Category: Issue Comments

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:

Emera Incorporated has announced:

the applicable dividend rates for its Cumulative 5-Year Rate Reset First Preferred Shares, Series A (the “Series A Shares”) and Cumulative Floating Rate First Preferred Shares, Series B (the “Series B Shares”), in each case, payable if, as and when declared by the Board of Directors of the Company:
• 2.555% per annum on the Series A Shares ($0.1597 per Series A Share per quarter), being equal to the sum of the Government of Canada bond yield as at July 16, 2015, plus 1.84%, payable quarterly on the 15th of February, May, August and November of each year during the five-year period commencing on August 15, 2015 and ending on (and inclusive of) August 14, 2020; and
• 2.393% on the Series B Shares of the Company (the “Series B Shares”) for the three-month period commencing on August 15, 2015 and ending on (and inclusive of) November 14, 2015 ($0.1508 per Series B Share for the quarter), being equal to the sum of the three-month Government of Canada treasury bill yield rate as at July 16, 2015, plus 1.84% (calculated on the basis of the actual number of days elapsed during the quarter divided by 365), payable on the 15th of November 2015. The quarterly floating dividend rate will be reset every quarter.

Holders of the Series A Shares have the right, at their option, to convert all or any of their Series A Shares, on a one-for-one basis, into Series B Shares on August 15, 2015 (the “Conversion Date”). On such date, holders who do not exercise their right to convert their Series A Shares into Series B Shares will continue to hold their Series A Shares. The foregoing conversion right is subject to the following:
• if the Company determines that there would be less than 1,000,000 Series B Shares outstanding on the Conversion Date, then holders of Series A Shares will not be entitled to convert their shares into Series B Shares, and
• alternatively, if the Company determines that there would remain outstanding less than 1,000,000 Series A Shares on the Conversion Date, then all remaining Series A Shares will automatically be converted into Series B Shares on a one-for-one basis on the Conversion Date.

Beneficial owners of Series A Shares who wish to exercise their conversion right should communicate with their broker or other nominee to obtain instructions for exercising such right during the conversion period, which runs from July 16, 2015 until 5:00 p.m. (EDT) on July 31, 2015.

Inquiries should be directed to Emera Investor Services, at 1-800-358-1995 or 902-428-6060, or by email to investors@emera.com.

The extension was reported on PrefBlog.

EMA.PR.A is a FixedReset, 4.40%+184, announced 2010-5-25, which commenced trading 2010-6-2. Therefore, the reset dividend of 2.555% represents a cut of 42% in the rate. Ouch!

It is too early to make a recommendation regarding whether to hold the FixedReset EMA.PR.A or to convert to the new FloatingReset, but it’s never too early to start thinking about it…

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; 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 EMA.PR.A FixedResets, 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:

So at this point it looks like it will be better to hold EMA.PR.A and, if for your own purposes you want a FloatingReset issue, to execute a swap in the marketplace, since it looks likely that the price of the FloatingReset will be significantly lower than the price of the FixedReset. However, not only is nothing actually guaranteed, but I won’t even make a formal recommendation until July 29 … just in case market sentiment has changed at that point!

Standard & Poor’s has announced:

• •We are revising our outlook to negative from stable on Calgary, Alta.-based ATCO Ltd. and its subsidiaries Canadian Utilities Ltd (CU Ltd.) and CU Inc.
• •We are also affirming our ‘A’ long-term corporate credit rating on ATCO and its subsidiaries.
• •The negative outlook reflects our view that ATCO’s planned capital program could put pressure on the company’s financial metrics, affecting our positive comparable rating analysis modifier on the company.

…
“We base the outlook revision on our view that the company’s forecast financial metrics in the context of a more difficult Alberta operating environment, as well as its aggressive capital program, weaken the rationale for our positive comparable rating modifier on the company,” said Standard & Poor’s credit analyst Stephen Goltz. “Recent regulatory decisions also put additional pressure on the company’s revenue and cash flow,” Mr. Goltz added.
…
We expect the company to invest heavily in the next few years, similar to the past three. Furthermore, although supported by long-term contracts, not all of the future spending will be regulated. Our forecast expects development of the water infrastructure and liquids storage project in Alberta, a natural gas pipeline and cogeneration power plant in Mexico, and the Fort McMurray West Transmission Project.

The outcome of the Alberta Utilities Commission’s latest decisions also affect ATCO’s revenue and recovery of prudent capital spending contributing additional pressure on cash flow stability.

The negative outlook reflects our view that the planned capital program that is forecast to occur in the context of a weaker Alberta operating environment could put pressure on financial metrics, which would cause us to remove our positive [comparable rating analysis] modifier on the company.

Affected issues are CU Inc.’s CIU.PR.A and CIU.PR.C, and Canadian Utilities’ CU.PR.C, CU.PR.D, CU.PR.E, CU.PR.F and CU.PR.G. All are tracked by HIMIPref™.