Category: Issue Comments

Capital Power Corporation has announced:

that it has notified the registered shareholder of its Cumulative 5-Year Rate Reset Preference Shares, Series 1 (Series 1 Shares) (TSX: CPX.PR.A) of the Conversion Privilege and Dividend Rate Notice.

Beginning on December 1, 2015 and ending on December 16, 2015 holders of the Series 1 Shares will have the right to elect to convert any or all of their Series 1 Shares into an equal number of Cumulative Floating Rate Preference Shares, Series 2 (Series 2 Shares).

If Capital Power does not receive an Election Notice from a holder of Series 1 Shares during the time fixed therefor, then the Series 1 Shares shall be deemed not to have been converted (except in the case of an Automatic Conversion). Holders of the Series 1 Shares and the Series 2 Shares will have the opportunity to convert their shares again on December 31, 2020, and every five years thereafter as long as the shares remain outstanding.

Effective December 31, 2015, the Annual Fixed Dividend Rate for the Series 1 Shares was set for the next five year period at 3.06%. Effective December 31, 2015, the Floating Quarterly Dividend for the Series 2 Shares was set for the first Quarterly Floating Rate Period (being the period from and including December 31, 2015, to but excluding March 31, 2016) at 2.67%. The Floating Quarterly Dividend Rate will be reset every quarter.

The Series 1 Shares are issued in “book entry only” form and, as such, the sole registered holder of the Series 1 Shares is the Canadian Depository for Securities Limited (CDS). All rights of beneficial holders of Series 1 Shares must be exercised through CDS or the CDS participant through which the Series 1 Shares are held. The deadline for the registered shareholder to provide notice of exercise of the right to convert Series 1 Shares into Series 2 Shares is 3:00 p.m. (MST) / 5:00 p.m. (EST) on December 16, 2015. Any notices received after this deadline will not be valid. As such, holders of Series 1 Shares who wish to exercise their right to convert their shares should contact their broker or other intermediary for more information and it is recommended that this be done well in advance of the deadline in order to provide the broker or other intermediary with time to complete the necessary steps.

After December 16, 2015, (i) if Capital Power determines that there would remain outstanding on December 31, 2015, less than 1,000,000 Series 1 Shares, all remaining Series 1 Shares will be automatically converted into Series 2 Shares on a one-for one basis effective December 31, 2015; or (ii) if Capital Power determines that there would remain outstanding after December 31, 2015, less than 1,000,000 Series 2 Shares, no Series 1 Shares will be permitted to be converted into Series 2 Shares effective December 31, 2015. There are currently 5,000,000 Series 1 Shares outstanding.

The Toronto Stock Exchange (TSX) has conditionally approved the listing of the Series 2 Shares effective upon conversion. Listing of the Series 2 Shares is subject to the Capital Power fulfilling all the listing requirements of the TSX and upon approval, the Series 2 Shares will be listed on the TSX under the trading symbol CPX.PR.B.

CPX.PR.A is a FixedReset, originally 4.60%+217, that commenced trading 2010-12-16 after being announced 2010-12-1. Thus, we observe a 33% reduction of the dividend.

As noted in the release, the deadline for notifying the company of a desire to convert to the FloatingReset CPX.PR.B 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 CPX.PR.B to trade significantly below CPX.PR.A. CPX.PR.A closed today at 10.15 (!) and the average implied 3-month bill rate of other junk issues is -0.70%. Assuming this relationship holds, the estimated trading price for CPX.PR.B is 8.69, about 15% lower. Rather than convert and thereby get 1.00 shares of CPX.PR.B, it seems likely (but by no means guaranteed!) that it will be better to execute trades in the marketplace after CPX.PR.B commences trading and thereby get (maybe!) 1.16 shares of CPX.PR.B.

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

Dundee Corporation has announced [although not yet on their website]:

that it is proposing a preferred share exchange transaction pursuant to which each of its First Preference Shares, Series 4 par value $17.84 (the “Series 4 Preferred Shares”) would be exchanged for 0.7136 of a First Preference Share, Series 5 par value $25.00 (the “Series 5 Preferred Shares”) pursuant to a statutory plan of arrangement under the Business Corporations Act (Ontario) (the “Arrangement” or the “Transaction”).

