Category: Issue Comments

DBRS has announced that it:

downgraded its credit ratings on Laurentian Bank of Canada (LBC or the Bank), including the Bank’s Long-Term Issuer Rating to BBB (high) from A (low). Concurrently, DBRS Morningstar confirmed the Bank’s Short-Term Issuer Rating at R-1 (low). The trend for all credit ratings is Negative. The Bank’s Intrinsic Assessment (IA) is BBB (high) while its Support Assessment (SA) remains SA3. The SA3 designation, which reflects no expectation of timely external support, results in the Bank’s Long-Term Issuer Rating being equivalent to the IA. These credit rating actions resolve the Under Review with Negative Implications status under which LBC was placed on November 3, 2023.

KEY CREDIT RATING CONSIDERATIONS
The credit rating downgrades and Negative trends reflect DBRS Morningstar’s view that LBC’s franchise strength and profitability prospects have significantly weakened with a limited visibility on the Bank’s long-term strategic path. The fundamental challenges faced by the Bank’s Personal Banking franchise in recent years has led to a sustained weakness in financial performance. Further, the Bank’s ability to improve earnings and growth prospects in the near to medium term will likely be affected by the adverse series of recent events, including the unexpected and sudden departure of the former President and CEO and the rapid succession of executive leadership departures, while there remains the uncertainty related to the delay in the Bank’s renewed strategic plan. Of note, LBC continues to report the lowest levels of profitability among Canadian medium-size banks rated by the DBRS Morningstar. The Bank is dealing with these fundamental changes and operational issues amid an uncertain economic environment with increasing headwinds. As a result, the challenging operating environment will likely make the timely and successful execution of a new strategic plan more complicated. The credit ratings also consider LBC’s relatively high proportion of brokered deposits and higher cost base.

Supporting its credit ratings, LBC has demonstrated good credit quality with low impairments and loan losses; however, DBRS Morningstar expects that asset quality metrics will deteriorate from current levels in F2024 as a result of the high interest rate environment, which has materially increased debt-servicing costs. Despite recent events, the Bank’s balance sheet fundamentals remain stable with higher levels of liquidity to deal with any potential deposit outflows. LBC’s capital position is adequate with sufficient buffers to absorb stressed levels of loan losses.

CREDIT RATING DRIVERS
Given the Negative trends, credit rating upgrades are unlikely. DBRS Morningstar would change the trends to Stable if LBC’s new leadership demonstrates a sustained improvement in the Bank’s franchise position and financial performance while maintaining a similar risk profile.

Conversely, additional operational missteps and/or a failure to execute on the strategic initiatives leading to further deterioration in franchise strength and earnings generation would result in a credit ratings downgrade. Furthermore, increased pressure on funding and liquidity would also result in a credit ratings downgrade.

CREDIT RATING RATIONALE
Franchise Combined Building Block (BB) Assessment: Good/Moderate
LBC is Canada’s eighth-largest Schedule I bank with assets of $49.9 billion as at October 31, 2023. The Bank offers retail services in Québec through its branch network as well as commercial lending across Canada and in the U.S. LBC also distributes financial products to brokers and financial advisors across Canada through its wholesale arm, B2B Bank. Over the past few years through 2022, LBC’s franchise has been faced with fundamental challenges in its Personal Banking business, which resulted in customer attrition, shrinking loans, and stagnant deposits. Two years into the current strategic plan that was unveiled on December 10, 2021, the Bank has undertaken a digital-first approach and introduced new and enhanced digital capabilities to close gaps in its Personal Banking business, particularly across mortgage, Visa, and deposit products. On October 2, 2023, following the mainframe outage, the Bank announced the sudden and unexpected departure of its president and CEO, Rania Llewellyn, and the resignation of its board chair, Michael Mueller. With Éric Provost only recently being appointed as president and CEO, DBRS Morningstar has limited visibility into LBC’s long-term strategic direction, although the Bank’s current focus is on improving operating efficiency and simplifying the organizational structure.

