Category: Issue Comments

Huh. Sometimes I just can’t win. Remember yesterday, when I passed on the news that:

Element Financial, proud issuer of EFN.PR.A, EFN.PR.C, EFN.PR.E and EFN.PR.G, has announced:

that following the completion of a strategic review of each of the Company’s business units that it initiated in October of last year, the Board of Directors has approved plans to proceed with a transaction that will result in the separation of the current business into two publicly traded companies – a $19.5 billion world class fleet management company (Element Fleet Management) to be led by Bradley Nullmeyer and a $7.0 billion North American commercial finance company (Element Commercial Asset Management) to be led by Steven Hudson.
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The Company is currently analyzing the most efficient method to implement the separation of the two businesses and further details will be provided to the market as Element completes this analysis with its advisors. The separation transaction that will split the Company into these two publicly traded entities is expected to be completed on a tax free basis before the end of 2016. The allocation of the assets, liabilities and capital structure of the Company, as well as the structure of the Board and the deployment of current corporate services staff between the two new entities will be determined as the details of this separation transaction are determined.

And remember when I went on to say:

We’ll see what happens as details emerge, but I have a hard time envisaging this as being credit-positive for the preferreds!

DBRS has announced that it:

has today placed the ratings of Element Financial Corporation (Element or the Company), including its Issuer Rating of BBB, Under Review with Positive Implications. Today’s rating action follows the Company’s plans to separate into two public companies.
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The Under Review with Positive Implications reflects DBRS’s view that while the separation transaction will remove some revenue diversity, the transaction will lower the risk profile of Element Fleet Management’s balance sheet. The separation will remove the largest source of credit risk on the current balance sheet (the Commercial and Vendor Finance portfolio), as well as a key source of asset residual exposure (Aviation Finance). Moreover, the key factors that are the foundation of the Company’s ratings, namely, the strong franchise position of the fleet management business and strengthening earnings profile of the fleet business remain intact. Indeed, the soon to be separated commercial businesses accounted for just 23% of total earning assets at September 30, 2015.

The Under Review with Positive Implications also reflects DBRS’s expectations that Element will successfully execute the spin-out of the commercial business, while integrating the GE Fleet business. Moreover, the rating action considers DBRS’s anticipation that the Company’s earnings profile will continue to strengthen as earnings assets grow, and the Company improves its penetration rate within its fleet customers, while maintaining credit costs within historical levels and improving operating efficiency. Conversely, positive rating momentum could stall if there are indications of miss-steps in either the legal separation of the businesses or the GE Fleet integration evidenced by loss of key customers or operational-related charges. Further, leverage outside of fleet management peers would be viewed negatively. DBRS expects to conclude the review once the separation is completed and final details are known regarding Element Fleet Management’s balance sheet composition and pro-forma earnings capacity.

While there are certain execution risks associated with separating business lines, especially at a time when the Company continues to integrate the very sizeable GE Fleet business, DBRS views these risks as manageable in the Element transaction. Indeed, DBRS anticipates minimal disruption to the operating strategy and performance of each business line; as each business currently operates with its own senior management team on a day-to-day basis with oversight from Element’s executive management. DBRS notes that these management teams will remain in place post spin-out. Moreover, there is minimal IT separation required as each of the business lines have dedicated operating platforms owed to the uniqueness of the assets. As a result, while there will be a degree of back-office systems to be separated, DBRS sees IT separation costs and risks as lower in this transaction than in many other separations or spin-outs. DBRS comments that the integration of the GE Fleet business is on target with IT integration expected to be completed in 2016. Importantly, Element’s funding strategy has been to have permanent funding in place for each vertical, which in DBRS’s view should also aid in a smooth separation.

As noted above, affected issues are EFN.PR.A, EFN.PR.C, EFN.PR.E and EFN.PR.G.

