HSE.PR.G To Reset To 3.935%

Husky Energy has announced:

that the Company does not intend to exercise its right to redeem its Cumulative Redeemable Preferred Shares, Series 7 (Series 7 Shares) on June 30, 2020. As a result, subject to certain conditions, the holders of Series 7 Shares have the right to choose one of the following options with regard to their shares:

retain any or all of their Series 7 Shares and continue to receive an annual fixed-rate dividend paid quarterly; or

convert, on a one-for-one basis, any or all of their Series 7 Shares into Cumulative Redeemable Preferred Shares, Series 8 (Series 8 Shares) of Husky and receive a floating rate quarterly dividend.
Conversion to Series 8 Shares is subject to the conditions that: (i) if Husky determines that there would be less than one million Series 7 Shares outstanding after June 30, 2020, then all remaining Series 7 Shares will automatically be converted to Series 8 Shares on a one-for-one basis on June 30, 2020, and (ii) if Husky determines that there would be less than one million Series 8 Shares outstanding after June 30, 2020, no Series 7 Shares will be converted into Series 8 Shares. In either case, Husky will issue a news release to that effect no later than June 23, 2020.

Holders of Series 7 Shares who choose to retain any or all of their shares will receive the new fixed-rate quarterly dividend applicable to the Series 7 Shares for the five-year period commencing June 30, 2020 to, but excluding, June 30, 2025 of 3.935%, being equal to the sum of the Government of Canada five-year bond yield of 0.415% plus 3.52% in accordance with the terms of the Series 7 Shares, subject to the conditions described above.

Holders of Series 7 Shares who choose to convert their shares to Series 8 Shares will receive a new floating-rate quarterly dividend applicable to the Series 8 Shares. The dividend rate applicable to the Series 8 Shares for the three-month period commencing June 30, 2020 to, but excluding, September 30, 2020 will be 3.775%, being equal to the annual rate for the most recent auction of 90-day Government of Canada Treasury Bills of 0.255% plus 3.52%, in accordance with the terms of the Series 8 Shares (the Floating Quarterly Dividend Rate), subject to the conditions described above. The Floating Quarterly Dividend Rate will be reset every quarter.

Beneficial owners of Series 7 Shares who wish to exercise the right of conversion should communicate as soon as possible with their brokers or other nominees in order to meet the deadline for registered holders to exercise such right, which is 5 p.m. ET on June 15, 2020. It is recommended this communication be had well in advance of the deadline in order to provide the brokers or other intermediaries with time to complete the necessary steps. Holders of Series 7 Shares who do not exercise the right of conversion by this deadline will continue to hold Series 7 Shares with the new annual fixed-rate dividend, subject to the conditions described above.

Holders of the Series 7 Shares and the Series 8 Shares will have the opportunity to convert their shares again on June 30, 2025 and every five years thereafter as long as the shares remain outstanding.

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 Company’s prospectus supplement dated June 10, 2015 on www.sedar.com

HSE.PR.G is a FixedReset, 4.60%+352, that commenced trading 2015-6-17 after being announced 2015-6-9. It is tracked by HIMIPref™ and is assigned to the FixedReset subindex.

18 Responses to “HSE.PR.G To Reset To 3.935%”

  1. Dan Good says:

    I still don’t understand why anyone would own these preferreds paying roughly 4% when you have the A series paying roughly 2% but priced over $3.50 lower? The difference of 2% on $3.50 is something like 7 cents per year. But you have the opportunity to make up the capital difference of $3.50 so why not just buy the A? Again I would rather own something at 25 cents on the dollar than 40 cents unless the yield difference is substantial. The commons are at 30 cents on the dollar and have a yield of 1% so they don’t even warrant a consideration. The cool thing about preferreds is that they get marked substantially lower when there is a loss but in reality the loss is fully attributed to the commons. Thus the opportunity to make good money with the security of asset coverage. Having oil come back obviously doesn’t hurt either. Husky has something like $8 billion in assets net of debt so the preferreds look like a pretty safe bet.

  2. stusclues says:

    Dan Good, serious attempts were made to explain this to you previously. Go ahead and buy all the As you would like. All the Husky series are under-priced. If you want to buy the cheapest on a relative basis, you need to understand relative value. Try reading James’ work on implied volatility theory for starters.

    I suspect that you already have and you are just muck-raking or you really don’t have a serious interest in understanding preferred shares.

  3. stusclues says:

    Dan Good, I will throw this out there … the Gs have at least 20% more upside than the As once the market stops demanding such a ridiculous spread for Husky and yields normalize. See if you can do the math to figure that out.

  4. Dan Good says:

    Why so condescending? As Peter Cundill used to say all you need to do the math is a hand held calculator. Obviously the upside on both is $25 as Husky can redeem them at this price. So lets say interest rates return to “normal”, you could potentially receive $18 more on a $6.57 investment on your A shares in capital appreciation and only $14 more on a $10.65 investment in the G shares. And what do you give up in yield? A few shekels per year. Literally 98.375 cents per year for the G and 97 cents for the A until reset date assuming a $25 investment in each. Try the Intelligent Investor by Benjamin Graham chapter 16.