The Company has called a special meeting (the “Meeting”) of the holders of Series 4 Preferred Shares (the “Series 4 Preferred Shareholders”) to consider the Arrangement for 9:00 a.m. (Toronto time) on January 7, 2016, at the offices of Dundee Corporation, 1 Adelaide St. East, Suite 2100, Toronto, Ontario, Canada, M5C 2V9. The Management Information Circular of the Company (the “Circular”) for the Meeting will be mailed to the Series 4 Preferred Shareholders and filed on SEDAR in due course.

The Company has engaged GMP Securities L.P. (“GMP”) as its financial advisor and dealer manager, and Shorecrest Group Ltd. as its proxy advisor and paying agent in connection with the Transaction.

The board of directors of Dundee (the “Board of Directors”) has unanimously determined that the Arrangement is fair to the Series 4 Preferred Shareholders (as well as to the holders of all other classes and series of shares) and is in the best interests of Dundee, and unanimously recommends that the Series 4 Preferred Shareholders vote FOR the Arrangement Resolution (as defined below). The determination of the Board of Directors is based on various factors, including a fairness opinion of GMP.

The Company has received substantial support for the Arrangement based on confidential consultations with representatives of significant holders of the Series 4 Preferred Shares. To be effective, the Arrangement must be approved by a resolution (the “Arrangement Resolution”) passed at the Meeting by not less than two-thirds (66 2/3%) of the votes validly cast by the Series 4 Preferred Shareholders present in person or represented by proxy.

The completion of the Arrangement is conditional on, among other things, the holders of the Series 4 Preferred Shares approving the Arrangement, the approval of the Toronto Stock Exchange, dissent rights not having been exercised with respect to more than 10% of the issued and outstanding Series 4 Preferred Shares, any required lender approvals and other customary conditions.

Series 4 Preferred Shareholders who vote in favour of the Arrangement and their brokers may be entitled to certain consent payments, depending on when their vote is received among other things. See “Consent Payments” below. Series 4 Preferred Shareholders are encouraged to vote regardless of how many Series 4 Preferred Shares they own. Series 4 Preferred Shareholders should follow the instructions provided on the voting instruction form to be provided by their broker, investment dealer, bank, trust company or other intermediary to ensure their vote is counted at the Meeting.

Details of the Transaction

Reasons for the Arrangement

By recommending the Arrangement Resolution to the Series 4 Preferred Shareholders, the Board of Directors believes the Arrangement Resolution provides a number of anticipated benefits to the Series 4 Preferred Shareholders, including, without limitation, the following:

(a) the Series 5 Preferred Shares will have a dividend rate of 6% per annum, which is greater than the current dividend rate on the Series 4 Preferred Shares of 5% per annum;

(b) each Series 4 Preferred Share (each having a par value and redemption price of $17.84 per Series 4 Preferred Share) will be exchanged for 0.7136 of a Series 5 Preferred Share, which will adjust the par value and redemption price to $25.00 per Series 5 Preferred Share, aligning with standard market convention;

(c) the Series 5 Preferred Shares will be redeemable by the Company at its option by the payment of an amount in cash for each Series 5 Preferred Share so redeemed as outlined below. Currently, the Series 4 Preferred Shares are redeemable by the Company at its option at par, together with any accrued and unpaid dividends to but excluding the redemption date. As a result, until June 30, 2019, the Company will not be able to redeem the Series 5 Preferred Shares at its option unless it pays a redemption premium over par, and the Series 5 Preferred Shares will not be callable at the par value of $25.00 per share until the date at which the holder of a Series 5 Preferred Share may require the Company to redeem such share at $25.00 per share; and

(d) the Series 4 Preferred Shareholders will have the opportunity to receive the Consent Payments outlined below.

