Category: Issue Comments

The Canadian Imperial Bank of Commerce has announced:

that it had entered into an agreement with a group of underwriters led by CIBC World Markets Inc. for an issue of 16 million Basel III-compliant Non-cumulative Rate Reset Class A Preferred Shares, Series 45 (the “Series 45 Shares”) priced at $25.00 per Series 45 Share to raise gross proceeds of $400 million.

CIBC has granted the underwriters an option to purchase up to an additional four million Series 45 Shares at the same offering price, exercisable at any time up to two days prior to closing. Should the underwriters’ option be fully exercised, the total gross proceeds of the financing will be $500 million.

The Series 45 Shares will yield 4.40% per annum, payable quarterly, as and when declared by the Board of Directors of CIBC, for an initial period ending July 31, 2022. On July 31, 2022, and on July 31 every five years thereafter, the dividend rate will reset to be equal to the then current five-year Government of Canada bond yield plus 3.38%.

Subject to regulatory approval and certain provisions of the Series 45 Shares, on July 31, 2022 and on July 31 every five years thereafter, CIBC may, at its option, redeem all or any part of the then outstanding Series 45 Shares at par.

Subject to the right of redemption, holders of the Series 45 Shares will have the right to convert their shares into Non-cumulative Floating Rate Class A Preferred Shares, Series 46 (the “Series 46 Shares”), subject to certain conditions, on July 31, 2022 and on July 31 every five years thereafter. Holders of the Series 46 Shares will be entitled to receive a quarterly floating rate dividend, as and when declared by the Board of Directors of CIBC, equal to the three-month Government of Canada Treasury Bill yield plus 3.38%.

Holders of the Series 46 Shares may convert their Series 46 Shares into Series 45 Shares, subject to certain conditions, on July 31, 2027 and on July 31 every five years thereafter.

The expected closing date is June 2, 2017. CIBC will make an application to list the Series 45 Shares as of the closing date on the Toronto Stock Exchange. The net proceeds of this offering will be used for general purposes of CIBC.

Later, they announced:

that as a result of strong investor demand for its previously announced domestic public offering of non-cumulative Rate Reset Class A Preferred Shares, Series 45, the size of the offering has been increased to 32 million shares. The gross proceeds of the offering will now be $800 million. The offering will be underwritten by a syndicate led by CIBC World Markets Inc. The expected closing date is June 2, 2017.

The net proceeds from this transaction will be used for general purposes of CIBC.

A good sized issue!

Implied Volatility analysis for FixedResets suggests the issue may be a little expensive:

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The theoretical price implied by the above calculation is 24.76.

In keeping with its policy of contempt for the preferred shareholders who provide a chunk of its financing, Enbridge has again decided not to publicize events related to its ENB.PR.B issue, its extension, reset and conversion privilege.

Assiduous Readers will recall that ENB.PR.B will reset to 3.415% effective 2017-6-1. It was issued as a 4.00%+240 FixedReset which commenced trading 2011-9-30 after being announced 2011-9-21.

An inquiry to Enbridge Investor Relations elicited the response:

Approximately 1.7 million Series B will be converted into Cs and those Cs will start to trade on the TSX on June 1.

It will be remembered that I recommended against conversion.

Market conditions with respect to FixedReset / FloatingReset equivalency have not changed significantly since my recommendation:

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ECN Capital Corp. has announced:

that it has closed the previously announced offering of 4,000,000 6.25% Cumulative 5-Year Minimum Rate Reset Preferred Shares, Series C (the “Series C Preferred Shares”) at a price of $25.00 per share for aggregate gross proceeds of $100,000,000. The offering was conducted by a syndicate of underwriters co-led by BMO Capital Markets, CIBC Capital Markets, National Bank Financial, RBC Capital Markets, TD Securities, and including Cormark Securities, Desjardins Securities, GMP Securities, HSBC Securities (Canada) and Raymond James.

The Corporation intends to use the net proceeds to originate and finance, directly and indirectly, finance assets, to fund future acquisitions and for general corporate purposes.

“We are grateful for the support shown by the market in the successful completion of this financing”, said Steve Hudson, Chief Executive Officer, “and we look forward to executing on our business plan and delivering value for our shareholders.”

The Series C Preferred Shares will commence trading today on the Toronto Stock Exchange under the symbol “ECN.PR.C”.

ECN.PR.C is a FixedReset, 6.25%+519M625, announced 2017-5-15. It will be tracked by HIMIPref™ but relegated to the Scraps subindex on credit concerns.

