Archive for the ‘Issue Comments’ Category

BAM.PR.Z : No Conversion to FloatingReset

Tuesday, December 19th, 2017

Brookfield Asset Management Inc. has announced:

that after having taken into account all election notices received by the December 18, 2017 deadline for the conversion of the Cumulative Class A Preference Shares, Series 30 (the “Series 30 Shares”) (TSX:BAM.PR.Z) into Cumulative Class A Preference Shares, Series 31 (the “Series 31 Shares”), the holders of Series 30 Shares are not entitled to convert their Series 30 Shares into Series 31 Shares. There were 119,204 Series 30 Shares tendered for conversion, which is less than the one million shares required to give effect to conversions into Series 31 Shares.

It will be recalled that BAM.PR.Z will reset to 4.685% and that I recommended against conversion.

BAM.PR.Z is a FixedReset, 4.80%+296, that commenced trading 2011-11-2 after being announced 2011-10-24. It is tracked by HIMIPref™ and assigned to the FixedReset subindex.

IFC.PR.A : No Conversion to FloatingReset

Monday, December 18th, 2017

Intact Financial Corporation has announced:

that, after having taken into account all elections received before the December 15, 2017, 5:00 p.m. (ET) conversion deadline, with respect to the Non-cumulative Rate Reset Class A Shares Series 1 of IFC (the “Series 1 Preferred Shares”) tendered for conversion on December 31, 2017 into Non-cumulative Floating Rate Class A Shares Series 2 of IFC (the “Series 2 Preferred Shares”), the holders of Series 1 Preferred Shares are not entitled to convert their shares. There were 181,136 Series 1 Preferred Shares tendered for conversion, which is fewer than the 1,000,000 Series 1 Preferred Shares required for the ability to proceed with the conversion, in accordance with the terms of the Series 1 Preferred Shares.

There are 10,000,000 Series 1 Preferred Shares listed on the Toronto Stock Exchange (“TSX”) under the symbol IFC.PR.A. The annual dividend rate for the Series 1 Preferred Shares for the five-year period from and including December 31, 2017 to but excluding December 31, 2022, will be 3.396%, as determined in accordance with the terms of the Series 1 Preferred Shares.

Subject to certain conditions described in IFC’s prospectus dated July 5, 2011, IFC may redeem the Series 1 Preferred Shares, in whole or in part, on December 31, 2022 and on December 31 every five years thereafter.

For more information on the terms of, and risks associated with an investment in, the Series 1 Preferred Shares, see IFC’s prospectus dated July 5, 2011 which is available on www.sedar.com.

It will be recalled that IFC.PR.A will reset at 3.396% effective December 31, 2017, and I recommended against conversion.

IFC.PR.A is a FixedReset, 4.20%+172, that commenced trading 2011-7-12 after being announced 2011-6-22. The issue is tracked by HIMIPref™ and has been assigned to the FixedReset subindex.

As this issue is not NVCC compliant and it is an insurance issue, it is analyzed as having a Deemed Retraction. Note that I am less certain with respect to this decision than I am with life insurers – it is by no means assured that property and casualty insurers will be treated the same as life insurers once all the regulatory dust settles.

KML.PR.C Settles Firm On Decent Volume

Friday, December 15th, 2017

Kinder Morgan Canada Limited has announced:

that it has completed its previously announced offering of cumulative redeemable minimum rate reset preferred shares, Series 3 (the “Series 3 Preferred Shares”) for aggregate gross proceeds of $250 million. The Company issued 10,000,000 Series 3 Preferred Shares, including 2,000,000 Series 3 shares issued as a result of the full exercise of the underwriter’s option, through a syndicate of underwriters led by CIBC Capital Markets, Scotiabank, RBC Capital Markets and TD Securities.

The Company intends to use the proceeds from the offering to indirectly subscribe for preferred units in Kinder Morgan Canada Limited Partnership, which, in turn, intends to use such proceeds to, directly or indirectly, finance the development, construction and completion of the Trans Mountain Expansion Project and Base Line Terminal project as well as potential future growth opportunities, to repay indebtedness and for general corporate purposes.
The Series 3 Preferred Shares will begin trading today on the TSX under the symbol KML.PR.C. S&P and DBRS have assigned this series a rating of P-3 (High) and Pfd-3 (high), respectively.

