Great-West Lifeco has announced:
the dividend rates for its Non-Cumulative 5-Year Rate Reset First Preferred Shares, Series N (the “Series N Shares”) and for its Non-Cumulative Floating Rate First Preferred Shares, Series O (the “Series O Shares”).
The annual fixed dividend rate for the five-year period commencing on December 31, 2015 and ending on December 30, 2020 applicable to any Series N Shares that remain outstanding on December 31, 2015 will be 2.176% per annum (or $0.136 per Series N Share per quarter), which rate is equal to the sum of the Government of Canada Yield (as defined in the Series N Share Conditions) on December 1, 2015 plus 1.30%.
The floating dividend rate for the period commencing on December 31, 2015 and ending on March 30, 2016 applicable to any Series O Shares issued on December 31, 2015 will be 1.742% per annum (or $0.108578 per Series O Share). The 1.742% annual rate is equal to the sum of the T-Bill Rate (as defined in the Series O Share Conditions) on December 1, 2015 plus 1.30%.
Beneficial owners of Series N Shares who wish to exercise their right to convert their Series N Shares into Series O Shares on a one-for-one basis should communicate as soon as possible with their brokers or other intermediaries through whom they hold their Series N Shares and ensure that they follow their instructions so as to meet the 5:00 p.m. (eastern time) December 16, 2015 deadline for exercising such right. The news release announcing such conversion right was issued on November 5, 2015 and can be viewed on Great-West Lifeco’s website.
The Series N Shares and the Series O 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 N Shares and the Series O Shares may not be offered, sold or delivered in the United States and this release does not constitute an offer to sell or a solicitation of an offer to buy any Series N Shares or Series O Shares within the United States.
The extension of GWO.PR.N was announced on November 6.
GWO.PR.N commenced trading 2010-11-23 as a FixedReset, 3.65%+130, after being announced 2010-11-15. The issue was met with disfavour and there was an inventory clearance sale closing 2010-12-3.
The new rate of 2.176% is therefore a dividend reduction of just over 40%. Ouch!
As noted in the release, the deadline for notifying the company of a desire to convert to the FloatingReset Series O is 5:00 p.m. (EST) on December 16, 2015, (a Wednesday) but brokerages will normally have an internal deadline a day or two prior to that. If you miss the brokerage deadline, they’ll probably submit the request for you if you grovel, but if you miss the company deadline, that’s it.
At this point, market conditions are such that I expect the FloatingReset to trade significantly below GWO.PR.N. GWO.PR.N closed today at a bid of 13.35 (!) and the average implied 3-month bill rate of other investment-grade issues is -0.58%. Assuming this relationship holds, the estimated trading price for the new FloatingReset is 11.82, about 11% lower. Rather than convert and thereby get 1.00 shares of the new FloatingReset, it seems likely (but by no means guaranteed!) that it will be better to execute trades in the marketplace after the new FloatingReset commences trading and thereby get (maybe!) 1.13 shares of the new FloatingReset
So, I expect to recommend that holders of GWO.PR.N hang on to them, but I will make a formal recommendation on December 11, just in time for PrefLetter.
Note that since the issue is issued by an insurance holding company and is not convertible into common at the option of the issuer, I consider it to have a “Deemed Maturity” 2025-1-31 (this date may change in the future). This is due to my belief that OSFI will eventually extend the Non-Viability Contingent Capital (NVCC) rules to insurers and insurance holding companies. There is a brief explanation of this on the PrefLetter website (under the heading “DeemedRetractibles”) and with more detailed argument and progress reports on international negotiations in every edition of PrefLetter.
I will note that the market does not share my views regarding future application of the NVCC rules insurers and insurance issues trade very similarly to perpetuals.
“The floating dividend rate for the period commencing on December 31, 2015 and ending on March 30, 2016 applicable to any Series O Shares issued on December 31, 2015 will be 1.742% per annum (or $0.108578 per Series O Share). The 1.742% annual rate is equal to the sum of the T-Bill Rate (as defined in the Series O Share Conditions) on December 1, 2015 plus 1.30%.”
Is there an inconsistency here? A dividend rate of 1.742% per annum works out to a quarterly dividend of $0.108875. A quarterly dividend of $0.108578 works out to a dividend rate of 1.737248% per annum. Which is it?
Another point: where did the 3-month T-bill rate of .42% come from, supposedly on December 1st? From BoC’s web site, the rate was .5%.
I’m probably missing something, and thanks James if you can shed some light on this apparent inconsistency in the news release.
Sorry, miscalculation on my part. You have to multiply the yearly dividend of $0.435500 by 91/365. There are 91 days in the first quarter (it’s a leap year), but the formula assumes that all years have 365 days.
I was assuming, incorrectly, that the fraction was going to be 25%, but the fraction is a bit less than that for Q1 and Q2: 24.9315%
Left unexplained is the T-bill rate that was chosen.
From the prospectus [SEDAR, “Great-West Lifeco Inc. Nov 16 2010 11:01:39 ET Prospectus supplement – English PDF 347 K”, Retail Scum are not permitted to link directly to this public document, sorry]:
They also provide the definition:
In addition:
and:
So the first day of the Quarterly Floating Rate Period is December 31, and therefore the Floating Rate Calculation Date is December 1, and “the most recent treasury bills auction preceding the applicable Floating Rate Calculation Date” was November 17.
The 3-Month T-Bill Auction Yield on 2015-12-1 was 0.50%, but this auction did not precede the Floating Rate Calculation Date. The yield at the 2015-11-17 auction is reported to be 0.44%. You can get the missing 0.2bp reported by downloading the Excel spreadsheet from their auction results page.
Thanks James. GW must have been quite happy not to use the Dec. 1 auction in their calculation.
GWO.PR.N, and .O when it starts trading, are really cheap at this point, so they might be worth buying at some point. The return to “maturity” is huge.
Any thoughts on whether our new masters in Ottawa will get around to settling the NVCC requirements for insurance holding companies in the near future?
Any thoughts on whether our new masters in Ottawa will get around to settling the NVCC requirements for insurance holding companies in the near future?
For the latest news, see the post Update On OSFI Insurer Regulation.