Archive for the ‘Issue Comments’ Category

AIM Downgraded To P-4(high), Watch Negative By S&P; Review-Negative by DBRS

Friday, May 12th, 2017

S&P has announced:

  • •We are lowering our long-term corporate credit rating on Montreal-based Aimia Inc. to ‘BB+’ from ‘BBB-‘, reflecting our view of the risks to the company’s business and cash flow prospects following Air Canada’s notice to not renew its contract with Aimia when the current agreement expires June 30, 2020.
  • •We are also lowering our global scale rating to ‘B+’ from ‘BB’ and our Canada scale rating to ‘P-4(High)’ from ‘P-3’ on the company’s preferred shares.
  • •The ‘BBB-‘ issue-level rating on the company’s C$450 million senior secured debt outstanding is unchanged, reflecting our expectation of substantial recovery (70%-90%, rounded estimate 80%) in a default scenario. As such, we are assigning a ‘2’ recovery rating to the secured notes.
  • •At the same time, we are placing all our ratings on Aimia on CreditWatch with negative implications.
  • •The CreditWatch listing reflects the potential that we could lower the ratings on the company by one or more notches. We expect to resolve the CreditWatch placement within the next couple of months following our review of Aimia’s plans.


The Aeroplan program drives a significant portion of Aimia’s EBITDA and cash flow, and we believe the announcement increases the risk that gross billings will decline and redemptions increase through 2020. We believe this structural change could materially weaken the company’s medium-term cash flow and growth, and raise significant uncertainty about the company’s long-term outlook for sustained growth and profitability, factors that do not support an investment-grade rating, in our opinion.

The CreditWatch listing reflects the risk that we could lower our ratings on Aimia by one or more notches. We expect to resolve the CreditWatch placement within the next couple of months following our review of Aimia’s plans to manage potentially rising reward redemptions; mitigate potentially lower attractiveness of the Aeroplan program to its members; and, more important, demonstrate sufficient liquidity, financial flexibility, and capital market access to support Aimia’s debt obligations and address investments required to transition the business.

On May 11, DBRS announced that it:

has today placed Aimia Inc.’s (Aimia or the Company) Issuer Rating and Senior Secured Debt rating of BBB (low) as well as its Preferred Shares rating of Pfd-3 (low) Under Review with Negative Implications. The action follows the Company’s announcement that it has received a notice of contract non-renewal from Air Canada after the agreement’s expiration in June 2020. DBRS notes that the existing agreement and Air Canada’s purchasing commitments to Aimia remain in place until June 2020.

The Under Review with Negative Implications status reflects Air Canada’s importance to Aimia as a coalition partner and DBRS’s previous expectation that the agreement with Air Canada would be renewed, albeit on less favourable terms to Aimia. Furthermore, consumers’ reaction to this announcement, including the potential for lower engagement in the Aeroplan program and accelerated reward redemption, creates additional uncertainty going forward regarding the Company’s revenue, adjusted EBITDA and free cash flow profile (particularly with a lack of clarity on future dividend payments). Consequently, there is an increased risk in the ability to repay and/or refinance the $250 million of Senior Secured Notes due May 2019 as well as amounts outstanding on the revolving credit facility, which matures in April 2020. As such, DBRS believes that Aimia’s credit risk profile may no longer be consistent with an investment-grade rating, even if current credit metrics are maintained.

While a negative rating action is likely required, the degree of such an action will follow DBRS’s ongoing review with management, which will focus on (1) the potential impact on the business risk profile following the loss of Air Canada as a coalition partner; (2) the Company’s longer-term business strategy, including plans to maintain customer engagement and find a new airline partner(s), (3) the Company’s liquidity, including refinancing of upcoming 2019 and 2020 maturities; and (4) Aimia’s financial management intentions and dividend policy going forward. DBRS notes that in today’s release Aimia stated that going forward dividends would be linked to free cash flow. DBRS will seek greater insight on these issues to resolve the Under Review status of the ratings as soon as possible.

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

ENB.PR.B To Reset At 3.415%

Friday, May 12th, 2017

Due to total lack of communication from Enbridge, it was necessary for me to write an eMail:

Subject: ENB.PR.B

I understand that this issue will reset on June 1, 2017.

What will be the dividend reset rate? Where may I find a copy of the news release?

Sincerely,

Enbridge’s Investor Relations department replied (emphasis added):

Thank you for your email and interest in Enbridge.

We are rolling both the Series B (ENB.PR.B) and Series J (ENB.PR.U) preferred shares.

