Category: Issue Comments

DBRS has announced that it:

has today confirmed the ratings of Royal Bank of Canada (RBC or the Bank) and its related entities, including RBC’s Long-Term Issuer Rating at AA and Short-Term Issuer Rating at R-1 (high). RBC’s Long-Term Issuer Rating is composed of an Intrinsic Assessment (IA) of AA (low) and a Support Assessment (SA) of SA2, reflecting the expectation of timely, systemic support from the Government of Canada (rated AAA with a Stable trend by DBRS). The SA2 designation results in a one-notch uplift to the Long-Term Issuer Rating. The trends on RBC’s short-term ratings, as well as the Long-Term Issuer Rating, Long-Term Senior Debt, Long-Term Deposits and older-style subordinated debt, have been revised to Stable from Negative, while other capital instruments whose ratings are notched down from the Bank’s IA remain Stable.

The revision of the trend to Stable reflects DBRS’s view that RBC’s long-tenured track record of strong fundamentals and growing franchise points to an improving IA, which may offset the anticipated regulatory reform support-related downward pressure on the rating. Therefore, the expectation of a ratings downgrade following the removal of support is less likely.
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DBRS continues to believe that changes in Canadian banking legislation and regulation point to a declining potential for timely support for Canada’s systemically important banks. Eventually, this decline is expected to result in a change in DBRS’s SA to SA3 from SA2. Currently, for these banks, the SA2 results in an uplift of one notch above their IAs. This regime primarily affects the six big Canadian banks that have been designated as domestic systemically important banks (D-SIBs). While this bail-in regime is expected to come into force in H1 2018, the proposed new bail-inable debt will only begin to be issued by D-SIBs at that time and no existing debt will be subject to bail-in retroactively. Thus, DBRS considers that there would not be sufficient bail-inable debt initially to reduce the likelihood of systemic support from its current level in Canada. DBRS expects to maintain the current notch of support until the D-SIBs build up sufficient new bail-inable senior debt such that the likelihood of systemic support has declined to a level at which this uplift is no longer warranted. The timing of such action depends on the finalization of the bail-in regime and the extent to which the D-SIBs build up their bail-inable senior debt. Two factors pressuring the D-SIBs to issue new bail-inable senior debt are the maturing of their existing senior debt and their need to meet the newly established requirements for total loss absorbing capacity (TLAC) by November 1, 2021. DBRS continues to evaluate the impact of the proposed regulations and will comment further as the proposals are finalized. For more detail, please see “DBRS Comments on Proposed Implementation of Bail-in Regime in Canada; Bank Negative Trends Unchanged” published July 11, 2017, on dbrs.com.

The paper DBRS Comments on Proposed Implementation of Bail-in Regime in Canada; Bank Negative Trends Unchanged states in part:

Under the CDIC Act, if a bank is determined to have ceased or is about to cease to be viable, the CDIC would be authorized to take temporary control or ownership to the bank and conduct the bail-in process. Existing CDIC resolution tools include liquidation, forced sale and creation of a bridge bank. Adding to these powers, the proposed Bail-in Regime permits the conversion of bail-inable liabilities into common shares to recapitalize the distressed bank. CDIC would establish the terms and conditions of the bail-in with the intent under this Act to recapitalize the bank, while respecting the relative hierarchy of the bank’s obligations. Under this approach, more senior obligations are treated better than more junior obligations, as compared to an absolute hierarchy whereby more junior obligations would be written off completely. Thus, senior bail-inable debt would receive more common shares than NVCC securities and all securities in the same class would receive the same treatment.

In its TLAC guideline, OSFI specified its proposed minimum requirements for TLAC for D-SIBs. Initially, there will be a minimum of at least 21.5% for the Risk-based TLAC ratio (TLAC Measure / Risk Weighted Assets). Focusing on the risks faced by a bank, this ratio is considered the primary basis for assessing a D-SIB’s TLAC. There is also a minimum of 6.75% for the TLAC Leverage ratio (TLAC Measure / Exposure Measure), with the framework for determining this exposure being provided in OSFI’s Leverage Requirements guideline. This ratio is considered an overall measure of a D-SIB’s TLAC. Subject to certain adjustments and exclusions, TLAC comprises common equity Tier 1, additional Tier 1 capital, Tier 2 capital, and other TLAC instruments, principally bail-inable senior unsecured debt. OSFI considers that these minimums are consistent with the Financial Stability Board’s (FSB) requirements for G-SIBs, thereby ensuring that Canada’s six D-SIBs are in a comparable position to G-SIBs globally and prepared if there is a change in the designation of one or more of these banks. The intent of the TLAC requirements is to require D-SIBs to have enough resources to be restored to viability after experiencing significant losses in a very stressed environment. D-SIBs will be expected to maintain buffers over the minimum requirements.

