Category: Issue Comments

Issue Comments

DC.PR.C: Consider Exercising Dissent Rights To Defeat Management's Coercive Plan

Assiduous Reader prefman alerted me in the comments to the post “DC.PR.C: Coercive Exchange Offer” that the Notice of Special Meeting of Holders of First Preference Shares, Series 4 of Dundee Corporation to be held on January 7, 2016 and Management Information Circular has been published on Dundee’s website.

Update, 2015-12-16: The company announced the mailing of the information circular and published some FAQs on December 10.

Simultaneously, the market has shown distinct distasted for the plan by giving the issue a good thumping: it closed today at 14.62 with a VWAP of 14.75, which compares to par value of 17.84. The performance of the issue since the November 24 announcement and the Globe story on December 4 doesn’t look very good!

DCPRC_151215_1Mo
Click for Big

One thing that is made clear in the Information Circular is that widespread dissent can be fatal to the plan:

Completion of the Arrangement is conditional on the occurrence of the following, each of which may be waived
by the Company to the extent permitted under applicable law:

  • • Approval of the Arrangement Resolution. The Arrangement Resolution is approved by not less than two-thirds (662/3%) of the votes cast by the holders of Series 4 Preferred Shares who vote in respect of the Arrangement Resolution in person or by proxy at the Meeting;
  • • Interim Order and Final Order. The Interim Order and the Final Order shall have each been obtained on terms acceptable to the Company, and shall not have been set aside or modified in a manner unacceptable to the Company;
  • • TSX Approval. The approval of the TSX (including the approval of the TSX for the listing and posting for trading of the Series 5 Preferred Shares to be issued pursuant to the Arrangement on the TSX) is obtained on terms acceptable to the Company;
  • • Dissent Rights. Dissent Rights shall not have been validly exercised and not withdrawn with respect to more than 10% of the issued and outstanding Series 4 Preferred Shares;
  • • Legality. No applicable law, constitution, treaty, convention, ordinance, code, rule, regulation, order, injunction, judgement, decree ruling or other similar requirement shall be in effect that makes the consummation of the Arrangement illegal or otherwise prohibits or enjoins the Company from consummating the Arrangement; and
  • • Board of Directors of the Company. The Board of Directors not having determined not to proceed with the Arrangement.

So while a “no” vote of just over one-third is required to defeat the plan, a “dissent” of just over 10% is sufficient to defeat it.

The company maintains its cheerful outlook:

The Company has received substantial support for the Arrangement based on confidential consultations with representatives of significant holders of the Series 4 Preferred Shares.

… but the meaning of the phrase “substantial support” is rendered dubious by the price action of the issue since the announcement, the fact that the company is including a very substantial payment to advisors who are able to obtain favourable votes, and the fact that the company is not allowing holders to get out on the original terms. Assiduous Readers of PrefBlog will know that such an offer is de rigueur when Split Share Corporations extend term (see, for example, the “Special Retraction Rights” offered on the past FTN.PR.A term extension) and that I get very upset when a Special Retraction is not part of the deal.

Dissent rights may be exercised as follows (emphasis in original removed):

A Beneficial Shareholder who wishes to exercise Dissent Rights should immediately contact the Intermediary with whom the Beneficial Shareholder deals in respect of its Series 4 Preferred Shares and either: (i) instruct the Intermediary to exercise the Dissent Rights on the Beneficial Shareholder’s behalf (which, if the Series 4 Preferred Shares are registered in the name of CDS or other clearing agency, may require that such Series 4 Preferred Shares first be re-registered in the name of the Intermediary), or (ii) instruct the Intermediary to re-register such Series 4 Preferred Shares in the name of the Beneficial Shareholder, in which case the Beneficial Shareholder would be able to exercise the Dissent Rights directly.

A Registered Series 4 Preferred Shareholder who wishes to dissent must provide a written notice of dissent (the “Dissent Notice”) to the Company at 1 Adelaide St. East, Suite 2100, Toronto, Ontario, Canada, M5C 2V9, Attention: Lili Mance, to be received not later than 9:00 a.m. (Toronto time) on January 5, 2016 (or, in the case of any adjournment or postponement of the Meeting, not less than 48 hours (excluding Saturdays, Sundays and holidays) prior to the time of such adjourned or postponed meeting). Failure to properly exercise Dissent Rights may result in the loss or unavailability of the right to dissent.

The filing of a Dissent Notice does not deprive a Registered Series 4 Preferred Shareholder of the right to vote
at the Meeting.

Once dissent has been exercised, we get into the whole back and forth ritual that is such a complete waste of time and money for all concerned:

Within ten days after the holders of Series 4 Preferred Shares adopt the Arrangement Resolution, the Company is required to notify each Dissenting Shareholder that the Arrangement Resolution has been adopted. Such notice is not required to be sent to any holder of Series 4 Preferred Shares who voted FOR the Arrangement
Resolution or who has withdrawn its Dissent Notice.

