PrefBlog

Quadravest has announced:

Financial 15 Split Corp. (the “Company”) is pleased to announce it will undertake an offering of Preferred Shares and Class A Shares of the Company. The offering will be co-led by National Bank Financial Inc., CIBC World Markets Inc., Scotia Capital Inc. and RBC Capital Markets, and will also include BMO Capital Markets, Canaccord Genuity Corp., Industrial Alliance Securities Inc., Echelon Wealth Partners, GMP Securities L.P., Raymond James Ltd., Desjardins Securities Inc., Mackie Research Capital Corporation, and Manulife Securities Incorporated.

The Preferred Shares will be offered at a price of $9.85 per Preferred Share to yield 5.6% and the Class A Shares will be offered at a price of $8.15 per Class A Share to yield 18.5%.

The closing price on the TSX of each of the Preferred Shares and the Class A Shares on April 22, 2019 was $9.97 and
$8.22, respectively.

Since inception of the Company, the aggregate dividends declared on the Preferred Shares have been $8.15 per share and the aggregate dividends declared on the Class A Shares have been $19.27 per share, for a combined total of $27.42. All distributions to date have been made in tax advantage eligible Canadian dividends or capital gains dividends.

The net proceeds of the offering will be used by the Company to invest in an actively managed, high quality portfolio consisting of 15 financial services companies made up of Canadian and U.S. issuers as follows:

Bank of Montreal	National Bank of Canada	Bank of America Corp.
The Bank of Nova Scotia	Manulife Financial Corporation	Citigroup Inc.
Canadian Imperial Bank of Commerce	Sun Life Financial Services of Canada Inc.	Goldman Sachs Group Inc.
Royal Bank of Canada	Great-West Lifeco Inc.	JP Morgan Chase & Co.
The Toronto-Dominion Bank	CI Financial Corp.	Wells Fargo & Co.

The Company’s investment objectives are:
Preferred Shares:
i. to provide holders of the Preferred Shares with fixed, cumulative preferential monthly cash dividends currently in the amount of 5.50% annually, to be set by the Board of Directors annually subject to a minimum of 5.25% until 2020; and
ii. on or about the termination date, currently December 1, 2020 (subject to further 5 year extensions thereafter), to pay the holders of the Preferred Shares $10.00 per Preferred Share.

Class A Shares:
i. to provide holders of the Class A Shares with regular monthly cash dividends in an amount to be determined by the Board of the Directors; and
ii. to permit holders to participate in all growth in the net asset value of the Company above $10 per Unit, by paying holders on or about the termination date of December 1, 2020 (subject to further 5 year extensions thereafter) such amounts as remain in the Company after paying $10 per Preferred Share.

The sales period of this overnight offering will end at 9:00 a.m. EST on April 24, 2019. The offering is expected to close on or about April 30, 2019 and is subject to certain closing conditions including approval by the TSX.

So they’re selling Whole Units for $18.00 at a time when the NAVPU is about $15.90, a premium of about 13.2%. What an awesome business it is!

Bank of Montreal has announced:

it has closed its domestic public offering of Non-Cumulative 5-Year Rate Reset Class B Preferred Shares Series 46 (Non-Viability Contingent Capital (NVCC)) (the “Preferred Shares Series 46”). The offering was underwritten on a bought-deal basis by a syndicate of underwriters led by BMO Capital Markets. Bank of Montreal issued 14 million Preferred Shares Series 46 at a price of $25.00 per share to raise gross proceeds of $350 million.

The Preferred Shares Series 46 were issued under a prospectus supplement dated April 10, 2019, to the Bank’s short form base shelf prospectus dated May 23, 2018. Such shares will commence trading on the Toronto Stock Exchange today under the ticker symbol BMO.PR.F.

BMO.PR.F is a FixedReset 5.10%+351, NVCC-compliant issue announced April 8. It will be tracked by HIMIPref™ and is assigned to the FixedReset (Premium) subindex.

