Category: Issue Comments

PWF.PR.Q is a FloatingReset, Bills+160bp, resulting from the 20% conversion from PWF.PR.P, which has reset at 2.306%. The issue will be tracked by HIMIPref™ and has been assigned to the FloatingReset subindex. The two issues constitute a Strong Pair.

The issue traded no shares today and closed at 11.25-17.50 (!), 50×50.

Vital statistics are:

TransCanada Corporation has announced:

that 1,285,739 of its 14,000,000 fixed rate Cumulative Redeemable First Preferred Shares, Series 5 (Series 5 Shares) were tendered for conversion today, on a one-for-one basis, into floating rate Cumulative Redeemable First Preferred Shares, Series 6 (Series 6 Shares). As a result of the conversion, TransCanada has 12,714,261 Series 5 Shares and 1,285,739 Series 6 Shares issued and outstanding. The Series 5 Shares will continue to be listed on the Toronto Stock Exchange (TSX) under the symbol TRP.PR.C. The Series 6 Shares will begin trading on the TSX today under the symbol TRP.PR.I.

The Series 5 Shares will continue to pay on a quarterly basis, for the five-year period beginning on January 30, 2016, as and when declared by the Board of Directors of TransCanada, a fixed dividend at an annualized rate of 2.263 per cent.

The Series 6 Shares will pay a floating rate quarterly dividend for the five-year period beginning on February 1, 2016, as and when declared by the Board of Directors of TransCanada. The dividend rate for the Series 6 Shares for the first quarterly floating rate period commencing February 1, 2016 to, but excluding April 30, 2016, is 2.037 per cent and will be reset every quarter.

For more information on the terms of, and risks associated with an investment in, the Series 5 Shares and the Series 6 Shares, please see the Corporation’s prospectus supplement dated June 17, 2010 which can be found under the Corporation’s profile on SEDAR at www.sedar.com.

TRP.PR.I is a FloatingReset, Bills+154bp, resulting from the 9% conversion from TRP.PR.C, which has reset at 2.263%. The issue will be tracked by HIMIPref™ and has been assigned to the FloatingReset subindex. The two issues constitute a Strong Pair.

The issue traded no shares today and closed at 9.00-17.50 (!), 5×50.

Vital statistics are:

DBRS has announced that it:

has today taken rating actions on 11 issuers following a full review of the oil and gas portfolio. This review covered 19 issuers and was undertaken in light of the recent price crude oil price declines and the outlook for a continued weak pricing environment. The rating actions are highlighted in the table below. As a result of the announced actions today, all issuers within DBRS’s oil and gas portfolio (with the exception of Suncor Energy Inc., rated A (low), and Canadian Oil Sands Limited (COS), rated BBB (low), which are both Under Review with Developing Implications) now have a Negative trend.
…
The weak pricing environment has created material, near-term financial challenges for oil and gas issuers that has been reflected today by DBRS’s rating and trend changes. Companies have responded to the lower pricing environment by cutting capital expenditure (capex) programs, undertaking asset sales and implementing cost-saving measures. However the sharp contraction in cash flows from oil- and gas-producing activities has been far greater, resulting in cash flow deficits, a drain on liquidity and escalating debt/cash flow ratios. The integrated oil companies and multinational oil companies rated by DBRS (which have downstream exposure) have weathered the pricing storm better but have also experienced weakening financial risk profiles. With expectations for continued weak pricing, the key credit metrics of issuers will remain under pressure. DBRS anticipates companies will announce additional significant capex cuts, cost-saving measures and possible dividend cuts to preserve liquidity and balance sheet strength. As such, DBRS will monitor each issuer closely as more information becomes available. A lack of concrete action by issuers to respond to a period of lower pricing and/or prevent their financial profiles from eroding further could lead to further negative rating actions by DBRS.
…
With the weak pricing outlook for both oil and natural gas, DBRS-rated oil and gas companies were all stress tested under various crude oil and natural gas pricing scenarios over a two-year forecast period. As a base case scenario DBRS used a forecast in line with the forward oil and gas price curves. The base case price forecast incorporated a West Texas Intermediate (WTI) oil price of USD 32 per barrel (bbl) in 2016 and USD 37/bbl in 2017. The natural gas price base case incorporated a forecast of USD 2.25 and CDN 2.25 per thousand cubic feet for NYMEX and AECO natural gas, respectively, in 2016. For 2017 the forecast was USD 2.75 and CDN 2.75 for NYMEX and AECO natural gas, respectively. A CDN/USD $0.70 exchange rate was assumed in the base case. DBRS also considered stressed pricing scenarios as low as USD 25/bbl for WTI in 2016, USD 30/bbl in 2017 and a CDN/USD exchange rate of $0.68. The stress tests focused on the effect that oil and gas prices would have on: (1) internally generated cash flow, (2) discretionary versus committed capex, (3) dividend flexibility, (4) planned asset dispositions, (5) covenant tests, (6) available liquidity, (7) key credit metrics and (8) a recovery rate analysis for high yield credits. Moreover, for non-investment-grade issuers borrowing bases were stress tested, at reductions of 20%, 25%, and 30% of current levels given the uncertainty with the upcoming borrowing base reviews.

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

Implied Volatility analysis shows a high level of Implied Volatility (implying a certain amount of directionality in expected pricing is contradicting an assumption of the Black-Scholes analysis) and a very high spread.

