Category: Issue Comments

Enbridge Inc. has announced:

• •$30.4 billion transfer of the Canadian Mainline, the Regional Oil Sands System and Canadian renewable energy assets to Enbridge Income Fund
• •Transaction supports higher dividend payout and positions Enbridge to extend its industry leading growth rate beyond 2018
• •Available Cash Flow from Operations growth expected to average approximately 18 percent from 2014 to 2018
• •33 percent dividend per share growth in 2015, as previously announced
• •14 to 16 percent expected annual average dividend per share growth from 2016 to 2018
• •Transformation of Enbridge Income Fund Holdings to a premier Liquids Pipelines investment vehicle in Canada
• •Enbridge to remain as manager and operator of transferred assets

Enbridge Inc. (TSX:ENB) (NYSE:ENB) (Enbridge or the Company) has reached agreement with Enbridge Income Fund (the Fund) to transfer its Canadian Liquids Pipelines Business, held by Enbridge Pipelines Inc. (EPI) and Enbridge Pipelines Athabasca Inc. (EPA), and certain Canadian renewable energy assets to the Fund for consideration payable at closing valued at $30.4 billion (the Transaction). The Transaction is subject to customary regulatory approvals and closing conditions, as well as a vote of the public shareholders of Enbridge Income Fund Holdings Inc. (TSX: ENF) (ENF), which is expected to occur in August 2015.

The Transaction is a key component of Enbridge’s Financial Strategy Optimization introduced in December of last year which included an increase in the Company’s targeted dividend payout. It advances the Company’s sponsored vehicle strategy and supports Enbridge’s previously announced 33 percent dividend increase in 2015 and expected annual average dividend per share (DPS) growth of 14 to 16 percent from 2016 through to 2018. It also positions Enbridge to extend its industry leading DPS growth beyond 2018. The Transaction is expected to provide Enbridge with an alternate source of funding for its enterprise wide growth initiatives and enhance its competitiveness for new organic growth opportunities and asset acquisitions.

The transaction (often referred to as the dropdown), and its resultant rating agency unhappiness with the company, was discussed on PrefBlog in December, 2014. Now it has advanced a step and the first thing that happened was a downgrade from S&P:

• •We are lowering our ratings on Calgary, Alta.-based Enbridge Inc. (EI), Enbridge Pipelines Inc. (EPI), and Toronto-based Enbridge Gas Distribution Inc. (EGD), including our long-term corporate credit rating on each to ‘BBB+’ from ‘A-‘.
• •We are also lowering our corporate credit rating on Houston-based Enbridge Energy Partners L.P. (EEP) to ‘BBB’ from ‘BBB+’.
• •We are removing the ratings from CreditWatch, where they were placed Dec. 4, 2014.
• •The downgrade reflects our assessment of weak forecast financial metrics at EI.
• •The announced dropdown transaction of assets to Enbridge Income Fund (EIF) does not change our assessment of business or financial risk profiles at EI, nor does it introduce a sufficient level of subordination to further lower EI debt ratings.
• •We assess EGD and EPI to be “core” and EEP to be “highly strategic” to EI.

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We view Enbridge’s financial risk profile as “aggressive.” The continuing large capital program to expand existing and build new liquids pipelines will continue to pressure financial metrics for the next several years. We forecast adjusted funds from operations (AFFO)-to-debt of 10%-13% under our forecast capital expenditures and financing plans over the next two years. The lower financial risk profile reflects our expectation of lower consolidated funds from operations (FFO)-to-debt ratios that are in the aggressive financial risk profile category using the medial cash flow volatility table. The company has brought large-scale capital projects in service on time and on budget, and we expect this to continue. Financial policy has generally been credit-supportive, although growing capital expenditures from new projects, and the parents support of subsidiary companies with internal equity financing, have shifted to what we believe is a more neutral stance.
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A downgrade could occur if AFFO-to-debt stays below 11%, which could result from weaker financial performance, due to mainline volumes falling below expectations, or a more aggressive funding of the large capital program throughout our outlook period.

Maintaining AFFO-to-debt above 15% could result in an upgrade by revising the financial risk profile to “significant” from aggressive.

