Category: Issue Comments

Moody’s Investors Service has announced:

Today, Moody’s Investors Service downgraded the long term debt and deposit ratings of Bank of Nova Scotia (BNS) and its subsidiaries to Aa3 from Aa2, its long term counterparty risk assessment to Aa2(cr) from Aa1(cr) and its baseline credit assessment to a2 from a1. Moody’s also downgraded BNS’s senior unsecured shelf and deposit note program ratings to (P)Aa3 from (P)Aa2 and subordinate shelf ratings to (P)A3 from (P)A2. Subordinated debt and non-cumulative preferred share obligations are also downgraded according to Moody’s standard notching convention. Meanwhile Moody’s affirmed BNS’s Prime-1 short-term deposit rating, short-term Counterparty Risk Assessment and other short term ratings. The outlook for all BNS ratings is negative, reflecting Moody’s view that the balance of risk related to government support has shifted to the downside.
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Moody’s said the ratings change was prompted by Bank of Nova Scotia (BNS) having taken significant measures to increase its profitability that signal a fundamental shift away from the bank’s traditionally low risk appetite. This risk positioning was a key part of the rationale for what had been its superior credit standing. While the bank’s strategic actions are intended to enhance current profitability — BNS reports the lowest domestic net interest margin of the six largest Canadian banks — in Moody’s view, they increase the prospect of future incremental credit losses.

Over the last two years, in accordance with its strategic initiatives, BNS has accelerated the growth in its credit card and auto finance portfolios — both of which are particularly prone to deterioration during an economic downturn and exhibit higher defaults and loss severities than mortgage portfolios. In addition, the bank has made a series of acquisitions away from its strong domestic franchise towards higher-growth but less stable international markets. BNS has aspirations to continue to grow its international earnings, which in Moody’s view adds to bondholder risk.

Moody’s believes it is likely that BNS’s increased risk tolerance and strategic imperative to increase profitability by shifting the asset mix towards higher yielding categories of consumer credit, both domestically and in international operations, will persist.

This takes the preferred share rating down to Baa2(hyb). The downgrade should not be the biggest surprise in the world since Moody’s placed the bank on Review-Negative in November, 2015.

Affected issues are: BNS.PR.A, BNS.PR.B, BNS.PR.C, BNS.PR.D, BNS.PR.E, BNS.PR.L, BNS.PR.M, BNS.PR.N, BNS.PR.O, BNS.PR.P, BNS.PR.Q, BNS.PR.R, BNS.PR.Y and BNS.PR.Z.

On December 14, 2015, CI Financial announced:

First Asset CanBanc Split Corp. (the “Fund”) announces that all of the issued and outstanding Preferred Shares (TSX: CBU.PR.A) and Class A Shares (TSX: CBU) of the Fund will be redeemed by the Fund on January 15, 2016 (the “Redemption Date”) as scheduled.

The redemption price payable by the Fund for a Preferred Share on the Redemption Date will be equal to the lesser of (i) $10.00 plus any accrued and unpaid distributions thereon, and (ii) the net asset value (“NAV”) of the Fund on the Redemption Date divided by the total number of Preferred Shares then outstanding.

The redemption price payable by the Fund for a Class A Share on the Redemption Date will be equal to the greater of (i) the NAV per Unit on that date minus the sum of $10.00 plus any accrued and unpaid distributions per share on the Preferred Shares then outstanding, and (ii) nil. A “Unit” is a notional unit consisting of one Preferred Share and one Class A Share.

NAV per Unit was $42.39 as at December 11, 2015.

Redemption proceeds will be paid on or before January 22, 2016. Shareholders are not required to take any action in connection with the above redemptions.

… and on January 18, 2016, they further announced:

First Asset CanBanc Split Corp. (the “Fund”) announces that the Fund completed the redemption of all of the issued and outstanding Preferred Shares and Class A Shares on January 15, 2016 (the “Redemption Date”).

Each Preferred Share will receive $10.0268 per share, and each Class A Share will receive $30.1588 per share. These proceeds will be paid on or before January 22, 2016 to the beneficial holders of such shares through CDS Clearing and Depository Services Inc. Shareholders need not take any action to receive the final redemption proceeds.

