Archive for the ‘New Issues’ Category

New Issue: BMO FixedReset 4.85%+268, NVCC

Thursday, September 6th, 2018

Bank of Montreal has announced:

a domestic public offering of $300 million of Non-Cumulative 5-Year Rate Reset Class B Preferred Shares Series 44 (Non-Viability Contingent Capital (NVCC)) (the “Preferred Shares Series 44”). The offering will be underwritten on a bought-deal basis by a syndicate of underwriters led by BMO Capital Markets. The Bank has granted to the underwriters an option to purchase up to an additional $100 million of the Preferred Shares Series 44 exercisable at any time up to 48 hours before closing.

The Preferred Shares Series 44 will be issued to the public at a price of $25.00 per share. Holders will be entitled to receive non-cumulative preferential fixed quarterly dividends for the initial period to November 25, 2023, as and when declared by the Board of Directors of the Bank, payable in the amount of $0.303125 per share, to yield 4.85 per cent annually.

Subject to regulatory approval, on November 25, 2023 and on November 25 of every fifth year thereafter, the Bank may redeem the Preferred Shares Series 44 in whole or in part at par. On November 25, 2023, the dividend rate will reset and will reset thereafter every five years to be equal to the 5-Year Government of Canada Bond Yield plus 2.68 per cent. Subject to certain conditions, holders may elect to convert any or all of their Preferred Shares Series 44 into an equal number of Non-Cumulative Floating Rate Class B Preferred Shares Series 45 (Non-Viability Contingent Capital (NVCC)) (“Preferred Shares Series 45”) on November 25, 2023, and on November 25 of every fifth year thereafter. Holders of the Preferred Shares Series 45 will be entitled to receive non-cumulative preferential floating rate quarterly dividends, as and when declared by the Board of Directors of the Bank, equal to the then 3-month Government of Canada Treasury Bill Yield plus 2.68 per cent. Subject to certain conditions, holders may elect to convert any or all of their Preferred Shares Series 45 into an equal number of Preferred Shares Series 44 on November 25, 2028, and on November 25 of every fifth year thereafter.

The anticipated closing date is September 17, 2018. The net proceeds from the offering will be used by the Bank for general banking purposes.

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

impvol_bmo_180906
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According to this analysis, the fair value of the new issue on September 6 is 24.22.

The ludicrously high figure of Implied Volatility is something I take to mean that the underlying assumption of the Black-Scholes model, that of no directionality of prices, is not accepted by the market; the market seems to be taking the view that since things seem rosy now, they will always be rosy and everything will trade near par in the future.

I balk at ascribing a 100% probability to the ‘all issues will be called, or at least exhibit price stability’ hypothesis. There may still be a few old geezers amongst the Assiduous Readers of this blog who can still (faintly) remember the Great Bear Market of 2014-16, in which quite a few similar assumptions made earlier turned out to be slightly inaccurate. The extra cushion implied by an Issue Reset Spread that is well over the market spread is worth something, even if nothing gets called.

Or, to put it another way, one can buy a whole lot of downside protection for very little extra money, relative to this issue. For instance, BMO.PR.D, FixedReset, 4.40%+317, is bid at 25.13 (theoretical fair value of 25.33, according to the above analysis, which ignores the interim dividend shortfall). You’re giving up about $0.10 p.a. in dividends until it resets 2022-8-25, sure, but you’re getting a significant amount of protection in the event of a market downturn, and more dividend afterwards. Is it worth it? Well, that will depend a lot on your aversion to loss … I’m just saying that buying the same amount of protection costs more in most other series of FixedResets.

New Issue: BIP FixedReset, 5.10%+292M510

Wednesday, September 5th, 2018

Brookfield Infrastructure has announced:

that it has agreed to issue 8,000,000 Cumulative Class A Preferred Limited Partnership Units, Series 11 (“Series 11 Preferred Units”) on a bought deal basis to a syndicate of underwriters led by Scotiabank, BMO Capital Markets, CIBC Capital Markets, RBC Capital Markets, and TD Securities Inc. The Series 11 Preferred Units will be issued at a price of $25.00 per unit, for gross proceeds of $200,000,000. Holders of the Series 11 Preferred Units will be entitled to receive a cumulative quarterly fixed distribution at a rate of 5.10% annually for the initial period ending December 31, 2023. Thereafter, the distribution rate will be reset every five years at a rate equal to the greater of: (i) the 5-year Government of Canada bond yield plus 2.92%, and (ii) 5.10%. The Series 11 Preferred Units are redeemable on or after December 31, 2023.

