Category: Issue Comments

Northland Power Inc. has announced:

that pursuant to the share terms in respect of the Cumulative Rate Reset Preferred Shares, Series 1 (“Series 1 Shares”), it has determined the fixed dividend rate for the five years commencing September 30, 2015 and ending September 29, 2020. The fixed quarterly dividends on the Series 1 Shares during that period will be paid at an annual rate of 3.51% (Cdn. $0.22 per share per quarter).

Holders of Series 1 Shares have the right, at their option, exercisable not later than 5:00 pm (Toronto time) on September 15, 2015, to convert all or part of their Series 1 Shares, on a one-for-one basis, into Cumulative Floating Rate Preferred Shares, Series 2 (the “Series 2 Shares”), effective September 30, 2015. The quarterly floating rate dividends on the Series 2 Shares will be paid at an annual rate, calculated for each quarter, of 2.80% over the annual yield on 90-day Government of Canada treasury bills. The actual quarterly dividend rate in respect of the September 30, 2015 to December 30, 2015 dividend period for the Series 2 Shares will be 0.80% (3.18% on an annualized basis) and the dividend, if and when declared, for such dividend period will be Cdn. $0.20 per share, payable on December 31, 2015.

Holders of Series 1 Shares are not required to elect to convert all or any part of their Series 1 Shares into Series 2 Shares.

As provided in the share conditions of the Series 1 Shares, (i) if Northland determines that there would be fewer than 1,000,000 Series 1 Shares outstanding after September 30, 2015, all remaining Series 1 Shares will be automatically converted into Series 2 Shares on a one-for-one basis effective September 30, 2015; or (ii) if Northland determines that there would be fewer than 1,000,000 Series 2 Shares outstanding after September 30, 2015, no Series 1 Shares will be permitted to be converted into Series 2 Shares. There are currently 6,000,000 Series 1 Shares outstanding.

The Toronto Stock Exchange (“TSX”) has conditionally approved the listing of the Series 2 Shares effective upon conversion. Listing of the Series 2 Shares is subject to Northland fulfilling all the listing requirements of the TSX and, upon approval, the Series 2 Shares will be listed on the TSX under the trading symbol “NPI.PR.B”.

NPI.PR.A is a FixedReset with a spread of 280bp over five-year Canadas, which commenced trading July 28, 2015 under the ticker symbol NPP.PR.A after being announced July 6, 2010. The ticker was changed effective January 1, 2011 after conversion from an Income Trust. The original coupon was 5.25%, so the reset rate of 3.51% represents a decline of 33%. Hey, by recent 40%+ standards, that looks good!

As noted in the press release, holders have the option to convert into NPI.PR.B, a FloatingReset, and this option must be exercised prior to 5pm, September 15 before vanishing until the next reset date in 2020. Recent market conditions have been highly unfavourable for FloatingResets and it is likely that I will recommend against conversion. However, conditions can change dramatically and rapidly and I will wait until September 10 to make a more formal recommendation.

Note that the September 15 notification date is for notification of the company, and brokers will generally have an internal deadline a day or two prior to this … so if you’re planning to wait until the last minute, contact your broker and find out precisely when the last minute will be!

Fairfax Financial Holdings Limited has announced:

that it has determined the fixed dividend rate on its Cumulative 5-Year Rate Reset Preferred Shares, Series G (“Series G Shares”) (TSX:FFH.PR.G) for the five years commencing October 1, 2015 and ending September 30, 2020. The fixed quarterly dividends on the Series G Shares during that period will be paid at an annual rate of 3.318% (Cdn.$0.207375 per share per quarter).

Holders of Series G Shares have the right, at their option, exercisable not later than 5:00pm (Toronto time) on September 15, 2015, to convert all or part of their Series G Shares, on a one-for-one basis, into Cumulative Floating Rate Preferred Shares, Series H (the “Series H Shares”), effective September 30, 2015. The quarterly floating rate dividends on the Series H Shares will be paid at an annual rate, calculated for each quarter, of 2.56% over the annual yield on three month Government of Canada treasury bills. The actual quarterly dividend rate in respect of the October 1, 2015 to December 30, 2015 dividend period for the Series H Shares will be 0.731987% (2.936% on an annualized basis) and the dividend for such dividend period, if and when declared, will be Cdn.$0.18300 per share, payable on December 30, 2015.