Dividends on the Series 3 Preferred Shares are expected to be $1.3000 per share annually, payable quarterly on the 15th day of February, May, August and November, as and when declared by the Board of Directors of the Company, for the initial fixed rate period to but excluding February 15, 2023. The first dividend, if declared, will be payable February 15, 2018, in the amount of $0.22082 per share.

All of the Company’s dividends are designated “eligible dividends” for Canadian income tax purposes.

KML.PR.C is a FixedReset, 5.20%+351M520, announced 2017-12-6. It will be tracked by HIMIPref™ but relegated to the Scraps subindex on credit concerns.

The issue traded 508,130 shares today in a range of 24.94-00 before closing at 24.99-00. Vital statistics are:

KML.PR.C FixedReset YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-12-15
Maturity Price : 23.15
Evaluated at bid price : 24.99
Bid-YTW : 5.13 %

ENB.PF.K Soft on Modest Volume

Monday, December 11th, 2017

Enbridge Inc. has announced:

that it has closed its previously announced public offering (the Offering) of Cumulative Redeemable Minimum Rate Reset Preference Shares, Series 19 (the Series 19 Preferred Shares) through a syndicate of underwriters led by Scotiabank, BMO Capital Markets, CIBC Capital Markets and National Bank Financial. Enbridge issued 20 million Series 19 Preferred Shares, inclusive of 4 million Series 19 Preferred Shares issued on full exercise of the underwriters’ option, for gross proceeds of $500 million. The Series 19 Preferred Shares will begin trading on the Toronto Stock Exchange (TSX) today under the symbol ENB.PF.K. Proceeds from the Offering are expected to be used to partially fund capital projects, to reduce existing indebtedness and for other general corporate purposes of the Company and its affiliates.

ENB.PF.K is a FixedReset 4.90%+317M490 announced December 4. It has been added to the HIMIPref™ database but has been relegated to the Scraps subindex on credit concerns.

The issue traded 694,690 shares in a range of 24.72-88 before closing at 24.72-75. Vital statistics are:

ENB.PF.K FixedReset YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-12-11
Maturity Price : 23.05
Evaluated at bid price : 24.72
Bid-YTW : 4.88 %

This issue looks extraordinarily expensive to me! According to Implied Volatility analysis:

impvol_enb_171211
Click for Big

With the parameters shown, the theoretical value of the new issue is 23.23, roughly equivalent to the BPO new issue that settled recently. Critics will be quick to point out that in this calculation there is zero value assigned to the minimum rate guarantee … but I’d say that’s about right!

LB Rating Trend Negative: DBRS

Monday, December 11th, 2017

DBRS has announced that it:

confirmed the ratings of Laurentian Bank of Canada (LBC or the Bank). The trends on all long-term ratings have been revised to Negative from Stable, while the trends on all short-term ratings remain Stable. The Bank’s Intrinsic Assessment (IA) of A (low) and Support Assessment of SA3 are unchanged. The SA3 designation, which reflects no expectation of timely external support, results in the final rating being equivalent to the IA.

In revising the trends to Negative, DBRS reflects its concern with the quality of LBC’s control functions and underwriting procedures at a sensitive time in the housing cycle and the potential impact of recent events on the Bank’s reputation and funding. These rating actions follow the Bank’s disclosure that residential prime mortgages the Bank had sold to third parties had documentation and client misrepresentation issues.

LBC continues to demonstrate a solid track record of strong asset quality resulting in low levels of impairments and loan losses. Residential mortgages make up just over half of the Bank’s loan portfolio. Out of the $18.5 billion mortgages in 2017, 50% were in Québec, where housing prices have kept pace with inflation over the last few years. Nevertheless, in DBRS’s opinion, the Bank’s more recent geographic expansion through its B2B Bank and its Commercial segments does expose LBC to heightened levels of operational risk and credit risk. Given recent events, DBRS is also concerned that risk management processes and policies have not evolved at a pace commensurate with the Bank’s growth.

While LBC has had a strong deposit funding base, thanks to its retail franchise, DBRS notes that the Bank is also reliant on broker sourced deposits that could be a more volatile source of funds should issues related to its mortgage underwriting practices persist. If the current issues persist and foster market uncertainty, LBC could face difficulty in attracting broker-sourced deposits which, in conjunction with any potential restrictions on accessing mortgage securitization conduits, could pressure the Bank’s funding and weaken its liquidity.

The Bank’s capital ratios are close to regulatory minimums and leave only a very limited buffer to absorb any significant losses. LBC’s CET1 ratio stood at 7.9% at the end of 2017, which was a slight deterioration from 8.0% at YE2016.

