Category: Issue Comments

DBRS has announced that it:

downgraded its credit ratings on Laurentian Bank of Canada (LBC or the Bank), including the Bank’s Long-Term Issuer Rating to BBB from BBB (high) and Short-Term Issuer Rating to R-2 (high) from R-1 (low). Morningstar DBRS changed the trends for all credit ratings to Stable from Negative. The Bank’s Intrinsic Assessment (IA) is BBB with a Support Assessment (SA) of SA3. The SA3 designation reflects no expectation of timely external support and results in the Bank’s Long-Term Issuer Rating being equivalent to the IA.

KEY CREDIT RATING CONSIDERATIONS
The credit rating downgrades reflect LBC’s weak earnings performance, which also affects Morningstar DBRS’ view of LBC’s competitive position and franchise strength. Earnings have remained under pressure in the first nine months of 2024 ended July 31, 2024 (9M 2024), and Morningstar DBRS expects continued weakness in earnings in the short to medium term as the new leadership team embarks on its turnaround strategy. Moreover, because of lack of scale, LBC has divested assets under administration to two different entities as part of its strategy to focus on areas of business where it can win and be more competitive. Other aspects of the new strategic plan include revamping its leadership team, simplifying the Capital Markets segment, and accelerating investments to improve operational and technological resiliency. Nevertheless, in Morningstar DBRS’ view, these initiatives could take some time to realize material benefits, considering the Bank’s previous transformations, which yielded less than desired levels of success. The Stable trends reflect Morningstar DBRS’ expectations that LBC’s new leadership will implement the strategic initiatives without operational missteps, while demonstrating a gradual improvement in earnings and franchise strength over time.

Supporting the credit ratings, LBC continues to demonstrate good credit quality with low impairments and loan losses; however, Morningstar DBRS expects asset quality metrics to modestly deteriorate from current levels in F2025 because of elevated debt-servicing costs for borrowers. The Bank’s balance sheet fundamentals remain stable with good levels of liquidity and capital buffers to deal with potential deposit outflows and absorb a stressed level of loan losses.

CREDIT RATING DRIVERS
Over the longer term, Morningstar DBRS would upgrade the credit ratings, if LBC demonstrates a material and sustained improvement in its franchise position and financial performance while maintaining a similar risk profile.

Conversely, additional missteps and/or a failure to execute on the Bank’s strategic initiatives would result in another credit ratings downgrade. In addition, pressure on funding and liquidity or a significant deterioration in asset quality would also result in another credit ratings downgrade.

CREDIT RATING RATIONALE
Franchise Combined Building Block (BB) Assessment: Moderate
LBC is Canada’s eighth-largest Schedule I bank with assets of $47.5 billion as at July 31, 2024. The Bank offers retail services in Québec through its branch network as well as commercial lending across Canada and in the U.S. LBC also distributes financial products to brokers and financial advisors across Canada through its wholesale arm, B2B Bank. During its Investor Day on May 31, 2024, LBC unveiled its new strategic plan developed by recently appointed President and Chief Executive Officer (CEO) Éric Provost. The plan lays out a path to profitability-driven growth, which includes improved efficiency in the Personal Banking part of the Personal and Commercial Banking segment through digitalization and simplification as well as a continued focus on commercial lending as the key growth engine. Furthermore, the Bank will be focusing on funding optimization, strengthening core retail deposit gathering, and expanding the Bank’s fixed income and foreign exchange specialization capabilities in its Capital Markets segment. As part of the revamped strategy, LBC has divested its full-service and discount brokerage divisions and equity research businesses, while accelerating investments to improve operational and technological resiliency.

Earnings Combined Building Block (BB) Assessment: Weak
LBC has experienced further earnings deterioration and continues to report weaker profitability relative to its peers, with reported adjusted net income declining by about 21.9% year over year (YOY) to $127.7 million for 9M 2024. Adjusted return on common equity, as reported by the Bank, fell to 6.1% in 9M 2024 from 8.1% for the same period of the prior fiscal year. Lower adjusted net earnings were largely driven by a 3.2% YOY reduction in net interest income on the back of lower commercial loan volumes and a 4.6% YOY increase in noninterest expenses largely reflecting technology costs and a higher provision for credit losses. As a result, the adjusted efficiency ratio, as reported by the Bank, deteriorated by 42 basis points (bps) YOY to 73.4% in 9M 2024, while the reported net interest margin remained stable at 1.8% for the same period. Of note, the Bank reported a net loss of $46.2 million in 9M 2024 (on an unadjusted basis) largely associated with the impairment and restructuring charges of $212.0 million ($166.8 million after income taxes) related to the Bank’s operations and the impairment of the Personal and Commercial Banking segment recorded in Q2 2024.