Holders of the Series 11 Preferred Units will have the right, at their option, to reclassify their Series 11 Preferred Units into Cumulative Class A Preferred Limited Partnership Units, Series 12 (“Series 12 Preferred Units”), subject to certain conditions, on December 31, 2023 and on December 31 every five years thereafter. Holders of Series 12 Preferred Units will be entitled to receive a cumulative quarterly floating distribution at a rate equal to the 90-day Canadian Treasury Bill yield plus 2.92%.

Brookfield Infrastructure has granted the underwriters an option, exercisable until 48 hours prior to closing, to purchase up to an additional 2,000,000 Series 11 Preferred Units which, if exercised, would increase the gross offering size to $250,000,000.

The Series 11 Preferred Units will be offered in all provinces and territories of Canada by way of a supplement to Brookfield Infrastructure’s existing short form base shelf prospectus.

Brookfield Infrastructure intends to use the net proceeds of the issue of the Series 11 Preferred Units to fund an active pipeline of new investment opportunities and a growing backlog of committed organic growth capital expenditure projects, and for general working capital purposes. The offering of Series 11 Preferred Units is expected to close on or about September 12, 2018.

They later announced:

that as a result of strong investor demand for its previously announced offering, the underwriters have exercised their option to increase the size of the offering to 10,000,000 Cumulative Class A Preferred Limited Partnership Units, Series 11 (“Series 11 Preferred Units”). The Series 11 Preferred Units will be issued at a price of $25.00 per unit, for gross proceeds of $250,000,000. The Series 11 Preferred Units are being offered for distribution to the public on a bought deal basis by a syndicate of underwriters led by Scotiabank, BMO Capital Markets, CIBC Capital Markets, RBC Capital Markets, and TD Securities Inc.

The Series 11 Preferred Units will be offered in all provinces and territories of Canada by way of a supplement to Brookfield Infrastructure’s existing short form base shelf prospectus.

Brookfield Infrastructure intends to use the net proceeds of the issue of the Series 11 Preferred Units to fund an active pipeline of new investment opportunities and a growing backlog of committed organic growth capital expenditure projects, and for general working capital purposes. The offering of Series 11 Preferred Units is expected to close on or about September 12, 2018.

There are two non-standard elements to this issue. First, distributions are not dividends: they are Return of Capital and (potentially fully taxable) other things (commentary from my commentary regarding the announcement of BIP.PR.D:

I understand that the Return of Capital percentage of distributions is forecast – but by no means guaranteed! – to be about 50% over the next five years. See the discussion of BIP.PR.A for some sample calculations regarding the implications of this.

Second, it is likely, although not certain, that conversion of this issue into a FloatingReset when the time comes may be a Deemed Disposition and therefore trigger a capital gain or loss (commentary taken from my discussion of BIP.PR.D’s closing):

Update, 2017-10-11: Note that according to the prospectus, available on SEDAR under “Brookfield Infrastructure Partners L.P. Jan 19 2017 19:48:49 ET Prospectus (non pricing) supplement – English PDF 525 K”:
The reclassification of a Series 7 Preferred Unit into a Series 8 Preferred Unit or a Series 8 Preferred Unit into a Series 7 Preferred Unit, whether pursuant to an election made by the Resident Holder or pursuant to an automatic reclassification, may be considered to be a disposition of the Series 7 Preferred Unit or Series 8 Preferred Unit by the Resident Holder. The CRA’s position is that the conversion of an interest in a partnership into another interest in the partnership may result in a disposition of the partnership interest by the holder if the conversion results in a significant change in the rights and obligations of the holder in respect of the converted interest, including a significant change in the percentage interest in the profits of the partnership. Whether or not the reclassification of Series 7 Preferred Units into Series 8 Preferred Units or Series 8 Preferred Units into Series 7 Preferred Units would result in a significant change in the percentage interest of a Resident Holder in the profits of the Partnership is a question of fact that depends upon the facts and circumstances that exist at the time of the reclassification.