HIMIPref™ did not track this issue; according to the last financials (SEDAR, First Asset CanBanc Split Corp. Aug 31 2015 21:16:09 ET Interim financial statements/report – English PDF 348 K) the total assets of the fund amounted to $15.4-million of which, according to the second press release, only about one-quarter was due to the preferred shareholders. But I thought I should post this for completeness’ sake.

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 34 (non-viability contingent capital (NVCC)) (the “Series 34 Preferred Shares”). National Bank issued 16 million Series 34 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 34 Preferred Shares will commence trading on the Toronto Stock Exchange today under the ticker symbol NA.PR.X.

The Series 34 Preferred Shares were issued under a prospectus supplement dated January 15, 2016 to National Bank’s short form base shelf prospectus dated December 1, 2014.

NA.PR.X is a FixedReset, 5.60%+490, announced 2016-1-13. It will be tracked by HIMIPref™ and has been added to the FixedReset subindex.

NA.PR.X traded 796,852 shares today (consolidated exchanges) in a range of 24.65-99 before closing at 24.84-85, 57×31. Vital Statistics are:

A little softness is reasonable, given the wild market action in the time since the announcement. The TXPL price index closed at 597.06 on announcement day, January 13, and at 587.78 today, for a decline of 1.56%. Mind you, this was via a low of 560.24 on January 18, 6.17% below the initial figure … some players might have gotten cold feet!

Implied Volatility analysis is not possible for the NA issues, since there are only three of them including the new issue. However, comparison to today’s analysis for TD shows that the issue is attractively priced. The high level of Implied Volatility leads to the conclusion that there is a high degree of directional bias in the pricing of TD’s NVCC-compliant FixedResets. As this bias recedes (assuming that it ever does!), Implied Volatility will decline, the curve will flatten and the higher-spread issues (most notably the new issues) will significantly outperform the lower-spread issues.

The NA issues are priced very close to the TD curve, with perhaps a slight yield premium.

Note that the NVCC non-compliant issues are so obviously differentiated from the NVCC-compliant ones that they are not included in the calculation, although they are shown in the chart.

On the other hand, the directional bias could be quite right! There will be many among us who think that +490 is an utterly ridiculous spread for solid bank – NVCC or no NVCC – and that spreads will narrow once memories of 2015 fade. Given this particular scenario, the lower-spread issues will shine: a calculation based on projected calculated values of 250bp Spread and 10% Implied Volatility implies that the extant TD NVCC-compliant preferreds will enjoy total capital gains in the area of 35% which, if achieved in a reasonable timeframe, will dwarf the yield advantage of the new issue for which capital gains will be a big fat zero.

So pays yer money and takes yer chances, gents, roll up, roll up! If you think current market conditions are the new normal, you’ll like the new issue. If you think this is a transitory crash, you won’t.

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The Bank of Nova Scotia has announced:

that 5,184,345 of the 16,360,000 Non-cumulative 5-Year Rate Reset Preferred Shares Series 32 of Scotiabank (the “Preferred Shares Series 32”) have been elected for conversion on February 2, 2016, on a one-for-one basis, into Non-cumulative Floating Rate Preferred Shares Series 33 of Scotiabank (the “Preferred Shares Series 33”). Consequently, on February 2, 2016, Scotiabank will have 11,175,655 Preferred Shares Series 32 and 5,184,345 Preferred Shares Series 33 issued and outstanding. The Preferred Shares Series 32 and Preferred Shares Series 33 will be listed on the Toronto Stock Exchange under the symbols BNS.PR.Z and BNS.PR.F, respectively.

Assiduous Readers will remember that BNS.PR.Z will reset to 2.063%, while the FloatingReset issue, BNS.PR.F, will pay 3-Month T-Bills + 134bp, reset quarterly. I recommended against conversion.