Risk Combined Building Block (BB) Assessment: Good
Amounting to $35.1 billion as at Q3 2024, gross loans contracted by 5.1% YOY, largely because of reductions in commercial and nonmortgage personal loans of 7.2% and 20.2%, respectively. The bulk of credit risk lies in the commercial book, which accounted for about 47% of total loans as at Q3 2024 and has concentrations in commercial real estate and inventory financing. The Bank’s asset quality is still good with low impairments and loan losses, although the gross impaired loans ratio increased by 53 bps YOY to 1.1% at the end of Q3 2024, largely because of increased impairments in commercial loans, including commercial mortgages. Morningstar DBRS expects asset quality metrics to further deteriorate from their current levels in F2025 despite the declining interest rate environment. Furthermore, Morningstar DBRS remains cautious that if not managed prudently, the Bank’s continued realignment of the loan portfolio and geographic expansion, as well as potential challenges with the execution of the revamped strategy, could expose LBC to heightened levels of operational and credit risk.

Funding and Liquidity Combined Building Block (BB) Assessment: Good/Moderate
LBC’s overall funding and liquidity position remains stable. The Bank has maintained a good branch-raised deposit base in Québec and also funds its operations through broker-sourced deposits. Accounting for about 65% of LBC’s total funding base, total deposits, including capital markets deposits, declined by 11.3% YOY to $23.3 billion in Q3 2024, in line with the contraction in the loan book. The decrease was largely driven by personal deposits, which represented 86% of total deposits as at Q3 2024. Meanwhile, deposits from the broker channel totalled $10.0 billion and accounted for about 43% of total deposits as at Q3 2024. As part of its revamped strategy, the Bank is seeking to attract additional deposits across Canada, especially direct retail deposits through expansion of its digital capabilities, which Morningstar DBRS views positively.

Capitalization Combined Building Block (BB) Assessment: Good/Moderate
LBC’s capital ratios under the standardized approach are above regulatory minimums and provide appropriate buffers to absorb stressed levels of loan losses. Morningstar DBRS would view favourably a larger capital buffer, sufficient to absorb significant losses, especially as the Bank is focused on commercial lending, which may be more susceptible to weakness in the event of a sustained economic downturn. The CET1 capital ratio increased by 110 bps YOY to 10.9% as at Q3 2024, primarily reflecting lower risk-weighted assets on the back of lower loan balances. The Bank reported a leverage ratio of 5.2% in Q3 2024 (compared with 4.8% as at Q3 2023) that was also above the regulatory minimum of 3.0%.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/442469.

The issue was downgraded to Pfd-3(low), Trend Negative last December. This downgrade does not affect the level of the rating, but changes the trend to stable.

Update, 2024-12-3: Somehow, I missed a crucial point in the DBRS release:

01-Nov-24 NVCC Preferred Shares Pfd-4 (high) Stb Downgraded, Trend Change

Pembina Pipeline Corporation has announced:

that it does not intend to exercise its right to redeem the currently outstanding Cumulative Redeemable Rate Reset Class A Preferred Shares, Series 7 (“Series 7 Shares”) (TSX: PPL.PR.G) on December 1, 2024.

As a result of the decision not to redeem the Series 7 Shares, and subject to certain terms of the Series 7 Shares, the holders of the Series 7 Shares will have the right to elect to convert all or part of their Series 7 Shares on a one-for-one basis into Cumulative Redeemable Floating Rate Class A Preferred Shares, Series 8 of Pembina (“Series 8 Shares”) on December 1, 2024 (the “Conversion Date”). Holders who do not exercise their right to convert their Series 7 Shares into Series 8 Shares will retain their Series 7 Shares.

As provided in the terms of the Series 7 Shares: (i) if Pembina determines that there would remain outstanding immediately following the conversion less than 1,000,000 Series 7 Shares, then all remaining Series 7 Shares will be automatically converted into Series 8 Shares on a one-for-one basis effective as of the Conversion Date; or (ii) if Pembina determines that there would be less than 1,000,000 Series 8 Shares outstanding immediately following the conversion, no Series 7 Shares will be converted into Series 8 Shares on the Conversion Date. There are currently 10,000,000 Series 7 Shares outstanding.

