Category: Issue Comments

It will be recalled that AIM.PR.A will reset to 4.50% and that FFH.PR.E will reset to 2.91% effective March 31.

Holders of both securities have the option to convert to FloatingResets, which will pay 3-month bills plus 375bp and plus 291bp, respectively. Deadlines for notifying the company of the intent to convert are March 17 and March 16, respectively; note that these are company deadlines and that brokers will generally set their deadlines a day or two in advance, so there’s not much time to lose if you’re planning to convert!

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., AIM.PR.A and the FloatingReset 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.

To this end, we may construct a table showing similar pairs currently trading:

We can show this 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 profound distaste at the moment for floating rate product; the implied rates until the next interconversion are all lower than the current 3-month bill rate and many are negative! While a negative average bill yield over the next 4-5 years is not impossible, I suggest that it’s very unlikely, leading to the conclusion that, as a group, FloatingResets are currently cheap relative to their FixedReset counterparts (since FloatingResets’ total return will be greater if the actual average exceeds the implied average).

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. The average in the table above for the junk issues is about -0.70%; for the investment grade issues it is about 0.10%. If we plug in these implied yields and the current bid prices of the FixedResets, we may construct the following table showing consistent prices for the two pairs under consideration:

Based on current market conditions, I suggest that the FloatingResets that may result from conversion of AIM.PR.A and FFH.PR.E will be cheap and trading considerably below the price of the continuing FixedResets. Therefore, I recommend that holders of AIM.PR.A and FFH.PR.E continue to hold these 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. But that, of course, will depend on the prices at that time.

Canadian Imperial Bank of Commerce has announced:

that it has completed the offering of 12 million Basel III-compliant Non-cumulative Rate Reset Class A Preferred Shares Series 43 (the “Series 43 Shares”) priced at $25.00 per share to raise gross proceeds of $300 million.

The offering was made through a syndicate of underwriters led by CIBC World Markets Inc. The Series 43 Shares commence trading on the Toronto Stock Exchange today under the ticker symbol CM.PR.Q.

The Series 43 Shares were issued under a prospectus supplement dated February 27, 2015, to CIBC’s short form base shelf prospectus dated March 11, 2014.

CM.PR.Q is a FixedReset, 3.60%+279, announced February 26. The issue will be tracked by HIMIPref™ and has been assigned to the FixedResets subindex.

CM.PR.Q traded 1,150,500 shares today (consolidated exchanges) in a range of 24.80-89 before closing at 24.80-81. Vital statistics are:

TD.PF.D is a FixedReset, 3.60%+279, announced February 27. It is NVCC-compliant and will be tracked by HIMIPref™ and has been assigned to the FixedReset subindex.

The issue traded 1,077,395 shares today in a range of 24.795-96 before closing at 24.95-97. Vital statistics are:

The Implied Volatility calculation has some points of interest:

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Firstly, the market does not appear to be differentiated between the NVCC compliant and non-compliant issues, as the latter appear to be plotted on a line more or less defined by the former. Additionally, the Implied Volatility is very high – ridiculously high, for NVCC-compliant issues – so I would expect TD.PF.D to outperform the three other compliant issues (TD.PF.A, TD.PF.B and TD.PF.C) as the market comes to realize what the word “perpetual” means.

Global Champions Split Corp., proud issuer of GCS.PR.A, has been upgraded to Pfd-2 by DBRS:

DBRS Limited (DBRS) has today upgraded the rating of the Class A Preferred Shares, Series 1 (the Preferred Shares) issued by Global Champions Split Corp. (the Company) to Pfd-2 from Pfd-2 (low). The Company issued 2,000,000 Preferred Shares at an issue price of $25.00 per Preferred Share and an equal number of capital shares (the Capital Shares) on March 7, 2013.

The redemption date for the Preferred Shares will be on or about July 31, 2019. Net proceeds from the initial offering were used to invest in a portfolio of common shares of 15 international large capitalization companies (the Portfolio).
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The Portfolio may be comprised of non-U.S. dollar denominated securities. The Company intends to substantially hedge all of the Portfolio’s investments denominated in currencies other than the U.S. dollar back to U.S. dollars. Dividends received on the Portfolio securities denominated in currencies other than U.S. dollars are currently being hedged back to U.S. dollars, but the Company is not required to do so. Distributions to holders of the Preferred Shares are denominated in Canadian dollars and are hedged back to U.S. dollars unless the net asset value (NAV) of the Company is less than the aggregate original issue price of the Class A Preferred Shares.