Click for Big

According to this analysis, HSE.PR.E, resetting at +357bp on 2020-3-31, is $0.17 cheap, while HSE.PR.C, resetting at +313 on 2019-12-31 is $0.11 rich.

Update, 2016-2-19: Moody’s has affirmed HSE at Baa2:

Husky’s Baa2 senior unsecured rating reflects favorably priced contracts for its natural gas production offshore China, integrated upstream and refining operations that provide diversity and lessen cash flow volatility, and strong cash flow-based leverage and interest coverage metrics. These positive attributes are mitigated by the company’s exposure to weak commodity prices in its North American conventional business and risks associated with the ramp up of in-situ oil sands production at Sunrise.

Husky will have good liquidity through 2016. At September 30, 2015 the company had approximately C$2.6 billion available under its C$4 billion revolving credit facilities (C$2 billion of which matures in December 2016 and C$2 billion of which matures in June 2018). We expect the facility maturing in December 2016 to be renewed and extended. We expect negative free cash flow of about C$250 million through December 2016. We expect proceeds from asset sales of approximately C$1.5 billion to be used to fund the negative free cash flow and reduce short term debt. Husky has a US$200 million note maturity in November 2016. The company has numerous assets that could be sold to enhance liquidity.

The stable outlook reflects improving financial metrics in the current low oil price environment.

The rating could be upgraded when RCF/D appears likely to approach 30% after taking into account the reinstatement of a normalized long term dividend.

The rating could be downgraded if it appears that the RCF/D is likely to fall towards 20%.

Husky Energy Inc., headquartered in Calgary, Alberta, is a diversified independent E&P company with principal assets in North America and Southeast Asia. While Husky is a publicly traded company, approximately 69% is owned by entities controlled by Mr. Li Ka-shing of Hong Kong.

Dundee Corporation has announced:

that holders of First Preference Shares, Series 4 (the “Series 4 Preferred Shares”) earlier today approved the previously announced plan of arrangement (the “Arrangement”) of the Company pursuant to which each Series 4 Preferred Share will be exchanged for: (i) 0.7136 of a First Preference Share, Series 5 of the Company; and (i) 0.25 of a Class A subordinate voting share purchase warrant.

The Arrangement was approved at the special meeting, with 3,056,887 Series 4 Preferred Shares, representing 93.22% of the total votes cast at the meeting, voting in favour of the Arrangement and 222,393 Series 4 Preferred Shares, representing 6.78% of the total votes cast at the meeting, voting against it.

The Company intends to apply for the final order of the Ontario Superior Court of Justice (Commercial List) to approve the Arrangement on February 10, 2016. Assuming that court approval is obtained, the Arrangement is expected to be completed on or about February 12, 2016.

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.

I would dearly love to know how much of a role the exorbitant proxy solicitation fees played. How many votes were actually cast by informed shareholders, vs. how many by mis-informed or under-informed holders pressured by their fee-hungry advisors … and how many were cast simply by the advisors themselves?

Anyway, I have set up a new security for this issue on HIMIPref™, which reflects the new dividend rate and new call schedule, but the old par value – since the issue will trade based on $17.84 par until the change is approved by the court and the new Series 5 shares start trading on the Exchange.

Vital statistics are:

I had previously estimated that a coupon of 13% would be required in order for the issue to trade at around par, which was later revised to 11%-12%. So far it looks like I was about right.

Strathbridge Asset Management has announced:

Top 10 Split Trust (the “Fund”) announced today that pursuant to the Fund’s trust agreement, the term of the Fund is being extended automatically for an additional five year period beyond the March 31, 2016 termination date to March 31, 2021. The automatic extension was approved by unitholders of the Fund at a meeting held on March 21, 2011. In connection with the automatic extension of the term, holders of Capital Units and Preferred Securities have a special retraction right (“Special Retraction Right”) to permit holders of such securities to retract such securities on March 31, 2016 on the terms on which such securities would have been redeemed or repaid had the term of the Fund not been extended.

Retraction payments for Capital Units and Preferred Securities tendered pursuant to the Special Retraction Right will be made no later than 10 business days following the retraction date of March 31, 2016, provided that such securities have been surrendered for retraction on or prior to 5:00 p.m. (Toronto time) on March 18, 2016. If more Capital Units than Preferred Securities are retracted under the Special Retraction Right, the Fund will redeem Preferred Securities on a pro rata basis to ensure an equal number of Capital Units and Preferred Securities remain outstanding. Conversely, if more Preferred Securities than Capital Units are retracted under the Special Retraction Right, the Fund will consolidate the Capital Units on a basis to ensure an equal number of Capital Units and Preferred Securities remain outstanding. Notice of such retraction or consolidation, as the case may be, will be made via press release on or before March 22, 2016.

The Fund is an investment trust designed to provide unitholders with exposure to the six largest Canadian banks and four largest Canadian life insurance companies. Preferred Security distributions of $0.78125 per security per annum are paid quarterly for a yield of 6.25% on the $12.50 issue price. Capital Unit distributions are calculated and paid each calendar quarter based on 7.5% per annum of the net asset value of the Capital Unit.

TXT.PR.A is not tracked by HIMIPref™ since it’s such a small issue – only 1,376,799 shares out according to the Exchange.

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.
…
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.

Click for Big

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.