Category: Issue Comments

Standard & Poor’s has announced:

S&P Global Ratings today said it affirmed its ‘BB+’ long-term corporate credit rating on Capstone Infrastructure Corp. (CIC). At the same time, S&P Global Ratings affirmed its ‘B+’ preferred stock rating and ‘P-4(High)’ Canada national scale preferred share rating on the company’s preferred shares. The outlook is stable.

Subsequently, S&P Global Ratings withdrew its ratings on CIC at the company’s request.

The ratings on CIC before the withdrawal primarily reflected our view of a fair business risk profile, underpinned by a high proportion of cash flows from long-term term contracts with investment-grade counterparties, which provides stability to cash flows. The company had no corporate-level debt and in our debt calculations we used imputed debt from the 50% of the preferred shares. We expect the available cash flows will be used to finance general and administrative expenses and preferred share dividends at the corporate level. We also expected Capstone to maintain credit metrics commensurate with the intermediate financial risk profile.

The company is wholly owned by Irving Infrastructure Corp., a subsidiary of iCON Infrastructure Partners III, L.P., a fund advised by London, UK-based iCON Infrastructure LLP.

CSE.PR.A is a FixedReset, 3.271%+271. It is tracked by HIMIPref™ but has been relegated to the Scraps index since issue on credit concerns.

Brookfield Asset Management Inc. has announced:

that after having taken into account all election notices received by the June 15, 2017 deadline for the conversion of the Cumulative Class A Preference Shares, Series 28 (the “Series 28 Shares”) (TSX: BAM.PR.X) into Cumulative Class A Preference Shares, Series 29 (the “Series 29 Shares”), the holders of Series 28 Shares are not entitled to convert their Series 28 Shares into Series 29 Shares. There were 398,894 Series 28 Shares tendered for conversion, which is less than the one million shares required to give effect to conversions into Series 29 Shares.

Assiduous Readers will recall that BAM.PR.X will reset at 2.727% and should now be referred to as a FixedReset, 2.727%+180. I recommended against conversion.

The issue commenced trading 2011-2-8 after being announced 2011-1-19. It has been a member of the FixedReset subindex since inception.

TransAlta Corporation has announced:

that after having taken into account all election notices received by the June 15, 2017 deadline for the conversion of the Cumulative Redeemable Rate Reset Preferred Shares, Series C (the “Series C Shares”) into Cumulative Redeemable Floating Rate Preferred Shares, Series D (the “Series D Shares”), there were 827,628 Series C Shares tendered for conversion, which is less than the one million shares required to give effect to conversions into Series D Shares. As a result, none of the Series C Shares will be converted into Series D Shares on June 30, 2017.

Assiduous Readers will recall that TA.PR.F will reset at 4.027% and should now be referred to as a FixedReset, 4.027%+310. I recommended against conversion.

The issue commenced trading 2011-11-30 after being announced 2011-11-22. It has been relegated to the Scraps subindex since inception on credit concerns.

Canaccord Genuity Group Inc. has announced:

that after having taken into account all election notices received by the June 15, 2017 conversion deadline in respect of the Cumulative 5-Year Rate Reset First Preferred Shares, Series C (the “Series C Preferred Shares”) tendered for conversion into Cumulative Floating Rate First Preferred Shares, Series D (the “Series D Preferred Shares”), the holders of the Series C Preferred Shares are not entitled to convert their shares. There were 136,467 Series C Preferred Shares tendered for conversion, which is less than the 1,000,000 shares required for the ability to proceed with the conversion into Series D Preferred Shares, in accordance with the terms of the Series C Preferred Shares.

As outlined in a press release on June 1, 2017, holders of Series C Preferred Shares will be entitled to receive quarterly fixed, cumulative, preferential cash dividends, if, as and when declared by the Board of Directors of the Company, subject to the provisions of the Business Corporations Act (British Columbia). The dividend rate for the five-year period commencing on July 1, 2017 and ending on and including June 30, 2022 will be 4.993% per annum, being equal to the sum of the five year Government of Canada bond yield determined as of June 1, plus 4.03%, in accordance with the terms of the Series C Preferred Shares. This new dividend rate is expected to deliver approximately $750,000 in annual savings for common shareholders.

There are currently 4,000,000 Series C Preferred Shares listed on the Toronto Stock Exchange under the symbol CF.PR.C.

Assiduous Readers will recall that CF.PR.C will reset at 4.993% and should now be referred to as a FixedReset, 4.993%+403. I recommended against conversion.