Holders of Series G Shares are not required to elect to convert all or any part of their Series G Shares into Series H Shares. A holder of Series G Shares who does not so elect will (subject to the next paragraph) retain their Series G Shares.

As provided in the share conditions of the Series G Shares, (i) if Fairfax determines that there would be fewer than 1,000,000 Series G Shares outstanding after September 30, 2015, all remaining Series G Shares will be automatically converted into Series H Shares on a one-for-one basis effective September 30, 2015; and (ii) if Fairfax determines that there would be fewer than 1,000,000 Series H Shares outstanding after September 30, 2015, no Series G Shares will be permitted to be converted into Series H Shares. There are currently 10,000,000 Series G Shares outstanding.

The Toronto Stock Exchange (“TSX”) has conditionally approved the listing of the Series H Shares effective upon conversion. Listing of the Series H Shares is subject to Fairfax fulfilling all the listing requirements of the TSX and, upon approval, the Series H Shares will be listed on the TSX under the trading symbol “FFH.PR.H”.

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

FFH.PR.G is a FixedReset with a spread of 256bp over five-year Canadas, which commenced trading July 28, 2010 after being announced July 20, 2010. The original coupon was 5.00%, so the reset rate of 3.318% represents a decline of 34%. Hey, by recent 40%+ standards, that looks good!

As noted in the press release, holders have the option to convert into FFH.PR.H, a FloatingReset, and this option must be exercised prior to 5pm, September 15 before vanishing until the next reset date in 2020. Recent market conditions have been highly unfavourable for FloatingResets and it is likely that I will recommend against conversion. However, conditions can change dramatically and rapidly and I will wait until September 10 to make a more formal recommendation.

Note that the September 15 notification date is for notification of the company, and brokers will generally have an internal deadline a day or two prior to this … so if you’re planning to wait until the last minute, contact your broker and find out precisely when the last minute will be!

The National Bank of Canada has announced:

its intention to redeem on November 15, 2015, all of its issued and outstanding Non-Cumulative Fixed Rate First Preferred Shares Series 20 (the “Preferred Shares Series 20”) for total redemption price of approximately $176 million.

Pursuant to the share conditions, on November 15, 2015, the Bank may redeem the Preferred Shares Series 20 at a price equal to $25.50 per share together with all declared and unpaid dividends.

Separately from the payment of the redemption price, the declared quarterly dividend of $0.375, payable on November 15, 2015, will be paid in the usual manner to shareholders of record on October 13, 2015.

Since November 15, 2015 is a non-business day, any payments due to shareholders on such date will be made on the first business day following such date, being Monday, November 16, 2015.

A formal notice will be issued to holders of the Preferred Shares Series 20 in accordance with the share conditions. The redemption is subject to the final approval of the Office of the Superintendent of Financial Institutions (OSFI).

The Bank recommends shareholders consult with their tax advisors to determine the appropriate treatment and impact of the redemption.

Since the redemption is being priced at a premium to par, the Deemed Dividend rules come into account for taxable shareholders. Shareholders who allow their shares to be redeemed will be taxed as if they had sold it for $25.00 and simultaneously received a dividend of $0.50; shareholders who sell on the market (at a price which, unless something goes terribly wrong, should be a few pennies under the total redemption value, which will include the final actual dividend until that goes ex) will be taxed normally. The most favourable course will depend on the investors personal tax situation; please consult your personal tax advisor.

DBRS has announced:

has today downgraded Enbridge Inc.’s (ENB) Issuer Rating and Medium-Term Notes & Unsecured Debentures rating to BBB (high) from A (low), Commercial Paper rating to R-2 (high) from R-1 (low) and Cumulative Redeemable Preferred Shares rating to Pfd-3 (high) from Pfd-2 (low). The trends are all Stable. ENB’s ratings were placed Under Review with Developing Implications on December 3, 2014, and changed to Under Review with Negative Implications on June 19, 2015 (please see DBRS press releases for details). The current action removes the ratings from Under Review with Negative Implications.

The ENB ratings downgrade is consistent with DBRS’s expectations as noted in the June 19, 2015, press release and follows today’s approval by the public shareholders of Enbridge Income Fund Holdings Inc. (EIFH) of the Transaction described below. For the rationale for the downgrade of ENB’s ratings, please see “Impact on ENB – Update”, below.
…
IMPACT ON ENB – UPDATE
Following its review of the EIFH Management Information Circular (MIC), DBRS continues to believe that the combination of the Transaction and the EECI Transfer have negatively impacted ENB’s credit risk profile. Please see the June 19, 2015, DBRS press release for the main factors leading to that conclusion.