The deadline for the registered shareholder, CDS & Co., to provide notice of exercise of the right to convert Series B Preference Shares into Series C Preference Shares is 5:00 p.m. (Toronto time) on May 17, 2017.
The annual dividend rate applicable to the Series B (ENB.PR.B) Preference Shares for the five-year period from and including June 1, 2017 to but excluding June 1, 2022 will be 3.415%, being equal to the 5-year Government of Canada bond yield determined as of May 2, 2017, plus 2.40%, as determined in accordance with the terms of the Series B Preference Shares.

The dividend rate applicable to the Series C Preference Shares for the 3-month floating rate period from and including June 1, 2017 to but excluding September 1, 2017 will be 0.744% (2.950% on an annualized basis), being equal to the sum of the three month Government of Canada treasury bills, plus 2.40%, on an actual/366 day count basis, as determined in accordance with the terms of the Series C Preference Shares (the “Floating Quarterly Dividend Rate”). The Floating Quarterly Dividend Rate will be reset every quarter and registered holders will be provided with notice thereof.

The deadline for the registered shareholder, CDS & Co., to provide notice of exercise of the right to convert Series J Preference Shares into Series K Preference Shares is 5:00 p.m. (Toronto time) on May 17, 2017.

The annual dividend rate applicable to the Series J Preference Shares (ENB.PR.U) for the five-year period from and including June 1, 2017 to but excluding June 1, 2022 will be 4.887%, being equal to the 5-year United States treasury bond yield determined as of May 2, 2017, plus 3.05%, as determined in accordance with the terms of the Series J Preference Shares.

The dividend rate applicable to the Series K Preference Shares for the 3-month floating rate period from and including June 1, 2017 to but excluding September 1, 2017 will be 0.978% (3.880% on an annualized basis), being equal to the sum of the three month United States Government treasury bills, plus 3.05%, on an actual/366 day count basis, as determined in accordance with the terms of the Series K Preference Shares (the “Floating Quarterly Dividend Rate”). The Floating Quarterly Dividend Rate will be reset every quarter and registered holders will be provided with notice thereof.

On May 4th, 2017 a notification was sent out by the CDS (Clearing and Depository Services Inc.) to brokerage firms for both the Series B (ENB.PR.B) and Series J (ENB.PR.U) via email, bulletin link or swift notification which outlined the reset terms of these preferred series.

Under the terms of the prospectus, we fulfilled our obligation to notify CDS at which point the information is distributed to participants. The CDS notification included the fixed and floating reset rates.

Kind Regards,

Note that the deadline to advise the company if you wish to convert holdings of ENB.PR.B is 5:00 p.m. (Toronto time) on May 17, 2017..

I will have post a recommendation regarding such a conversion on Friday May 12.

I consider it an absolute disgrace that Enbridge holds its preferred shareholders in such disdain that it refuses to issue a press release to advise them of the rate and deadlines. Virtually every other company with FixedResets outstanding does so as a matter of course.

Moody’s Downgrades Canadian Banks

Wednesday, May 10th, 2017

Moody’s Investors Service has announced that it:

has today downgraded the Baseline Credit Assessments (BCAs), the long-term ratings and the Counterparty Risk Assessments (CRAs) of six Canadian banks and their affiliates, reflecting Moody’s expectation of a more challenging operating environment for banks in Canada for the remainder of 2017 and beyond, that could lead to a deterioration in the banks’ asset quality, and increase their sensitivity to external shocks.

The banks affected are: Toronto-Dominion Bank, Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Canada, National Bank of Canada, and Royal Bank of Canada.

The BCAs, long-term debt and deposit ratings and CRAs of the banks and their affiliates were downgraded by 1 notch, excepting only Toronto-Dominion Bank’s CRA, which was affirmed. The short term Prime-1 ratings of the Canadian banks were affirmed. All relevant ratings for these banks continue to have negative outlooks, reflecting the expected introduction of an operational resolution regime in Canada.

“Today’s downgrade of the Canadian banks reflects our ongoing concerns that expanding levels of private-sector debt could weaken asset quality in the future. Continued growth in Canadian consumer debt and elevated housing prices leaves consumers, and Canadian banks, more vulnerable to downside risks facing the Canadian economy than in the past.” said David Beattie, a Moody’s Senior Vice President.