The issue commenced trading 2012-4-10 after being announced 2012-3-22. It has been relegated to the Scraps subindex since inception on credit concerns.

Aimia Inc. has announced:

that its Board of Directors has suspended payment of all dividends on both its outstanding common shares and its Series 1, Series 2 and Series 3 Cumulative Rate Reset Preferred Shares (collectively, the “Preferred Shares”) effective immediately. This includes the previously declared dividends originally scheduled to have been paid on June 30, 2017, to shareholders of record as of June 16, 2017.

Under paragraph 42 of the Canada Business Corporations Act (“CBCA”), the Company’s governing corporate statute, there are two legal tests that must be met before any dividend can be paid. The Company has concluded that it satisfies the solvency test set forth at paragraph 42(a) of the CBCA.

However, due to a number of factors, the Company believes that the capital impairment test set forth in paragraph 42(b) of the CBCA would not be satisfied on June 30, 2017. These factors include the recent significant decline in the Company’s market capitalization following the May 11, 2017, non-renewal announcement by Air Canada and the high amount of the stated capital account (currently about $1.5 billion for common shares and Preferred shares on a combined basis), primarily resulting from past common share issuances at significantly higher prices than the current market.

In the event the Company is able to pay the previously declared dividends referred to above at a future date, the record date for shareholders entitled to such payment remains June 16, 2017. Dividends on the outstanding Preferred Shares are cumulative and will continue to accrue in accordance with the rights, privileges, restrictions and conditions attaching to each series of Preferred Shares.

“The Company currently has the requisite liquidity to pay these dividends, however the statutory capital impairment test legally prohibits us from doing so. Our business continues to perform well and generate strong free cash flow. We reported $331.7 million of cash and cash equivalents, restricted cash and short-term investments and $225.5 million of long-term investments in corporate and government bonds as at March 31, 2017,” said Robert E. Brown, Executive Chairman, Aimia.

“The Company has been in active discussions with various parties with a view to securing new long-term commercial and strategic relationships post-2020. We believe we have a unique set of assets that are highly valuable and compelling,” said David Johnston, Aimia’s Group Chief Executive. “At the same time, the Company is also making progress on its plan to remove a further $70 million of costs from the Company through its business review and we will provide further updates as developments warrant.”

They also announced:

the resignation of three directors. Joanne Ferstman has resigned as a director of the Company. In addition, as part of the Board of Directors’ ongoing process of renewal, the Board of Directors has also accepted the resignations of Alan Rossy and Beth Horowitz.

Over the past few years, the Company has been on a path to simplify and focus the business, reduce operating costs and dispose of certain non-core assets. Reflecting the changing profile of the Company, the Board of Directors has been reviewing its size and composition against the Company’s current needs. The current Board is now reduced to nine members.

Ferstman joined the Board in 2005, Rossy joined the Board in 2007, and Horowitz joined the Board in 2012.

It’s pretty hard to swallow the idea that this is part of a scheduled review, considering that less than a month ago they announced:

that the nominees listed in the management information circular dated March 13, 2017, as amended, were elected as directors of Aimia. The detailed results of the vote for the election of directors held at its Annual Meeting on May 11, 2017 in Toronto are set out below.

Each of the following 12 nominees proposed by management was elected as a director of Aimia:

On top of the Annual Report comments:

This was also an important year for Board renewal as we added to the retailing, capital markets and financial reporting expertise represented.

Following an extensive search led by the Governance and Nominating Committee, we announced the appointment of Thomas (Tom) D. Gardner and William (Bill) McEwan to our Board of Directors in December 2016 and the nomination of Robert (Chris) Kreidler to our Board for election at our AGM in May 2017.

I mean, either this is a lie or the company has been grossly incompetent in scheduling its review vis a vis the Annual Meeting. I’ll need a lot of convincing before I believe there’s a third option.

All this follows hard on the heels of last Thursday’s announcement:

that Chief Financial Officer Tor Lønnum will be leaving the company in September. Family reasons spurred his decision to seek out a new role that allowed him to return to Copenhagen.

Aimia Group Chief Executive David Johnston, together with the Board of Directors, has appointed Aimia director Roman Doroniuk to act as Interim Chief Financial Officer, effective September 5, while a successor is sought. Lønnum will lead the reporting of the company’s second quarter results on August 9, and then work with Doroniuk until September for a smooth transition.