Prior to closing, EPA will issue a senior unsecured promissory note to ENB with a principal amount of approximately $4.1 billion (the Mirror Note), representing a portion of the required capitalization of EPA. Payments of principal and interest by EPA thereunder have been structured to mirror the payments of certain principal and interest required under certain Canadian MTNs issued by ENB.

While DBRS recognizes that the $4.1 billion Mirror Note provides ENB with a senior claim on EPA assets ranking ahead of EIF bond holder claims, this factor does not fully offset the increased structural subordination with respect to EPI’s assets and the loss of full access to EPA cash flows available prior to the Transaction.

Based on its review, DBRS has downgraded all of ENB’s ratings by one notch, with Stable trends following completion of the Transaction.

The two earlier warnings from DBRS were reported in PrefBlog in the posts Rating Agencies Unhappy With Enbridge and ENB Finalizes Dropdown; S&P Downgrades To P-2(low); DBRS Review-Negative.

Moody’s downgraded the ENB preferreds to junk in June, 2015.

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.

This is a major development: ENB issues comprise about 10% of the preferred share universe. If we look at the CPD credit quality breakdown, we find the sponsor indicates levels of 75.67% investment grade, 22.37% junk and 1.66% “other” (I confess I’m not sure what is meant by “other”). A shift of 10% between groups is significant!

I also note that the BMO-CM “50” index is 9.07% ENB issues.

I do not expect significant price action as a result of this downgrade – it was well telegraphed in advance and Enbridge fans can comfort themselves with the thought that the issues remain investment-grade according to S&P. Additionally, we may examine Chart FR-29 from the August PrefLetter:

This chart shows the relationship between Issue Reset Spread and YTW for all FixedResets for which the YTW Scenario is extension until perpetuity. Correlations are fairly low, 10% for the “Pfd-2 Group” (issues rated Pfd-2(high), Pfd-2 and Pfd-2(low) by DBRS) and 15% for the Pfd-3 Group, but given that all information about each issue other than Issue Reset Spread, credit group, YTW and YTW-scenario has been thrown out, I’d say it’s close enough for government work!

The point is … see those purple boxes (Pfd-2 Group) that are right smack dab on top of the Pfd-3 Group regression line? That’s Enbridge. The downgrade has been anticipated by the market; we can construct the following table:

Still, there will always be some investors who are surprised and others who were hoping a longshot affirmation would come through – so we’ll just see what the coming weeks bring by way of price movement!

Well! There’s going to be a little bounce in the tracking error reports next time the ETF figures come out!

TXPR was down 0.81%:

See that? Just a tiny little sliver of vertical drop at 3:59pm, from about 676.70 to what the TMX claims is 672.10, although that’s off the chart.

But the ETF based on TXPR, CPD? Down a mere 0.37%:

TXPL? Down 1.15% … you can just see a little sliver at the end, where the index moves from about 728.25 to a claimed 721.77, which is again off the chart.

How about the ETF based on TXPL, ZPR? Down a mere 0.18%:

It’s rather odd. Unfortunately the Exchange’s indices are based on prices while my indices and all my data are based on quotes, but we’ll see what we can do … let’s look at some of the big losers on a bid/bid basis:

The day’s range was 21.38-66 (quite reasonable!), but the closing quote was 20.44-50, 40×2, which must be some kind of record for separation between the two measures. There are nine trades timestamped 3:59, totalling 1,680 shares, executed in a range of 21.38-40. Six of these trades are listed with RBC as the seller, three with anonymous.

The day’s range was 22.64-23.95 (!) with a closing quote of 22.82-24.05 (!), 17×20. There are five trades timestamped 3:59, totalling 600 shares, executed in a range of 22.64-82. Four of these trades have an anonymous seller, one RBC.

The day’s range was 11.70-32 with a closing quote of 11.75-24, 19×3. There were no trades timestamped 3:59.

The day’s range was 14.18-92 with a closing quote of 14.18-55, 8×1. There are 24 trades timestamped 3:59, totalling 2,460 shares, executed in a range of 14.18-50. Fourteen of these trades have an anonymous seller, nine RBC, one Nesbitt.

The day’s range was 15.23-85 with a closing quote of 15.19-74, 5×3. There are six trades timestamped 3:59, totalling 700 shares, executed in a range of 15.23-38. Five of these trades have an anonymous seller, one RBC.