Earnings Combined Building Block (BB) Assessment: Moderate
Relative to its peers, LBC has demonstrated lower profitability although it has a higher share of noninterest income at about 27% of total revenue as at October 31, 2023. The Bank’s net income decreased by about 20.1% year over year (YOY) to $181.1 million in F2023 as a result of lower noninterest income and higher provision for credit losses and operating expenses. While a decrease in noninterest income was largely driven by reduced capital markets revenue, noninterest expenses increased on higher salaries, employee benefits, and ongoing investments in technology. Noninterest expenses included restructuring charges of $18.2 million resulting from changes in the Bank’s management structure, as well as strategic review-related charges of $5.9 million. As a result, the operating efficiency ratio deteriorated to 71.1% in F2023 from 67.7% in the prior year. Partly offsetting the downward pressure on net earnings, net interest income grew 1.8% YOY to $746.3 million in F2023; however, the net interest margin as calculated by DBRS Morningstar compressed by 6 basis points (bps) to 1.51% on higher funding costs, which outpaced growth in asset yields.

Risk Combined Building Block (BB) Assessment: Good
Amounting to $37.1 billion as at October 31 2023, gross loans contracted by 1.1% YOY in F2023, compared with 11.4% YOY growth in the prior-year period. A reduction in commercial and nonmortgage personal loans was partly offset by an increase in residential mortgages. The bulk of credit risk lies in the commercial book, which accounted for about 48% of total loans as at October 31, 2023 and has concentrations in commercial real estate and inventory financing. Overall, the Bank’s asset quality is good with low impairments and loan losses. The gross impaired loans ratio increased by 19 bps YOY to 62 bps in F2023, largely because of increased impairments in commercial mortgages. As with the rest of the banking sector, DBRS Morningstar expects asset quality metrics to further deteriorate from current levels amid the challenging macroeconomic environment. Furthermore, if not managed prudently, the Bank’s continued realignment of the loan portfolio and geographic expansion, as well as any additional deficiencies in IT capabilities and uncertainties around its new strategic direction, could expose LBC to heightened levels of operational and credit risk.

Funding and Liquidity Combined Building Block (BB) Assessment: Good/Moderate
LBC’s overall funding and liquidity position remains sound. Accounting for about 65% of the funding base, total deposits, including capital markets deposits, declined by 4.1% YOY to $26.0 billion in F2023. Personal deposits, which represented 86% of total deposits, remained broadly stable at $22.3 billion in F2023 on the back of an uptick in direct retail deposits. Broker-sourced deposits marginally declined to $10.7 billion and accounted for about 41% of total deposits. The Bank expects to attract more direct client deposits on a national level in the coming years, which DBRS Morningstar would view favourably over broker deposits. Liquidity levels are strong, with liquid assets forming 23% of total assets as at Q4 2023.

Capitalisation Combined Building Block (BB) Assessment: Good/Moderate
LBC’s capital ratios under the standardized approach are above regulatory minimums and provide adequate buffers to absorb stressed levels of loan losses. DBRS Morningstar would view favourably a larger capital buffer, sufficient to absorb significant losses, especially as the Bank undertakes an “accelerated evolution of its strategic plan” and continues to grow its commercial loan book, which may be more susceptible to weakness in the event of a sustained economic downturn. The CET1 capital ratio increased to 9.9% as at Q4 2023, compared with 9.1% for the same period of F2022, primarily reflecting lower risk-weighted assets as well as internal capital generation.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/425414.

The affected issue is LB.PR.H. It remains rated at P-3(low) by S&P.

AQN.PR.A’s reset rate was announced last week, but there was a problem: it looked like the company calculated the rate on the wrong day.

Following the lead of Assiduous Reader longtimelurker, I wrote the following eMail to Algonquin Power Investor Relations last week:

I understand from your press release at https://investors.algonquinpower.com/news-market-information/news/news-details/2023/Algonquin-Power–Utilities-Corp.-Announces-Dividend-Rates-on-Cumulative-Rate-Reset-Preferred-Shares-Series-A-and-Cumulative-Floating-Rate-Preferred-Shares-Series-B/default.aspx that the new dividend rate for AQN.PR.A has been set at 6.469%, based on a spread to five-year Canadas of 2.94% and, therefore, an implied yield of 3.529% for the Canadas.

