Archive for the ‘New Issues’ Category

New Issue: BEP FixedReset 5.75%+394M575

Monday, March 4th, 2019

Brookfield Renewable Partners L.P. has announced:

that it has agreed to issue 6,000,000 Cumulative Minimum Rate Reset Class A Preferred Limited Partnership Units, Series 15 (the “Series 15 Preferred Units”) on a bought deal basis to a syndicate of underwriters led by CIBC Capital Markets, BMO Capital Markets, RBC Capital Markets, Scotiabank and TD Securities Inc. for distribution to the public. The Series 15 Preferred Units will be issued at a price of $25.00 per unit, for gross proceeds of $150,000,000.

Holders of the Series 15 Preferred Units will be entitled to receive a cumulative quarterly fixed distribution yielding 5.75% annually for the initial period ending April 30, 2024. 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 3.94%, and (ii) 5.75%. The Series 15 Preferred Units are redeemable on April 30, 2024 and on each Series 15 Reclassification Date (as defined below) thereafter.

Holders of the Series 15 Preferred Units will have the right, at their option, to reclassify their Series 15 Preferred Units into Cumulative Floating Rate Reset Class A Preferred Limited Partnership Units, Series 16 (“Series 16 Preferred Units”), subject to certain conditions, on April 30, 2024 and on April 30 every 5 years thereafter (each a “Series 15 Reclassification Date”). Holders of Series 16 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 3.94%.

Brookfield Renewable has granted the underwriters an option, exercisable until 48 hours prior to closing, to purchase up to an additional 2,000,000 Series 15 Preferred Units which, if exercised, would increase the gross offering size to $200,000,000.

The Series 15 Preferred Units will be offered in all provinces and territories of Canada by way of a supplement to Brookfield Renewable’s existing Canadian short form base shelf prospectus. The Series 15 Preferred Units may not be offered or sold in the United States or to U.S. persons absent registration or an applicable exemption from the registration requirements under the U.S. Securities Act.

Brookfield Renewable intends to use the net proceeds of the issue of Series 15 Preferred Units to repay outstanding indebtedness and for general corporate purposes. The offering of Series 15 Preferred Units is expected to close on or about March 11, 2019.

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

impvol_bep_190304
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According to this analysis, the fair value of the new issue on January 19 is 23.34.

It’s interesting to note that the theoretical spread (on a notional non-callable perpetual resettable annuity) is 380bp, roughly the same as the actual issue spread of 394bp – which means that BEP is basically getting the call options on the issue for free.

Update, 2019-3-10: The underwriters’ option was partially exercised:

Brookfield Renewable Partners L.P. (TSX: BEP.UN; NYSE: BEP) (“Brookfield Renewable”) today announced that as a result of strong investor demand for its previously announced offering, the underwriters have partially exercised their option to increase the size of the offering to 7,000,000 Cumulative Minimum Rate Reset Class A Preferred Limited Partnership Units, Series 15 (the “Series 15 Preferred Units”) to be offered on a bought deal basis to a syndicate of underwriters led by CIBC Capital Markets, BMO Capital Markets, RBC Capital Markets, Scotiabank and TD Securities Inc. The Series 15 Preferred Units will be issued at a price of $25.00 per unit, for gross proceeds of $175,000,000.

New Issue: Brookfield Infrastructure Subsidiary, FixedReset, 5.85%+396M585

Tuesday, January 29th, 2019

Brookfield Infrastructure has announced (although not yet on their website) (emphasis added):

that it has agreed to issue 4,000,000 Senior Preferred Shares, Series 1 (“Series 1 Shares”) on a bought deal basis to a syndicate of underwriters led by TD Securities Inc., BMO Capital Markets, CIBC Capital Markets, RBC Capital Markets and Scotiabank. The Series 1 Shares are being issued by BIP Investment Corporation (“BIPIC”), a wholly-owned subsidiary of Brookfield Infrastructure, and will be fully and unconditionally guaranteed by Brookfield Infrastructure and certain of its key holding subsidiaries. The Series 1 Shares will be issued at a price of $25.00 per share, for gross proceeds of $100,000,000. Holders of the Series 1 Shares will be entitled to receive a cumulative quarterly fixed dividend at a rate of 5.85% annually for the initial period ending March 31, 2024. Thereafter, the dividend 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 3.96%, and (ii) 5.85%. The Series 1 Shares are redeemable by BIPIC on or after March 31, 2024.

