Archive for the ‘Issue Comments’ Category

PIC.PR.A To Be Extended

Saturday, October 14th, 2017

Strathbridge Asset Management Inc. has announced (on September 1):

Premium Income Corporation (the “Fund”) is pleased to announce that the term of the Fund will be extended automatically for an additional seven year period beyond November 1, 2017 to November 1, 2024 as provided for in its articles of incorporation. In addition, in connection with the new term, holders of Class A shares will continue to receive ongoing leveraged exposure to a high-quality portfolio consisting principally of common shares of Bank of Montreal, The Bank of Nova Scotia, Canadian Imperial Bank of Commerce, National Bank of Canada and The Toronto-Dominion Bank, as well as attractive quarterly distributions in the amount of $0.20319 ($0.81276 per annum) per class A share. Holders of the preferred shares are expected to continue to benefit from fixed cumulative preferential quarterly distributions in the amount of $0.215625 ($0.8625 per annum) per preferred share representing a yield of 5.75% on the original issue price of $15.00.

In connection with the extension of the term, holders of class A shares and preferred shares have a special retraction right (“Special Retraction Right”) to permit holders of such securities to retract such shares on November 1, 2017 on the terms on which such shares would have been redeemed had the term of the Fund not been extended. In order to exercise the Special Retraction Right, shares must be surrendered for retraction on or prior to 5:00 p.m. (Toronto time) on October 13, 2017. Depending on if more class A shares or preferred shares are retracted under the Special Retraction Right, the Fund will have to redeem preferred shares or consolidate the class A shares on a basis to ensure an equal number of class A shares and preferred shares remain outstanding. Notice of such redemption or consolidation, will be made via press release on or before October 23, 2017.

For further information, please contact Investor Relations at 416.681.3966, toll free at 1.800.725.7172 or visit www.strathbridge.com.

PPL / VSN Ticker Change

Thursday, October 5th, 2017

As previously discussed, ticker changes are required to reflect the assumption of Veresen’s preferreds by Pembina Pipeline. These changes came into effect today.

So the changes are:

VSN to PPL Ticker Conversions
Effective 2017-10-05
Old Ticker Old Description New Description New Ticker
VSN.PR.A Veresen Inc. Cumulative Series ‘A’ Pr Pembina Pipeline Corporation Cl ‘A’ Pr Ser 15 PPL.PR.O
VSN.PR.C Veresen Inc. Cumulative Series ‘C’ Pr Pembina Pipeline Corporation Cl ‘A’ Pr Ser 17 PPL.PR.Q
VSN.PR.E Veresen Inc. Cumulative Series ‘E’ Pr Pembina Pipeline Corporation Cl ‘A’ Pr Ser 19 PPL.PR.S

Implied Volatility analysis of the PPL preferreds yields a very interesting result:

impvol_ppl_171005
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The curve is extraordinarily steep, giving rise to an Implied Volatility of 40%, which is a ludicrously high number beyond which I refuse even to calculate possible fitting errors. This can arise in two major situations:

  • Market participants feel that all issues will be redeemed at par; this invalidates the Black-Scholes option theory used in the analysis as market prices will no longer be directionless over time, or
  • Market participants feel that GOC-5 yields will increase dramatically and are willing to pay a premium for low-spread, low-cost issues, as these are more highly leveraged to the benchmark yield

With respect to the first possibility, I can think of no reason to believe that PPL will redeem its preferreds except in reaction to the normal ebb and flow of credit spreads. With respect to the second, this is not what we observe in two major investment-grade series:

impvol_bam_171005
Click for Big

The BAM series has a very reasonable Implied Volatility of 9%; note that the pattern of variance is quite odd, with the slope appearing to be negative for the lower-spread, non-floor issues.

impvol_mfc_171005
Click for Big

The MFC series has an Implied Volatility of 17%, which is too high (although most of these series have Implied Volatilities that I consider unreasonably high) if the future is supposed to be directionless, but far too low if you believe, as I do, that Deemed Retractions for insurers will be seen in the future.