Brookfield Renewable Energy Partners L.P. has announced:

that, in connection with its previously announced offer to exchange each issued and outstanding Class A Preference Share, Series 5 of Brookfield Renewable Power Preferred Equity Inc. (TSX:BRF.PR.E) with an annual dividend rate of 5.00% (collectively, the “Series 5 Preferred Shares”) for one newly issued Class A Preferred Limited Partnership Unit, Series 5 of Brookfield Renewable with an annual distribution rate of 5.59% (the “Exchange Offer”), it has extended the expiry date of the Exchange Offer to 5:00 p.m. (Toronto Time) on February 8, 2016 and waived the Exchange Offer’s minimum tender condition (the “Minimum Tender Condition”). As of 5:00 p.m. (Toronto Time) on January 20, 2016, a total of 2,805,911 Series 5 Preferred Shares have been validly tendered to the Exchange Offer, representing approximately 40.08% of the issued and outstanding Series 5 Preferred Shares.

Following expiry of the Exchange Offer, any and all Series 5 Preferred Shares tendered will be taken up, regardless of how many Series 5 Preferred Shares are tendered, provided that the remaining Exchange Offer conditions have been satisfied or waived and the expiry date of the Exchange Offer has not been further extended. The waiver of the Minimum Tender Condition and the extension of the Exchange Offer enable holders of Series 5 Preferred Shares (the “Series 5 Preferred Shareholders”) who have not yet tendered their Series 5 Preferred Shares to accept the Exchange Offer. All other terms and conditions of the Exchange Offer remain the same. Series 5 Preferred Shareholders who have validly tendered (and not withdrawn) their Series 5 Preferred Shares pursuant to the Exchange Offer need take no further action to accept the Exchange Offer.

The Exchange Offer is being extended pursuant to a second amendment and restatement of Brookfield Renewable’s prospectus supplement dated November 9, 2015, as amended and restated on December 23, 2015, to its short form base shelf prospectus dated May 12, 2015 (the “Second Amended and Restated Prospectus Supplement”). Full details of the Exchange Offer are contained in the Second Amended and Restated Prospectus Supplement, which will be filed with securities regulatory authorities in each of the provinces and territories of Canada and mailed to Series 5 Preferred Shareholders as required under applicable Canadian securities laws on or about January 27, 2016. Copies of the Second Amended and Restated Prospectus Supplement will be available on SEDAR at www.sedar.com and on Brookfield Renewable’s website at www.brookfieldrenewable.com at such time. Series 5 Preferred Shareholders are urged to evaluate carefully all information in the Exchange Offer, including risk factors, and to consult their own investment, tax and legal advisors.

Computershare Investor Services Inc. is the Depositary for the Exchange Offer and D.F. King Canada, a division of CST Investor Services Inc., is the Information Agent. Any questions or requests for assistance concerning the Exchange Offer or further information about tendering to the Exchange Offer should be directed to the Depositary at 1-800-564-6253 (toll free in North America) or 1-514-982-7555, or by e-mail at corporateactions@computershare.com; or to the Information Agent at 1-800-332-4904 (toll free in North America) or 1-201-806-7301, or by e-mail at inquiries@dfking.com.

Copies of the Second Amended and Restated Prospectus Supplement may be obtained free of charge upon request to the Depositary or the Information Agent. Series 5 Preferred Shareholders whose Series 5 Preferred Shares are registered in the name of a broker, investment dealer, bank, trust company or other nominee should contact such nominee for assistance in depositing their Series 5 Preferred Shares to the Exchange Offer.

Assiduous Readers will remember that the original offer was announced 2015-11-9, which was extended 2015-12-21 with a filing thereof appearing on SEDAR on 2015-12-23.

TransCanada Corporation has announced:

that 1,284,609 of its 14,000,000 fixed rate Cumulative Redeemable First Preferred Shares, Series 5 (Series 5 Shares) have been elected for conversion on a one-for-one basis, into floating rate Cumulative Redeemable First Preferred Shares, Series 6 (Series 6 Shares) effective on February 1, 2016. As a result, on February 1, 2016, TransCanada will have 12,715,391 Series 5 Shares and 1,284,609 Series 6 Shares issued and outstanding. The Series 5 Shares and Series 6 Shares will be listed on the Toronto Stock Exchange under the symbols TRP.PR.C and TRP.PR.I, respectively.

Assiduous Readers will recall that TRP.PR.C will reset to 2.263%; TRP.PR.I is a FloatingReset paying 154bp over 3-Month Bills, reset quarterly. I recommended against conversion.