The Board of Directors also believes that the Arrangement Resolution provides a number of anticipated benefits to the Company and indirect benefits to the holders of the other classes (and series) of shares of the Company as follows:

(a) by extending the retraction date of the Series 4 Preferred Shares through the issuance of the Series 5 Preferred Shares from June 30, 2016 to June 30, 2019, the Company can repurpose up to $107,040,000 that would have been needed should the holders have required the Company to redeem the Series 4 Preferred Shares on or after June 30, 2016 at the par price of $17.84 per Series 4 Preferred Share;

(b) the Company will maintain financial flexibility for future opportunistic business developments; and

(c) the Series 5 Preferred Shares will continue to be serviceable at an attractive cost of capital.

Series 5 Preferred Shares

The rights, privileges, restrictions and conditions of the Series 5 Preferred Shares will be similar to those of the Series 4 Preferred Shares, except that:
•the cumulative dividend rate will be 6% per annum, being an annual dividend of $1.50 per Series 5 Preferred Share, or a quarterly dividend of $0.3750 per Series 5 Preferred Share. This is greater than the current cumulative dividend rate on the Series 4 Preferred Shares of 5% per annum;
•the Series 5 Preferred Shares will be redeemable by Dundee by the payment of an amount in cash for each Series 5 Preferred Share so redeemed of (i) $25.75 per share if redeemed prior to June 30, 2017, (ii) $25.50 per share if redeemed on or after June 30, 2017 and prior to June 30, 2018, (iii) $25.25 per share if redeemed on or after June 30, 2018 and prior to June 30, 2019, and (iv) $25.00 per share if redeemed on or after June 30, 2019, plus, in each case, an amount equal to all accrued and unpaid dividends thereon to but excluding the date fixed for redemption. Currently, the Series 4 Preferred Shares are redeemable by Dundee at par, together with any accrued and unpaid dividends to but excluding the redemption date; and
•the date after which holders may require Dundee to redeem the Series 5 Preferred Shares for cash and before which Dundee may convert the Series 5 Preferred Shares into Dundee’s Class A Subordinate Voting Shares will be June 30, 2019, as opposed to June 30, 2016, which is the date after which holders of Series 4 Preferred Shares may require Dundee to redeem the Series 4 Preferred Shares for cash or before which Dundee may convert the Series 4 Preferred Shares into Dundee’s Class A Subordinate Voting Shares.

Dividends

Series 4 Preferred Shareholders as at the close of business on the anticipated dividend record date of December 17, 2015 are expected to receive a final dividend in respect of their Series 4 Preferred Shares in the amount of $0.2230 per share, which is expected to be paid on the dividend payment date of December 31, 2015. After that, if the Arrangement is completed, holders of Series 5 Preferred Shares will be entitled to receive a quarterly dividend of $0.3750 per Series 5 Preferred Share in accordance with the terms of the Series 5 Preferred Shares.

Series 4 Preferred Shareholders are urged to carefully review the Circular once it is available as it will contain further details on the terms and conditions of the Arrangement, including the Series 5 Preferred Shares.

Consent Payments

If the Arrangement is completed, Dundee will make certain payments (“Consent Payments”) to the Series 4 Preferred Shareholders and their brokers, investment dealers, banks, trust companies or other intermediaries (collectively, “Intermediaries”), subject to certain procedures and conditions which will be outlined in the Circular:
•a Consent Payment of an aggregate of $0.4014 per Series 4 Preferred Share (the “Early Consent Payment”) (representing 2.25% of the par value of the Series 4 Preferred Shares) will be paid by Dundee in respect of each Series 4 Preferred Share that is voted FOR the Arrangement Resolution on or prior to December 31, 2015 (the “Early Deadline”), provided such vote is valid and is not subsequently withdrawn. The Intermediary will be entitled to receive and retain $0.1784 of such amount (representing 1.00% of the par value of the Series 4 Preferred Shares) and the holder of the Series 4 Preferred Share will be entitled to receive $0.2230 of such amount from its Intermediary (representing 1.25% of the par value of the Series 4 Preferred Shares); and
•a Consent Payment of $0.2676 per Series 4 Preferred Share (the “Later Consent Payment”) (representing 1.50% of the par value of the Series 4 Preferred Shares) will be paid by Dundee in respect of each Series 4 Preferred Share that is voted FOR the Arrangement Resolution after the Early Deadline but on or prior to the proxy cut off of 9:00 a.m. (Toronto time) on January 5, 2016, provided such vote is valid and is not subsequently withdrawn. The Intermediary will be entitled to receive and retain $0.0892 of such amount (representing 0.50% of the par value of the Series 4 Preferred Shares) and the holder of the Series 4 Preferred Share will be entitled to receive $0.1784 of such amount from its Intermediary (representing 1.00% of the par value of the Series 4 Preferred Shares).

