Category: Issue Comments

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

Figures of interest are:

MER: 1.25% of the whole unit value, “presented to reflect the normal operating expenses of the Company
excluding any one time secondary offering expenses.”

Average Net Assets: We need this to calculate portfolio yield. The Total Assets of the fund at year end was $259.1-million, compared to $287.3-million on May 31, so call it an average of $273.2-million. Preferred share dividends of $4,336,167 were paid over the half year at 0.525 p.a., implying average units outstanding 16.52-million, at an average NAVPU of (17.39 + 17.77)/2 = 17.58, implies $290.4-million. Say the Average Net Assets are the average of the two estimates, $281.8-million.

Underlying Portfolio Yield: Income received of $4,007,070 divided by average net assets of $281.8-million, multiplied by two because it’s semiannual is 2.84%.

Income Coverage: Net investment income of $2,047,004 (before capital gains) divided by preferred share dividends of $4,336,167 is a very low 47%.

The Income Coverage is significantly higher than the calculation performed from the 2014 Annual Report of 33%. There was a secondary offering in 14H2 and another one in 15H1, so it’s fairly difficult to derive precise numbers from the financial statements.

Brookfield Renewable Energy Partners L.P. has published its 15Q2 Quarterly Report:

Brookfield Renewable entered into an automatic purchase plan to allow for purchases of its Series 1, Series 2, and Series 3 Class A Preference Shares. The automatic purchase plan commenced on July 1, 2015 and will terminate on August 6, 2015. Subsequent to June 30, 2015, 75,537 Class A Preference Shares and 22,900 LP Units were repurchased and cancelled.

News of their Normal Course Issuer Bid was reported on PrefBlog on June 23 and the automatic purchase plan reported June 29; neither announcement was given its own post because these things are usually just window dressing.

In this case however, things actually got done. Poking around on the System for Electronic Disclosure by Insiders website enabled me to prepare a summary of their actions, which may be condensed into the following table:

The total is less than the seventy-five thousand odd disclosed in their quarterly report; I assume that this is a result of cancellations of shares purchased subsequent to July 31.

Remaining Holdings as of 2015-7-31 are:

So … seventy-five thousand shares at $20 comes to about $1.5-million. This is not the most earthshaking corporate action ever announced, but NCIBs that are actually executed by operating companies are very rare!

Standard & Poor’s has announced:

• •Montreal-based Bombardier Inc.’s leverage remains elevated and cash flow usage for the first half of 2015 has exceeded our expectations.
• •In addition, the company has announced a delay in the Global 7000
  aircraft’s schedule, with expected entry into service now in the second half of 2018, reduced margin guidance for the business jet segment, and reported weak net orders of aircraft.

• •As a result, we are lowering our ratings on Bombardier, including our long-term corporate credit rating to ‘B’ from ‘B+’.
• •Because of our expectation of continued reduced profitability, lower aircraft deliveries, and negative free cash flow through 2017, we have reassessed our comparable rating analysis modifier on the company to “neutral” from “positive.”
• •The negative outlook reflects our view that Bombardier is subject to significant execution and performance risk, and our belief that the company will face challenges to improve profitability and generate meaningful free cash flow in light of emerging endmarket stresses particularly for the aerospace segments.

…
Standard & Poor’s also lowered its ratings on Bombardier’s global scale preferred stock to ‘CCC’ from ‘CCC+’ and the company’s Canadian scale preferred stock to ‘P-5’ from ‘P-5(High)’.
…
The negative outlook reflects our view that Bombardier is subject to significant execution and performance risk, and our belief that Bombardier may be challenged to improve its profitability and generate meaningful free cash flow in light of emerging endmarket stresses particularly for the aerospace segments. Furthermore, the outlook incorporates our opinion that, given Bombardier’s leverage and debt-to-cash flow metrics, there remains very limited room for missteps on project execution or additional margin deterioration beyond what we expect when the Cseries moves into production.

