Category: Issue Comments

Brookfield Asset Management Inc. has announced:

the completion of its previously announced Class A Preference Shares, Series 44 issue in the amount of C$250,000,000. The offering was underwritten by a syndicate led by Scotiabank, CIBC, RBC Capital Markets, and TD Securities Inc.

Brookfield issued 10,000,000 Series 44 Shares at a price of C$25.00 per share, for total gross proceeds of C$250,000,000. Holders of the Series 44 Shares will be entitled to receive a cumulative quarterly fixed dividend yielding 5.00% annually for the initial period ending December 31, 2020. Thereafter, the dividend rate will be reset every five years at a rate equal to the greater of: (i) the 5-year Government of Canada bond yield plus 4.17%, and (ii) 5.00%. The Series 44 Shares will commence trading on the Toronto Stock Exchange this morning under the ticker symbol BAM.PF.H.

BAM.PF.H is a FixedReset, 5.00%+417M500, announced September 24. It will be tracked by HIMIPref™ and has been assigned to the FixedResets subindex.

The issue traded 1,304,995 shares today (consolidated exchanges) in a range of 24.95-03 before closing at 24.96-99, 14×57. Vital statistics are:

Implied Volatility analysis for the BAM FixedResets is difficult to take seriously, since the fit is so poor – but it is interesting to compare the following chart with the chart published on the announcement day. The issue’s siblings have been very weak in the intervening time, with the low Expected Future Current Yield moving from about 4.40% to 4.60% and several issues moving to have an EFCY of about 5%, on a level with the new issue. I will point out that this equivalence makes no sense – lower-spread issues should trade with a lower yield as compensation for their lower risk of call. Mind you, all this ignores the rate floor on the new issue!

Click for Big

AltaGas Ltd. has announced:

that 2,488,780 of its 8,000,000 Cumulative Redeemable Five-Year Fixed Rate Reset Preferred Shares, Series A (“Series A Preferred Shares”) (TSX: ALA.PR.A) were tendered for conversion into Cumulative Floating Rate Preferred Shares, Series B (the “Series B Preferred Shares”). As a result of the conversion AltaGas has 5,511,220 Series A Preferred Shares and 2,488,780 Series B Preferred Shares issued and outstanding. The Series A Preferred Shares will continue to be listed on the Toronto Stock Exchange (TSX) under the symbol ALA.PR.A. The Series B Preferred Shares will begin trading on the TSX today under the symbol ALA.PR.B.

The Series A Preferred Shares will continue to pay on a quarterly basis, for the five-year period beginning on September 30, 2015, as and when declared by the Board of Directors of AltaGas, a fixed dividend based on an annual fixed dividend rate of 3.38 percent.

The Series B Preferred Shares will pay a floating quarterly dividend for the five-year period beginning on September 30, 2015, as and when declared by the Board of Directors of AltaGas. The floating quarterly dividend rate for the Series B Preferred Shares for the first quarterly floating rate period (being the period from September 30, 2015 to but excluding December 31, 2015) is 3.04 percent and will be reset every quarter.

For more information on the terms of, and risks associated with an investment in, the Series A Preferred Shares and the Series B Preferred Shares, please see the prospectus supplement dated August 11, 2010 which is available on www.sedar.com.

ALA.PR.A is a FixedReset, currently 3.38%+266. ALA.PR.B is its Strong Pair, a FloatingReset paying 266bp over three month bills, reset quarterly. Both issues will be tracked by HIMIPref™, both relegated to the Scraps index on credit concerns.

The conversion rate was 31%, after my recommendation not to convert.

Vital statistics are:

Surprisingly, there were actually five trades today, totalling 600 shares – it’s very rare to see trades on the first day of a Floating Reset, since retail (typically) won’t be seeing the shares in their on-line accounts until reorg processes the entries in a batch after the close. But still, I wouldn’t take the quote of 15.50-89 all that seriously!

However:

Click for Big

The ALA.PR.A / ALA.PR.B Strong Pair predicts an average three-month bill rate of 0.81% over the next five years, well above the average for investment-grade pairs.

Northland Power Inc. has announced:

that 1,498,435 of its 6,000,000 Cumulative Rate Reset Preferred Shares, Series 1 (“Series 1 Shares”) have been converted on a one-for-one basis, into Cumulative Floating Rate Preferred Shares, Series 2 (the “Series 2 Shares”). Consequently, effective today Northland will have 4,501,565 Series 1 Shares and 1,498,435 Series 2 Shares issued and outstanding.

