Category: Issue Comments

Brookfield Infrastructure has announced:

the completion of its previously announced issue of Cumulative Class A Preferred Limited Partnership Units, Series 5 (“Series 5 Preferred Units”) in the amount of $250,000,000. The offering was underwritten by a syndicate led by TD Securities Inc., CIBC Capital Markets, RBC Capital Markets, and Scotiabank.

Brookfield Infrastructure issued 10,000,000 Series 5 Preferred Units at a price of $25.00 per unit, for total gross proceeds of $250,000,000. Holders of the Series 5 Preferred Units will be entitled to receive a cumulative quarterly fixed distribution yielding 5.35% annually for the initial period ending September 30, 2021. Thereafter, the distribution rate will be reset every five years at a rate equal to the greater of: (i) the 5-year Government of Canada bond yield plus 4.64%, and (ii) 5.35%. The Series 5 Preferred Units will commence trading on the Toronto Stock Exchange this morning under the ticker symbol BIP.PR.C.

BIP.PR.C is a FixedReset 5.35%+464M535 issue announced 2016-7-25. It will be remembered that distributions from this issue are not Eligible Dividends, but will be a mixture of Return of Capital and Ordinary Income, in proportions that will change from year to year.

The issue traded 1,330,574 shares today in a range of 25.31-45 before closing at 25.37-38, 10×133.

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

BCE Inc. has announced:

that 5,081,951 of its 10,754,990 fixed-rate Cumulative Redeemable First Preferred Shares, Series AI (“Series AI Preferred Shares”) have been tendered for conversion on August 1, 2016, on a one-for-one basis, into floating-rate Cumulative Redeemable First Preferred Shares, Series AJ (“Series AJ Preferred Shares”). In addition, 276,845 of its 3,245,010 Series AJ Preferred Shares have been tendered for conversion on August 1, 2016, on a one-for-one basis, into Series AI Preferred Shares. Consequently, on August 1, 2016, BCE will have 5,949,884 Series AI Preferred Shares and 8,050,116 Series AJ Preferred Shares issued and outstanding. The Series AI Preferred Shares and the Series AJ Preferred Shares will continue to be listed on the Toronto Stock Exchange under the symbols BCE.PR.I and BCE.PR.J, respectively.

The Series AI Preferred Shares will pay on a quarterly basis, for the five-year period beginning on August 1, 2016, as and when declared by the Board of Directors of BCE, a fixed cash dividend based on an annual fixed dividend rate of 2.75%.

The Series AJ Preferred Shares will continue to pay a monthly floating adjustable cash dividend for the five-year period beginning on August 1, 2016, as and when declared by the Board of Directors of BCE. The monthly floating adjustable dividend for any particular month will continue to be calculated based on the prime rate for such month and using the Designated Percentage for such month representing the sum of an adjustment factor (based on the market price of the Series AJ Preferred Shares in the preceding month) and the Designated Percentage for the preceding month.

The issues closed the day at 13.45-64 (BCE.PR.I) and 13.95-10 (BCE.PR.J), resulting in an implied Canada Prime breakeven rate of 3.25%. This is consistent with other FixedFloater / RatchetRate Strong Pairs and up from the mid-July break-even rate of about 3.00%. Assiduous Readers will remember that I advised converting to, or continuing to hold, BCE.PR.J

Fortis Inc. has announced:

Fortis will redeem all of the issued and outstanding First Preference Shares, Series “E” of the Corporation in accordance with their terms on or about 1 September 2016. The redemption price will be $25.3063 in cash for each share, being equal to $25.00 plus $0.3063, representing the amount of the accrued and unpaid dividends per share for the period from and including 1 June 2016 to but not including 1 September 2016. A notice of redemption providing additional details will be mailed to the registered holders of First Preference Shares, Series E on or about 29 July 2016.

FTS.PR.E commenced trading on 2004-7-16 as a 4.9% 12-year Operating Retractible. It is currently redeemable at par and becomes retractible for common shares September 1, 2016 – but that option has now been superseded by the redemption. FTS.PR.E has been tracked by HIMIPref™ since issued and is currently the sole member of the Operating Retractible subindex.

