Category: Issue Comments

Standard and Poor’s has announced:

• •We are revising our outlook on AltaGas Ltd. to negative from stable.
• •We are also affirming our ratings, including our ‘BBB’ long-term corporate credit rating, on the company.
• •We base the outlook revision on weaker forecast financial metrics at the lower end of the “significant” financial risk profile.
• •The negative outlook reflects our view of the company’s weaker financial metrics, given the low commodity environment and high leverage due to ongoing capital programs and recent acquisitions.

…
We are forecasting lower cash flows and higher leverage due to ongoing capital programs and recent acquisitions. Our forecast financial metrics have fallen as a result, with funds from operations (FFO)-to-debt in the low end of the “significant” category (12%-15%) over the next two years. However, we still expect the financial metrics to improve as new gas gathering and processing facilities are brought into service and the GWF Energy Holdings LLC (GWF) acquisition starts contributing cash flow for a full year in 2016.

We view AltaGas’ business risk profile as “strong.” We expect about one-third of cash flow from very low-risk regulated utility subsidiaries, a third from midstream gathering and processing, and the rest from highly contracted unregulated power.
…
We view the financial risk profile as “significant” based on the medial volatility cash flow leverage table. Although we expect credit metrics to improve as contracted projects come online to contribute full-year cash flows and capital expenditures start to decline in 2017, the company has little cushion to absorb weaker-than-expected cash flows over the next two years.

The negative outlook reflects Standard & Poor’s view that AltaGas’ financial metrics are at the lower end of the “significant” category and has little cushion to absorb weaker-than-expected cash flows over the next two years. We are expecting metrics to continue to improve in 2016 and 2017 as the company realizes full-year cash flows from completed projects and the GWF acquisition.

AltaGas is the proud issuer of ALA.PR.A, ALA.PR.B, ALA.PR.E, ALA.PR.G and ALA.PR.I. DBRS continues to rate the issues Pfd-3 with a stable trend following a confirmation 2015-10-12.

TransCanada Corporation has announced:

that it does not intend to exercise its right to redeem its Cumulative Redeemable First Preferred Shares, Series 5 (Series 5 Shares) on January 30, 2016. As a result, subject to certain conditions, the holders of Series 5 Shares have the right to choose one of the following options with regard to their shares:
1.To retain any or all of their Series 5 Shares and continue to receive a fixed rate quarterly dividend; or
2.To convert, on a one-for-one basis, any or all of their Series 5 Shares into Cumulative Redeemable First Preferred Shares, Series 6 (Series 6 Shares) of TransCanada and receive a floating rate quarterly dividend.

The dividend rate applicable to the Series 5 Shares for the five-year period commencing on January 30, 2016 to, but excluding, January 30, 2021 will equal the Government of Canada five-year bond yield on December 31, 2015 plus 1.54 per cent. The dividend rate applicable to the Series 6 Shares for the three-month period commencing on January 30, 2016 to, but excluding, April 30, 2016 will equal the Government of Canada 90-day treasury bill rate on December 31, 2015 plus 1.54 per cent. Both rates will be calculated according to the terms of the prospectus supplement dated June 17, 2010, and announced by way of a news release on December 31, 2015.

Beneficial owners of Series 5 Shares 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 p.m. (EDT) on January 15, 2016. Any notices received after this deadline will not be valid. As such, 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.

The foregoing conversions are subject to the conditions that: (i) if TransCanada determines that there would be less than one million Series 5 Shares outstanding after January 30, 2016, then all remaining Series 5 Shares will automatically be converted into Series 6 Shares on a one-for-one basis on January 30, 2016, and (ii) alternatively, if TransCanada determines that there would be less than one million Series 6 Shares outstanding after January 30, 2016, no Series 5 Shares will be converted into Series 6 Shares. In either case, TransCanada will issue a news release to that effect no later than January 22, 2016.

Holders of the Series 5 Shares and the Series 6 Shares will have the opportunity to convert their shares again on January 30, 2021, and every five years thereafter as long as the shares remain outstanding.

TRP.PR.C is a FixedReset, 4.40%+154, that commenced trading 2010-6-29 after being announced 2010-6-17.

I will report the reset rate when it is announced and recommend whether or not to convert closer to the company’s deadline.

