Category: Issue Comments

MFC.PR.P, the new FloatingReset that has come into existence via partial exchange from MFC.PR.F, is now trading.

The 21% conversion rate has been reported previously; Assiduous Readers will remember that I recommended against conversion. MFC.PR.F now pays 2.178% (on par) until 2021-6-19, while MFC.PR.P will pay 3-month bills +141bp, reset quarterly.

MFC.PR.P closed June 20 with a quote of 12.90-20

Vital statistics are:

The $2.05 price difference between the two elements of the Strong Pair (I told you not to convert!) implies a break-even three-month bill rate of -1.20% – at the low end of the range defined by other investment-grade Strong Pairs.

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Brookfield Renewable Partners L.P. has announced:

that the Toronto Stock Exchange (the “TSX”) accepted a notice filed by Brookfield Renewable Power Preferred Equity Inc. (“BRP Equity”) of its intention to renew its normal course issuer bid for its outstanding Class A Preference Shares (“Preferred Shares”). BRP Equity is a wholly-owned subsidiary of Brookfield Renewable. Brookfield Renewable believes that in the event that the Preferred Shares trade in a price range that does not fully reflect their value, the acquisition of Preferred Shares may represent an attractive use of available funds. There are currently five series of Preferred Shares outstanding.
…
Under its current normal course issuer bid that commenced on June 26, 2015 and expires on June 25, 2016, BRP Equity purchased 32,036 Series 1 Preferred Shares, 7,900 Series 2 Preferred Shares, and 38,601 Series 3 Preferred Shares at weighted average prices of $17.87, $16.29 and $20.47 per Preferred Share, respectively. No Series 5 or Series 6 Preferred Shares were purchased by BRP Equity under the normal course issuer bid.

I consider this noteworthy because Normal Course Issuer Bids for preferred shares are often announced but seldom implemented – so the fact that any preferred shares at all were purchased under the expiring plan is noteworthy.

On the other hand, I will note that I reported the purchase of about 75,000 that happened last summer – so the number of shares purchased since last summer’s operation is trivial, if in fact there were any.

That being said, affected issues are BRF.PR.A, BRF.PR.B, BRF.PR.C, BRF.PR.E and BRF.PR.F.

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 36 (non-viability contingent capital (NVCC)) (the “Series 36 Preferred Shares”). National Bank issued 16 million Series 36 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 36 Preferred Shares will commence trading on the Toronto Stock Exchange today under the ticker symbol NA.PR.A.

The Series 36 Preferred Shares were issued under a prospectus supplement dated June 6, 2016 to National Bank’s short form base shelf prospectus dated December 1, 2014.

NA.PR.A is a FixedReset, 5.40%+466, NVCC issue announced 2016-6-2.

This issue will be tracked by HIMIPref™ and has been assigned to the FixedReset subindex. Vital statistics are:

As has so often been the case recently, using Implied Volatility analysis to determine whether the pricing of this issue is rich or cheap yields ambiguous results:

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The new issue fits in very well with the line determined by the three extant NVCC-compliant issues, but the Implied Volatility is very high. Thus, if one believes that spreads are very high and will eventually regress to more usual levels, one will buy the low-spread low-price issues in order to capture the expected capital gain. However, if one believes that current conditions represent the new normal (with low GOC-5 yields and spreads that are high relative to historical norms) then one will buy the high-spread high-price issues in order to avoid the capital loss that one expects on the low-spread issues as Implied Volatility declines and the curve flattens.

Manulife Financial Corporation has announced:

that 1,664,169 of its currently outstanding 8,000,000 Non-cumulative Rate Reset Class 1 Shares Series 3 (the “Series 3 Preferred Shares”) have been elected for conversion on June 20, 2016, on a one-for-one basis, into Non-cumulative Floating Rate Class 1 Shares Series 4 of Manulife (the “Series 4 Preferred Shares”). As a result, on June 20, 2016, Manulife will have 6,335,831 Series 3 Preferred Shares and 1,664,169 Series 4 Preferred Shares issued and outstanding. The Series 3 Preferred Shares and the Series 4 Preferred Shares will be listed on the Toronto Stock Exchange under the symbols MFC.PR.F and MFC.PR.P, respectively.

Subject to certain conditions described in the prospectus supplement dated March 7, 2011 relating to the issuance of the Series 3 Preferred Shares, Manulife may redeem the Series 3 Preferred Shares, in whole or in part, on June 19, 2021 and on June 19 every five years thereafter and may redeem the Series 4 Preferred Shares, in whole or in part, after June 20, 2016.

Assiduous Readers will remember that MFC.PR.F will reset to 2.178%, while the FloatingReset issue, MFC.PR.P, will pay 3-Month T-Bills + 141bp, reset quarterly. I recommended against conversion.

It will be recalled that SJR.PR.A will reset to 2.791% effective June 30.

Holders of SJR.PR.A have the option to convert to FloatingResets, which will pay 3-month bills plus 200bp 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. (EDT) on June 15, 2016; 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 created, will be SJR.PR.B.

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.R 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 below zero, at -0.66% and -0.07%, 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 SJR.PR.A 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 SJR.PR.A 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.