On March 7, 2014, DBRS confirmed the rating of the Preferred Shares at Pfd-2 (low) mainly based on the sufficient downside protection available to holders of the Preferred Shares. Since then, the NAV of the Company (after adjusting for exchange rates) has increased, with downside protection increasing from 52% to 61% and remaining with a positive trend over the past few months. As a result, the rating of the Class A Preferred Shares has been upgraded to Pfd-2 from Pfd-2 (low).

GCS.PR.A is a SplitShare paying 4.00% (probably) eligible dividends, maturing July 31, 2019; it commenced trading March 7, 2013 after its initial mention on PrefBlog on 2013-2-15.

Algonquin Power & Utilities Corp. has announced:

that the issuance of fourth quarter and year-end financial results previously scheduled for today, and the conference call previously scheduled for 10:00 a.m. eastern time on Friday, March 6, 2015 have been rescheduled. APUC now plans to release 2014 fourth quarter and year-end financial results on Thursday, March 26, 2015 after market close. APUC will hold an earnings conference call at 10:00 a.m. eastern time on Friday, March 27, 2015, hosted by Chief Executive Officer, Ian Robertson and Chief Financial Officer, David Bronicheski.

Well, at least they’re confident that they know the names of the CEO and CFO! That’s a good sign!

Further:

In an emailed statement to Inside the Market prior to the post-market release from Siskinds, a spokesperson commented, “We have rescheduled the release of our year-end financial results in order to allow our auditors to complete their audit work. … We are continuing to work with our auditors to finalize the results.”

So there’s the smell of fat fees in the air:

Siskinds LLP today announced that it has commenced an investigation into the accounting and other practices and disclosures of Algonquin Power & Utilities Corp (TSE:AQN).

Siskinds LLP is evaluating a possible class action on behalf of persons who purchased shares or other securities of Algonquin Power & Utilities Corp.

Common stock holders panicked, sending the price of common down 9%, with volume five or six times the February daily average.

But the preferred market yawned. AQN.PR.A was quoted at 21.95-14 today compared with 21.87-00 yesterday; AQN.PR.D closed at 25.00-05 compared with yesterday’s 25.15-40.

Volume was no great shakes either. AQN.PR.A traded 6,645 shares today, higher than normal, but nobody could call it a deluge (unless, of course, they were a rigorously supervised and extremely dedicated Toronto Stock Exchange market maker, of course); AQN.PR.D traded 6,700 shares, again higher than normal, but somehow, through heroic efforts and the tough but fair supervision of the unsung heroes in the highly efficient Toronto Stock Exchange Market Maker Supervision Department, the market maker managed to cope with the torrent.

I will confess to some curiosity regarding the reason for the delay in financials. We will see!

Brookfield Soundvest Capital Management Ltd., manager of Brookfield Soundvest Split Trust (the “Trust” in the following extract, also referred to in this post as “BSD”) has announced (emphasis added):

that the board of directors of the Manager has approved proposed extraordinary resolutions (the “Extraordinary Resolutions”), one relating to the preferred securities (the “Preferred Securities”) of the Trust and one relating to the trust units (the “Units”) of the Trust, to be presented to the holders of the Preferred Securities (the “Preferred Securityholders”) and the holders of the Units (the “Unitholders”), as the case may be, at a special meeting of the Preferred Securityholders and the Unitholders (the “Meeting”).

The Extraordinary Resolution relating to the Preferred Securities will allow the Trust to implement the following:

• •extend the term of the Preferred Securities for additional five-year renewal terms following the scheduled maturity date of March 31, 2015;
• •determine the interest rate on the Preferred Securities for each subsequent extended five-year renewal term of the Preferred Securities, and set the interest rate for the first renewal term at 6.0% per annum; and
• •provide the Preferred Securityholders with the right to retract and receive repayment of their Preferred Securities on March 31, 2015, and at the end of each subsequent renewal term of the Preferred Securities, if they so choose (the “Preferred Special Repayment Right”).