Husky Energy has announced that it:

is providing notice that the Company does not intend to exercise its right to redeem its Cumulative Redeemable Preferred Shares, Series 1 (Series 1 Shares) on March 31, 2016. As a result, subject to certain conditions, the holders of Series 1 Shares have the right to choose one of the following options with regard to their shares:

1. Retain any or all of their Series 1 Shares and continue to receive an annual fixed rate dividend paid quarterly; or
2. Convert, on a one-for-one basis, any or all of their Series 1 Shares into Cumulative Redeemable Preferred Shares, Series 2 (Series 2 Shares) of Husky Energy and receive a floating rate quarterly dividend.

The dividend rate applicable to the Series 1 Shares for the five year period commencing March 31, 2016, to, but excluding, March 31, 2021 will equal the sum of the Government of Canada five year bond yield on March 1, 2016 plus 1.73 percent. The dividend rate applicable to the Series 2 Shares for the three month period commencing March 31, 2016 to, but excluding, June 30, 2016 will equal the sum of the Government of Canada 90 day treasury bill rate on March 1, 2016 plus 1.73 percent. Both rates will be calculated according to the terms of the prospectus supplement dated March 11, 2011, and announced by way of a news release on March 1, 2016.

Beneficial owners of Series 1 Shares who wish to exercise the right of conversion should communicate as soon as possible with their broker or other nominee in order to meet the deadline to exercise such right, which is 5 p.m. ET on March 16, 2016. It is recommended this communication be done well in advance of the deadline in order to provide the broker or other intermediary with time to complete the necessary steps. Holders of Series 1 Shares who do not exercise the right of conversion by this deadline will continue to hold Series 1 Shares with the new annual fixed rate dividend.

Conversion to Series 2 Shares is subject to the conditions that: (i) if Husky Energy determines that there would be less than one million Series 1 Shares outstanding after March 31, 2016, then all remaining Series 1 Shares will automatically be converted to Series 2 Shares on a one-for-one basis on March 31, 2016, and (ii) if Husky Energy determines that there would be less than one million Series 2 Shares outstanding after March 31, 2016, no Series 1 Shares will be converted into Series 2 Shares. In either case, Husky Energy will issue a news release to that effect no later than March 31, 2016.

Holders of the Series 1 Shares and the Series 2 Shares will have the opportunity to convert their shares again on March 31, 2021, and every five years thereafter as long as the shares remain outstanding.

For more information on the terms of, and risks associated with, an investment in the Series 1 Shares and the Series 2 Shares, please see the Company’s prospectus supplement dated March 11, 2011 on www.sedar.com.

There is no great surprise here, as HSE.PR.A is a FixedReset, 4.45%+173, which commenced trading 2011-3-18 after being announced 2011-3-10. It is currently quoted at 8.35-60, 1×1. It is tracked by HIMIPref™ and assigned to the FixedReset subindex.

I will report the actual reset rate when it is announced (given today’s GOC-5 yield of 0.65%, we may estimate (0.65% + 1.73%) * 25 = (2.38% * 25) = $0.595, a reduction of 47%!) and provide a recommendation regarding whether to convert or hold before the company’s notification deadline of 5 p.m. ET on March 16.

The Empire Life Insurance Company has announced:

that it has completed its Canadian public offering of 5.2 million Non-Cumulative Rate Reset Preferred Shares, Series 1 (the “Series 1 Preferred Shares”) at a price of $25 per share to raise gross proceeds of $130 million.

The offering was underwritten on a bought deal basis by a syndicate of underwriters co-led by Scotia Capital Inc., CIBC World Markets Inc. and TD Securities Inc. The Series 1 Preferred Shares commence trading on the Toronto Stock Exchange today under the ticker symbol EML.PR.A.

The Series 1 Preferred Shares were issued under a short form prospectus dated February 5, 2016.

EML.PR.A is a FixedReset, 5.75%+499, announced 2016-01-25. It will be tracked by HIMIPref™ and assigned to the FixedReset subindex. DBRS confirmed the provisional Pfd-2 rating.

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.

The issue traded 351,820 shares today in a range of 24.67-80 before closing at 24.73-75, 5×36. Although this looks soft, it should be remembered that between the January 25 announcement and the February 16 settlement, the TXPL index fell 3.84%, so things could have been a lot worse!