Holders of the Series 1 Shares will have the right, at their option, to convert their Series 1 Shares into Senior Preferred Shares, Series 2 (the “Series 2 Shares”), subject to certain conditions, on March 31, 2024 and on March 31 every five years thereafter. Holders of Series 2 Shares will be entitled to receive a cumulative quarterly floating dividend at a rate equal to the 90-day Canadian Treasury Bill yield plus 3.96%.

The Series 1 Shares will be offered in all provinces and territories of Canada by way of a supplement to BIPIC’s existing short form base shelf prospectus.

The net proceeds of the issue of the Series 1 Shares will be used to fund new investments and/or for general working capital purposes. The offering of Series 1 Shares is expected to close on or about February 5, 2019.

Note the redemption terms, because this is very important. These are not redeemable only on exchange dates, they are redeemable at any time after the first exchange date. This marks a new low in the quality of the swill that gets offered to new issue investors. I do not believe this is a mere typo – though I will be checking the prospectus supplement! – because in the very next sentence the company is careful to say that conversion rights exist “on March 31, 2024 and on March 31 every five years thereafter.”

But, such is the state of investment management in Canada that there will be many who think increased opportunity for calls by the issuers is a good thing, in the charming belief that it’s good to get called out of a position.

S&P further muddies the waters (emphasis added):

S&P Global Ratings today said it assigned its ‘BBB-‘ global scale rating and ‘P-2(Low)’ Canada scale rating to BIP Investment Corp.’s (BIPIC) C$100 million proposed cumulative minimum rate reset senior preferred shares, series 1. The company intends to use the net proceeds from the offering to fund new investments and for general working capital purposes.

We classify the series 1 preferred shares as having minimal equity content because in our view the retraction feature, which gives the investors the option to put the preferred share securities at any time, undermines the
permanence of these securities. Consequently, we will treat 100% of the principal outstanding as debt and will treat 100% of the related dividends on these securities as interest expense in our analysis.

BIPIC is a newly formed subsidiary of Brookfield Infrastructure Partners L.P. (BBB+/Stable/–), which will fully guarantee BIPIC’s series 1 preferred shares.

I’m not quite sure how to interpret this mention of a retraction feature. If the shares are retractible into cash at any time, then that is of course an extremely valuable feature; but if they’re only retractible into debentures, a la PVS Split Share Preferreds, then it’s worth … not so much. And if this is just a stenographical error by S&P, then it’s worth nothing! I’ll wait until the prospectus supplement is available.

The prospectus (available on SEDAR at “BIP Investment Corporation Nov 23 2018 14:13:23 ET Final short form prospectus – English PDF 826 K”, but I’m not allowed to link to it directly because Canadian regulators think you’re scum) states:

The Preference Shares of each series will rank on a parity with the Preference Shares of every other series with respect to accumulated dividends and return of capital. Each series of Preference Shares will participate rateably with every other series of Preference Shares in respect of accumulated dividends and return of capital.

So I think we can assume that distributions will be a mixture of dividends and return of capital – no ordinary income! – although that’s yet another thing I will have to check when the prospectus supplement comes out.

Update, 2019-2-1: The prospectus supplement is now available on SEDAR via a search for “BIP Investment Corporation Jan 29 2019 21:10:15 ET Prospectus (non pricing) supplement – English PDF 882 K”. The regulators won’t allow me to link to it directly, sorry. If you don’t like it, move to the States, where the SEC treats investors as having some importance.

There were three things badly in need of checking.

First, redemption. From page 16 of the PDF:

The Series 1 Shares will not be redeemable by the Corporation prior to March 31, 2024. On March 31, 2024 and on March 31 every five years thereafter (or, if such date is not a business day, the immediately following business day), and subject to the provisions of the BCBCA and certain other restrictions set out in “Description of the Series 1 Shares — Restrictions on Dividends and Retirement and Issue of Shares”, the Corporation may, at its option, on at least 30 days and not more than 60 days prior written notice, redeem all or from time to time any part of the outstanding Series 1 Shares by payment in cash of a per share sum equal to C$25.00, in each case together with all accrued and unpaid dividends up to but excluding the date fixed for redemption (less any tax required to be deducted or withheld by the Corporation).