DBRS has announced that it:

has today maintained the Negative trend on the senior and subordinated debt ratings of the Royal Bank of Canada, The Toronto-Dominion Bank, the Bank of Nova Scotia, the Bank of Montreal, the Canadian Imperial Bank of Commerce, the National Bank of Canada and their subsidiaries. Additionally, the Negative trend has been maintained on related short-term ratings that might be affected by a long-term rating change under DBRS methodologies. The ratings were previously revised to Negative from Stable on May 20, 2015, to reflect the declining likelihood of systemic support. For details on the rating actions on specific banks, please see their separate press releases.

The maintenance of the Negative trend reflects DBRS’s view that ongoing changes in Canadian legislation and regulation still indicate that the potential for timely systemic support for these six banks that DBRS considers systemically important institutions is declining, leading to a likely change in DBRS’s support assessment to SA3 from SA2 for these banks. Currently, the six banks’ final ratings benefit from an uplift of one notch above their intrinsic assessments because of the SA2 support assessment.

The legislation enacting the bank recapitalization, or bail-in, regime is moving forward, but DBRS does not yet have sufficient clarity on the details of the implementation to remove the benefit of systemic support from the affected ratings. Most recently, the Budget Implementation Act (Bill C-15) passed on June 8, 2016, included proposed amendments to existing legislation to enable the appropriate statutory powers for the bail-in regime. According to the Department of Finance Canada, the proposed amendments include permitting the Office of the Superintendent of Financial Institutions to designate the domestic systemically important banks (D-SIBs) to which the bail-in regime would apply, providing new powers for the Canada Deposit Insurance Corporation (CDIC) to carry out a bail-in by converting the eligible debt of a D-SIB that was determined to be non-viable into common shares, enabling CDIC to resolve a failed bank by taking temporary control of a non-viable bank to carry out a bail-in conversion, updating the process for investors to seek redress and revising the amount of minimum regulatory capital and debt subject to the new bail-in conversion power for D-SIBs (Department of Finance Canada, Bill C-15 – Budget Implementation Act 2016, No. 1 – Part 4: Various Measures, http://www.fin.gc.ca/pub/C15/04-eng.asp (May 10, 2016)). This will require amendments to be made to the Bank Act, the CDIC Act, the Financial Administration Act, the Payment Clearing and Settlement Act and the Winding-up and Restructuring Act.

This was reiterated in statements for each of the Big Six Banks … with some commentary regarding the highly topical housing costs issue:

BNS:

DBRS remains concerned over the significant appreciation seen in housing prices, particularly in the greater Vancouver and Toronto areas. Nonetheless, Scotiabank’s Canadian residential mortgage portfolio appears conservatively underwritten or is insured. Indeed, the Bank purchased bulk insurance on an additional portion of this portfolio during Q2 2016. Following this additional purchase, 62% of Scotiabank’s Canadian residential mortgage portfolio is now insured, while the loan-to-value of the uninsured portion is very conservative at 51%. Alberta, the province most exposed to the energy sector, represents 16% of the total residential mortgage portfolio and is primarily insured.

RY:

DBRS remains concerned about the significant appreciation seen in housing prices, particularly in the greater Vancouver and Toronto areas. Nonetheless, RBC’s Canadian residential mortgage portfolio appears conservatively underwritten or is insured. Indeed, 46% of RBC’s Canadian residential mortgage portfolio is now insured, while the loan-to-value ratio of the uninsured portion is conservative at 56%. Alberta, the most exposed province to the energy sector, represents 16% of the total residential mortgage portfolio and is primarily insured.

CM:

The Bank’s overall asset quality remains strong with impaired loans and provisions remaining at very low levels. CIBC’s overall credit quality benefits from the performance of its large and low-risk residential mortgage portfolio, which is 61% insured. However, DBRS remains concerned about the significant appreciation in housing prices, particularly in and around Toronto and Vancouver. Meanwhile, CIBC’s outstanding loan balances to the troubled resource sector are very manageable, with oil and gas comprising approximately 2% of loans and mining comprising less than 1%.

