VNR.PR.A to Reset at 4.62%

Valener Inc. has announced:

Following the August 8, 2017 decision of the Board of directors of Valener Inc. (“Valener” or the “Corporation”) (TSX: VNR), Valener reiterated today that it does not intend to exercise its right to redeem all or any part of the currently outstanding Cumulative Rate Reset Preferred Shares, Series A of the Corporation (“Series A shares”) (TSX: VNR.PR.A) on October 15, 2017. There are currently 4,000,000 Series A shares outstanding.

As a result, subject to certain conditions, the holders of the Series A shares have the right to convert all or part of their Series A shares, on a one-for-one basis, into Cumulative Floating Rate Preferred Shares, Series B of the Corporation (“Series B shares”) (TSX: VNR.PR.B) on October 15, 2017 (the “Conversion Date”). A formal notice of the right to convert Series A Shares into Series B Shares will be sent to the registered holders of the Series A Shares, subject to certain conditions.

Holders who do not exercise their right to convert their Series A shares into Series B shares will continue to hold their Series A shares and will have the opportunity to convert their shares again on October 15, 2022, and every five years thereafter as long as the shares remain outstanding.

The above conversion right is subject to the following conditions:

i. if the Corporation determines that there would be less than 1,000,000 Series B shares outstanding after the Conversion Date, then holders of Series A shares will not be entitled to convert their shares into Series B shares, and alternatively

ii. if the Corporation determines that there would remain outstanding less than 1,000,000 Series A shares after the Conversion Date, then all remaining Series A shares will automatically be converted into Series B shares on a one-for-one basis on the Conversion Date.

In either case, the Corporation will give written notice to that effect to any registered holders affected by the preceding condition no later than October 6, 2017.

The dividend rate applicable for the Series A shares for the five-year period from and including October 15, 2017 and ending on and excluding October 15, 2022, and the dividend rate applicable to the Series B shares for the 3-month period from and including October 15, 2017 and ending on and excluding January 15, 2018, are respectively 4.62% and 3.71%.

Beneficial owners of Series A 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 runs from September 15, 2017 until 5:00 p.m. (Eastern Standard Time) on September 29, 2017.

According to the conditions of the Series A and Series B Shares, Valener may redeem the Series A Shares, in whole or in part, on October 15, 2022 and on October 15 every five years thereafter for $25.00 per share plus declared and unpaid dividends and may redeem the Series B Shares, in whole or in part, after October 15, 2017 for $25.50 per share plus declared and unpaid dividends, unless such Series B Shares are redeemed on October 15, 2022 or on October 15 every five years thereafter, in which case the redemption price will be $25.00 per share plus declared and unpaid dividends.

The Toronto Stock Exchange (“TSX”) has conditionally approved the listing of the Series B shares effective upon conversion. Listing of the Series B shares is subject to the Corporation fulfilling all the listing requirements of the TSX and upon approval, the Series B shares will be listed on the TSX under the trading symbol VNR.PR.B.

The Series A and Series B shares have not been and will not be registered under the United States Securities Act of 1933, as amended, or any state securities laws. The Series A and the Series B shares may not be offered, sold or delivered, directly or indirectly, in the United States of America for the account or benefit of U.S. persons. This press release does not constitute an offer to sell or a solicitation of an offer to buy such securities in the United States.

For more information on the terms and risks associated with an investment in the Series A and the Series B shares, please see the Corporation’s prospectus dated May 30, 2012 which is available on

VNR.PR.A is a FixedReset, 4.35%+281, that commenced trading 2012-6-6 after being announced 2012-5-15. The issue is tracked by HIMIPref™ and has been assigned to the FixedReset 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., VNR.PR.A and the FloatingReset VNR.PR.B 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 appears to have a distaste at the moment for floating rate product; most of the implied rates until the next interconversion are lower than the current 3-month bill rate and the averages for investment-grade and junk issues are both below current market rates, at +0.67% and +0.51%, 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 VNR.PR.A FixedReset, we may construct the following table showing consistent prices for its soon-may-be-issued FloatingReset counterpart VNR.PR.B given a variety of Implied Breakeven yields consistent with issues currently trading:

Estimate of FloatingReset VNR.PR.B (received in exchange for VNR.PR.A) Trading Price In Current Conditions
  Assumed FloatingReset
Price if Implied Bill
is equal to
FixedReset Bid Price Spread 1.00% 0.50% 0.00%
VNR.PR.A 22.59 281bp 21.77 21.26 20.76

Based on current market conditions, I suggest that the FloatingResets that will result from conversion are likely to be cheap and trading below the price of their FixedReset counterparts. Therefore, it seems likely that I will recommend that holders of VNR.PR.A continue to hold the issue and not to convert, but I will wait until it’s closer to the September 29 notification deadline before making a final pronouncement. I will note that, given the apparent cheapness of the FloatingResets, 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.

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