With respect to any Series 7 Shares that remain outstanding after the Conversion Date, holders thereof will be entitled to receive quarterly fixed cumulative preferential cash dividends, if, as and when declared by the Board of Directors of Pembina. The annual dividend rate for the Series 7 Shares for the five-year period from and including December 1, 2024, to, but excluding, December 1, 2029, will be 5.953 percent, being equal to the five-year Government of Canada bond yield of 3.013 percent determined as of today plus 2.94 percent, in accordance with the terms of the Series 7 Shares.

With respect to any Series 8 Shares that may be issued on the Conversion Date, holders thereof will be entitled to receive quarterly floating rate cumulative preferential cash dividends, if, as and when declared by the Board of Directors of Pembina. The annual dividend rate applicable to the Series 8 Shares for the three-month floating rate period from and including December 1, 2024, to, but excluding, March 1, 2025, will be 6.583 percent, being equal to the annual rate of interest for the most recent auction of 90-day Government of Canada treasury bills of 3.643 percent plus 2.94 percent, in accordance with the terms of the Series 8 Shares (the “Floating Quarterly Dividend Rate”). The Floating Quarterly Dividend Rate will be reset on the first day of March, June, September and December in each year.

Beneficial holders of Series 7 Shares who wish to exercise their right of conversion during the conversion period, which runs from November 1, 2024, until 3:00 pm (MT) / 5:00 pm (ET) on November 18, 2024, should communicate as soon as possible with their broker or other intermediary for more information. It is recommended that this be done well in advance of the deadline in order to provide the broker or other intermediary with the time to complete the necessary steps. Any notices received after this deadline will not be valid.

As previously announced, the dividend payable on December 1, 2024, to holders of the Series 7 Shares of record on November 1, 2024, will be $0.273750 per Series 7 Share. Pursuant to the terms of the Series 7 Shares, as December 1, 2024, is not a business day, payment will occur on December 2, 2024. For more information on the terms of the Series 7 Shares and the Series 8 Shares, please see the prospectus supplement dated September 4, 2014, which can be found on SEDAR+ at www.sedarplus.ca.

PPL.PR.G was issued as a FixedReset, 4.50%+294, that commenced trading 2014-9-11 after being announced 2014-9-2. The issue resets to 4.380% effective 2019-12-1 and there was no conversion. It is tracked by HIMIPref™ but relegated to the Scraps index on credit concerns.

Thanks to Assiduous Reader niagara for bringing this to my attention!

Update, 2024-11-18: No conversion:

Pembina Pipeline Corporation (“Pembina”) (TSX: PPL; NYSE: PBA) announced today that none of Pembina’s Cumulative Redeemable Rate Reset Class A Preferred Shares, Series 7 (“Series 7 Shares”) (TSX: PPL.PR.G) will be converted into Cumulative Redeemable Floating Rate Class A Preferred Shares, Series 8 of Pembina (“Series 8 Shares”) on December 1, 2024.

After taking into account all the conversion notices received from holders of its outstanding Series 7 Shares by the November 18, 2024 deadline for the conversion of the Series 7 Shares into Series 8 Shares, less than the 1,000,000 Series 7 Shares required to give effect to conversions into Series 8 Shares were tendered for conversion.

Enbridge Inc. has announced:

that it does not intend to exercise its right to redeem its currently outstanding Cumulative Redeemable Preference Shares, Series 9 (Series 9 Shares) (TSX: ENB.PF.A) on December 1, 2024. As a result, subject to certain conditions, the holders of the Series 9 Shares have the right to convert all or part of their Series 9 Shares on a one-for-one basis into Cumulative Redeemable Preference Shares, Series 10 of Enbridge (Series 10 Shares) on December 1, 2024. Holders who do not exercise their right to convert their Series 9 Shares into Series 10 Shares will retain their Series 9 Shares.

The foregoing conversion right is subject to the conditions that: (i) if Enbridge determines that there would be less than 1,000,000 Series 9 Shares outstanding after December 1, 2024, then all remaining Series 9 Shares will automatically be converted into Series 10 Shares on a one-for-one basis on December 1, 2024; and (ii) alternatively, if Enbridge determines that there would be less than 1,000,000 Series 10 Shares outstanding after December 1, 2024, no Series 9 Shares will be converted into Series 10 Shares. There are currently 11,000,000 Series 9 Shares outstanding.

