Category: Issue Comments

Brookfield Asset Management Inc. has announced:

that the dividend rate on its Class A Preference Shares, Series 9 (the “Series 9 Preferred Shares”) (TSX: BAM.PR.G) for the five years commencing November 1, 2016 and ending October 31, 2021 will be 2.75% per annum. This dividend rate represents 357% of the interpolated yield, calculated as of October 11, 2016 at 10:00 a.m. (Toronto time), on the 0.75% Government of Canada bond due September 1, 2021 and the 2.75% Government of Canada bond due June 1, 2022. This dividend will be payable quarterly on the first day of February, May, August and November, commencing with the dividend payable on February 1, 2017. The implied yield on the Series 9 Preferred Shares based on the new fixed dividend rate that will apply for the five years commencing November 1, 2016 and today’s closing price for the Series 9 Preferred Shares is approximately 4.63%.

The annual rate currently paid on the company’s Series 9 Preferred Shares is 3.80%. The final quarterly dividend payable at this rate will be paid on November 1, 2016 to shareholders of record on October 15, 2016.

Conversion Rights

Holders of Brookfield’s Series 9 Preferred Shares have the privilege to convert, at their option, all or part of their Series 9 Preferred Shares on a one-for-one basis into the company’s Class A Preference Shares, Series 8 (the “Series 8 Preferred Shares”) (TSX: BAM.PR.E) effective November 1, 2016. The deadline for exercising this conversion privilege is 5:00 p.m. (Toronto time) on October 18, 2016. Holders of the Series 9 Preferred Shares who do not elect to convert their shares by this date will retain their Series 9 Preferred Shares and will receive the reset fixed-rate dividend as described above.

Holders of Brookfield’s Series 8 Preferred Shares also have the privilege to convert, at their option, all or part of their Series 8 Preferred Shares on a one-for-one basis into the company’s Series 9 Preferred Shares effective November 1, 2016. The deadline for exercising this conversion privilege is 5:00 p.m. (Toronto time) on October 18, 2016. Holders of the Series 8 Preferred Shares who do not elect to convert their shares by this date will retain their Series 8 Preferred Shares and will continue to receive a floating-rate dividend based on the prime rate.

If, after the close of business on October 18, 2016, the company determines that there would be fewer than 500,000 Series 9 Preferred Shares outstanding after the conversion date, it will automatically convert all of the remaining shares of this issue into Series 8 Preferred Shares and return all Series 8 Preferred Shares submitted for conversion. Similarly if, after the close of business on October 18, 2016, the company determines that there would be fewer than 500,000 Series 8 Preferred Shares outstanding after the conversion date, it will automatically convert all of the remaining shares of this issue into Series 9 Preferred Shares and return all Series 9 Preferred Shares submitted for conversion.

Holders of the company’s Series 8 and Series 9 Preferred Shares will again have the opportunity to convert their shares into the other series on November 1, 2021 and every five years thereafter.

Brookfield Asset Management Inc. is a global alternative asset manager with approximately US$250 billion in assets under management. The company has more than a 100-year history of owning and operating assets with a focus on property, renewable power, infrastructure and private equity. Brookfield offers a range of public and private investment products and services, and is co-listed on the New York, Toronto and Euronext stock exchanges under the symbol BAM, BAM.A and BAMA, respectively.

For more information, please visit our website at www.brookfield.com.

BAM.PR.G and BAM.PR.E form a Strong Pair and can therefore be compared with other Strong Pairs of this form using the Pairs Equivalency Calculator:

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The BAM.PR.E / BAM.PR.G pair, at the bids of 14.83 and 14.79, respectively, will have an equivalent total return to the next Exchange Date if the average Prime Rate is 2.71%; this figure is a little lower than the average for this type of pair and about equivalent to the current Prime Rate of 2.70% (although note that this ignores the effect of the last dividend on each issue; BAM.PR.G will pay about $0.18 more than BAM.PR.E).

