Archive for the ‘Issue Comments’ Category

CPX.PR.E To Reset at 5.238%

Monday, June 4th, 2018

Capital Power Corporation has announced (on May 31):

that it has notified registered shareholders of its Cumulative Rate Reset Preference Shares, Series 5 (Series 5 Shares) (TSX: CPX.PR.E) of the Conversion Privilege and Dividend Rate Notice.

Subject to certain conditions, beginning on May 31, 2018 and ending at 5:00 p.m. (Toronto time) on June 15, 2018, each registered holder of Series 5 Shares will have the right to elect to convert any or all of their Series 5 Shares into an equal number of Cumulative Floating Rate Preference Shares, Series 6 (Series 6 Shares) by delivering an Election Notice to the Corporation.

If Capital Power does not receive an Election Notice from a holder of Series 5 Shares during the time fixed therefor, then the Series 5 Shares shall be deemed not to have been converted (except in the case of an Automatic Conversion, see below). Holders of the Series 5 Shares and the Series 6 Shares will have the opportunity to convert their shares again on June 30, 2023, and every five years thereafter as long as the shares remain outstanding.

Effective June 30, 2018, on May 31, 2018, the Annual Fixed Dividend Rate for the Series 5 Shares was set for the next five-year period at 5.23800%. Effective June 30, 2018, on May 31, 2018, the Floating Quarterly Dividend for the Series 6 Shares was set for the first Quarterly Floating Rate Period (being the period from and including June 30, 2018, to but excluding September 30, 2018) at 1.12164%. The Floating Quarterly Dividend Rate will be reset every quarter.

The Series 5 Shares are issued in “book entry only” form and, as such, the sole registered holder of the Series 5 Shares is CDS Clearing and Depository Services Inc. (CDS). All rights of beneficial holders of Series 5 Shares must be exercised through CDS or the CDS participant through which the Series 5 Shares are held. The deadline for the registered shareholder to provide notice of exercise of the right to convert Series 5 Shares into Series 6 Shares is 3:00 p.m. (MDT) / 5:00 p.m. (EDT) on June 15, 2018. Any Election Notices received after this deadline will not be valid. As such, beneficial holders of Series 5 Shares who wish to exercise their rights to convert their shares should contact their broker or other intermediary for more information and it is recommended that this be done well in advance of the deadline in order to provide the broker or other intermediary with time to complete the necessary steps.

After June 15, 2018, (i) if Capital Power determines that there would remain outstanding on June 30, 2018, less than 1,000,000 Series 5 Shares, all remaining Series 5 Shares will be automatically converted into Series 6 Shares on a one-for one basis effective June 30, 2018 (an Automatic Conversion); or (ii) if Capital Power determines that there would remain outstanding after June 30, 2018, less than 1,000,000 Series 6 Shares, no Series 5 Shares will be permitted to be converted into Series 6 Shares effective June 30, 2018. There are currently 8,000,000 Series 5 Shares outstanding.

The Toronto Stock Exchange (TSX) has conditionally approved the listing of the Series 6 Shares effective upon conversion. Listing of the Series 6 Shares is subject to the Capital Power fulfilling all the listing requirements of the TSX and upon approval, the Series 6 Shares will be listed on the TSX under the trading symbol CPX.PR.F.

CPX.PR.E is a FixedReset, 4.50%+315, that commenced trading 2013-3-14 after being announced 2013-3-5. It is tracked by HIMIPref™ but 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., CPX.PR.E and the FloatingReset, CPX.PR.F, 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_180604
Click for Big

The market appears to be relatively uninterested in floating rate product; the implied rates until the next interconversion bracket the current 3-month bill rate as the averages for investment-grade and junk issues are at +1.01% and +1.34%, 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 CPX.PR.E FixedReset, we may construct the following table showing consistent prices for its soon-may-be-issued FloatingReset counterpart, CPX.PR.F, given a variety of Implied Breakeven yields consistent with issues currently trading:

Estimate of FloatingReset CPX.PR.F (received in exchange for CPX.PR.E) Trading Price In Current Conditions
  Assumed FloatingReset
Price if Implied Bill
is equal to
FixedReset Bid Price Spread 1.50% 1.00% 0.50%
CPX.PR.E 22.60 315bp 22.02 21.53 21.04

Based on current market conditions, I suggest that the FloatingResets that will result from conversion are likely to be cheap and trading below the price of their FixedReset counterparts. Therefore, it seems likely that I will recommend that holders of CPX.PR.E continue to hold the issue and not to convert, but I will wait until it’s closer to the June 15 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 the FixedReset for the FloatingReset in the market once both elements of each pair are trading and you can – presumably, according to this analysis – do it with a reasonably good take-out in price, rather than doing it through the company on a 1:1 basis. But that, of course, will depend on the prices at that time and your forecast for the path of policy rates over the next five years. There are no guarantees – my recommendation is based on the assumption that current market conditions with respect to the pairs will continue until the FloatingResets commence trading and that the relative pricing of the two new pairs will reflect these conditions.