DBRS was more restrained, changing the status of the Review to Negative from Developing:

DBRS Limited (DBRS) has today changed the status of the following ratings of Enbridge Inc. (ENB) to Under Review with Negative Implications from Under Review with Developing Implications, where they were placed on December 3, 2014:
— Enbridge Inc., Issuer Rating of A (low)
— Enbridge Inc., Medium-Term Notes & Unsecured Debentures rated A (low)
— Enbridge Inc., Cumulative Redeemable Preferred Shares rated Pfd-2 (low)
— Enbridge Inc., Commercial Paper rated R-1 (low)

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DBRS expects the combination of the Transaction and the Plan to have a negative impact on ENB’s credit risk profile mainly due to the following factors:

(1) Following completion of the Transaction and the Plan, holders of ENB’s direct external debt would be further away from the cash flow of the assets transferred to EIF (the Transferred Assets). Dividends from the Transferred Assets would be needed to service EIF debt prior to the payment of common dividends to EIFH’s public shareholders and payment of preferred and common share dividends to ENB, the latter of which would be available to meet the obligations to ENB’s external debt and preferred shareholders. Conversely, as part of the Plan, ENB’s direct external debt holders would be closer to EEP’s assets, which would be owned directly by ENB (through EECI) rather than through EPI (and then EECI) following completion of the Plan. For context, however, the Transferred Assets accounted for more than 40% of ENB’s 2014 segment earnings compared with 12% for EEP.
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(2) The initial 33% increase in ENB’s common share dividend and its move to a higher dividend payout ratio range (75% to 85% of adjusted earnings, converting to 40% to 50% of available cash flow from operations), combined with the impacts of the Transaction and the Plan, would result in higher consolidated ENB funding needs. Consequently, ENB would be relying more heavily on dividends from (and external funding at) its directly encumbered subsidiaries (including EIF) to finance the direct-to-ENB portion (including its joint ventures with EEP) of the substantial consolidated growth capital expenditure (capex) program over the 2015 to 2018 period. This factor would be at least partly offset by the offloading of at least part of the direct-to-ENB funding needs to EIF. DBRS’s ENB ratings incorporate expected improvement in ENB’s credit metrics on both fully and modified consolidated bases as longer-dated organic growth projects come on-stream and begin to generate cash flow in the later years of its five-year growth capex program.
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Based on its review to date, DBRS expects to downgrade all of ENB’s ratings by one notch, with Stable trends, upon completion of the Transaction; therefore, DBRS believes that Under Review with Negative Implications is the appropriate rating action at this time.

Moody’s had nothing to say but the Outlook remains Negative.

Affected issues are: ENB.PF.A, ENB.PF.C, ENB.PF.E, ENB.PF.G, ENB.PR.A, ENB.PR.B, ENB.PR.D, ENB.PR.F, ENB.PR.H, ENB.PR.J, ENB.PR.N, ENB.PR.P, ENB.PR.T and ENB.PR.Y.

Husky Energy has announced that it:

has completed its recently announced public offering of 6,000,000 Cumulative Redeemable Preferred Shares, Series 7 (the “Series 7 Shares”) with a syndicate of underwriters led by RBC Capital Markets, BMO Capital Markets and Scotia Capital Inc.

The aggregate gross proceeds to Husky from the completed offering are $150 million.

The net proceeds of the offering will be used for general corporate purposes which may include, among other things, the partial repayment of bank debt incurred by the Company to further advance its near-term heavy oil thermal projects.

The Series 7 Shares were offered by way of prospectus supplement to the short form base shelf prospectus of Husky Energy dated February 23, 2015.

Holders of the Series 7 Shares are entitled to receive a cumulative quarterly fixed dividend yielding 4.60 percent annually for the initial period ending June 30, 2020. Thereafter, the dividend rate will be reset every five years at a rate equal to the five-year Government of Canada bond yield plus 3.52 percent.

Holders of Series 7 Shares will have the right, at their option, to convert their shares into Cumulative Redeemable Preferred Shares, Series 8 (the “Series 8 Shares”), subject to certain conditions, on June 30, 2020 and on June 30 every five years thereafter. Holders of the Series 8 Shares will be entitled to receive cumulative quarterly floating dividends at a rate equal to the 90-day Government of Canada Treasury Bill rate plus 3.52 percent.

