 2019.

The dividend rate applicable to the Preferred Shares Series 29 for the 5-year period commencing on August 25, 2019, and ending on August 24, 2024, and the dividend rate applicable to the Preferred Shares Series 30 for the 3-month period commencing on August 25, 2019, and ending on November 24, 2019, will be determined and announced by way of a news release on July 26, 2019. The Bank will also give written notice of these dividend rates to the registered holders of Preferred Shares Series 29.

Beneficial owners of Preferred Shares Series 29 who, on or after July 26, 2019, wish to exercise their right of conversion should instruct their broker or other nominee to exercise such right before 5:00 p.m. (EDT) on August 12, 2019.

Conversion inquiries should be directed to BMO’s Registrar and Transfer Agent, Computershare Trust Company of Canada, at 1-800-340-5021.

BMO.PR.T is a FixedReset, 3.90%+224, NVCC-compliant issue that commenced trading 2014-6-6 after being announced 2019-05-28. It is tracked by HIMIPref™ and is assigned to the FixedReset (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., RY.PR.H and the FloatingReset 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). Inspection of the graph and the overall average break-even rates for extant pairs will provide a guide for estimating the break-even rate for the pair now under consideration assuming, of course, that enough conversions occur so that the pair is in fact created.

pairs_fr_190726
Click for Big

The market has lost enthusiasm for floating rate product; the implied rates until the next interconversion are generally well below the current 3-month bill rate as the averages for investment-grade and junk issues are at +1.11% and +1.09%, 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 BMO.PR.T 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 BMO.PR.T) Trading Price In Current Conditions
  Assumed FloatingReset
Price if Implied Bill
is equal to
FixedReset Bid Price Spread 1.50% 1.00% 0.50%
BMO.PR.T 18.03 224bp 18.15 17.64 17.13

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, BMO.PR.T. Therefore, it seems likely that I will recommend that holders of BMO.PR.T continue to hold the issue and not to convert, but I will wait until it’s closer to the August 12 notification deadline before making a final pronouncement. I will note that once the FloatingResets commence trading (if, in fact, they do) it may be a good trade to swap 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.

RY.PR.H To Reset At 3.65%

Thursday, July 25th, 2019

Royal Bank of Canada has announced:

the applicable dividend rates for its Non-Viability Contingent Capital (NVCC) Non-Cumulative 5-Year Rate Reset First Preferred Shares, Series BB (the “Series BB shares”) and NVCC Non-Cumulative Floating Rate First Preferred Shares, Series BC (the “Series BC shares”).

With respect to any Series BB shares that remain outstanding after August 24, 2019, holders will be entitled to receive quarterly fixed rate non-cumulative preferential cash dividends, as and when declared by the Board of Directors of Royal Bank of Canada, subject to the provisions of the Bank Act (Canada).

The dividend rate for the 5-year period from and including August 24, 2019 to, but excluding, August 24, 2024 will be 3.65% for Series BB shares, being equal to the 5-Year Government of Canada bond yield determined as of July 25, 2019 plus 2.26%, as determined in accordance with the terms of the Series BB shares.

With respect to any Series BC shares that may be issued on August 24, 2019, holders will be entitled to receive quarterly floating rate non-cumulative preferential cash dividends, calculated on the basis of the actual number of days elapsed in such quarterly period divided by 365, as and when declared by the Board of Directors of Royal Bank of Canada, subject to the provisions of the Bank Act (Canada).

The dividend rate for the floating rate period from and including August 24, 2019 to, but excluding, November 24, 2019 will be 3.91%, being equal to the 3-month Government of Canada Treasury Bill yield determined as of July 25, 2019 plus 2.26%, as determined in accordance with the terms of the Series BC shares.

Beneficial owners of Series BB shares who wish to exercise their conversion rights should instruct their broker or other nominee to exercise such rights on or prior to the deadline for notice of intention to convert, which is 5:00 p.m. (EST) on August 9, 2019.

RY.PR.H is a FixedReset, 3.90%+226, NVCC-Compliant issue that commenced trading 2014-6-3 after being announced 2014-5-23. The bank gave notice of extension on 2019-7-22. The issue is tracked by HIMIPref™ and has been assigned to the FixedReset-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., RY.PR.H and the FloatingReset 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). Inspection of the graph and the overall average break-even rates for extant pairs will provide a guide for estimating the break-even rate for the pair now under consideration assuming, of course, that enough conversions occur so that the pair is in fact created.

pairs_fr_190725
Click for Big

The market has lost enthusiasm for floating rate product; the implied rates until the next interconversion are generally well below the current 3-month bill rate as the averages for investment-grade and junk issues are at +1.06% and +0.68%, 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 RY.PR.H 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 RY.PR.H) Trading Price In Current Conditions
  Assumed FloatingReset
Price if Implied Bill
is equal to
FixedReset Bid Price Spread 1.50% 1.00% 0.50%
RY.PR.H 18.10 226bp 18.21 17.71 17.20

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, RY.PR.H. Therefore, it seems likely that I will recommend that holders of RY.PR.H continue to hold the issue and not to convert, but I will wait until it’s closer to the August 9 notification deadline before making a final pronouncement. I will note that once the FloatingResets commence trading (if, in fact, they do) it may be a good trade to swap 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.