The issue traded 99,442 shares today in a range of 24.43-75 before closing at 24.44-52. Vital statistics are:

Canadian Utilities Limited has announced:

that after having taken into account all election notices following the conversion deadline for the Cumulative Redeemable Second Preferred Shares Series Y (“Series Y Preferred Shares”) tendered for conversion into Cumulative Redeemable Second Preferred Shares Series Z (“Series Z Preferred Shares”), the holders of Series Y Preferred Shares are not entitled to convert their Series Y Preferred Shares into Series Z Preferred Shares. There were approximately 508,379 Series Y Preferred Shares tendered for conversion, which is less than the two million shares required to give effect to conversions into Series Z Preferred Shares.

The Series Y Preferred Shares will continue to pay on a quarterly basis, for the five-year period from and including June 1, 2017 to but excluding June 1, 2022, as and when declared by the Board of Directors of Canadian Utilities Limited, a fixed dividend based on an annual dividend rate of 3.40%.

Assiduous Readers will remember that I recommended against conversion after the reset to 3.40% for CU.PR.C.

So CU.PR.C is now a FixedReset, 3.4O%+240. It is tracked by HIMIPref™ and is assigned to the FixedReset subindex.

Intact Financial Corporation has announced:

that it has closed its previously announced bought deal offering of 6,000,000 Class A Series 5 Preferred Shares (the “Series 5 Shares”) (the “Offering”) underwritten by a syndicate of underwriters (the “Underwriters”) led by CIBC Capital Markets together with BMO Capital Markets, National Bank Financial and TD Securities Inc., resulting in gross proceeds (including the proceeds resulting from the exercise of their option) to IFC of $150 million.

The net proceeds from the Offering are intended to be used by IFC to fund a portion of the purchase price for its previously announced acquisition (the “Acquisition”) of all of the issued and outstanding shares of OneBeacon Insurance Group, Ltd. (“OneBeacon”). The closing of the Acquisition is expected to occur in the fourth quarter of 2017 and is subject to approval by OneBeacon’s shareholders and receipt of required regulatory approvals. If the Acquisition is not completed, the net proceeds of this Offering will be used for general corporate purposes.

Each Series 5 Share entitles the holder thereof to receive quarterly non-cumulative preferential cash dividends, if, as and when declared by the Board of Directors, on the last day of March, June, September and December in each year at a rate equal to $0.325 per share. The initial dividend, if declared, will be payable on September 30, 2017 and will be $0.45945 per share.

The Series 5 Shares will commence trading today on the Toronto Stock Exchange under the symbol IFC.PR.E

IFC.PR.E is a Straight Perpetual, 5.20%, announced 2017-5-12. It will be tracked by HIMIPref™ and has been assigned to the DeemedRetractible subindex.

As this issue is not NVCC compliant, it will be analyzed as a DeemedRetractible. Note, however, that this carries more uncertainty than it does with most other insurers because Intact is a P&C insurer, not a life company.

The issue traded 601,313 shares today in a range of 24.90-00 before closing at 24.91-95. Vital statistics are:

Great-West Lifeco Inc. has announced:

the completion of its offering of 8,000,000 5.15% Non-Cumulative First Preferred Shares, Series T through a syndicate of underwriters co-led by BMO Capital Markets, CIBC Capital Markets, Scotiabank and TD Securities Inc. for gross proceeds of $200 million. The Series T Shares will be listed for trading on the Toronto Stock Exchange under the symbol “GWO.PR.T”.

GWO.PR.T is a Straight Perpetual, 5.15%, announced 2017-05-09. The issue will be tracked by HIMIPref™ and has been assigned to the DeemedRetractible subindex.

As this issue is not NVCC compliant, it will be analyzed as a DeemedRetractible.

The issue traded 837,263 shares in a range of 24.95-05 before closing at 24.95-96. Vital statistics are:

There has been a little flattening in the curve (i.e., a decline of Implied Volatility) in the Implied Volatility for Straights analysis:

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Power Financial Corporation has announced:

the closing of an offering of 10,000,000 5.15% Non-Cumulative First Preferred Shares, Series V (the “Series V Shares”) priced at $25.00 per share for gross proceeds of $250 million.

The issue was bought by an underwriting syndicate co-led by BMO Capital Markets, RBC Capital Markets, Scotiabank and TD Securities Inc.

The Series V Shares will be listed and posted for trading on the Toronto Stock Exchange under the symbol “PWF.PR.Z”. The net proceeds from the issue will be used to supplement Power Financial’s financial resources and for general corporate purposes.

