Category: Issue Comments

Standard & Poor’s has announced:

• •Standard & Poor’s Ratings Services published its “Methodology For Companies With Noncontrolling Equity Interests” criteria Jan. 5, 2016.
• •We are removing all ratings on Valener Inc. from “under criteria observation” (UCO) and lowering the corporate credit rating to ‘BB+’ from ‘BBB+’.
• •We are also lowering our global-scale preferred share rating to ‘B+’ from ‘BBB-‘, and our Canada-scale preferred share rating to ‘P-4(High)’ from ‘P-2(Low)’.
• •The criteria look at structural subordination of Valener relative to the investee company, Gaz Metro L.P., and its discretionary dividends that Valener does not control.
• •Finally, we are withdrawing all ratings at the company’s request.

Standard & Poor’s Ratings Services removed all its ratings on Montreal-based Valener Inc. from “under criteria observation” (UCO) and lowered its long-term corporate credit rating on Valener to ‘BB+’ from ‘BBB+’. The outlook is stable.

At the same time, Standard & Poor’s lowered its issue-level rating on Valener’s preferred shares to ‘B+’ from ‘BBB-‘ and its national scale rating preferred shares to ‘P-4(High)’ from ‘P-2(Low)’. Standard & Poor’s then withdrew all ratings at the company’s request.

“The downgrade reflects the implementation of the ‘Methodology For Companies With Noncontrolling Equity Interests’ criteria,” said Standard & Poor’s credit analyst Andrew Ng.

We base this on the seniority of the distributions from Gaz Metro L.P. (GMLP), which are the only material source of cash flow for the company. The difference relative to the corporate credit rating on Gaz Metro L.P. (A/Stable/–), of which Valener owns a 29% equity interest, would be four notches as per the criteria if not for the SACP’s capping at ‘bb+’ based on the factors outlined in the criteria.

In the criteria, we developed an approach to establish an SACP on companies whose only significant assets consist of one or two noncontrolling equity stakes in other unrelated corporate entities. We typically rate these entities three-to-six notches below the underlying entity.

The notching differential reflects the structural subordination of Valener relative to GMLP and its discretionary dividends that Valener does not completely control. The main factors that determine the number of notches below the SACP on the investee company include cash flow stability, corporate governance and financial policy, financial ratios, and the ability to liquidate investments.

DBRS confirmed their rating at Pfd-2(low) on December 21:

DBRS Limited (DBRS) has today confirmed Valener Inc.’s (Valener or the Company) Cumulative Rate Reset Preferred Shares, Series A rating at Pfd-2 (low) with a Stable trend. Valener’s preferred share rating is based on the credit quality of Gaz Métro Limited Partnership (the Partnership), which guarantees the First Mortgage Bonds and Senior Secured Notes (rated “A”) of Gaz Métro inc. The one-notch differential in the ratings of Valener and the Partnership reflects the structural subordination at Valener.

For the fiscal year ended September 30, 2015 (F2015), Valener’s operating cash flow continued to support its common and preferred shares dividend payments ($33.8 million and $4.4 million, respectively). The Company’s operating cash flow primarily consists of distributions from its 29% ownership in the Partnership and, to a lesser extent, distributions from its financial interest in wind farm projects. Distributions received from GMLP and the wind assets combined improved favourably to $53.5 million in F2015 from $50.4 million in F2014, driven by record results at GMLP and strong wind farm performance. The distributions from the aforementioned entities are expected to further rise in F2016 as a result of the sustained growth of GMLP’s regulated activities.

Although distributions from the Partnership could be curtailed if the viability of the Partnership were to need safeguarding, the Partnership has historically provided stable distributions to its equity holders. The Partnership has made cash distributions to its partners in an amount of over 90% of its net income, excluding non-recurring items, for most of the last 20 years.