Moody’s considers that weakening credit conditions in Canada — including an increase in private-sector debt to GDP to 185.0% as of the end of 2016, up from 179.3% for 2015 — present increasing risk to Canadian banks’ asset quality and profitability. This increase has been led by household debt, which is now at a record high of 167.3% of disposable income (as at Q4 2016) and accompanying house price appreciation. Despite macro-prudential measures put into place by Canadian policymakers in recent years — which have had some success in moderating the rate of housing price growth — house prices and consumer debt levels remain historically high. Business credit, the other component of private-sector debt, has also grown rapidly, at a 6.2% CAGR over the past 3 years. We do note that the Canadian banks maintain strong buffers in terms of capital and liquidity. However, the resilience of household balance sheets, and consequently bank portfolios, to a serious economic downturn has not been tested at these levels of private sector indebtedness.

Specifically:

Toronto-Dominion Bank (TD, Aa2/Aa2 negative, a1); TD’s strong ratings are attributable to its very strong domestic retail franchise — which generates stable and recurring profitability and its business mix. This strength is due to leading market share positions in many personal & commercial financial services products, where TD typically has market shares in the high teens and holds first or second positions.

TD is the most retail oriented of its Canadian peers, with approximately 90% of earnings coming from retail (combined Canadian personal & commercial, wealth management and US personal & commercial, excluding corporate). While CM income has increased over recent quarters and capital allocated to the wholesale business is rising, we expect that reliance on this inherently volatile source of income will remain relatively modest.

Through acquisition and organic growth, TD has increased its exposure to unsecured Canadian consumer credit risk in recent years. In our view, however, the strength and stability of the earnings from TD’s Canadian personal and commercial banking franchise remain the primary credit strength supporting its ratings. The ratings of TD’s US affiliates benefit from support from the parent, and as such are also affected by this action.

TD’s preferred shares have been downgraded to Baa1(hyb). Issues affected are: TD.PF.A, TD.PF.C, TD.PF.D, TD.PF.E, TD.PF.F, TD.PF.G, TD.PF.H, TD.PR.S, TD.PR.T, TD.PR.Y, TD.PR.Z

BMO:

Bank of Montreal (BMO A1/A1 negative, a3); BMO is one of the six major banks in Canada which benefit from the protection of significant barriers to entry and the stability of a prudent regulatory environment. Although its Canadian retail market shares are towards the lower end of the Canadian peer group, BMO has double digit market shares across all significant retail financial services and products, providing scale and recurring earnings power in its home market. In our view, however, the strength and stability of the earnings from BMO’s Canadian personal and commercial (P&C) banking franchise remain the primary credit strength supporting its ratings. BMO has a strong and improving US regional banking presence through BMO Harris, which adds important diversification away from reliance on Canadian P&C earnings. However, BMO does not enjoy the same franchise strength and pricing power in the more competitive US market that it does in Canada. The ratings of BMO Harris and affiliates benefit from support from the parent, and as such are also affected by this action.

BMO’s preferred shares have been downgraded to Baa3(hyb). Issues affected are: BMO.PR.A, BMO.PR.B, BMO.PR.C, BMO.PR.K, BMO.PR.L, BMO.PR.M, BMO.PR.Q, BMO.PR.R, BMO.PR.S, BMO.PR.T, BMO.PR.W, BMO.PR.Y, BMO.PR.Z.

BNS:

Bank of Nova Scotia (BNS A1/A1 negative, a3); BNS is the most internationally active of the Canadian banks with approximately half of its earnings generated outside of Canada. BNS has taken significant measures to increase its profitability that signal a fundamental shift away from the bank’s traditionally low risk appetite. While the bank’s strategic actions are intended to enhance current profitability — in 2016, BNS reported domestic net interest margin lower than the six largest Canadian banks’ average- in our view, they increase the prospect of future incremental credit losses.

While BNS had strategically grown its credit card and auto finance portfolios – both of which are particularly prone to deterioration during an economic downturn and exhibit higher defaults and loss severities than mortgage portfolios — in recent years, growth in 2016 was flat. In addition, the bank has made a series of acquisitions away from its strong domestic franchise towards higher-growth but less stable international markets. BNS has aspirations to continue to grow its international earnings, which in Moody’s view adds to bondholder risk.

BNS’ preferreds have been downgraded to Baa3(hyb). Issues affected are: BNS.PR.A, BNS.PR.B, BNS.PR.C, BNS.PR.D, BNS.PR.E, BNS.PR.F, BNS.PR.G, BNS.PR.H, BNS.PR.O, BNS.PR.P, BNS.PR.Q, BNS.PR.R, BNS.PR.Y and BNS.PR.Z.