RY.PR.H To Be Extended

Monday, July 22nd, 2019

Royal Bank of Canada has announced:

that it does not intend to exercise its right to redeem all or any part of the currently outstanding Non-Viability Contingent Capital (NVCC) Non-Cumulative 5-Year Rate Reset First Preferred Shares, Series BB (the “Series BB shares”) on August 24, 2019. There are currently 20,000,000 Series BB shares outstanding.

Subject to certain conditions set out in the prospectus supplement dated May 27, 2014 relating to the issuance of the Series BB shares, the holders of the Series BB shares have the right to convert all or part of their Series BB shares, on a one-for-one basis, into NVCC Non-Cumulative Floating Rate First Preferred Shares, Series BC (the “Series BC shares”) on August 24, 2019. On such date, holders who do not exercise their right to convert their Series BB shares into Series BC shares, will continue to hold their Series BB shares. The conversion will occur on August 26 being the first business day following the conversion date of August 24 as identified in the prospectus, which falls on a Saturday. The foregoing conversion rights are subject to the following:

  • if Royal Bank of Canada determines that there would be less than 1,000,000 Series BC shares outstanding after taking into account all shares tendered for conversion on August 24, 2019, then holders of Series BB shares will not be entitled to convert their shares into Series BC shares, and
  • alternatively, if Royal Bank of Canada determines that there would remain outstanding less than 1,000,000 Series BB shares after August 24, 2019, then all remaining Series BB shares will automatically be converted into Series BC shares on a one-for-one basis on August 24, 2019.

In either case, Royal Bank of Canada will give written notice to that effect to holders of Series BB shares no later than August 17, 2019.

The dividend rate applicable for the Series BB shares for the 5-year period from and including August 24, 2019 to but excluding August 24, 2024, and the dividend rate applicable to the Series BC shares for the 3-month period from and including August 24, 2019 to but excluding November 24, 2019, will be determined and announced by way of a press release on July 25, 2019.

Beneficial owners of Series BB shares who wish to exercise their conversion rights should instruct their broker or other nominee to exercise such rights during the conversion period, which runs from July 25, 2019 until 5:00 p.m. (EST) on August 9, 2019.

Inquiries should be directed to Shareholder Relations Officer, Shirley Boudreau, at 416-955-7806.

RY.PR.H is a FixedReset, 3.90%+226, NVCC-Compliant issue that commenced trading 2014-6-3 after being announced 2014-5-23. The issue is tracked by HIMIPref™ and has been assigned to the FixedReset-Discount subindex.

I will have more to say when the reset rate is announced July 25.

SLF on Review-Positive by DBRS

Monday, July 22nd, 2019

DBRS has announced that it:

placed Sun Life Financial Inc.’s (SLF or the Company) Issuer Rating and Senior Unsecured Debentures rating of “A” as well as its Subordinated Unsecured Debentures rating of A (low) and Preferred Shares rating of Pfd-2 Under Review with Positive Implications. DBRS also placed Sun Life Assurance Company of Canada’s (Sun Life Assurance or SLA) Financial Strength Rating and Issuer Rating of AA (low) as well as its Subordinated Debt rating of A (high) Under Review with Positive Implications. Additionally, DBRS placed Sun Life Capital Trust’s SLEECS Series B rating and Sun Life Capital Trust II’s SLEECS Series 2009-1 rating of “A” Under Review with Positive Implications.

KEY RATING CONSIDERATIONS
The Under Review with Positive Implications status reflects DBRS’s view that the Company has been making good progress in realizing benefits from its strategic business plan to diversify and balance its business mix to improve the quality of its earnings. Furthermore, SLF has had greater success than DBRS anticipated in addressing legacy items and improving its risk profile, placing the Company’s credit profile closer to its AA-rated peers. During the review period, which is expected to be concluded within 90 days, DBRS will focus on the Company’s improved ability to deliver sustained earnings commensurate with the higher rating level across its four core business segments while simultaneously maintaining strong regulatory capital levels.

DBRS has gained comfort from actions taken by management over the past year to turn around the performance of SLF’s legacy U.S. individual life block that is in run-off, including the reserve strengthening, which should reduce the probability of the block adversely impacting results. DBRS has also taken into account measures taken by the Company to manage its risk associated with having a higher proportion of mortgages, BBB-rated bonds and corporate loans in the Company’s investment portfolio. Overall, the investment portfolio is delivering investment yields near the 4% range and has contributed to SLF’s strong and stable earnings performance in recent years.

