PrefBlog

Standard & Poor’s has announced:

• On Feb. 6, 2020, Innergex Renewable Energy Inc. (Innergex) and Hydro-Quebec announced the formation of a strategic partnership whereby Hydro-Quebec has invested C$661 million in Innergex’s equity through a private placement, and committed to C$500 million in further capital for future co-investments in renewable energy projects globally.
• We view Hydro-Quebec’s equity investment in Innergex as supportive for the rating. Therefore, we are removing the issuer credit rating (ICR) and preferred share rating from CreditWatch, where they were placed with negative implications on Dec. 23, 2019. At the same time, we are affirming our ‘BBB-‘ ICR on the company and our ‘BB’ global scale and ‘P-3’ Canada scale preferred stock ratings on the company.
• The negative outlook reflects limited headroom to withstand financial underperformance, increased debt levels, or any other credit-negative events. We believe there is a one-in-three likelihood that leverage could be higher than our base-case forecast.
• We continue to assess the business risk profile as satisfactory, underpinned by high levels of contractedness and counterparty strength, reasonable asset performance, and good diversity.

…
While we acknowledge that the equity issuance helps improve Innergex’s credit metrics to an extent that it supports the rating, we believe there is a likelihood that leverage could be higher than our base-case forecast and possibly below the downside trigger given limited headroom, rapid development track record, and aggressive use of corporate debt to fund equity in projects. Our forecast assumptions also incorporate asset-level financing for some of the company’s projects that are currently under construction. This ultimately has a positive impact on holdco debt and our calculated metrics, which could be adversely affected if the financings are delayed or amounts differ from plan. Finally, Hydro-Quebec is committed to co-invest C$500 million with Innergex in suitable renewable projects over the next three years. Details on the deployment of this capital (timing, development versus acquisition, financing, incremental cash flow, etc.) are unknown, but in our view, the risk remains that leverage could be higher than our base-case forecast if Innergex relies heavily on corporate debt to co-fund equity in these investments.

The negative outlook reflects FFO-to-debt of about 23% in 2020, which is at the cusp of the downside trigger. We believe that Innergex will continue with its strategy of funding the equity portion of its development pipeline with corporate debt and will have limited free cash flow to reduce holdco debt given its ambitious growth plans. Therefore, we believe that there is a one-in-three likelihood that leverage could be higher than our base-case forecast.

We could lower the rating if we expect that Innergex will be unable to achieve FFO-to-debt of at least 23% in 2020 and beyond. This would likely occur if the company continues to rely heavily on corporate-level debt financing to support its expansion plans, or if its financial performance falls short of our base-case forecast.

We could revise the outlook to stable if Innergex deleverages at the holdco level and builds a reasonable cushion in its credit metrics. We would look for FFO-to-debt of at least 24%-26% on a sustained basis before revising the outlook.

Affected issues are INE.PR.A and INE.PR.C.

The now-cancelled Watch-Negative was previously reported on PrefBlog.

Intact Financial Corporation has announced:

that it has closed its previously announced bought deal offering (the “Offering”) of Non-Cumulative Class A Shares, Series 9 (the “Series 9 Preferred Shares”) underwritten by a syndicate of underwriters led by TD Securities Inc. together with BMO Capital Markets, CIBC Capital Markets, National Bank Financial, RBC Capital Markets and Scotiabank, resulting in aggregate gross proceeds (including the proceeds resulting from the exercise of their option) to IFC of $150 million. The net proceeds from the Offering will be used by IFC for general corporate purposes.

Each Series 9 Preferred Share entitles the holder thereof to receive quarterly non-cumulative preferential cash dividends, if, as and when declared by the Board of Directors, on the last day of March, June, September and December in each year at a rate equal to $0.3375 per share. The initial dividend, if declared, will be paid on June 30, 2020 and will be $0.4906 per share.

The Series 9 Preferred Shares will commence trading today on the Toronto Stock Exchange under the symbol IFC.PR.I.

IFC.PR.I is a Straight Perpetual 5.40% issue announced 2020-2-6. It will be tracked by HIMIPref™ and has been assigned to the PerpetualPremium sub-index.

The issue traded 743,673 shares today in a range of 25.10-32 before closing at 25.21-22. Vital statistics are:

It will be recalled that ENB.PF.C will reset at 3.938% effective March 1, 2020.

ENB.PF.C is a FixedReset, 4.40%+264, that commenced trading 2014-5-22 after being announced 2014-5-12. The issue is tracked by HIMIPref™ but is relegated to the Scraps – FixedReset – Discount subindex on credit concerns.

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. ENB.PF.C and the FloatingReset that will arise 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 appears to have lost its fleeting interest in floating rate product; the implied rates until the next interconversion are generally below the current 3-month bill rate as the averages for investment-grade and junk issues are at +0.85% and +1.66%, respectively, after discarding the junk outlying pair AIM.PR.A / AIM.PR.B, which resets on 2020-3-31. 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 ENB.PF.C 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, ENB.PF.C. Therefore, I recommend that holders of ENB.PF.C continue to hold the issue and not to convert. I will note that once the FloatingResets commence trading (if, in fact, they do) it may be a good trade to swap one issue for the other in the market once both elements of each pair are trading and you can – hopefully – 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.

Those who wish to convert are advised that the deadline for notifying the company of such a desire is 5:00 p.m. (EST) on February 18, 2020. Brokers and other intermediaries generally set their internal deadlines a day or two in advance of this date, so if you wish to convert there’s no time to waste! Note that brokers will, in general, try to execute the instruction on a ‘best efforts’ basis if received between the two deadlines, provided that the procrastinating shareholder grovels entertainingly enough.