DC.PR.C was last mentioned on PrefBlog when it was created through conversion of DC.PR.A. It is tracked by HIMIPref™ but relegated to the Scraps index on credit concerns.

Woo-hoo, how about them consent payments, eh? I’m sure glad that the regulators are considering eliminating mutual fund trailers, thus ensuring complete objectivity by advisors! Consent payments to advisors are always suspect, and when they reach the proportions of this offer (1% of par to the advisor, for early tender) become disgraceful and coercive. In addition, the 1.25% of par to holders voting in favour is yet another disgrace. Yes, it’s legal. That doesn’t mean I have to approve.

It will be recalled that Dundee discontinued its credit rating in 2012 [prior to the DC.PR.A conversion to DC.PR.C]. I do not generally track unrated preferred issues, but the issue that I presume will result from this conversion will be tracked, as I consider it to be grandfathered.

I expect the conversion offer will succeed due to the high consent payments and increased dividend; although some [such as myself] might say that a mere 100bp increase to go from a retractible issue to a perpetual would be pretty skinny for investment-grade and is basically laughable considering that Dundee isn’t just junk, it’s unrated junk. As support for my expectation, I will point out that the issue traded 39,456 shares today in a range of 16.90-19 before closing at 17.13-20, 98×36. The volume is very good for this issue; the price is well above recent averages.

The touted 6% yield isn’t really all that hot. Junk Straight Perpetuals are rare, but the Weston issues trade at a significant [but not huge] discount to par [which is good, remember! Calls are Bad!] to yield in the 5.60-70% range, so you’re only getting 30-40bp of spread for an unrated issue from a lesser credit. In addition, the par call commences June 30, 2019, which isn’t much of a lock-out period.

I don’t like this. I think holders should sell; perhaps not immediately, but wait for the news of the consent payments to get out, together with the headline coupon number. There was a bump in price today; maybe there will be more once the proceeds from tax-loss selling need to find a home.

Update, 2015-11-25: As pointed out in the comments by Assiduous (and Careful!) Readers SafetyInNumbers and prefman, the issue is actually retractible in about three-and-a-half years; it is not a perpetual, as I originally mistakenly said.

So what’s the yield? For every DC.PR.C share converted, the holder will get 0.7136 new shares, which will pay 6% quarterly; there will also be a Consent Payment of $0.4014 (if tendered early), of which $0.1784 will go to the advisor as a trailer solicitation fee and $0.2230 will be retained by the rightful owner. $25.00 * 0.7136 = $17.84, so assuming that fair value of DC.PR.C is its retraction price of $17.84 means that

Plugging in the numbers on the Yield-to-Call Calculator results in a conclusion that the company is paying 6.53% for funds, of which the holder gets 6.21%. These humbers are dependent upon the current price we use for DC.PR.C, of course; I have used its pare value of $17.84, but this does not account for accumulated dividend, which it should since I have also used the current date as the purchase date.

Using 2015-12-31 as the purchase date (when payments for DC.PR.C will stop and payments for the new issue will commence accumulating, assuming the deal goes through) result in the holder getting 6.40% compared to the company’s cost of 6.73%.

This is the equivalent of 8.32% interest for three-and-a-half year money! Rich indeed, but the question is – how much should the company be paying given its credit quality? I will note that DC.PR.B, FixedReset, 5.688%+410 was bid yesterday at 17.75 to yield 7.50%, while its Strong Pair DC.PR.D, FloatingReset+410 was bid at 13.61 to yield 8.50%.