The Series 7 Shares are listed on the Toronto Stock Exchange under the symbol HSE.PR.G.

HSE.PR.G is a FixedReset, 4.60%+352, announced June 9. It will be tracked by HIMIPref™ and has been assigned to the FixedReset subindex.

The issue traded 1,051,829 shares today (consolidated exchanges) in a range of 24.50-73 before closing at 24.59-60. Since announcement date the FixedReset subindex is down just a hair over 1%, so the weakness in this issue is not fully explained by market movement. Vital statistics are:

Similarly to the analysis of announcement day, the chart of Implied Volatility for the series of HSE FixedResets indicates that the new issue can be thought of as being a little cheap because the Implied Volatility seems a little high, indicating that there is, perhaps, a little bit more downside protection with the higher-spread issues than with the lower-spread issues.

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Update, 2015-6-18: Rated Pfd-2(low) by DBRS.

It will be recalled that SLF.PR.G will reset to 2.275% effective June 30 and TRP.PR.B will reset at 2.152% effective June 30.

Holders of SLF.PR.G and TRP.PR.B have the option to convert to FloatingResets, which will pay 3-month bills plus 141bp for the SLF issue and 3-month bills plus 128bp for the TRP issue; both rates will be on the par value of $25.00. The deadline for notifying the company of the intent to convert is June 15 for both issues; but note first 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., SLF.PR.G and the FloatingReset, SLF.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).

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The market appears to have a distaste at the moment for floating rate product; most of the implied rates until the next interconversion are lower than the current 3-month bill rate! 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; four of the six junk pairs now in existence are not plotted on the graph as they have a negative implied T-Bill rate.

If we plug in the current bid price of the SLF.PR.G and TRP.PR.B 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 below the price of their FixedReset counterparts. Therefore, I recommend that holders of SLF.PR.G and TRP.PR.B continue to hold the issues 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 SLF.PR.G are tendered for conversion, then no conversions will be allowed; but if only 100,000 shares of SLF.PR.G will remain after the rest are all tendered, then conversion will be mandatory. However, this is relatively rare: all 26 Strong Pairs currently extant have some version of this condition and all but two have both series outstanding.

Loblaw Companies Limited has announced:

the completion today of the sale of 9 million cumulative Second Preferred Shares, Series B (the “Preferred Shares Series B”), to yield 5.30% per annum, to a syndicate of underwriters co-led by RBC Capital Markets, Scotiabank and TD Securities Inc. The aggregate gross proceeds of the sale were $225 million. The Preferred Shares Series B have been listed and posted to trade on the Toronto Stock Exchange under the symbol “L.PR.B”.

L.PR.B is a 5.30% Straight Perpetual announced June 2. It will be tracked by HIMIPref™ but relegated to the Scraps index on credit concerns.

The issue traded 765,451 shares today (consolidated exchanges) in a range of 24.87-97 before closing at 24.92-95. Vital statistics are:

Standard & Poor’s has announced:

• •We now consider the prospect that the U.K. and German governments would provide extraordinary support to their banking systems to be uncertain, meaning that we now include no such uplift in the ratings on systemic commercial banking groups domiciled in these countries.
• •However, we recognize that these countries’ bank resolution frameworks are now well advanced, and we now include notches of uplift for systemic banks that we expect will hold or build sizeable volumes of bail-in capital in the coming years.
• •At the same time, we have recognized the strengthening intrinsic creditworthiness of a few banks that have, for example, materially strengthened their capitalization and lowered their exposure to unexpected losses.
• •We have resolved the CreditWatch placements on all these banks, lowering the long-term, and in some cases short-term, ratings on some, and affirming the ratings on others.
• •The outlook on most of these banks is now stable, but we have assigned negative outlooks where, for example, we see a risk that their building of core or bail-in capital may fall short.
• •Finally, we maintain the developing outlook on Germany-based Deutsche Pfandbriefbank AG (PBB), reflecting our view that the outcome of its reprivatization process is still uncertain.