CM:

Canadian Imperial Bank of Commerce (CIBC A1/A1 negative, a3); CIBC is the most reliant of the Canadian banks on domestic P&C earnings, which generate approximately 65% of total earnings, excluding Corporate. In our view, however, the strength and stability of the earnings from CIBC’s Canadian personal and commercial banking franchise remain the primary credit strength supporting its ratings. CIBC has the second lowest proportionate exposure to unsecured and non-real estate secured consumer debt as a percentage of domestic consumer assets (roughly 11.5%), reflective of its very large book of insured mortgages.

CIBC is one of the six major banks in Canada that benefit from the protection of significant barriers to entry and the stability of a prudent regulatory environment. Although its Canadian retail market shares are mid-range relative to its Canadian peers, CIBC has solid double digit market shares across all significant retail financial services and products, providing scale and recurring earnings.

CM’s preferreds have been downgraded to Baa3(hyb). Affected issues are CM.PR.O, CM.PR.P and CM.PR.Q.

NA:

National Bank of Canada (NBC A1/A1 negative, baa1); NBC’s dominant position in commercial banking and strong second place share of market in retail banking in Québec are the primary credit strengths supporting its high ratings. The stability of the recurring earnings power of NBC’s regional retail franchise is, in Moody’s view, highly unlikely to be challenged. That being said, NBC’s asset base (CAD234 billion as of Q1 2017) and national deposit share (roughly 4%) are small relative to the other large Canadian banks whose branch systems are more national in scale. In our view, however, the strength and stability of the earnings from NBC’s Canadian personal and commercial banking franchise remain the primary credit strength supporting its ratings.

While each of the major Canadian banks enjoys the benefits of superior pricing power due to sustainable large market shares in many significant retail and commercial products and services, this is true for NBC only in the context of its regional market, the province of Québec. As such, the challenges in geographic diversification and earnings stability and the Québec credit concentrations offset partially the strength in local market share and sustainability. NBC is the Canadian bank most reliant upon inherently less stable capital markets earnings, which generated 38% of total earnings, excluding Corporate for 2016 (38% for 2015.)

NA’s preferreds have been downgraded to Ba1(hyb). Affected issues are NA.PR.A, NA.PR.Q, NA.PR.S, NA.PR.W and NA.PR.X

RY:

Royal Bank of Canada (RBC A1/A1 negative, a3 ); RBC’s ratings reflect its profile as a strong and diversified universal bank with sustainable leading market shares across many retail products and services in its home market. The stable earnings from RBC’s domestic Personal and Commercial franchise are a key credit strength. RBC has had very low earnings volatility, supported by the stabilizing effect of the recurring profitability of RBC’s solid domestic retail banking franchise.

However, over the past four years RBC has demonstrated rapid growth in its Capital Markets business, led by growth in its US corporate loan book and the repo and securities finance business. We believe that RBC’s US-focused Capital Markets growth strategy increases its exposure to risks that could more rapidly erode its creditworthiness in volatile or adverse market conditions, and is therefore negative for the credit. To date, this risk has been well managed and its performance has been very stable. Maintaining this performance through more volatile markets will be key to RBC’s longer term risk management track record. We do not expect that this business will continue on this growth trajectory, and, in fact, that capital committed to the Capital Markets business will be more constrained.

Management plans to substantially grow the earnings of its recently acquired, California-based private and commercial bank, City National Bank, (deposits Aa3 stable, a2) both organically and through targeted acquisitions. Growth in the City National business presents less credit risk than continued growth in the Capital Markets area, in our view.

RY’s preferreds have been downgraded to Baa3(hyb). Affected issues are RY.PR.A, RY.PR.B, RY.PR.C, RY.PR.D, RY.PR.E, RY.PR.F, RY.PR.G, RY.PR.H, RY.PR.I, RY.PR.J, RY.PR.K, RY.PR.L, RY.PR.M, RY.PR.N, RY.PR.O, RY.PR.P, RY.PR.Q, RY.PR.R, RY.PR.W and RY.PR.Z.

EFN.PR.I Firm On Good Volume

Friday, May 5th, 2017

Element Fleet Management Corp. has announced:

that it has closed the previously announced offering of 6,000,000 5.75% Cumulative 5-Year Minimum Rate Reset Preferred Shares, Series I, including 2,000,000 shares issued pursuant to the underwriters’ option, which was exercised in full on April 28, 2017 (the “Series I Preferred Shares” or the “Offering”) at a price of $25.00 per share for aggregate gross proceeds of $150,000,000. The Offering was conducted by a syndicate of underwriters led by BMO Capital Markets, CIBC Capital Markets, National Bank Financial, RBC Capital Markets, TD Securities, Cormark Securities, Desjardins Securities, GMP Securities, HSBC Securities (Canada) and Raymond James.