BMO:

DBRS remains concerned over the significant appreciation seen in housing prices, particularly in and around Vancouver and Toronto. Nonetheless, BMO’s residential mortgage portfolio appears conservatively underwritten or is insured. Specifically, 59% of BMO’s Canadian residential mortgage portfolio is insured, while the loan-to-value of the uninsured portion is a very conservative 57%. Meanwhile, loss rates for the past four quarters have been less than one basis point. Alberta, the province most exposed to the energy sector, represents 16% of the total residential mortgage portfolio and is primarily insured. The resource sector also remains challenged, but overall exposures to oil & gas and mining total less than 3% of the total loan portfolio.

NA:

National’s currently strong earnings power benefits from a very good revenue mix, modestly improving expense levels and generally low credit costs. However, National reported two issues in 2016 that have negatively affected earnings, including the $164 million pre-tax write-down of its investment in Maple Financial Group (MFG) and a $250 million pre-tax sectoral provision related to its oil & gas portfolio. Please see the DBRS commentaries on these two events dated May 5, 2016, and February 8, 2016, for more information.

TD:

TD’s risk profile remains strong, as evidenced by its still quite favourable credit quality indicators, though DBRS views current levels as likely unsustainable, given how low they are compared with historical norms. Similar to peers, the Bank’s oil & gas portfolio was pressured in recent periods but remains highly manageable, representing less than 1% of total loans. Moreover, DBRS anticipates seeing some signs of deterioration in other parts of the loan portfolio in the near to intermediate term, given the above-average debt levels of Canadian consumers, rapidly rising housing prices and expected credit quality trend reversion. Importantly, DBRS remains comforted by TD’s track record and disciplined approach to risk management.

Bank of Montreal has announced (although not yet on their website):

the applicable dividend rates for its Non-Cumulative 5-Year Rate Reset Class B Preferred Shares, Series 25 (the “Preferred Shares Series 25”) and Non-Cumulative Floating Rate Class B Preferred Shares, Series 26 (the “Preferred Shares Series 26”).

With respect to any Preferred Shares Series 25 that remain outstanding after August 25, 2016, commencing as of such date, holders thereof will be entitled to receive fixed rate non-cumulative preferential cash dividends on a quarterly basis, as and when declared by the Board of Directors of the Bank and subject to the provisions of the Bank Act (Canada). The dividend rate for the five-year period commencing on August 25, 2016, and ending on August 24, 2021, will be 1.805 per cent, being equal to the sum of the five-year Government of Canada bond yield as at July 26, 2016, plus 1.15 per cent, as determined in accordance with the terms of the Preferred Shares Series 25.

With respect to any Preferred Shares Series 26 that may be issued on August 25, 2016, holders thereof will be entitled to receive floating rate non-cumulative preferential cash dividends on a quarterly basis, calculated on the basis of the actual number of days elapsed in each quarterly floating rate period divided by 365, as and when declared by the Board of Directors of the Bank and subject to the provisions of the Bank Act (Canada). The dividend rate for the three-month period commencing on August 25, 2016, and ending on November 24, 2016, will be 1.622 per cent, being equal to the sum of the three-month Government of Canada Treasury bill yield as at July 26, 2016, plus 1.15 per cent, as determined in accordance with the terms of the Preferred Shares Series 26.

Beneficial owners of Preferred Shares Series 25 who wish to exercise their right of conversion should communicate as soon as possible with their broker or other nominee and ensure that they follow their instructions in order to ensure that they meet the deadline to exercise such right, which is 5:00 p.m. (EDT) on August 10, 2016.

Conversion enquiries should be directed to BMO’s Registrar and Transfer Agent, Computershare Trust Company of Canada, at 1-800-340-5021.

I previously reported that this issue will be extended.

BMO.PR.Q is a FixedReset, 3.90%+115, that commenced trading 2011-3-11 after being announced 2011-3-2.

The new rate therefore represents a 54% cut in dividends. Ouch!

This issue has been tracked by HIMIPref™ and is a member of the FixedResets index. A hardMaturity at par dated 2022-1-31 has been added to the call schedule indicated by the prospectus to reflect an anticipated call due to the issues lack of a NVCC clause and OSFI’s refusal to grandfather such issues – but note that this Deemed Maturity is a matter of analysis, not a formal commitment of the issuer!