AltaGas Ltd. has announced:

that it has closed its previously announced public offering of 8,000,000 Cumulative Redeemable 5-Year Minimum Rate Reset Preferred Shares, Series I (the “Series I Preferred Shares”), at a price of $25.00 per Series I Preferred Share (“the Offering”) for aggregate gross proceeds of $200 million.

The Offering was first announced on November 12, 2015 when AltaGas entered into an agreement with a syndicate of underwriters co-led by RBC Capital Markets, BMO Capital Markets and Scotiabank.

Net proceeds will be used to reduce outstanding indebtedness and for general corporate purposes.

The Series I Preferred Shares will commence trading today on the Toronto Stock Exchange (“TSX”) under the symbol ALA.PR.I.

ALA.PR.I is a FixedReset, 5.25%+419M525, announced November 12. The issue will be tracked by HIMIPref™ but relegated to the Scraps index on credit concerns.

The issue traded 844,179 shares today (consolidated exchanges) in a range of 24.97-20 before closing at 25.05-07, 10×40. Vital statistics are:

The Implied Volatility fit isn’t very good …

Click for Big

Quadravest has announced:

Financial 15 Split Corp. (the “Company”) is pleased to announce it has filed a preliminary short form prospectus in each of the provinces of Canada with respect to an offering of Preferred Shares and Class A Shares of the Company. The offering will be co-led by National Bank Financial Inc., CIBC, RBC Capital Markets, Scotia Capital Inc., and will also include BMO Capital Markets, GMP Securities L.P., Canaccord Genuity Corp., Dundee Securities, Raymond James, Desjardins Securities Inc., Mackie Research Capital Corporation and Manulife Securities Incorporated.

The Preferred Shares will be offered at a price of $10.00 per Preferred Share to yield 5.25% and the Class A Shares will be offered at a price of $9.90 per Class A Share to yield 15.24%. The closing price on the TSX of each of the Preferred Shares and the Class A Shares on November 18, 2015 was $10.07 and $10.38, respectively.

Since inception of the Company, the aggregate dividends paid on the Preferred Shares have been $6.28 per share and the aggregate dividends paid on the Class A Shares have been $14.12 per share, for a combined total of $20.40. All distributions to date have been made in tax advantage eligible Canadian dividends or capital gains dividends. The net proceeds of the offering will be used by the Company to invest in an actively managed, high quality portfolio consisting of 15 financial services companies made up of Canadian and U.S. issuers as follows:

Bank of Montreal	National Bank of Canada	Bank of America Corp.
The Bank of Nova Scotia	Manulife Financial Corporation	Citigroup Inc.
Canadian Imperial Bank of Commerce	Sun Life Financial Services of Canada Inc.	Goldman Sachs Group Inc.
Royal Bank of Canada	Great-West Lifeco Inc.	JP Morgan Chase & Co.
The Toronto-Dominion Bank	CI Financial Corp.	Wells Fargo & Co.

The Company’s investment objectives are:
Preferred Shares:
i. to provide holders of the Preferred Shares with fixed, cumulative preferential monthly cash dividends currently in the amount of 5.25% annually, to be set by the Board of Directors annually subject to a minimum of 5.25% until 2020; and
ii. on or about the termination date, currently December 1, 2020 (subject to further 5 year extensions thereafter), to pay the holders of the Preferred Shares $10.00 per Preferred Share.

Class A Shares:
i. to provide holders of the Class A Shares with regular monthly cash dividends in an amount to be determined by the Board of the Directors; and
ii. to permit holders to participate in all growth in the net asset value of the Company above $10 per Unit, by paying holders on or about the termination date of December 1, 2020 (subject to further 5 year extensions thereafter) such amounts as remain in the Company after paying $10 per Preferred Share.

The sales period of this overnight offering will end at 9:00 a.m. EST on November 20, 2015.

The Net Asset Value Per Unit on November 18 is $17.05 and the new units are being offered at 19.90. Geez, the SplitShare business is nice when it works!