Vital statistics are:

I used the MFC series of FixedResets as a comparator with Implied Volatility analysis for this issue on the announcement date; here’s the updated chart:

Click for Big

Update, 2016-3-1: The Empire Life Insurance Company has announced:

that in connection with its recently completed Canadian public offering of 5.2 million Non-Cumulative Rate Reset Preferred Shares, Series 1 (the Series 1 Preferred Shares), the underwriters have exercised their option in full to purchase an additional 780,000 Series 1 Preferred Shares at $25 per share. The sale of the additional Series 1 Preferred Shares was completed today and increased the gross proceeds from the public offering by an additional $19.5 million, increasing the total size of the offering to $149.5 million.

The offering was made through a syndicate of underwriters led by Scotia Capital Inc, CIBC World Markets Inc. and TD Securities Inc.

The Series 1 Preferred Shares were issued under a short form prospectus dated February 5, 2016.

Brompton Life & Banc Split Corp. has released its Semi-Annual Report to June 30, 2015.

Figures of interest are:

MER: “The MER per unit, excluding Preferred share distributions (which were covered by the portfolio’s dividend income), was 0.96% for the six months ended June 30, 2015 compared to 0.95% in 2014.”

Average Net Assets: We need this to calculate portfolio yield. The Total Assets of the fund at year end 2014 was $297-million, compared to $304-million on June 30, so call it an average of $300-million. Preferred share dividends of $3.747-million were paid over the half year at 0.475 p.a., implying average units outstanding of 15.8-million, at an average NAVPU of about $19.02, implies $301-million. Good agreement between the two methods! So say Average Net Assets are $300-million.

Underlying Portfolio Yield: Dividend income received of $5.509-million divided by average net assets of $300-million, multiplied by two because it’s semiannual, is 3.67%.

Income Coverage: Investment income of $5.526-million, less recurring expenses of $1.925-million (disregarding transaction costs) is $3.601-million, divided by preferred share dividends of $3.747-million is 96%.

Dundee Corporation has announced:

the completion of its previously announced share exchange transaction pursuant to which each First Preference Shares, Series 4 of the Company was exchanged for: (i) 0.7136 of a First Preference Share, Series 5 of the Company (the “Series 5 Preferred Shares”); and (ii) 0.25 of a Class A subordinate voting share purchase warrant (the “Warrants”) pursuant to a plan of arrangement under section 182 of the Business Corporations Act (Ontario).

The Series 5 Preferred Shares and the Warrants are each listed on the Toronto Stock Exchange (the “TSX”) under the symbols “DC.PR.E” and “DC.WT”, respectively, and will commence trading on the TSX at the opening of the market today.

The closing quotation for DC.PR.E was 17.08-23.00, 10×1 … let’s hope the spread tightens a little in future!

Dundee made an initial proposal in November that attracted some press coverage and an exhortation to consider exercising dissent rights. This led to reconsideration by Dundee despite a rather peculiar endorsement from a proxy advisor and led to a sweeter offer that attracted further commentary.

… and finally, the company announced a ringing endorsement from the shareholders … or perhaps it would be better to say “the shareholders’ advisors”, since the proxy solicitation fee was so high!

Well, I hope it works out for them! The closing price of DC.A today was 4.69 (against a conversion floor price of $2.00), they’re not making any money and it may be a long time before they see their longed-for:

recovery in the energy and resource sector

DC.PR.E will be tracked by HIMIPref™ but relegated to the Scraps index on credit concerns.

Vital Statistics are based on the rather silly 17.08 bid:

Update, 2016-2-26: Dundee estimates warrant value:

Dundee Corporation (TSX:DC.A) (the “Company”) today announced that it has estimated the fair market value of the Class A subordinate voting share purchase warrants (the “Warrants”) issued recently in connection with the Company’s previously announced share exchange transaction, pursuant to which each First Preference Share, Series 4 of the Company was exchanged for (i) 0.7136 of a First Preference Share, Series 5 of the Company, and (ii) 0.25 of a Warrant. The estimated fair market value is C$1.0666 per whole Warrant. As a result, based on this estimated value, non-dissenting holders of the Series 4 preferred shares should not be deemed for Canadian income tax purposes to have received a dividend as a result of the exchange. This estimate is not binding upon the Canada Revenue Agency or other tax authorities.