A Dissenting Shareholder who has not withdrawn its Dissent Notice prior to the Meeting must then, within twenty days after receipt of notice that the Arrangement Resolution has been adopted, or if the Dissenting Shareholder does not receive such notice, within twenty days after learning that the Arrangement Resolution has been adopted, send to the Company, care of the Company’s transfer agent, Computershare Investor Services Inc. (the “Transfer Agent”) at its Toronto office located at 100 University Avenue, 8th Floor, Toronto, Ontario, Canada, M5J 2Y1, a written notice containing his or her name and address, the number of Series 4 Preferred Shares in respect of which it, he or she dissents (the “Dissenting Shares”), and a demand for payment of the fair value of such Series 4 Preferred Shares (the “Demand for Payment”). Within thirty days after sending a Demand for Payment, the Dissenting Shareholder must send to the Company, care of the Transfer Agent, certificates representing the Series 4 Preferred Shares in respect of which he or she dissents.

The Company will or will cause the Transfer Agent to endorse on the applicable Series 4 Preferred Share certificates received from a Dissenting Shareholder a notice that the holder is a Dissenting Shareholder and will forthwith return such Series 4 Preferred Share certificates to the Dissenting Shareholder.

Failure to strictly comply with the requirements set forth in section 185 of the OBCA, as modified by the Plan of Arrangement and Interim Order, may result in the loss of any right to dissent.

One of the many things about the Way We Do Business In Canada that appalls me is the fact that notices such as this continue to babble about certificates. Why does this bother me? Well, let’s look at the original prospectus, available on SEDAR, a public document to which I am not entitled to link because the regulators have no intention or interest in furthering the interests of investor-taxpayer scum. You will have to search for “Dundee Corporation Jun 21 2006 14:01:56 ET Final short form prospectus – English -PDF 336 K”. It will be recalled that this issue was issued as DBC.PR.A; the symbol changed to DC.PR.A, and then DC.PR.C was issued as partial consideration for DC.PR.A. As stated in the original prospectus:

BOOK-BASED SYSTEM

Registration of interests in and transfers of the Series 1 Shares will only be made through the book-based system administered by CDS. On or about the date of closing of this offering, the Corporation will deliver to CDS a certificate evidencing the aggregate number of Series 1 Shares subscribed for under this offering. Series 1 Shares must be purchased, transferred and surrendered for redemption, conversion or retraction through a participant in CDS (a ‘‘CDS Participant’’). All rights of an owner of Series 1 Shares must be exercised through, and all payments or other property to which such owner is entitled will be made or delivered by, CDS or the CDS Participant through which the owner holds Series 1 Shares. Upon a purchase of any Series 1 Shares, the owner will receive only the customary confirmation. References in this short form prospectus to a holder of Series 1 Shares mean, unless the context otherwise requires, the owner of the beneficial interest in such shares.

The ability of a beneficial owner of Series 1 Shares to pledge such shares or otherwise take action with respect to such owner’s interest in such shares (other than through a CDS Participant) may be limited due to the lack of a physical certificate.

The Corporation has the option to terminate registration of the Series 1 Shares through the book-based system, in which event certificates for Series 1 Shares in fully registered form will be issued to the beneficial owners of such shares or their nominees.

When we prudently check the Management Information Circular for the conversion to DC.PR.C [SEDAR, Dundee Corporation Apr 18 2013 16:57:07 ET Management information circular – English PDF 7227 K], we find:

As soon as practicable following the Effective Time, the global certificate formerly representing the Dundee Series 1 Preference Shares registered in the name of CDS will be withdrawn from CDS and replaced with a global certificate representing the Dundee New Series 4 Preference Shares and a global certificate representing the DREAM Series 1 Preference Shares.

So … ain’t no certificates. The politicians can’t be bothered to make a minor change in the law to acknowledge the existence of the 21st century, and the regulators can’t be bothered to make sure that circulars of this type have any degree of relationship to reality. It’s nice work, if you can get it.

So, basically, read the information circular carefully, tell your custodial broker what you want to do, and keep written records of all conversations.

So what happens then?

The Company is required, not later than seven days after the later of the Effective Date or the date on which a Demand for Payment is received from a Dissenting Shareholder, to send to each Dissenting Shareholder who has sent a Demand for Payment an Offer to Pay for its Dissenting Shares in an amount considered by the Board of Directors to be the fair value of the Series 4 Preferred Shares, accompanied by a statement showing the manner in which the fair value was determined. Every Offer to Pay for Series 4 Preferred Shares must be on the same terms. The Company must, subject to applicable law, pay for the Dissenting Shares of a Dissenting Shareholder within ten days after an Offer to Pay has been accepted by a Dissenting Shareholder, but any such offer lapses if the Company does not receive an acceptance within thirty days after the Offer to Pay has been made.

If the Company fails to make an Offer to Pay for Dissenting Shares, or if a Dissenting Shareholder fails to accept an Offer to Pay that has been made, the Company may, within fifty days after the Effective Date or within such further period as a court may allow, apply to a court to fix a fair value for the Dissenting Shares. If the Company fails to apply to a court, a Dissenting Shareholder may apply to a court for the same purpose within a further period of twenty days or within such further period as a court may allow. A Dissenting Shareholder is not required to give security for costs in such an application.