Power Financial Corporation has announced:

that 2,234,515 of its outstanding 11,200,000 Non-Cumulative 5-Year Rate Reset First Preferred Shares, Series P (the “Series P shares”) will be converted on February 1, 2016, on a one-for-one basis, into Non-Cumulative Floating Rate First Preferred Shares, Series Q (the “Series Q shares”) of Power Financial.

As a result, on February 1, 2016, Power Financial will have issued and outstanding 8,965,485 Series P shares and 2,234,515 Series Q shares.

The Series P shares are currently listed on the Toronto Stock Exchange under the symbol PWF.PR.P. The Series Q shares will be listed on the Toronto Stock Exchange under the symbol PWF.PR.Q.

Assiduous Readers will remember that PWF.PR.P will reset to 2.306%; PWF.PR.Q is a FloatingReset that will pay 3-Month T-Bills +160bp, reset quarterly. I recommended against conversion.

Pembina Pipeline Corporation has announced:

that it has closed its previously announced public offering of cumulative redeemable minimum rate reset class A preferred shares, Series 11 (the “Series 11 Preferred Shares”) for aggregate gross proceeds of $170 million (the “Offering”).

The Offering was announced on January 6, 2016 when Pembina entered into an agreement with a syndicate of underwriters led by Scotiabank, BMO Capital Markets and RBC Capital Markets. A total of 6,800,000 Series 11 Preferred Shares, which includes 800,000 Series 11 Preferred Shares issued pursuant to the partial exercise of the underwriters’ option, were sold under the Offering.

Proceeds from the Offering will be used to reduce indebtedness under the Company’s credit facilities, as well as for capital expenditures and working capital requirements in connection with the Company’s 2016 capital program.

The Series 11 Preferred Shares will begin trading on the Toronto Stock Exchange today under the symbol PPL.PR.K.

Dividends on the Series 11 Preferred Shares are expected to be $1.4375 per share annually, payable quarterly on the 1st day of March, June, September and December, as and when declared by the Board of Directors of Pembina, for the initial fixed rate period to but excluding March 1, 2021.

Concurrently with the closing of the Offering, Pembina’s Board of Directors has declared the initial quarterly dividend for the Series 11 Preferred Shares in the amount of $0.1812, for the period of January 15, 2016 to March 1, 2016. The dividend will be payable on March 1, 2016, to shareholders of record on February 1, 2016.

All of Pembina’s dividends are designated “eligible dividends” for Canadian income tax purposes.

That’s very good of them to highlight the record date of the short first dividend! I wish more issuers would provide specifics – or at least estimates and intentions – on their announcements of closing.

PPL.PR.K is a FixedReset, 5.75%+500M575, announced January 6. The issue will be tracked by HIMIPref™ and has been assigned to the Scraps index on credit concerns.

The issue traded 333,090 shares today in a range of 23.40-24.70 before closing at 23.20-47, 10×10. VWAP was 24.09. Those who are outraged at the poor performance of this issue are reminded that the market in the last ten days has been horrid; epically horrid, as the kids say. From the close on the day of announcement, January 6, to the close today, January 15, the TXPL Price Index went from 661.34 to 565.59, a drop of 14.5%; the TXPL Total Return index went from 777.32 to 664.90, also a drop of 14.5%. So in context of the market, the drop to a bid of 23.20 from the issue price of 25.00, which is 7.2%, actually looks pretty good. Buyers of the new issue can celebrate!

I have the funny feeling I’m going to be telling this story quite a bit over the next few years, until my Assiduous Readers get fed up to the back teeth with the thing. But really: a market drop of 14.5% between announcement and closing? If I don’t cite the example when I tell the story, nobody will believe me.

In fact, I have a sneaking suspicion that the only person telling this story more often than me will be Scott Burrows, Pembina’s CFO. “Yes, sir”, he’ll say, drawling a little to emphasize his good old-fashioned common sense, “When the dealers approached me about a bought deal, I suddenly realized that my big toe had been hurting all day. Something terrible! And when my big toe hurts that much for so long, it means only one thing: the market’s about to drop by 14.5%. So I didn’t waste any time! I got that puppy out the door as fast as the agreement could be printed! I printed it backwards, so I could sign on the dotted line while waiting for the job to finish!”