In the short term, I would expect this Pair to trade more in line with the overall average for FixedFloater / RatchetRate preferreds of (currently) 2.92%, which should provide a small boost in the price of BAM.PR.E relative to BAM.PR.G; over the medium term I suggest that it is prudent to take the view that Canada Prime is much more likely to increase over the next five years than it is to decrease. Therefore, I recommend that holders of BAM.PR.G convert to BAM.PR.E, and that holders of the latter issue maintain their position.

Lowe’s Companies, Inc. and its subsidiary RONA inc. have announced:

that Lowe’s, through a wholly owned subsidiary, and RONA have entered into a definitive agreement for the acquisition of RONA’s outstanding Cumulative 5-Year Rate Reset Series 6 Class A Preferred Shares and Cumulative Floating Rate Series 7 Class A Preferred Shares (collectively, the “Preferred Shares”) for C$24 per share in cash pursuant to a plan of arrangement under the Business Corporations Act (Québec).

The board of directors of RONA, after consultation with its financial and legal advisors, has unanimously approved the transaction and has resolved to unanimously recommend that holders of the Preferred Shares (the “Preferred Shareholders”) vote in favour of the transaction at a meeting of Preferred Shareholders to be held to consider the transaction. RBC Capital Markets has provided a fairness opinion to RONA’s board of directors that, subject to the assumptions, limitations and qualifications set out in such fairness opinion, and as of the date of such opinion, the consideration under the transaction is fair from a financial point of view to the Preferred Shareholders.

The transaction is subject to court approval and the requisite approval of the Preferred Shareholders. Assuming the required approvals are received, the transaction is expected to be consummated before the end of the year.

Fidelity Investments Canada ULC, a large institutional investor that owns a significant portion of the Preferred Shares, has agreed to vote its Preferred Shares in favour of the transaction.

The terms and conditions of the transaction will be disclosed in further detail in the information circular to be mailed to Preferred Shareholders in advance of their meeting to approve the transaction. In addition, a copy of the definitive agreement and the information circular and certain related documents will be filed with the Canadian securities regulatory authorities and will be available under RONA’s profile at www.sedar.com.

So first of all: mea culpa. It looks like my recommendation at the time of the takeover was not optimal:

I don’t understand the rationale that might support a higher offer. The post suggests it is because of “emails and phone calls from pissed off retail investors making a big stink about the whole situation.” Now, in this day and age of governance by Internet meme it may well be that the Public Relations department is perturbed. But from a hard-headed point of view, who cares? RON.PR.A represents cheap financing, it is unlikely that Lowe’s will be issuing equity of any kind in Canada in the future, and the $34.5-million additional cost to acquire at par isn’t chump change.

I’ve been wrong before and I’ll be wrong again, but in this case I suggest that the rational course of action is to vote in favour of the Preferred Share Resolution. Be quick though, voting closes very soon! The safest course of action is, however, to sell on the market – the price is very close to $20 and such a sale would eliminate the potential for nasty consequences should either the common or preferred shareholders vote against their respective resolutions.

When we take another look at the comparators I cited in that post:

So, while there have been gains in the market since 2016-3-24, these pale beside the $4 pickup in the price of RON.PR.A.

What I don’t understand is why Lowe’s is doing this. At today’s closing bid of 23.95, RON.PR.A yield 3.34% to perpetuity, the equivalent of 4.34% interest at the standard conversion factor of 1.3x. Perhaps the requirement to be a reporting issuer in Canada adds enough cost to make this a good financing play for them; perhaps there is also concern about not having a capital structure that US investors will consider ‘clean’. I don’t know.

But one way or another, RON.PR.A (and the FloatingReset RON.PR.B) has provided a great deal of entertainment and food for thought this year!

Capital Power Corporation has announced:

it has closed its previously announced offering of 8,000,000 Cumulative Minimum Rate Reset Preference Shares, Series 7 (the “Series 7 Shares”) at a price of $25.00 per Series 7 Share for aggregate gross proceeds of $200 million on a bought deal basis with a syndicate of underwriters, led by TD Securities Inc. and CIBC Capital Markets.

The Series 7 Shares will begin trading today on the TSX under the symbol CPX.PR.G.