…
The Extraordinary Resolution relating to the Units will allow the Trust to implement the following:

• •provide the Unitholders with the right to retract, in the aggregate, a number of Units not exceeding the number of Preferred Securities tendered under the Preferred Special Repayment Right on March 31, 2015 and at the end of each subsequent renewal term of the Preferred Securities, if they so choose (the “Unit Special Retraction Right”), and receive redemption proceeds equal to the net asset value per Unit as of such dates, and to the extent that more Units are tendered for retraction under the Unit Special Retraction Right than Preferred Securities tendered for repayment under the Preferred Special Repayment Right, Units so tendered will be redeemed on a pro rata basis;
• …

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Even though the Meeting will not be held until March 27, 2015 and the outcome of the vote will not be known until then, (i) Preferred Securityholders who wish to exercise the Preferred Special Repayment Right must give notice to the Trust through their advisor no later than 5:00 p.m. (Eastern time) on March 13, 2015, and (ii) Unitholders who wish to exercise the Unit Special Retraction Right must give notice to the Trust through their advisor no later than 5:00 p.m. (Eastern time) on March 20, 2015.

Assiduous Readers will remember this company for its press release criticized in the post BSD.PR.A to Allow Retractions. They have a long history of downplaying to the point of invisibility the fact that retractions were suspended in October 2008 due to their exercise of their discretion. This discretion was utilized again in October, 2011 (again using obfuscatory language to disguise the fact that this was an exercise of discretion) and has not yet been reversed.

But are they competent money managers? Well, according to the 2013 Management Report of Fund Performance, the total return of the Capital Units from inception (March 16, 2005) to December 31, 2013, net of issuance costs, was -6.8%. Total Return of the S&P/TSX Composite Return Index, which they chose as their benchmark, was +6.1%. So the Capital Units underperformed by 12.9% … ANNUALIZED. ‘Nuff said? They did not publish Whole Unit performance for the period, and I certainly can’t be bothered to work it out.

However, in this particular case they have outdone themselves by requiring that notice of exercise of the Preferred Special Repayment Right be served on the company before this right actually exists.

Brookfield Asset Management is a fine company. I find it very difficult to understand why they are mixed up in this:

To the knowledge of the directors and executive officers of the Trust, the only person or company that beneficially owns, directly or indirectly, or exercises control or direction over the Preferred Securities or the Units carrying more than 10% of the voting rights attached to all outstanding Preferred Securities or Units, as the case may be, as at February 19, 2015, is Brookfield Asset Management Inc., which holds 455,045 Units, representing 11.29% of the outstanding Units.
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The Manager, 50% owned by Brookfield Asset Management Inc. and 50% owned by entities controlled by Kevin Charlebois, has been the Trust’s manager as well as its investment advisor since its inception. The Manager is located at 100 Sparks Street, 9th Floor, Ottawa, Ontario, K1P 5B7.

So who are the directors of the manager who have approved the proposed extraordinary resolutions and “that the Preferred Securityholders and the Unitholders vote in favour of their Extraordinary Resolution to be considered at the Meeting.” I’m sure they’re all very proud of their roles, so let’s highlight their names:

Note that, “Partners Value Fund Inc.” is a different company from “Partners Value Split Inc., the preferreds of which I often recommend as a SplitShare investment. Mr. Myhal is not an officer of PVS, thank God, and neither is Gail Cecil. Regrettably, however, Partners Value Fund Inc. holds all the Junior Preferred shares and all the capital units and all the Class A voting shares in PVS, so they certainly have influence. In turn Partners Limited controls approximately 49% of Partners Value Fund (SEDAR, Partners Value Fund Inc. (formerly BAM Investments Corp.) Oct 16 2014 18:08:14 ET Issuer bid circular – English PDF 518 K, I am not permitted to link directly, sorry). And then, of course, we get into the depressing world of Brookfield Asset Management governance.

Brookfield Soundvest Split Trust (BSD) ain’t cheap, either! According to the 2013 Management Report of Fund Performance:

The MER before interest expense for the years ended December 31, 2013 and 2012 on the combined units was 1.8% and 1.8%, respectively.