According to the prospectus for the issue at [Link redacted because (i) it doesn’t work any more and (ii) links to SEDAR+ documents continue to violate the Terms of Use. Public documents are TOP SECRET!] :

i) “Subsequent Fixed Rate Period” means for the initial Subsequent Fixed Rate Period, the period from and including December 31, 2018 to, but excluding, December 31, 2023 and for each succeeding Subsequent Fixed Rate Period, the period commencing on the day immediately following the end of the immediately preceding Subsequent Fixed Rate Period to, but excluding, December 31 in the fifth year thereafter.

ii) “Fixed Rate Calculation Date” means, for any Subsequent Fixed Rate Period, the 30th day prior to the first day of such Subsequent Fixed Rate Period.

Since the first day of the “Subsequent Fixed Rate Period” just calculated is December 31, 2023, the “Fixed Rate Calculation Date” must be December 1, 2023, and

iii) “Annual Fixed Dividend Rate” means, for any Subsequent Fixed Rate Period, the annual rate (expressed as a percentage rounded to the nearest one hundred-thousandth of one percent (with 0.000005% being rounded up)) equal to the sum of the Government of Canada Yield on the applicable Fixed Rate Calculation Date plus 2.94%.

I find it surprising that your implied GOC rate of 3.529% is at such variance with another issuer, Capital Power Corporation, which in a press release December 1 (the day of calculation) announced a rate implying a GOC yield of 3.63%, while your press release was issued December 4.

Can you please confirm the “Fixed Rate Calculation Date” used for the calculation of the reset date for AQN.PR.A ?

Two follow-ups later, I received a reply:

You are correct; we have provided CDS with an amended notice for delivery to participants that updates the rate to 6.576% (an increase of 10.7 basis points), being the rate as of December 1, 2023.

So all’s well that ends well.

The Bank of Nova Scotia has announced:

its intention to redeem (i) all outstanding CDN $1,750 million 3.89% Subordinated Debentures (Non-Viability Contingent Capital (NVCC)) due January 18, 2029 (the “Debentures”) at 100% of their principal amount plus accrued and unpaid interest to but excluding the date fixed for redemption, and (ii) all outstanding Non-cumulative 5-Year Rate Reset Preferred Shares Series 40 (Non-Viability Contingent Capital (NVCC)) (“Series 40 Shares”) at a price equal to $25.00 per share together with dividends declared and unpaid prior to the redemption. The redemptions of the Debentures and Series 40 Shares will occur on January 18, 2024, and January 29, 2024, respectively. Formal notice will be delivered to the debenture holders in accordance with the terms and conditions set forth in the related trust indenture.

On November 28, 2023, the Board of Directors of Scotiabank declared a quarterly dividend of $0.303125 per Series 40 Share. This will be the final dividend of the Series 40 Shares and will be paid on January 29, 2024, to shareholders of record at the close of business on January 3, 2024, as previously announced. Subsequent to this final dividend payment, the Series 40 Shares will cease to be entitled to dividends.

The redemptions of the Debentures and Series 40 Shares have been approved by the Office of the Superintendent of Financial Institutions and will be financed out of the general funds of Scotiabank. These redemptions are part of the Bank’s ongoing management of its Tier 1 and Tier 2 capital.

BNS.PR.I is a FixedReset, 4.85%+243, NVCC, issue that commenced trading 2018-10-12 after being announced 2018-10-2. It has been tracked by HIMIPref™ and has been assigned to the FixedReset-Discount sub-index.

This obviously comes as a surprise, since the issue closed today with a quote of 23.20-25. Sometimes, Santa comes early!

Thanks to Assiduous Reader Peculiar_Investor for bringing this to my attention!