With respect to any Series 9 Shares that remain outstanding after December 1, 2024, holders thereof will be entitled to receive quarterly fixed cumulative preferential cash dividends, as and when declared by the Board of Directors of Enbridge. The new annual dividend rate applicable to the Series 9 Shares for the five-year period commencing on December 1, 2024 to, but excluding, December 1, 2029 will be 5.672 percent, being equal to the five-year Government of Canada bond yield of 3.012 percent determined as of today plus 2.66 percent in accordance with the terms of the Series 9 Shares.

With respect to any Series 10 Shares that may be issued on December 1, 2024, holders thereof will be entitled to receive quarterly floating rate cumulative preferential cash dividends, as and when declared by the Board of Directors of Enbridge. The dividend rate applicable to the Series 10 Shares for the three-month floating rate period commencing on December 1, 2024 to, but excluding, March 1, 2025 will be 1.55342 percent, based on the annual rate on three month Government of Canada treasury bills for the most recent treasury bills auction of 3.64 percent plus 2.66 percent in accordance with the terms of the Series 10 Shares (the Floating Quarterly Dividend Rate). The Floating Quarterly Dividend Rate will be reset every quarter.

Beneficial holders of Series 9 Shares who wish to exercise their right of conversion during the conversion period, which runs from November 1, 2024 until 5:00 p.m. (EST) on November 18, 2024, should communicate as soon as possible with their broker or other intermediary for more information. It is recommended that this be done well in advance of the deadline in order to provide the broker or other intermediary time to complete the necessary steps. Any notices received after this deadline will not be valid.

ENB.PF.A was issued as a FixedReset, 4.40%+266, that commenced trading 2014-3-13 after being announced 2014-3-4. It reset to 4.097% effective 2019-12-1 and there was no conversion. Enbridge issues were upgraded to Pfd-2(low) by DBRS in June, 2024. ENB.PF.A is tracked by HIMIPref™ and is currently assigned to the FixedReset (Discount) subindex.

Update, 2024-11-18: No conversion:

Enbridge Inc. (TSX: ENB) (NYSE: ENB) (Enbridge) announced today that none of its outstanding Cumulative Redeemable Preference Shares, Series 9 (Series 9 Shares) will be converted into Cumulative Redeemable Preference Shares, Series 10 (Series 10 Shares) on December 1, 2024.

After taking into account all conversion notices received from holders of its outstanding Series 9 Shares by the November 18, 2024 deadline for the conversion of the Series 9 Shares into Series 10 Shares, less than the 1,000,000 Series 9 Shares required to give effect to conversions into Series 10 Shares were tendered for conversion.

Mulvihill Capital Management Inc. has announced:

Premium Income Corporation (the “Fund”) is pleased to announce that in connection with the special retraction right granted to shareholders arising as a result of the extension of the term of the Fund to November 1, 2031, the Fund is announcing a consolidation of its Class A shares effective the opening of trading on or about November 12, 2024. As more Preferred shares than Class A shares were retracted on the special retraction, the consolidation will ensure that an approximately equal number of Class A shares and Preferred shares will be outstanding immediately following the consolidation. Under the consolidation, each Class A share will be consolidated into approximately 0.67 of a Class A share. The total value of a shareholder’s investment in Class A shares will not change, however, the number of Class A shares reflected in the shareholder’s account will decline and the net asset value per Class A share will increase proportionately. The consolidation is subject to regulatory approval. No fractional shares will be issued and shareholders are not required to take any action for the consolidation to be effective.

In addition, the Fund is pleased to announce that distributions on the Class A shares will be paid monthly instead of quarterly commencing in November 2024. Monthly distributions are expected to be $0.08 per Class A share or $0.96 per share per annum (compared to the previous rate of $0.81276 per annum). Holders of Class A shares will continue to receive ongoing leveraged exposure to a high-quality portfolio consisting principally of common shares of Bank of Montreal, The Bank of Nova Scotia, Canadian Imperial Bank of Commerce, National Bank of Canada and The Toronto-Dominion Bank. Holders of the Preferred shares are expected to continue to benefit from fixed cumulative preferential monthly distributions in the amount of $0.10625 ($1.275 per annum) per Preferred share representing a yield of 8.5% on the original issue price of $15.00 per share.

For further information, please contact Investor Relations at 416.681.3966, toll free at 1.800.725.7172, email at info@mulvihill.com or visit www.mulvihill.com

It will be remembered that the Capital Units could also be retracted; so the 33% excess preferred share retraction is on top of the number that were retracted in equal numbers to the Capital Units. And all this, despite the dividend boost to 8.50%!