As noted, the deadline to notify the company regarding conversion is 5:00 p.m. (EDT) on August 10, 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.

Standard & Poor’s has announced:

• •Boucherville, Que.-based RONA Inc. recently announced that Lowe’s Cos. Inc. (A-/Stable/A-2) has provided guarantees of the obligations under RONA’s preferred shares and debentures outstanding.
• •As a result, we are raising our issue-level rating on RONA’s senior unsecured notes to ‘A-‘ from ‘BBB+’ and our global scale rating on the company’s preferred shares to ‘BBB’ from ‘BBB-‘.
• •At the same time, we are affirming our ‘BBB+’ long-term corporate credit rating on RONA.
• •The stable outlook on RONA reflects our stable outlook on Lowe’s and our expectation that over our two-year outlook horizon, RONA’s stand-alone business and financial risk profiles should be unchanged.

…
RONA recently announced that Lowe’s Cos. Inc. (A-/Stable/A-2) has guaranteed RONA’s preferred shares outstanding as well as the company’s 5.4% debentures due Oct. 20, 2016.

“We base the upgrade on Lowe’s guarantee of RONA’s preferred shares and debentures outstanding,” said S&P Global Ratings credit analyst Alessio Di Francesco.

In our opinion, this guarantee has enhanced the credit profile of these issues resulting in a one-notch upgrade. Our rating on RONA’s senior unsecured debentures is now equalized with our ‘A-‘ issue-level rating on Lowe’s senior unsecured notes. Our ‘BBB’ global scale rating on RONA’s preferred shares is two notches below our long-term corporate credit rating on Lowe’s (guarantor). The notching incorporates our view that the preferred shares have an optional deferral feature and are subordinated to Lowe’s debt outstanding.

The guarantee by Lowe’s has been previously reported on PrefBlog. DBRS has discontinued its rating of RONA, so the S&P rating is the only one available. S&P previously rated the issues P-2(low) following the closing of the takeover via Plan of Arrangement on May 20. RONA’s preferred shareholders turned down a $20 cash offer that was part of the plan. Since March 31, the TXPR total return index has returned +5.42%, while RON.PR.A is up 3.75% from the $20 offer.

Capstone Infrastructure Corporation has announced:

that none of its Cumulative 5-Year Rate Reset Preferred Shares, Series A (the “Series A shares”) will be converted into Cumulative Floating Rate Preferred Shares, Series B (the “Series B shares”).

On June 10, 2016, Capstone notified holders of Series A shares that they could elect to convert their Series A shares into Series B shares, subject to the terms and conditions of those shares. One such condition is that, following conversion, there be at least 1,000,000 Series B shares outstanding or else no Series A shares will be converted.

As of 5:00 p.m. (EST) on July 18, 2016, the end of the period during which holders of Series A shares could elect to convert their Series A shares into Series B shares, elections for conversion into Series B shares were received in respect of only 429,367 of the 3,000,000 outstanding Series A shares. As a result, the above condition is not satisfied and no Series A shares will be converted into Series B shares. All holders of Series A shares will continue to hold Series A shares.

As previously announced, for the five year period from and including July 31, 2016 to but excluding July 31, 2021, the fixed annual dividend rate for the Series A shares has been set at 3.271% per share, payable in equal quarterly amounts on the last day of each of the months of January, April, July and October if, as and when dividends are declared by the Board of Directors of Corporation.

I have previously reported on the extension of CSE.PR.A, the reset to 3.271% and recommended against conversion.

It will be recalled that BCE.PR.I will reset to 2.75% effective August 1.

Holders of BCE.PR.I have the option to convert to the RatchetRate issue, BCE.PR.J, which pays a percentage of Canada Prime on the par value of $25.00. The percentage is currently 100% and will not decline unless the trading price of BCE.PR.J rises above $25, which seems rather unlikely in the current environment. The deadline for notifying the company of the intent to convert is July 22, 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.

It will also be noted that holders of BCE.PR.J have the option of converting to BCE.PR.I. After the dust settled following the last Exchange Date five years ago, about 25% of the total was BCE.PR.J.

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., BCE.PR.I and BCE.PR.J, which will have another Exchange Date in five years). Since they will be interconvertible on this future date, it may be assumed that they will be priced identically on this date (if they aren’t then holders will simply convert en masse to the higher-priced issue). And since they will be priced identically on a given date in the future, any current difference in price must be offset by expectations of an equal and opposite value of dividends to be received in the interim. And since the dividend rate on one element of the pair is both fixed and known, the implied average rate of the other, floating rate, instrument can be determined. Finally, we say, we may compare these average rates and take a view regarding the actual future course of that rate relative to the implied rate, which will provide us with guidance on which element of the pair is likely to outperform the other until the next interconversion date, at which time the process will be repeated.

We can show the break-even rates for each FixedFloater / RatchetRate Strong Pair graphically by plotting the implied average Canada Prime rate against the next Exchange Date (which is the date to which the average will be calculated).

Click for Big

There’s a fair bit of scatter, but most pairs are within shouting distance of a 2.70% breakeven rate – that is, most pairs are priced such that the total return of the component issues will be equal if Canada Prime remains at 2.70% until the relevant Exchange Date.

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.

And, of course, since BCE.PR.I will reset to 2.75%, this is equivalent to saying the prices currently and the prices expected to be effective following the Exchange Date are roughly equal. I do not believe that any gains can be expected to be made, or losses expected to be avoided, by holding either issue.

However, on a looking forward basis, I find it more believable that the average Canada Prime over the next five years will exceed 2.70% than I find it to believe that the rate will average lower than current.

Therefore, I recommend that holders of BCE.PR.I convert to BCE.PR.J and that holders of BCE.PR.J continue to hold their shares.

Note 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 BCE.PR.I will remain after all instructions are executed, then all BCE.PR.I will be converted and no BCE.PR.J will convert to BCE.PR.I. And the other way ’round, of course, if practically everybody wants to hold BCE.PR.I. However, this is relatively rare: all 51 Strong Pairs currently extant have some version of this condition and all but six have both series outstanding.

Lowe’s Companies, Inc. has announced (although not yet on their website):

RONA inc. (TSX:RON.PR.A)(TSX:RON.PR.B) (“RONA”) today announced that Lowe’s Companies, Inc. (“Lowe’s”) has provided guarantees of the obligations of RONA under RONA’s outstanding Cumulative 5-Year Rate Reset Series 6 Class A Preferred Shares and Cumulative Floating Rate Series 7 Class A Preferred Shares as well as RONA’s 5.40% debentures due October 20, 2016.

The full text of the guarantees have been filed with the Canadian securities regulators and are available on RONA’s profile at www.sedar.com. As a result and in accordance with applicable securities laws and exemptions therefrom, RONA will satisfy its continuous disclosure requirements and other related reporting requirements going forward by filing copies of all disclosure and financial reporting documents Lowe’s is required to file with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as well as certain prescribed summary financial information for RONA, on RONA’s profile at www.sedar.com, and it will no longer be required to file full quarterly and audited annual financial statements in respect of RONA.

Recently, DBRS has discontinued rating these issues while S&P rated them P-2(low) after the takeover closed in May following the decision by preferred shareholders to scorn the $20 offer.

The preferred shareholders figured that keeping RONA as a reporting issuer would be so expensive for Lowe’s that they would gladly pay the full $25 redemption price to get rid of the obligation – I’m not sure if they counted on this maneuver!

It will be recalled that CSE.PR.A will reset to 3.271% effective July 31.

Holders of CSE.PR.A have the option to convert to FloatingResets, which will pay 3-month bills plus 271bp 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. (EST) on July 18, 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, has not yet been confirmed.

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 -0.90% and -0.27%, 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 CSE.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 CSE.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 CSE.PR.A are tendered for conversion, then no conversions will be allowed; but if only 100,000 shares of CSE.PR.A will remain after the rest are all tendered, then conversion will be mandatory. However, this is relatively rare: all 51 Strong Pairs currently extant have some version of this condition and all but six have both series outstanding.