Power Financial Corporation has announced:

that it does not intend to exercise its right to redeem all or part of the currently outstanding 8,000,000 Non-Cumulative 5-Year Rate Reset First Preferred Shares, Series T (the “Series T shares”) on January 31, 2024. As a result, subject to certain conditions, the holders of the Series T shares have the right to convert all or part of their Series T shares, on a one-for-one basis, into Non-Cumulative Floating Rate First Preferred Shares, Series U (the “Series U shares”) on January 31, 2024 (the “Conversion Date”) pursuant to the terms and conditions of the Series T shares.

Holders of Series T shares who do not exercise their right to convert their Series T shares into Series U shares on the Conversion Date will retain their Series T shares, subject to certain conditions.

The foregoing conversion rights are subject to the conditions that: (i) if Power Financial determines that there would be outstanding on the Conversion Date less than 1,000,000 Series U shares, after having taken into account all Series T shares tendered for conversion into Series U shares, then holders of Series T shares will not be entitled to convert their shares into Series U shares, and (ii) alternatively, if Power Financial determines that there would remain outstanding on the Conversion Date less than 1,000,000 Series T shares, after having taken into account all Series T shares tendered for conversion into Series U shares, then all remaining Series T shares will automatically be converted into Series U shares without the consent of the holders, on a one-for-one basis, on the Conversion Date. In either case, Power Financial will give written notice to that effect to the registered holder of Series T shares no later than January 24, 2024.

The dividend rate applicable to the Series T shares for the 5-year period from January 31, 2024 to but excluding January 31, 2029, and the dividend rate applicable to the Series U shares for the 3-month period from January 31, 2024 to but excluding April 30, 2024, will be determined and announced by way of a news release on January 2, 2024.

Beneficial owners of Series T 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 January 2, 2024 until January 16, 2024 at 5:00 p.m. (Eastern Time).

PWF.PR.T was issued as a FixedReset, 4.20%+237, that commenced trading 2013-12-11 after being announced 2013-12-2. PWF.PR.T reset at 4.215% effective 2019-1-31. I recommended against conversion and there was no conversion. It is tracked by HIMIPref™ and is assigned to the FixedReset Discount subindex.

Thanks to Assiduous Reader NK for bringing this to my attention!

Brookfield Infrastructure Partners L.P. has announced:

that it has determined the fixed distribution rate on its Cumulative Class A Preferred Limited Partnership Units, Series 11 (“Series 11 Units”) (TSX: BIP.PR.F) for the five years commencing January 1, 2024 and ending December 31, 2028.

Series 11 Units and Series 12 Units

If declared, the fixed quarterly distributions on the Series 11 Units during the five years commencing January 1, 2024 will be paid at an annual rate of 6.446% ($0.402875 per unit per quarter).

Holders of Series 11 Units have the right, at their option, exercisable not later than 5:00 p.m. (Toronto time) on December 18, 2023, to reclassify all or part of their Series 11 Units, on a one-for-one basis, into Cumulative Class A Preferred Limited Partnership Units, Series 12 (“Series 12 Units”), effective December 31, 2023.

The quarterly floating rate distributions on the Series 12 Units will be paid at an annual rate, calculated for each quarter, of 2.92% over the annual yield on three-month Government of Canada treasury bills. The actual quarterly distribution rate in respect of the January 1, 2024 to March 31, 2024 distribution period for the Series 12 Units will be 1.98505% (7.962% on an annualized basis) and the distribution, if declared, for such distribution period will be $0.4962625 per unit, payable on March 31, 2024.

Holders of Series 11 Units are not required to elect to reclassify all or any part of their Series 11 Units into Series 12 Units.

As provided in the unit conditions of the Series 11 Units, (i) if Brookfield Infrastructure determines that there would be fewer than 1,000,000 Series 11 Units outstanding after December 31, 2023, all remaining Series 11 Units will be automatically reclassified into Series 12 Units on a one-for-one basis effective December 31, 2023; or (ii) if Brookfield Infrastructure determines that there would be fewer than 1,000,000 Series 12 Units outstanding after December 31, 2023, no Series 11 Units will be reclassified into Series 12 Units. There are currently 9,936,190 Series 11 Units outstanding.