The last time FTN.PR.A got bigger was December 1, 2014, and there are currently slightly over 16.5-million units outstanding. Daily volume is better than most operating issues:

Click for Big

Click for Big

Update, 2015-11-20 : A very successful offering!

Financial 15 Split Corp. (the “Company”) is pleased to announce it has completed the overnight marketing of up to 3,335,474 Preferred Shares and up to 2,502,700 Class A Shares of the Company. Total proceeds of the offering are expected to be approximately $58.1 million.

Update, 2015-12-4: It closed:

Financial 15 Split Corp. (the “Company”) is pleased to announce it has completed the overnight offering of 3,335,474 Preferred Shares and 2,502,700 Class A Shares of the Company. Total proceeds of the offering were $58.1 million, bringing the Company’s net assets to approximately $334.7 million. The shares will trade on the Toronto Stock Exchange under the existing symbols of FTN.PR.A (Preferred Shares) and FTN (Class A shares).

BCE Inc. has announced:

BCE Inc. will, on December 1, 2015, continue to have Cumulative Redeemable First Preferred Shares, Series R (“Series R Preferred Shares”) outstanding if, following the end of the conversion period on November 17, 2015, BCE Inc. determines that at least one million Series R Preferred Shares would remain outstanding. In such a case, as of December 1, 2015, the Series R Preferred Shares will pay, on a quarterly basis, as and when declared by the Board of Directors of BCE Inc., a fixed cash dividend for the following five years that will be based on a fixed rate equal to the product of: (a) the average of the yields to maturity compounded semiannually, determined on November 10, 2015 by two investment dealers selected by BCE Inc., that would be carried by non-callable Government of Canada bonds with a 5-year maturity (the “Government of Canada Yield”), multiplied by (b) a percentage rate determined by BCE Inc. (the “Selected Percentage Rate”) for such period. The “Selected Percentage Rate” determined by BCE Inc. for such period is 390%. The “Government of Canada Yield” is 1.059%. Accordingly, the annual dividend rate applicable to the Series R Preferred Shares for the period of five years beginning on December 1, 2015 will be 4.130%.

Five years ago the rate was reset to 4.49% and there was no conversion into the RatchetRate.

According to the conversion notice issued by BCE (emphasis added):

This letter and the attached Notice of Conversion Privilege have been sent to the holders of BCE Inc. Cumulative Redeemable First Preferred Shares, Series R (the “Series R Preferred Shares”).

Beginning on October 16, 2015 and ending on November 17, 2015, holders of Series R Preferred Shares will have the right to choose one of the following options with regards to their shares:
1. To retain any or all of their Series R Preferred Shares and continue to receive a fixed quarterly dividend; or
2. To convert, on a one-for-one basis, any or all of their Series R Preferred Shares into BCE Inc. Cumulative Redeemable First Preferred Shares, Series Q (the “Series Q Preferred Shares”) and receive a floating monthly dividend.

Effective December 1, 2015, the fixed dividend rate for the Series R Preferred Shares will be set for a five-year period as explained in more detail in paragraph 5 of the attached Notice of Conversion Privilege. Should you wish to continue receiving a fixed quarterly dividend for the five-year period beginning December 1, 2015, you do not need to take any action with respect to this notice. However, should you wish to receive a floating monthly dividend, you must elect to convert your Series R Preferred Shares into Series Q Preferred Shares as explained in more detail in the attached Notice of Conversion Privilege.

In order to convert your shares, you must exercise your right of conversion during the conversion period, which runs from October 16, 2015 to November 17, 2015, inclusively. We would like to draw your attention to the fact that should Series Q Preferred Shares be issued following the conversion on December 1, 2015 of Series R Preferred Shares, the Series Q Preferred Shares so issued will begin trading under the symbol BCE.PF.Q. This is not to be confused with BCE Inc.’s Cumulative Redeemable First Preferred Shares, Series AQ which currently trade under the symbol BCE.PR.Q. Should any Series R Preferred Shares remain outstanding after December 1, 2015, they will continue to trade under the symbol BCE.PR.R.