Note as well that conversion rights are dependent upon at least one million shares of each series being outstanding after giving effect to holders’ instructions; e.g., if only 100,000 shares of SJR.PR.A are tendered for conversion, then no conversions will be allowed; but if only 100,000 shares of SJR.PR.A will remain after the rest are all tendered, then conversion will be mandatory. However, this is relatively rare: all 39 Strong Pairs currently extant have some version of this condition and all but five have both series outstanding.

It will be recalled that BPO.PR.N will reset to 3.782% effective July 1.

Holders of BPO.PR.N have the option to convert to FloatingResets, which will pay 3-month bills plus 307bp 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. (EDT) on June 15, 2016; 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 created, will be BPO.PR.O.

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.R 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 below zero, at -0.66% and -0.07%, 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.R 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 BPO.PR.N 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.

Note as well that conversion rights are dependent upon at least one million shares of each series being outstanding after giving effect to holders’ instructions; e.g., if only 100,000 shares of BPO.PR.N are tendered for conversion, then no conversions will be allowed; but if only 100,000 shares of BPO.PR.N will remain after the rest are all tendered, then conversion will be mandatory. However, this is relatively rare: all 39 Strong Pairs currently extant have some version of this condition and all but five have both series outstanding.

It will be recalled that BAM.PR.R will reset to 3.014% effective July 1.

Holders of BAM.PR.R have the option to convert to FloatingResets, which will pay 3-month bills plus 230bp 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. (EDT) on June 15, 2016; 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 created, will be BAM.PR.S.

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.R 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 below zero, at -0.66% and -0.07%, 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.R 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 BAM.PR.R 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.

Note as well that conversion rights are dependent upon at least one million shares of each series being outstanding after giving effect to holders’ instructions; e.g., if only 100,000 shares of BAM.PR.R are tendered for conversion, then no conversions will be allowed; but if only 100,000 shares of BAM.PR.R will remain after the rest are all tendered, then conversion will be mandatory. However, this is relatively rare: all 39 Strong Pairs currently extant have some version of this condition and all but five have both series outstanding.

Capstone Infrastructure Corporation has announced:

that it does not intend to exercise its right under the terms of its Cumulative 5-Year Rate Reset Preferred Shares, Series A (the “Series A shares”) to redeem all or part of the currently outstanding 3,000,000 Series A shares on July 31, 2016. As a result, subject to certain conditions, the holders of the Series A shares have the right to convert all or part of their Series A shares, on a one-for-one basis, into Cumulative Floating Rate Preferred Shares, Series B (the “Series B shares”) on August 2, 2016 (the “Conversion Date”) in accordance with the terms of the Series A shares.

Holders of Series A shares who do not exercise their right to convert their Series A shares into Series B shares on the Conversion Date will retain their Series A shares, subject to the conditions set out below.

The dividend rate applicable to the Series A shares for the five-year period from July 31, 2016 to but excluding July 31, 2021, and the dividend rate applicable to the Series B shares for the three-month period from July 31, 2016 to October 31, 2016, will be determined and announced by way of a news release on July 4, 2016.

Beneficial owners of Series A shares who wish to exercise their conversion right should communicate with their broker or other nominee to obtain instructions for exercising such right during the conversion period, which runs from July 4, 2016 until July 18, 2016 at 5:00 p.m. (EST).

The foregoing conversion rights are subject to the conditions, as set out in the terms of the Series A shares, that: (i) if Capstone determines that there would remain outstanding on the Conversion Date less than 1,000,000 Series B shares, after having taken into account all Series A shares tendered for conversion into Series B shares, then holders of Series A shares will not be entitled to convert their shares into Series B shares and all holders will continue to hold Series A shares, and (ii) alternatively, if Capstone determines that there would remain outstanding on the Conversion Date less than 1,000,000 Series A shares, after having taken into account all Series A shares tendered for conversion into Series B shares, then all remaining Series A shares will automatically be converted into Series B shares on a one-for-one basis on the Conversion Date and all holders will hold Series B shares. In either case, Capstone will give written notice to that effect to the registered holder of Series A shares no later than July 26, 2016.

I will report on the rate when determined and my recommendation for converting or holding in due course.

Standard & Poor’s has announced:

• •We believe Royal Bank of Canada’s (RBC) risk appetite has grown relative to peers’.
• •We are revising our outlook on RBC to negative from stable, reflecting credit quality metrics that have recently converged to the peer average and the risk that this may continue (or worsen).
• •We are affirming our ratings on the bank, including our ‘AA-/A-1+’ long- and short-term issuer credit ratings.
• •The negative outlook reflects RBC’s higher risk appetite and aggregate loan risk exposure relative to those of its peers.

…
“The outlook revision reflects concerns over what we see as RBC’s higher risk appetite, relative to peers’,” said S&P Global Ratings credit analyst Lidia Parfeniuk. “We see one example of this in its aggressive growth in loans and commitments in the capital markets wholesale loan book, particularly in the U.S., with an emphasis on speculative-grade borrowers, including exposure to leveraged loans. RBC also has higher-than-peer average exposure to the highly indebted Canadian consumer and to oil and gas-producing regions. These exposures, and potential future growth, in aggregate, could lead to higher loan losses than peers’.”