So it’s all something of a mystery! I suggest, however, that the lower-spread PPL issues look vulnerable to underperformance relative to their higher-spread siblings in the absence of dramatic overall market move, as Implied Volatility moves to a more reasonable level.

FFN.PR.A To Get Bigger

Wednesday, October 4th, 2017

Quadravest has announced:

North American Financial 15 Split Corp. (the “Company”) is pleased to announce it has filed a preliminary short form prospectus in each of the provinces of Canada with respect to an offering of Preferred Shares and Class A Shares of the Company. The offering will be co-led by National Bank Financial Inc., CIBC, Scotia Capital Inc., RBC Capital Markets and will also include BMO Capital Markets, Canaccord Genuity Corp., GMP Securities L.P., Raymond James, Desjardins Securities Inc., Echelon Wealth Partners, Industrial Alliance 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 5.30% and the Class A Shares will be offered at a price of $9.00 per Class A Share to yield 13.33%.

The closing price on the TSX of each of the Preferred Shares and the Class A Shares on October 3, 2017 was $10.09 and $9.19, respectively.

Since inception of the Company, the aggregate dividends declared on the Preferred Shares have been $6.80 per share and the aggregate dividends declared on the Class A Shares have been $11.15 per share, for a combined total of $17.95. 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 5.25% annually, to be set by the Board of Directors annually subject to a minimum of 5.25% until 2019 (set at 5.50% annually effective Dec. 1, 2017); and
ii. on or about the termination date, currently December 1, 2019 (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, 2019 (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 October 5, 2017. The offering is expected to close on or about October 19, 2017 and is subject to certain closing conditions including approval by the TSX.

So

The Preferred Shares will be offered at a price of $9.90 per Preferred Share to yield 5.30% and the Class A Shares will be offered at a price of $9.00 per Class A Share

… for a total of $18.90 per whole unit, compared to a NAV per whole unit of 17.23 as of 2017-09-29. It’s a great business when it works!

The dividend rate on FFN.PR.A was boosted by 25bp to 5.50% just last week … I suppose that, somehow, this will make the offering easier to sell.

Update, 2017-10-05: The offering was successful:

North American Financial 15 Split Corp. (the “Company”) is pleased to announce it has completed the overnight marketing of up to 3,664,000 Preferred Shares and up to 3,664,000 Class A Shares of the Company. The total proceeds of the offering are expected to be approximately $69.2 million.

VNR.PR.A : No Conversion to FloatingReset

Tuesday, October 3rd, 2017

Valener Inc. has announced:

that, after having taken into account all conversion notices received from holders of its outstanding Cumulative Rate Reset Preferred Shares, Series A (“Series A Shares”) by the September 29, 2017 deadline for the conversion of the Series A Shares into Cumulative Floating Rate Preferred Shares, Series B (“Series B Shares”), less than the 1,000,000 Series A Shares required to give effect to conversions into Series B Shares were tendered for conversion. As a result, none of Valener’s Series A Shares will be converted into Series B Shares on October 15, 2017.

It will be recalled that VNR.PR.A will reset to 4.62% effective 2017-10-15 and will henceforth be referred to as a FixedReset, 4.62%+281. It commenced trading 2012-6-6 as a FixedReset, 4.35%+281, after being announced 2012-5-15. The issue is tracked by HIMIPref™ and has been assigned to the FixedReset subindex.

I recommended against conversion.

PPL / VSN Deal Closes; Tickers to Change … Someday

Monday, October 2nd, 2017

Pembina Pipeline Corporation has announced:

that it has completed its previously announced business combination (the “Transaction”) with Veresen Inc. (TSX: VSN) (“Veresen”) pursuant to a plan of arrangement (the “Arrangement”) under Section 193 of the Business Corporations Act (Alberta) to create one of the largest energy infrastructure companies in Canada.

Pursuant to the Arrangement, Pembina acquired all of the issued and outstanding common shares of Veresen in a transaction valued at approximately $9.4 billion, including the assumption of Veresen’s debt (including subsidiary debt) and preferred shares.