The net proceeds will be used to fund the growth of Element’s business and for general corporate purposes.

The Series I Preferred Shares will commence trading today on the Toronto Stock Exchange under the symbol “EFN.PR.I”.

EFN.PR.I is a FixedReset, 5.75%+464M575, announced April 26. It will be tracked by HIMIPref™ but is relegated to the Scraps index on credit concerns.

The issue traded 534,126 shares today in a range of 24.80-02 before closing at 24.98-00. Vital statistics are:

EFN.PR.I FixedReset YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-05-05
Maturity Price : 23.14
Evaluated at bid price : 24.98
Bid-YTW : 5.70 %

The issue is attractively priced relative to its peer:

impvol_efn_170505
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An interesting feature of the above FixedReset Volatility Analysis is that the minimum rate guarantee on EFN.PR.I is assumed to be effective. This, together with the small difference in reset spreads with some of the extant issues, results in EFN.PR.I having a lower spread but a higher expected dividend on reset, resulting in a higher Current Yield than would otherwise be the case, resulting in a jog in the usual straight line. I will have to do some thinking about the implications of this for the analysis!

BPO.PR.U To Be Redeemed

Friday, May 5th, 2017

Brookfield Office Properties Inc. has announced:

that it intends to:
  • •Redeem all 4,123,863 of its outstanding Class AAA Preference Shares, Series G (TSX: BPO.PR.U) (the “Series G Shares”), all of which are beneficially held by CDS & Co., as nominee of CDS Clearing and Depositary Services Inc., for cash on June 5, 2017. The redemption price for each such share will be US$25.00 plus accrued and unpaid dividends thereon (which as of June 5, 2017 will be US$0.2337), representing a total redemption price of US$25.2337.

Notices of Redemption for both series have been sent to CDS & Co. Payment of the redemption price will be made on or after June 5, 2017 through the facilities of CDS & Co. to all beneficial holders of the Series G Shares and Series J Shares.

BPO.PR.U was partially exchanged for BPS.PR.U following a reorganization in 2014.

BPO.PR.U has not been tracked by HIMIPref™ since it is a US-pay issue.

BPO.PR.J To Be Redeemed

Friday, May 5th, 2017

Brookfield Office Properties Inc. has announced:

that it intends to:
  • •Redeem all 2,804,795 of its outstanding Class AAA Preference Shares, Series J (TSX: BPO.PR.J) (the “Series J Shares”), all of which are beneficially held by CDS & Co., as nominee of CDS Clearing and Depositary Services Inc., for cash on June 5, 2017. The redemption price for each such share will be C$25.00 plus accrued and unpaid dividends thereon (which as of June 5, 2017 will be C$0.22260), representing a total redemption price of C$25.22260.

Notices of Redemption for both series have been sent to CDS & Co. Payment of the redemption price will be made on or after June 5, 2017 through the facilities of CDS & Co. to all beneficial holders of the Series G Shares and Series J Shares.

BPO.PR.J had a recent partial call for redemption and in 2014 was partially exchanged for BPS.PR.B pursuant to a reorganization.

BPO.PR.J is a 5.00% Operating Retractible issued 2004-4-30 which became redeemable at par 2014-6-30 and retractible for shares 2014-12-31. It has been relegated to the Scraps index since issue.

BPO.PR.G Firm On Muted Volume

Thursday, May 4th, 2017

Brookfield Office Properties Inc. has announced:

the completion of its previously announced Preferred Shares, Series GG issue. The offering was underwritten by a syndicate of underwriters led by TD Securities Inc., CIBC Capital Markets, RBC Capital Markets and Scotiabank. On April 26, 2017, the syndicate agreed to purchase 10,000,000 Preferred Shares, Series GG at C$25.00 per share and has since exercised its option to purchase an additional 1,000,000 shares at the same offering price.

The Preferred Shares, Series GG will yield 4.85% annually for the initial period ending June 30, 2022. The net proceeds of the issue will be used by Brookfield Office Properties for general corporate purposes which may include the redemption of existing preferred shares.

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

BPO.PR.G is a FixedReset, 4.85%+374M485, announced 2017-04-26. It will be tracked by HIMIPref™ but relegated to the Scraps index on credit concerns.

DBRS has assigned a Pfd-3 rating to the issue:

DBRS Limited (DBRS) has today assigned a rating of Pfd-3 with a Stable trend to the $275 million Class AAA Preference Shares, Series GG (Series GG Preferred Shares) issued by Brookfield Office Properties Inc. (Brookfield).