If less than all of the outstanding Series 1 Shares are to be redeemed, the shares to be redeemed shall be selected on a pro rata basis disregarding fractions or, if such shares are at such time listed on such exchange, with the consent of the TSX, in such manner as the Board of Directors in its sole discretion may, by resolution, determine.

So Assiduous Reader dodoi‘s report of the TDDI description, which was later confirmed by Assiduous Reader prefguy is all correct – and a damn sight better than the execrable press release!

The second thing to check was the retraction terms. From page 16 of the prospectus supplement:

The Series 1 Shares may be surrendered for retraction at any time, subject to the provisions of the BCBCA and certain other restrictions set out in “Description of the Series 1 Shares — Restrictions on Dividends and Retirement and Issue of Shares”. Retraction payments for Series 1 Shares will be made on or before the 15th day of each month (the “Series 1 Retraction Payment Date”) provided the Series 1 Shares have been surrendered for retraction at least five business days (the “Series 1 Deposit Date”) before the last business day of the preceding month. If a holder makes such surrender after 5:00 p.m. (Toronto time) on a Series 1 Deposit Date, the retraction payment will be made on the next succeeding Series 1 Retraction Payment Date.

The Corporation will enter into a remarketing agreement (the “Series 1 Remarketing Agreement”) with a registered dealer that will provide that the registered dealer will use its commercially reasonable efforts to find purchasers for any Series 1 Shares tendered for retraction at a price that is not less than (after expenses) the Series 1 Retraction Price (as defined herein), provided that a retracting holder has not withheld consent to the sale of such Series 1 Shares. If a purchaser cannot be found pursuant to the terms of the Series 1 Remarketing Agreement or the retracting holder has withheld its consent, the retracting holder will receive, per Series 1 Share retracted, cash in an amount equal to the Series 1 Retraction Price. The “Series 1 Retraction Price” will be equal to the lesser of (i) 95% of the volume weighted average price of the Series 1 Shares on the principal exchange or market on which the Series 1 Shares are listed or quoted for trading for the three business days ending on the applicable Series 1 Deposit Date and (ii) C$23.75 (less any tax required to be deducted or withheld by the Corporation).

So this provision is not quite entirely useless, although it approaches that state. It is possible, albeit not at all probable, that something happens on the Deposit Date that really hurts the fundamentals of the company; holders will then have until 5pm to submit them for retraction at a price which can at least be guessed at (since the VWAP is determined for the three days up to and including the Deposit Date) and, possibly, completely known (for those who are able to instruct their intermediaries between the 4pm market close and the 5pm deadline).

But it’s still basically useless. At best, the retraction price is only 95% of the VWAP – in all but the most contrived circumstances, investors will be better off just selling them on the market.

For this reason, I will be ignoring this provision when specifying the issue on HIMIPref™.

The puzzle is – why include such a useless provision at all? The only publicly stated effect, so far, is that S&P won’t give the issue any equity credit, which is contrary to the company’s interest. It may be ‘some tax thing’ or it might even be a bit of flim-flam, taken with the aim of getting the issue onto lists of retractible issues (it will not appear on HIMIPref™’s list!). There are thousands and thousands of clowns out there who call themselves market professionals and rarely, if ever, do anything more than read the Bloomberg description of issue terms.

So Assiduous Reader prefhound‘s description of the feature taken from Scotia iTrade was correct, and I agree with prefguy‘s succinct “useless” summary.

The third thing to check was the tax status of the distributions. From page 26 of the PDF:

Taxable dividends received on the Shares by a holder will be included in computing the holder’s income.

In the case of a holder that is an individual, taxable dividends will be subject to the gross-up and dividend tax credit rules under the Tax Act normally applicable to taxable dividends received from a taxable Canadian corporation. Such taxable dividends will be eligible for the enhanced gross-up and dividend tax credit if the Corporation designates the taxable dividends as “eligible dividends”. There may be limitations on the Corporation’s ability to designate taxable dividends as eligible dividends.