DBRS has announced that it:

has today downgraded the Preferred Shares issued by Brompton Oil Split Corp. (the Company) to Pfd-3 from Pfd-3 (high). On February 24, 2015, the Company issued 2,800,000 Preferred Shares and 2,800,000 Class A Shares at an issue price of $10.00 per Preferred Share and $15.00 per Class A Share for a total of $70,000,000 in gross proceeds. Both classes of shares are scheduled to mature on March 31, 2020.
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Net proceeds from the offering were used to invest in common shares of at least 15 large capitalization North American oil and gas issuers (the Portfolio) selected from the S&P 500 Index and the S&P/TSX Composite Index. In addition, the Company may also invest up to 25% of the Portfolio value in the common shares of issuers listed on the S&P 500 Index or the S&P/TSX Composite Index that satisfy its investment criteria, operating in energy subsectors including equipment, services, pipelines, transportation and infrastructure.
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Dividends received on the Portfolio are used to pay a fixed cumulative quarterly distribution to holders of the Preferred Shares of $0.1250 per Preferred Share ($0.50 per annum or 5.0% per annum on the initial issue price of $10.00 per Preferred Share). Holders of the Capital Shares are expected to receive a regular monthly non-cumulative cash distribution of $0.10 per Class A Share ($1.20 per annum), subject to the asset coverage test which does not permit any distributions to holders of the Class A Shares if the net asset value (NAV) of the Company falls below $15.00.

As of February 5, 2016, the dividend coverage ratio is 1.36. The downside protection available to holders of the Preferred Shares is approximately 37%. Since the initial rating in February 2015, the oil and energy equity markets have experienced a decline in prices which is reflected in the Company’s NAV. The level of downside protection currently available to the Preferred Shares and the asset coverage test to permit distributions on the Capital Shares support the Pfd-3 rating on the Preferred Shares.

As of February 11, the NAVPU of OSP / OSP.PR.A was 15.08. The issue commenced trading 2015-2-24 after being announced 2015-1-7.

OSP.PR.A is tracked by HIMIPref™ but relegated to the Scraps index on credit concerns.

Amidst all the wreckage of the past … year, it’s nice to see a little ray of sunshine!

Standard & Poor’s has announced:

• •U.S. power generator Atlantic Power Corp. (APC) has reduced its debt leverage substantially over the past 18 months.
• •We are raising our corporate credit ratings on Atlantic Power Corp. (APC)
  and affiliate Atlantic Power Ltd. Partnership (APLP) to ‘B+’ from ‘B’. The outlook is stable.

• •In addition, we are raising the issue ratings on the $600 million secured term loan facility ($473 million outstanding) and $210 million secured revolving credit facility to ‘BB-‘ from ‘B+’. The recovery rating on this debt remains ‘2’, indicating expectations of substantial (70% to 90%, at the higher end of the range) recovery in a payment default.
• •At the same time, we raised our rating on the C$210 million 5.95% medium-term notes (MTN) due 2036 to ‘BB’ from ‘BB-‘. The recovery rating on this debt remains ‘1’, indicating expectations of very high (90% to 100%) in a default.
• •The stable outlook reflects our expectation that the company will use excess cash flow to sweep down debt and its consolidated debt to EBITDA will decline to about 5.75x to 6.0x by year-end 2016.