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

impvol_bip_180905
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According to this analysis, the fair value of the new issue on September 5 is 23.41.

The ludicrously high figure of Implied Volatility is something I take to mean that the underlying assumption of the Black-Scholes model, that of no directionality of prices, is not accepted by the market; the market seems to be taking the view that since things seem rosy now, they will always be rosy and everything will trade near par in the future.

I balk at ascribing a 100% probability to the ‘all issues will be called, or at least exhibit price stability’ hypothesis. There may still be a few old geezers amongst the Assiduous Readers of this blog who can still (faintly) remember the Great Bear Market of 2014-16, in which quite a few similar assumptions made earlier turned out to be slightly inaccurate. The extra cushion implied by an Issue Reset Spread that is well over the market spread is worth something, even if nothing gets called.

Or, to put it another way, one can buy a whole lot of downside protection for very little extra money, relative to this issue. For instance, BIP.PR.D, FixedReset, 5.00%+378M500, ROC + Interest, is bid at 25.08 (theoretical fair value of 25.33, according to the above analysis, which ignores the interim dividend shortfall). You’re giving up about $0.025 p.a. in dividends until it resets 2022-03-31, sure, but that’s hardly a big deal and you’re getting a significant amount of protection in the event of a market downturn, and a bit more dividend afterwards. Is it worth it? Well, that will depend a lot on your aversion to loss … I’m just saying that buying the same amount of protection costs more in most other series of FixedResets.

New Issue : TD FixedReset, 4.75%+259

Tuesday, September 4th, 2018

As noted by Assiduous Reader FletcherLynd, The Toronto-Dominion Bank has announced:

a domestic public offering of Non-Cumulative 5-Year Rate Reset Preferred Shares (non-viability contingent capital (NVCC)), Series 20 (the “Series 20 Shares”).

TD has entered into an agreement with a group of underwriters led by TD Securities Inc. to issue, on a bought deal basis, 10 million Series 20 Shares at a price of $25.00 per share to raise gross proceeds of $250 million. TD has also granted the underwriters an option to purchase, on the same terms, up to an additional 2 million Series 20 Shares. This option is exercisable in whole or in part by the underwriters at any time up to two business days prior to closing.

The Series 20 Shares will yield 4.75% annually, with dividends payable quarterly, as and when declared by the Board of Directors of TD, for the initial period ending October 31, 2023. Thereafter, the dividend rate will reset every five years at a level of 2.59% over the then five-year Government of Canada bond yield.

Subject to regulatory approval, on October 31, 2023 and on October 31 every 5 years thereafter, TD may redeem the Series 20 Shares, in whole or in part, at $25.00 per share. Subject to TD’s right of redemption and certain other conditions, holders of the Series 20 Shares will have the right to convert their shares into Non-Cumulative Floating Rate Preferred Shares (NVCC), Series 21 (the “Series 21 Shares”), on October 31, 2023, and on October 31 every five years thereafter. Holders of the Series 21 Shares will be entitled to receive quarterly floating rate dividends, as and when declared by the Board of Directors of TD, equal to the three-month Government of Canada Treasury Bill yield plus 2.59%.

The expected closing date is September 13, 2018. TD will make an application to list the Series 20 Shares as of the closing date on the Toronto Stock Exchange. The net proceeds of the offering will be used for general corporate purposes.

They later announced:

that as a result of strong investor demand for its previously announced domestic public offering of Non-Cumulative 5-Year Rate Reset Preferred Shares (non-viability contingent capital (NVCC)), Series 20 (the “Series 20 Shares”), the size of the offering has been increased to 16 million Series 20 Shares. The gross proceeds of the offering will now be $400 million. The offering will be underwritten by a group of underwriters led by TD Securities Inc.

The expected closing date is September 13, 2018. TD will make an application to list the Series 20 Shares as of the closing date on the Toronto Stock Exchange. The net proceeds of the offering will be used for general corporate purposes.

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

impvol_td_180904
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According to this analysis, the fair value of the new issue on September 4 is 24.38.

The ludicrously high figure of Implied Volatility is something I take to mean that the underlying assumption of the Black-Scholes model, that of no directionality of prices, is not accepted by the market; the market seems to be taking the view that since things seem rosy now, they will always be rosy and everything will trade near par in the future.