The amount of any dividend that the Corporation elects to pay from its “capital gains dividend account” (as defined in the Tax Act) (“Capital Gains Dividend”) received by a holder of the Shares from the Corporation will be considered to be a capital gain of such holder from the disposition of capital property in the taxation year of the holder in which the Capital Gains Dividend is received.

I don’t see anything explicit about distributions being treated as a return of capital in the prospectus supplement, but I don’t know of any reason why the company couldn’t designate them as such.

New Issue: CWB FixedReset, 6.00%+404, NVCC-Compliant

Monday, January 21st, 2019

Canadian Western Bank has announced:

its intent to issue $100 million non-cumulative 5-year rate reset First Preferred Shares Series 9 (Non-Viability Contingent Capital (NVCC)) (the “Series 9 Preferred Shares”). The offering will be underwritten on a bought deal basis by a syndicate led by National Bank Financial Inc. and BMO Capital Markets. The expected closing date is on or about January 29, 2019.

Under the terms of the offering, CWB will issue 4,000,000 Series 9 Preferred Shares at a price of $25.00 per share. CWB has granted the underwriters an option to purchase, on the same terms, up to an additional 1,000,000 Series 9 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 $125 million should this option be exercised in full.

Holders of the Series 9 Preferred Shares will be entitled to receive a non-cumulative fixed dividend in the amount of $1.50 annually, payable quarterly, as and when declared by the board of directors of CWB, for the initial period ending April 30, 2024. The quarterly dividend represents an annual yield of 6.00% based on the stated issue price per share. Thereafter, the dividend rate will reset every five years at a level of 404 basis points over the then 5-year Government of Canada bond yield. The first of such dividends, if declared, will be payable on April 30, 2019 and will be $0.3832 per Series 9 Preferred Share, based on the anticipated closing date of the offering of January 29, 2019. CWB maintains the right to redeem, subject to the approval of the Superintendent of Financial Institutions (Canada), up to all of the then outstanding Series 9 Preferred Shares on April 30, 2024, and on April 30 every five years thereafter at a price of $25.00 per share.

Should CWB choose not to exercise its right to redeem the Series 9 Preferred Shares, holders of these shares will have the right to convert their shares into an equal number of non-cumulative floating rate First Preferred Shares Series 10 (Non-Viability Contingent Capital (NVCC)) (the “Series 10 Preferred Shares”), subject to certain conditions, on April 30, 2024, and on April 30 every five years thereafter. Holders of the Series 10 Preferred Shares will be entitled to receive quarterly floating dividends, as and when declared by the board of directors of CWB, equal to the 90-day Government of Canada Treasury Bill rate plus 404 basis points.

Net proceeds from the offering will be added to CWB’s general funds and utilized for general banking purposes. CWB intends to file a prospectus supplement to its January 4, 2019 base shelf prospectus in all provinces and territories of Canada 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 9 (Non-Viability Contingent Capital (NVCC)) (the “Series 9 Preferred Shares”), the underwriters have exercised their option to purchase an additional 1,000,000 Series 9 Preferred Shares. The size of the offering has been increased to 5,000,000 shares. The gross proceeds of the offering will now be $125 million. The offering will be underwritten on a bought deal basis by a syndicate led by National Bank Financial Inc. and BMO Capital Markets. The expected closing date is on or about January 29, 2019.

Net proceeds from the offering will be added to CWB’s general funds and utilized for general banking purposes. CWB intends to file a prospectus supplement to its January 4, 2019 base shelf prospectus in all provinces and territories of Canada in respect of this issue.

There are only three CWB issues, including the new issue, so we can’t do a meaningful Implied Volatility analysis, but we can look at the comparators:

Ticker Quote Issue
Reset
Spread
Yield-to-Worst (YTW) YTW Scenario
CWB.PR.B 21.23-40 276 5.59% Limit Maturity at 21.23
CWB.PR.? 25.00
Issue
Price
404 5.94% Limit Maturity at 23.14
CWB.PR.C 25.69-90 547 5.04% Call 2021-7-31 at 25.00

Well, no wonder it sold out so quickly! This was a very rare cheap new issue!