The issue traded 2,191,850 shares today in a range of 25.05-24 before closing at 25.22-23. Vital statistics are:

2.2-million shares is an awesome trading volume for a medium-sized issue such as BMO.PR.F, even though the total places it only at #27 on the all-time (well … since 1993, anyway) list. Only thirty-eight entries in my database crack the 2-million mark, an achievement managed only twice in 2017, four times in 2016 and, prior to then, just once in each of 2008 and 2007, with a host of earlier dates. The last 2-million-plus day was June 2, 2017, when CM.PR.R managed the feat.

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

Click for Big

According to this analysis BMO.PR.F is fairly valued at 24.49 (down 0.11 from announcement date) and is therefore 0.73 rich – although holders can take some solace, perhaps, from the fact that BMO.PR.E may be considered 1.28 rich to its fair value of 21.07

It’s interesting to note that the theoretical spread (on a notional non-callable perpetual resettable annuity) of 348bp is roughly the same as the actual issue spread on BMO.PR.F of 351bp – which means that BMO is basically getting the call options on the issue for free.

National Bank of Canada has announced:

the dividend rates applicable to the Non-Cumulative 5-Year Rate Reset First Preferred Shares, Series 30 (the “Series 30 Preferred Shares”) and the Non-Cumulative Floating Rate First Preferred Shares, Series 31 (the “Series 31 Preferred Shares”).

Holders of Series 30 Preferred Shares, should any remain outstanding after May 15, 2019, will be entitled to receive fixed rate non-cumulative preferential cash dividends on a quarterly basis, as and when declared by the Board of Directors of the Bank and subject to the provisions of the Bank Act (Canada). The dividend rate for the five-year period commencing on May 16, 2019 and ending on May 15, 2024 will be 4.025%, being equal to the sum of the five-year Government of Canada Bond yield (1.625%) plus 2.40%, as determined in accordance with the terms of the Series 30 Preferred Shares.

Holders of Series 31 Preferred Shares, should any be issued on May 15, 2019, will be entitled to receive floating rate non-cumulative preferential cash dividends on a quarterly basis, as and when declared by the Board of Directors of the Bank and subject to the provisions of the Bank Act (Canada). The dividend rate for the three-month period commencing on May 16, 2019 and ending on August 15, 2019, will be 4.060%, being equal to the sum of the 90-day Government of Canada Treasury Bill yield (1.66%) plus 2.40%, calculated on the basis of actual number of days elapsed in such quarterly floating rate period divided by 365, as determined in accordance with the terms of the Series 31 Preferred Shares.

Holders of the Series 30 Preferred Shares have, subject to certain conditions, the right to convert all or part of their Series 30 Preferred Shares on a one-for-one basis into Series 31 Preferred Shares on May 15, 2019.

Beneficial owners of Series 30 shares who wish to exercise their conversion right should communicate as soon as possible with their broker or other nominee and ensure that they follow their instructions in order to meet the deadline to exercise such right, which is April 30, 2019 at 5:00 p.m. (EST).

They previously announced (on March 18):

that it does not intend to exercise its right to redeem all or part of the currently outstanding 14,000,000 Non-Cumulative 5-Year Rate Reset First Preferred Shares, Series 30 (the “Series 30 Preferred Shares”) on May 15, 2019. As a result, subject to certain conditions, the holders of the Series 30 Preferred Shares have the right to convert all or part of their Series 30 Preferred Shares on a one-for-one basis into Non-cumulative Floating Rate First Preferred Shares Series 31 (the “Series 31 Preferred Shares”) on May 15, 2019 in accordance with the terms of the Series 30 Preferred Shares described in the prospectus supplement dated January 31, 2014 to the short form base shelf prospectus dated October 5, 2012.

Holders of Series 30 Preferred Shares who do not exercise their right to convert their Series 30 Preferred Shares into Series 31 Preferred Shares on May 15, 2019 will retain their Series 30 Preferred Shares.

The foregoing conversions are subject to the conditions that: (i) if National Bank determines that there would remain outstanding on May 15, 2019 less than 1,000,000 Series 31 Preferred Shares, after having taken into account all Series 30 Preferred Shares tendered for conversion into Series 31 Preferred Shares, then holders of Series 30 Preferred Shares will not be entitled to convert their shares into Series 31 Preferred Shares, and (ii) alternatively, if National Bank determines that there would remain outstanding on May 15, 2019 less than 1,000,000 Series 30 Preferred Shares, after having taken into account all Series 30 Preferred Shares tendered for conversion into Series 31 Preferred Shares, then all remaining Series 30 Preferred Shares will automatically be converted into Series 31 Preferred Shares without the consent of the holders on May 15, 2019.