If the Company or a Dissenting Shareholder makes an application to court, the Company will be required to notify each affected Dissenting Shareholder of the date, place and consequences of the application and of its right to appear and be heard in person or by counsel. Upon an application to a court, all Dissenting Shareholders who have not accepted an Offer to Pay will be joined as parties and be bound by the decision of the court. Upon any such application to a court, the court may determine whether any person is a Dissenting Shareholder who should be joined as a party, and the court would then be expected to fix a fair value for the Dissenting Shares of all Dissenting Shareholders. The final order of a court would be expected to be rendered against the Company in favour of each Dissenting Shareholder for the amount of the fair value of its Dissenting Shares as fixed by the court. The court may, in its discretion, allow a reasonable rate of interest on the amount
payable to each Dissenting Shareholder from the Effective Date until the date of payment.

So, if there’s no agreement on what constitutes fair value, it will go to court. In many cases, as I understand it, the court will decide that Fair Value is what everybody else took, which [since it got this far in the first place] will be the new, extended-term shares. However, a good argument could be made that Fair Value is represented by the original deal: you either get your $17.64 in June, 2016, or you get discounted DC.A Subordinate Voting Shares in lieu, if the company would rather pay you that way.

It’s a tangled web and one that is not without risk – by dissenting, a holder is giving up the Consent Payment, for instance, which is one reason why the company is abusing its investors by making the consent payment so high. There may be costs associated with the court case, if the company makes a derisory “Fair Value” offer. On the other hand, the market is clearly showing its distaste for the plan by marking down the market value of DC.PR.C and the current highlighting of junk bond liquidity woes may make institutional holders more diligent in their protection of their investors’ interests.

I make no recommendation; I do investment analysis, not investment law! However, from an investment perspective, I suggest that the dissenting route is worthy of consideration.

Issue Comments

FFN.PR.A: 15H1 Semi-Annual Report

North American Financial 15 Split Corp. has released its Semi-Annual Report to May 31, 2015.

Figures of interest are:

MER: 1.31% of the whole unit value

Average Net Assets: We need this to calculate portfolio yield. No change in Number of Units Outstanding, so just calculate as [129.2-million (NAV at beginning of period) + 126.6-million (NAV at end of period)] / 2 = 127.9-million.

Underlying Portfolio Yield: Dividends received (net of withholding) of 1.874-million times two because it’s only half a year divided by average net assets of 127.9-million is 2.93%

Income Coverage: Net Investment Income of 982,591 divided by Preferred Share Distributions of 1,978,585 is 50%.

Issue Comments

INE.PR.A To Be Extended

Innergex Renewable Energy Inc. has announced:

that it does not intend to exercise its right to redeem all or any part of the currently outstanding Cumulative Rate Reset Preferred Shares, Series A of the Corporation (“Series A shares”) (TSX: INE.PR.A) on January 15, 2016. There are currently 3,400,000 Series A shares outstanding.

As a result, subject to certain conditions, the holders of the Series A shares have the right to convert all or part of their Series A shares, on a one-for-one basis, into Cumulative Floating Rate Preferred Shares, Series B of the Corporation (“Series B shares”) on January 15, 2016 (the “Conversion Date”). A formal notice of the right to convert Series A Shares into Series B Shares will be sent to the registered holder of the Series A Shares.

Holders who do not exercise their right to convert their Series A shares into Series B shares will continue to hold their Series A shares and will have the opportunity to convert their shares again on January 15, 2021, and every five years thereafter as long as the shares remain outstanding.

The foregoing conversion right is subject to the following conditions:
i. if the Corporation determines that there would be less than 1,000,000 Series B shares outstanding after the Conversion Date, then holders of Series A shares will not be entitled to convert their shares into Series B shares, and
ii. alternatively, if the Corporation determines that there would remain outstanding less than 1,000,000 Series A shares after the Conversion Date, then all remaining Series A shares will automatically be converted into Series B shares on a one-for-one basis on the Conversion Date.

In either case, the Corporation will give written notice to that effect to any registered holders affected by the preceding condition no later than January 7, 2016.

The dividend rate applicable for the Series A shares for the five-year period from and including January 15, 2016 to but excluding January 15, 2021, and the dividend rate applicable to the Series B shares for the 3-month period from and including January 15, 2016 and ending on and excluding April 15, 2016, will be determined on December 16, 2015 and notice of such dividend rates shall be provided to the registered holders of the Series A shares on that day.

Beneficial owners of Series A shares who wish to exercise their conversion right should communicate with their broker or other nominee to obtain instructions for exercising such right during the conversion period, which runs from December 16, 2015, until 5:00 p.m. (Montreal time) on December 31, 2015.

The Corporation may redeem the Series A Shares, in whole or in part, on January 15, 2021 and on January 15 every five years thereafter for $25.00 per share plus declared and unpaid dividends and may redeem the Series B Shares, in whole or in part, after January 15, 2016 for $25.50 per share plus declared and unpaid dividends, unless such Series B Shares are redeemed on January 15, 2021 or on January 15 every five years thereafter, in which case the redemption price will be $25.00 per share plus declared and unpaid dividends.