New Issue: TD FixedReset 5.20%+327, NVCC-Compliant

Friday, January 18th, 2019

The Toronto-Dominion Bank has announced (although not yet on their website):

a domestic public offering of Non-Cumulative 5-Year Rate Reset Preferred Shares (non-viability contingent capital (NVCC)), Series 22 (the “Series 22 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 22 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 22 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 22 Shares will yield 5.20% annually, with dividends payable quarterly, as and when declared by the Board of Directors of TD, for the initial period ending April 30, 2024. Thereafter, the dividend rate will reset every five years at a level of 3.27 % over the then five-year Government of Canada bond yield.

Subject to regulatory approval, on April 30, 2024 and on April 30 every 5 years thereafter, TD may redeem the Series 22 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 22 Shares will have the right to convert their shares into Non-Cumulative Floating Rate Preferred Shares (NVCC), Series 23 (the “Series 23 Shares”), on April 30, 2024, and on April 30 every five years thereafter. Holders of the Series 23 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 3.27 %.

The expected closing date is January 28, 2019. TD will make an application to list the Series 22 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 (also not yet on their website):

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 22 (the “Series 22 Shares”), the size of the offering has been increased to 14 million Series 22 Shares. The gross proceeds of the offering will now be $350 million. The offering will be underwritten by a group of underwriters led by TD Securities Inc.

The expected closing date is January 28, 2019. TD will make an application to list the Series 22 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 ridiculously expensive according to Implied Volatility Analysis:

impvol_td_190117
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According to this analysis, the fair value of the new issue on January 19 is 23.32. Note that TD.PF.K, a FixedReset, 4.75%+259, NVCC Compliant issue that commenced trading 2018-9-13 after being announced 2018-9-4, was quoted today at 22.50-65, after trading 4,100 shares in a range of 22.40-72. The fair value of TD.PF.K is 21.24 according to the analysis, so it remains 1.26 expensive four months after issue.

Update, 2019-1-22: It’s interesting to note that the theoretical spread (on a notional non-callable perpetual resettable annuity) is roughly the same as the actual issue spread – which means that TD is basically getting the call options on the issue for free.

New Issue: CM FixedReset, 5.20%+331, NVCC-compliant

Monday, January 14th, 2019

The Canadian Imperial Bank of Commerce has announced:

that it had entered into an agreement with a group of underwriters led by CIBC Capital Markets for an issue of 10 million Basel III-compliant Non-cumulative Rate Reset Class A Preferred Shares Series 49 (Non-Viability Contingent Capital (NVCC)) (the “Series 49 Shares”) priced at $25.00 per Series 49 Share to raise gross proceeds of $250 million.

CIBC has granted the underwriters an option to purchase up to an additional 2 million Series 49 Shares at the same offering price, exercisable at any time up to two days prior to closing. Should the underwriters’ option be fully exercised, the total gross proceeds of the financing will be $300 million.

The Series 49 Shares will yield 5.20% per annum, payable quarterly, as and when declared by the Board of Directors of CIBC, for an initial period ending April 30, 2024. On April 30, 2024, and on April 30 every five years thereafter, the dividend rate will reset to be equal to the then current five-year Government of Canada bond yield plus 3.31%.

Subject to regulatory approval and certain provisions of the Series 49 Shares, on April 30, 2024 and on April 30 every five years thereafter, CIBC may, at its option, redeem all or any part of the then outstanding Series 49 Shares at par.

Subject to the right of redemption, holders of the Series 49 Shares will have the right to convert their shares into Non-cumulative Floating Rate Class A Preferred Shares Series 50 (Non-Viability Contingent Capital (NVCC)) (the “Series 50 Shares”), subject to certain conditions, on April 30, 2024 and on April 30 every five years thereafter. Holders of the Series 50 Shares will be entitled to receive a quarterly floating rate dividend, as and when declared by the Board of Directors of CIBC, equal to the three-month Government of Canada Treasury Bill yield plus 3.31%.