…
•We affirmed our ratings on the hybrid capital instruments issued by, or guaranteed by, HSBC, Santander UK, and SCB, but raised by one notch the issue credit ratings on hybrids issued by Lloyds (and its banking affiliates) and Nationwide. We also raised by one notch the long-term issuer credit ratings on Lloyds Banking Group PLC and HBOS PLC.
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However, to summarise, these actions reflect our view that these countries’ implementation of the comprehensive resolution framework set out in the EU’s Bank Recovery & Resolution Directive, including bail-in powers and requirements, mean that the prospect for extraordinary government support now appears uncertain, even for systemically important bank operating companies, and even while these banks remain in a transitional phase of building buffers of loss-absorbing debt instruments. However, we expect that regulators will (in most cases) require these banks within the next few years to build those buffers to a level that offers a material level of protection to senior unsecured creditors on a nonviability (or “gone concern”) basis.

For two reasons, our review primarily focused on the implications of the above for the issuer credit ratings on these banks’ operating companies and the issue credit ratings on their senior unsecured debt issue instruments:

• •Our ratings on European banks’ subordinated debt instruments and U.K. bank holding companies already excluded any uplift for government
  support; and

• •We saw no prospect of uplift under our additional loss absorbing capacity (ALAC) criteria for the instruments cited in the bullet above because regulators intend them to act as a source of bail-in capital to support the systemic functions provided by bank operating companies, including the servicing of certain senior obligations.

The now-resolved Credit-Watch-Negative on HSBC was reported in February.

Bank of Montreal has announced:

it has closed its domestic public offering of Non-Cumulative 5-Year Rate Reset Class B Preferred Shares Series 33 (Non-Viability Contingent Capital (NVCC)) (the “Preferred Shares Series 33”). The offering was underwritten on a bought deal basis by a syndicate of underwriters led by BMO Capital Markets. Bank of Montreal issued 8 million Preferred Shares Series 33 at a price of $25 per share to raise gross proceeds of $200 million.

The Preferred Shares Series 33 were issued under a prospectus supplement dated May 29, 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.Y.

BMO.PR.Y is a FixedReset, 3.80%+271, announced May 27. It will be tracked by HIMIPref™ and has been assigned to the FixedReset subindex.

The issue traded 651,560 shares today (consolidated exchanges) in a range of 24.46-65 before closing at 24.65-73. Vital statistics are:

This issue looks reasonably good according to Implied Volatility theory:

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Note that the very high level of Implied Volatility is also calculated when only the NVCC-compliant issues are considered – for these issues alone, I get a spread of 99bp and Implied Volatility of 40%. This level of Implied Volatility is silly and will generally arise when the issues concerned are trading with an expectation of directionality in prices; I suggest that there are a lot of investors who figure that anything with the BMO brand name on it will trade somewhere near par forever.

This has the effect of making the lower spread issues vulnerable to a decline in credit quality and/or an increase in spreads; in other words, the higher-spread issues (such as this new issue) are getting a boatload of downside protection for free (when compared to other BMO issues ONLY!).

Royal Bank of Canada has announced:

it has closed its domestic public offering of Non-Cumulative, Preferred Shares Series BH. Royal Bank of Canada issued 6 million Preferred Shares Series BH 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 BH will commence trading on the Toronto Stock Exchange today under the ticker symbol RY.PR.N.

The Preferred Shares Series BH were issued under a prospectus supplement dated May 29, 2015 to the bank’s short form base shelf prospectus dated December 20, 2013.

RY.PR.N is a 4.90% Straight Perpetual announced May 28. It will be tracked by HIMIPref™ an is assigned to the PerpetualDiscounts subindex.

The issue traded 659,315 shares today (consolidated exchanges) in a wide range of 24.57-90 before closing at 24.75-85. Vital statistics are:

Fortis Inc. has announced:

that 2,975,154 of its 10,000,000 issued and outstanding Cumulative Redeemable Five-Year Fixed Rate Reset First Preference Shares, Series H (“Series H Shares”) were tendered for conversion, on a one‑for‑one basis into Cumulative Redeemable Floating Rate First Preference Shares, Series I (“Series I Shares”). As a result of the conversion, Fortis has 7,024,846 Series H Shares and 2,975,154 Series I Shares issued and outstanding. The Series H Shares will continue to be listed on the Toronto Stock Exchange (TSX) under the symbol FTS.PR.H. The Series I Shares will begin trading on the TSX today under the symbol FTS.PR.I.