EMA.PR.H Holds Its Own on Excellent Volume

Sunday, June 3rd, 2018

Emera Incorporated has announced (on May 31):

that it has completed its bought deal offering of 12,000,000 Cumulative Minimum Rate Reset First Preferred Shares, Series H at a price of $25.00 per share for aggregate gross proceeds of $300 million. The syndicate of underwriters was led by Scotiabank, CIBC Capital Markets, RBC Capital Markets and TD Securities Inc., as joint bookrunners, and also included BMO Capital Markets, National Bank Financial Inc., Industrial Alliance Securities Inc. and Raymond James Ltd. The net proceeds of the offering will be used for general corporate purposes.

EMA.PR.H is a FixedReset, 4.90%+254M490, announced May 17. It will be tracked by HIMIPref™ and has been assigned to the FixedReset subindex.

The issue traded 1,345,583 shares on its May 31 opening day in a range of 24.65-95 before closing at 24.88-92. Vital Statistics are:

EMA.PR.H FixedReset YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-05-31
Maturity Price : 23.11
Evaluated at bid price : 24.88
Bid-YTW : 4.85 %

The new issue is somewhat expensive according to Implied Volatility Analysis:

impvol_ema_180531
Click for Big

According to the analysis above, the fair value is $24.50 … note, however, that complainers will triumphantly point out that this assigns a value of zero to the Floor Rate Guarantee. But as I stated in the February, 2018, edition of PrefLetter:

It is often asserted that a horrific fall of FixedReset prices is a completely logical expectation; that the 2014-16 bear market was completely justified; that similar experiences will happen again; and that floor rates are an excellent way to protect investors from the decline in income.

This assertion does not make a lot of sense to me. Suppose an investor holds a FixedReset with a coupon rate of 5% and that a decline in government yields makes a reduction to 4% seem both likely and imminent. If the bear market scenario is to play out, this investor and many like him will be selling to avoid experiencing the reset.

But where is this money to be deployed? Yields are already down in the government market and all other fixed income markets will be affected to some degree; corporate-government spreads increased during the recent episode (see Chart FR-63 ), but corporate yields did decline – they just didn’t decline as much. I see no reason for an expectation that FixedReset yields should magically remain constant if the face of global interest rate declines.

However, any increase in the price of the floor-rate issue is capped by the call price. In the simplest scenario, the non-floor issue will remain priced at par and reset to a 4% distribution, while the floored issue will be called; the investor will then have to reinvest his funds … and find that he is reinvesting at contemporary rates and experiencing transaction costs that are not borne by the investor in the non-floored issue. It’s not much of a win!

In order for the floor rate to have value, both issues must be trading at a discount to par; this will give the floored issue room to rise in price on the secondary market. Such a price rise will be determined by the excess yield to be gained over the next five years until the next reset plus, perhaps, an allowance for the possibility that current conditions will persist and give the holder another chance to reset. The benefit will be capped by the distribution rate difference multiplied by the Modified Duration of the issues (which will normally be in the range of 20 to 25), so a price difference of between 20% and 25% for a one percent decline in government yields. However, this potential gain is capped by the potential for a call, so the issues must already be trading at a 20%-25% discount to par for this maximum to be reached … and to work out the value of this scenario, we must then calculate the probability of such a decline in government yields.

Once we see floor-rate issues trading at large discounts in an environment in which a significant decline in government rates has a reasonable probability, I will revisit my opinion of the value of such guarantees. I’m not holding my breath.

Now, against the above we have actual empirical data regarding the prices of the EMA FixedResets since the announcement date:

Issue Issue
Reset
Spread
Total Return
5/17 – 5/31
EMA.PR.A 184 +0.05%
EMA.PR.C 265 -2.76%
EMA.PR.F 263 -2.33%

This has accompanied the fall in the GOC-5 yield from 2.33% on May 17 to 2.10% on May 31 (which, proponents will gleefully point out, has made the floor rate on the new issue a matter of great interest). For now, the situation remains murky.