The Toronto Stock Exchange (“TSX”) has conditionally approved the listing of the Series B shares effective upon conversion. Listing of the Series B shares is subject to the Corporation fulfilling all the listing requirements of the TSX and upon approval, the Series B shares will be listed on the TSX under the trading symbol INE.PR.B.

The Series A shares and Series B shares have not been and will not be registered under the United States Securities Act of 1933, as amended, or any state securities laws. The Series A shares and the Series B shares may not be offered, sold or delivered, directly or indirectly, in the United States of America for the account or benefit of U.S. persons. This press release does not constitute an offer to sell or a solicitation of an offer to buy such securities in the United States.
For more information on the terms and risks associated with an investment in the Series A shares and the Series B shares, please see the Corporation’s prospectus dated September 7, 2010 which is available on sedar.com or on the Corporation’s website at www.innergex.com.

No surprises here, since INE.PR.A is a FixedReset, 5.00%+279, which commenced trading 2010-9-14 after being announced 2010-8-23.

I can’t really say much more until I know the reset rate!

Issue Comments

GWO.PR.N, FFH.PR.I, CPX.PR.A: Convert or Hold?

It will be recalled that

The deadline for notifying the companies of the intent to convert is December 16 at 5pm; but note that these are company deadlines 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 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., CPX.PR.A and the FloatingReset, CPX.PR.B, 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).

pairs_FR_151211A
Click for Big

The market appears to have a marked distaste at the moment for floating rate product; every single one of the implied rates until the next interconversion are lower than the current 3-month bill rate and most pairs have a break-even yield significantly below zero! 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 three FixedResets, we may construct the following table showing consistent prices for their soon-to-be-issued FloatingReset counterparts given a variety of Implied Breakeven yields consistent with issues currently trading:

Estimate of FloatingReset Trading Price In Current Conditions
  Assumed FloatingReset
Price if Implied Bill
is equal to
FixedReset Bid Price Spread -1.00% -0.50% 0.00%
GWO.PR.N. 13.50 130bp 11.53 12.05 12.58
FFH.PR.I 15.28 285bp 13.48 13.97 14.45
CPX.PR.A 9.80 217bp 8.09 8.54 8.99

Based on current market conditions, I suggest that the FloatingResets that will result from conversion are likely to be cheap and trading well below the price of their FixedReset counterparts. Therefore, I recommend that holders of GWO.PR.N, FFH.PR.I and CPX.PR.A continue to hold these issues and not to convert. I will note that current conditions make extant FloatingResets so cheap (in general) that 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 future path of policy rates. 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 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 GWO.PR.N are tendered for conversion, then no conversions will be allowed; but if only 100,000 shares of GWO.PR.N will remain after the rest are all tendered, then conversion will be mandatory. However, this is relatively rare: all 30 Strong Pairs currently extant have some version of this condition and all but two have both series outstanding.

Contingent Capital

S&P Revises Bank Outlook to Stable on Federal Complacency

Standard & Poor’s has announced:

  • •We continue to evaluate the likelihood, degree, and timeframe with respect to which the default risk of systemically important Canadian banks may change as a result of the government’s progress toward introducing a bank bail-in framework.
  • •We now expect that the timeframe could be substantially longer than we had previously assumed. We see the absence of the topic from the new government’s Dec. 4 Speech from the Throne as recent, incremental evidence in this regard.
  • •We now do not expect to consider the removal of rating uplift for our expectation of the likelihood of extraordinary government support from the issuer credit ratings (ICRs) on systemically important Canadian banks until a point beyond our standard two-year outlook horizon for investment-grade ratings, if at all.
  • •When and if we remove such uplift, the potential ratings impact will also consider uplift for additional loss-absorbing capacity, as well as any changes to our stand-alone credit profiles on these banks.
  • •As a result, we are revising our outlooks on all systemically important Canadian banks to stable from negative.

RATING ACTION
On Dec. 11, 2015, Standard & Poor’s Ratings Services revised its outlooks on the Canadian banks that it views as having either “high” (Bank of Montreal, The Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Royal Bank of Canada, The Toronto-Dominion Bank), or “moderate” (Caisse centrale Desjardins and National Bank of Canada) systemic importance, to stable from negative (see ratings list). The issuer credit ratings (ICRs) on the banks are unchanged.

RATIONALE
We believe that the potential negative ratings impact of a declining likelihood of extraordinary government support, at least within our standard two-year outlook horizon, has subsided. This reflects our updated view that there could be an extended implementation timetable–2018 or later–for the proposed Canadian bail-in framework. Importantly, at the point we would consider removing any uplift from the likelihood of extraordinary government support from our ratings, we would also consider the potential ratings impact of any uplift for additional loss-absorbing capacity (ALAC), as well as any
changes to our stand-alone credit profiles (SACPs) on these banks. In our view, the extended timetable introduces some potential that either the presence of ALAC or fundamental changes in credit quality at individual banks might come into play more than under the previously contemplated timetable.