The Series H Shares will pay on a quarterly basis, for the five-year period beginning on June 1, 2015, as and when declared by the Board of Directors of Fortis, a fixed dividend based on an annual fixed dividend rate of 2.50 per cent.

The Series I Shares will pay a floating quarterly dividend for the five-year period beginning on June 1, 2015, as and when declared by the Board of Directors of Fortis. The floating quarterly dividend rate for the Series I Shares for the first quarterly floating rate period (being the period from June 1, 2015 to but excluding September 1, 2015) is 2.10 per cent and will be reset every quarter based on the applicable 3-month Government of Canada Treasury Bill rate plus 1.45%.

For more information on the terms of, and risks associated with an investment in, the Series H Shares and the Series I Shares, please see the Corporation’s prospectus dated January 18, 2010 which can be found under the Corporation’s profile on SEDAR at www.sedar.com and on the Corporation’s website at www.fortisinc.com.

I am very pleased to see this news release, following the earlier policy of minimal communication.

The 30% conversion rate of FixedReset into FloatingReset is lower than it has been for most issues lately; perhaps the persistently poor pricing of FloatingResets is beginning to seep into the market’s consciousness!

Vital statistics for the two elements of the Strong Pair are:

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The FTS.PR.H / FTS.PR.I pair is at the high end of break-even T-Bill rates, but not impossibly so at 0.63% compared with an average of 0.49% for all investment-grade pairs. There are three junk pairs implying a negative three-month bill rate over the next five-odd years.

TransCanada Corporation has announced:

that it has notified the registered shareholder of its Cumulative Redeemable First Preferred Shares, Series 3 (Series 3 Shares) of the Conversion Privilege and Dividend Rate Notice.

Beginning on June 1, 2015 and ending on June 15, 2015, holders of the Series 3 Shares will have the right to choose one of the following options with regard to their shares:
1.To retain any or all of their Series 3 Shares and continue to receive a fixed quarterly dividend; or
2.To convert, on a one-for-one basis, any or all of their Series 3 Shares into Cumulative Redeemable First Preferred Shares, Series 4 (Series 4 Shares) of TransCanada and receive a floating quarterly dividend.

Holders of the Series 3 Shares and the Series 4 Shares will have the opportunity to convert their shares again on June 30, 2020, and every five years thereafter as long as the shares remain outstanding.

Effective June 1, 2015, the Annual Fixed Dividend Rate for the Series 3 shares was set for the next five year period at 2.152%.

Effective June 1, 2015, the Floating Quarterly Dividend for the Series 4 Shares was set for the first Quarterly Floating Rate Period (being the period from and including June 30, 2015, to but excluding September 30, 2015) at 1.945%. The Floating Quarterly Dividend Rate will be reset every quarter.

The Series 3 Shares are issued in “book entry only” form and, as such, the sole registered holder of the Series 3 Shares is the Canadian Depositary for Securities Limited (CDS). All rights of beneficial holders of Series 3 Shares must be exercised through CDS or the CDS participant through which the Series 3 Shares are held. The deadline for the registered shareholder to provide notice of exercise of the right to convert Series 3 Shares into Series 4 Shares is 3 p.m. (MDT)/ 5 p.m. (EDT) on June 15, 2015. Any notices received after this deadline will not be valid. As such, holders of Series 3 Shares who wish to exercise their right to convert their shares should contact their broker or other intermediary for more information and 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.

For more information on the terms of, and risks associated with an investment in, the Series 3 Shares and the Series 4 Shares, please see the Corporation’s prospectus supplement dated March 4, 2010 which is available on sedar.com or on the Corporation’s website.

TRP.PR.B has paid 4.00% over the past five years, so the change in dividend represents a cut of 46%. Ouch! +128 is a pretty skinny spread!

TRP.PR.B was announced 2010-3-4 and commenced trading 2010-3-11. It is tracked by HIMIPref™ and is assigned to the FixedReset subindex.

Note that holders of TRP.PR.B have the right, until 5:00 p.m. (ET) on Monday, June 15, 2015, to notify the company that they wish to convert to the new FloatingReset series – the two series will be interconvertible every five years for as long as they exist. Note that brokers will have earlier internal deadlines.