Holders of the Series 50 Shares may convert their Series 50 Shares into Series 49 Shares, subject to certain conditions, on April 30, 2029 and on April 30 every five years thereafter.

The expected closing date is January 22, 2019. CIBC will make an application to list the Series 49 Shares as of the closing date on the Toronto Stock Exchange. The net proceeds of this offering will be used for general purposes of CIBC.

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

impvol_cm_190114a
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According to this analysis, the fair value of the new issue on January 14 is 23.85. Note that CM.PR.R, a FixedReset, 4.40%+338, NVCC Compliant issue that commenced trading 2017-6-2 after being announced 2017-5-25, was quoted today at 23.34-55, after trading 69,809 shares in a range of 23.07-45. CM.PR.R resets 2022-7-31, so it has 14 dividend payments left to reset at 80bp less than the new issue, so 25 * 0.008 * 14 / 4 = 0.70, so it will receive $0.70 less total dividends than the new issue until it resets. I’m ignoring a ‘first-coupon effect’ for the new issue, but the currently payable dividend for CM.PR.R pays it up until 2019-1-30, so the effect is minimal.

New Issue: PVS Split Share, 4.90%, 7-year

Thursday, November 15th, 2018

It is my understanding that:

Partners Value Split Corp. has entered into an agreement to sell six million Class AA preferred shares Series 9 to a syndicate of underwriters led by Scotiabank, BMO Capital Markets , CIBC Capital Markets , RBC Capital Markets and TD Securities Inc. on a bought deal basis.

The Series 9 Preferred Shares will be issued at a price of $25.00 per share, for gross proceeds of $150,000,000 . The Series 9 Preferred Shares will carry a fixed coupon of 4.90% and will have a final maturity of February 28, 2026 . The Series 9 Preferred Shares have a provisional rating of Pfd-2 (low) from DBRS. The net proceeds of the offering will be used to redeem the Company’s outstanding Class AA preferred shares Series 3.

The Company has granted the underwriters an option, exercisable in whole or in part prior to closing, to purchase up to an additional 2,000,000 Series 9 Preferred Shares at the same offering price, which, if exercised, would increase the gross offering size to $200,000,000 . Closing of the offering is expected to occur on or about November 26, 2018.

Adil Mawani , Chief Financial Officer, will be available at (647) 503-6513 to answer any questions regarding the offering.

In line with the company’s usual contempt for the investors who provide it with capital, there is no press release published on the company’s web-page, nor is there any information available on Marketwired, where they have previously grudgingly published announcements, so it doesn’t appear that Adil Mawani has any greater desire to do a competent job than any of the other clowns at PVS. Feel free to call him and ask if the company will ever do something right.

Amazingly, there’s an actual term-sheet on SEDAR, searchable (but the regulators will get very upset if you link to it) with the description “Partners Value Split Corp. Nov 15 2018 13:29:09 ET Marketing materials – English PDF 16 K”.

There is also a provisional rating announcement from DBRS:

DBRS Limited (DBRS) assigned a provisional rating of Pfd-2 (low) to the Class AA Preferred Shares, Series 9 (the Series 9 Preferred Shares) to be issued by Partners Value Split Corp. (the Company) that will rank pari passu with the existing Class AA Preferred Shares, Series 3 (the Series 3 Preferred Shares); the Class AA Preferred Shares, Series 6 (the Series 6 Preferred Shares); the Class AA Preferred Shares, Series 7 (the Series 7 Preferred Shares); and the Class AA Preferred Shares, Series 8 (the Series 8 Preferred Shares; collectively, the Class AA Preferred Shares).

Proceeds from the Series 9 Preferred Share offering will be used to fund the redemption of the Series 3 Preferred Shares no later than their scheduled maturity date of January 10, 2019. The Series 9 Preferred Shares will be entitled to fixed quarterly cumulative preferential dividends on the expected issue price of $25.00. The maturity date for the Series 9 Preferred Shares is set to February 28, 2026.