The Toronto Stock Exchange (“TSX”) has conditionally approved the listing of the Series 12 Units effective upon reclassification. Listing of the Series 12 Units is subject to Brookfield Infrastructure fulfilling all the listing requirements of the TSX.

BIP.PR.F was issued as a FixedReset, 5.10%+292M510, that commenced trading 2018-9-12 after being announced 2018-09-05. As previously discussed, the issue’s distributions are complex (and may involve return of capital) and converting the issue may be a Deemed Disposition for tax purposes. It has been assigned to the FixedReset-Discount subindex.

Thanks to Assiduous Readers NK, CanSiamCyp and Fuzzybear for bringing this to my attention

Update, 2023-12-11: The information given in this post has been corrected by the company. The rate is actually 6.576%

Algonquin Power & Utilities Corp. has announced:

the applicable dividend rates for its Cumulative Rate Reset Preferred Shares, Series A (the “Series A Preferred Shares”) and Cumulative Floating Rate Preferred Shares, Series B (the “Series B Preferred Shares”).

With respect to any Series A Preferred Shares that remain outstanding after January 2, 2024, holders thereof will be entitled to receive quarterly fixed cumulative preferential cash dividends, if, as and when declared by the board of directors of the Company (the “Board”). The dividend rate for the 5-year period from and including December 31, 2023 to but excluding December 31, 2028 will be 6.469% [see note above; rate is actually 6.576%], being equal to the 5-year Government of Canada bond yield determined as of today plus 2.94%, in accordance with the terms of the Series A Preferred Shares.

With respect to any Series B Preferred Shares that may be issued on January 2, 2024, holders thereof will be entitled to receive quarterly floating rate cumulative preferential cash dividends, if, as and when declared by the Board. The dividend rate for the 3-month floating rate period from and including December 31, 2023 to but excluding March 31, 2024 will be 7.982%, being equal to the 3-month Government of Canada Treasury Bill yield determined as of today plus 2.94%, calculated on the basis of the actual number of days in such quarterly period divided by 365, in accordance with the terms of the Series B Preferred Shares.

Beneficial owners of Series A Preferred Shares who wish to exercise their conversion right should communicate with their broker or other nominee to ensure their instructions are followed so that the registered holder of the Series A Preferred Shares can meet the deadline to exercise such conversion right, which is 5:00 p.m. (EST) on December 18, 2023.

AQN.PR.A was issued as a FixedReset, 4.50%+294, that commenced trading 2012-11-9 after being announced 2012-10-25. The 2018-11-28 notice of extension was reported on PrefBlog. The issue reset at 5.162% effective December 31, 2018. I recommended against conversion and there was no conversion. Notice of extension was issued in 2023. The issue is tracked by HIMIPref™, but relegated to the Scraps – FixedReset Discount index on credit concerns.

Thanks to Assiduous Reader Fuzzybear for bringing this to my attention!

Element Fleet Management Corp. has announced (in their Earnings Release of 2023-11-6; emphasis added):

To further optimize the Company’s balance sheet and mature its capital structure, the Company announced today its intention to redeem – in accordance with the terms of the 6.93% Cumulative 5-Year Rate Reset Preferred Shares Series A (the “Series A Shares”) as set out in the Company’s articles – all of its 4,600,000 issued and outstanding Series A Shares on December 31, 2023 (the “Redemption Date”) for a redemption price equal to $25.00 per Series A Share, for an aggregate total amount of approximately $115 million, together with all accrued and unpaid dividends up to but excluding the Redemption Date (the “Redemption Price”), less any tax required to be deducted and withheld by the Company.

The Company has provided notice today of the Redemption Price and the Redemption Date to the sole registered holder of the Series A Shares in accordance with the terms of the Series A Shares as set out in the Company’s articles. Non-registered holders of Series A Shares should contact their broker or other intermediary for information regarding the redemption process for the Series A Shares in which they hold a beneficial interest. The Company’s transfer agent for the Series A Shares is Computershare Investor Services Inc. Questions regarding the redemption process may be directed to Computershare Investor Services Inc. at 1-800-564-6253 or by email to corporateactions@computershare.com.