I balk at ascribing a 100% probability to the ‘all issues will be called, or at least exhibit price stability’ hypothesis. There may still be a few old geezers amongst the Assiduous Readers of this blog who can still (faintly) remember the Great Bear Market of 2014-16, in which quite a few similar assumptions made earlier turned out to be slightly inaccurate. The extra cushion implied by an Issue Reset Spread that is well over the market spread is worth something, even if nothing gets called.

Or, to put it another way, one can buy a whole lot of downside protection for very little extra money, relative to this issue. For instance, TD.PF.E, FixedReset, 3.70%+287, is bid at 24.92 (theoretical fair value of 25.06, according to the above analysis, which ignores the interim dividend shortfall). You’re giving up about $0.25 p.a. in dividends until it resets 2020-10-31, sure, but you’re getting a significant amount of protection in the event of a market downturn, and a bit more dividend afterwards. Is it worth it? Well, that will depend a lot on your aversion to loss … I’m just saying that buying the same amount of protection costs more in most other series of FixedResets.

New Issue: NA FixedReset, 4.95%+277, NVCC

Saturday, June 2nd, 2018

National Bank of Canada has announced (on May 31):

that it has entered into an agreement with a group of underwriters led by National Bank Financial Inc. for the issuance on a bought deal basis of 10 million non-cumulative 5-year rate reset first preferred shares series 42 (non-viability contingent capital (NVCC)) (the “Series 42 Preferred Shares”) at a price of $25.00 per share, to raise gross proceeds of $250 million.

National Bank has granted the underwriters an option to purchase, on the same terms, up to an additional 2 million Series 42 Preferred Shares. This option is exercisable in whole or in part by the underwriters at any time up to two business days prior to closing. The gross proceeds raised under the offering will be $300 million should this option be exercised in full.

The Series 42 Preferred Shares will yield 4.95% annually, payable quarterly, as and when declared by the Board of Directors of National Bank, for the initial period ending November 15, 2023. The first of such dividends, if declared, shall be payable on November 15, 2018. Thereafter, the dividend rate will reset every five years at a level of 277 basis points over the then 5-year Government of Canada bond yield. Subject to regulatory approval, National Bank may redeem the Series 42 Preferred Shares in whole or in part at par on November 15, 2023 and on November 15 every five years thereafter.

Holders of the Series 42 Preferred Shares will have the right to convert their shares into an equal number of non-cumulative floating rate first preferred shares series 43 (non-viability contingent capital (NVCC)) (the “Series 43 Preferred Shares”), subject to certain conditions, on November 15, 2023, and on November 15 every five years thereafter. Holders of the Series 43 Preferred Shares will be entitled to receive quarterly floating dividends, as and when declared by the Board of Directors of National Bank, equal to the 90-day Government of Canada Treasury Bill rate plus 277 basis points.

The net proceeds of the offering will be used for general corporate purposes and added to National Bank’s capital base. The expected closing date is on or about June 11, 2018. National Bank intends to file in Canada a prospectus supplement to its November 21, 2016 base shelf prospectus in respect of this issue.

They later announced:

that as a result of strong investor demand for its previously announced domestic public offering of non-cumulative 5-year rate reset first preferred shares series 42 (non-viability contingent capital (NVCC)) (the “Series 42 Preferred Shares”), the underwriters have exercised their option to purchase an additional 2,000,000 Series 42 Preferred Shares. The size of the offering has been increased to 12 million shares for gross proceeds of $300 million. The offering will be underwritten by a syndicate led by National Bank Financial Inc. The expected closing date is on or about June 11, 2018.

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

impvol_na_180601
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According to this analysis, the fair value of the new issue on June 1 is 23.91.