The original trend change was reported on PrefBlog in 2015 in the post DBRS: Bank Senior Debt On Trend-Negative Due to Government Support Uncertainty

Preferred shares were not affected by the trend opinion, but I considered the information to be material.

RY’s currently outstanding preferreds are: RY.PR.A, RY.PR.B, RY.PR.C, RY.PR.D, RY.PR.E, RY.PR.F, RY.PR.G, RY.PR.H, RY.PR.I, RY.PR.J, RY.PR.K, RY.PR.L, RY.PR.M, RY.PR.N, RY.PR.O, RY.PR.P, RY.PR.Q, RY.PR.R, RY.PR.W and RY.PR.Z.

BCE Inc. has released the conversion notice for BCE.PR.A and a matching notice for BCE.PR.B.

These issues constitute a Strong Pair.

The effective date of the interconversion is 2017-9-1. The deadline for instructing the company to convert shares is 2017-8-22 – but note that brokers serving the public will probably have internal deadlines a day or two in advance of this. The new dividend rate on BCE.PR.A will be published 2017-8-9.

At the last conversion opportunity in 2012 there was minimal net conversion and the shares outstanding were split almost evenly between BCE.PR.A and BCE.PR.B. The outstanding shares of BCE.PR.A have paid 3.45% since then. Prime was at 3.00% when the last conversion was effective … just 5bp higher than the current rate!

These shares are trading at very nearly the same price … alas, there isn’t much of an arbitrage possibility here!

Brompton Funds has announced:

Dividend Growth Split Corp. (the “Company”) is pleased to announce it is undertaking an overnight treasury offering of class A and preferred shares.

The sales period for this overnight offering will end at 9:00 a.m. (ET) tomorrow, July 27, 2017. The offering is expected to close on or about August 3, 2017 and is subject to certain closing conditions including approval by the TSX.

The class A shares will be offered at a price of $8.00 for a distribution rate of 15.0% on the issue price, and the preferred shares will be offered at a price of $10.00 for a yield to maturity of 5.7%. The closing price on the Toronto Stock Exchange (“TSX”) for each of the class A and preferred shares on July 25, 2017 was $8.32 and $10.22, respectively. The class A and preferred share offering prices were determined so as to be non-dilutive to the most recently calculated net asset value per unit of the Company (calculated as at July 24, 2017), as adjusted for dividends and certain expenses to be accrued prior to or upon settlement of the offering.

The Company invests in a portfolio of common shares of high quality, large capitalization companies, which have among the highest dividend growth rates of those companies included in the S&P/TSX Composite Index. Currently, the portfolio consists of common shares of the following 20 companies:

Great-West Lifeco Inc.	The Bank of Nova Scotia	CI Financial Corp.	Shaw Communications Inc.
Industrial Alliance Insurance and Financial Services Inc.	Canadian Imperial Bank of Commerce	IGM Financial Inc.	TELUS Corporation
Manulife Financial Corporation	National Bank of Canada	Power Corporation of Canada	Canadian Utilities Limited
Sun Life Financial Inc.	Royal Bank of Canada	BCE Inc.	Enbridge Inc.
Bank of Montreal	The Toronto-Dominion Bank	Rogers Communications Inc.	TransCanada Corporation

The investment objectives for the class A shares are to provide holders with regular monthly cash distributions targeted to be $0.10 per class A share and to provide the opportunity for growth in the net asset value per class A share.

The investment objectives for the preferred shares are to provide holders with fixed cumulative preferential quarterly cash distributions, currently in the amount of $0.13125 per preferred share, and to return the original issue price to holders of preferred shares on the Company’s maturity date (November 28, 2019).

The syndicate of agents for the offering is being led by RBC Capital Markets, CIBC and Scotiabank

The fund’s NAVPU at July 24 was 17.10, so the whole unit offering price of 18.00 is quite anti-dilutive! When the Split Share model works, it really works!

At their last offering, only four months ago they brought in $86-million, and the fund had total assets of $484-million as of June 30, so it’s getting to be quite the size!

I cannot wait, simply cannot wait, until the stock market crashes again and all those myriad holders panic.

Update, 2017-7-27: The offering was a success!