The Series GG Preferred Shares rank on parity with Brookfield’s existing Class AAA preference shares, junior to Brookfield’s Class A and Class AA preference shares, and in priority to the Company’s Class B preference shares and common shares.

DBRS understands that the net proceeds from the sale of the Series GG Preferred Shares will be used to redeem Brookfield’s Class AAA Preference Shares, Series G and Class AAA Preference Shares, Series J and to repay part of the amounts drawn on the Company’s corporate revolver.

The redemption of BPO.PR.U and of BPO.PR.J noted by DBRS have been reported on PrefBlog.

The issue traded 380,392 shares today in a range of 24.75-95 before closing at 24.92-93. Vital statistics are:

BPO.PR.G FixedReset YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-05-04
Maturity Price : 23.12
Evaluated at bid price : 24.92
Bid-YTW : 4.78 %

As previously discussed, I think this issue is expensive, as illustrated by the Implied Volatility analysis:

impvol_bpo_170504
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According to me, a price of 23.77 would be appropriate for this issue, given the levels of its peers. But, as also discussed, this depends on my assignment of a zero value to the minimum reset rate guarantee, which is not a universally popular opinion.

CU.PR.C To Reset At 3.40%

Thursday, May 4th, 2017

Canadian Utilities Limited has announced:

that it has notified the registered shareholder of its Cumulative Redeemable Second Preferred Shares Series Y (“Series Y Preferred Shares”) of a conversion privilege and applicable dividend rates. As a result, subject to certain conditions, the holders of Series Y Preferred Shares will have the right to choose one of the following options with regard to their shares:
1.To retain any or all of their Series Y Preferred Shares and continue to receive a fixed rate quarterly dividend; or
2.To convert, on a one-for-one basis, any or all of their Series Y Preferred Shares into Cumulative Redeemable Second Preferred Shares Series Z (“Series Z Preferred Shares”) of Canadian Utilities Limited and receive a floating rate quarterly dividend.

Effective June 1, 2017, the annual dividend rate for the Series Y Preferred Shares is set at 3.40% for the five-year period from and including June 1, 2017 to but excluding June 1, 2022 and the dividend rate for the Series Z Preferred Shares is set at an annual rate of 2.95% for the three-month period commencing June 1, 2017 to but excluding September 1, 2017. The dividend rate for the Series Z Preferred Shares will be reset each quarter. Both rates were calculated according to the terms described in the prospectus supplement of Canadian Utilities Limited dated September 15, 2011.

Beneficial owners of Series Y Preferred Shares 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 meet the deadline to exercise such right, which is 3 p.m. (Calgary time) / 5 p.m. (Toronto time) on May 17, 2017. Any notices received after this deadline will not be valid. As such, 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.

The foregoing conversions are subject to the conditions that: (i) if Canadian Utilities Limited determines that there would be less than 2,000,000 Series Y Preferred Shares outstanding on June 1, 2017, then all remaining Series Y Preferred Shares will automatically be converted into Series Z Preferred Shares on June 1, 2017, and (ii) alternatively, if Canadian Utilities Limited determines that there would be less than 2,000,000 Series Z Preferred Shares outstanding on June 1, 2017 after giving effect to conversion notices received, no Series Y Preferred Shares will be converted into Series Z Preferred Shares. If either of these scenarios occurs, Canadian Utilities Limited will issue a news release to that effect on or before May 24, 2017.

Holders of the Series Y Preferred Shares and the Series Z Preferred Shares, as applicable, will have the opportunity to convert their shares again on June 1, 2022, and every five years thereafter as long as the shares remain outstanding.

For more information on the terms of, and risks associated with an investment in, the Series Y Preferred Shares and the Series Z Preferred Shares, please see Canadian Utilities Limited’s prospectus supplement dated September 15, 2011, which can be found under Canadian Utilities Limited’s profile on SEDAR at www.sedar.com.

With approximately 5,400 employees and assets of $19 billion, Canadian Utilities Limited is an ATCO company. ATCO is a diversified global corporation delivering service excellence and innovative business solutions in Structures & Logistics (workforce housing, innovative modular facilities, construction, site support services, and logistics and operations management); Electricity (electricity generation, transmission, and distribution); Pipelines & Liquids (natural gas transmission, distribution and infrastructure development, energy storage, and industrial water solutions); and Retail Energy (electricity and natural gas retail sales). More information can be found at www.canadianutilities.com.

CU.PR.C is a FixedReset 4.00%+240 that commenced trading 2011-9-21 after being announced 2011-9-13. It has been a member of the FixedReset subindex since inception.