However, even those unimpressed by all that “Implied Volatility” blather and tiresome pettifogging regarding Floor Guarantees should be, at the very least, tempted by EMA.PR.A in preference to the new issue. Sure, it only pays 2.555% at present … but it will reset on 2020-8-15 at GOC-5 + 184, or – given the May 31 GOC-5 yield of 2.10% – 3.94%. It was quoted May 31 at 19.10-31, an Expected Future Current Yield of 5.16%, which ain’t bad for investment grade!

BBD : Trend Positive, Says DBRS

Friday, June 1st, 2018

DBRS has announced that it:

changed the trend to Positive from Stable and confirmed the Issuer Rating of Bombardier Inc. (Bombardier or the Company) at B. This action reflects an improvement in DBRS’s projected financial profile expectations for 2018 and 2019 since the last rating action taken in November 2017 as a result of the Company’s performance over the last two quarters; a change in DBRS’s view regarding the Company’s ability to reach free cash flow breakeven status in 2018 (according to the Company’s definition, which includes changes in working capital), which DBRS now views as achievable (previously “aggressive”); greater comfort with the new management team’s ability to deliver on goals/targets when this had been a challenge in past years; continued margin improvement in the business aircraft (BBA) and aerostructures/engineering (BAES) divisions while Bombardier Transportation (BT; the rail division) continued to post EBIT margins above 8% as a result of the ongoing transformation initiative; less risk associated with the C Series program and partnership with Airbus SE after the U.S. International Trade Commission announced in January 2018 that U.S. aircraft producers were not injured in the complaint brought forth by The Boeing Company; and the Company’s explicit comments regarding the focus on deleveraging, as well as DBRS’s view that this is realistic.

DBRS believes that the Company’s business risk profile benefited from the de-risking of the C Series program and will benefit from a successful launch of the Global 7500, which currently has a backlog running through 2021. Further improvements from the transformation program would also be mildly supportive. The financial risk profile should improve over the next 12 months to 24 months as the Company moves into its “Deleveraging Phase” in 2019 and operating performance improves, supported by continued strong performance at BT, early signs of firming in the business jet market, continued steady contributions from the Company’s Q400 and CRJ regional jet product lines and improved results from the C Series program as deliveries and orders rise and the program approaches a cash breakeven position over the next few years. Key metrics are projected to improve within the B rating category in F2018, with certain metrics possibly achieving the BB rating level. DBRS projects that key credit metrics should be in the high B to BB range in 2019.

Bombardier’s liquidity position is more than adequate for current needs after a $500 million equity raise in Q1 2018, and the sale of its non-core Downsview property in Toronto, which is expected to close in Q2 2018 and net the Company $550 million.

Affected issues are BBD.PR.B, BBD.PR.C and BBD.PR.D

KML : DBRS Commences Review-Negative

Thursday, May 31st, 2018

DBRS has announced that it:

placed the following ratings Under Review with Negative Implications:

— Kinder Morgan Canada Limited (KML), Preferred Shares – Cumulative rating of Pfd-3 (high)
— Kinder Morgan Cochin ULC (KMU), Issuer Rating of BBB (high)

The rating action follows the announcement by KML’s board that the Government of Canada (Rated AAA with Stable trend by DBRS) has agreed to purchase the existing Trans Mountain Pipeline System and the $7.4 billion Trans Mountain Expansion Project (TMEP) for $4.5 billion. As part of the agreement, the Government of Canada has agreed to fund the resumption of TMEP planning and construction work by guaranteeing TMEP’s expenditures under a separate federal government recourse credit facility until the transaction closes. The parties expect to close the transaction by late Q3 2018 or early Q4 2018, subject to KML shareholder and applicable regulatory approvals.

DBRS’s view is that, following the sale of the Trans Mountain Pipeline System and TMEP to the Government of Canada, KMU’s residual assets may not be supportive of the BBB (high) rating. The Company will continue to operate an integrated network of crude oil tank storage and rail terminals in Alberta; the Vancouver Wharves Terminal, a mineral concentrate export/import facility; and the Canadian portion of the Cochin Pipeline system, which transports light condensate originating from the United States to Fort Saskatchewan. Although the TMEP project overhang and legal risks are removed for the Company, the remaining assets have a relatively weaker credit profile compared with the assets being sold. The existing assets are contractually supported, but they lack the scale, diversification and the rate-regulated underpinnings that the Company had prior to the sale. Furthermore, the contract duration for the remaining assets are shorter, with a mix of investment grade and non-investment counterparties. DBRS notes that the Company had minimal debt at Q1 2018 and the capital expenditure requirements going forward are expected to be reasonable.