Dividend Growth Split Corp. (the “Company”) is pleased to announce a successful overnight treasury offering of class A and preferred shares. Gross proceeds of the offering are expected to be approximately $74.25 million. The offering is expected to close on or about August 3, 2017 and is subject to certain closing conditions including approval by the Toronto Stock Exchange (the “TSX”). The Company has granted the Agents (as defined below) an over-allotment option, exercisable for 30 days following the closing date of the offering, to purchase up to an additional 15% of the number of class A and preferred shares issued at the closing of the offering.

Element Fleet Management Corp. has announced:

its intention to segment its financial reporting of core and non-core assets, optimize its capital structure and enhance governance.
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Element Fleet is firmly committed to expanding its position as the leading business-services provider focused on fleet management services. Core Fleet operations currently consist of approximately 92% of Element Fleet’s assets and include our global vehicle fleet management services in more than 50 countries around the world through the Element-Arval Global Alliance. The remaining assets are non-core.
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Non-core assets represent approximately 8% of Element Fleet assets and include a 49.99% interest in 19th Capital Group LLC and a 32.5% interest in ECAF I Holdings Ltd. that remained with Element Fleet as part of the separation transaction when Element Financial Corp. was reorganized into Element Fleet and ECN Capital on October 3, 2016.

The Company will review and engage in opportunities to optimize the value of its non-core assets and expects to opportunistically use the proceeds from any monetization of such assets in a manner that will best create value for shareholders, including retiring debt and/or share buybacks.

Element Fleet has achieved one of the lowest costs of financing in the fleet industry with the issuance in May 2017 of US$1.2 billion rated term notes through Chesapeake Funding II LLC. The offering marked the largest Asset Backed Security issuance to date in the fleet lease sector. By further refining Element Fleet’s business model to focus exclusively on Core Fleet operations, the Company expects to further lower its overall funding spreads and increase balance sheet efficiency.

So, it appears that there are some changes on the horizon, with an unknown effect on credit quality.

Affected issues are EFN.PR.A, EFN.PR.C, EFN.PR.E, EFN.PR.G and EFN.PR.I.

Standard & Poor’s has announced:

• •We are lowering our long-term corporate credit and senior unsecured debt ratings on Calgary, Alta.-based ATCO Ltd., and its core subsidiaries Canadian Utilities Ltd. (CU Ltd.) and CU Inc., to ‘A-‘ from ‘A’.
• •As well, we are downgrading the company’s preferred shares to ‘BBB’ from ‘BBB+’.
• •Because we consider CU Ltd. and CU Inc. core to ATCO under our group rating methodology, we have equalized the ratings on the subsidiaries with those on the parent.
• •The stable outlook reflects our view that the company’s credit metrics are forecast to be within the thresholds for the ‘A-‘ rating.

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The downgrade reflects credit metrics that we forecast will continue to be weak in the medium term. Historically, ATCO’s credit metrics have been quite robust with funds from operations (FFO)-to-debt in the high teens. Over the past few years, these metrics have declined as the company embarked on a significant capital program. While the large capital program is abating, we forecast continued weakness as ATCO embarks on further capital spending. Overall, we believe that management will continue to operate the company in line with its conservative corporate strategy and consistent track record. However, we continue to forecast credit metrics at the mid-to-lower end of the significant financial risk category, with FFO-to-debt of 13%-14% for both 2017 and 2018. A significant contributor to the stressed credit metrics is construction of the Edmonton to Fort McMurray transmission line, which will continue to pressure credit metrics in the medium term. In addition, a continued weak Alberta operating environment is affecting metrics. While the conversion to a capacity market may present some opportunities for the company, the ultimate impact of these changes is unknown. Accordingly, we do not believe there is a continued rationale for the one-notch uplift that we historically linked to strong credit metrics.

The stable outlook on ATCO continues to reflect S&P Global Ratings’ view of a stable and consistent cash flow from predominately regulated utilities as well as good operating performance. Although credit metrics will be weak during the outlook period with AFFO-to-debt forecast of about 13% in 2017, we believe that once the Edmonton to Fort McMurray transmission line is finished in 2019, credit metrics will improve to about 15%.

All affected instruments were downgraded from P-2(high) to P-2.

Affected instruments are:

CIU.PR.A, CIU.PR.C

CU.PR.C, CU.PR.D, CU.PR.E, CU.PR.F, CU.PR.G, CU.PR.H and CU.PR.I.