The Company owns a portfolio (the Portfolio) of Class A Limited Voting Shares (the BAM Shares) of Brookfield Asset Management Inc. (BAM; rated A (low) with a Stable trend by DBRS). Dividends received from the Portfolio are used to fund the payment of interest on the Debentures to the extent that any have been issued and to fund the payment of dividends on the Class AA Preferred Shares. There were 700 Debentures issued on November 9, 2018, as a result of the retraction of 700 Series 8 Preferred Shares.

Holders of the Junior Preferred Shares, Series 1 (the Junior Preferred Shares) are entitled to receive quarterly noncumulative cash distributions at an annual rate of 5% when declared by the board of directors. There is $200 million worth of Junior Preferred Shares currently outstanding. Holders of the Capital Shares of the Company will only receive excess dividend income after interest on the Debentures, Class AA Preferred Share distributions, Junior Preferred Share Distributions and other Company expenses have been paid. Any capital appreciation of the BAM Shares will benefit the holders of the Capital Shares. All series of Class AA Preferred Shares rank senior to the Capital Shares, the Class AAA Preferred Shares and the Junior Preferred Shares and on a pari passu basis with all other Class AA Preferred Shares with respect to payment of dividends and repayment of principal.

The Company has issued a limited number of Class A Voting Shares that rank senior to the Class AA Preferred Shares in respect of capital upon the dissolution, winding up or insolvency of the Company. As of June 30, 2018, there were $100 worth of such shares outstanding.

Following the redemption of the Series 3 Preferred Shares, the downside protection available to the Class AA Preferred Shares is expected to be approximately 85% (based on the closing price of BAM shares as of October 29, 2018) and the dividend coverage ratio is expected to be approximately 2.0 times (x; based on the Canadian dollar and U.S. dollar exchange rate as of October 29, 2018). BAM declares its dividends in U.S. dollars; consequently, there is the risk that an appreciating Canadian dollar will cause the dividend coverage ratio to fall below 1.0x. In the event of a shortfall, the Company may sell some of the BAM Shares, engage in security lending or write covered call options to generate sufficient income to satisfy its obligations to pay the Class AA Preferred Shares dividends. If the Company chooses to lend its holdings, the Portfolio would be exposed to the potential losses in the event that the borrower defaults on its obligations to return the borrowed securities.

The main constraints to the ratings are the following:

(1) The downside protection available to holders of the Class AA Preferred Shares depends solely on the market value of the BAM Shares held in the Portfolio, which will fluctuate over time.

(2) There is a lack of diversification, as the Portfolio is entirely made up of BAM Shares.

(3) Changes in the dividend policy of BAM may result in reductions in Class AA Preferred Shares dividend coverage.

(4) As BAM declares dividends in U.S. dollars, the Company is exposed to foreign currency risk relating to the Canadian-U.S. exchange rate, specifically the appreciation of the Canadian dollar versus the U.S. dollar. This may have a negative impact on the dividend coverage ratio of the Class AA Preferred Shares, as these dividends are paid in Canadian dollars.

(5) Downside protection available to the Class AA Preferred Shares may be negatively affected by the retraction of the Junior Preferred Shares.

New Issue: RY FixedReset, 4.80%+238, NVCC

Friday, October 26th, 2018

Royal Bank of Canada has announced (on October 25):

a domestic public offering of Non-Cumulative, 5-Year Rate Reset Preferred Shares Series BO.

Royal Bank of Canada will issue 12 million Preferred Shares Series BO priced at $25 per share to raise gross proceeds of $300 million. The bank has granted the Underwriters an option, exercisable in whole or in part, to purchase up to an additional 2 million Preferred Shares Series BO at the same offering price.

The Preferred Shares Series BO will yield 4.80 per cent annually, payable quarterly, as and when declared by the Board of Directors of Royal Bank of Canada, for the initial period ending February 24, 2024. Thereafter, the dividend rate will reset every five years at a rate equal to 2.38 per cent over the 5-year Government of Canada bond yield.

Subject to regulatory approval, on or after February 24, 2024, the bank may redeem the Preferred Shares Series BO in whole or in part at par. Holders of Preferred Shares Series BO will, subject to certain conditions, have the right to convert all or any part of their shares to Non-Cumulative Floating Rate Preferred Shares Series BP on February 24, 2024 and on February 24 every five years thereafter.