I will post regarding my opinion on whether to retain or convert TRP.PR.B closer to the deadline; until then, contemplate today’s graph of FixedReset/FloatingReset Strong Pairs:

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The Investment Grade pairs are very well-behaved today, with implied break-even 3-Month T-Bill rates in a nice cluster between 0.31% and 0.63%, with an average of 0.48%.

So at this point, it appears that holders of TRP.PR.B who wish to own the FloatingReset issue would be better advised not to convert, but to swap on the market; this will result in a small cash take-out provided that the new pair trades in line with extant pairs, which is by no means guaranteed.

Sun Life Financial Inc. has announced:

the applicable dividend rates for its Class A Non-Cumulative Rate Reset Preferred Shares Series 8R (the “Series 8R Shares”) and Class A Non-Cumulative Floating Rate Preferred Shares Series 9QR (the “Series 9QR Shares”).

With respect to any Series 8R Shares that remain outstanding after June 30, 2015, commencing as of such date, holders thereof will be entitled to receive non-cumulative preferential cash dividends on a quarterly basis, as and when declared by the Board of Directors of Sun Life Financial and subject to the Insurance Companies Act (Canada). The dividend rate for the five-year period commencing on June 30, 2015 to but excluding June 30, 2020 will be 2.275 % per annum or $0.142188 per share per quarter, being equal to the sum of the Government of Canada Yield, as defined in the terms of the Series 8R Shares, on Monday, June 1, 2015 plus 1.41%, as determined in accordance with the terms of the Series 8R Shares.

With respect to any Series 9QR Shares that may be issued on June 30, 2015, holders thereof will be entitled to receive floating rate non-cumulative preferential cash dividends on a quarterly basis, as and when declared by the Board of Directors of Sun Life Financial and subject to the Insurance Companies Act (Canada), based on a dividend rate equal to the sum of the T-Bill Rate, as defined in the terms of the Series 9QR Shares, plus 1.41% (calculated on the basis of the actual number of days elapsed in such Quarterly Floating Rate Period divided by 365 days), subject to certain adjustments in accordance with the terms of the Series 9QR Shares. The dividend rate for the period commencing on June 30, 2015 to but excluding September 30, 2015 will be equal to 2.075 % per annum or $0.130753 per share, as determined in accordance with the terms of the Series 9QR Shares.

Beneficial owners of Series 8R 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 5:00 p.m. (ET) on Monday, June 15, 2015.

An application will be made to list the Series 9QR Shares on the Toronto Stock Exchange.

SLF.PR.G has paid 4.35% over the past five years, so the change in dividend represents a cut of 48%. Ouch!

SLF.PR.G was announced 2010-5-13 and commenced trading 2010-5-25. It is tracked by HIMIPref™ and is assigned to the FixedReset subindex. As it is an insurance issue, it is my opinion that OSFI will – eventually – apply the NVCC rules to it and as it is not NVCC-compliant, it is my further opinion that it will be redeemed on or before a certain date. For analytical purposes, I have currently set that date to be 2025-1-31; it will probably be pushed back a year or two as OSFI’s foot-dragging with respect to the Life Insurance Regulatory Framework continues. You may agree or disagree with me as you wish; at present, the performance of insurance issues suggests the market as a whole disagrees.

Note that holders of SLF.PR.G have the right, until 5:00 p.m. (ET) on Monday, June 15, 2015, to notify the company that they wish to convert to the new FloatingReset series – the two series will be interconvertible every five years for as long as they exist. Note that brokers will have earlier internal deadlines.

I will post regarding my opinion on whether to retain or convert SLF.PR.G closer to the deadline; until then, contemplate today’s graph of FixedReset/FloatingReset Strong Pairs:

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The Investment Grade pairs are very well-behaved today, with implied break-even 3-Month T-Bill rates in a nice cluster between 0.31% and 0.63%, with an average of 0.48%.

So at this point, it appears that holders of SLF.PR.G who wish to own the FloatingReset issue would be better advised not to convert, but to swap on the market; this will result in a small cash take-out provided that the new pair trades in line with extant pairs, which is by no means guaranteed.