PWF.PR.Z is a Straight Perpetual, 5.15%, announced 2017-5-16. It will be tracked by HIMIPref™ and has been assigned to the PerpetualPremium subindex.

The issue traded 755,121 shares today in a range of 24.96-05 before closing at 25.03-06. Vital statistics are:

Implied Volatility for Straights analysis shows a very high level of implied volatility – but this is not surprising when so many of the issues are trading significantly above their call price.

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The Bank of Nova Scotia announced (on March 10):

that it intends to exercise its right to redeem all outstanding Non-cumulative Preferred Shares Series 17 of Scotiabank (the “Series 17 Shares”) on April 26, 2017, at a price equal to $25.00 per share, together with all declared and unpaid dividends. Formal notice will be issued to shareholders in accordance with the share conditions.

The redemption has been approved by the Office of the Superintendent of Financial Institutions and will be financed out of the general funds of Scotiabank.

On February 28, 2017, the Board of Directors of Scotiabank announced a quarterly dividend of $0.350000 per Series 17 Share. This will be the final dividend on the Series 17 Shares and will be paid in the usual manner on April 26, 2017, to shareholders of record at the close of business on April 4, 2017, as previously announced.

BNS.PR.O was a Straight Perpetual paying 5.60% which commenced trading 2008-1-31 after being announced 2008-1-17. It has been analyzed as a DeemedRetractible since OSFI’s announcement of the NVCC rules for banks.

It will be recalled that ENB.PR.B will reset to 3.415% effective June 1.

Holders of ENB.PR.B have the option to convert to FloatingResets, which will pay 3-month bills plus 240bp on the par value of $25.00, reset quarterly. The deadline for notifying the company of the intent to convert is 5:00 p.m. (Toronto time) on May 17, 2017; but note that this is a company deadline and that brokers will generally set their deadlines a day or two in advance, so there’s not much time to lose if you’re planning to convert! However, if you miss the brokerage deadline they’ll probably do it on a ‘best efforts’ basis if you grovel in a sufficiently entertaining fashion. The ticker for the new FloatingReset, if it is issued, is not yet known.

ENB.PR.B is a FixedReset, 4.00%+240, that commenced trading 2011-9-30 after being announced 2011-9-21.

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., ENB.PR.B 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).

Click for Big

The market appears to have a distaste at the moment for floating rate product; most of the implied rates until the next interconversion are lower than the current 3-month bill rate and the averages for investment-grade and junk issues are both well below current market rates, at +0.02% and -0.15%, 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 ENB.PR.B FixedReset, we may construct the following table showing consistent prices for its soon-to-be-issued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:

Based on current market conditions, I suggest that the FloatingResets that will result from conversion are likely to be cheap and trading below the price of their FixedReset counterparts. Therefore, I recommend that holders of ENB.PR.B continue to hold the issue and not to convert. I will note that, given the apparent cheapness of the FloatingResets, 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.

It will be recalled that CU.PR.C will reset to 3.40% (paid on par) effective June 1.

Holders of CU.PR.C have the option to convert to FloatingResets, which will pay 3-month bills plus 240bp on the par value of $25.00, reset quarterly. The deadline for notifying the company of the intent to convert is 3 p.m. (Calgary time) / 5 p.m. (Toronto time) on May 17, 2017; but note that this is a company deadline and that brokers will generally set their deadlines a day or two in advance, so there’s not much time to lose if you’re planning to convert! However, if you miss the brokerage deadline they’ll probably do it on a ‘best efforts’ basis if you grovel in a sufficiently entertaining fashion. The ticker for the new FloatingReset, if it is issued, is not yet known.

CU.PR.C is a FixedReset, 4.00%+240, that commenced trading 2011-9-21 after being announced 2011-9-13.

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., CU.PR.C 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).

Click for Big

The market appears to have a distaste at the moment for floating rate product; most of the implied rates until the next interconversion are lower than the current 3-month bill rate and the averages for investment-grade and junk issues are both well below current market rates, at +0.02% and -0.15%, 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 CU.PR.C FixedReset, we may construct the following table showing consistent prices for its soon-to-be-issued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:

Based on current market conditions, I suggest that the FloatingResets that will result from conversion are likely to be cheap and trading below the price of their FixedReset counterparts. Therefore, I recommend that holders of CU.PR.C continue to hold the issue and not to convert. I will note that, given the apparent cheapness of the FloatingResets, 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.