RBC’s U.S. wholesale loan portfolio has grown very rapidly. The growth has been, on average, 16% per year, adjusted for foreign exchange from 2010 through 2015. We believe that the emphasis has been on speculative-grade loans. We also believe the bank has been increasing risky exposure to improve risk-adjusted returns amid low interest rates.

Adding to the bank’s risk exposures is its higher-than-peers exposure to leveraged loans, which we view as a frothy segment within wholesale lending. We believe that while credit conditions have been benign over the last few years, they may begin to worsen, particularly in a rising-rate environment.
…
The outlook is negative. We could lower the rating over the next two years if RBC’s credit quality metrics remain at the peer average (or worse) for several quarters. This would most likely result in the issuer credit rating falling by one notch to ‘A+’, to reflect the higher risk profile. We could revise the outlook to stable if we were to see evidence that risk appetite is moderating and that credit quality metrics recover to a more favorable stance than the peer average.

Oddly, the press release made no reference to the ‘bail-in’ regime, which the agency has previously assigned a position of some importance and which has been endorsed by the new government, as discussed March 22, 2016.

Affected issues are: RY.PR.A, RY.PR.B, RY.PR.C, RY.PR.D, RY.PR.E, RY.PR.F, RY.PR.G, RY.PR.H, RY.PR.I, RY.PR.J, RY.PR.K, RY.PR.L, RY.PR.M, RY.PR.N, RY.PR.O, RY.PR.P, RY.PR.Q, RY.PR.R, RY.PR.W and RY.PR.Z.

Shaw Communications Inc. has announced:

that it has given the registered shareholder of its Cumulative Redeemable Rate Reset Class 2 Preferred Shares, Series A (the “Series A Shares”) notices of the conversion right and dividend rates.

Beginning on May 31, 2016 and ending on June 15, 2016 holders of the Series A Shares will have the right to elect to convert any or all of their Series A Shares into an equal number of Cumulative Redeemable Floating Rate Class 2 Preferred Shares, Series B (the “Series B Shares”).

If Shaw does not receive an Election Notice from a holder of Series A Shares during the time fixed therefor, then the Series A Shares shall be deemed not to have been converted (except in the case of an Automatic Conversion). Holders of the Series A Shares and the Series B Shares will have the opportunity to convert their shares again on June 30, 2021, and every five years thereafter as long as the shares remain outstanding.

Effective June 30, 2016, the Annual Fixed Dividend Rate for the Series A Shares was set for the next five year period at 2.791%. Effective June 30, 2016, the Floating Quarterly Dividend for the Series B Shares was set for the first Quarterly Floating Rate Period (being the period from and including June 30, 2016 to but excluding September 30, 2016) at 2.539%. The Floating Quarterly Dividend Rate will be reset every quarter.

The Series A Shares are issued in “book entry only” form and, as such, the sole registered holder of the Series A Shares is the Canadian Depository for Securities Limited (“CDS”). All rights of beneficial holders of Series A Shares must be exercised through CDS or the CDS participant through which the Series A Shares are held. The deadline for the registered shareholder to provide notice of exercise of the right to convert Series A Shares into Series B Shares is 3:00 p.m. (MT) / 5:00 p.m. (ET) on June 15, 2016. Any notices received after this deadline will not be valid. As such, holders of Series A Shares who wish to exercise their right to convert their shares should contact their broker or other intermediary for more information and it is recommended that this be done well in advance of the deadline in order to provide the broker or other intermediary with time to complete the necessary steps.

After June 15, 2016, (i) if Shaw determines that there would remain outstanding on June 30, 2016, fewer than 1,000,000 Series A Shares, all remaining Series A Shares will be automatically converted into Series B Shares on a one-for one basis effective June 30, 2016; or (ii) if Shaw determines that there would remain outstanding after June 30, 2016, fewer than 1,000,000 Series B Shares, no Series A Shares will be permitted to be converted into Series B Shares effective June 30, 2016. There are currently 12,000,000 Series A Shares outstanding.

The Toronto Stock Exchange (TSX) has conditionally approved the listing of the Series B Shares effective on conversion. Listing of the Series B Shares is subject to the Shaw fulfilling all the listing requirements of the TSX and on approval, the Series B Shares will be listed on the TSX under the trading symbol SJR.PR.B. The Series A Shares are listed on the Toronto Stock Exchange under the ticker symbol SJR.PR.A.

For more information on the terms of, and risks associated with an investment in, the Series A Shares and the Series B Shares, see Shaw’s prospectus supplement dated May 20, 2011 which is available on sedar.com.

SJR.PR.A is a FixedReset 4.50%+200, that commenced trading 2011-5-31 after being announced 2011-5-18.

The new rate therefore represents a 38% cut in dividends.

As noted, the deadline to notify the company is 5 p.m. (ET) on June 15, 2016.; brokers will have internal deadlines a day or two in advance.

I will post a recommendation regarding whether or not to convert closer to the deadline.