The proposed Plan of Arrangement involving DC.PR.C has been covered on PrefBlog in the posts DC.PR.C: Coercive Exchange Offer, DC.PR.C: Coercive Offer Attracts Wider Notice and DC.PR.C: Consider Exercising Dissent Rights To Defeat Management’s Coercive Plan.

This morning, Dundee blinked:

Dundee Corporation (TSX:DC.A)(TSX:DC.PR.C) is today announcing that it continues to seek a collaborative dialogue with its Series 4 Preferred Shareholders in respect of its proposed plan of arrangement. Since the mailing of its Circular, the Corporation has heard from a broader group of beneficial shareholders, including large institutional holders, who have expressed concerns.

The Corporation continues to engage in dialogue with known beneficial shareholders, in order to achieve a favourable result. However there can be no assurance that this dialogue will result in the support necessary for the proposed transaction to become effective. Accordingly, it is possible that, among other things, the proposed transaction terms may be amended or withdrawn.

But the shares plunged anyway, down a stunning 14.50% (close / close) on heavy volume of 68,201 shares:

Click for Big

They’ve been going in one direction ever since the announcement:

Click for Big

I have no idea how sincere they are or with whom they are negotiating, but the “known beneficial shareholders” will, I’m sure, appreciate a bit of support to strengthen their hand. Don’t delay – vote “No” now and seriously consider exercising your right of dissent. The objective is to obtain a “Special Retraction Right”, as is standard when the maturities of Split Shares are extended, that will allow shareholders to opt to receive the original deal. That’s the main thing. But those who are interested in extending term should demand that the company renew and maintain a public credit rating from two major credit rating agencies – it was almost three years ago that the company cancelled this service which, while being of controversial intrinsic value, serves admirably to focus management’s and directors’ attention during bad times – which is particularly important in the fragmented, retail preferred share market.

Westcoast Energy Inc. has announced:

that it has closed its previously announced public offering (the “Offering”) of Cumulative 5-Year Minimum Rate Reset Redeemable First Preferred Shares, Series 10 (the “Series 10 First Preferred Shares”). The Offering was conducted through a syndicate of underwriters co-led by BMO Capital Markets and Scotiabank (collectively, the “Underwriters”).

In connection with closing, the Underwriters exercised the previously granted option (the “Over-Allotment Option”) to purchase an additional 15% of the Series 10 First Preferred Shares at the offering price. As a result of the exercise in full of the Over-Allotment Option, the Corporation issued 4,600,000 Series 10 First Preferred Shares at a price of $25.00 per share for total gross proceeds of $115,000,000. The Series 10 First Preferred Shares will begin trading on the TSX today under the symbol W.PR.K. The proceeds are expected to be used to refinance upcoming debt maturities and for general corporate purposes.

The Series 10 First Preferred Shares were offered only in the provinces of Canada by means of a short form prospectus of the Corporation dated December 7, 2015.

This news release does not constitute an offer to sell securities, nor is it a solicitation of an offer to buy securities, in any jurisdiction. All sales will be made through registered securities dealers in jurisdictions where the offering has been qualified for distribution.

Westcoast Energy Inc. is an indirect subsidiary of Spectra Energy Corp.

W.PR.K is a FixedReset, 5.25%+426M525, announced November 24. At the close on November 24, the TXPL Total Return Index Value was 802.86; at the close December 15, this index stood at 746.11, a decline of about 7.1%. By that standard, the decline of less than 4% in W.PR.K from issue price looks pretty good! Purists will object that TXPL contains a lot of junk and W.PR.K is investment grade (at least, according to DBRS); purists will also object that W.PR.K has a floor on reset and is therefore even less comparable with the index. Purists can suck eggs.

The issue will be tracked by HIMIPref™ and has been assigned to the FixedReset subindex.

The issue traded 241,305 shares in a range of 23.75-37 before closing at 24.10-15, 19×9. Vital statistics are:

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!

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.

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%.

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!

It will be recalled that

• GWO.PR.N will reset to 2.176% effective December 31. Holders of GWO.PR.N have the option to convert to FloatingResets, which will pay 3-month bills plus 130bp, reset quarterly.
• FFH.PR.I will reset to 3.708% effective December 31. Holders of FFH.PR.I have the option to convert to FloatingResets, which will pay 3-month bills plus 285bp, reset quarterly.
• CPX.PR.A will reset to 3.06% effective December 31. Holders of CPX.PR.A have the option to convert to FloatingResets, which will pay 3-month bills plus 217bp, reset quarterly.

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).

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:

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.