The day’s range was 21.00-91 with a closing quote of 21.00-55, 15×1. There are thirteen trades timestamped 3:59, totalling 1,666 shares, executed in a range of 21.00-70 (!) There is one sale from Laurentian, five from RBC and seven anonymous.

The day’s range was 21.00-94 with a closing quote of 21.00-67, 15×1. There are fourteen trades timestamped 3:59, totalling 1,366 shares, executed in a range of 21.00-65 (!). There are two sales from National, four from RBC and eight anonymous.

The day’s range was 20.01-21.54 (!) with a closing quote of 20.65-21.75 (!), 8×56. There are six trades timestamped 3:59, totalling 700 shares, all executed at 20.67 (the day’s low of 20.01 was 400 shares executed at 3:12, seller was National). Five of the last minute sales were anonymous, one RBC.

The day’s range was 18.42-10, with a closing quote of 18.42-06, 3×1. There are thirteen trades timestamped 3:59, totalling 2,400 shares, executed in a range of 18.42-95. Seven of these trades are RBC, six anonymous.

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Well, that’s enough examples to be getting along with!

Here’s my guess: a broker from RBC decided to get a lot of his clients out of the preferred share market and his Sales Assistant spent all day inputting the orders for execution at 3:59. Some of these were put in as anonymous, some as RBC (maybe their algorithm input screen has a tick box and default?). The behaviour of BMO.PR.W suggests that these were limit orders (maybe a limit of 20.50 on those?) but other evidence (e.g., CM.PR.Q) suggests that if there was a limit, it was pretty low relative to the day’s trading.

Then the clock ticked 3:59 and presto! The market, being thin, got moronized on relatively tiny volume!

I will emphasize that the above is a guess! I have no way of telling whether the orders listed as anonymous were in fact coming out of RBC. The RBC broker might have been given explicit instructions by clients about how they wanted the trades executed. Each of these tiny little sales that I do know came out of RBC could have been from a different broker. They could also have come directly out of individual investors independently via RBC Direct Investing. It could have been an institutional client with Direct Market Access via RBC (or even RBC’s preferred desk itself), doing something silly with an algorithm. It could have been a lot of things.

Emera Incorporated has announced:

that 2,135,364 of its 6,000,000 issued and outstanding Cumulative 5-Year Rate Reset First Preferred Shares, Series A (the “Series A Shares”) were tendered for conversion, on a one-for-one basis into Cumulative Floating Rate First Preferred Shares, Series B (the “Series B Shares”). As a result of the conversion, Emera has 3,864,636 Series A Shares and 2,135,364 Series B Shares issued and outstanding. The Series A Shares will continue to be listed on the Toronto Stock Exchange (TSX) under the symbol EMA.PR.A. The Series B Shares will begin trading on the TSX today under the symbol EMA.PR.B.

EMA.PR.A is a FixedReset with an Issue Reset Spread of 184bp that has just reset at 2.555%. EMA.PR.B is its FloatingReset, paying three month bills +184bp. The next interconversion date is 2020-8-15. I had previously recommended that holders of EMA.PR.A continue to hold the issue as I expect that EMA.PR.B will trade – at least initially – at lower levels than EMA.PR.A.

EMA.PR.B traded zero shares today (consolidated exchanges) and closed with a quote of 12.13-18.00, 1×5. Zero activity on the first day is normal; retail holders who converted won’t see the new shares in their account until tomorrow and it might also be expected that those who just made the decision to convert are less likely than otherwise to want to sell two weeks later.

EMA.PR.B will be tracked by HIMIPref™ and will be assigned to the Scraps index on credit concerns. Vital statistics are:

Dividend 15 Split Corp. II has released its Semi-Annual Report to May 31, 2014.

Figures of interest are:

MER: 1.24% of the whole unit value, “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 $198.6-million, compared to $232.2-million on May 31, so call it an average of $223.8-million.

Underlying Portfolio Yield: Income received of $3.953-million divided by average net assets of $223.8-million, multiplied by two because it’s semiannual is 3.34%.

Income Coverage: Net investment income of $2.300-million divided by preferred share dividends of $3.122-million is 74%.

Note that both the calculated portfolio yield and the income coverage are more than what was calculated according to the 2014 Annual Report. There was a secondary offering during the period but it does not appear to have had much effect on calculated numbers.

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