  5. avocado says:

    Dan Good, husky has the right to redeem any of their preferred shares, but not the obligation; they can simply push them back every 5 years forever.

    Why would they want to redeem series A which cost them a premium of 1.73% vs series G which costs them a premium of 3.52% over the 5 year gov rate. series G costs them more in div payments than series A. Therefore *IF* they wanted to redeem some, they would redeem the onces which are costing them the most.

    What leads you to think they want to redeem any of their prefs?

  6. stusclues says:

    “What leads you to think they want to redeem any of their prefs?”

    Exactly the unanswered question put to Dan Good previously. He must be baiting, so I’m done replying to him. No one is that thick. I know I sound condescending, but he is a self-professed investment advisor and Jeremy Grantham acolyte, not someone who is just casually asking questions. Just wait for the 500 word post coming explaining how he is a value investor … something Grantham … something else Dundee … even more Bob Loblaw.

  7. Dan Good says:

    Not to date myself but I was introduced to the “Kondratiev” wave theory in 1981 that basically stated economic cycles were predictive and recurring in a series of small and larger waves. For example, interest rates rose for roughly 40 years from the 1940s to 1981 and have been falling for 40 years ever since. Who is to say rates might not increase in the future? And if they do then interest reset preferreds will become very costly to corporations and they will be better off to redeem them than continue to pay such a high premium over bond rates. Say rates hit 5% on bonds, Husky would be paying 8.5% on the G in after tax dollars. They would likely redeem them given the opportunity. But even the As would be expensive at just under 7% so they might redeem them as well. I think James has mentioned 65% or more of the Canadian market is resets now? But what becomes costly to corporations becomes an opportunity to investors. Another thing Cundill would do is look in areas where the market has declined the most for values. Where there is blood on the street so to speak. The interest reset market for preferreds I think would qualify today. If and when rates increase you may see a mass exit in this market for corporations in favor of perpetuals, Remember resets are still a relatively recent novalty in preferreds.

  8. peet says:

    “As Peter Cundill used to say all you need to do the math is a hand held calculator”

    To which I would add, ” garbage in, garbage out.”

    DanGood’s investment “thesis” [ and ideas about relative value] seem to be based on comparatively steep discounts to par [ in this case “A” versus “G”] accompanied by some notion that the deeply discounted pref will be called, thereby juicing the return. We noticed that already in the May 2020 postings with respect to Dundee, and it was roundly questioned back then, and again here by Avocado and Stusclues with respect to HSE.PR.A. Their questions remain unanswered.

    DanGood also ignores what primarily matters for these resets going forward: it is not the coupon rate per se that matters but what will be the spread to the 5-year GOC demanded by the market at the relevant time.

    To use the “A” as an example: if the GOC at reset time is 5% [ the figure used by DanGood], the coupon on “A” will rise to 6.73%. But if the market at that time still requires, say, a 3% spread to the 5-year, then the price of “A” will reflect a current yield of 8%. That would mean that the “A” would still be trading well below par. Why therefore would Husky redeem the “A” pref trading below par, to replace it with … what?

    Like Stusclues, I too wonder if DanGood is simply baiting, on the theory that some publicity is better than no publicity

  9. avocado says:

    In DanGood’s defense regarding “Their questions remain unanswered”; if I’m not mistaken Dan’s thesis requires interest rates to increase significantly to the point where companies will have to reduce their debt (and prefs in this case).

    Now I question if we’ll ever see 5% rates again, or has QE forever changed our world? I was previously under the illusion that we would see 2-3% before covid came along; however I have since been humbly required to accept this new reality that we’ll be stuck for another decade of super low rates

    My wishful thinking on this topic is that husky gets taken private and the prefs get called.

  10. jiHymas says:

    For the record, my own views regarding the effect of the general level of interest rates on the probability of preferred share redemption may be found under the heading “Term Extension” in the FixedReset Review: October, 2016.

    It may well be that yields get to be so high that HSE finds it advisable to reduce their debt generally … but generally speaking it will be cheaper and easier for them to reduce their commercial paper ($450-million as of 20Q1) and to reduce the level of refinancing of their market debt, most of which matures within the next ten years.

    I will also point out that Dan Good‘s investment thesis, insofar as it has been laid out here, assigns a 100% probability to a sharp increase in the general level of interest rates, which seems rather aggressive.

    As far as the general idea of preferentially investing in lower priced preferreds is concerned, there is some support for that; yes, there is more room for capital gains in the future and yes, there is, potentially, higher credit quality for the lower-priced issues (assuming that negotiations in times of extreme stress focus on par value rather than yield, which is possible although not guaranteed).