New Issue: Global Dividend Growth Split Corp., 5%, 3-Year

Tuesday, May 29th, 2018

Global Dividend Growth Split Corp, which commenced marketing in late April has released its final prospectus on SEDAR (as usual, the Canadian Securities Administrators will not allow me to link to this public document. Search for “Global Dividend Growth Split Corp. May 23 2018 22:26:01 ET Final long form prospectus – English PDF 832 K”)”):

The investment objectives for the Preferred Shares are to provide their holders with fixed cumulative preferential quarterly cash
distributions and to return the original issue price of $10.00 to holders on June 30, 2021 (the ‘‘Maturity Date’’), subject to extension for successive terms of up to five years as determined by the board of directors of the Company. See ‘‘Investment Objectives’’. The quarterly cash distribution will be $0.1250 per Preferred Share ($0.50 per annum or 5.0% per annum) on the issue price of $10.00 per Preferred Share until June 30, 2021. See ‘‘Distribution Policy’’.

Closing of the Offering is expected to occur on or about June 15, 2018, but no later than 90 days after a receipt for this prospectus has been issued (the ‘‘Closing Date’’).

No distributions will be paid on the Class A Shares if (i) the distributions payable on the Preferred Shares are in arrears, or (ii) in respect of a cash distribution by the Company, the NAV per Unit would be less than $15.00.

Assuming that the gross proceeds of the Offering are $75 million and fees and expenses are as presented in this prospectus, in order to achieve the Company’s targeted annual distributions for the Class A Shares and the Preferred Shares while maintaining a stable NAV per Unit, the Company will be required to generate an average annual total return (comprised of net realized capital gains, option premiums and dividends) on the Portfolio of approximately 9.2%. The Portfolio currently generates dividend income of 3.2% per annum net of withholding taxes and would be required to generate an additional 6.1% per annum from other sources to return and distribute such amounts.

The Preferred Shares will be redeemed by the Company on the Maturity Date. The redemption price payable by the Company for a Preferred Share on that date will be equal to the lesser of (i) $10.00 plus any accrued and unpaid distributions thereon and (ii) the NAV of the Company on that date divided by the total number of Preferred Shares then outstanding.

Holders of Preferred Shares whose Preferred Shares are surrendered for [monthly] retraction will be entitled to receive a retraction price per Preferred Share (the “Preferred Share Retraction Price”) equal to 96% of the lesser of (i) the Net Asset Value per Unit determined as of such Retraction Date, less the cost to the Company of the purchase of a Class A Share for cancellation; and (ii) $10.00.

There is also a press release (link address adjusted 2018-6-15).

Those familiar with Split Share Credit Quality will recognize that the computed return of 9.2% required to meet the portfolio objectives is highly optimistic. The significant cash drag on the portfolio introduces material sequence of return risk and the long-term results will be highly dependent upon the variation of returns as well as their time-weighted average value.

And some will remember my views on Split Share Capital Units … although some will point out that special circumstances can alter cases.

New Issue: E Split Corp., 5.25%, 5-Year

Friday, May 18th, 2018

Middlefield Group has announced:

on behalf of E Split Corp. (the “Company”), is pleased to announce that it has filed a preliminary prospectus in relation to an initial public offering of preferred shares and class A shares.

The Company will invest in common shares of Enbridge Inc., a North American oil and gas pipeline, gas processing and natural gas distribution company.

The Company’s investment objectives for the:

Class A shares are to provide holders with:
(i) non-cumulative monthly cash distributions; and
(ii) the opportunity for capital appreciation through exposure to the portfolio

Preferred shares are to:
(i) provide holders with fixed cumulative preferential quarterly cash distributions; and
(ii) return the original issue price of $10.00 to holders upon maturity.

The initial target distribution yield for the class A shares is 8% per annum based on the original subscription price (or $0.10 per month or $1.20 per annum).

The initial target distribution yield for the preferred shares is 5.25% per annum based on the original subscription price (or $0.13125 per quarter or $0.525 per annum).

Middlefield Capital Corporation, the advisor, will provide investment management advice to the Company.

Prospective purchasers investing in E Split Corp. have the option of paying for: (i) preferred shares or class A shares in cash; or (ii) units comprised of one preferred share and one class A share or class A shares by exchanging securities of issuers listed in the preliminary prospectus. Prospective purchasers under the exchange option are required to deposit their exchange eligible securities prior to 5:00 p.m. (Toronto time) on June 8, 2018, in the manner described in the preliminary prospectus.