The Series 1 Shares are listed on the Toronto Stock Exchange under the symbol “NPI.PR.A” and the Series 2 Shares are listed on the Toronto Stock Exchange under the symbol “NPI.PR.B”.

NPI.PR.A is a FixedReset, currently (after reset) 3.51%+280. NPI.PR.B is its FloatingReset Strong Pair, paying three-month bills +280. Both issues will be tracked by HIMIPref™, both relegated to the Scraps index on credit concerns.

The conversion ratio was 25.0% after my recommendation not to convert.

Vital statistics are:

NPI.PR.B did not trade any shares today on any of the consolidated exchanges, so the quote of 14.00-50 should be taken with a grain of salt!

However:

Click for Big

The NPI.PR.A / NPI.PR.B Strong Pair predicts an average three month bill rate of 0.28% over the next five years – well above the average for investment-grade pairs.

Canadian Utilities Limited has announced:

it has closed its previously announced public offering of Cumulative Redeemable Second Preferred Shares Series FF, by a syndicate of underwriters co-led by BMO Capital Markets and RBC Capital Markets, and including TD Securities Inc., Scotiabank, CIBC, Canaccord Genuity Corp., and GMP Securities L.P. Canadian Utilities Limited issued 10,000,000 Series FF Preferred Shares for gross proceeds of $250,000,000. The Series FF Preferred Shares will begin trading on the TSX today under the symbol CU.PR.I. The proceeds will be used for capital expenditures, to repay indebtedness and for other general corporate purposes.

CU.PR.I is a FixedReset, 4.50%+369M450, announced September 14. It will be tracked by HIMIPref™ and has been assigned to the FixedReset subindex.

The issue traded 973,025 shares today (consolidated exchanges) in a range of 24.97-19 before closing at 25.08-12, 24×26. Vital statistics are:

Fairfax Financial Holdings Limited has announced (emphasis added):

that the Toronto Stock Exchange (the “TSX”) accepted a notice filed by Fairfax of its intention to commence a Normal Course Issuer Bid for its Subordinate Voting Shares, Cumulative 5-Year Rate Reset Preferred Shares, Series C (“Series C Shares”), Cumulative Floating Rate Preferred Shares, Series D (“Series D Shares”), Cumulative 5-Year Rate Reset Preferred Shares, Series E (“Series E Shares”), Cumulative Floating Rate Preferred Shares, Series F (“Series F Shares”), Cumulative 5-Year Rate Reset Preferred Shares, Series G (“Series G Shares”), Cumulative 5-Year Rate Reset Preferred Shares, Series I (“Series I Shares”), Cumulative 5-Year Rate Reset Preferred Shares, Series K (“Series K Shares”) and Cumulative 5-Year Rate Reset Preferred Shares, Series M (“Series M Shares” and, together with the Series C Shares, Series D Shares, Series E Shares, Series F Shares, Series G Shares, Series I Shares and Series K Shares, the “Preferred Shares”) through the facilities of the TSX (or other alternative Canadian trading systems). Purchases will be made in accordance with the rules and policies of the TSX and Subordinate Voting Shares and Preferred Shares purchased will be cancelled.

The notice provides that Fairfax’s board of directors has approved the purchase on the TSX, during the period commencing September 28, 2015 and ending September 27, 2016, of up to 800,000 Subordinate Voting Shares, 601,538 Series C Shares, 398,361 Series D Shares, 405,134 Series E Shares, 357,204 Series F Shares, 1,000,000 Series G Shares, 1,200,000 Series I Shares, 950,000 Series K Shares and 920,000 Series M Shares, representing approximately 3.7% of the public float in respect of the Subordinate Voting Shares and 10% of the public float in respect of each series of Preferred Shares. As at September 21, 2015, Fairfax had outstanding 22,034,939 Subordinate Voting Shares, 6,016,384 Series C Shares, 3,983,616 Series D Shares, 4,051,346 Series E Shares, 3,572,044 Series F Shares, 10,000,000 Series G Shares, 12,000,000 Series I Shares, 9,500,000 Series K Shares and 9,200,000 Series M Shares. Under the bid, Fairfax may purchase up to 6,966 Subordinate Voting Shares, 1,881 Series C Shares, 1,426 Series D Shares, 1,908 Series E Shares, 1,151 Series F Shares, 2,695 Series G Shares, 3,394 Series I Shares, 2,919 Series K Shares and 5,713 Series M Shares on the TSX (or other alternative Canadian trading systems) during any trading day, each of which represents 25% of the average daily trading volume on the TSX calculated in accordance with the rules of the TSX. This limitation does not apply to purchases made pursuant to block purchase exemptions.