We had revised our outlooks on systemically important Canadian banks to negative chiefly in reaction to the former government’s “Taxpayer Protection and Bank Recapitalization Regime” consultation paper of Aug. 1, 2014, as we then expected a bail-in regime could be fully implemented by 2016 (see “Outlook On Six Big Canadian Banks Revised To Negative Following Review Of Bail-In Policy Proposal,” published Aug. 8, 2014, on RatingsDirect). A number of subsequent developments have caused us to re-evaluate this expectation:

  • •In its April 2015 budget proposal, the former government affirmed its intention to introduce a bank bail-in regime in Canada, but it provided only very limited additional information relative to what it had outlined in its 2014 consultation paper; nor did the government make substantial subsequent public statement on the topic; nor did it specify timing for the announcement of its fully-developed (post-consultation) legislative proposal.
  • •The Oct. 19 federal election changed the party in government to Liberal (center-left), from Conservative (center-right). The former government’s proposed bail-in regime did not feature prominently in election debates.
  • •The new government’s Dec. 4 Speech from the Throne made no mention of the proposed bail-in framework, nor were any of the legislative priorities enumerated therein closely related, in our opinion. We believe this indicates the introduction of a bail-in framework is not among the immediate priorities of the new government.

Moreover, with Canada experiencing no government bank bail-outs, nor large bank failures, for decades, we believe the political incentive to rapidly end “too-big-to-fail” is less in Canada than in the U.S. and several EU countries, which are jurisdictions under which we have already removed uplift for our expectation of the likelihood of extraordinary government support from our ratings (see “U.S. Global Systemically Important Bank Holding Companies Downgraded Based On Uncertain Likelihood Of Government Support,” and “Most European Bank Ratings Affirmed Following Government Support And ALAC Review,” both published Dec. 2, on RatingsDirect). We will take this factor into consideration as we continue to evaluate our view on the likelihood of extraordinary government support in Canada relative to not only the U.S. and Europe, but also other jurisdictions where we maintain a government support assessment of “supportive” or “highly supportive” under our criteria (such as for many countries in Latin America and Asia-Pacific; see “Banking Industry Country Risk Assessment Update: November 2015,” published Nov. 27).

We now believe the procedural hurdles to passing legislation and related regulations (the latter after passage of the former) for a bail-in regime will alone require a minimum of one-to-two years, after the new government decides on a final legislative framework to propose to Parliament. Considering all of this, we now expect the eventual date for initial implementation of the bail-in regime (that is, banks issuing bail-inable debt) could be in 2018 or later.

In addition, and in contrast to bail-in frameworks outlined by U.S. authorities or in European countries like Germany, Canadian officials’ statements have made clear that only debt issued or renegotiated after an initial implementation date would be subject to conversion. It will take some time for the banks to issue or renegotiate bail-inable debt. We believe this means it could take several years after the initial implementation date before we would consider a Canadian bail-in regime effective, so as to provide a viable alternative to the direct provision of extraordinary government support.

As well, and again in contrast to the U.S. and EU jurisdictions, Canadian governments have made no attempt to limit their ability to provide direct extraordinary support to their banks, if needed. We expect bailing in senior creditors to be the first Canadian policy response in the face of a crisis. At the same time, we believe Canadian governments would be likely to consider all policy options, in such a circumstance. It is therefore not certain that the introduction of a bail-in regime would of itself result in our revising our government support assessment on Canada to “uncertain” from the current “supportive” and the removal of rating uplift for our view on the likelihood of extraordinary government support from our ICRs on systemically important Canadian banks. Rather, our decision would depend, among other factors, on the details of the eventual bail-in regime, including the extent to which bail-inable and unbail-inable senior debt is distinguishable.

Partly to honor G-20 and other international commitments, the Canadian government will, we expect, present a finalized legislative proposal for the bail-in framework in 2016 or 2017. However, we expect an implementation date that could be in 2018 or later, and we think it could take at least one and possibly several years more for substantial bail-in eligible debt to be in place. With a runway that long, the potential ratings impact from removing uplift for the likelihood of extraordinary government support is beyond our standard two-year outlook horizon for investment-grade ratings, and could by then be more meaningfully affected by either ALAC uplift (from the bail-inable debt, assuming our related criteria are met) or SACP changes, than under the previously contemplated timetable.

When the government presents the detailed provisions of the framework, along with a more specific timeframe, we will review the applicable notching for various bank liabilities, taking into account the framework’s implications on different instruments. We expect that issue ratings on new bail-inable instruments will be at a level that is notched in reference to banks’ SACPs, while ratings on non-bailinable senior debt may continue to incorporate rating uplift above the banks’ SACPs, based on our expectation of the likelihood of extraordinary government support, or ALAC.

OUTLOOK
Our outlooks on the systemically important Canadian banks are stable, based on our reassessment of the likelihood, degree, and timeframe with respect to which the default risk of systemically important Canadian banks may change as a result of the government’s progress toward introducing a bank bail-in framework. We believe that the likelihood of extraordinary government support will continue to be a factor in systemically important Canadian bank ratings throughout the current outlook period.