The syndicate of agents is being co-led by CIBC Capital Markets and RBC Capital Markets, and includes BMO Capital Markets, Scotiabank, TD Securities Inc., Canaccord Genuity Corp., GMP Securities L.P., National Bank Financial Inc., Raymond James Ltd., Industrial Alliance Securities, Manulife Securities Incorporated, Desjardins Securities Inc., Mackie Research Capital Corporation, and Middlefield Capital Corporation.

A preliminary prospectus containing important information relating to these securities has been filed with securities commissions or similar authorities in each of the provinces of Canada. The preliminary prospectus is still subject to completion or amendment. Copies of the preliminary prospectus may be obtained from any of the agents named above using the contact information for such agent. There will not be any sale or any acceptance of an offer to buy the securities until a receipt for the final prospectus has been issued.

DBRS provisionally rates the issue Pfd-3(high):

DBRS Limited (DBRS) assigned a provisional rating of Pfd-3 (high) to the Preferred Shares to be issued by E Split Corp. (the Company), which will be managed by Middlefield Limited (the Manager). Middlefield Capital Corporation will provide investment management advice to the Company. The Company will issue the Preferred Shares and Class A Shares at an issue price of $10.00 per Preferred Share and $15.00 per Class A Share. The Preferred Shares and Class A Shares will be issued on the basis that an equal number of Preferred Shares and Class A Shares will be outstanding at all times. Thus one Preferred Share and one Class A Share will comprise one unit (the Unit). The Maturity Date will be on June 30, 2023. The term of the Company may be extended beyond the redemption date for additional terms of five years each as determined by the Company’s board of directors.

The Preferred Shares will be entitled to fixed quarterly cumulative preferential cash distributions of $0.13125 (or $0.525 annually) per share, representing a 5.25% per-annum return on the issue price of $10.00. Holders of the Class A Shares will receive regular monthly non-cumulative distributions targeted to be $0.10 (or $1.20 annually) per Class A Share to yield 8.00% per annum on the issue price of $15.00. No distributions will be paid on the Class A Shares if (1) the distributions payable on the Preferred Shares are in arrears or (2) in respect of a cash distribution by the Company, the net asset value (NAV) per Unit is less than $15.00.

Net proceeds from the offering will be used to invest in a portfolio comprising common shares of Enbridge Inc. (rated BBB (high) with a Stable trend by DBRS; the Portfolio) in accordance with the Company’s investment objectives, strategy and restrictions. Up to 10% of the Portfolio may be invested in securities of any other issuer as determined by the Manager. The Company will not for a period of more than 30 consecutive days have less than 90% of the value of the total assets of the Company (excluding cash and cash equivalents) comprising common shares of Enbridge Inc.

Middlefield is best known for its stealth redemption of STW.PR.A at the peak of the Credit Crunch.

New Issue: IFC FixedReset 4.90%+255

Thursday, May 17th, 2018

Intact Financial Corporation has announced (although not yet on their website):

that it has entered into an agreement with a syndicate of underwriters led by TD Securities Inc. together with BMO Capital Markets, CIBC Capital Markets and National Bank Financial pursuant to which the underwriters have agreed to purchase, on a bought deal basis, 8,000,000 Non-Cumulative Rate Reset Class A Shares, Series 7 (the “Series 7 Preferred Shares”) from Intact for sale to the public at a price of $25.00 per Series 7 Preferred Share, representing aggregate gross proceeds of $200 million.

Intact has granted the underwriters an underwriters’ option to purchase up to an additional 2,000,000 Series 7 Preferred Shares at the same offering price exercisable in whole or in part, at any time before 8:30am on the date that is two (2) business days prior to closing. Should the underwriters’ option be fully exercised, the total gross proceeds of the Series 7 Preferred Shares offering will be $250 million. The net proceeds will be used for general corporate purposes.

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

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

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

The Series 7 Preferred Shares will be offered for sale to the public in each of the provinces and territories of Canada pursuant to a prospectus supplement to be filed with the Canadian securities regulatory authorities. The offering is scheduled to close on or about May 29, 2018.

As this issue is not NVCC compliant, it will be analyzed as having a Deemed Retraction. Note, however, that this carries more uncertainty than it does with most other insurers because Intact is a P&C insurer, not a life company.