Thanks to Assiduous Reader newbiepref for bringing this to my attention!

Moody’s Ratings has announced (on 2024-10-23) that it:

has today downgraded the long-term ratings and assessments of The Toronto-Dominion Bank (TD), including its Baseline Credit Assessment (BCA) to a2 from a1, its long-term Counterparty Risk Ratings to Aa2 from Aa1 and the bank’s long-term Counterparty Risk Assessment to Aa3(cr) from Aa2(cr). Concurrent with this rating action, we downgraded the long-term issuer rating to A3 from A2 of TD Group US Holdings LLC (TD GUS), the US Intermediate Holding Company (IHC) of TD Bank US Holding Company, which in turn is the direct parent of TD Bank, N.A. (collectively, “TD US”).

The rating outlooks for the long-term deposits, issuer ratings, senior unsecured and junior senior unsecured debt ratings at TD as well as the outlook for the long-term issuer rating at TD GUS included in today’s rating action were changed to stable from negative.

The rating action follows TD’s announcement [1] on 10 October that it has resolved its civil and criminal investigations into its US Bank Secrecy Act (BSA)/anti-money laundering (AML) program by US prudential regulators, the Financial Crimes Enforcement Network and the US Department of Justice. The total financial penalties of US$3.09 billion was largely covered by the bank’s previous provisions of US$3.05 billion.

“The downgrade of TD’s BCA reflects the scale and severity of the bank’s risk management failures as evidenced by its BSA/AML settlement with the Department of Justice and regulators, which has changed our view of the effectiveness of TD’s governance” said Robert Colangelo, Moody’s Ratings Vice President – Senior Credit Officer. “Next year will be a transitional year for the bank’s US operations as it continues to invest in its US BSA/AML remediation program and undertakes its balance sheet restructuring to comply with the asset cap that was imposed on its US bank subsidiaries,” Mr. Colangelo added.

A full list of affected ratings can be found at the end of this press release.

RATINGS RATIONALE

The ratings downgrade reflects the severity of TD’s risk management failures, which are no longer consistent with an a1 BCA, and change our view of TD’s long-established culture of low risk tolerance. TD and two US banking subsidiaries – TD Bank, N.A. and TD Bank USA, N.A. (collectively TD Bank US) – have consented to orders with the Office of the Comptroller of the Currency (OCC), the Federal Reserve Board, and the Financial Crimes Enforcement Network (FinCEN), with the OCC imposing an asset cap on TD Bank US whereby the total assets of TD Bank US cannot exceed US$434 billion (total assets as of 30 September 2024). In addition, TD Bank, N.A. and its parent company TD Bank US Holding Company pled guilty to conspiring to fail to maintain an AML program that complies with the BSA, fail to file accurate Currency Transaction Reports, and launder money.

We regard TD’s weaknesses in corporate governance and risk management as a governance risk under our General Principles for Assessing Environmental, Social and Governance Risks (ESG), given its implications for financial strategy and risk management, management credibility and track record, and compliance and reporting. We reflect such governance deficiencies in TD and TD GUS’s high risk Governance Issuer Profile Score (G-4). As a result, we changed TD and TD GUS’s ESG Credit Impact Score to CIS-4 from CIS-2, indicating that ESG considerations have a discernible impact on the current ratings. We have added a one-notch downward adjustment for corporate behavior into TD’s rating construct.

While the financial penalties imposed on TD are largely covered by the provisions the bank has already booked, we expect that profitability will remain challenged over the medium term given the extensive US remediation program being implemented and the expected costs that will be incurred from the bank’s strategy to comply with the asset cap that includes an asset reduction and investment portfolio repositioning. TD’s remediation program will require ongoing monitoring of its progress through the appointment of a compliance monitor, which we believe will restrict the strategic and financial flexibility associated with its US activities. However, we expect these planned actions to provide capacity for TD to serve its US clients while allowing the bank to protect its US franchise through the remediation period.

TD’s capitalization remains comfortably above regulatory minimums, with the bank reporting a common equity tier 1 (CET1) capital ratio of 12.8% as of 31 July 2024. The bank’s proforma CET1 ratio is approximately 13.0% reflecting the 54 basis points (bps) impact from the sale of 40.5 million shares of common stock of The Charles Schwab Corporation (Schwab, A2 stable), which will offset the negative 35 bps impact from higher operational risk due to the provision.