As the Company has no bonds/debentures issued, and is not expected to issue any long-term debt in the foreseeable future, its leverage solely consists of its credit facility outstanding. As at September 30, 2015, Valener utilized approximately $120 million of the $200 million credit facility which matures on September 30, 2020. Valener’s debt-to-capital ratio was reasonable at approximately 14.3% as at September 30, 2015. Valener is expected to fund future growth investments in a prudent manner to maintain leverage within the 20% threshold. If Valener is unable to do so on a sustained basis, this could result in a negative rating action. Other key non-consolidated credit metrics have also remained supportive of the current rating category, including cash flow-to-interest at 38.8 times, cash-flow fixed coverage at 10.4 times and cash flow-to-debt at 49.7% in F2015.

Update, 2016-1-15: Valener commented:

Valener Inc. (“Valener”) (TSX: VNR) (TSX: VNR.PR.A) today announced that it has requested a withdrawal of its Standard & Poor’s (“S&P”) corporate credit rating following a methodology change that resulted in what it views as an unjustified downgrade by the rating agency.

As a result of the application of new criteria set forth by S&P when rating companies with one or two non-controlling equity interests (“NCEI”), Valener’s corporate credit rating was downgraded from BBB+ to BB+ earlier today. Upon review of the new methodology, which includes the introduction of a cap of BB+ on companies with one or two NCEI, Valener notified S&P that the resulting credit rating would not accurately take into consideration the company’s investment in Gaz Métro Limited Partnership (“Gaz Métro”), an investment grade company with a corporate credit rating of A. Also, it would fail to provide an accurate assessment of Valener’s creditworthiness, especially considering that just a few weeks ago, in December, S&P reiterated Valener’s BBB+ rating, and that there has been no change in the company’s financial situation since.

“It is Valener’s opinion that the new methodology does not accurately reflect the quality and stability of cash flows of Gaz Métro, Valener’s principal investment, and as such is unfairly punitive. What’s more, Valener is well represented on Gaz Métro’s board and has significant influence on Gaz Métro’s distributions to unitholders,” said Pierre Monahan, Chairman of Valener’s board of directors. “The downgrade attributed by S&P is purely the result of an amendment to the rating agency’s methodology, not the outcome of an event affecting Valener’s or Gaz Métro’s operations, and as such, Valener has suspended its relationship with Standard & Poor’s and has asked to have its credit rating withdrawn. We are confident that this will not affect Valener’s ability to borrow additional funds”.

Valener remains rated by DBRS, with a current corporate credit rating of BBB+.

It will be recalled that TRP.PR.C will reset to 2.263% effective January 30.

Holders of TRP.PR.C have the option to convert to FloatingResets, which will pay 3-month bills plus 154bp on the par value of $25.00. The deadline for notifying the company of the intent to convert is January 15 at 5pm EDT; but note that this is a company deadline 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 ticker for the new FloatingReset is not yet known.

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., TRP.PR.C and the FloatingReset 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).

Click for Big

The market appears to have a distaste at the moment for floating rate product; almost all of the implied rates until the next interconversion are lower than the current 3-month bill rate and the averages for investment-grade and junk issues are both well below zero, at -0.78% and -0.47%, respectively! 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 TRP.PR.C FixedReset, we may construct the following table showing consistent prices for its soon-to-be-issued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:

Based on current market conditions, I suggest that the FloatingResets that will result from conversion are likely to be cheap and trading below the price of their FixedReset counterparts. Therefore, I recommend that holders of TRP.PR.C continue to hold the issue and not to convert. I will note that, given the apparent cheapness of the FloatingResets, 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 two 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 TRP.PR.C are tendered for conversion, then no conversions will be allowed; but if only 100,000 shares of TRP.PR.C will remain after the rest are all tendered, then conversion will be mandatory. However, this is relatively rare: all 38 Strong Pairs currently extant have some version of this condition and all but four have both series outstanding.

Innergex Renewable Energy Inc. has announced:

that after having taken into account all election notices received following the December 31, 2015 conversion deadline, in respect to the Cumulative Rate Reset Preferred Shares, Series A (“Series A Shares”) tendered for conversion into Cumulative Floating Rate Preferred Shares, Series B (“Series B Shares”), the holders of Series A Shares are not entitled to convert their shares. There were 357,543 Series A Shares tendered for conversion, which is fewer than the 1,000,000 shares required for the ability to proceed with the conversion, in accordance with the terms of the Series A Shares.