RATING DRIVERS
If the ongoing audits of the mortgage portfolio remain in line with current management expectations and the costs and sources of funding are not materially impacted, the ratings could be revised back to Stable. However, if further issues are discovered beyond the scope currently disclosed, or if funding costs were to materially increase, or if funding sources were to be significantly curtailed, the ratings could be downgraded. Furthermore, if DBRS were to see a material deterioration in liquidity, or a reduction in capitalization to levels closer to regulatory minimums, there could also be negative rating implications.

Laurentian’s mortgage documentation problems have been big news lately.

Affected issues are LB.PR.F (soon to be redeemed), LB.PR.H and LB.PR.J .

BAM.PR.Z : Convert or Hold?

Saturday, December 9th, 2017

It will be recalled that BAM.PR.Z will reset to 4.685% (paid on par) effective January 1.

Holders of BAM.PR.Z have the option to convert to FloatingResets, which will pay 3-month bills plus 296bp on the par value of $25.00, reset quarterly. The deadline for notifying the company of the intent to convert is 5:00 p.m. (Toronto time) on December 18, 2017; but note that this is a company deadline and that brokers will generally set their deadlines a day or two in advance, so there’s not much time to lose if you’re planning to convert! However, if you miss the brokerage deadline they’ll probably do it on a ‘best efforts’ basis if you grovel in a sufficiently entertaining fashion. The ticker for the new FloatingReset, if it is issued, will be BAM.PF.K.

BAM.PR.Z is a FixedReset, 4.80%+296, that commenced trading 2011-11-2 after being announced 2011-10-24. It is tracked by HIMIPref™ and assigned to the FixedReset 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., BAM.PR.Z and the FloatingReset, BAM.PF.K, 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_171208
Click for Big

The market appears to have a distaste at the moment for floating rate product; most of the implied rates until the next interconversion are lower than the current 3-month bill rate and the averages for investment-grade and junk issues are both well below current market rates, at +0.47% and +0.51%, respectively! Whatever might be the result of the next few Bank of Canada overnight rate decisions, I suggest that it is unlikely that the average rate over the next five years will be lower than current – but if you disagree, of course, you may interpret the data any way you like.

Since credit quality of each element of the pair is equal to the other element, it should not make any difference whether the pair examined is investment-grade or junk, although we might expect greater variation of implied rates between junk issues on grounds of lower liquidity, and this is just what we see.

If we plug in the current bid price of the BAM.PR.Z FixedReset, we may construct the following table showing consistent prices for its maybe-soon-to-be-issued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:

Estimate of FloatingReset BAM.PF.K (received in exchange for BAM.PR.Z) Trading Price In Current Conditions
  Assumed FloatingReset
Price if Implied Bill
is equal to
FixedReset Bid Price Spread +1.00% +0.50% 0.00%
BAM.PR.Z 24.20 296bp 23.46 22.95 22.45

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

NPI.PR.C : Convert or Hold?

Saturday, December 9th, 2017

It will be recalled that NPI.PR.C will reset to 5.08% (paid on par) effective December 31.

Holders of NPI.PR.C have the option to convert to FloatingResets, which will pay 3-month bills plus 346bp on the par value of $25.00, reset quarterly. The deadline for notifying the company of the intent to convert is 5:00 pm (Toronto time) on December 18, 2017; but note that this is a company deadline and that brokers will generally set their deadlines a day or two in advance, so there’s not much time to lose if you’re planning to convert! However, if you miss the brokerage deadline they’ll probably do it on a ‘best efforts’ basis if you grovel in a sufficiently entertaining fashion. The ticker for the new FloatingReset, if it is issued, will be NPI.PR.D.

NPI.PR.C is a FixedReset, 5.00%+346, that commenced trading 2012-5-24 after being announced 2012-5-14. It 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., NPI.PR.C and the FloatingReset, NPI.PR.D, 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_171208
Click for Big

The market appears to have a distaste at the moment for floating rate product; most of the implied rates until the next interconversion are lower than the current 3-month bill rate and the averages for investment-grade and junk issues are both well below current market rates, at +0.47% and +0.51%, 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 NPI.PR.C FixedReset, we may construct the following table showing consistent prices for its maybe-soon-to-be-issued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:

Estimate of FloatingReset NPI.PR.D (received in exchange for NPI.PR.C) Trading Price In Current Conditions
  Assumed FloatingReset
Price if Implied Bill
is equal to
FixedReset Bid Price Spread +1.00% +0.50% 0.00%
NPI.PR.C 24.35 346bp 23.73 23.23 22.73

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 NPI.PR.C continue to hold the issue and not to convert. I will note that, given the apparent cheapness of the FloatingResets, it may be a good trade to swap the FixedReset for the FloatingReset in the market once both elements of each pair are trading and you can – presumably, according to this analysis – do it with a reasonably good take-out in price, rather than doing it through the company on a 1:1 basis. But that, of course, will depend on the prices at that time and your forecast for the path of policy rates over the next five years. There are no guarantees – my recommendation is based on the assumption that current market conditions with respect to the pairs will continue until the FloatingResets commence trading and that the relative pricing of the new pair will reflect these conditions.

IFC.PR.A : Convert or Hold?

Friday, December 8th, 2017

It will be recalled that IFC.PR.A will reset to 3.396% (paid on par) effective December 31.

Holders of IFC.PR.A have the option to convert to FloatingResets, which will pay 3-month bills plus 172bp on the par value of $25.00, reset quarterly. The deadline for notifying the company of the intent to convert is 5:00 p.m. (Toronto time) on Friday, December 15, 2017; but note that this is a company deadline and that brokers will generally set their deadlines a day or two in advance, so there’s not much time to lose if you’re planning to convert! However, if you miss the brokerage deadline they’ll probably do it on a ‘best efforts’ basis if you grovel in a sufficiently entertaining fashion. The ticker for the new FloatingReset, if it is issued, has not yet been disclosed.

IFC.PR.A is a FixedReset, 4.20%+172, that commenced trading 2011-7-12 after being announced 2011-6-22. The issue is tracked by HIMIPref™ and has been assigned to the FixedReset subindex.

As this issue is not NVCC compliant and it is an insurance issue, it is analyzed as having a Deemed Retraction. Note that I am less certain with respect to this decision than I am with life insurers – it is by no means assured that property and casualty insurers will be treated the same as life insurers once all the regulatory dust settles.

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., IFC.PR.A 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_171208
Click for Big

The market appears to have a distaste at the moment for floating rate product; most of the implied rates until the next interconversion are lower than the current 3-month bill rate and the averages for investment-grade and junk issues are both well below current market rates, at +0.47% and +0.51%, 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 IFC.PR.A FixedReset, we may construct the following table showing consistent prices for its maybe-soon-to-be-issued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:

Estimate of FloatingReset (received in exchange for VNR.PR.A) Trading Price In Current Conditions
  Assumed FloatingReset
Price if Implied Bill
is equal to
FixedReset Bid Price Spread +1.00% +0.50% 0.00%
IFC.PR.A 19.61 172bp 18.91 18.39 17.87

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 IFC.PR.A continue to hold the issue and not to convert. I will note that, given the apparent cheapness of the FloatingResets, it may be a good trade to swap the FixedReset for the FloatingReset in the market once both elements of each pair are trading and you can – presumably, according to this analysis – do it with a reasonably good take-out in price, rather than doing it through the company on a 1:1 basis. But that, of course, will depend on the prices at that time and your forecast for the path of policy rates over the next five years. There are no guarantees – my recommendation is based on the assumption that current market conditions with respect to the pairs will continue until the FloatingResets commence trading and that the relative pricing of the new pair will reflect these conditions.

BPO.PR.I Weak on Poor Volume

Friday, December 8th, 2017

Brookfield Office Properties Inc. has announced:

the completion of its previously announced Preferred Shares, Series II issue. The offering was underwritten by a syndicate of underwriters led by Scotiabank, CIBC Capital Markets, RBC Capital Markets and TD Securities Inc. On November 29, 2017, the syndicate agreed to purchase 10,000,000 Preferred Shares, Series II at C$25.00 per share.

The Preferred Shares, Series II will yield 4.85% annually for the initial period ending December 31, 2022. The net proceeds of the issue will be used by Brookfield Office Properties for general corporate purposes.

The Preferred Shares, Series II will commence trading today on the Toronto Stock Exchange under the ticker symbol BPO.PR.I.

BPO.PR.I is a FixedReset, 4.85%+323M485, announced 2017-11-29. The issue will be tracked by HIMIPref™ but has been relegated to the Scraps subindex on credit concerns.