Holders of the Preferred Shares Series BP will be entitled to receive a non-cumulative quarterly floating dividend, as and when declared by the Board of Directors of Royal Bank of Canada, at a rate equal to the 3-month Government of Canada Treasury Bill yield plus 2.38 per cent. Holders of Preferred Shares Series BP will, subject to certain conditions, have the right to convert all or any part of their shares to Preferred Shares Series BO on February 24, 2029 and on February 24 every five years thereafter.

The offering will be underwritten by a syndicate led by RBC Capital Markets. The expected closing date is November 2, 2018.

We routinely undertake funding transactions to maintain strong capital ratios and a cost effective capital structure. Net proceeds from this transaction will be used for general business 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 Series BO, the size of the offering has been increased to 14 million shares. The gross proceeds of the offering will now be $350 million. The offering will be underwritten by a syndicate led by RBC Capital Markets. The expected closing date is November 2, 2018.

We routinely undertake funding transactions to maintain strong capital ratios and a cost effective capital structure. Net proceeds from this transaction will be used for general business purposes.

Thanks to Assiduous Reader dodoi for pointing out I was late posting this announcement.

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

impvol_ry_180826
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According to this analysis, the fair value of the new issue on October 26 is 23.77.

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.

New Issue: BNS FixedReset 4.85%+243 NVCC

Tuesday, October 2nd, 2018

The Bank of Nova Scotia has announced:

a domestic public offering of Non-cumulative 5-Year Rate Reset Preferred Shares Series 40 (Non-Viability Contingent Capital (NVCC)) (the “Preferred Shares Series 40”).

Scotiabank has agreed to sell 10 million of Preferred Shares Series 40 to a syndicate of underwriters led by Scotia Capital Inc. on a bought deal basis. Scotiabank has granted the Underwriters an option, exercisable in whole or in part up to 48 hours before closing, to purchase up to an additional 2 million Preferred Shares Series 40 at the same offering price.

Scotiabank will issue Preferred Shares Series 40 priced at $25 per share and holders will be entitled to receive a non-cumulative quarterly fixed dividend, as and when declared by the Board of Directors of Scotiabank, for the initial period ending on and including January 26, 2024 at an annual rate of $1.2125 per share to yield 4.85% per cent annually.

On January 27, 2024 and on January 27 every five years thereafter, Scotiabank may, at its option, subject to regulatory approval, redeem all or any number of the then outstanding Preferred Shares Series 40 at a redemption price of $25 per share. Thereafter, the dividend rate will reset every five years at a rate equal to 2.43% over the 5-year Government of Canada bond yield. Holders of Preferred Shares Series 40 will, subject to certain conditions, have the right to convert all or any part of their shares to Non-cumulative Floating Rate Preferred Shares Series 41 (Non-Viability Contingent Capital (NVCC)) (the “Preferred Shares Series 41”) of Scotiabank on January 27, 2024 and on January 27 every five years thereafter.

Holders of the Preferred Shares Series 41 will be entitled to receive a non-cumulative quarterly floating dividend at a rate equal to the 3-month Government of Canada Treasury Bill yield plus 2.43%, as and when declared by the Board of Directors of Scotiabank. Holders of Preferred Shares Series 41 will, subject to certain conditions, have the right to convert all or any part of their shares to Preferred Shares Series 40 on January 27, 2029 and on January 27 every five years thereafter.

Closing is expected to occur on October 12, 2018. Scotiabank will make an application to list the Preferred Shares Series 40 as of the closing date on the Toronto Stock Exchange.

Net proceeds of the offering will be used by Scotiabank to fund a portion of the redemption of Non-cumulative 5-Year Rate Reset Preferred Shares Series 20 and Non-cumulative Floating Rate Preferred Shares Series 21 announced on September 25, 2018.

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

impvol_bns_181002
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According to this analysis, the fair value of the new issue on October 2 is 23.43. However, it should be noted that the analysis is forced to do some major extrapolation, as the only other BNS FixedReset NVCC-compliant issues are BNS.PR.E, BNS.PR.G and BNS.PR.H, all of which have Issue Reset Spreads in excess of 400bp.

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.

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.