In addition, capital levels at TD US remain very strong underpinning a still relatively favorable BCA. We expect TD US to maintain capitalization levels well in excess of regulatory minimums, particularly as it navigates through its remediation period. We note that the OCC consent order includes the requirement for board certification for any dividend distributions from TD’s two US subsidiaries to the parent to help ensure that the bank continues to prioritize the AML remediation. However, this does not affect the parent’s ability to pay common share dividends.

The downgrade of TD GUS’s adjusted BCA and long-term ratings was driven by our downgrade of the long-term ratings and assessments of TD, TD GUS’s parent, which provides affiliate support. There remains a very high likelihood that TD would provide support to TD US, if needed, given its size and strategic importance to TD, including that TD US is the principal source of growth and diversification for TD outside Canada.

We utilize advanced Loss Given Failure (LGF) analysis for the bank’s creditors and believe that TD’s long-term deposits and senior unsecured debt are likely to face extremely low loss given failure, due to loss absorption provided by more junior obligations and to the high volume of deposits in its liability structure. Our current ratings expect the volume of TD’s junior senior unsecured debt outstanding will reduce over the course of 2024 and 2025 given the 2024 termination of the First Horizon Corporation acquisition, lowering the loss absorption provided by those more junior obligations.

The stable outlooks reflect our expectation that TD and TD GUS’s financial profiles will remain largely unchanged despite the significant BSA/AML remediation efforts underway, due primarily to the enduring strength of TD’s Canadian franchise. We also expect the entities to maintain strong capitalization, with TD’s CET1 ratio expected to remain comfortably above the regulatory minimum.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

TD

An upgrade of TD’s BCA would be contingent upon the bank successfully managing the asset cap imposed on its US bank subsidiaries with no further risk management issues becoming apparent; and with TD demonstrating material improvements in the strength and stability of profitability while maintaining a conservative risk appetite, and stronger capital, liquidity and funding.

TD’s BCA could be downgraded should significant new risk management failures become apparent or if the nonfinancial penalties imposed on its US activities restrict its strategic decision-making and financial flexibility, resulting in a deterioration of its US franchise strength. Downward rating pressure could also emerge if the bank were to experience a material worsening of asset quality or a decrease in its tangible common equity to risk-weighted assets ratio below 12% for a sustained period, or should the bank significantly increase its reliance on capital markets activities. A lower BCA would likely lead to a ratings downgrade. The long-term deposits and senior unsecured debt ratings could also be downgraded due to a reduction in our assumptions regarding the expected issuance volume of junior senior unsecured debt, resulting in lower protection for the bank’s creditors.

TD GUS

An upgrade of TD Bank, N.A.’s BCA would be contingent upon the bank successfully managing its asset cap and with no further risk management issues becoming apparent; and with a material and sustained improvement in its profitability and funding profile, with its capital, liquidity and asset quality remaining strong. However, a higher BCA is unlikely to lead to an upgrade in TD US’s ratings, absent an upgrade of TD’s BCA.

TD Bank, N.A.’s BCA could be downgraded should significant new risk management failures become apparent or should its nonfinancial penalties significantly restrict its financial flexibility, resulting in a material worsening of TD US’s profitability or erosion of its franchise strength. Downward rating pressure could also emerge if TD US were to experience a sustained deterioration in asset quality, a significant decrease in capitalization, a sustained weakening in its funding and liquidity profile, or a heightened risk appetite. However, a downgrade of TD Bank, N.A.’s BCA might not result in a downgrade of its adjusted BCA or ratings, since we might incorporate a further notch of affiliate support into its rating construct. A downgrade of TD’s BCA would likely lead to TD US’s ratings being downgraded.

Affected issues are TD.PF.A, TD.PF.C, TD.PF.D, TD.PF.E, TD.PF.I and TD.PF.J.

BIP Investment Corporation, an indirect subsidiary of Brookfield Infrastructure Partners L.P., has announced (on 2024-10-24):

that it will be holding a special meeting of holders of senior preferred shares, series 1 (the “Preferred Shares”) on November 27, 2024 at 10:00 a.m. (Eastern time) (the “Meeting”) in a virtual format whereby holders may attend and participate via live webcast.