The Company also currently anticipates using a portion of its free cash flow to redeem all its outstanding 6.21% Cumulative 5-Year Rate Reset Preferred Shares Series C (due June 2024) and 5.903% Cumulative 5-Year Rate Reset Preferred Shares Series E (due September 2024) for approximate aggregate total amounts of $128 million and $133 million, respectively. Redeeming all the Company’s high-cost legacy preferred shares will eliminate approximately $5.9 million in cash dividends per quarter, once all redemptions are complete.

The Company also has approximately $168 million in 4.25% convertible debentures as of September 30, 2023, that are convertible into an aggregate of approximately 14.6 million common shares in June 2024.

Affected issues are EFN.PR.A, EFN.PR.C and EFN.PR.E.

EFN.PR.A was issued as a FixedReset, 6.60%+471, that was announced 2013-12-9; HIMIPref™ commenced tracking the issue in September 2015 after it received a DBRS rating. The notice of extension dated 2018-11-20 was reported on PrefBlog; EFN.PR.A reset at 6.933% effective 2018-12-31; I recommended against conversion; and there was no conversion. The issue is relegated to the Scraps – FixedReset Discount subindex on credit concerns.

Capital Power Corporation has announced:

that it has notified registered shareholders of its Cumulative Rate Reset Preference Shares, Series 3 (Series 3 Shares) (TSX: CPX.PR.C) of the Conversion Privilege and Dividend Rate Notice.

Subject to certain conditions, beginning on December 1, 2023 and ending at 5:00 p.m. (Toronto time) on December 18, 2023, each registered holder of Series 3 Shares will have the right to elect to convert any or all of their Series 3 Shares into an equal number of Cumulative Floating Rate Preference Shares, Series 4 (Series 4 Shares) by delivering an Election Notice to the Corporation.

If Capital Power does not receive an Election Notice from a holder of Series 3 Shares during the time fixed therefor, then the Series 3 Shares shall be deemed not to have been converted (except in the case of an Automatic Conversion, see below). Holders of the Series 3 Shares and the Series 4 Shares will have the opportunity to convert their shares again on December 31, 2028, and every five years thereafter as long as the shares remain outstanding.

On December 1, 2023, the Annual Fixed Dividend Rate for the Series 3 Shares was set for the next five-year period (from and including December 31, 2023, to but excluding December 31, 2028) at 6.86000% and the Floating Quarterly Dividend Rate for the Series 4 Shares was set for the first Quarterly Floating Rate Period (being the period from and including December 31, 2023, to but excluding March 31, 2024) at 2.06233%. The Floating Quarterly Dividend Rate will be reset every quarter.

The Series 3 Shares are issued in “book entry only” form and, as such, the sole registered holder of the Series 3 Shares is CDS Clearing and Depository Services Inc. (CDS). All rights of beneficial holders of Series 3 Shares must be exercised through CDS or the CDS participant through which the Series 3 Shares are held. The deadline for the registered shareholder to provide notice of exercise of the right to convert Series 3 Shares into Series 4 Shares is 3:00 p.m. (MT) / 5:00 p.m. (ET) on December 18, 2023. Any Election Notices received after this deadline will not be valid. As such, beneficial holders of Series 3 Shares who wish to exercise their rights to convert their shares should contact their broker or other intermediary for more information and it is recommended that this be done well in advance of the deadline in order to provide the broker or other intermediary with time to complete the necessary steps.

After December 18, 2023, (i) if Capital Power determines that there would remain outstanding on December 31, 2023, less than 1,000,000 Series 3 Shares, all remaining Series 3 Shares will be automatically converted into Series 4 Shares on a one-for-one basis effective December 31, 2023 (an Automatic Conversion); or (ii) if Capital Power determines that there would remain outstanding after December 31, 2023, less than 1,000,000 Series 4 Shares, no Series 3 Shares will be permitted to be converted into Series 4 Shares effective December 31, 2023. There are currently 6,000,000 Series 3 Shares outstanding.