In accordance with the Arrangement, Veresen has been amalgamated with Pembina and the outstanding Veresen preferred shares have been exchanged for Pembina preferred shares with the same terms and conditions, and will be listed on the Toronto Stock Exchange (“TSX”) under the symbols PPL.PR.O (series 15, previously Series A preferred shares of Veresen), PPL.PR.Q (series 17, previously Series C preferred shares of Veresen) and PPL.PR.S (series 19, previously Series E preferred shares of Veresen) within a few days following closing. Dividends on the series 15, 17 and 19 preferred shares will continue to be paid on the last business day of March, June, September and December in each year if, as and when declared by the Board of Directors.

So the changes will be (once the principals get around to it):

VSN to PPL Ticker Conversions
Old Ticker Old Description New Description
Unofficial
New Ticker
VSN.PR.A Veresen Inc. Cumulative Series ‘A’ Pr Pembina Pipeline Corporation Series 15 PPL.PR.O
VSN.PR.C Veresen Inc. Cumulative Series ‘C’ Pr Pembina Pipeline Corporation Series 17 PPL.PR.Q
VSN.PR.E Veresen Inc. Cumulative Series ‘E’ Pr Pembina Pipeline Corporation Series 19 PPL.PR.S

I will provide further details as they are slowly and painstakingly unveiled by the company and the Toronto exchange, to whom this entire affair comes as a complete surprise.

DBRS has discontinued Veresen ratings:

DBRS Limited (DBRS) discontinued the Issuer Rating, Senior Unsecured Notes Rating and Preferred Shares Rating of Veresen Inc. (Veresen or the Company). The rating is being discontinued at the request of the Company following today’s announcement that the previously announced business combination between Veresen and Pembina Pipeline Corporation (Pembina; rated BBB, Stable trend) has been closed pursuant to a plan of arrangement (the Arrangement). Pursuant to the Arrangement, Pembina has acquired all of the issued and outstanding common shares of Veresen in a transaction valued at approximately $9.4 billion, including the assumption of Veresen’s debt (including subsidiary debt) and preferred shares.

They further commented:

In terms of Pembina’s financing of the Acquisition, DBRS notes that the financing is consistent with Pembina’s financing plan at the time of the announcement of the Acquisition in May 2017. The cash portion of the Acquisition is estimated to be approximately $1.5 billion. This will temporarily be financed with Pembina’s credit facilities and then refinanced with a mix of long-term debt, common equity and preferred shares. DBRS continues to hold the view that the Acquisition will modestly weaken Pembina’s financial metrics in the near term. Please see DBRS’s above-referenced press release dated May 1, 2017, for more details.

FFN.PR.A Dividend Rate Raised by 25bp for One Year

Friday, September 29th, 2017

Quadravest has announced:

North American Financial 15 Split Corp. (the “Company”) is pleased to announce the Preferred Share dividend rate for the fiscal year beginning December 1, 2017. Monthly payments to FFN.PR.A will be $0.04583 per share for an annual yield of 5.50% on their $10 redemption value. This is an increase of one quarter of one percent over the current rate.

The Company invests 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.

This is a rather peculiar action for them to take, particularly given that the liquidation date for the company is 2019-12-1 (which the company may extend at will, but only while giving retraction rights to shareholders). I believe we are now in the position of waiting for the other shoe to drop!

FTN.PR.A Dividend Rate Raised 25bp for One Year

Friday, September 29th, 2017

Quadravest has announced:

Financial 15 Split Corp. (the “Company”) is pleased to announce the Preferred Share dividend rate for the fiscal year beginning December 1, 2017. Monthly payments to FTN.PR.A will be $0.04583 per share for an annual yield of 5.50% on their $10 redemption value. This is an increase of one quarter of one percent over the current rate.

The Company invests 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.

This is a rather peculiar action for them to take, particularly so soon after their recent treasury offering and given that the liquidation date for the company is 2020-12-1 (which the company may extend at will, but only while giving retraction rights to shareholders). I believe we are now in the position of waiting for the other shoe to drop!