At the meeting, BIPIC will be seeking approval from holders of the Preferred Shares (“Preferred Shareholders”) to pass a special resolution (the “Special Resolution”) to permit the redemption of the Preferred Shares by BIPIC at any time on not less than three business days’ notice for an amount in cash equal to C$26.75 per Preferred Share (the “Enhanced Redemption Price”). If the Special Resolution is approved, BIPIC intends to provide notice promptly following the Meeting of its intention to redeem all of the outstanding Preferred Shares for the Enhanced Redemption Price (the “Redemption”).

BIPIC intends to declare a quarterly dividend for the fourth quarter of 2024 in the amount of C$0.4671875 per Preferred Share payable immediately prior to the Redemption (the “Q4 2024 Dividend”) and to elect that the Q4 2024 Dividend be deemed a capital gains dividend. The Q4 2024 Dividend, if declared, will be paid to Preferred Shareholders of record as of November 29, 2024 in addition to the Enhanced Redemption Price in the event the Special Resolution is approved at the Meeting and the Preferred Shares are redeemed by BIPIC.

Preferred Shareholders of record as of market close on October 25, 2024 will be entitled to receive notice of and vote at the Meeting. The Special Resolution must be passed by the affirmative vote of 66 2/3% of the votes cast at the Meeting.

A management information circular containing the details of the Meeting and the matters to be presented and voted on will be mailed on or about November 1, 2024 to all holders of Preferred Shares of record as of market close on October 25, 2024, and will also be available on BIPIC’s SEDAR+ profile at https://sedarplus.ca.

About Brookfield Infrastructure

Brookfield Infrastructure is a leading global infrastructure company that owns and operates high-quality, long-life assets in the utilities, transport, midstream and data sectors across the Americas, Asia Pacific and Europe. We are focused on assets that have contracted and regulated revenues that generate predictable and stable cash flows. Investors can access its portfolio either through Brookfield Infrastructure Partners L.P. (NYSE: BIP; TSX: BIP.UN), a Bermuda-based limited partnership, or Brookfield Infrastructure Corporation (NYSE, TSX: BIPC), a Canadian corporation. Further information is available at https://bip.brookfield.com.

Brookfield Infrastructure is the flagship listed infrastructure company of Brookfield Asset Management, a global alternative asset manager with approximately US$1 trillion of assets under management. For more information, go to https://brookfield.com.

The affected issue is BIK.PR.A.

Thanks to Assiduous Reader NK for bringing this to my attention!

TC Energy Corporation has announced:

that 1,297,203 of its 18,000,000 fixed rate Cumulative Redeemable First Preferred Shares, Series 9 (Series 9 Shares) have been elected for conversion on a one-for-one basis into floating rate Cumulative Redeemable First Preferred Shares, Series 10 (Series 10 Shares) effective on Oct. 30, 2024. As a result, on Oct. 30, 2024, TC Energy will have 16,702,797 Series 9 Shares and 1,297,203 Series 10 Shares issued and outstanding. The Series 9 Shares and Series 10 Shares will be listed on the Toronto Stock Exchange under the symbols TRP.PR.E and TRP.PR.L, respectively.

TRP.PR.E was issued as a FixedReset, 4.25%+235, that commenced trading 2014-1-20 after being announced 2014-1-13. Notice of extension was provided on 2019-9-18. TRP.PR.E reset at 3.762% effective 2019-10-30. I recommended against conversion and there was no conversion. The issue resets to 5.08% effective 2024-10-30. TRP.PR.E is tracked by HIMIPref™ and assigned to the FixedReset-Discount subindex.

So, if you think about it: TRP.PR.E reset to 5.08% in accordance with a GOC-5 rate of 2.73%. So those who converted to the FloatingRate are betting that the 3-Month bill rate for the next five years will average better than 2.73%. Given that 3-Month bills are now at about 3.54% and that the swaps market is forecasting an overnight rate of 2.58% at the end of 2025, it’s not the most horrible bet I’ve seen people make.

Thanks to Assiduous Reader NK for bringing this to my attention!

DBRS has announced:

changed the trends on all long-term credit ratings of The Toronto-Dominion Bank (TD or the Bank), and its related entities, to Negative from Stable and confirmed all credit ratings, including TD’s Long-Term Issuer Rating at AA (high). At the same time, Morningstar DBRS confirmed all short-term credit ratings, including TD’s Short-Term Issuer Rating of R-1 (high), with Stable trends, with the exception of TD Bank, N.A. and TD Bank US Holding Company whose short-term credit rating trends were changed to Negative from Stable. TD’s Long-Term Issuer Rating is composed of an Intrinsic Assessment (IA) of AA and a Support Assessment (SA) of SA2, which reflects the expectation of timely systemic support from the Government of Canada (rated AAA with a Stable trend). As a result of the SA2 designation, the Bank’s Long-Term Issuer Rating benefits from a one-notch uplift to the Bank’s IA.