From time to time, when Fairfax does not possess material nonpublic information about itself or its securities, it may, in accordance with the requirements of applicable securities laws and the TSX, enter into a pre-defined plan with its broker to allow for the purchase of its Subordinate Voting Shares or Preferred Shares, as the case may be, under the bid at times when it ordinarily would not be active in the market due to its own internal trading blackout periods.

Fairfax is making this Normal Course Issuer Bid because it believes that in appropriate circumstances its Subordinate Voting Shares and Preferred Shares represent an attractive investment opportunity and that, with respect to the Subordinate Voting Shares, purchases under the bid will enhance the value of the Subordinate Voting Shares held by the remaining shareholders.

Pursuant to its existing normal course issuer bid for its Subordinate Voting Shares, Fairfax has purchased 127,309 of its Subordinate Voting Shares and 376,610 of its Series E Shares during the last twelve months at weighted average prices per share of Cdn.$671.76 and Cdn.$16.89, respectively.

Fairfax is a holding company which, through its subsidiaries, is engaged in property and casualty insurance and reinsurance and investment management.

It will be remembered that NCIBs, as a general rule, are public relations exercises by the announcing companies and are only rarely given effect. However, there was a real, if small, buy-back of BRF preferreds earlier this year and now it looks like there is another exception to the usual case.

FFH.PR.E was issued as a FixedReset FixedReset 4.75%+216, that commenced trading 2010-2-1 after being announced 2010-1-21. The dividend was reset to 2.91% effective 2015-3-31 and there was a 31% conversion to the FFH.PR.F FloatingReset, after which I reported:

there were 7,915,539 shares of FFH.PR.E outstanding relative to 3,572,044 shares of the FloatingReset FFH.PR.F.

This cannot be right since only eight million FFH.PR.E were originally issued! Oopsy.

TMXMoney now reports 4,074,543 shares of FFH.PR.E outstanding. compared to 3,572,044 of the FFH.PR.F; the total is 7,646,587, which although looking reasonable does not allow for the cancellation of the 376,610 shares of FFH.PR.E mentioned in the press release. So either there are some shares sitting in the FFH treasury that have not yet been cancelled, or there’s some kind of timing difference or (shock! horror!) the Toronto Stock Exchange has made a mistake, but I suppose these figures are close enough for government work.

The pricing behaviour for the prior year, combined with the average reported price of $16.89, suggests that the bulk of the buying was done in 2015:

Click for Big

It is of interest to note that FFH.PR.E, resetting at +216bp over GOC-5, is the lowest-spread issue among the six FFH issues. The current comparison with other FFH FixedResets shows Implied Volatility is negligible:

Click for Big

The Implied Volatility of the FFH series has been quite low all year, implying that the lower-spread issues, as a group have been cheap relative to the higher-spread issues.

Scotia Managed Companies has announced:

BNS Split Corp. II (the “Company”) is pleased to announce that it has completed its public offering of Class B preferred shares, series 2 (“Preferred Shares”) raising $11,217,809 through the issuance of 569,143 Preferred Shares at a price per share of $19.71. In addition, the Company has redeemed all of its outstanding Class B preferred shares, series 1. The Preferred Shares were offered to the public on a best efforts basis by a syndicate of agents led by Scotiabank, which included CIBC and RBC Capital Markets.

BNS Split Corp. II is a mutual fund corporation created to hold a portfolio of common shares of The Bank of Nova Scotia. Capital Shares and Preferred Shares of BNS Split Corp. II are listed for trading on The Toronto Stock Exchange under the symbols BSC and BSC.PR.C, respectively.

The issue is a 4% Five-Year Split Share. It will be tracked by HIMIPref™ and has been assigned to the SplitShare subindex (although, given the size of the issue, I expect it to be permanently relegated to the Scraps subindex on volume concerns in fairly short order).

BSC.PR.C traded 65,570 shares today in a range of 19.71-72 before closing at 19.69-72, 1×103. Vital statistics are:

Note that BSC.PR.B has been redeemed.

AltaGas Ltd. has announced:

that it and its indirect wholly owned subsidiary AltaGas Power Holdings (U.S.) Inc. have entered into a purchase and sale agreement with Highstar Capital IV, L.P. and certain of its affiliates to acquire GWF Energy Holdings LLC, which holds a portfolio of three natural gas-fired electrical generation facilities in northern California totalling 523 MW (the “Acquisition”), including the 330 MW Tracy facility, the 97 MW Hanford facility and the 96 MW Henrietta facility (collectively the “Facilities”). The purchase price of the Acquisition is US$642 million, subject to certain closing adjustments.
…
Acquisition Funding

AltaGas expects the cash to close the Acquisition will be provided from a combination of equity and debt, specifically from: (i) a portion of the proceeds of the Offering; (ii) AltaGas’ existing credit facilities; (iii) future debt and preferred share financings; and (iv) potential dispositions of non-core assets.