The issue traded 398,681 shares today in a range of 24.40-70 before closing at 24.55-65. Vital statistics are:

BPO.PR.I FixedReset YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-12-07
Maturity Price : 23.00
Evaluated at bid price : 24.55
Bid-YTW : 4.95 %

This issue looks extraordinarily expensive to me! According to Implied Volatility analysis:

impvol_bpo_171207_all
Click for Big

With the parameters shown, the theoretical value of the new issue is a mere 22.56, down over fifty cents from announcement day. Critics will be quick to point out that in this calculation there is zero value assigned to the minimum rate guarantee … but I’d say that’s about right!

However, when the graph is examined more closely, it does look as if the Floor issues are on a different line with a steeper slope than the non-Floor issues. So let’s try disaggregating the data again:

impvol_bpo_171207_nofloor
Click for Big
impvol_bpo_171207_floor
Click for Big

It’s an interesting idea that bears watching in the future. The Implied Volatility of the “Floor” series is extremely high, indicating that the Black-Scholes assumptions do not hold, which I usually take to mean implies a strong belief in the directionality of future prices, e.g., that all issues will be called and hence are all expected to gravitate towards par. Regretably, all extant ‘floor’ issues (BPO.PR.C, BPO.PR.E, BPO.PR.G) have relatively high spreads (518, 396 and 374bp, respectively) and are trading above or only slightly below par, which may be contaminating the data.

PPL.PF.A Firm on Good Volume

Friday, December 8th, 2017

Pembina Pipeline Corporation has announced:

that it has closed its previously announced public offering of cumulative redeemable minimum rate reset class A preferred shares, Series 21 (the “Series 21 Preferred Shares”) for aggregate gross proceeds of $400 million (the “Offering”).

The Offering was announced on November 28, 2017 when Pembina entered into an agreement with a syndicate of underwriters co-led by RBC Capital Markets, CIBC World Markets and Scotiabank. A total of 16,000,000 Series 21 Preferred Shares, which includes 4,000,000 Series 21 Preferred Shares issued pursuant to the exercise of the underwriters’ option, were sold under the Offering.

The Company intends to use the net proceeds from the Offering to reduce indebtedness of the Company under its credit facilities. The indebtedness of the Company under the credit facilities was incurred in the normal course of business to fund the Company’s capital program, and to fund a portion of the cash consideration payable to former common shareholders of Veresen Inc. (“Veresen”) pursuant to the plan of arrangement with Veresen which closed on October 2, 2017.

The Series 21 Preferred Shares will begin trading on the Toronto Stock Exchange today under the symbol [redacted].

Dividends on the Series 21 Preferred Shares are expected to be $1.225 per share annually, payable quarterly on the 1st day of March, June, September and December, as and when declared by the Board of Directors of Pembina, for the initial fixed rate period to but excluding March 1, 2023. The first dividend, if declared, will be payable March 1, 2018, in the amount of $0.2819 per share.

I have redacted the ticker symbol indicated in the press release because it is inaccurate and would otherwise lead to alarms, confusion and mystifying search results for Assiduous Readers. I must admit, I haven’t seen that kind of error before!

PPL.PF.A is a FixedReset 4.90%+326M490 announced 2017-11-28. It will be tracked by HIMIPref™, but has been relegated to the Scraps subindex on credit concerns.

The issue traded 1,402,627 shares today in a range of 24.85-02 before closing at 24.99-00. Vital statistics are:

PPL.PF.A FixedReset YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-12-07
Maturity Price : 23.14
Evaluated at bid price : 24.99
Bid-YTW : 4.88 %

It looks expensive to me! According to Implied Volatility analysis:

impvol_ppl_171207
Click for Big

With the parameters shown, the theoretical value of the new issue is 23.84 – the decline of the market since announcement date has really hurt the valuation of this issue; fair value is now more than fifty cents less than it was then. Critics will be quick to point out that in this calculation there is zero value assigned to the minimum rate guarantee … but I’d say that’s about right!

These straw-men critics I have created will also have to explain why the two other Floor-Rate FixedResets (PPL.PR.K and PPL.PR.M) are cheap according to this analysis. It can be done – just assume that spreads on those two issues are so large that the floor doesn’t matter any more – but one way or another, it’s another example of the asymmetry of returns on issues priced near par working against the investor.

Note also that the Implied Volatility on this series is extraordinarily high, which leads to an expectation that the curve will flatten in the future. As PPL.PF.A is nearer the ‘low spread’ end of the curve than it is to the ‘high spread’ end, such a flattening should lead to underperformance by the issue.