CPX.PR.G is a FixedReset, 6.00%+526M600, announced September 22. It will be tracked by HIMIPref™ but relegated to the Scraps index on credit concerns. DBRS has rated it Pfd-3(low) [Stable] in line with the corporation’s other preferred share issues.

The issue traded 530,562 shares today in a range of 24.75-00 before closing at 24.99-00, 8×199. Vital statistics are:

Implied Volatility analysis simply leads to a repetition of my previous analysis – this is a very expensive issue.

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There was no announcement from Sun Life Financial Corporation, but SLF.PR.K, a FloatingReset that has resulted from a 14% exchange from SLF.PR.H has commenced trading. SLF.PR.H has reset at 2.842% and will reset again 2021-9-30 (or be called on that date) at GOC-5 +217, while SLF.PR.K will pay three month bills +217bp, reset quarterly; in both cases, the dividends will be calculated on the $25 par value of the stocks. The two issues are interconvertible every Exchange Date, making them a Strong Pair.

Vital Statistics as of September 30 are:

It will be noted in the above that I assume a Hard Maturity as of 2025-01-31 for both issues.

As this issue is from an insurer and there is no provision for conversion into common shares at the option of the issuer, I consider this to be subject to my Deemed Retraction policy; accordingly I have placed a maturity entry dated 2025-1-31 at par in the call schedule of this instrument for analytical purposes. Note that this approach is due to analysis and there is no contractual provision in the terms of issue for any such maturity.

At the close 2016-10-3, the Strong Pair was trading with an implied average three-month bill rate to the next Exchange Date of +0.24%; SLF.PR.K has a good relative bid compared to other pairs!

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There was no announcement from Intact Financial Corporation, but IFC.PR.D, a FloatingReset that has resulted from a 16% exchange from IFC.PR.C has commenced trading. IFC.PR.C has reset at 3.332% and will reset again 2021-9-30 (or be called on that date) at GOC-5 +266, while IFC.PR.D will pay three month bills +266bp, reset quarterly; in both cases, the dividends will be calculated on the $25 par value of the stocks. The two issues are interconvertible every Exchange Date, making them a Strong Pair.

Vital Statistics as of September 30 are:

It will be noted in the above that I assume a Hard Maturity as of 2025-01-31 for both issues.

As this issue is from an insurer and there is no provision for conversion into common shares at the option of the issuer, I consider this to be subject to my Deemed Retraction policy; accordingly I have placed a maturity entry dated 2025-1-31 at par in the call schedule of this instrument for analytical purposes. Note that this approach is due to analysis and there is no contractual provision in the terms of issue for any such maturity.

At the close 2016-10-3, the Strong Pair was trading with an implied average three-month bill rate to the next Exchange Date of -1.96%; IFC.PR.D has a very weak bid!

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There has been no announcement by Brookfield Property, but BPO.PR.S commenced trading today and data from the TMX website indicates a conversion rate of 11%.

It will be recalled the FixedReset BPO.PR.R has reset at 4.155% and will reset 2021-9-30 at GOC5+348bp, while BPO.PR.S will pay three-month bills +348bp, reset quarterly. They will be interconvertible again at the next Exchange Date, 2021-9-30.

Both issues are followed by HIMIPref™ but both are relegated to the Scraps subindex due to credit concerns.

Vital statistics are:

At the current bid prices, the implied average three-month bill rate until the next Exchange date is -0.50%, slightly below the average implied rate for junk issues of -0.35%.

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DBRS has announced:

DBRS, Inc. (DBRS) has today upgraded the ratings of Element Fleet Management Corporation (Element or the Company), including its Issuer Rating to BBB (high) from BBB. The trend on all ratings is Stable. Concurrently, DBRS has changed the name of Element Financial Corporation to Element Fleet Management Corporation on its website, reflecting the change in the Company’s legal name effective today following the legal separation of Element from its former commercial businesses which are now housed within ECN Capital Corporation. Today’s rating action concludes the Under Review with Positive Implications, where the ratings were placed on February 17, 2016.
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From DBRS’s perspective, Element’s below-average risk profile is a positive and a key factor in the ratings. The Company’s risk profile is supported by its conservative credit risk appetite and its well-designed risk management framework. Credit risk, which is derived from the Company’s corporate client base, is Element’s primary risk exposure. However, with more than 60% of the client base investment grade corporates, historical credit losses in Element’s fleet management business have been very low, averaging approximately 0.03% of book value annually. Moreover, Element’s overall risk profile benefits from minimal exposure to asset risk, given the lease structure of the majority of the leasing portfolio.