S&P Assigns “Outlook Negative” to BEP & BRF

Friday, September 29th, 2017

Standard & Poor’s has announced:

  • •We are revising our outlook on Brookfield Renewable Partners L.P. (BEP) to negative from stable, reflecting limited cushion in the credit metrics should the recovery we are expecting in hydrology and generation across BEP’s footprint fail to materialize.
  • •We believe droughts, El Nino, and low hydrology have affected BEP’s portfolio over the past couple of years, resulting in generation below long-term averages (LTA) that is offsetting the portfolio’s geographic diversity.
  • •We are affirming our ratings on BEP, including our ‘BBB+’ long-term corporate credit rating.


The outlook revision reflects what we view as limited cushion in the credit metrics should the recovery we are expecting to see in hydrology and generation across BEP’s footprint fail to materialize. Metrics have been lower in the past two years because of lower distributions received from owned assets. During this period, generation has been lower than long-term averages mainly due to low hydrology in North America and Brazil, and drought in Colombia due to the El Nino effect in first-half 2016. Even though minimal, the appreciation of the U.S. dollar during this time has also not helped.

The negative outlook reflects S&P Global Ratings’ view that there is limited cushion in the credit metrics should the recovery expected in hydrology and generation across BEP’s footprint fail to materialize. We still expect BEP to maintain a well-diversified portfolio of generation assets, operate under long-term contracts with investment-grade counterparties, and generate fairly predictable cash flows to support its holding-company debt obligations. We expect base-case FFO-to-debt in the 20%-25% range and debt-to-EBITDA of 3.5x-4.5x during our two-year outlook period. We also expect BEP to remain moderately strategic to parent BAM as per our group rating assessment.

We could lower the rating if FFO-to-debt consistently falls below 23% or if the QD score deteriorates during the outlook period. This could result distributions lower than currently forecast as a result of generation below LTA or from acquisitions or capital expenditures financed with substantially higher levels of holding-company debt or acquisition of higher risk merchant assets or a material change in the contractual profile of the operating assets. Given the group support, a negative rating action on the parent would flow through to BEP. In addition, a revision in our assessment of the group status to nonstrategic could result in a downgrade, though this appears less likely.

We could revise the outlook back to stable if the company maintains forward-looking credit metrics at the higher end of the significant. This could result from lower resource variability, generation in line with LTA, increased cash flow, significant deleveraging, and acquisitions financed with lower levels of holding-company debt, all resulting in FFO-to-debt of 25%-30% and debt-to-EBITDA of 3.0x-3.5x.

Affected issues are:

BRF.PR.A, BRF.PR.B, BRF.PR.C, BRF.PR.E and BRF.PR.F (These are from Brookfield Renewable Power Preferred Equity Inc., a wholly owned subsidiary of BEP, and pay eligible dividends)

BEP.PR.E, BEP.PR.G, BEP.PR.I and BEP.PR.K (These are from Brookfield Renewable Partners L.P. itself, and pay distributions comprised of return of capital and ordinary income)

It is not too long since S&P upgraded BEP & BRF to P-2(low) (which was affirmed).

NA.PR.Q To Be Redeemed

Friday, September 29th, 2017

National Bank of Canada has announced:

its intention to redeem all of its remaining issued and outstanding Non-Cumulative 5-Year Rate Reset First Preferred Shares Series 28 (the “Preferred Shares Series 28”) on November 15, 2017 (the “Redemption Date”).

Pursuant to the share conditions, on the Redemption Date, the Bank may, at its option, redeem the Preferred Shares Series 28 at a price equal to $25.00 per share together with all declared and unpaid dividends. The declared dividends payable on November 15, 2017 will be paid to shareholders of record on October 10, 2017.

Formal notice will be issued to shareholders in accordance with the share conditions. The redemption of the Preferred Shares Series 28 is subject to the approval of the Office of the Superintendent of Financial Institutions and is part of the Bank’s ongoing management of its regulatory capital.

The Bank recommends shareholders consult with their tax advisors to determine the appropriate treatment and impact of the redemption.

NA.PR.Q is a FixedReset, 3.80%+243, that commenced trading 2012-11-7 after being announced 2012-10-30. It has been tracked by HIMIPref™ and assigned to the FixedReset subindex.