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About $835 million of rated debt is currently outstanding, consisting of about $473 million of the term loan B, $210 million of revolving credit facility and C$210 million (U.S.$151 million) of medium-term notes. There is about $108 million of nonrecourse project level debt and about $288 million of U.S and Canadian dollar denominated convertible unsecured subordinate debentures that we do not rate. The company’s capital structure also has C$225 million of perpetual preferred stock.
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The company has sold five non-APLP wind assets along with which about $250 million of nonrecourse project debt was also transferred. The company has also refocused its strategy on maintaining and optimizing its fleet instead of growing its portfolio. As a result of these changes, we believe the company is structured more as a corporate issuer than a developer and now assess Atlantic Power under our corporate rating methodology.

“Our ‘B+’ corporate credit rating on APC reflects our assessment of its business risk profile as fair and a financial risk profile as highly leveraged,” said Standard & Poor’s credit analyst Aneesh Prabhu. Our business risk assessment reflects the company’s reliance on distributions from its underlying portfolio of power generation projects, limited scale, its near-term focus on operational improvements in its existing assets rather than growth projects to increase cash flow, and a portfolio that is mostly contracted in the medium term but has recontracting risk emerging from 2020. The financial risk profile reflects high consolidated debt per kilowatt and credit measures commensurate with an assessment of a highly leveraged financial risk profile.
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A deterioration in financials because of operating cost increases in the short term, or an inability to recontract expiring PPAs over the next year, could pressure financial measures. We would lower the ratings if consolidated debt to EBITDA deteriorates above 6.5x with no expectation of an immediate decline.

A ratings upgrade will result if cash flow sweeps result in adjusted FFO to debt improving above 12% on a sustained basis, or if consolidated debt to EBITDA declines below 5.25x. We could see this happen by year-end 2017 if cash flow sweeps occur as expected in our base-case.

Affected issues are AZP.PR.A, AZP.PR.B and AZP.PR.C, which are issued by Atlantic Power Preferred Equity Ltd., a wholly owned subsidiary.

Algonquin Power & Utilities Corp. has announced:

Algonquin Power & Utilities Corp. to Acquire The Empire District Electric Company in C$3.4 Billion (US$2.4 Billion) Transaction

Company Release – 02/09/2016 16:00

Acquisition is expected to be significantly accretive to EPS and FFOPS

Highlights:

• • Major regulated utility acquisition results in a pro-forma Algonquin Power & Utilities Corp. asset base of C$8.9 billion
• • Empire shareholders to receive US$34.00 per common share in cash, representing a 21% premium to the closing share price on February 8, 2016
• • Aggregate purchase price of C$3.4 billion (US$2.4 billion), including assumed debt, represents a 1.49×1 multiple of Empire’s projected rate base and a 9.2×2 multiple of Empire’s 2017 EBITDA
• • Expected to be immediately accretive to APUC’s earnings per share (EPS) and funds from operations per share (FFOPS), positioning APUC for further growth
• • Average annual accretion to EPS and FFOPS expected to be approximately 7% to 9% and 12% to 14%, respectively, for the three year period following closing
• • Acquisition is aligned with APUC’s financial objectives and provides continuing support to APUC’s 10% annual dividend growth rate target
• • APUC’s financing plan designed to maintain strong investment grade credit rating
• • Shifts APUC’s overall business mix towards regulated operations, with EBITDA from regulated operations increasing from 51% to 72%2
• • Empire has complementary operations in the States of Missouri and Arkansas, with regional headquarters located in Joplin, Missouri
• • Empire has an experienced management team committed to providing customers with safe, reliable, cost effective utility services
• • Empire will maintain its headquarters in Joplin after the acquisition
• • APUC expects to retain all existing Empire employees and the Empire management team will lead Liberty Utilities’ Central US Region
• • Empire’s customer rates unaffected by the acquisition

They later announced:

that APUC [Algonquin Power & Utilities Corp.] and its direct wholly-owned subsidiary, Liberty Utilities (Canada) Corp. (the “Selling Debentureholder”), have entered into an agreement with a syndicate of underwriters (the “Underwriters”) led by CIBC Capital Markets and Scotiabank, under which the Underwriters have agreed to buy, on a bought deal basis, C$1 billion aggregate principal amount of 5.00% convertible unsecured subordinated debentures (“Debentures”) of APUC (the “Offering”). In connection with the Offering, the underwriters have also been granted a 15% over-allotment option to purchase additional Debentures within 30 days from the date of the closing of the Offering solely to cover over-allotments, if any, and for market stabilization purposes.