DBRS considers Element’s funding and liquidity profile as appropriately managed and aligned with the asset base. However, DBRS views the reliance on secured forms of wholesale funding as limiting financial flexibility and a constraint on the ratings. Liquidity is largely comprised of unrestricted cash and capacity under its bank facilities, supported by solid cash flow from operations, which as of June 30, 2016, on a pro-forma basis, was more than sufficient to fund expected originations over the next year. DBRS views capitalization as solid given the credit risk profile, limited residual value exposure and strengthening ability to generate organic capital. On a pro-forma basis, tangible leverage is in line with industry peers at 7.5x, at June 30, 2016, and within maximum covenant limits.

I previously reported on the Review-Positive when it was announced by DBRS in February, 2016.

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

S&P Global Ratings has announced:

• •Bombardier Inc. has cut its 2016 delivery forecast for the C-Series due to jet engine delivery delays by Pratt & Whitney.
• •In addition, the business and commercial jet portfolios continue to be pressured due to softer end markets, leading us to revise the business risk profile to weak from fair.
• •As a result, we are lowering our long-term corporate credit and issue ratings on Bombardier to ‘B-‘ from ‘B’.
• •We are lowering our global scale and Canada scale ratings on the company’s preferred stock to ‘CCC-‘ and ‘P-5(Low)’
• •The stable outlook reflects our view that the company’s liquidity provides significant financial flexibility to cover cash flow deficits and any unexpected underperformance through 2017.

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“The downgrade primarily reflects our view of the company’s increased sensitivity to protracted weakness in its end markets and future delays to its C-Series program,” said S&P Global Ratings credit analyst Aniki Saha-Yannopoulos.
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The ratings on Bombardier reflect what we view as the company’s weak business risk profile and highly leveraged financial risk profile. Our ratings take into consideration the company’s competitive market position in the transportation and business aircraft segments, as well as Bombardier’s product diversity. These positives are offset, in part we believe, by the continued risk associated with Bombardier’s production ramp-up of the C-Series jet, high leverage, weakness in the business jet space, and declining cash flow from both the aerospace and transportation divisions.

The stable outlook reflects our view that even though the company faces multiple risks, it has ample liquidity resources to manage its operations.

The most recent news regarding Bombardier’s core competency is:

Canadian government officials should “make up their minds” on a financial aid request by struggling aircraft maker Bombardier Inc., Quebec Finance Minister Carlos Leitao says.

Quebec announced an aid package for the C Series program late last year, which helped stabilize the Montreal-based company and allowed it to secure sales for the jet, Mr. Leitao said at the Bloomberg Canadian Fixed Income Conference in New York. Quebec finalized the deal in June.

Bombardier also sought federal help late last year, though Prime Minister Justin Trudeau’s government has since sought corporate-governance concessions in exchange for any aid package. Bombardier and the federal government remain locked in a standoff over the matter. Mr. Leitao says federal funding would allow the company to start developing new products.
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Philip Proulx, a spokesman for federal Innovation Minister Navdeep Bains, who is leading talks with Bombardier on behalf of Mr. Trudeau’s government, declined to comment directly on whether a decision on the aid request is imminent.

“We want to be part of the solution to help set the company up for long term success,” Mr. Proulx said by e-mail. “That is why we continue to be engaged with the company. For us, the priority is to ensure good quality jobs, R&D investments and head office remains in Canada.”

Affected issues are BBD.PR.B, BBD.PR.C and BBD.PR.D.

Element Financial Corporation has announced:

that the previously announced separation transaction (the “Separation Transaction”), to be implemented by way of plan of arrangement (the “Arrangement”) has received the requisite shareholder approval at Element’s special meeting of shareholders held on September 20, 2016 (the “Meeting”). As a result of the Separation Transaction, shareholders will hold one new common share of Element Fleet Management Corp. and one common share of ECN Capital Corp. (“ECN Capital”) for each common share of Element held. The results of the ballot were 313,993,690 common shares (99.52%) voted at the meeting in favour of the resolution.