We could lower our ratings on Bombardier should its new aircraft programs not allow for profitable production, resulting in our reassessment of the company’s business risk profile. In addition, we could take a negative rating action should Bombardier face financing difficulties that result in liquidity pressures.

An outlook revision to stable would be contingent on Bombardier being able to place the CSeries into service, effectively removing the execution and cost risks associated with the program, combined with generating sustained positive free cash flow.

Affected issues are BBD.PR.B, BBD.PR.C and BBD.PR.D.

These issues were last mentioned on PrefBlog when S&P downgraded them to P-5(high) in January, 2015. They are all tracked by HIMIPref™ but are relegated to the Scraps index on credit concerns.

Update, 2015-8-27: DBRS downgrades unsolicited issuer rating to B [Trend Negative]:

The Negative trend reflects: (1) the continued high cash burn rate, (2) the weaker outlook for operating earnings and cash flow, driven in part by the market weakness in key Emerging Markets, (3) the Company’s inability to secure further firm orders for its new CSeries aircraft and the increased prospects for delays or cancellations of the current firm orders, and (4) the slowing progress toward achieving a broader and more competitive business jet offering suite as a result of the development delays for the technically challenging large class Global 7000/8000 program, and the pause of the Learjet 85 program

The Bank of Nova Scotia has announced:

BNS Split Corp. II (the “Company”) announced today that holders of its Class A Capital Shares (“Capital Shares”) have overwhelmingly approved a share capital reorganization (the “Reorganization”) allowing holders of Capital Shares, at their option, to retain their investment in the Company after the scheduled redemption date of September 22, 2015. The Reorganization will permit holders of Capital Shares to extend their investment in the Company beyond the redemption date of September 22, 2015 for up to an additional 5 years. The Class B Preferred Shares, Series 1 will be redeemed on the same terms originally contemplated in their share provisions on September 22, 2015. In order to maintain the leveraged “split share” structure of the Company, the Company expects to create and issue a new series of Class B preferred shares on or about September 22, 2015.

Holders of Capital Shares electing to retain their investment in the Company will continue to enjoy the benefit of a leveraged participation in the capital appreciation of the Company’s portfolio while potentially deferring any capital gains tax liability which would otherwise be realized on the redemption of their Capital Shares.

Holders of Capital Shares who do not wish to continue their investment in the Company after September 22, 2015 must give notice that they wish to exercise their special retraction right and how they wish to be paid for their shares on or prior to August 20, 2015. Holders of Capital Shares who retract their Capital Shares will be paid on September 22, 2015. The Reorganization will become effective provided that holders of at least 800,000 Capital Shares retain their Capital Shares and do not exercise the special retraction right.

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.B respectively.

The proposed term extension for the Capital Units was previously reported on PrefBlog.

Canadian Utilities Limited has announced:

it has closed its previously announced public offering of Cumulative Redeemable Second Preferred Shares Series EE, 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 5,000,000 Series EE Preferred Shares for gross proceeds of $125,000,000. The Series EE Preferred Shares will begin trading on the TSX today under the symbol CU.PR.H. The proceeds will be used for capital expenditures, to repay indebtedness and for other general corporate purposes.

CU.PR.H is a Straight Perpetual, 5.25%, announced July 27. It will be tracked by HIMIPref™ and is assigned to the PerpetualDiscount subindex.

The issue traded 12,380 (sic) shares today (consolidated exchanges) in a range of 23.87-00 before closing at 23.87-00. Vital Statistics are:

The PerpetualDiscounts index was down 1.96% from July 27 to August 7, so the drop in CU.PR.H from its issue price far exceeds the drop in the index. Implied Volatility theory suggests that CU.PR.H is now slightly preferable to other CU PerpetualDiscounts:

Click for Big

The fit to the curve is very good, but the Implied Volatility is very high at 22%. In a world in which all the assumptions of Implied Volatility theory are correct, this would suggest CU.PR.H will – on average, over all possible outcomes – outperform its siblings as Implied Volatility declines to a more reasonable level (say, about 15%). A decline in Implied Volatility (which would be reflected at a flattening of the curve in the chart) will also be expected simply from an increase in yields, even though this makes no sense.