Holders of both the Series R Preferred Shares and the Series Q Preferred Shares will have the opportunity to convert their shares again on December 1, 2020, and every five years thereafter as long as the shares remain outstanding.

Should you require advice as to whether to exercise your conversion privilege, please contact your investment advisor.

If you cannot locate your share certificate or have any questions about the steps to be followed, please contact CST Trust Company at 1-800-561-0934, the transfer agent and registrar for BCE Inc.’s preferred shares.

Please see the attached Notice of Conversion Privilege for further details.

So, there are two things to note very carefully: first, the deadline for notifying the company of an intent to convert is November 17, Tuesday, and not only that, but brokers will generally have earlier internal deadlines so you’ll have to act quickly if you want to convert! Second, the symbol will be BCE.PF.Q – rather confusing, really, but the company made a mistake when converting the BAF.PR.E issue into a BCE issue in September 2014 and it’s too late to fix it.

The conversion notice itself explains the mechanics of how RatchetRate preferreds work, but includes the following important point:

The Designated Percentage for the month of December 2015 will be 80% so that the annual floating dividend rate for the month of December 2015 will be equal to 80% of Prime.

All other RatchetRate preferreds are paying 100% of prime (since they’ve been priced so far below par for so long), and at the maximum rate of change (which is expected to be effective), it will be five months before the new issue’s dividend finally adjusts. This means that the price of 15.60, which is the logical expected trading price for the new issue, will probably not actually be attained until late Spring – until then, a price lower than 15.60 for the RatchetRate should be expected.

If we look at the implied break-even prime rates for the various FixedFloater / Ratchet strong pairs while assuming that the new RatchetRate will, if issued, eventually trade at 15.60 (the approximate level where other RatchetRates are trading), we can draw the following relationships:

Click for Big

Clearly, the implied rate of 2.99% for this pair is lower than the other pairs and is more likely to increase than decrease. It is unreasonable to assume that the price of the RatchetRate will change, because there are lots of these trading from the same issuer at about the level assigned, of 15.60. Therefore, it is more reasonable to assume a decrease in the price of BCE.PR.R, from its current bid of 16.70 to a target bid of 16.07, which will result in an implied break-even prime rate of 3.64%, which is the average of the other pairs. It will be noted, however, that this is still a higher bid than is expected for the Ratchet Rate! Therefore, I recommend retaining BCE.PR.R for those who insist on holding one element of the pair.

If you disagree with me and want to convert, remember you’ve got to act fast! The company deadline for receipt of notifications is November 17, and brokers’ internal deadlines will be earlier.

Moody’s Investors Service has announced that it:

has placed the long term ratings, Counterparty Risk Assessment and Baseline Credit Assessment of Bank of Nova Scotia (BNS, Aa2/Aa2 negative, a1) and its subsidiaries on review for downgrade, and affirmed BNS’s Prime-1 short-term deposit rating, short-term Counterparty Risk Assessment and other short term ratings.
…
Moody’s said the review was prompted by BNS having taken significant measures to increase its profitability that signal a fundamental shift away from the bank’s traditionally low risk appetite. These strategic actions are intended to enhance current profitability (BNS reports the lowest domestic net interest margin of the six largest Canadian banks), but in Moody’s view increase the prospect of future incremental credit losses when the credit cycle turns.

Over the last two years, BNS has accelerated the growth in its credit card and auto finance portfolios, in accordance with its strategic initiatives to expand these portfolios, both of which are particularly prone to rapid deterioration during an economic shock and exhibit higher defaults and loss severities than mortgage portfolios. Personal and credit cards loans grew at a CAGR of 8% over the past two years, the highest among the six large Canadian peer banks. In addition, BNS has made a series of acquisitions away from its strong domestic franchise towards higher-growth but less stable international markets.

During the review period, Moody’s will review the likelihood 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. Moody’s will also undertake further analysis of the operating environments of the regions outside of Canada where BNS operates, and the bank’s strategy and performance in these regions. Moody’s will also assess the implications of the shift in risk tolerance, balanced against the strategic plan to enhance profitability and shareholder returns.