There are 3,400,000 Series A Shares listed on the Toronto Stock Exchange (TSX) under the symbol INE.PR.A. The dividend rate for the five year period commencing on January 15, 2016 to but excluding January 15, 2021 will be 3.608% or $0.2255 per share per quarter.

It will be recalled that I recommended against conversion and INE.PR.A will reset to 3.608% effective January 15.

Dundee Corporation has announced:

the postponement of its special meeting of holders of its First Preference Shares, Series 4 par value of $17.84 (the “Series 4 Preferred Shares” and the holders thereof, the “Series 4 Preferred Shareholders”), which was originally scheduled for January 7, 2016 until January 28, 2016 in order for Series 4 Preferred Shareholders to consider amendments to the terms of the Company’s previously announced preferred share exchange transaction (the “Amended Exchange Transaction”). The December 3, 2015 record date will remain the same. The amendment follows consultations with a number of the Series 4 Preferred Shareholders. The terms of the Amended Exchange Transaction are outlined below:

• •In consideration for extending the date on which the Series 4 Preferred Shares would become retractable by the holder thereof, being June 30, 2016, for an additional three year period to June 30, 2019, each Series 4 Preferred Shareholder will exchange their Series 4 Preferred Share pursuant to a statutory plan of arrangement under the Business Corporations Act (Ontario) for:
  • ◦0.7136 of a First Preference Share, Series 5 par value $25.00 (the “Series 5 Preferred Shares” and each holder thereof a “Series 5 Preferred Shareholder”); plus
  • ◦0.25 of a subordinate voting share purchase warrant (“Warrant”), each whole Warrant entitling the holder thereof to purchase one class A subordinate voting share of the Company (a “Subordinate Voting Share”) at a price of $6.00 per Subordinate Voting Share at any time on or prior to 5:00 p.m. (Toronto time) on June 30, 2019. The Company is applying to the Toronto Stock Exchange (the “TSX”) for the listing of the Warrants.

The Terms of the Series 5 Preferred Shares

The rights, privileges, restrictions and conditions of the Series 5 Preferred Shares are identical to those of the Series 4 Preferred Shares, except that:

• •The cumulative dividend rate will increase from 5.0% to 7.5% per annum, being an annual dividend of $1.875 per Series 5 Preferred Share, or a quarterly dividend of $0.46875 per Series 5 Preferred Share;
• •Up to 15% of the then outstanding Series 5 Preferred Shares of each Series 5 Preferred Shareholder will be subject to redemption at the holder’s option for its par value on June 30, 2016;
• •A further 17% of the then outstanding Series 5 Preferred Shares of each Series 5 Preferred Shareholder will be subject to redemption at the holder’s option for its par value on January 31, 2018; and
• •The Series 5 Preferred Shares will be redeemable by Dundee at (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 the Company at par together with any accrued and unpaid dividends to but excluding the redemption date.

Consent Payments

The one-time consent fee of up to 1.25% that would have been payable to Series 4 Preferred Shareholders who voted in favour of the prior proposal has been replaced by a 1.5% per year increase in the dividend rate payable to all Series 5 Preferred Shareholders in the event that the Amended Exchange Transaction proceeds. If the Amended Exchange Transaction is completed, Dundee will make certain payments (the “Consent Payments”) to the brokers, investment dealers, banks, trust companies or other intermediaries of the Series 4 Preferred Shareholders (collectively, the “Intermediaries”), subject to certain procedures and conditions which will be outlined in the revised Circular (as defined below):

• •a Consent Payment of $0.1784 per Series 4 Preferred Share, representing 1.00% of the par value of the Series 4 Preferred Shares, will be paid by Dundee to Intermediaries in respect of each Series 4 Preferred Share that is voted FOR the Arrangement Resolution (as defined below) on or prior to January 21, 2016, provided such vote is valid and is not subsequently withdrawn; and
• •a Consent Payment of $0.0892 per Series 4 Preferred Share, representing 0.50% of the par value of the Series 4 Preferred Shares, will be paid by Dundee to Intermediaries in respect of each Series 4 Preferred Share that is voted FOR the Arrangement Resolution after January 21, 2016 but on or prior to the proxy cut off time of 9:00 a.m. (Toronto time) on January 26, 2016, provided such vote is valid and is not subsequently withdrawn.