In either case, National Bank shall give a notice to that effect to all registered holders of Series 30 Preferred Shares no later than May 8, 2019.

On April 15, 2019, National Bank will give notice of:

i. the annual fixed dividend rate applicable to the Series 30 Preferred Shares to which a holder of Series 30 Preferred Shares will be entitled for the 5-year period from May 16, 2019 up to and including May 15, 2024; and

ii. the floating quarterly dividend rate applicable to the Series 31 Preferred Shares to which a holder of Series 31 Preferred Shares will be entitled for the 3-month period from May 16, 2019 up to and including August 15, 2019.

Beneficial owners of Series 30 shares who wish to exercise their conversion right should communicate with their broker or other nominee to obtain instructions for exercising such right during the conversion period, which will run from April 15, 2019 until April 30, 2019 at 5:00 p.m. (EST).

NA.PR.S is a NVCC-compliant FixedReset, 4.10%+240, that commenced trading 2014-2-7 after being announced 2014-1-29. It is tracked by HIMIPref™ and assigned to the FixedResets-Discount subindex.

The most logical way to analyze the question of whether or not to convert is through the theory of Preferred Pairs, for which a calculator is available. Briefly, a Strong Pair is defined as a pair of securities that can be interconverted in the future (e.g., NA.PR.S and the FloatingReset that will exist if enough holders convert). Since they will be interconvertible on this future date, it may be assumed that they will be priced identically on this date (if they aren’t then holders will simply convert en masse to the higher-priced issue). And since they will be priced identically on a given date in the future, any current difference in price must be offset by expectations of an equal and opposite value of dividends to be received in the interim. And since the dividend rate on one element of the pair is both fixed and known, the implied average rate of the other, floating rate, instrument can be determined. Finally, we say, we may compare these average rates and take a view regarding the actual future course of that rate relative to the implied rate, which will provide us with guidance on which element of the pair is likely to outperform the other until the next interconversion date, at which time the process will be repeated.

We can show the break-even rates for each FixedReset / FloatingReset Strong Pair graphically by plotting the implied average 3-month bill rate against the next Exchange Date (which is the date to which the average will be calculated).

Click for Big

The market has lost its fleeting enthusiasm for floating rate product; the implied rates until the next interconversion are below the current 3-month bill rate as the averages for investment-grade and junk issues are at +0.68% and +1.42%, respectively. Whatever might be the result of the next few Bank of Canada overnight rate decisions, I suggest that it is unlikely that the average rate over the next five years will be lower than current – but if you disagree, of course, you may interpret the data any way you like.

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

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

Based on current market conditions, I suggest that the FloatingResets that will result from conversion are likely to trade below the price of their FixedReset counterparts, NA.PR.S. Therefore, it seems likely that I will recommend that holders of NA.PR.S continue to hold the issue and not to convert, but I will wait until it’s closer to the April 30 notification deadline before making a final pronouncement. I will note that once the FloatingResets commence trading (if, in fact, they do) it may be a good trade to swap the FixedReset for the FloatingReset in the market once both elements of each pair are trading and you can – presumably, according to this analysis – do it with a reasonably good take-out in price, rather than doing it through the company on a 1:1 basis. But that, of course, will depend on the prices at that time and your forecast for the path of policy rates over the next five years. There are no guarantees – my recommendation is based on the assumption that current market conditions with respect to the pairs will continue until the FloatingResets commence trading and that the relative pricing of the two new pairs will reflect these conditions.