Given the direction of the review, upward pressure on the rating is unlikely. Downward pressure will depend upon our assessment of the items noted above as the focus of our review.

Doug Alexander of Bloomberg observes:

Debtholders already weighed in on the Toronto-based bank: Scotiabank’s Canadian dollar bonds are the worst performing among Canada’s six largest lenders this year.
…
Scotiabank is rated Aa2 by Moody’s, surpassed only by Toronto-Dominion Bank’s Aa1 grade. Royal Bank of Canada, Bank of Montreal, Canadian Imperial Bank of Commerce and National Bank of Canada carry Aa3 ratings. Moody’s last downgraded Scotiabank in January 2013.
…
Canadian consumers, already saddled with record household debt, have pushed the ratio of debt to disposable income to almost double that of the nation’s last severe recession in 1992, when unemployment hit 11.7 percent. Canadian card losses typically average around 3 percent of overall balances and soar to 7.5 percent in troubled times, whereas losses from mortgages are about 0.02 percent and have reached 0.1 percent in recessions, Moody’s said.
…
Scotiabank’s Canadian dollar bonds had a year-to-date total return of 1.5 percent as of Nov. 6, trailing the returns of Canada’s other so-called Big 6 lenders.

Scotia has a raft of preferred shares currently extant which could potentially be downgraded: 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.

Great-West Lifeco Inc. has announced:

that it does not intend to exercise its right to redeem its outstanding Non-Cumulative 5-Year Rate Reset First Preferred Shares, Series N (the “Series N Shares”) on December 31, 2015. As a result, subject to certain conditions, the holders of the Series N Shares have the right to convert all or any of their Series N Shares into Non-Cumulative Floating Rate First Preferred Shares, Series O (the “Series O Shares”) on a one-for-one basis on December 31, 2015. A formal notice of the right to convert Series N Shares into Series O Shares will be sent to the registered holder of the Series N Shares in accordance with the rights, privileges, restrictions and conditions attached to the Series N Shares. Holders of Series N Shares who do not exercise their right to convert their Series N Shares into Series O Shares on such date will retain their Series N Shares.

The foregoing conversion right is subject to the conditions that: (i) if Lifeco determines that if, following such conversions, there would be less than one million Series O Shares outstanding on December 31, 2015, no Series N Shares may be converted into Series O Shares, and (ii) alternatively, if Lifeco determines that if, following such conversions, there would be less than one million Series N Shares outstanding on December 31, 2015, then all remaining Series N Shares will automatically be converted into Series O Shares on a one-for-one basis on December 31, 2015. In either case, Lifeco will give written notice to that effect to any registered holder affected by the preceding conditions on or before Thursday, December 24, 2015.

The dividend rate applicable to the Series N Shares for the five-year period commencing on December 31, 2015 and ending on December 30, 2020, and the dividend rate applicable to the Series O Shares for the three-month period commencing on December 31, 2015 and ending on March 30, 2016, will be determined on Tuesday, December 1, 2015 and written notice thereof will be given to the registered holder of the Series N Shares on that day.

Beneficial owners of Series N Shares who wish to have their Series N Shares converted into Series O Shares should communicate as soon as possible with their broker or other nominee to ensure their instructions are followed so that the registered holder of the Series N Shares can meet the deadline to exercise such conversion right, which is 5:00 p.m. (ET) on Wednesday, December 16, 2015.

Lifeco may redeem the Series N Shares, in whole or in part, on December 31, 2020 and on December 31 every five years thereafter for $25.00 per share plus declared and unpaid dividends and may redeem the Series O Shares, in whole or in part, after December 31, 2015 for $25.50 per share plus declared and unpaid dividends, unless such Series O Shares are redeemed on December 31, 2020 or on December 31 every five years thereafter, in which case the redemption price will be $25.00 per share plus declared and unpaid dividends.

No surprises here, since GWO.PR.N is a FixedReset, 3.65%+130, which commenced trading 2010-11-23 after being announced 2010-11-15. The issue was met with disfavour and there was an inventory clearance sale closing 2010-12-3.

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.