The Postponed Meeting

In connection with the Amended Exchange Transaction, a special meeting of the Series 4 Preferred Shareholders has been scheduled for 9:00 a.m. (Toronto time) on January 28, 2016 (the “Meeting”), at the offices of Dundee Corporation, 1 Adelaide St. East, Suite 2100, Toronto, Ontario, Canada, M5C 2V9. The Amended and Restated Management Information Circular of the Company (the “Circular”) for the postponed Meeting will be mailed to the Series 4 Preferred Shareholders and filed on SEDAR shortly.

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 on the voting instruction form to be provided by their Intermediary to ensure their vote is counted at the Meeting.

Due to the changes in the proposed terms, any votes and any dissents previously submitted by Series 4 Preferred Shareholders in accordance with the instructions provided in the previous management information circular dated December 3, 2015 will not apply to the amended terms. Shareholders can anticipate receiving a new voting instruction form and control number in the mail. Even if Series 4 Preferred Shareholders have voted previously, in order for their vote to count, they must use the new voting instruction form to instruct their Intermediary how to vote on their behalf. Series 4 Preferred Shareholders who wish to vote or dissent in respect of the Amended Exchange Transaction should refer to the instructions in the Circular on how to do so.

To be effective, the Amended Exchange Transaction must be approved by a resolution (the “Arrangement Resolution”) passed at the postponed 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 Amended Exchange Transaction is conditional on, among other things, the holders of the Series 4 Preferred Shares approving the Arrangement Resolution, the approval of the TSX, 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 (unless waived by the Company).

Reasons for the Amended Exchange Transaction

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 Amended Exchange Transaction.

The board of directors of Dundee (the “Board of Directors”) has unanimously determined that the Amended Exchange Transaction 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. The determination of the Board of Directors is based on various factors, including a fairness opinion prepared by GMP.

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 7.5% 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 (i) 0.7136 of a Series 5 Preferred Share par value $25.00, aligning with standard market convention; plus (ii) 0.25 of a Warrant, each whole Warrant entitling the holder thereof to purchase one Subordinate Voting Share at a price of $6.00 per Subordinate Voting Share at any time prior to 5:00 p.m. (Toronto time) on June 30, 2019;
• c.Up to 15% of the then outstanding Series 5 Preferred Shares of each Series 5 Preferred Shareholder will be subject to redemption at the holder’s option for its par value on June 30, 2016;
• d.Up to an additional 17% of the then outstanding Series 5 Preferred Shares of each Series 5 Preferred Shareholder will be subject to redemption at the holder’s option for its par value on January 31, 2018; and
• e.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 June 30, 2016. The Company will not be able to redeem the Series 5 Preferred Shares at its option prior to June 30, 2019 unless it pays a redemption premium over par.

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 certain capital 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.

Why is this offer still abusive? Because there is no provision for shareholders who want the original deal to get the original deal. Virtually every preferred share term extension voted on by shareholders provides for a Special Retraction Right, which allows shareholders who so desire to cash out their shares on the original terms. I get extremely upset when such a provision is not made.

The fact that there is no such provision implies that the company is afraid of a mass retraction, which indicates that the company knows its offer is no good – an implication that is given further support by the fact that consent payments to intermediaries are still revoltingly high. But how good should the offer be?

The closing price of 14.43 today will reflect a number of things:

• Widespread feeling that the original offer would pass
• Some buying pressure from those hoping the deal would fail, and
• Some buying pressure from those hoping for a sweetened deal

Ignore, for now, the two positive influences on the share price and consider only the price as it reflects the original offer. The closing price today was 14.43, which the YTC Yield Calculator shows an annual quarterly yield-to-call of 12.94%. So, ignoring relatively minor tax effects, the dividend rate demanded by the market is about 13%, a far cry from the paltry 7.5% offered by the company.