Moreover, we believe these banks will continue to exhibit broad revenue diversification, conservative underwriting standards, and strong overall asset quality. Our current view is that the impact of low oil prices on their profitability and credit quality will be contained, given the modest direct exposure of the banks to the oil and gas sector, and the limited knock-on impact so far on consumer credit in regional economies affected by low oil prices.

On the other hand, we continue to monitor a number of key downside risks to our ratings on these banks, including low margins, high Canadian consumer leverage, residential real estate prices we believe are at least somewhat inflated in some parts of Canada, a Canadian macroeconomic outlook that is very tentative, and the higher-risk nature of certain recent foreign acquisitions.

The August 2014 imposition of Outlook-Negative was reported on PrefBlog, as was the federal consultation on the recapitalization regime. As far as I can tell, the comments received on the consultation paper have not been published; I believe this is because Canadians are too stupid to understand smart stuff like legislation and parliament and all that – if given a pile of comments to work through, we’d probably try to eat them.

Issues affected are:

BMO.PR.K, BMO.PR.L, BMO.PR.M, BMO.PR.Q, BMO.PR.R, BMO.PR.S, BMO.PR.T, BMO.PR.W, BMO.PR.Y and BMO.PR.Z

BNS.PR.A, BNS.PR.B, BNS.PR.C, BNS.PR.D, 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

CM.PR.O, CM.PR.P and CM.PR.Q

NA.PR.Q, NA.PR.S and NA.PR.W

RY.PR.A, RY.PR.B, RY.PR.C, RY.PR.D, RY.PR.E, RY.PR.F, RY.PR.G, RY.PR.H, RY.PR.I, RY.PR.J, RY.PR.K, RY.PR.L, RY.PR.M, RY.PR.N, RY.PR.O, RY.PR.P RY.PR.W and RY.PR.Z

TD.PF.A, TD.PF.B, TD.PF.C, TD.PF.D, TD.PF.E, TD.PF.F, TD.PR.S, TD.PR.T, TD.PR.Y and TD.PR.Z

Issue Comments

BIP.PR.B Settles Better than Expected On Anemic Volume

Brookfield Infrastructure has announced:

the completion of its previously announced issue of Cumulative Class A Preferred Limited Partnership Units, Series 3 (“Series 3 Preferred Units”) in the amount of $125,000,000. The offering was underwritten by a syndicate led by RBC Capital Markets, CIBC, Scotiabank, and TD Securities Inc.

Brookfield Infrastructure issued 5,000,000 Series 3 Preferred Units at a price of $25.00 per unit, for total gross proceeds of $125,000,000. Holders of the Series 3 Preferred Units will be entitled to receive a cumulative quarterly fixed distribution yielding 5.50% annually for the initial period ending December 31, 2020. 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 4.53%, and (ii) 5.50%. The Series 3 Preferred Units will commence trading on the Toronto Stock Exchange this morning under the ticker symbol BIP.PR.B.

BIP.PR.B is a FixedReset, 5.50%+453M550 (Interest + ROC), announced December 1. The issue traded 113,268 shares today (consolidated exchanges) in a range of 24.35-58 before closing at 24.35-40, 8×40.

Given that the TXPL index is down 6.37% to December 8 from its December 1 level, the issue actually performed a little better than expected; but it remains to be seen how much of that is due to underwriter support. I’d have more confidence in the level if the volume was higher.

With some trepidation I am including this issue in the HIMIPref™ FixedReset subindex rather than the Interest-Bearing subindex, since I feel that the defining characteristic of the issue is its dividend formula rather than its dividend taxation status. I might change my mind later!

Vital statistics are:

BIP.PR.B FixedReset YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-12-08
Maturity Price : 22.92
Evaluated at bid price : 24.35
Bid-YTW : 5.61 %
Issue Comments

PWF.PR.P To Be Extended

Power Financial Corporation has announced:

that it does not intend to exercise its right to redeem all or part of the currently outstanding 11,200,000 Non-Cumulative 5-Year Rate Reset First Preferred Shares, Series P (the “Series P shares”) on January 31, 2016. As a result, subject to certain conditions, the holders of the Series P shares have the right to convert all or part of their Series P shares, on a one-for-one basis, into Non-Cumulative Floating Rate First Preferred Shares, Series Q (the “Series Q shares”) on February 1, 2016 (the “Conversion Date”) in accordance with the prospectus supplement dated June 18, 2010.

Holders of Series P shares who do not exercise their right to convert their Series P shares into Series Q shares on the Conversion Date will retain their Series P shares.

The dividend rate applicable to the Series P shares for the 5-year period from February 1, 2016 to January 31, 2021, and the dividend rate applicable to the Series Q shares for the 3-month period from February 1, 2016 to April 30, 2016, will be determined and announced by way of a news release on January 4, 2016.

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

The foregoing conversion rights are subject to the conditions that: (i) if Power Financial determines that there would remain outstanding on the Conversion Date less than 1,000,000 Series Q shares, after having taken into account all Series P shares tendered for conversion into Series Q shares, then holders of Series P shares will not be entitled to convert their shares into Series Q shares, and (ii) alternatively, if Power Financial determines that there would remain outstanding on the Conversion Date less than 1,000,000 Series P shares, after having taken into account all Series P shares tendered for conversion into Series Q shares, then all remaining Series P shares will automatically be converted into Series Q shares without the consent of the holders on a one-for-one basis on the Conversion Date.