All Debentures are being sold on an instalment basis at a price of C$1,000 per Debenture, of which C$333 is payable on the closing of the Offering (the “First Instalment”) and the remaining C$667 (the “Final Instalment”) is payable on a date (the “Final Instalment Date”) to be fixed by APUC following satisfaction of all conditions precedent to the closing of APUC’s acquisition of The Empire District Electric Company (NYSE:EDE) (“Empire”).

So S&P has slapped ‘Outlook-Negative’ on them:

• •On Feb. 9, Algonquin Power & Utilities Corp. announced the US$2.4 billion proposed acquisition of Empire District Electric Co., a Missouri-based utility.
• •The cash portion of the proposed acquisition is partly being financed with the issuance of convertible debentures, with this additional debt pushing Algonquin’s adjusted funds from operations-to-debt to below 14%.
• •We are revising our outlook on Algonquin and its subsidiaries Algonquin Power Co. and Liberty Utilities Co. to negative from stable to reflect the execution risk of the transaction and the potential for lower ratings stemming from the limited ability to absorb weaker financial performance.
• •We are also revising the industry risk score to low from intermediate to reflect the increase in Algonquin’s consolidated cash flow that comes from regulated utilities.
• •We are also affirming all ratings on the companies, including our ‘BBB’ long-term corporate credit rating on Algonquin.

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The debentures have features that encourage holders to convert, such as interest payments ceasing on closing of the acquisition. However, we treat the debentures as debt until they convert. As a result of this analytical treatment, we expect adjusted funds from operations (AFFO)-to-debt to decline to about 10.5% until the debentures are fully converted to equity, which is below our 14% downgrade threshold for the rating.
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The negative outlook reflects our expectation that APUC’s credit metrics will materially weaken in 2016 due to the issuance of convertible debentures to finance in part the cash purchase of Empire. Although we expect that the debentures will have a very high likelihood of conversion in 2017 when the transaction closes, in the meantime we expect that credit metrics will be weak for the rating, eliminating any financial cushion at the current rating level. The negative outlook also reflects the execution risk associated with the additional equity and debt necessary to support the transaction and to fund the company’s ongoing development plans.

We could lower the ratings on APUC if the company is unable to execute its development projects and acquisitions with financing arrangements of debt and equity that lead to AFFO to total debt below 14% by 2017 once the convertible debentures have converted.

We could revise the outlook to stable if the proposed equity issuance occurs as contemplated and APUC achieves AFFO to debt of 14% on a consistent basis.

Affected issues are AQN.PR.A and AQN.PR.D. Both are tracked by HIMIPref™ but are relegated to the Scraps index on credit concerns.

Update, 2016-2-11: Review-Developing by DBRS:

DBRS Limited (DBRS) has today placed the BBB (low) Issuer Rating and Pfd-3 (low) Preferred Shares ratings of Algonquin Power & Utilities Corp. (APUC or the Company) Under Review with Developing Implications. This rating action follows the announcement that the Company has entered into an agreement and plan of merger pursuant to which Liberty Utilities Co. (LUC) will indirectly acquire The Empire District Electric Company (Empire) and its subsidiaries (the Transaction).
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The rating action reflects DBRS’s view that the Transaction will have a modestly positive impact on APUC’s business risk assessment (BRA). The impact on the financial risk assessment (FRA) is uncertain since the financing plan has not been finalized.