This is ridiculous. A MER of about 1.8% and Asset Coverage of a miserable 1.3-:1 on the preferreds. I’m not even going to bother doing a proper Split Share Credit Quality analysis of the Preferreds. It’s not worth it. I know it will be awful, whatever the precise numbers are, and this fund and this sponsor make me sick.

I recommend that holders of BSD.PR.A: (i) Vote NO on the Special Resolution, and (ii) serve notice of exercise of the Preferred Special Repayment Right.

… or you could just sell the garbage, of course. It’s trading near par.

There may be problems with your brokerage with respect to the exercise of the Preferred Special Retraction Right; I have been advised that TD Direct Investing had no idea of how to process it, but it seems quite likely that any broker will be scratching their heads over how to exercise a right that will not exist until two weeks after the deadline. Please let me know in the comments of how you fare in jumping through these ridiculous, abusive hoops. And don’t waste any time on this! The deadline for notification of the company is only a week hence!

Bank of Nova Scotia has announced:

that it does not intend to exercise its right to redeem the currently outstanding Non-cumulative 5-Year Rate Reset Preferred Shares Series 30 of Scotiabank (the “Preferred Shares Series 30”) on April 26, 2015 and, as a result, subject to certain conditions, the holders of Preferred Shares Series 30 have the right to convert all or part of their Preferred Shares Series 30 on a one-for-one basis into Non-cumulative Floating Rate Preferred Shares Series 31 of Scotiabank (the “Preferred Shares Series 31”) on April 26, 2015. Holders who do not exercise their right to convert their Preferred Shares Series 30 into Preferred Shares Series 31 on such date will retain their Preferred Shares Series 30.

The foregoing conversions are subject to the conditions that: (i) if Scotiabank determines that there would be less than one million Preferred Shares Series 30 outstanding after April 26, 2015, then all remaining Preferred Shares Series 30 will automatically be converted into Preferred Shares Series 31 on a one-for-one basis on April 26, 2015, and (ii) alternatively, if Scotiabank determines that there would be less than one million Preferred Share Series 31 outstanding after April 26, 2015, no Preferred Shares Series 30 will be converted into Preferred Shares Series 31. In either case, Scotiabank shall give a written notice to that effect to holders of Series 30 Preferred Shares no later than April 17, 2015.

The dividend rate applicable to the Preferred Shares Series 30 for the five-year period commencing on April 26, 2015 and ending on April 25, 2020, and the dividend rate applicable to the Preferred Shares Series 31 for the three-month period commencing on April 26, 2015, and ending on July 25, 2015, will be determined on March 27, 2015 and announced by way of a press release on March 30, 2015.

Beneficial owners of Preferred Shares Series 30 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. (EDT) on April 13, 2015.

There are no surprises here, since BNS.PR.Y is a FixedReset, 3.85%+100, that commenced trading 2010-4-12 after being announced March 29.

The Implied Volatility calculation shows a very high value for Implied Volatility; this is reasonable since all the BNS FixedResets are NVCC non-compliant and hence are expected to be redeemed on or prior to 2022-1-31.

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Well, they didn’t waste much time! After indicating the intention to redeem TD.PR.R on February 27, Toronto Dominion Bank has announced:

that it will exercise its right to redeem all of its 10 million outstanding Non-cumulative Redeemable Class A First Preferred Shares, Series R (the “Series R Shares”) on May 1, 2015 at the cash redemption price of $25.503836 per Series R Share, for total redemption proceeds of approximately $255 million.

The cash redemption price represents the sum of the redemption amount of $25.50 per share, plus an amount equal to the quarterly cash dividend pro rated for the period from and including April 30, 2015 to but excluding May 1, 2015. The regular quarterly dividend of $0.35 per Series R Share will be paid in the usual manner on April 30, 2015 to shareholders of record on April 8, 2015, as previously announced.

From and after May 1, 2015, the Series R Shares will cease to be entitled to dividends and the only remaining rights of holders of such shares will be to receive payment of the cash redemption price.

Beneficial holders who are not directly the registered holder of Series R Shares should contact the financial institution, broker or other intermediary through which they hold these shares to confirm how they will receive their redemption proceeds. Instructions with respect to receipt of the redemption amount will be set out in the Letter of Transmittal to be mailed to registered holders of the Series R Shares shortly. Inquiries should be directed to our Registrar and Transfer Agent, CST Trust Company, at 1-800-387-0825 (or in Toronto 416-682-3860).