KEY CREDIT RATING CONSIDERATIONS
The trend change to Negative from Stable reflects the significant failures in corporate governance related to antimoney laundering (AML) at TD’s U.S. retail operations and what Morningstar DBRS views as the heightened risk of discovering additional past transgressions or new missteps, including the potential for not remediating identified regulatory issues in a timely, effective manner. Moreover, Morningstar DBRS believes that profitability may be negatively affected for a prolonged period, which could lead to further negative credit rating pressure.

Certain U.S. subsidiaries of TD pleaded guilty to multiple criminal charges, including conspiracy to commit money laundering, as part of a global resolution to its AML investigations with the Office of the Comptroller of the Currency (OCC), the Federal Reserve Board, the Financial Crimes Enforcement Network, and the U.S. Department of Justice. Total fines of USD 3.09 billion were substantial and the largest ever imposed on a bank for AML-related matters, although Morningstar DBRS notes the USD 3.05 billion in provisions the Bank had already put aside. In addition, the OCC Consent Order included an asset cap on TD’s two U.S. banking subsidiaries (TD Bank USA, N.A. and TD Bank, N.A.) of approximately USD 434 billion. Morningstar DBRS considers this to be the outcome from multiple corporate governance failures at the Bank and expects the asset cap, combined with ongoing AML remediation efforts necessary to address TD’s material shortcomings, to reduce the Bank’s earnings power over the intermediate term. TD estimates its pretax U.S. governance and control costs to be USD 350 million in F2024 and USD 500 million in F2025. The extent of the AML resolution’s medium to long-term impact, including the asset cap, on TD’s reputation and earnings power remains uncertain. Further, TD’s AML remediation efforts will be a multiyear undertaking that will require a significant time commitment from the Bank’s revamped senior executive team if TD is to avoid any missteps, which could have further asset cap implications.

TD has some flexibility and levers to mitigate a prolonged and adverse impact to earnings. While the asset cap will hamper U.S. growth, Morningstar DBRS estimates the Bank is operating with a roughly USD 40 billion to USD 50 billion surplus in U.S. assets that can be redeployed to create loan capacity to support existing or new U.S. customer relationships. With U.S. assets representing 28.5% of total Bank assets at Q3 2024 and U.S. revenue comprising approximately 25% of total Bank revenue, Morningstar DBRS also views the Bank as having the ability to pivot its growth focus toward Canada and TD Securities to minimize the impact on earnings. TD has leading market positions in Canada in both retail and commercial, along with a large, integrated wealth management franchise. TD Securities, which is not affected by the asset cap, has a top two market share position in Canada and the integration of TD Cowen has notably increased its U.S. capital markets business while expanding the wholesale bank’s capabilities and product set, providing additional opportunities for growth in the U.S.

Finally, TD currently has an elevated liquidity position. At Q3 2024, the liquidity coverage ratio was 129%, representing a surplus of $75 billion over the published regulatory minimum. The Bank also currently has a solid capital position, with a healthy CET1 position of 12.8% in Q3 2024, which Morningstar DBRS expects to rise to 13% going forward. Both are expected to remain well above their respective regulatory minimum thresholds and remain supportive of the current credit ratings.

CREDIT RATING DRIVERS
Given the Negative trends, credit rating upgrades are unlikely. Morningstar DBRS would change the trends back to Stable if TD demonstrates substantial progress in its AML remediation efforts while demonstrating a credible path to return to profitability metrics commensurate with its credit rating category.

A credit ratings downgrade would occur if the Bank experienced any additional missteps or failures, including in its AML remediation efforts. Additionally, the credit ratings would be downgraded if profitability is negatively affected for a prolonged period, there is notable deterioration in franchise strength, or there is a sustained deterioration in asset quality.

CREDIT RATING RATIONALE
Franchise Combined Building Block (BB) Assessment: Very Strong

Earnings Combined Building Block (BB) Assessment: Strong/Good

Risk Combined Building Block (BB) Assessment: Strong

Funding and Liquidity Combined Building Block (BB) Assessment: Strong

Capitalization Combined Building Block (BB) Assessment: Strong

Affected issues are TD.PF.A, TD.PF.C, TD.PF.D, TD.PF.E, TD.PF.I and TD.PF.J.