And, oh, how I wish I could be a fly on the wall during his next performance and salary review. “Mick”, he’ll say to Michael Dilger, CEO, “Remember that $170-million preferred share issue I pushed out just before the market dropped 14.5%? Well, I’ve been doing some figuring, and I figure that gave the company a trading gain of a little under $25-million, mainly out of the pockets of the Big Banks, right out of the box. I couldn’t believe it when the first headhunter told me that, but when the third one called and casually mentioned it in the course of completely innocent conversation, I just had to check the numbers myself. Interesting, eh?”

Vital Statistics are:

Implied Volatility of the PPL series provides some food for thought:

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The Implied Volatility of 7% is dramatically lower than the 22% calculated on the announcement date. This may be ascribed to the following changes in price for the PPL FixedReset series:

So we verify that the drop in Implied Volatility can be ascribed to outperformance of the higher-spread issues. This is a mathematical equivalence, but it’s always good to check!

What surprises me, though is just how different the PPL Implied Volatility is from other series – the TD series, for example, discussed in the post New Issue: NA FixedReset, 5.60%+490, has an Implied Volatility of 29%.

It may have something to do with credit or, more precisely, credit perception. Assiduous Readers will be aware that the BAM series of FixedResets consistently has a lower Implied Volatility than the other series examined regularly; given that unreasonably high levels of Implied Volatility are associated with expectations of directionality in future prices, there might be a connection. Just how this might be explained and proven, however, is another question.

Update, 2016-2-8: It seems to have settled in-line with other issues at 23.50.

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Standard & Poor’s has announced:

• •We are removing our ratings on Shaw Communications Inc. from CreditWatch, where they were placed with negative implications Dec. 17, 2015.
• •At the same time, we are affirming our ratings on Shaw, including our ‘BBB-‘ long-term corporate credit rating. The outlook is negative.
• •We expect that Shaw will generate weak free cash flow over the next two years as the company integrates WIND Mobile Corp. and builds out its mobile network to the current industry-standard long-term evolution (LTE).
• •We could lower the rating on Shaw if fully adjusted debt leverage increases toward 3.5x, which could indicate the company is having difficulties achieving profitability expectations in mobile or increasing debt-funded capital to support its competitive position.
• •The negative outlook reflects our expectation of weak free cash flow over the next two years as the company integrates WIND and builds out its mobile network to the current industry-standard LTE.
• •We could revise the outlook to stable if Shaw’s free and discretionary cash flow measures improve enough to keep fully adjusted debt leverage consistently below 3x, which we believe would be characterized by free operating cash flow approaching 10% and sustained positive discretionary cash flow.
  …
  “The affirmation incorporates our expectation that Shaw will maintain fully adjusted debt leverage of about 3x over the next two years, which is consistent with our ‘BBB-‘ rating, after incorporating the WIND acquisition and the recently announced sale of Shaw Media,” said Standard & Poor’s credit analyst Donald Marleau.
  …
  The negative outlook reflects our expectation of weak free cash flow over the next two years as the company integrates WIND and builds out its mobile network to the current industry-standard LTE.

  We could lower the rating if we expect that Shaw’s fully adjusted debt leverage will increase toward 3.5x, which could indicate difficulties achieving profitability expectations in mobile or increased debt-funded capital to support the company’s competitive position.

  We could revise the outlook to stable if Shaw’s free and discretionary cash flow measures improve enough to keep fully adjusted debt leverage consistently below 3x, which we believe would occur if WIND EBITDA maintained a positive trajectory to exceed C$100 million by 2018 along with expectations of steady-to-declining capital expenditures. We believe that such a scenario would be characterized by free operating cash flow approaching 10% and sustained positive discretionary cash flow.

The acquisition of Wind Mobile was greeted with distaste by the Rating Agencies; both DBRS and S&P placed the rating on review-negative. As noted in the Market Action report for January 13, 2016, the acquisition will be financed by the sale of media assets to a related firm (or is it affiliated? I can never get that terminology right); this news was greeted with distinct lack of enthusiasm by DBRS, which is simply waiting for the acquisition to close before (very probably) downgrading the rating by a notch.