Update, 2017-7-25: DBRS confirms at Pfd-2(high):

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Unsecured Debentures rating of Canadian Utilities Limited (CU, the Company or Holdco) at “A,” the Commercial Paper rating at R-1 (low) and the Cumulative Preferred Shares Rating at Pfd-2 (high). All trends are Stable. The confirmations reflect solid financial performance at CU’s sizable and diversified regulated subsidiaries, stable regulations in Alberta and Australia, and modest and manageable exposure in the higher-risk non-regulated business. DBRS includes a one-notch uplift in the rating of Cumulative Preferred Shares issued, largely because of low non-consolidated leverage and strong cash balances supported by the Company’s liquidity policy.

CU’s consolidated financial profile strengthened in 2016 and improved further in the first half of 2017. The consolidated debt in capital structure remained stable at 60%, which is supportive of the current rating for the holding company, which has approximately 84% of consolidated earnings from regulated subsidiaries. Consolidated cash flow-to-debt and consolidated interest coverage improved over the past 18 months, reflecting (1) incremental cash flow from substantial investments in the regulated business at CU Inc. (CUI; 100% owned by CU; rated A (high) by DBRS) in the 2012–2015 period and (2) solid contribution from the regulated gas distribution business in Australia. Liquidity remains strong as CU is expected to maintain material cash balances of around $400 million to $500 million over the next several years.

From a non-consolidated perspective, CU’s non-consolidated financial profile remained solid in 2016, underpinned by the following factors: (1) low non-consolidated leverage at around 13% and (2) a strong cash flow-to-non-consolidated debt ratio. DBRS notes that the debt issued by the Holdco is structurally subordinated to the debt issued by CUI and its other subsidiaries. However, the structural subordination is somewhat mitigated by the sizable and well-diversified operations.

DBRS notes that CU’s business risk profile is negatively affected by the higher risk of its non-regulated business, which consists mostly of power generation in Alberta and Australia. The non-regulated business faces several major risks, such as power price volatility, reconstructing risk and regulatory risk in Alberta. However, DBRS recognizes that these risks are partially mitigated by power contractual arrangements and the relatively small scale of non-regulated activities. For the full year 2017, it is estimated that non-regulated operations will only account for 12% of assets and 14% of consolidated cash flow. In addition, the debt issued by non-regulated subsidiaries (except non-recourse debt at the project level) accounted for only 1% of consolidated debt at June 30, 2017.

CU owns an 80% interest in the Alberta Power Line (APL) Project, a 500-kilometre transmission line between the Wabamun and Fort McMurray areas. Costs for the APL Project are estimated at $1.4 billion, of which $1.2 billion will be financed through non-recourse project debt. CU intends to fund its equity portion through excess cash from operations and its Dividend Reinvestment Program (DRIP). DBRS does not expect the funding of the APL Project to have a material impact on CU’s credit metrics during the construction.

DBRS is of a view that there is a limited opportunity for the rating to move up. However, the following factors, if they occur, could pressure the current “A” rating: (1) a material increase in consolidated and non-consolidated leverage, (2) a significant increase in non-regulated operations, or (3) adverse changes in regulation in Alberta that negatively affect the rating of CUI.

Brompton Lifeco Split Corp. has released its Annual Report to December 31, 2016.

Note that the benchmarking isn’t ideal, since the Financial index will include banks, while the fund has a mandate only for insurers.

Figures of interest are:

MER: 1.03% of the whole unit value, excluding Preferred share distributions (which were largely covered by the Fund’s dividend income) and issuance costs and agents’ fees in connection with the Fund’s treasury offerings (which were paid by new subscribers of the Fund).

Average Net Assets: We need this to calculate portfolio yield; and it’s tricky because there were redemptions during the year. MER of 1.03% on Total Expenses excluding Preferred share distributions (2,951,640) and issuance costs (0) and agents’ fees (0) of $2,951.640, leaves expenses of $827,605 implies $80.35-million average net assets. Preferred Share distributions of 2,951,640 @ 0.575 / share implies 5.133-million shares out on average. Average Unit Value (beginning & end of year) = (15.34 + 17.00) / 2 = 16.17. Therefore 5.133-million @ 16.17 = 83.0-million average net assets. Good agreement between these two methods! Call it $81.7-million average fund assets.

Underlying Portfolio Yield: Dividends, interest and lending income received of 2.754-million divided by average net assets of 81.7-million is 3.37%

Income Coverage: Gross Investment Income (before capital gains & losses and issuance costs and agents’ fees ) of $2,759,028 less expenses of 827,605 is net investment income of 1,931,423 divided by Preferred Share Distributions of 2,951,640 is 65%.

TD.PF.I, a FixedReset, 4.50%+301, NVCC-compliant issue announced 2017-07-05 closed today. It will be tracked by HIMIPref™ and has been assigned to the FixedResets subindex.

The issue traded 775,498 shares today in a tight range of 24.97-02 before closing at 25.00-01. Vital statistics are:

Implied Volatility for FixedResets analysis shows:

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The numbers show a large change from the parameters determined on issue date, which were GOC5=1.43%; Spread=204bp and Implied Volatility=26%. Plugging in the new values for the last two parameters demonstrates a clear steepening during the interval.

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The new fit is significantly better, with a sum of squared errors of 1.40 compared to 1.86 when today’s data is imposed on the prior parameters.

One thing that hasn’t change is the apparent richness of TD.PF.I – the theoretical price is now 24.28 compared to 24.30 on announcement day.

On June 16, Bombardier announced (emphasis added):

In connection with the conversion privilege for holders of its Series 2 and Series 3 Preferred Shares, Bombardier Inc. (TSX: BBD.B) (TSX: BBD.A) (TSX: BBD.PR.B) (TSX:BBD.PR.D) today announced the basis for resetting the dividend rate on its Series 3 Preferred Shares in accordance with the terms applicable to those shares.

Holders of Bombardier Inc. Series 2 Preferred Shares have the right to convert all or part of their shares, effective on August 1, 2017, on a one for one basis into Series 3 Preferred Shares. Holders of Bombardier Inc. Series 3 Preferred Shares have the right to convert all or part of their shares, effective on August 1, 2017, on a one for one basis into Series 2 Preferred Shares. Holders who do not convert their shares will retain their Series 2 Preferred Shares or Series 3 Preferred Shares, as the case may be, unless automatically converted in accordance with the terms of the Series 2 or Series 3 Preferred Shares, as described below.

In the case of the Series 2 Preferred Shares, starting as of August 1, 2017, holders will continue to receive a monthly floating adjustable cash dividend, as and when declared by the Board of Directors of Bombardier Inc., based on a dividend rate equal to a percentage of the prime rate, subject to certain adjustments in accordance with the terms of such shares.

In the case of the Series 3 Preferred Shares, starting as of August 1, 2017, holders will receive a quarterly fixed cash dividend for the following five years, as and when declared by the Board of Directors of Bombardier Inc., based on a fixed rate equal to 265% of the yield on five-year non-callable Government of Canada bonds determined as at July 11, 2017, in accordance with the terms of such shares. The annual dividend rate applicable to the Series 3 Preferred Shares will be published on July 12, 2017 in select newspapers.

Any registered shareholder who wishes to convert his or her Series 2 and/ or Series 3 Preferred Shares must complete and sign the conversion panel contained on the back of the Series 2 or Series 3 Preferred Share certificate as the case may be, and deliver it, at the latest by 5:00 p.m. (Montréal time) on July 18, 2017, to Computershare Investor Services Inc.

Shareholders who are beneficial owners and who wish to exercise their right of conversion should communicate as soon as possible with their broker or other nominee and follow their instructions. In that case, it is important that they follow such instructions and act in the timeframe advised so as to provide enough time to their broker or other nominee to meet the July 18, 2017 deadline.

If, after July 18, 2017, Bombardier Inc. determines that there would be less than one million Series 2 Preferred Shares outstanding after the conversion date (being August 1, 2017), then all remaining Series 2 Preferred Shares will automatically be converted into Series 3 Preferred Shares on a one-for-one basis. However, if, after July 18, 2017, Bombardier Inc. determines that there would be less than one million Series 3 Preferred Shares outstanding after the conversion date (being August 1, 2017), then all remaining Series 3 Preferred Shares will automatically be converted into Series 2 Preferred Shares on a one-for-one basis. In either case, Bombardier Inc. shall give a written notice to that effect to holders of such remaining shares no later than July 25, 2017.

Subject to the conditions mentioned in the previous paragraph, on August 1, 2017, and every five years thereafter, holders of Series 2 Preferred Shares and holders of Series 3 Preferred Shares will have again the right to convert their shares into shares of the other series.

The Series 2 and Series 3 Preferred Shares are listed on the Toronto Stock Exchange under the ticker symbol BBD.PR.B and BBD.PR.D, respectively.

In my terminology, BBD.PR.B is a Ratchet Rate preferred, currently paying 100% of Prime, reset quarterly. BBD.PR.D is a FixedFloater currently paying $0.7835 p.a., or 3.134% of its $25 par value. The latter rate resets every Exchange Date; the next exchange date is imminent – 2017-8-1. Both issues have been relegated to the Scraps subindex since inception on credit concerns.

