New Issue : Fortis Perp Fixed-Reset

It looks like the Desjardins Fixed-Reset idea used by Scotia’s recent new issue has found another customer.

Fortis has announced:

that it has entered into an agreement with a syndicate of underwriters led by Scotia Capital Inc. and CIBC World Markets Inc. pursuant to which they have agreed to purchase from Fortis and sell to the public 8,000,000 Cumulative Redeemable Five-Year Fixed Rate Reset Series G First Preference Shares (the “Series G First Preference Shares”) of the Corporation (the “Offering”). The underwriters will also have the option to purchase up to an additional 1,200,000 Series G First Preference Shares to cover over-allotments, if any, and for market stabilization purposes, during the 30 days following the closing of the Offering (the “Over-Allotment Option”).

Holders of Series G First Preference Shares will be entitled to receive a cumulative quarterly fixed dividend for the initial five-year period ending on August 31, 2013 of 5.25% per annum, if, as and when declared by the Board of Directors of the Corporation. Thereafter, the dividend rate will reset every five years at a level of 2.13% over the five-year Canada bond yield.

The purchase price of $25.00 per Series G First Preference Share will result in gross proceeds of $200,000,000 ($230,000,000, if the Over-Allotment Option is exercised in full). The net proceeds of the Offering will be used to repay the total amount outstanding of approximately $170 million under the Corporation’s committed credit facility, which indebtedness was incurred to fund a portion of the purchase price for the acquisition of Terasen Inc. on May 17, 2007 and the purchase price for the acquisition of the Delta Regina hotel on August 1, 2007. The balance will be used for general corporate purposes.

The Offering is subject to the receipt of all necessary regulatory and stock exchange approvals. Closing is expected to occur on or about May 23, 2008.

Issuer : Fortis Inc. (FTS)

Issue: Cumulative Redeemable Five-Year Fixed Rate Reset Preference Shares, Series G

Amount: 8-million shares @ $25 (= $200-million)

Greenshoe: 1.2-million shares @ $25.00, up to 30 days after closing.

Initial dividend rate: 5.25% (= $1.3125 p.a.) until the August 31, 2013. First reset date September 1, 2013.

Dividend Resets: Resets every 5 years to 5-year Canadas + 213bp, determined 30 days prior to the reset period.

Redemption: Redeemable on every reset date at $25.00

Priority: Parri Passu with other prefs, senior to common. Voting rights if eight dividends are missed.

Ratings: S&P: P-2 ; DBRS Pfd-3(high)

Closing: On or about May 23, 2008

I don’t like ’em. I’ve said it before … I’ll say it again. If I’m going to lend perpetual money, I want perpetual dividend rates!

8 Responses to “New Issue : Fortis Perp Fixed-Reset”

  1. kaspu says:

    You know, its crap like this that causes me to shake my head in wonderment. 5.25 for 5 years for a P3! At current rates, that 213 bp stepup is 5.28 today…for a P3. Why wouldn’t I just buy a bank P1 for 6?

  2. madequota says:

    What is the matter with you guys? This is brilliant.

    They can sell a 5.25% P3 with a 5 yr term, while the brain-trust at Canada’s billion dollar/quarter earning banks can only get away with 5.65% – 5.8% for a perp P1. This confirms everything I’ve ever said about the banks and their mindless desire to leave money on the table. This also confirms that preferred shares may actually be worth investing in.

    This will drag the market up, not down. Especially for issues like FTS.PR.F that have been hopelessly hanging around and below the $22 mark.

    Mr. Hymas, MAPF will have a major uptick because of this.

    Kaspu, your multi-million dollar holdings will gain 10’s of thousands of dollars in the short term because of this.

    What do you guys have against making money? I just don’t get you guys sometimes.

    This is the best pref share IPO news I’ve seen for a long, long time.

    This is a good thing.


  3. lystgl says:

    “Why wouldn’t I just buy a bank P1 for 6?”

    Would that include CIBC and BMO?

  4. madequota says:

    In my overwhelmingly delighted state, I almost forgot to make the market opening call on this one.

    $25.10 – $25.15 . . . it will never be underwater . . . I would recommend (and you will rarely hear this from me!) buying the IPO this time. (but only after you’ve stocked up on the RY’s, BMO’s, BNS’s, and CM’s around $20/sh) . . . because they won’t be available at that level . . . perpetually.


  5. prefhound says:

    Well, this might be perpetual money, as Mr. Hymas says, but I like the 213bp over 5-year Canadas (which have averaged about 4.0% for the past 5 years).
    If, as, when it renews at 6.1% in five years, it might be quite inviting (but I fear so much so that Fortis will call it).

    In many respects it is like those rising yield bonds issued by (you guessed it) the banks! The first year is pretty low, but the last year looks great. The only trouble is, they are always called before the yield reaches an interesting level.

    I too, am out.

  6. jiHymas says:

    Mr. Hymas, MAPF will have a major uptick because of this.

    I don’t worry so much about whether the market will go up or down. Market timing is not, shall we say, one of my core beliefs.

    I just try to buy cheap shares. This issue ain’t one of them.

    If, as, when it renews at 6.1% in five years, it might be quite inviting (but I fear so much so that Fortis will call it).

    That’s it exactly. If Fortis continues to have a (reasonably) strong financial position, it will be called. If Fortis does not have the ability to do this, chances are I won’t be too happy about a lousy 6.1%.

    I want to buy an issue that will pay me (say) 5.7% for at least ten years, so that in the former case I’ve been paid a good rate for my risk of the latter.

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