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.T and the FloatingReset BAM.PR.W 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_170503
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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 +0.02% and -0.44%, 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 CU.PR.C FixedReset, we may construct the following table showing consistent prices for its soon-to-be-issued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:

Estimate of FloatingReset CU.PR.? (received in exchange for CU.PR.C) Trading Price In Current Conditions
  Assumed FloatingReset
Price if Implied Bill
is equal to
FixedReset Bid Price Spread 0.50% 0.00% -0.50%
CU.PR.C 22.17 231bp 21.64 21.11 20.58

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 CU.PR.C continue to hold the issue and not to convert, but I will wait until it’s closer to the May 17 notification deadline before making a final pronouncement. 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 two new pairs will reflect these conditions.

Thanks to Assiduous Reader KC for ensuring I was aware of this!

REI.PR.C To Be Redeemed

Thursday, May 4th, 2017

RioCan Real Estate Investment Trust has announced:

that it will exercise its right to redeem all of its 5,980,000 outstanding Cumulative Rate Reset Preferred Trust Units, Series C (the “Series C Units”) on June 30, 2017 at the cash redemption price of $25.00 per Series C Unit, for total redemption proceeds of $149.5 million.

The regular quarterly distribution of $0.29375 per Series C Unit for the quarter ending June 30, 2017 (the “Final Distribution”) will be payable to holders of the Series C Units of record on June 30, 2017. Payment of the redemption proceeds and the Final Distribution will be made to CDS & Co., as sole registered holder, on or prior to June 30, 2017. Payment to beneficial holders will be made through the facilities of CDS & Co. on or about July 4, 2017 in respect of the redemption proceeds and July 6, 2017 in respect of the Final Distribution, respectively.

From and after June 30, 2017, the Series C Units will cease to be entitled to distributions and the only remaining rights of holders of such units will be to receive payment of the cash redemption price.

Beneficial holders who are not directly the registered holder of Series C Units should contact the financial institution, broker or other intermediary through which they hold these units to confirm how they will receive their redemption proceeds. Instructions with respect to receipt of the redemption amount will be set out in the redemption notice to be mailed to the registered holder of the Series C Units shortly. Inquiries should be directed to our Registrar and Transfer Agent, CST Trust Company, at 1-800-387-0825 (or in Toronto 416-682-3860).

REI.PR.C is an interest-bearing FixedReset, 4.70%+318, that commenced trading 2011-11-30 after being announced 2011-11-17. It has been a member of the Scraps subindex throughout its existence due to credit concerns.

The spread is very low for a redeemed issue, particularly since it is paying interest rather than dividends, but the company’s intent to redeem has been clear since the shocking redemption of REI.PR.A, which boosted the price of that share by 50%+ on announcement day. While the CFO made a case that the funding was not cost-effective in current conditions (even when having to redeem at par) no case was ever made as to why a tender offering and Normal Course Issuer Bid was ever pursued.

PPL Offers to Assume VSN Preferreds on Takeover

Monday, May 1st, 2017

Pembina Pipelines and Veresen have announced:

they have entered into an arrangement agreement to create one of the largest energy infrastructure companies in Canada with a pro-forma enterprise value of approximately $33 billion (the “Transaction”).

Under the terms of the arrangement agreement, Pembina is offering to acquire all the issued and outstanding shares of Veresen by way of a plan of arrangement under the Business Corporations Act (Alberta). The Transaction is valued at approximately $9.7 billion including the assumption of Veresen’s debt (including subsidiary debt) and preferred shares.

Pembina is offering to acquire all of the outstanding Veresen common shares in exchange for either (i) 0.4287 of a common share of Pembina or (ii) $18.65 in cash, subject to pro-ration based on maximum share consideration of approximately 99.5 million Pembina common shares and maximum cash consideration of approximately $1.523 billion. Assuming full pro-ration, each Veresen shareholder would receive $4.8494 in cash and 0.3172 of a common share of Pembina for each Veresen common share.

Furthermore, Veresen will be seeking approval of holders of outstanding Veresen preferred shares to effect the exchange of such shares for Pembina preferred shares with the same terms and conditions as the outstanding Veresen preferred shares. For such exchange to occur at closing of the Transaction, approval of at least 662/3 percent of holders of Veresen’s preferred shares is required, voting as one class, represented in person or by proxy at a special meeting of Veresen preferred shareholders to be called to consider the Transaction. Closing of the Transaction is not conditional on the approval of the holders of Veresen’s preferred shares.

