Category: Issue Comments

Timbercreek Asset Management Inc. has announced:

TD Split Inc. (the “Company”) announced today that, in accordance with the expiration of the term and as set out in the short form prospectus of the Company dated October 26, 2010 (the “Prospectus”), the Company will redeem all outstanding Class C Preferred Shares and Class C Capital Shares (collectively, the “Shares”) on November 15, 2015 (the “Redemption Date”) as scheduled and in accordance with their share provisions.

Prior to the Redemption Date, Timbercreek Asset Management Ltd. will sell the Company’s portfolio of TD Bank common shares to fund the redemptions. On the Redemption Date, in accordance with the share provisions for the Shares, holders of Class C Preferred Shares shall be entitled to receive a redemption price per share equal to the lesser of $10.00 and the Company’s unit value. Holders of Class C Capital Shares shall be entitled to receive a redemption price per share equal to the amount by which the unit value exceeds $10.00, or provided the holder tenders a cash amount of $10.00 for each Class C Capital Share to be redeemed at least 20 business days prior to the Redemption Date, TD Bank common shares represented by such holder’s pro rata share of the Company’s portfolio of TD Bank common shares plus (or minus) the pro rata share of the amount by which the value of the other assets of the Company exceed (or are less than) the liabilities of the Company as at the Redemption Date and the redemption value at the Class E Shares.

The Company was established to generate dividend income for the Class C Preferred Shares while providing holders of the Class C Capital Shares with a leveraged opportunity to participate in capital appreciation from a portfolio of common shares of The Toronto-Dominion Bank. In that respect, as of August 15, 2015, the Class C Preferred Shares, since their issuance in 2010, have generated a consistent 4.75% annual yield, with no change to the par value, while the Class C Capital Shares have delivered a net capital appreciation of 11.43% annualized, which compares to the underlying TD bank stock appreciation of 7.5%.

Information concerning TD Split Inc. is available on our website at http://www.timbercreek.com/td-split-inc.

TDS.PR.C was last mentioned on PrefBlog when it was confirmed at Pfd-2 by DBRS. The issue came to market five years ago with the refunding of TDS.PR.B.

Update, 2015-11-03: Final figures have been announced:

TD Split Inc. (TSX:TDS.C)(TSX:TDS.PR.C) (the “Company”) announced today that in connection with the previously announced upcoming maturity of the fund on November 15, 2015, 968,770 Class C Preferred Shares and 799,390 Class C Capital Shares have been tendered for redemption on November 13, 2015. The redemption price paid for the Class C Preferred Shares will be $10.00 per Class C Preferred Share, and the redemption price for the Class C Capital Shares will be $28.7964 per Class C Capital Share.

In addition, holders of Class C Capital Shares tendered 169,380 Class C Capital Shares (representing approximately 17.48% of the outstanding Class C Capital Shares), together with a cash amount of $10.00 per Class C Capital Share tendered (together, a “TD Split Unit”), in exchange for the holder’s pro rata share of the Company’s shares of TD Bank, resulting in payment of 0.7165 TD Bank Shares per TD Split Unit.

Payments of cash and delivery of the underlying portfolio shares owing to shareholders as a result of the final redemptions will be made by the Company on November 13, 2015.

Nova Scotia Power Incorporated has announced:

that effective October 15, 2015 (the “Redemption Date”) the Company will redeem all of its outstanding Cumulative Redeemable First Preferred Shares, Series D (the “Series D Shares”) for a redemption price of $25.00 per share. In addition, on July 10, 2015, the Company declared a dividend on the Series D Shares in the amount of $0.36875 per share for the quarter ending on September 30, 2015. The dividend will be paid in the usual manner on October 15, 2015 to holders of record on October 1, 2015.

Beneficial holders of the Series D Shares should contact the financial institution, broker or other intermediary through which they hold the Series D Shares to confirm how they will receive their redemption proceeds.

After the Redemption Date, holders of the Series D Shares will cease to be entitled to dividends or to exercise any rights of shareholders.

NSI.PR.D was mentioned last week on PrefBlog when S&P put the company on Outlook-Negative due to fears that its parent Emera, was overextending itself with an acquisition.

NSI.PR.D is a rather odd issue; it pays a flat rate of $1.475, which is 5.90% of par, was issued 2000-10-27 and becomes callable for the first time at par 2015-10-15. That’s a nice long lock-out period! Further, commencing 2016-01-15 it becomes retractible at $24.75 which is the odd part of the deal. Nice to have, certainly, and while the sub-par retraction price does make sense, I can’t think of any other issue that works this way. However, it will soon be off the books and I won’t have to worry about it any more.

Dividend Growth Split Corp. has released its Semi-Annual Report to June 30, 2015.

The company is the issuer of DGS.PR.A

Figures of interest are:

MER: Expenses were $2,414,610 for six months on assets of $349.2-million (see below) or 1.38% p.a..