    Both rationales, however, should only be taken as adjustments to valuation rather than the sole determinants, particularly since the current market is such that the value of the issuer’s embedded option to call at par is worth as close to zero for both HSE.PR.A and HSE.PR.G as one might wish.

    HSE.PR.A yields far less than HSE.PR.G under current market conditions; 8.45% for the former vs. the latter’s 9.54% as of yesterday’s close, according to my calculations. The question of how much yield one should be willing to give up in exchange for a lower spread (and therefore a lower call probability) is a complex one (which I attempt to address with Implied Volatility theory) – but at the moment, I like the Gs.

  11. stusclues says:

    “if I’m not mistaken Dan’s thesis requires interest rates to increase significantly to the point where companies will have to reduce their debt (and prefs in this case)”

    Well its hard to argue that some deleveraging wouldn’t be a consequence of rising rates. Its another matter entirely to leap to the wiping out of preferred shares in the capital structure of a company. Even “if”, Dan Good’s last post identifies (rightly) that the Gs would probably be redeemed ahead of the As, which puts to drivel his initial assertion that the As are best issue to buy because the are the most discounted from par. He doesn’t even know what he is arguing.

  12. peet says:

    Thank you James.

    For the lazy ones amongst us, here is what you wrote back in 2016. It also relates to the last point Stusclues just made:

    “However, it must always be remembered that the decision by the issuer regarding whether to call the issue or to allow it to reset will have little, if anything, to do with the GOC-5 yield: the relationship between the Issue Reset Spread and the level achievable in the marketplace at that time will be much more important. For example, one might think that if GOC-5 reaches 1980’s levels of 10%, then TRP will not wish to pay a 12.38% dividend on TRP.PR.D. But calling the issue will require them to fund their operations from other sources – which, given a GOC-5 yield of 10%, might make 12.38% look cheap!

    This is a very difficult concept for many retail investors to grasp.”

  13. dodoi says:

    You do not have to wait for a preferred share to be called, you could sell it. If we look at the recent past, last year when GOC5 was about 1.5% HSE.PR.A reached about $18. I have bought some As with an average in lower $6s. I do not know how soon GOC5 will reach 1.5% again and if the HSE.PR.A will be priced at that level but it is possible and I would be happy if could triple my money and in the meantime get close to 9% or more dividend.

  14. Dan Good says:

    Exactly my point. In Canada we have been living in a world primarily void of deep discount plays as the makets have primarily risen over the past 10 years. Now there are many. This is when the fun starts. The theory is to only purchase securities trading with a adequate margin of safety. You can get this with price (40 cents on the dollar is safer than 100 cents) asset quality (cash is good unless they burn it) little or no debt and business quality among other factors. So you don’t wait around for $25 on the preferreds since they have no margin of safety in price left. Things have a way of going surprising bad. Hopefully you can get out at $18+ and get into a similar preferred share at $12.50 or less? As you said tripling your money and getting well paid on the dividend is not to be frowned upon. I do know with absolute certainty you cannot triple you money on the G shares from here. Dundee preferreds are fully backed by cash and have the potential for a substantial issuer bid. So maybe they are a better bet? I don’t know. As James has pointed out yield spreads on preferreds are at or near historical high levels. This is the area I want to be. To have some corporation pay me a 3+% premium to a risk free rate seems like a misprint to me. And then being able to buy the security at a discount? I need a piece of that action. As for calling preferreds, corporations also must look at what rate of return they can invest their capital at as well. I have argued for many years with EL Financial management that they should buy out their preferreds as they cannot invest and earn a return anywhere near 5% after tax in a risk free asset. The CEO bought out my chunks of the G shares over the last year so at least he sees their value. I have given up on believing management is run by reasonable business men.

  15. peet says:

    “… last year when GOC5 was about 1.5% HSE.PR.A reached about $18. … I would be happy if could triple my money”

    Dodoi, not sure where you’re getting your $ 18 last year. I see the “A” in a range of some $13.50 earlier in 2019 when the 5-year was consistently above 1.75%, and then the price dropping off over the rest of the year.

    Perhaps you’re thinking of 2018 when “A” was actually around $ 18 … but in 2018 the 5-year GOC averaged 2.34%.

    Relative to each other the “A” and the “G” have pretty much performed identically price-wise since November 2018.

  16. dodoi says:

    You are right!

  17. mbarbon says:

    Given HSE.to stock price over the past few years, there may be a concern of it going broke.. This may more likely that than preferreds of this company being called back at par (or anything similar)..

    Note I’m not buying any of HSE preferred shares given its financial situation.

  18. stusclues says:

    “Note I’m not buying any of HSE preferred shares given its financial situation.”

    That has definitely been the prevailing view! I was buying HSE.PR.G throughout April at spreads north of 11%! They have subsequently narrowed to north of 8% and they have some ways to go as worries of solvency risk at Husky begins to melt.

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