There will be those who argue that market yields are more likely to decrease than to increase and which will leave us with the problem of estimating “how much of a decrease” and whether the relatively long period before a par call of CU.PR.H is possible compensates for it having the highest dividend rate. It’s never easy!

All in all, though, I’d say it’s a pretty good issue at the current price.

Bank of Montreal has announced:

it has closed its domestic public offering of Non-Cumulative Perpetual Class B Preferred Shares, Series 35 (Non-Viability Contingent Capital (NVCC)) (the “Preferred Shares Series 35”). The offering was underwritten on a bought deal basis by a syndicate of underwriters led by BMO Capital Markets. Bank of Montreal issued 6 million Preferred Shares Series 35 at a price of $25 per share to raise gross proceeds of $150 million.

The Preferred Shares Series 35 were issued under a prospectus supplement dated July 22, 2015, to the Bank’s short form base shelf prospectus dated March 13, 2014. Such shares will commence trading on the Toronto Stock Exchange today under the ticker symbol BMO.PR.Z.

Z is for Zombie. I have been advised that the underwriters aren’t wasting any time blowing it out of inventory – it’s being reoffered at 23.75.

BMO.PR.Z is a Straight Perpetual, 5.00%, NVCC-compliant issue, announced July 20. It will be tracked by HIMIPref™ and has been assigned to the PerpetualDiscount sub-index.

The issue traded 96,035 shares today in a range of 24.01-25 before closing at 24.00-01, 45×98. Vital statistics are:

It will be recalled that EMA.PR.A will reset to 2.555% effective August 15.

Holders of EMA.PR.A have the option to convert to FloatingResets, which will pay 3-month bills plus 184bp on the par value of $25.00. The deadline for notifying the company of the intent to convert is July 31 at 5pm; 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 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., EMA.PR.A and the FloatingReset, EMA.PR.?, 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 average for both investment-grade and junk issues is not far above 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 EMA.PR.A 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 EMA.PR.A 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 EMA.PR.A are tendered for conversion, then no conversions will be allowed; but if only 100,000 shares of EMA.PR.A will remain after the rest are all tendered, then conversion will be mandatory. However, this is relatively rare: all 29 Strong Pairs currently extant have some version of this condition and all but two have both series outstanding.

Royal Bank of Canada has announced:

it has closed its domestic public offering of Non-Cumulative, Preferred Shares Series BI. Royal Bank of Canada issued 6 million Preferred Shares Series BI at a price of $25 per share to raise gross proceeds of $150 million.

The offering was underwritten by a syndicate led by RBC Capital Markets. The Preferred Shares Series BI will commence trading on the Toronto Stock Exchange today under the ticker symbol RY.PR.O.

The Preferred Shares Series BI were issued under a prospectus supplement dated July 16, 2015 to the bank’s short form base shelf prospectus dated December 20, 2013.

RY.PR.O is a NVCC-compliant Straight Perpetual paying 4.90%, announced July 14. It will be tracked by HIMIPref™ and has been assigned to the PerpetualDiscounts subindex.

The issue traded 254,478 shares today (consolidated exchanges) in a range of 24.52-65 before closing at 24.57-60. Vital statistics are:

The performance of this issue is actually worse than it looks, since the HIMIPref™ PerpetualDiscounts index is up 1.23% since July 14.

TD.PF.F, a 4.90% NVCC-compliant Straight Perpetual announced July 9 has settled.

The issue traded 464,790 shares today (consolidated exchanges) in a range of 24.57-74 before closing at 24.66-69. Note that the HIMIPref™ PerpetualDiscounts subindex is down up about 1.25% (about $0.30 for a $25 issue) between July 9 and July 21, so the issue is not actually as poorly received as one might think from the raw numbers did not benefit from the rising market.

Sorry about the mix-up in direction … I inverted the numerator and denominator! JH 15-07-22

TD.PF.F will be tracked by HIMIPref™ and has been assigned to the PerpetualDiscounts subindex. Vital statistics are: