TRP.PR.D To Reset At 3.903%

TransCanada Corporation has announced:

that it has notified the registered shareholder of the applicable dividend rates for Cumulative Redeemable First Preferred Shares, Series 7 (Series 7 Shares) and the Cumulative Redeemable First Preferred Shares, Series 8 (Series 8 Shares).

As previously announced in our news release dated March 15, 2019, holders of the Series 7 Shares have the right on April 30, 2019 to convert, on a one-for-one basis, any or all of their Series 7 Shares into Series 8 Shares and receive a floating rate quarterly dividend, or retain any or all of their Series 7 Shares and receive a new fixed rate quarterly dividend.

Should a holder of Series 7 Shares choose to retain their shares, such shareholders will receive the new annual fixed dividend rate applicable to the Series 7 Shares of 3.903% for the five-year period commencing April 30, 2019 to, but excluding, April 30, 2024.

Should a holder of Series 7 Shares choose to convert their shares to Series 8 Shares, holders of Series 8 Shares will receive the floating quarterly dividend rate applicable to the Series 8 Shares of 4.032% for the first quarterly floating rate period commencing effective April 30, 2019 to, but excluding, July 30, 2019. The floating quarterly dividend rate will be reset every quarter.

Beneficial owners of Series 7 Shares who do not provide notice or communicate with their broker or other nominee by 5 p.m. (EDT) on April 15, 2019 will retain their Series 7 Shares and receive the new annual fixed dividend rate applicable to the Series 7 Shares stated above.

For more information on the terms of, and risks associated with an investment in the Series 7 Shares and the Series 8 Shares, please see the prospectus supplement dated February 25, 2013 which is available on sedar.com or on our website.

TRP.PR.D is a FixedReset, 4.00%+238, that commenced trading 2013-3-4 after being announced 2013-2-25. The extension was announced 2019-3-15. The issue is tracked by HIMIPref™ and assigned to the FixedReset (Discount) subindex.

Note that the reset rate for CWB.PR.B announced today implies a GOC-5 yield of 1.541%, whereas the TRP.PR.D reset implies 1.523%. This is not necessarily a problem. The prospectus for CWB.PR.B (available at SEDAR, search for “Canadian Western Bank Feb 3 2014 19:39:17 ET Prospectus supplement – English PDF 242 K”; sorry I can’t link directly but the Canadian Securities Administrators do not believe that investor scum should have easy access to public ha-ha documents) states:

“Initial Fixed Rate Period” means the period commencing on the Closing Date and ending on and including April 30, 2019.

…while the TRP.PR.D prospectus (kudos to TransCanada for posting the prospectus on their website!) states:

‘‘Initial Fixed Rate Period’’ means the period from and including the date of issue of the Series 7 Shares to but excluding April 30, 2019.

What a difference a day makes!

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., TRP.PR.D 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).

pairs_fr_190401
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 +0.78% and +1.11%, 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 TRP.PR.D 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:

Estimate of FloatingReset (received in exchange for TRP.PR.D) Trading Price In Current Conditions
  Assumed FloatingReset
Price if Implied Bill
is equal to
FixedReset Bid Price Spread 1.50% 1.00% 0.50%
TRP.PR.D 17.10 238bp 17.08 16.58 16.09

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, TRP.PR.D. Therefore, it seems likely that I will recommend that holders of TRP.PR.D continue to hold the issue and not to convert, but I will wait until it’s closer to the April 15 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.

5 Responses to “TRP.PR.D To Reset At 3.903%”

  1. dodoi says:

    Hi James,

    I am a little confused by the numbers for floating reset price in the table. Is not the Three Months Bill Rate 1.67 and as a result floating dividend (1.67+2.38) already greater than fixed dividend (1.523+2.38)? Sure there is no guarantee that it will stay at this level for the next five years and there will be no recession.

    Thank you,

  2. jiHymas says:

    Sure, the current Three Month Bill rate is 1.67%, but extant pairs are now trading such that if the average bill rate from now until their next Exchange Date is 1.00% (roughly) then either element of the pair will have achieved the same total return between now and that date, assuming that on their next Exchange Date they have the same price.

    If the actual average bill rate between now and then is in excess of 1.00%, then the FloatingResets will have outperformed. If the actual rate is below 1.00%, then the FixedReset part of the pair will outperform.

    On a practical basis, my analysis assumes that the FloatingReset counterpart to TRP.PR.D does commence to trade, it will reflect extant market conditions and trade at a price such that the pair’s breakeven rate is 1.00%. Why wouldn’t it trade like everything else?

    Of course, there will be many who do believe the average rate will be higher than 1.00%. They may wish to hang on to their TRP.PR.D in the hopes of selling it at 17.10 (the current price) and buying the newly created FloatingResets at 16.58 (the price of the FloatingResets that reflects a 1.00% breakeven rate). This will, of course, be more advantageous than electing to convert via the company at a 1:1 ratio.

    I suggest you read my article on preferred pairs for a more detailed exposition.

  3. dodoi says:

    I see. You think that it would be cheaper to sell the fixed and buy the floater. It could be true, though if I look at some other pairs they are trading at about the some price even the dividend is higher for the floater (closing price is from Apr 2nd, 2019):

    -slf.prj.j (5.203%) at $14.80 vs slf.pr.g (3.846%) at $14.79
    -mfc.pr.p (5.333%) at $14.50 vs mfc.pr.f (3.729) at $14.60
    -brf.pr.b (6.571%) at $15.90 vs brf.pr.a (5.275%) at $15.90

    I think the floaters are discounted since everyone expect a recession.

    In this particular case since we know for sure that the trp floater dividend would be higher than the fixed, ignoring the risk of a recession when the floater dividend will go into the ground, would it not be better to convert the fixed to the floater? We would get the higher dividend for sure at least for some time and in addition avoid a capital gain if there is one.

    Thank you,

  4. jiHymas says:

    we know for sure that the trp floater dividend would be higher than the fixed, ignoring the risk of a recession when the floater dividend will go into the ground, would it not be better to convert the fixed to the floate

    Certainly it will be better to convert to the FloatingReset, if we know for sure that the floating dividend will be higher than the fixed throughout the term of the fixed rate, thus ignoring the risk of a recession which would probably cause the floating dividend to decline and, additionally, we assume that market pricing reflects that assumption.

    and in addition avoid a capital gain if there is one.

    There’s no capital gain for exchanges of a regular corporation’s issues. Capital gains or losses may be triggered if a ‘Partnership preferred unit’ is exchanged. This is discussed in the prospectuses.

  5. dodoi says:

    I meant that it would be better to exchange it from fixed to floater instead of selling the fixed and buy the floater in order to avoid the capital gain. Since I am not into trading preferred shares like you I am not very concerned about the floated/fixed price since at the next exchange it should be the same.

    My crystal ball has been fuzzy for some time, but if someone has a clearer one the result could be quite nice. I have had slf.prj.j for almost 2 years and the dividend has gone up from 0.1178 to 0.1925 (+64%), and for brf.pr.b from 0.1911 in 2016 to 0.2652 (+39%) per unit. There is still time to go down though.

    Anyway I do not think we will have a floated for this issue. Assuming the 3 month GOC will be higher than 5 year GOC it will be interesting to see what happens for an existing pair like slf.pr.g/j where a possible exchange is next year. I do not think that it is possible for the 3 month GOC to stay higher than 5 year GOC for such a long time but who knows?

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