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

FFH: Outlook Positive, says S&P

Wednesday, May 30th, 2018

Standard & Poor’s has announced:

  • •Fairfax Financial Holdings Ltd. and its subsidiaries’ (collectively, FFH)
    operating earnings outlook is improving as the company redeploys its substantial cash and short-term holdings.
  • •Our view of its competitive position has strengthened in the past few years due to the addition of strong operating assets that complement FFH’s insurance platform.
  • •We are revising our outlook on FFH to positive from stable, and affirming all of our ratings.
  • •The positive outlook means that we could upgrade FFH by one notch during the next 24 months if the group improves its fixed charge coverage, supported by a stable-to-declining trend in financial leverage, and maintains very strong capitalization redundant at the ‘AA’ level.


The positive outlook reflects the expansion of operating earnings primarily driven by an increase in investment earnings that should lead to steady improvement in debt serviceability and support prospective capitalization in the next two-to-three years. In addition, we expect FFH to build on its competitive position, leveraging further the strength of its combined insurance operating platform. We also expect group enterprise risk management (ERM) practices to continue to develop reflective of a large and complex organization.

Affected issues are FFH.PR.C, FFH.PR.D, FFH.PR.E, FFH.PR.F, FFH.PR.G, FFH.PR.H, FFH.PR.I, FFH.PR.J, FFH.PR.K and FFH.PR.M.

IFC.PR.G Holds Its Own on Modest Volume

Tuesday, May 29th, 2018

Intact Financial Corporation has announced:

that it has closed its previously announced bought deal offering (the “Offering”) of Non-cumulative Rate Reset Class A Shares, Series 7 (the “Series 7 Preferred Shares”) underwritten by a syndicate of underwriters (the “Underwriters”) led by TD Securities Inc. together with BMO Capital Markets, CIBC Capital Markets and National Bank Financial, resulting in aggregate gross proceeds (including the proceeds resulting from the exercise of their option) to IFC of $250 million. The net proceeds from the Offering will be used by IFC for general corporate purposes.

The holders of Series 7 Preferred Shares will be entitled to receive fixed non-cumulative preferential cash dividends, as and when declared by the Board of Directors of IFC, on a quarterly basis (with the first quarterly dividend, covering the period from issuance to September 30, 2018, to be paid on September 28, 2018), for the initial fixed rate period ending on June 30, 2023, based on an annual rate of 4.90%. The dividend rate will be reset on June 30, 2023 and every five years thereafter at a rate equal to the 5-year Government of Canada bond yield plus 2.55%.

Holders of the Series 7 Preferred Shares will have the right, at their option, to convert their Series 7 Preferred Shares into Non-cumulative Floating Rate Class A Shares, Series 8 (the “Series 8 Preferred Shares”), subject to certain conditions, on June 30, 2023 and on June 30 every five years thereafter. The holders of Series 8 Preferred Shares will be entitled to receive floating rate non-cumulative preferential cash dividends, as and when declared by the Board of Directors of IFC, at a rate equal to the 90-day Canadian Treasury Bill rate plus 2.55%.

DBRS Limited has assigned a rating of Pfd-2 with a Stable trend for the Series 7 Preferred Shares.

The Series 7 Preferred Shares will commence trading on the Toronto Stock Exchange on May 29, 2018 under the symbol IFC.PR.G.

IFC.PR.G is a FixedReset, 4.90%+255, announced 2018-5-17. It will be tracked by HIMIPref™ and has been assigned to the FixedReset subindex.

As this issue is not NVCC compliant, it will be analyzed as having a Deemed Retraction – that is, a “DeemedMaturity” on 2025-1-31 will be assumed. This date may change in the future. Note, however, that this carries more uncertainty than it does with most other insurers because Intact is a P&C insurer, not a life company.

The issue traded 463,145 shares today in a range of 24.70-92 before closing at 24.80-82. Vital statistics are:

IFC.PR.G FixedReset YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.78
Bid-YTW : 5.09 %

The TXPR price index is down 1.45% since the close prior to announcement (that is, from the close on May 16 until the close May 29), so the issue held its own against the overall market.