Average Net Assets: We need this to calculate portfolio yield and MER. There were negligible capital transactions, so we’ll just take the average of the beginning and end of period assets (including preferred shares) so: (364.6-million + 349.7-million)/2 = $357.2-million. Total preferred dividends paid were 4,965,998 at 0.525 p.a., implying an average of 18.92-million units outstanding, at an average NAVPU of (17.42 + 18.65) / 2 = 18.04, implying average assets of $341.3. Taking the average of two methods results in an approximate value of 349.2-million.

Underlying Portfolio Yield: Total Income (excluding capital gains and losses) of $6.612-million semi-annually divided by average net assets of $349.2-million is 3.78% p.a..

Income Coverage: Net income of $4.197-million (before capital gains and losses) to cover preferred dividends of $4.966-million is 85%.

Partners Value Split Corp. has released its Semi-Annual Report to June 30, 2015.

The company has the following issues outstanding: PVS.PR.A, PVS.PR.B, PVS.PR.C and PVS.PR.D.

Figures of interest are:

MER: I suggest it is best to include the amortization of share issue costs in MER – after all, this is a charge against the stated value of the company. Therefore, expenses were $215,000 (regular expenses) + $739,000 (amortization) = $954,000 for six months on assets of $3.301-billion (see below) or 4bp p.a..

Average Net Assets: We need this to calculate portfolio yield and MER. There were negligible capital transactions, so we’ll just take the average of the beginning and end of period assets (including preferred shares) so: [(2.733-billion + 0.761-billion) + (2.348-billion + 0.760-billon)]/2 = $3.301-billion

Underlying Portfolio Yield: Total Income of $23.3-million semi-annually divided by average net assets of $3,301-million is 1.41% p.a..

Income Coverage: Net income of $23.068-million less amortization of $0.739-million is $22.329-million to cover senior preferred dividends and debenture interest of $12.964-million is 172%. However, I consider it prudent to include the $10-million p.a. stated entitlement of the Junior preferreds, even though none of this was actually paid in 2015 to date because the Juniors can be retracted at any time, which could prove embarrassing in times of extreme stress. So I’d say income coverage is 124%.

It will be recalled that

• NPI.PR.A will reset to 3.51% effective September 30. Holders of NPI.PR.A have the option to convert to FloatingResets, which will pay 3-month bills plus 280bp, reset quarterly.
• FFH.PR.G will reset to 3.318% effective September 30. Holders of FFH.PR.G have the option to convert to FloatingResets, which will pay 3-month bills plus 256bbp, reset quarterly.
• ALA.PR.A will reset to 3.38% effective September 30. Holders of ALA.PR.A have the option to convert to FloatingResets, which will pay 3-month bills plus 266bp, reset quarterly.

The deadline for notifying the companies of the intent to convert is September 15 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., NPI.PR.A and the FloatingReset, NPI.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 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 nearly all 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 NPI.PR.A, FFH.PR.G and ALA.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 NPI.PR.A are tendered for conversion, then no conversions will be allowed; but if only 100,000 shares of NPI.PR.A 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.

As mentioned in the post EMA Outlook-Negative by S&P; Review-Developing by DBRS, Emera’s Canadian subsidiary Nova Scotia Power has been put on Outlook-Negative by S&P:

• •On Sept. 4, Emera announced the US$10.4 billion proposed acquisition of TECO Energy, a Florida-based holding company that wholly owns regulated utilities Tampa Electric Co. and New Mexico Gas Co.
• •The proposed acquisition is partly being financed with the issuance of convertible debentures, and the additional debt load pushes Emera’s adjusted funds from operations-to-debt ratio to below 11%, the downgrade trigger.
• •As a result of the financing risk associated with this large acquisition that will double the size of the company, we are revising our outlook on Emera and its Canadian subsidiary Nova Scotia Power Inc. to negative from stable.
• •We are also revising the financial risk profile to “aggressive” from “significant”. The business risk of the consolidated entity post acquisition remains “excellent”.
• •We are affirming all ratings on Emera and NSPI, including our ‘BBB+’ long-term corporate credit ratings.

…
The negative outlooks on Emera and NSPI reflect the financing risk associated with this large acquisition and our expectation that the consolidated pro forma credit metrics will materially weaken due to the C$1.9 billion convertible debenture issuance to finance, in part, the purchase of TECO Energy.

Although we expect that the debentures have a high likelihood of conversion due to several factors including no interest after acquisition close, targeted sale to institutions that would be buyers of Emera equity, not debt), in the meantime credit metrics are expected to be below 11%. If conversion does not occur as expected and metrics remain below 11%, we could lower the ratings on Emera and NSPI.

We could revise our outlook to stable within our two-year outlook period if we expect consolidated AFFO-to-debt to be sustained comfortably above 11%, all else being equal. This could occur if the debentures are successfully converted.

The DBRS announcement regarding Emera made no mention of Nova Scotia Power.

Emera Inc. announced on Friday:

a definitive agreement for Emera to acquire TECO Energy (the “Transaction”), creating a North American energy leader, with over US$20 billion of assets and more than 2.4 million electric and gas customers. Upon closing, TECO Energy will become a wholly owned subsidiary of Emera.