Fortis Inc. has announced:

FORTIS INC. TO ACQUIRE ITC HOLDINGS CORP. FOR US$11.3 BILLION

Fortis to increase its 2016 consolidated mid year rate base to approximately
C$26 billion (US$18 billion) with acquisition of the largest independent transmission utility in the United States

Highlights

• •The acquisition aligns with Fortis’ financial objectives by providing approximately 5% earnings per common share accretion in the first full year following closing, excluding one-time acquisition-related expenses. Fortis continues to target 6% average annual dividend growth through 2020.
• •ITC owns and operates high-voltage transmission facilities in Michigan, Iowa, Minnesota, Illinois, Missouri, Kansas and Oklahoma, serving a combined peak load exceeding 26,000 megawatts along approximately 15,600 miles of transmission line.
• •Fortis will become one of the top 15 North American public utilities ranked by enterprise value.
• •ITC’s FERC regulated operations, with substantial rate base growth and robust investment opportunities, add a new growth platform.
• •Following the acquisition, ITC will continue as a stand-alone transmission company, retaining its focus on growth and operational excellence while benefiting from a broader platform that will support its mission to modernize electrical infrastructure in the U.S.
• •ITC’s average rate base and CWIP is expected to grow at a compounded average annual rate of approximately 7.5% through 2018.
• •Fortis intends on retaining all of ITC’s employees and maintaining the corporate headquarters in Novi, Michigan.
• •The per share consideration of cash and Fortis stock payable to ITC shareholders of US$44.90 represents a 33% premium to the unaffected closing share price on November 27, 2015 and a 37% premium to the 30-day average unaffected share price prior to November 27, 2015. Pro forma, upon closing of the transaction, ITC shareholders will own approximately 27% of the combined company and will receive a meaningful increase in their dividend per share.
• •In connection with the acquisition, Fortis will apply to list its common shares on the NYSE

Shareholders were not impressed:

Fortis, Canada’s largest utility owner, will pay the equivalent of $44.90 for each ITC share, according to a statement Tuesday. That’s a 14 percent premium to Monday’s close, and a 33 percent premium to the close on Nov. 27, before Bloomberg reported that ITC was exploring a sale. The offer, which totals $11.3 billion including assumed debt, will comprise $22.57 in cash and 0.752 Fortis shares apiece.
…
Fortis fell 10 percent, the biggest one-day decline on record, to close at C$37.14 in Toronto. ITC fell 1.9 percent to $38.65. The premium, or difference between ITC’s price and the per-share deal value, narrowed to 10 percent, according to data compiled by Bloomberg.

Fortis, based in St. John’s, Newfoundland and Labrador, bought Arizona utility owner UNS Energy Corp. for $2.5 billion in cash in 2014 and New York utility owner CH Energy Group Inc. for about $968.5 million in 2013. With ITC, Fortis expects to capitalize on construction of new high-voltage lines as the administration of President Barack Obama encourages development of wind farms and other sources of renewable energy.

Ha! Just another batch of parasites hoping to scoop up some the ‘green energy’ lolly that’s being tossed around with abandon.

Gillian Tan of Bloomberg points out two problems with the deal:

The deal values ITC at $44.90 a share, easily above the consensus analyst price target on the stock, and also represents a forward price-to-earnings multiple of 20. That’s in line with the lofty valuations ascribed to recent deals, and justifies ITC’s decision to seek out a buyer at a time when its larger rivals are starved of growth and debt is cheap. But borrowing isn’t going to be cheap forever, and the fact that Fortis shareholders are fleeing suggests that they aren’t overly enthused about the company lifting its debt burden to more than $15 billion from some $9.1 billion, even though it plans to maintain an investment-grade credit rating.

There’s another wrinkle: As part of the deal financing, Fortis needs to find an infrastructure fund (or funds) to write a check of between $1 billion and $1.4 billion in return for a stake in ITC of between 15 percent and 19.9 percent. While underbidders could step up (Borealis Infrastructure Management is said to be one, according to Bloomberg News), it’s unclear why Fortis didn’t pre-select a partner. If, for whatever reason it is unable to find one, Fortis said it could issue equity (which will dilute existing shareholders) or sell assets (at which time it’ll be a forced seller), both seemingly sub-optimal alternatives.

So S&P assigned the company status of ‘Outlook Negative’:

• •On Feb. 9, 2016, Fortis Inc. announced the US$11.3 billion proposed
  acquisition of ITC Holdings Corp. (ITC), a U.S.-based electricity transmission operator.