The Acquisition will be financed consistent with AltaGas’ current capital structure. AltaGas will continue to maintain its strong balance sheet and financial discipline and is committed to maintaining its investment grade credit rating.

Transaction Closing

The transaction is subject to customary approvals, including regulatory approvals from the Federal Energy Regulatory Commission of the United States government and the expiration or termination of the applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. The acquisition is expected to close late in the fourth quarter of 2015.

Common Equity Offering

Pursuant to the Offering, AltaGas has agreed to sell, on a bought deal basis, an aggregate of 8,760,000 common shares at a price of $34.25 per common share (the “Offering Price”) for gross proceeds of approximately $300 million. The common shares will be offered through a syndicate of underwriters co-led by TD Securities Inc. and BMO Capital Markets as joint bookrunners. AltaGas has also granted the underwriters an option to purchase, in whole or part, up to an additional 1,314,000 common shares at the Offering Price to cover over-allotments, if any, for a period of 30 days following the closing of the Offering (the “Over-Allotment Option”). If the Over-Allotment Option is exercised in full, gross proceeds from the Offering will be approximately $345 million.

The Offering will be used, in part, to fund the Acquisition as well as to reduce indebtedness and for general corporate purposes.

DBRS comments:

DBRS views the Acquisition as modestly positive for the Company’s business risk profile as it would diversify AltaGas’ energy infrastructure portfolio through the addition of relatively low-risk, fully contracted and long-life gas-fired power assets in Northern California to its existing power generation assets located in Southern California (507 MW Blythe Energy Centre), thereby expanding its presence in the California power market. The PPAs with PG&E are structured as tolling arrangements for 100% of the energy, capacity and ancillary services, which eliminates price and volume risk. AltaGas benefits from a highly contracted portfolio of power assets, and the commissioning of Forest Kerr (195 MW in 2014) and Volcano Creek (16 MW in 2015) run-of-the-river projects supported by a 60-year PPA with British Columbia Hydro and Power Authority (rated AA (high), Stable, by DBRS) as well as the acquisition of three western U.S. gas-fired power assets (combined 164 MW in January 2015) have partially mitigated the impact of weaker realized Alberta power prices and volumes for the Company. DBRS estimates that, the Acquisition increases AltaGas’ power-generation capacity to 2,035 MW from the current 1,512 MW and, consequently, the Company’s EBITDA contribution from its Power segment is expected to increase to approximately 40% from 31%, resulting in a more diversified lower-risk asset portfolio. DBRS is moderately concerned that there is re-contracting risk on the GWF PPAs which expire in 2022. However, the California Renewable Portfolio Standard Policy requiring utilities to use 33% renewable energy by 2020 and state legislation to boost California’s greenhouse gas reduction target to 40% by 2030 could result in the retirement of coal-fired utilities, thereby supporting the continued existence of gas-fired utilities to ensure adequate power supply.

DBRS expects the Acquisition to have a neutral impact on the Company’s financial risk profile. DBRS notes that the funding for the acquisition is consistent with the Company’s current capital structure and that the Acquisition is expected to provide a stable stream of contracted EBITDA of approximately $95 million annually (approximately 17% of EBITDA for last 12 months ended June 30, 2015). While the Acquisition is being financed with an initial common share offering ($300 million to $345 million), the balance of the purchase price is likely to be financed by a combination of debt and preferred share issuance, resulting in minimal impact on leverage. DBRS does not expect the increase in dividends to $0.165 per share to have a meaningful impact on the Company’s cash flow.

DBRS estimates that, following the Acquisition, DBRS adjusted total debt-to-capital is likely to remain largely unchanged with cash flow and interest coverage ratios improving slightly on a 2015 full-year pro forma basis. Overall, the Acquisition is expected to maintain the Company’s credit metrics consistent with the current ratings.

AltaGas has three preferred share issues outstanding, all FixedResets: ALA.PR.A, ALA.PR.E and ALA.PR.G. ALA.PR.A will reset shortly at 3.38%.

I suspect a new issue will have to yield somewhere around 5.00%-5.25%, with a reset-floor-rate. The company is best known for having the most useless investor relations department on earth.