Under the terms of the all-cash deal, which has been unanimously approved by the Board of Directors of both companies, TECO Energy shareholders will receive US$27.55 per common share, a 48 percent premium based on TECO Energy’s unaffected closing stock price on July 15, 2015 (the last trading day prior to news reports regarding TECO Energy’s strategic review) and 25 percent above TECO Energy’s unaffected 52-week high. This represents an aggregate purchase price of approximately US$10.4 billion including assumption of approximately US$3.9 billion of debt.

The closing of the Transaction, which is expected to occur by mid-2016, is subject to TECO Energy common shareholder approval and certain regulatory and government approvals, including approval by the New Mexico Public Regulation Commission, the Federal Energy Regulatory Commission and compliance with any applicable requirements under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the satisfaction of customary closing conditions.

… and announced today:

that its direct wholly-owned subsidiary, Emera Holdings NS Company (the “Selling Debentureholder”), has agreed to sell $1,900,000,000 aggregate principal amount of 4.00% convertible unsecured subordinated debentures (“Debentures”) of Emera in a secondary offering on a “bought deal” basis (the “Offering”). In connection with the Offering, the underwriters have also been granted an over-allotment option to purchase up to an additional $285,000,000 aggregate principal amount of Debentures at the offering price, within 30 days from the date of the closing of the Offering solely to cover over-allotments, if any, and for market stabilization purposes.

All Debentures are being sold on an instalment basis at a price of $1,000 per Debenture, of which $333 is payable on the closing of the Offering and the remaining $667 is payable on a date (the “Final Instalment Date”) to be fixed by the Company following satisfaction of all conditions precedent to the closing of Emera’s acquisition of TECO Energy, Inc. (NYSE:TE).

On September 4, 2015 Emera announced that it had entered into an agreement and plan of merger pursuant to which it will indirectly acquire TECO Energy, Inc. (“TECO Energy”), a Florida and New Mexico regulated electric and gas utilities holding company, for an aggregate purchase price of approximately US$10.4 billion including the assumption of approximately US$3.9 billion of debt.

As a result of this activity, S&P has announced:

• •On Sept. 4, Emera announced the US$10.4 billion proposed acquisition of TECO Energy, a Florida-based holding company that wholly owns regulated utilities Tampa Electric Co. and New Mexico Gas Co.
• •The proposed acquisition is partly being financed with the issuance of convertible debentures, and the additional debt load pushes Emera’s adjusted funds from operations-to-debt ratio to below 11%, the downgrade trigger.
• •As a result of the financing risk associated with this large acquisition that will double the size of the company, we are revising our outlook on Emera and its Canadian subsidiary Nova Scotia Power Inc. to negative from stable.
• •We are also revising the financial risk profile to “aggressive” from “significant”. The business risk of the consolidated entity post acquisition remains “excellent”.
• •We are affirming all ratings on Emera and NSPI, including our ‘BBB+’ long-term corporate credit ratings.

…
The negative outlooks on Emera and NSPI reflect the financing risk associated with this large acquisition and our expectation that the consolidated pro forma credit metrics will materially weaken due to the C$1.9 billion convertible debenture issuance to finance, in part, the purchase of TECO Energy.

Although we expect that the debentures have a high likelihood of conversion due to several factors including no interest after acquisition close, targeted sale to institutions that would be buyers of Emera equity, not debt), in the meantime credit metrics are expected to be below 11%. If conversion does not occur as expected and metrics remain below 11%, we could lower the ratings on Emera and NSPI.

We could revise our outlook to stable within our two-year outlook period if we expect consolidated AFFO-to-debt to be sustained comfortably above 11%, all else being equal. This could occur if the debentures are successfully converted.

Prior to the announcement of the convertible debt issue, DBRS announced:

DBRS Limited (DBRS) has today placed the BBB (high) Issuer Rating, BBB (high) Medium-Term Notes and Pfd-3 (high) Preferred Shares – Cumulative ratings of Emera Inc. (Emera or the Company) Under Review with Developing Implications.
…
The primary focus of DBRS’s FRA [financial risk assessment] analysis is on Emera’ non-consolidated capital structure (parent level) and cash flow from the subsidiaries to the parent to service the parent’s debt and corporate expenses. On a non-consolidated basis, the cash flow-to-interest expense ratio was reasonable at 12.3x in LTM 2015, while debt-to-capital was approximately 19%. DBRS notes that the non-consolidated leverage of 19% is well within the 30% threshold.

Currently, it is uncertain as to how Emera plans to ultimately finance the Acquisition. As a result, DBRS has placed the ratings of Emera Under Review with Developing Implications. DBRS will further review the Company’s financing plan when it is finalized. Upon final review, if the Company finances the Acquisition in such a way that its non-consolidated debt-to-capital structure exceeds 30% and its other non-consolidated credit metrics deteriorate significantly without corrective action within a reasonable time frame, then a negative rating action is likely to occur.

Affected issues are EMA.PR.A, EMA.PR.B, EMA.PR.C, EMA.PR.E and EMA.PR.F. S&P’s announcement also affects NSI.PR.D, which will be posted separately.