The company has further announced (emphasis added):

that as of August 1, 2017, its Series 3 Preferred Shares will pay, on a quarterly basis, as and when declared by the Board of Directors of Bombardier Inc., cash dividends for the following five years that will be based on a fixed rate equal to the product of (a) the average of the yield to maturity, designated on July 11, 2017 by National Bank Financial Inc. and Scotia Capital Inc., that would be carried by a Government of Canada bond with a five-year maturity, namely 1.503%, multiplied by (b) 265%, which multiplier was previously announced on June 16, 2017.

Accordingly, the annual dividend rate applicable to the Series 3 Preferred Shares for the period of five years beginning on August 1, 2017 will be 3.983%.

As a reminder, any registered shareholder who wishes to convert his or her Series 2 and/ or Series 3 Preferred Shares must complete and sign the conversion panel contained on the back of the Series 2 or Series 3 Preferred Share certificate as the case may be, and deliver it, at the latest by 5:00 p.m. (Montréal time) on July 18, 2017, to Computershare Investor Services Inc. Likewise, shareholders who are beneficial owners and who wish to exercise their right of conversion should communicate as soon as possible with their broker or other nominee and follow their instructions. In that case, it is important that they follow such instructions and act in the timeframe advised so as to provide enough time to their broker or other nominee to meet the July 18, 2017 deadline.

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., BBD.PR.D and BBD.PR.B). 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 FixedFloater / RatchetRate Strong Pair graphically by plotting the implied average Prime rate against the next Exchange Date (which is the date to which the average will be calculated).

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Recent tumult in the market resulting from the Bank of Canada’s hawkish signals (commencing on June 12, reinforced June 13 and piled on with a shovel on June 28) and the execution of a 25bp policy hike today has resulted in fine performance of RatchetRate preferreds, to the point where the average break-even Prime rate is now roughly 4.00% for issues with Exchange Dates in 2020 and afterwards.

Predictions are difficult, particularly when they are about the future! It will be remembered that Prime is currently at 2.95%; therefore, if we assume that future hikes are evenly sized and spaced, an average of 4.00% implies an end-value in five years of about 5.00%. I’m inclined to believe that it will turn out to be less than that, but if you disagree I won’t put up much of an argument!

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 BBD.PR.D FixedFloater, 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 BBD.PR.B will likely commence trading at close to the price of BBD.PR.D, its FixedFloater counterpart. Therefore, I make no recommendation regarding conversion into either one or the other. Those with strong convictions regarding future movements in Prime will, of course, have an equally strong preference for one of the two issues; other investors may wish to select which of the pair they wish to hold for the next five years based on their personal circumstances (e.g., if you’re hedging a prime-linked mortgage with this issue [not a wise move], you will want to hold BBD.PR.B).

I will note that the credit quality of these issues is lousy: S&P downgraded them to P-5(low) in 2016 and DBRS downgraded to Pfd-4(low) and discontinued coverage in 2013. With these issues, you’re making such a large bet on the future credit quality of the company that details regarding the next five years of dividends are a mere bagatelle.

Bank of Montreal has announced:

it has closed its domestic public offering of Non-Cumulative 5-Year Rate Reset Class B Preferred Shares Series 42 (Non-Viability Contingent Capital (NVCC)) (the “Preferred Shares Series 42”). The offering was underwritten on a bought-deal basis by a syndicate of underwriters led by BMO Capital Markets. Bank of Montreal issued 16 million Preferred Shares Series 42 at a price of $25 per share to raise gross proceeds of $400 million.

The Preferred Shares Series 42 were issued under a prospectus supplement dated June 22, 2017, to the Bank’s short form base shelf prospectus dated April 13, 2016. Such shares will commence trading on the Toronto Stock Exchange today under the ticker symbol BMO.PR.D.

BMO.PR.D is a FixedReset, 4.40%+317, NVCC, announced 2017-6-20. It will be tracked by HIMIPref™ and has been assigned to the FixedResets subindex.

The issue traded 1,276,967 shares today in a range of 24.80-97 before closing at 24.94-95. Vital statistics are:

Implied Volatility for FixedResets analysis shows very little change in relative valuation since the issue was announced:

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Only nine days ago, the GOC-5 rate was 1.13%, with the analysis showing a spread of 255bp and Implied Volatility of 18%. The theoretical price is now 24.81, compared to the issue-day calculation of 24.84.