Element Fleet Management Corp. has announced (although not yet on their website):
the dividend rates applicable to its Cumulative 5Year Rate Reset Preferred Shares, Series E (the “Series E shares”) and Cumulative Floating Rate Preferred Shares, Series F (the “Series F shares”).
With respect to any Series E shares that remain outstanding after September 30, 2019, holders thereof shall be entitled to receive, and the Corporation shall pay thereon, if, as and when declared by the Board of Directors of the Corporation (the “Board”), fixed, cumulative, preferential cash dividends payable quarterly. The dividend rate applicable to the Series E shares for the period from and including September 30, 2019 up to, but excluding, September 30, 2024, will be 5.903% per annum, being equal to the sum of the 5year Government of Canada bond yield determined as of today plus 4.72%, in accordance with the terms of the Series E shares.
With respect to any Series F shares that may be issued on September 30, 2019, holders thereof shall be entitled to receive, and the Corporation shall pay thereon, if, as and when declared by the Board, floating rate, cumulative, preferential cash dividends payable quarterly. The dividend rate applicable to the Series F shares for the period from and including September 30, 2019 up to, but excluding, December 31, 2019, will be 6.365% per annum, being equal to the sum of the 3month Government of Canada Treasury Bill yield determined as of today plus 4.72%, calculated on the basis of the actual number of days in such quarterly period divided by 365, in accordance with the terms of the Series F shares.
Beneficial owners of Series E shares who wish to exercise their Conversion Privilege should communicate with their broker or other nominee to ensure their instructions are followed so that the registered holder of the Series E shares can meet the deadline to exercise the Conversion Privilege. Such deadline is 5:00 p.m. (Toronto time) on September 16, 2019, as further described in the Corporation’s news release dated August 27, 2019 and in the rights, privileges, restrictions and conditions attaching to the Series E shares, as provided in Article 8 of the Corporation’s restated articles of incorporation dated October 4, 2016.
EFN.PR.E is a FixedReset, 6.40%+472, that was announced 201462 but not immediately tracked by HIMIPref™ as it was unrated. Coverage commenced in September, 2015 after the company’s preferreds were rated Pfd3 by DBRS. The extension was announced 2019827.
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., BAM.PF.F 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 higherpriced 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 breakeven rates for each FixedReset / FloatingReset Strong Pair graphically by plotting the implied average 3month bill rate against the next Exchange Date (which is the date to which the average will be calculated). Inspection of the graph and the overall average breakeven rates for extant pairs will provide a guide for estimating the breakeven rate for the pair now under consideration assuming, of course, that enough conversions occur so that the pair is in fact created.
Click for Big
The market has lost enthusiasm for floating rate product; the implied rates until the next interconversion are generally well below the current 3month bill rate as the averages for investmentgrade and junk issues are at +0.63% and +1.22%, 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 investmentgrade 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 EFN.PR.E FixedReset, we may construct the following table showing consistent prices for its soonmaybeissued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:
Estimate of FloatingReset (received in exchange for EFN.PR.E) Trading Price In Current Conditions 

Assumed FloatingReset Price if Implied Bill is equal to 
FixedReset 
Bid Price 
Spread 
1.50% 
1.00% 
0.50% 
EFN.PR.E 
18.99 
472bp 
19.28 
18.82 
18.37 
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, EFN.PR.E. Therefore, it seems likely that I will recommend that holders of EFN.PR.E continue to hold the issue and not to convert, but I will wait until it’s closer to the September 16 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 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 takeout 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.
This entry was posted on Wednesday, September 4th, 2019 at 1:28 am and is filed under Issue Comments. You can follow any responses to this entry through the RSS 2.0 feed.
You can leave a response, or trackback from your own site.
EFN.PR.E To Reset To 5.903%
Element Fleet Management Corp. has announced (although not yet on their website):
EFN.PR.E is a FixedReset, 6.40%+472, that was announced 201462 but not immediately tracked by HIMIPref™ as it was unrated. Coverage commenced in September, 2015 after the company’s preferreds were rated Pfd3 by DBRS. The extension was announced 2019827.
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., BAM.PF.F 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 higherpriced 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 breakeven rates for each FixedReset / FloatingReset Strong Pair graphically by plotting the implied average 3month bill rate against the next Exchange Date (which is the date to which the average will be calculated). Inspection of the graph and the overall average breakeven rates for extant pairs will provide a guide for estimating the breakeven rate for the pair now under consideration assuming, of course, that enough conversions occur so that the pair is in fact created.
Click for Big
The market has lost enthusiasm for floating rate product; the implied rates until the next interconversion are generally well below the current 3month bill rate as the averages for investmentgrade and junk issues are at +0.63% and +1.22%, 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 investmentgrade 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 EFN.PR.E FixedReset, we may construct the following table showing consistent prices for its soonmaybeissued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:
Price if Implied Bill
is equal to
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, EFN.PR.E. Therefore, it seems likely that I will recommend that holders of EFN.PR.E continue to hold the issue and not to convert, but I will wait until it’s closer to the September 16 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 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 takeout 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.
This entry was posted on Wednesday, September 4th, 2019 at 1:28 am and is filed under Issue Comments. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.