As far as the stated reason for suspending dividends is concerned, well, having $2-billion goodwill on the balance sheet vs. $115-million of shareholders’ equity doesn’t help matters much, and neither does a Retained Earnings (Deficit) balance of $2.7-billion. I’ll need a little convincing before I believe that “past common share issuances at significantly higher prices than the current market” has anything to do with. Looks more like the company has simply pissed away its capital.

Affected issues are AIM.PR.A, AIM.PR.B and AIM.PR.C.

National Bank of Canada has announced:

that it has closed its domestic public offering of non-cumulative 5-year rate reset first preferred shares series 38 (non-viability contingent capital (NVCC)) (the “Series 38 Preferred Shares”). National Bank issued 16 million Series 38 Preferred Shares at a price of $25.00 per share to raise gross proceeds of $400 million.

The offering was underwritten by a syndicate led by National Bank Financial Inc.

The Series 38 Preferred Shares will commence trading on the Toronto Stock Exchange today under the ticker symbol NA.PR.C.

The Series 38 Preferred Shares were issued under a prospectus supplement dated June 5, 2017 to National Bank’s short form base shelf prospectus dated November 21, 2016.

NA.PR.C is a FixedReset, 4.45%+343, NVCC-compliant announced 2017-6-1. It will be tracked by HIMIPref™ and has been assigned to the FixedResets subindex.

The issue traded 1,359,922 shares today in a range of 24.78-92 before closing at 24.90-93. Vital statistics are:

Implied Volatility analysis for FixedResets suggests that this issue continues to be expensive:

Click for Big

The theoretical price of the new issue according to this model is now 24.58, up from 24.25 on announcement day.

It will be recalled that CF.PR.C will reset to 4.993% (paid on par) effective July 1.

Holders of CF.PR.C have the option to convert to FloatingResets, which will pay 3-month bills plus 403bp 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 June 15, 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, has not yet been announced.

CF.PR.C is a FixedReset, 5.75%+403 that commenced trading 2012-4-10 after being announced 2012-3-22. It has been relegated to the Scraps subindex since inception on credit concerns.

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., CF.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 -0.04% and -0.16%, 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 CF.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 CF.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 new pair will reflect these conditions.

It will be recalled that TA.PR.F will reset to 4.027% (paid on par) effective June 30.

Holders of TA.PR.F have the option to convert to FloatingResets, which will pay 3-month bills plus 310bp on the par value of $25.00, reset quarterly. The deadline for notifying the company of the intent to convert is 3:00 p.m. (MST) / 5:00 p.m. (EST) on June 15, 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, has not yet been announced.

TA.PR.F is a FixedReset 4.60%+310 that commenced trading 2011-11-30 after being announced 2011-11-22. It has been relegated to the Scraps subindex since inception on credit concerns.

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., TA.PR.F 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 -0.04% and -0.16%, 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 TA.PR.F 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 TA.PR.F 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 new pair will reflect these conditions.

It will be recalled that IAG.PR.G will reset to 3.777% (paid on par) effective June 30.

Holders of IAG.PR.G have the option to convert to FloatingResets, which will pay 3-month bills plus 285bp 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. (Montreal time) on June 15, 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, has not yet been announced.

IAG.PR.G is a FixedReset 4.30%+285 that commenced trading 2012-6-1 (and was, unusually, re-opened on 2012-6-19) after being announced 2012-5-24. It has been a member of the FixedReset subindex since inception.

As this issue is not NVCC compliant, it is analyzed as having a Deemed Retraction.

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., IAG.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 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 -0.04% and -0.16%, 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 IAG.PR.G 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 IAG.PR.G 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 new pair will reflect these conditions.

It will be recalled that BAM.PR.X will reset to 2.727% (paid on par) effective July 1.

Holders of BAM.PR.X have the option to convert to FloatingResets, which will pay 3-month bills plus 180bp 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 June 15, 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, will be BAM.PR.Y.

BAM.PR.X is a FixedReset, FixedReset, 4.60%+180, that commenced trading 2011-2-8 after being announced 2011-1-19. Thus, the new rate represents a dividend reduction of 41%. Ouch!

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., BAM.PR.X and the FloatingReset BAM.PR.Y 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 -0.04% and -0.16%, 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 BAM.PR.X FixedReset, we may construct the following table showing consistent prices for its soon-to-be-issued FloatingReset counterpart BAM.PR.Y 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 BAM.PR.X 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.