RATING DRIVERS
The ratings could be upgraded if SLF continues to generate consistent earnings across its four core business segments commensurate with the higher rating level while maintaining its strong capitalization and progress in strengthening its franchise.

As the ratings have the Under Review with Positive Implications status, a negative rating action is unlikely. However, the trends on the ratings could revert to Stable if the Canadian operations weaken materially or if an adverse event causes regulatory capital to decline substantially.

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 .

IAF Upgraded One Notch (Global Scale) by S&P; Canadian Scale Unaffected

Monday, July 22nd, 2019

Standard & Poor’s has announced:

  • iA Financial Group (iA) has a meaningful presence in Canada and an increasingly diverse earnings profile supported by strong risk-adjusted returns versus its internal targets and peers’ performance.
  • It also has excellent capital adequacy per our risk-based model.
  • We are raising our ratings on iA’s nonoperating holding company, iA Financial Corp. Inc., to ‘A’ from ‘A-‘ and its operating subsidiary, Industrial Alliance Insurance and Financial Services to ‘AA-‘ from ‘A+’.
  • The outlook is stable reflecting our expectation that iA can maintain current levels of capital while further diversifying its earnings profile and returns.

NEW YORK (S&P Global Ratings) July 22, 2019– S&P Global Ratings said today it raised its financial strength rating (FSR) on Industrial Alliance Insurance and Financial Services Inc. (iA Insurance) to ‘AA-‘ from ‘A+’. At the same time, we raised our long-term issuer credit rating on iA Financial Group’s (iA) nonoperating holding company (NOHC) iA Financial Corp. Inc. to ‘A’ from ‘A-‘. The outlook is stable.

This rating action follows our review of iA under our revised criteria.

The stable outlook reflects the group’s maintenance of a comfortable capital redundancy at the ‘AAA’ level per our model, leading to top-quartile results vis-à-vis peers offering similar products. We do not expect to revise the ratings in the next two years.

While unlikely in the next two years, we could lower our ratings on iA if its:

  • Competitive position deteriorates, perhaps due to an unexpected weakening of its brand or a significant decline in sales; or
  • Capital adequacy weakens to below our ‘AA’ confidence level along with a substantial increase in unhedged exposure to market or interest rate risk.

We believe a further upgrade is unlikely in the next two years.

iA Insurance earns strong returns compared with many U.S. life insurers and Canadian peers that compete globally. Its asset management operations have grown and contribute meaningfully to earnings. Although its investment portfolio is somewhat concentrated in highly rated Canadian provincial bonds and nearly all of its business is conducted in Canada, we view iA’s insurance industry and country risk assessment (IICRA) as lower risk than its globally diversified Canadian peers and U.S. life insurers offering similar products. Its operating performance has been in the top quartile versus peers’ in the past few years and appears to be sustainable. Therefore, we view iA Insurance’s business risk profile as strong and improving.

The preferreds are now rated A (Global Scale), up from A-, and P-1(low) (Canadian Scale) (Unchanged).

Affected issues are: IAF.PR.B, IAF.PR.G and IAF.PR.I

TD.PF.B : No Conversion to FloatingReset

Friday, July 19th, 2019

The Toronto-Dominion Bank has announced:

that none of its 20 million Non-Cumulative 5-Year Rate Reset Preferred Shares, Series 3 (Non-Viability Contingent Capital (NVCC)) (the “Series 3 Shares”) will be converted on July 31, 2019 into Non-Cumulative Floating Rate Preferred Shares, Series 4 (NVCC) (the “Series 4 Shares”) of TD.

During the conversion period, which ran from July 2, 2019 to July 16, 2019, 350,885 Series 3 Shares were tendered for conversion into Series 4 Shares, which is less than the minimum 1,000,000 shares required to give effect to the conversion, as described in the prospectus supplement for the Series 3 Shares dated July 24, 2014. As a result, no Series 4 Shares will be issued on July 31, 2019 and holders of Series 3 Shares will retain their Series 3 Shares.

The Series 3 Shares are currently listed on the Toronto Stock Exchange under the symbol TD.PF.B. As previously announced on July 2, 2019, the dividend rate for the Series 3 Shares for the 5 year period from and including July 31, 2019 to but excluding July 31, 2024 will be 3.681%.

TD.PF.B is a FixedReset 3.80%+227, NVCC-compliant, issue that commenced trading 2014-7-31 after being announced 2014-7-22. TD provided notice of extension on 2019-6-25. The issue will reset At 3.681% effective July 31, 2019. I recommended against conversion. The issue is tracked by HIMIPref™ and is assigned to the FixedReset (Discount) subindex.