In either case, Power Financial will give written notice to that effect to the registered holder of Series P shares no later than January 25, 2016.

No surprises here! PWF.PR.P is a FixedReset, 4.40%+160, that commenced trading 2010-6-29 after being announced 2010-6-17.

Issue Comments

DC.PR.C: Coercive Offer Attracts Wider Notice

Assiduous Readers will recall that I harshly criticized Dundee’s recent proposal in the post DC.PR.C: Coercive Exchange Offer.

Now Niall McGee of the Globe has penned a piece titled Dundee faces backlash over new share-exchange plan:

Dundee’s share-exchange plan has raised the ire of a prominent fund manager, a high-profile shareholder rights group and – according to multiple sources – has caused consternation among the company’s institutional shareholder base.

Dundee is under financial pressure, having lost more than $400-million in the year to date, primarily due to heavy exposure to the cratering resource sector. Last week, the company unveiled a proposal designed to take pressure off its balance sheet.

Mr. McGee was kind enough to quote me in the article:

James Hymas, president of Hymas Investment Management Inc., says these payments, which are roughly eight times higher than average, represent “a huge conflict of interest” for brokers and are “coercive” to shareholders.

“You get money for voting yes. But if you vote no and the offer goes through anyway, then you get squat. That makes it coercive,” Mr. Hymas said. He runs a preferred share mutual fund and publishes a daily commentary on preferred shares. Neither he nor his clients have any position in Dundee’s preferred shares.

And a regulators’ puppet group has joined the fray:

“These types of payments are deeply troubling,” said Neil Gross, executive director of FAIR Canada, an independent shareholder rights advocacy firm.

“It’s not just that they give advisers a financial incentive to bias their advice. It’s that they do it so overtly – revealing that the financial industry still hasn’t internalized the principle that conflicts of interest are incompatible with investment professionalism.”

It always makes me laugh to hear those guys talk about conflicts of interest!

You can make up your own minds about Dundee’s defence:

Dundee chief executive officer David Goodman defended the proposal.

“I believe our structure is fair. It’s transparent. It’s in the best interest of Dundee Corporation and it’s consistent with industry custom,” he said in an interview.
…
Mr. Goodman says one of the reasons the payments are necessary is that Dundee needs brokers to get the word out about the vote. He also said he has no concerns about advisers giving biased advice in this instance.

“I have a very high appreciation for the integrity and value that the financial advisers provide and I don’t believe that the receipt of a solicitation fee for their services is going to compromise their ability to properly advise their clients.”

We’ll see how it goes!

Issue Comments

FFH.PR.I To Reset At 3.708%; Potential Conversion to FFH.PR.J

Fairfax Financial Holdings Limited has announced:

that it has determined the fixed dividend rate on its Cumulative 5-Year Rate Reset Preferred Shares, Series I (“Series I Shares”) (TSX:FFH.PR.I) for the five years commencing January 1, 2016 and ending December 31, 2020 . The fixed quarterly dividends on the Series I Shares during that period, if and when declared, will be paid at an annual rate of 3.708% (Cdn. $0.23175 per share per quarter).

Holders of Series I Shares have the right, at their option, exercisable not later than 5:00pm ( Toronto time) on December 16, 2015 , to convert all or part of their Series I Shares, on a one-for-one basis, into Cumulative Floating Rate Preferred Shares, Series J (the “Series J Shares”), effective December 31, 2015 . The quarterly floating rate dividends on the Series J Shares will be paid at an annual rate, calculated for each quarter, of 2.85% over the annual yield on three month Government of Canada treasury bills. The actual quarterly dividend rate in respect of the January 1, 2016 to March 30, 2016 dividend period for the Series J Shares will be 0.82587% (3.34936% on an annualized basis) and the dividend for such dividend period, if and when declared, will be Cdn. $0.20647 per share, payable on March 30, 2016 .

Holders of Series I Shares are not required to elect to convert all or any part of their Series I Shares into Series J Shares.

As provided in the share conditions of the Series I Shares, (i) if Fairfax determines that there would be fewer than 1,000,000 Series I Shares outstanding after December 31, 2015 , all remaining Series I Shares will be automatically converted into Series J Shares on a one-for-one basis effective December 31, 2015 ; and (ii) if Fairfax determines that there would be fewer than 1,000,000 Series J Shares outstanding after December 31, 2015 , no Series I Shares will be permitted to be converted into Series J Shares. There are currently 12,000,000 Series I Shares outstanding.

The Toronto Stock Exchange (“TSX”) has conditionally approved the listing of the Series J Shares effective upon conversion. Listing of the Series J Shares is subject to Fairfax fulfilling all the listing requirements of the TSX and, upon approval, the Series J Shares will be listed on the TSX under the trading symbol “FFH.PR.J”.

The extension of FFH.PR.I is not a surprise, given that it’s trading at about 13.00.