SBC.PR.A to Reset at 5.00%

Thursday, September 28th, 2017

Brompton Group has announced:

Brompton Split Banc Corp. (the “Fund”) announces that the distribution rate for the Preferred Shares for the 5 year term from December 1, 2017 to November 29, 2022 will be $0.50 per annum (5.0% on the original issue price of $10) payable quarterly. The Preferred Share distribution rate is based on current market rates for preferred shares with similar terms. In addition, the Fund intends to maintain the targeted monthly Class A Share distribution rate at $0.10 per Class A Share. The Fund previously announced the extension of the term of the Class A Shares and the Preferred Shares from November 29, 2017 to November 29, 2022. The term extension offers Preferred shareholders the opportunity to enjoy preferential cash dividends until November 29, 2022. Since inception in November 2005 to August 31, 2017, the Preferred share has delivered an attractive 5.1%(1) per annum return.

Since inception and over the 1, 3, 5 and 10 year periods to August 31, 2017, the Class A share has significantly outperformed both the S&P/TSX Capped Financials Index and the S&P/TSX Composite Index as shown in the table below.

Annual Compound Returns 1-Year 3-Year 5-Year 10-Year Since Inception
Brompton Split Banc Corp. – Class A 20.5% 7.9% 19.3% 10.3% 11.1%
S&P/TSX Capped Financials Index 15.8% 7.1% 14.2% 7.0% 8.1%
S&P/TSX Composite Index 7.2% 2.1% 8.1% 4.1% 6.1%

Since inception to August 31, 2017, Class A shareholders have also received cash distributions of $13.65 per share. Class A shareholders have the option to benefit by reinvesting their cash distributions in a distribution reinvestment plan (“DRIP”) which is commission free to participants. Class A shareholders can enroll in the DRIP program by contacting their investment advisor.

Brompton Split Banc Corp. invests in a portfolio, on an approximately equal weight basis, in common shares of six Canadian Banks: Bank of Montreal, Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada, The Bank of Nova Scotia and The Toronto-Dominion Bank.

In connection with the extension, shareholders who do not wish to continue their investment in the Fund, may retract their Preferred Shares or Class A Shares on November 29, 2017 pursuant to a special retraction right and receive a retraction price that is calculated in the same way that such price would be calculated if the Fund were to terminate on November 29, 2017. Pursuant to this option, the retraction price may be less than the market price if the security is trading at a premium to net asset value. Notice must be provided to your investment dealer by October 31, 2017 at 5:00 p.m. (Toronto time) in order to exercise this right; however, investment dealers may have earlier deadlines.

Well, sure the Capital Units have outperformed their indices over the last ten years. The market’s gone up substantially – if a leveraged investment hasn’t outperformed, then that would be a problem! A better – although by no means ‘good’ – indicator is the performance of the Whole Units against the index, and it is very pleasant to learn that as of the Fund’s 2016 Year-End, the Whole Units also outperformed the cited indices, although by much more modest amounts. That’s still not the greatest comparison, however, since the indices are the Composite – including everything – and the Capped Financial index, which includes insurance companies as the biggest non-bank chunk. Brompton Lifeco Split Corp. has not done quite as well!

However, I must emphasize that I am saying this only in reaction to the excessive bragging about performance in the press release. SBC & SBC.PR.A are fine products and the latter is frequently among the recommendations in my monthly newsletter. It does what it’s supposed to do and it does it cheaper than most, as disclosed in the 2016 Annual Report:

The MER per unit, excluding Preferred share distributions (which were covered by the portfolio’s dividend income), was 0.99% for 2016 and 0.97% for 2015. This ratio is more representative of the ongoing efficiency of the administration of the Fund.

SBC.PR.A was added to the HIMIPref™ universe in 2008. It was originally scheduled for redemption in 2012, but was extended with a coupon of 4.5%. The new coupon rate of 5.0% should, I think be sufficient to ensure that it continues to trade at a slight premium to par. On that basis, a recommendation not to retract will be superfluous, but if disaster strikes I will post something before the October 31 retraction notification deadline.