The potential 7.5% coupon implies a price of 15.18 if the issue is to yield 12.94% … a modest improvement, but nowhere near the par value of 17.84.

But, you say, there will be two interim retractions allowed, in June 2016 and June 2018, totalling roughly 1/3 of the issue! Surely that’s worth something! And yes, you’re right … but it’s not clear whether the company will be entitled to pay that out with shares, and it still only applies to a third of the holdings. But, for the sake of an argument, let’s say that these interim retractions make up one-third of the discount, bringing the estimated value of the new shares to $16.07, still far below par.

But that’s not all, shrieks the late night infomercial of a press release! You also get a quarter of a warrant to buy DC.A subordinated voting stock at the low, low price of only $6.00 / share, effective until June 30, 2019. Surely that’s worth something! Well, yes, it is worth something, but not much. It’s only a quarter of a share, after all, so you’d have to make a profit of $1.77 x 4 [the estimated effective discount times 4] = $7.08 on each warrant to cover the current loss of value. This implies a future price of DC.A of 13.08, which I suggest is a very generous price target given today’s closing price of 5.95 [which has been boosted recently by the potential for massive profits on Dundee’s TauRx holding]. I will leave the matter for others better versed in option theory and Dundee’s prospects to value the option: I’ll just say that I don’t think it’s worth very much; that given the nature of Dundee’s prospects I don’t think it can be valued as normal option anyway; and that I think it’s a chrome-plated gizmo that has the intended purpose of confusing retail investors.

So, I recommend holders of DC.PR.C vote No to the deal and, as before, seriously consider exercising right of dissent. What we want is:

• A Special Retraction Right allowing holders to cash out in June on the original terms [which may involve being paid in discounted DC.A shares]
• an offered dividend rate that allows a reasonable prospect of the issue trading near par; at the moment, I estimate this at about 13%
• a commitment from the company to maintain a credit rating from two major agencies until the retraction date of the issue

Power Financial Corporation has announced:

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

With respect to any Series P shares that remain outstanding after February 1, 2016, holders thereof will be entitled to receive quarterly fixed non-cumulative preferential cash dividends, if, as and when declared by the Board of Directors of Power Financial. The dividend rate for the 5-year period from and including February 1, 2016 to but excluding January 31, 2021 will be 2.306%, being equal to the 5-year Government of Canada bond yield determined as of today plus 1.60%, in accordance with the terms of the Series P shares.

With respect to any Series Q shares that may be issued on February 1, 2016, holders thereof will be entitled to receive quarterly floating rate non-cumulative preferential cash dividends, if, as and when declared by the Board of Directors of Power Financial. The dividend rate for the 3-month floating rate period from and including February 1, 2016 to but excluding April 30, 2016 will be 2.100%, being equal to the 3-month Government of Canada Treasury Bill yield determined as of today plus 1.60%, calculated on the basis of the actual number of days in such quarterly period divided by 365, in accordance with the terms of the Series Q shares.

Beneficial owners of Series P shares who wish to exercise their conversion right should communicate with their broker or other nominee to ensure their instructions are followed so that the registered holder of the Series P shares can meet the deadline to exercise such conversion right, which is 5:00 p.m. (EST) on January 18, 2016.

The news about the extension was reported on PrefBlog.

PWF.PR.P is a FixedReset, 4.40%+160, that commenced trading 2010-6-29 after being announced 2010-6-17, so the reset represents a cut of 48% in the dividend rate. Ouch!

As noted in the Press Release, holders have until 5:00 p.m. (EST) on Monday, January 18, to notify the company of a desire to convert to the FloatingReset Series Q. Brokerage deadlines will be earlier; missing the deadline at the brokerage probably means you’re going to have to grovel to get them to try to get the instruction to the company in time and in such a case they will do it only on a ‘best efforts’ basis. So ensure you know well in advance – by which I mean ‘right now’ – just when your brokerage’s internal deadline is.