Canadian Western Bank has announced:

that after having taken into account all election notices received by the April 15, 2019 deadline for conversion of its currently outstanding 5,000,000 non-cumulative 5-year rate reset First Preferred Shares Series 5 (the “Series 5 Preferred Shares”) (TSX: CWB.PR.B) into non-cumulative floating rate First Preferred Shares Series 6 of CWB (the “Series 6 Preferred Shares”), no Series 5 Preferred Shares will be converted into Series 6 Preferred Shares. There were 294,756 Series 5 Preferred Shares elected for conversion, which is less than the minimum 500,000 shares required to give effect to conversion into Series 6 Preferred Shares.

As announced by CWB on April 1, 2019, after April 30, 2019, holders of Series 5 Preferred Shares will be entitled to receive fixed rate non-cumulative preferential cash dividends on a quarterly basis, as and when declared by the Board of Directors of CWB and subject to the provisions of the Bank Act (Canada). The dividend rate for the five-year period commencing on May 1, 2019, and ending on April 30, 2024, will be 4.301% per annum or $0.2688125 per share per quarter, being equal to the sum of the five-year Government of Canada bond yield as at April 1, 2019, plus 2.76%, as determined in accordance with the terms of the Series 5 Preferred Shares. The quarterly cash dividend was previously $0.275 per Series 5 Preferred Share up to and including the dividend to be paid on April 30, 2019 to shareholders of record on April 23, 2019.

Subject to certain conditions described in the prospectus supplement dated February 3, 2014 relating to the issuance of the Series 5 Preferred Shares, CWB may redeem the Series 5 Preferred Shares, in whole or in part, on April 30, 2024 and on April 30 every five years thereafter.

CWB.PR.B is a FixedReset, 4.40%+276, that commenced trading 2014-2-10 after being announced 2014-1-31. The extension was announced 2019-3-11. It will reset at 4.301% effective May 1, 2019. I recommended against conversion. The issue is tracked by HIMIPref™ but relegated to the Scraps – FixedReset (Discount) index on credit concerns.

Royal Bank of Canada has announced (on April 12):

that it does not intend to exercise its right to redeem all or any part of the currently outstanding Non-Viability Contingent Capital (NVCC) Non-Cumulative 5-Year Rate Reset First Preferred Shares, Series AZ (the “Series AZ shares”) on May 24, 2019. There are currently 20,000,000 Series AZ shares outstanding.

Subject to certain conditions set out in the prospectus supplement dated January 23, 2014 relating to the issuance of the Series AZ shares, the holders of the Series AZ shares have the right to convert all or part of their Series AZ shares, on a one-for-one basis, into NVCC Non-Cumulative Floating Rate First Preferred Shares, Series BA (the “Series BA shares”) on May 24, 2019. On such date, holders who do not exercise their right to convert their Series AZ shares into Series BA shares, will continue to hold their Series AZ shares. The foregoing conversion rights are subject to the following:
if Royal Bank of Canada determines that there would be less than 1,000,000 Series BA shares outstanding after taking into account all shares tendered for conversion on May 24, 2019, then holders of Series AZ shares will not be entitled to convert their shares into Series BA shares, and
alternatively, if Royal Bank of Canada determines that there would remain outstanding less than 1,000,000 Series AZ shares after May 24, 2019, then all remaining Series AZ shares will automatically be converted into Series BA shares on a one-for-one basis on May 24, 2019.

In either case, Royal Bank of Canada will give written notice to that effect to holders of Series AZ shares no later than May 17, 2019.

The dividend rate applicable for the Series AZ shares for the 5-year period from and including May 24, 2019 to but excluding May 24, 2024, and the dividend rate applicable to the Series BA shares for the 3-month period from and including May 24, 2019 to but excluding August 24, 2019, will be determined and announced by way of a press release on April 24, 2019.

Beneficial owners of Series AZ shares who wish to exercise their conversion rights should instruct their broker or other nominee to exercise such rights during the conversion period, which runs from April 24, 2019 until 5:00 p.m. (EST) on May 9, 2019.

Inquiries should be directed to Shareholder Relations Officer, Shirley Boudreau, at 416-955-7806.

RY.PR.Z is a NVCC-compliant FixedReset, 4.00%+221, that commenced trading 2014-1-30 after being announced 2014-1-21. This issue is tracked by HIMIPref™ and is assigned to the FixedReset-Discount subindex.

I will have more commentary when the reset rate is announced on April 24.