This issue was announced almost simultaneously with a new issue from Emera Incorporated, a FixedReset 4.90%+254M490. Barry Critchley remarks:

While the two deals shared similar terms, investors treated them differently. By early afternoon only Intact’s order was completely filled. But sources indicated investors could still post expressions of interest for the Emera offering. On TD Investing’s website, the offering is indicated as open.

New Issue: EMA FixedReset 4.90%+254M490

Thursday, May 17th, 2018

Emera Incorporated has announced:

that it will issue 12,000,000 Cumulative Minimum Rate Reset First Preferred Shares, Series H (the “Series H Preferred Shares”) at a price of $25.00 per share and at an initial annual dividend rate of 4.90 per cent, for aggregate gross proceeds of $300 million on a bought deal basis to a syndicate of underwriters in Canada led by Scotiabank, CIBC Capital Markets, RBC Capital Markets and TD Securities Inc. Emera has granted to the underwriters an option, exercisable at any time up to 48 hours prior to the closing of the offering, to purchase up to an additional 2,000,000 Series H Preferred Shares at a price of $25.00 per share (the “Underwriters Option”). If the Underwriters Option is exercised in full, the aggregate gross proceeds to Emera will be $350 million.

The holders of the Series H Preferred Shares will be entitled to receive fixed cumulative preferential cash dividends at an annual rate of $1.225 per share, payable quarterly, as and when declared by the board of directors of Emera, yielding 4.90 per cent per annum, for the initial period ending on August 15, 2023. The first of such dividends, if declared, shall be payable on August 15, 2018, and shall be $0.25507 per Series H Preferred Share, based on the anticipated closing of the offering on May 31, 2018. The dividend rate will be reset on August 15, 2023 and every five years thereafter at a rate equal to the sum of the then five-year Government of Canada bond yield plus 2.54 per cent, provided that, in any event, such rate shall not be less than 4.90 per cent per annum. The Series H Preferred Shares are redeemable by Emera, at its option, on August 15, 2023 and on August 15 of every fifth year thereafter.

The holders of Series H Preferred Shares will have the right to convert their shares into Cumulative Floating Rate First Preferred Shares, Series I (the “Series I Preferred Shares”), subject to certain conditions, on August 15, 2023 and on August 15 of every fifth year thereafter. The holders of the Series I Preferred Shares will be entitled to receive quarterly floating rate cumulative preferential cash dividends, as and when declared by the board of directors of Emera, at a rate equal to the sum of the then 90-day Government of Canada treasury bill rate plus 2.54 per cent.

The offering is subject to the receipt of all necessary regulatory and stock exchange approvals. The net proceeds of the offering will be used for general corporate purposes.

This issue was announced almost simultaneously with a new issue from Intact Financial Corporation, a FixedReset 4.90%+255. Barry Critchley remarks:

While the two deals shared similar terms, investors treated them differently. By early afternoon only Intact’s order was completely filled. But sources indicated investors could still post expressions of interest for the Emera offering. On TD Investing’s website, the offering is indicated as open.

This seems quite rational, since the new issue is ridiculously expensive.

according to Implied Volatility Analysis:

impvol_ema_180517
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According to the analysis above, the fair value is a bit under $24.00 … note, however, that complainers will triumphantly point out that this assigns a value of zero to the Floor Rate Guarantee. But as I stated in the February, 2018, edition of PrefLetter:

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

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

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

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

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

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

However, even those unimpressed by all that “Implied Volatility” blather and tiresome pettifogging regarding Floor Guarantees should be, at the very least, tempted by EMA.PR.A in preference to the new issue. Sure, it only pays 2.555% at present … but it will reset on 2020-8-15 at GOC-5 + 184, or – given today’s GOC-5 yield of 2.33% – 4.17%. It was quoted today at 19.09-25, an Expected Future Current Yield of 5.46%, which ain’t bad for investment grade!

New Issue: Global Dividend Growth Split Begins Marketting

Thursday, April 26th, 2018

Brompton Group has announced:

Brompton Funds Limited (the “Manager”) is pleased to announce that Global Dividend Growth Split Corp. (the “Company”) has filed a preliminary prospectus dated April 24, 2018 in respect of an initial public offering of preferred shares and class A shares (the “Preliminary Prospectus”).