FFH.PR.I commenced trading 2010-10-5 as a FixedReset, 5.00%+285, after being announced 2010-9-27. The issue was not only upsized shortly after the announcement, but the greenshoe was fully exercised.

The new rate of 3.708% is therefore a dividend reduction of about 26%.

As noted in the release, the deadline for notifying the company of a desire to convert to FFH.PR.J is 5:00 p.m. (EST) on December 16, 2015, (a Wednesday) but brokerages will normally have an internal deadline a day or two prior to that. If you miss the brokerage deadline, they’ll probably submit the request for you if you grovel, but if you miss the company deadline, that’s it.

At this point, market conditions are such that I expect FFH.PR.J to trade significantly below FFH.PR.I. FFH.PR.I closed today at a bid of 16.60 and the average implied 3-month bill rate of other junk issues is -0.48%. Assuming this relationship holds, the estimated trading price for the FFH.PR.J is 15.28, about 8% lower. Rather than convert and thereby get 1.00 shares of the FFH.PR.J, it seems likely (but by no means guaranteed!) that it will be better to execute trades in the marketplace after FFH.PR.J commences trading and thereby get (maybe!) 1.09 shares of the new FFH.PR.J.

So, I expect to recommend that holders of GWO.PR.N hang on to them, but I will make a formal recommendation on December 11, just in time for PrefLetter.

Issue Comments

GWO.PR.N To Reset To 2.176%

Great-West Lifeco has announced:

the dividend rates for its Non-Cumulative 5-Year Rate Reset First Preferred Shares, Series N (the “Series N Shares”) and for its Non-Cumulative Floating Rate First Preferred Shares, Series O (the “Series O Shares”).

The annual fixed dividend rate for the five-year period commencing on December 31, 2015 and ending on December 30, 2020 applicable to any Series N Shares that remain outstanding on December 31, 2015 will be 2.176% per annum (or $0.136 per Series N Share per quarter), which rate is equal to the sum of the Government of Canada Yield (as defined in the Series N Share Conditions) on December 1, 2015 plus 1.30%.

The floating dividend rate for the period commencing on December 31, 2015 and ending on March 30, 2016 applicable to any Series O Shares issued on December 31, 2015 will be 1.742% per annum (or $0.108578 per Series O Share). The 1.742% annual rate is equal to the sum of the T-Bill Rate (as defined in the Series O Share Conditions) on December 1, 2015 plus 1.30%.

Beneficial owners of Series N Shares who wish to exercise their right to convert their Series N Shares into Series O Shares on a one-for-one basis should communicate as soon as possible with their brokers or other intermediaries through whom they hold their Series N Shares and ensure that they follow their instructions so as to meet the 5:00 p.m. (eastern time) December 16, 2015 deadline for exercising such right. The news release announcing such conversion right was issued on November 5, 2015 and can be viewed on Great-West Lifeco’s website.

The Series N Shares and the Series O Shares have not been and will not be registered under the United States Securities Act of 1933, as amended, or any state securities laws. The Series N Shares and the Series O Shares may not be offered, sold or delivered in the United States and this release does not constitute an offer to sell or a solicitation of an offer to buy any Series N Shares or Series O Shares within the United States.

The extension of GWO.PR.N was announced on November 6.

GWO.PR.N commenced trading 2010-11-23 as a FixedReset, 3.65%+130, after being announced 2010-11-15. The issue was met with disfavour and there was an inventory clearance sale closing 2010-12-3.

The new rate of 2.176% is therefore a dividend reduction of just over 40%. Ouch!

As noted in the release, the deadline for notifying the company of a desire to convert to the FloatingReset Series O is 5:00 p.m. (EST) on December 16, 2015, (a Wednesday) but brokerages will normally have an internal deadline a day or two prior to that. If you miss the brokerage deadline, they’ll probably submit the request for you if you grovel, but if you miss the company deadline, that’s it.

At this point, market conditions are such that I expect the FloatingReset to trade significantly below GWO.PR.N. GWO.PR.N closed today at a bid of 13.35 (!) and the average implied 3-month bill rate of other investment-grade issues is -0.58%. Assuming this relationship holds, the estimated trading price for the new FloatingReset is 11.82, about 11% lower. Rather than convert and thereby get 1.00 shares of the new FloatingReset, it seems likely (but by no means guaranteed!) that it will be better to execute trades in the marketplace after the new FloatingReset commences trading and thereby get (maybe!) 1.13 shares of the new FloatingReset

So, I expect to recommend that holders of GWO.PR.N hang on to them, but I will make a formal recommendation on December 11, just in time for PrefLetter.

Note that since the issue is issued by an insurance holding company and is not convertible into common at the option of the issuer, I consider it to have a “Deemed Maturity” 2025-1-31 (this date may change in the future). This is due to my belief that OSFI will eventually extend the Non-Viability Contingent Capital (NVCC) rules to insurers and insurance holding companies. There is a brief explanation of this on the PrefLetter website (under the heading “DeemedRetractibles”) and with more detailed argument and progress reports on international negotiations in every edition of PrefLetter.

I will note that the market does not share my views regarding future application of the NVCC rules insurers and insurance issues trade very similarly to perpetuals.