TD.PR.R is a DeemedRetractible, 5.60%, which commenced trading March 12, 2008 after being announced March 3, 2008.

The 2015-4-30 redemption date is its first day of being liable for redemption at 25.50. There can be no great surprise about the redemption intention announcement, given that the redemption of the very similar TD.PR.P and TD.PR.Q issues was announced in late January.

Fairfax Financial Holdings Limited has announced that it:

has completed its previously announced bought deal financings for Subordinate Voting Shares, Preferred Shares, Series M (“Series M Shares”) and Senior Notes due 2025 (“Notes”). As a result of the underwriters’ exercising their over-allotment option to purchase an additional 150,000 Subordinate Voting Shares, at a price of $650.00 per Subordinate Voting Share, Fairfax has issued 1,150,000 Subordinate Voting Shares for gross proceeds of $747,500,000 (the “Subordinate Voting Share Offering”). The underwriters for the offering of Series M Shares (the “Preferred Share Offering”) also exercised their option to purchase an additional 1,200,000 Series M Shares at a price of $25.00 per share. As a result, Fairfax has issued 9,200,000 Series M Shares for gross proceeds of $230 million pursuant to the Preferred Share Offering. In addition, Fairfax has completed its previously announced offering of Notes in an aggregate principal amount of $350 million (the “Notes Offering”). The total gross proceeds of the Subordinate Voting Share Offering, Preferred Share Offering and Notes Offering are approximately $1.325 billion.
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The Series M Shares were sold through a syndicate of Canadian underwriters led by BMO Capital Markets, RBC Capital Markets and Scotiabank and that also included CIBC World Markets Inc., National Bank Financial Inc., TD Securities Inc., Canaccord Genuity Corp., Desjardins Securities Inc., GMP Securities L.P. and Cormark Securities Inc.
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Fairfax intends to use the net proceeds of the Subordinate Voting Share Offering, the Preferred Share Offering and the Notes Offering to partially fund the previously announced proposed acquisition of all of the issued and to be issued shares of Brit plc. There can be no assurance that such acquisition will be completed. If the acquisition is not successfully completed, Fairfax intends to use the net proceeds from the offerings to augment its cash position, to increase short-term investments and marketable securities held at the holding company level, to refinance or retire outstanding debt and other corporate obligations of Fairfax and its subsidiaries from time to time, and for general corporate purposes.

FFH.PR.M is a FixedReset, 4.75%+398, announced February 20. It will be tracked by HIMIPref™ and will be assigned to the Scraps index on credit concerns.

The issue traded 774,812 shares today (consolidated exchanges) in a range of 24.63-75 before closing at 24.65-74. Vital Statistics are:

Implied Volatility theory provides a very poor fit to the data:

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According to this FFH.PR.M, resetting at +398bp on 2020-3-31, is $0.85 cheap at its bid of 24.65..

Canadian Imperial Bank of Commerce has announced:

its intention to redeem all of its issued and outstanding Non-cumulative Class A Preferred Shares Series 29 (TSX: CM.PR.G), for cash. The redemption will occur on April 30, 2015. The redemption price is $25.00 per Series 29 share.

The $0.337500 quarterly dividend announced on February 26, 2015 will be the final dividend on the Series 29 shares and will be paid on April 28, 2015, covering the period to April 30, 2015, to shareholders of record on March 27, 2015.

Holders of the Series 29 shares should contact the financial institution, broker or other intermediary through which they hold the shares to confirm how they will receive their redemption proceeds.

CM.PR.G was issued in accordance with a prospectus dated June 4, 2004 as a matched unit of a warrant and a Series 28 preferred; it was a Straight Perpetual paying 5.40%.

The issue is noteworthy because it was convertible into common at the option of the bank; the right to exercise this option was assigned to OSFI in August, 2011, and the shares were thereafter deemed to be NVCC-compliant. Due to this, the initial assignment of these shares to the DeemedRetractible index was reversed and the issue considered to be a Straight Perpetual for reporting and analytical purposes. CM.PR.G is the last of CIBC’s preferreds that has been treated in this way; CM.PR.D and CM.PR.E have already been redeemed.