ENB.PR.F: No Conversion to FloatingReset

Thursday, May 24th, 2018

Enbridge Inc. has announced :

that none of Enbridge’s outstanding Cumulative Redeemable Preference Shares, Series F (Series F Shares) will be converted into Cumulative Redeemable Preference Shares, Series G of Enbridge (Series G Shares) on June 1, 2018.

After taking into account all conversion notices received from holders of its outstanding Series F Shares by the May 17, 2018 deadline for the conversion of the Series F Shares into Series G Shares, less than the 1,000,000 Series F Shares required to give effect to conversions into Series G Shares were tendered for conversion.

It will be recalled that ENB.PR.F will reset to 4.689% effective 2018-6-1 and will hence be referred to as a FixedReset, 4.689%+251.

ENB.PR.F commenced trading 2012-1-18 after being announced 2012-1-9. It is tracked by HIMIPref™ but relegated to the Scraps subindex on credit concerns.

It will be further recalled that I recommended against conversion.

FTN.PR.A To Get Bigger

Wednesday, May 23rd, 2018

Quadravest Capital Management 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 World Markets Inc., Scotia Capital Inc. and RBC Capital Markets, and will also include BMO Capital Markets, Canaccord Genuity Corp., Industrial Alliance Securities Inc., Echelon Wealth Partners, GMP Securities L.P., Raymond James Ltd., Desjardins Securities Inc., Mackie Research Capital Corporation, and Manulife
Securities Incorporated.

The Preferred Shares will be offered at a price of $9.90 per Preferred Share to yield 5.6% and the Class A Shares will be offered at a price of $10.30 per Class A Share to yield 14.6%.

The closing price on the TSX of each of the Preferred Shares and the Class A Shares on May 22, 2018 was $10.13 and $10.49, respectively.

Since inception of the Company, the aggregate dividends paid on the Preferred Shares have been $7.60 per share and the aggregate dividends paid on the Class A Shares have been $17.89 per share, for a combined total of $25.49. 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 5.50% annually, to be set by the Board of Directors annually subject to a minimum of 5.25% until
2020; and
ii. on or about the termination date, currently December 1, 2020 (subject to further 5 year extensions thereafter), to pay the holders of the Preferred Shares $10.00 per Preferred Share.

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

The sales period of this overnight offering will end at 9:00 a.m. EST on May 24, 2018. The offering is expected to close on or about May 31, 2018 and is subject to certain closing conditions including approval by the TSX.

So Whole Units are being offered for 20.20 and the NAVPU as of May 15 was 17.76! That’s a premium of a little under 14%! Holy smokes, but it’s a nice business when it works, eh?

Update, 2018-5-26: The offering was successful:

Financial 15 Split Corp. (the “Company”) is pleased to announce it has completed the overnight marketing of up to 5,159,000 Preferred Shares and up to 5,159,000 Class A Shares of the Company. Total proceeds of the offering are expected to be approximately $104.2 million.

ENB.PR.F : Convert or Hold?

Saturday, May 12th, 2018

It will be recalled that ENB.PR.F will reset at 4.689% effective June 1.

ENB.PR.F is a FixedReset, 4.00%+251, that commenced trading 2012-1-18 after being announced 2012-1-9. It is tracked by HIMIPref™ but 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., ENB.PR.F 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_180511
Click for Big

The market appears to be relatively uninterested in floating rate product; most of the implied rates until the next interconversion are scattered around the current 3-month bill rate and the averages for investment-grade and junk issues are quite different, at +1.13% and +0.72%, respectively – although these break-even rates are much closer to the market rate than has often been the case! 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.F 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.F) Trading Price In Current Conditions
  Assumed FloatingReset
Price if Implied Bill
is equal to
FixedReset Bid Price Spread 1.75% 1.25% 0.75%
ENB.PR.F 20.29 251bp 19.87 19.38 18.89

Based on current market conditions, I suggest that the FloatingResets that will result from conversion are likely to be cheap and trading below the price of their FixedReset counterparts. Therefore, I recommend that holders of ENB.PR.F continue to hold the issue and not to convert.