The Company will invest in a diversified portfolio (the “Portfolio”) of equity securities of large capitalization global dividend growth companies selected by the Manager. In order to qualify for inclusion in the Portfolio, at the time of investment and at the time of each periodic reconstitution and/or rebalancing of the Portfolio, each global dividend growth company included in the Portfolio must (i) have a market capitalization of at least US$10 billion; and (ii) have a history of dividend growth or, in the Manager’s view, have high potential for future dividend growth.

The Manager expects that at least 20 global dividend growth companies will comprise the Portfolio. The indicative portfolio includes: Airbus SE, Apple Inc., AstraZeneca plc, BCE Inc., Carnival Corporation, Cisco Systems Inc., Deutsche Post AG, Enbridge Inc., HSBC Holdings plc, Intel Corporation, IBM Corporation, Johnson & Johnson, JP Morgan Chase & Co., Manulife Financial Corporation, Novartis AG, Pfizer Inc., Proctor & Gamble Co., Sanofi SA, Siemens AG, Sun Life Financial Inc., TELUS Corporation, Texas Instruments Inc., Toronto-Dominion Bank, UBS Group AG, and Vinci SA.

The class A shares will be offered at a price of $12.00 per share. The investment objectives for the class A shares are to provide holders with regular monthly non-cumulative cash distributions and the opportunity for capital appreciation through exposure to the Portfolio. The monthly cash distribution is targeted to be $0.10 per class A share representing a yield on the issue price of the class A shares of 10.0% per annum.

The preferred shares will be offered at a price of $10.00 per share. The investment objectives for the preferred shares are to provide holders with fixed cumulative preferential quarterly cash distributions and to return the original issue price of $10.00 to holders on June 30, 2021, subject to extension for successive terms of up to five years as determined by the board of directors of the Company. The quarterly cash distribution will be $0.1250 per preferred share ($0.50 per annum, or 5.0% per annum on the issue price of $10.00 per preferred share), until June 30, 2021. The preferred shares have been provisionally rated Pfd-3 (high) by DBRS Limited.

Prospective purchasers investing in the Company will have the option of paying for shares in cash or by an exchange of freely-tradable listed securities of any eligible issuers listed in the Preliminary Prospectus (the “Exchange Option”). Prospective purchasers who utilize the Exchange Option are required to deposit their securities of exchange eligible issuers by no later than 5:00 p.m. (Toronto time) on May 24, 2018 through CDS. Please contact your investment advisor or refer to the Preliminary Prospectus for detailed information on how to participate in the offering by way of either cash purchase or the exchange option.

Brompton Funds Limited will act as the manager and portfolio manager of the Company. The Manager currently manages five split share corporations with combined assets of over $1.3 billion.

The syndicate of agents for the offering is being led by RBC Capital Markets, CIBC Capital Markets, National Bank Financial Inc. and Scotiabank and includes BMO Capital Markets, TD Securities Inc., Canaccord Genuity Corp., GMP Securities L.P., Raymond James Ltd., Echelon Wealth Partners., Industrial Alliance Securities Inc., Desjardins Securities Inc., and Mackie Research Capital Corporation.

This follows yesterday’s announcement of a provisional Pfd-3(high) rating from DBRS.

New Split Share Corp. from Brompton?

Wednesday, April 25th, 2018

DBRS has announced that it:

assigned a provisional rating of Pfd-3 (high) to the Preferred Shares to be issued by Global Dividend Growth Split Corp. (the Company). The Company will issue an equal number of Preferred Shares and Class A Shares at an issue price of $10.00 per Preferred Share and $12.00 per Class A Share. The Preferred Shares will be scheduled to mature on June 30, 2021.

Net proceeds from the offering will be used to invest in a portfolio of equity securities of large capitalization global dividend growth companies (the Portfolio).

A search of SEDAR reveals the following documents:

Global Dividend Growth Split Corp. Apr 25 2018 10:33:25 ET Decision Document (Preliminary) PDF 70 K

Global Dividend Growth Split Corp. Apr 24 2018 20:54:40 ET Preliminary long form prospectus – English PDF 871 K

Global Dividend Growth Split Corp. Apr 24 2018 20:54:40 ET Preliminary long form prospectus – French PDF 898 K

As usual, I am not permitted to link directly to these public documents as the Canadian Securities Administrators would prefer that you buy a GIC instead.