I will make a recommendation January 13 based on the theory of Preferred Pairs, for which a calculator is available. Given recent market behaviour, it is highly likely that I will recommend holding PWF.PR.P and not to convert, but that won’t be final until I post!

FFH.PR.J has been created by partial exchange from FFH.PR.I, following the latter issue’s reset to 3.708% for the next five years, a reduction of about 26% in the dividend rate.

FFH.PR.J will pay 3-month bills + 285bp, reset quarterly.

The company has made no announcement regarding the take-up of the conversion offer or the commencement of trading, but the TMX website indicates that 1,534,447 shares of FFH.PR.J are outstanding, implying a conversion rate of 12.8% given that the TMX reports 10,465,553 shares of FFH.PR.I currently outstanding. It will be recalled that I recommended against conversion.

FFH.PR.J will be tracked by HIMIPref™ and has been assigned to the Scraps subindex on credit concerns.

The issue traded no shares before closing at 17.00-50, 1×1.

Vital Statistics are:

Strong Pair theory, for which a calculator is available, allows us to examine the consistency of the bid price of FFH.PR.I with FFH.PR.J; they are interconvertible in the future. The bids of 17.12 and 17.00, respectively, allow us to gauge that total returns over the next five years will be equal if the three-month Bill Yield exceeds 0.74%.

Click for Big

Whatever one might think of the probability of the bill yield averaging over 0.74% over the next five years, it is clearly rational to believe that the break-even yield will decline in the future, to become more comparable to the break-even yield of the issues’ peers. This implies an expectation that the bid price of the FloatingReset, FFH.PR.J, will decline in the next little while relative to that of FFH.PR.I [note the word “relative”! They could both increase or both decrease!]. In fact, keeping the bid price of FFH.PR.I constant at 17.12, a decline of the bid for FFH.PR.J to 14.80 will bring the break-even yield of the pair to -1.50%, the centerpoint of the chart.

In other words, I suggest there is good reason to believe FFH.PR.J will get substantially cheaper relative to FFH.PR.I over the next little while!

As I reported previously, there was a 15% conversion to GWO.PR.O, the FloatingReset, from GWO.PR.N, the FixedReset, following the latter issue’s reset to 2.176% for the next five years, a reduction of just over 40% in the dividend rate.

GWO.PR.O will pay 3-month bills +130bp, reset quarterly. It will be tracked by HIMIPref™ and has been assigned to the FloatingReset subindex.

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.

GWO.PR.O was listed today although, as is normally the case, there was no trading because brokerage customers haven’t actually seen the shares in their accounts yet – and, presumably, having recently made the decision to convert, are less likely than most to want to sell.

The issue closed with the extraordinary quote of 13.10-21.00, 10×2. I have not checked whether this lamentable state of affairs is due to inadequate Toronto Stock Exchange reporting or inadequate Toronto Stock Exchange supervision of market-makers.

Vital Statistics are:

Strong Pair theory, for which a calculator is available, allows us to examine the consistency of the bid price of GWO.PR.N with GWO.PR.O; they are interconvertible in the future. The bids of 13.99 and 13.00, respectively, allow us to gauge that total returns over the next five years will be equal if the three-month Bill Yield exceeds -0.07%. While this is a laughably low figure, it is not as low as that of other investment-grade FixedReset/FloatingReset pairs.

Click for Big

Whatever one might think of the probability of the bill yield averaging over -0.07% over the next five years, it is clearly rational to believe that the break-even yield will decline in the future, to become more comparable to the break-even yield of the issues’ peers. This implies an expectation that the bid price of the FloatingReset, GWO.PR.O, will decline in the next little while relative to that of GWO.PR.N [note the word “relative”! They could both increase or both decrease!]. In fact, keeping the bid price of GWO.PR.N constant at 13.99, a decline of the bid for GWO.PR.O to 11.50 will bring the break-even yield of the pair to -1.50%, the centerpoint of the chart.