If you do wish to convert, note that the deadline for notifying the company is 5:00 p.m. (EST) on May 17, 2018.. Brokerages and other intermediaries will normally set their internal deadlines a few days prior to this, so if you want to convert don’t waste any time! Such intermediaries may accept instructions after their internal deadline (but prior to the company deadline, of course) if you grovel in a sufficiently entertaining fashion, but this will only be done on a ‘best efforts’ basis.

I will note that once the FloatingResets commence trading (if, in fact, they do) it may be a good trade to swap the FixedReset for the FloatingReset in the market once both elements of each pair are trading and you can – presumably, according to this analysis – do it with a reasonably good take-out in price, rather than doing it through the company on a 1:1 basis. But that, of course, will depend on the prices at that time and your forecast for the path of policy rates over the next five years. There are no guarantees – my recommendation is based on the assumption that current market conditions with respect to the pairs will continue until the FloatingResets commence trading and that the relative pricing of the two new pairs will reflect these conditions.

BK.PR.A To Get Bigger

Thursday, May 10th, 2018

Quadravest has announced (on May 8):

Canadian Banc 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 Preferred 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 RBC Capital Markets, and will also include TD Securities Inc., BMO Capital Markets, Canaccord Genuity Corp., Industrial Alliance Securities Inc., Echelon Wealth Partners, GMP Securities L.P., Raymond James Ltd., Desjardins Securities Inc., Mackie Research Capital Corporation, and Manulife Securities Incorporated.

The Preferred Shares will be offered at a price of $10.00 per Preferred Share to yield 5% and the Class A Shares will be offered at a price of $13.35 per Class A Share to yield 10%.

The closing price on the TSX of each of the Preferred Shares and the Class A Shares on May 7, 2018 was $10.13 and $13.31, respectively.

Since inception of the Company, the aggregate dividends declared on the Preferred Shares have been $6.81 per share and the aggregate dividends declared on the Class A Shares have been $13.63 per share, for a combined total of $20.44 per unit. All distributions to date have been made in tax advantaged eligible Canadian dividends or capital gains dividends.

The net proceeds of the offering will be used by the Company to invest in a portfolio of six publicly traded Canadian Banks as follows:

Bank of Montreal Canadian Imperial Bank of Commerce Royal Bank of Canada
The Bank of Nova Scotia National Bank of Canada The Toronto-Dominion Bank

The Company’s investment objectives are to:

Preferred Shares:
i.provide holders with cumulative preferential floating rate monthly cash dividends at a rate per annum equal to the prevailing Canadian prime rate plus 0.75% (minimum annual rate of 5.0% and maximum annual rate of 7%) based on original issue price; and
ii.On or about December 1, 2018 or such other date as the Company may determine (the “termination date”) to pay holders the original $10 issue price of those shares.

Class A Shares:
i.provide holders with regular monthly cash distributions currently targeted to be at the annualized rate of 10% based upon the volume-weighted average trading price of the Class A Shares on the TSX for the last three trading days of the preceding month; and
ii.On the termination date to pay holders the original $15 issue price of those shares.

The sales period of this overnight offering will end at 9:00 a.m. EST on May 9, 2018. The offering is expected to close on or about May 23, 2018 and is subject to certain closing conditions including approval by the TSX.

Today, they announced:

Canadian Banc Corp. (the “Company’) is pleased to announce it has completed the overnight marketing of up to 2,915,000 Preferred Shares and up to 2,915,000 Class A Shares of the Company. Total proceeds of the offering are expected to be approximately $68.1 million.

The offering is being co-led by National Bank Financial Inc., CIBC World Markets Inc., Scotia Capital Inc. and RBC Capital Markets, and will also include TD Securities Inc., BMO Capital Markets, Canaccord Genuity Corp., Industrial Alliance Securities Inc., Echelon Wealth Partners, GMP Securities L.P., Raymond James Ltd., Desjardins Securities Inc., Mackie Research Capital Corporation, and Manulife Securities Incorporated.

The sales period of the overnight offering has now ended.

The offering is expected to close on or about May 23, 2018 and is subject to certain closing conditions including approval by the TSX.

The NAVPU was 22.08 as of April 30 and the Whole Units went for 23.35, a premium of just under 6%. Not a record, but not bad at all!

Given that there were 8,265,657 units outstanding as of April 30, and (up to) 2,915,000 units issued in this offering, this represents a nice liquidity boost for the preferreds. I think they have to say “up to” because purchasers have right of recision, but … I’m not a securities lawyer, so don’t take my thoughts on such matters too seriously!