• •We are revising our outlook on St. John’s, Nfld.-based holding company Fortis Inc. and its subsidiaries FortisAlberta Inc., Maritime Electric Co. Ltd., and Caribbean Utilities Co. Ltd. to negative from stable.
• •We are also affirming our long-term corporate credit ratings on Fortis and its subsidiaries.
• •In addition, we are downgrading Fortis’ senior unsecured debentures to ‘BBB+’ from ‘A-‘.
• •We are revising our competitive position score to strong from excellent.
• •The negative outlook reflects the execution risks associated with the transaction including selling up to 19.9% of ITC to one or more infrastructure-focused minority investors.
• •The negative outlook also reflects the limited cushion in the credit metrics for any post-merger integration or operational issues.

…
The negative outlook reflects the execution and integration risk associated with the ITC acquisition including the sale of up to 19.9% of ITC to one or more infrastructure-focused minority investors. In addition, the outlook reflects that credit metrics have a limited cushion in the two-year outlook period. With the acquisition of ITC, we expect the company will reach 11% AFFO to debt in 2019. However, until then metrics will be about 10%, which leaves little cushion for any operational or post-merger integration errors.

We could take a negative rating action on Fortis by applying a negative comparable rating modifier if the company’s AFFO-to-debt were to fall below 10%, at the low end of the significant financial risk profile during our two-year outlook period. This could happen as a result of cost overruns from the post-merger integration efforts with ITC, material adverse regulatory decisions, or if Fortis encounters operational difficulties.

We could revise the outlook to stable if AFFO-to-debt remains consistently above 10% once the transaction has closed and if the acquisition uncertainties have been resolved.

… and DBRS slapped it with ‘Review-Negative’:

DBRS Limited (DBRS) has today placed the A (low) Issuer Rating, the A (low) Unsecured Debentures rating and the Pfd-2 (low) Preferred Shares rating of Fortis Inc. (Fortis or the Company) Under Review with Negative Implications. This action follows the announcement that the Company has agreed to acquire ITC Holdings Corp. (ITC) for a total consideration of approximately US$11.3 billion, including the assumption of US$4.4 billion of debt on closing (the Acquisition). The rating action reflects DBRS’s view that the Acquisition will have a modestly positive impact on the Company’s business risk profile but a negative impact on its financial risk profile. The Acquisition is expected to close in late 2016 and is subject to both Fortis and ITC shareholder approvals, as well as various regulatory and federal approvals.
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Fortis intends to fund the Acquisition by issuing approximately (1) US$3.5 billion to US$3.9 billion of equity, largely satisfied through the share consideration to be paid to ITC shareholders, (2) US$2.0 billion of debt, and by (3) selling 15.0% to 19.9% of ITC to minority investors for approximately US$1.0 billion to US$1.4 billion. DBRS considers the current financing plan to be negative to the Company’s non-consolidated financial risk profile. Based on DBRS’s pro forma 2015 calculations, Fortis had a non-consolidated debt-to-capital ratio of approximately 21.9% and a non-consolidated cash flow-to-debt ratio of 21.4%. Based on the Company’s proposed financing plan and DBRS’s estimate of future dividends from the Acquisition assets to Fortis, DBRS expects a significantly negative impact on the Company’s non-consolidated metrics. As a result, DBRS believes that placing Fortis’s ratings Under Review with Negative Implications is the appropriate rating action at this time.

DBRS will continue to review the final financing plan for the Acquisition and will resolve the Under Review rating action once the transaction closes. The Company’s ratings could be downgraded by one notch if the non-consolidated debt-to-capital ratio following the Acquisition is materially over the 20% threshold and the non-consolidated cash flow-to-debt ratio is significantly below 20%.

Affected issues are: FTS.PR.E, FTS.PR.F, FTS.PR.G, FTS.PR.H, FTS.PR.I, FTS.PR.J, FTS.PR.K and FTS.PR.M. All are tracked by HIMIPref™.