Pembina Pipeline Corporation has announced:
that it does not intend to exercise its right to redeem the currently outstanding Cumulative Redeemable Rate Reset Class A Preferred Shares, Series 7 (“Series 7 Shares”) (TSX: PPL.PR.G) on December 2, 2019 (the “Conversion Date”).
As a result, and subject to certain terms of the Series 7 Shares, the holders of the Series 7 Shares will have the right to elect to convert all or any of their Series 7 Shares into Cumulative Redeemable Floating Rate Class A Preferred Shares, Series 8 of Pembina (“Series 8 Shares”) on the basis of one Series 8 Share for each Series 7 Share on the Conversion Date.
Pursuant to the terms of the Series 7 Shares, as December 1, 2019, the conversion date for the Series 7 Shares, is not a business day, the actual conversion date will be the next succeeding business day, December 2, 2019.
With respect to any Series 7 Shares that remain outstanding after December 2, 2019, holders thereof will be entitled to receive quarterly fixed cumulative preferential cash dividends, if, as and when declared by the Board of Directors of Pembina. The annual dividend rate for the Series 7 Shares for the fiveyear period from and including December 1, 2019 to, but excluding, December 1, 2024 will be 4.38%, being equal to the fiveyear Government of Canada bond yield of 1.44% determined as of today plus 2.94%, in accordance with the terms of the Series 7 Shares.
With respect to any Series 8 Shares that may be issued on December 2, 2019, holders thereof will be entitled to receive quarterly floating rate cumulative preferential cash dividends, if, as and when declared by the Board of Directors of Pembina. The annual dividend rate for the 3month floating rate period from and including December 1, 2019 to, but excluding, March 1, 2020 will be 4.602%, being equal to the annual rate of interest for the most recent auction of 90day Government of Canada treasury bills of 1.662% plus 2.94%, in accordance with the terms of the Series 8 Shares (the “Floating Quarterly Dividend Rate”). The Floating Quarterly Dividend Rate will be reset every quarter.
As provided in the terms of the Series 7 Shares: (i) if Pembina determines that there would remain outstanding immediately following the conversion less than 1,000,000 Series 7 Shares, all remaining Series 7 Shares will be converted automatically into Series 8 Shares on a oneforone basis effective December 2, 2019; or (ii) if Pembina determines that there would remain outstanding immediately following the conversion less than 1,000,000 Series 8 Shares, holders of Series 7 Shares will not be entitled to convert their Series 7 Shares into Series 8 Shares on the Conversion Date. There are currently 10,000,000 Series 7 Shares outstanding.
The Series 7 Shares are issued in “book entry only” form and, as such, the sole registered holder of the Series 7 Shares is the Canadian Depositary for Securities Limited (“CDS”). All rights of holders of Series 7 Shares must be exercised through CDS or the CDS participant through which the Series 7 Shares are held. The deadline for the registered shareholder (CDS) to provide notice of exercise of the right to convert Series 7 Shares into Series 8 Shares is 3:00 p.m. (MT) / 5:00 p.m. (ET) on November 15, 2019. Any notices received after this deadline will not be valid. As such, holders of Series 7 Shares who wish to exercise their right to convert their Series 7 Shares into Series 8 Shares should contact their broker or other intermediary for more information and it is recommended that this be done well in advance of the deadline in order to provide the broker or other intermediary with the time to complete the necessary steps.
If Pembina does not receive an election notice from CDS during the time fixed therefor, then the Series 7 Shares shall be deemed not to have been converted (except in the case of an automatic conversion). Holders of Series 7 Shares will have an opportunity to convert their shares again on December 1, 2024, and every five years thereafter as long as the shares remain outstanding.
As previously announced, the dividend payable on December 2, 2019 to holders of the Series 7 Shares of record on November 1, 2019 will be $0.281250 per Series 7 Share, consistent with the dividend rate in effect since issuance of the Series 7 Shares. For more information on the terms of the Series 7 Shares and the Series 8 Shares, please see Pembina’s prospectus supplement dated September 4, 2014 which can be found on SEDAR at www.sedar.com.
PPL.PR.G is a FixedReset, 4.50%+294, that commenced trading 2014911 after being announced 201492. It is tracked by HIMIPref™ but relegated to the Scraps index on credit concerns.
Note that the reset rate is inconsistent with the rate for ENB.PF.A; it has been shown on PrefBlog that FixedReset Prospectuses Are Imprecise!
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., PPL.PR.G 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 +0.73% and +1.03%, respectively, after removal of the outlying pair FFH.PR.C / FFH.PR.D from the junk group. 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 PPL.PR.G 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 PPL.PR.G) Trading Price In Current Conditions 

Assumed FloatingReset Price if Implied Bill is equal to 
FixedReset 
Bid Price 
Spread 
1.50% 
1.00% 
0.50% 
PPL.PR.G 
16.26 
294bp 
16.32 
15.84 
15.37 
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, PPL.PR.G. Therefore, it seems likely that I will recommend that holders of PPL.PR.G continue to hold the issue and not to convert, but I will wait until it’s closer to the November 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 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 Monday, November 4th, 2019 at 1:37 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.
PPL.PR.G To Reset At 4.380%
Pembina Pipeline Corporation has announced:
PPL.PR.G is a FixedReset, 4.50%+294, that commenced trading 2014911 after being announced 201492. It is tracked by HIMIPref™ but relegated to the Scraps index on credit concerns.
Note that the reset rate is inconsistent with the rate for ENB.PF.A; it has been shown on PrefBlog that FixedReset Prospectuses Are Imprecise!
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., PPL.PR.G 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 +0.73% and +1.03%, respectively, after removal of the outlying pair FFH.PR.C / FFH.PR.D from the junk group. 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 PPL.PR.G 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, PPL.PR.G. Therefore, it seems likely that I will recommend that holders of PPL.PR.G continue to hold the issue and not to convert, but I will wait until it’s closer to the November 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 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 Monday, November 4th, 2019 at 1:37 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.