According to the Management Information Circular:

On February 16, 2016, we announced that our Board of Directors unanimously approved in principle the reorganization of Element into two separate publicly-traded companies (the “Spin-Out Transaction”) that Element believes will be better able to pursue independent strategies and opportunities for growth and ultimately enhance long-term value for shareholders. If implemented, the reorganization would result in Element (which will be renamed “Element Fleet Management Corp.”) continuing as a fleet management company focused on generating revenue and earnings based on the continued service to Element’s existing fleet management business. The reorganization would also result in the creation of a new commercial finance company (to be named “ECN Capital Corp.”) with a broad origination platform in the commercial and vendor, rail and aircraft sectors, which will transition into an asset management business.
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Each of Element’s outstanding series of preferred shares will remain outstanding obligations of Element Fleet following the Element Arrangement.

Element’s Debentures will also remain outstanding obligations of Element Fleet following the Element Arrangement, and the Board has determined to adjust the conversion prices of the Debentures after the Element Effective Date in a manner equitable in the circumstances so as to reflect the effect of the Element Arrangement. Such adjustment will be subject to the approval of the TSX.
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While Element expects that the credit rating of Element Fleet following the Element Arrangement will improve in relation to Element’s current credit rating, there can be no assurance that its credit rating will improve or be maintained. In any case, the credit ratings assigned to Element are not a recommendation to buy, hold or sell securities of Element. A rating is not a comment on the market price of a security nor is it an assessment of ownership given various investment objectives. There can be no assurance that the credit ratings assigned to Element will remain in effect for any given period of time and ratings may be upgraded, downgraded, placed under review, confirmed and discontinued by an applicable credit ratings agency at any time. Real or anticipated changes in credit ratings may affect the ma rket value of securities of Element Fleet. In addition, real or anticipated changes in credit ratings may affect Element Fleet’s ability to obtain short -term and long-term financing and the cost at which Element Fleet can access the capital markets.

DBRS has had the company on Review-Positive since the announcement of intention in February, as previously reported. There has not yet been any announcement from the Credit Rating Agencies regarding changes in rating now that shareholder approval of the split has been obtained.

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

Intact Financial Corporation has announced:

that 1,594,996 of its 10,000,000 Non-cumulative Rate Reset Class A Shares Series 3 (the “Series 3 Preferred Shares”) were tendered, for conversion on September 30, 2016, on a one-for-one basis, into Non-cumulative Floating Rate Class A Shares Series 4 of IFC (the “Series 4 Preferred Shares”) after having taken into account all elections received before the September 15, 2016, 5:00 p.m. (ET) conversion deadline. As a result of the conversion, on September 30, 2016, IFC will have 8,405,004 Series 3 Preferred Shares and 1,594,996 Series 4 Preferred Shares issued and outstanding. The Series 3 Preferred Shares will continue to be listed on the Toronto Stock Exchange (“TSX”) under the symbol IFC.PR.C. The Series 4 Preferred Shares will begin trading on the TSX on September 30, 2016 under the symbol IFC.PR.D, subject to IFC fulfilling all the listing requirements of the TSX.

Subject to certain conditions described in IFC’s prospectus supplement dated August 11, 2011, IFC may redeem the Series 3 Preferred Shares, in whole or in part, on September 30, 2021 and on September 30 every five years thereafter and may redeem the Series 4 Preferred Shares, in whole or in part, after September 30, 2016.

For more information on the terms of, and risks associated with an investment in, the Series 3 Preferred Shares and the Series 4 Preferred Shares, see IFC’s prospectus supplement dated August 11, 2011 which is available on www.sedar.com.

I previously reported that IFC.PR.C will reset at 3.332%, to be reset again in five years at GOC-5 + 266bp if not called. IFC.PR.D will pay 3-month bills +266bp, reset quarterly. There will be another conversion opportunity at the next Reset Date.