The cash consideration associated with the Transaction will be initially funded through the company’s $2.5 billion unsecured credit facility. Subsequently, Pembina expects to refinance this with a combination of internally generated cash flows and the issuance of Medium Term Notes and preferred shares.

In addition, a special meeting of the holders of preferred shares of Veresen will be called to approve the Transaction. If the holders of Veresen preferred shares, voting together as a single class, approve the Transaction, each preferred share of Veresen would be exchanged, on a one for one basis, for a new preferred share of Pembina having the same terms and conditions as the Veresen preferred shares. Completion of the Transaction is not conditional upon the approval of the Transaction by holders of Veresen’s preferred shares.

If the holders of Veresen’s preferred shares do not approve the Transaction, voting as a single class but separate from common shares, the Veresen preferred shares will remain outstanding following completion of the Transaction.

DBRS immediately gave its blessing to the transaction:

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Unsecured Notes rating of Pembina Pipeline Corporation (Pembina or the Company) at BBB and the Company’s Preferred Shares at Pfd-3. All trends remain Stable. The confirmations follow Pembina’s announcement that it has entered into an agreement to acquire Veresen Inc. (Veresen) for $9.7 billion, including the assumption of Veresen’s debt (the Acquisition or the Transaction). The confirmations reflect DBRS’s expectation that the Acquisition would not have a material impact on the Company’s current credit profile. On March 3, 2017, DBRS confirmed all of Pembina’s ratings with Stable trends reflecting its solid financial performance in 2016 and the continued improvement of its business risk profile. Veresen was rated BBB by DBRS. However, On August 4, 2016, DBRS placed the ratings of Veresen Under Review with Negative Implications pending the completion of the sales of its power generation assets.

With respect to the potential impact of the Acquisition on Pembina’s financial risk profile, DBRS has reviewed Pembina’s financing plan and performed a pro forma analysis and is of the view that the Acquisition would modestly weaken Pembina’s credit metrics in the near term but would not have a material impact over the medium term.

DBRS later added:

DBRS Limited (DBRS) today notes that Veresen Inc. (Veresen or the Company; BBB, Under Review with Negative Implications) and Pembina Pipeline Corporation (Pembina; rated BBB, Stable trend) have announced that they have agreed to combine to create one of the largest energy infrastructure companies in Canada (the Transaction). Under the Transaction, valued at approximately $9.7 billion, including the assumption of Veresen’s debt (including subsidiary debt) and preferred shares, Pembina has offered to acquire all the issued and outstanding shares of Veresen. The Transaction is subject to approval by Veresen’s common shareholders, as well as regulatory approvals, and is expected to close late in the third quarter or early Q4 2017.

DBRS placed Veresen’s ratings Under Review with Negative Implications following the Company’s announcement that it would sell its power generation business. Please refer to the DBRS press releases “DBRS Places Veresen Inc.’s Ratings Under Review with Negative Implications,” dated August 4, 2016, and “DBRS Comments on Veresen’s Sale of Power Business,” dated February 21, 2017. Today’s announcement does not have an immediate impact on the credit profile of Veresen as the Transaction is expected to close later this year. Consequently, DBRS is maintaining the Under Review with Negative Implications status on Veresen’s ratings. DBRS will review the Under Review with Negative Implications status after the sale of Veresen’s remaining power assets has closed in Q2 2017 and as more details become available with respect to the Transaction.

Veresen preferred shares immediately leapt upwards, although early gains did not hold, as illustrated by this chart of the day’s trading in VSN.PR.A:

vsnpra_170501
Click for Big

VSN.PR.E saw very heavy trading (368,192 shares) but simply rose to a modest premium over par and stayed there.

The price movement left the PPL and VSN preferreds trading as equivalents:

impvol_ppl_170501
Click for Big

The results of this Implied Volatility analysis are a little puzzling. The near-par price for an issue with a spread of 427bp (VSN.PR.E) does not seem unreasonable in light of last week’s issuance of BPO FixedReset 4.85%+374M485 and EFN FixedReset 5.75%+464M575, but the Implied Volatility of 39% is ludicrously high; much higher than can be expected even assuming a huge market appetite for low-spread issues (in anticipation of GOC-5 yields). Thus, I would expect the higher-spread issues to outperform the lower spread issues over the next … period. (Predictions are one thing – predictions with a time frame are quite another!).

Affected issues are VSN.PR.A, VSN.PR.C and VSN.PR.E.

Outstanding PPL issues are PPL.PR.A, PPL.PR.C, PPL.PR.E, PPL.PR.G, PPL.PR.I, PPL.PR.K and PPL.PR.M.