In other words, I suggest that although GWO.PR.O is currently cheap relative to GWO.PR.N, there is good reason to believe it will get cheaper!

The Bank of Nova Scotia has announced:

that it does not intend to exercise its right to redeem the currently outstanding Non-cumulative 5-Year Rate Reset Preferred Shares Series 32 of Scotiabank (the “Preferred Shares Series 32”) on February 2, 2016 and, as a result, subject to certain conditions, the holders of Preferred Shares Series 32 have the right to convert all or part of their Preferred Shares Series 32 on a one-for-one basis into Non-cumulative Floating Rate Preferred Shares Series 33 of Scotiabank (the “Preferred Shares Series 33”) on February 2, 2016. Holders who do not exercise their right to convert their Preferred Shares Series 32 into Preferred Shares Series 33 on such date will retain their Preferred Shares Series 32.

The foregoing conversions are subject to the conditions that: (i) if Scotiabank determines that there would be less than one million Preferred Shares Series 32 outstanding after February 2, 2016, then all remaining Preferred Shares Series 32 will automatically be converted into Preferred Shares Series 33 on a one-for-one basis on February 2, 2016, and (ii) alternatively, if Scotiabank determines that there would be less than one million Preferred Share Series 33 outstanding after February 2, 2016, no Preferred Shares Series 32 will be converted into Preferred Shares Series 33. In either case, Scotiabank shall give a written notice to that effect to holders of Series 32 Preferred Shares no later than January 25, 2016.

With respect to any Preferred Shares Series 32 that remain outstanding after February 2, 2016, commencing as of such date, holders thereof will be entitled to receive non-cumulative preferential cash dividends on a quarterly basis, as and when declared by the Board of Directors of Scotiabank and subject to the Bank Act (Canada). The dividend rate for the five-year period commencing on February 2, 2016 and ending on February 1, 2021 will be 2.063%, being equal to the 5-Year Government of Canada bond yield determined as at 0.723% plus 1.34%, as determined in accordance with the terms of the Preferred Shares Series 32.

With respect to any Preferred Shares Series 33 that may be issued on February 2, 2016, holders thereof will be entitled to receive floating rate non-cumulative preferential cash dividends on a quarterly basis, as and when declared by the Board of Directors of Scotiabank and subject to the Bank Act (Canada), based on a dividend rate equal to the 90-day Canadian Treasury Bill yield plus 1.34%, on an actual/365 day count basis, subject to certain adjustments in accordance with the terms of the Preferred Shares Series 32. The dividend rate for the period commencing on February 2, 2016 and ending on April 25, 2016 will be equal to 1.837%%, as determined in accordance with the terms of the Preferred Shares Series 33. In addition, holders who exercise their right to convert to Preferred Shares Series 33 will be entitled to receive, on a pro rata basis, any dividend that may be declared by the Board of Directors of Scotiabank for Preferred Shares Series 32 for the period commencing on January 27, 2016 and ending on and including February 1, 2016.

Beneficial and registered owners of Preferred Shares Series 32 who wish to exercise their right of conversion should communicate as soon as possible with their broker or other nominee and ensure that they follow their instructions in order to meet the deadline to exercise such right, which is 5:00 p.m. (EST) on January 18, 2016.

BNS.PR.Z has been a FixedReset, 3.70%+134, which commenced trading 2011-2-3 after being announced as part of the acquisition of DundeeWealth. The reset dividend rate therefore represents a cut of 44%. Ouch!

As noted in the press release, the deadline for notification to the company of a desire to convert to the FloatingReset issue is 5:00 p.m. (EST) on January 18, 2016. However, brokerage deadlines will normally be a day or two in advance; they will usually attempt to exercise the conversion if notified between the two deadlines, but only on ‘best-efforts’ basis and only if the shareholder grovels in a sufficiently entertaining fashion.

Accordingly, I will make a recommendation regarding the conversion after the market close on January 12. Given market conditions, it is highly probable that the recommendation will be to continue to hold BNS.PR.Z … but market conditions can change!