Category: Issue Comments

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.
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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)’.
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The negative outlook reflects our view that Bombardier is subject to significant execution and performance risk, and our belief that Bombardier may be challenged to improve its profitability and generate meaningful free cash flow in light of emerging endmarket stresses particularly for the aerospace segments. Furthermore, the outlook incorporates our opinion that, given Bombardier’s leverage and debt-to-cash flow metrics, there remains very limited room for missteps on project execution or additional margin deterioration beyond what we expect when the Cseries moves into production.

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

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

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

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

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

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

The Bank of Nova Scotia has announced:

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

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

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

BNS Split Corp. II is a mutual fund corporation created to hold a portfolio of common shares of The Bank of Nova Scotia. Capital Shares and Preferred Shares of BNS Split Corp. II are listed for trading on The Toronto Stock Exchange under the symbols BSC and BSC.PR.B respectively.

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

Canadian Utilities Limited has announced:

it has closed its previously announced public offering of Cumulative Redeemable Second Preferred Shares Series EE, by a syndicate of underwriters co-led by BMO Capital Markets and RBC Capital Markets, and including TD Securities Inc., Scotiabank, CIBC, Canaccord Genuity Corp., and GMP Securities L.P. Canadian Utilities Limited issued 5,000,000 Series EE Preferred Shares for gross proceeds of $125,000,000. The Series EE Preferred Shares will begin trading on the TSX today under the symbol CU.PR.H. The proceeds will be used for capital expenditures, to repay indebtedness and for other general corporate purposes.

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

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

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

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.