The Toronto Stock Exchange (TSX) has conditionally approved the listing of the Series 4 Shares effective upon conversion. Listing of the Series 4 Shares is subject to the Capital Power fulfilling all the listing requirements of the TSX and upon approval, the Series 4 Shares will be listed on the TSX under the trading symbol CPX.PR.D.

For more information on the terms of, rates and risks associated with an investment in, the Series 3 Shares and the Series 4 Shares, please see Capital Power’s prospectus supplement dated December 10, 2012 which is available on sedarplus.ca or on Capital Power’s website at capitalpower.com.

CPX.PR.C is a FixedReset, 4.60%+323, that commenced trading 2012-12-18 after being announced 2012-12-6. The issue reset at 5.453% effective 2018-12-31. I recommended against conversion; there was no conversion. CPX.PR.C is tracked by HIMIPref™ but relegated to the Scraps – FixedReset Discount index on credit concerns.

Thanks to IrateAssiduousReader for bringing this to my attention!

Brookfield Office Properties Inc., a subsidiary of Brookfield Property Partners L.P. has announced:

the reset dividend rate on its Class AAA Preference Shares, Series T (“Series T Shares”) (TSX: BPO.PR.T).

If declared, the fixed quarterly dividends on the Series T Shares for the five years commencing January 1, 2024 and ending December 31, 2028 will be paid at an annual rate of 6.79% ($0.424375 per share per quarter).

Holders of Series T Shares have the right, at their option, exercisable not later than 5:00 p.m. (Toronto time) on December 18, 2023, to convert all or part of their Series T Shares, on a one-for-one basis, into Class AAA Preference Shares, Series U (the “Series U Shares”), effective December 31, 2023.

The quarterly floating rate dividends on the Series U Shares have an annual rate, calculated for each quarter, of 3.16% over the annual yield on three-month Government of Canada treasury bills. The actual quarterly dividend rate for the January 1, 2024 to March 31, 2024 dividend period for the Series U Shares will be 2.04438% (8.2% on an annualized basis) and the dividend, if declared, for such dividend period will be $0.511095 per share, payable on March 31, 2024.

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

As provided in the share conditions of the Series T Shares, (i) if Brookfield determines that there would be fewer than 1,000,000 Series T Shares outstanding after December 31, 2023, all remaining Series T Shares will be automatically converted into Series U Shares on a one-for-one basis effective December 31, 2023; and (ii) if Brookfield determines that there would be fewer than 1,000,000 Series U Shares outstanding after December 31, 2023, no Series T Shares will be permitted to be converted into Series U Shares. There are currently 10,000,000 Series T Shares outstanding.

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

BPO.PR.T is a FixedReset, 4.60%+316, that commenced trading 2012-9-13 after being announced 2012-9-5. BPO.PR.T reset at 5.383% effective January 1, 2019; I recommended against conversion; and there was no conversion. The issue is tracked by HIMIPref™, but relegated to the Scraps – FixedReset Discount index on credit concerns.

Thanks to Assiduous Reader Fuzzybear for bringing this to my attention.

Update, 2023-12-5: It has been observed that there is a discrepancy between the underlying GOC-5 rates for the resets of BPO.pr.T, CPX.PR.C and BIP.PR.F. I think that this is due to an error or choice in investors’ favour by BPO.

DBRS has announced that it:

upgraded Fairfax Financial Holdings Limited’s (Fairfax or the Company) Issuer Rating to A (low) from BBB (high). DBRS Morningstar also upgraded the Issuer Rating and the Financial Strength Ratings (FSR) of Fairfax’s subsidiaries Northbridge General Insurance Corporation (Northbridge) and Federated Insurance Company of Canada to A (high). The trends on all ratings were changed to Stable from Positive.

KEY CREDIT RATING CONSIDERATIONS
The credit rating upgrades reflect Fairfax’s consistent and improving underwriting profitability particularly at Brit, the Company’s UK subsidiary where Fairfax has curtailed risk and improved results. Moreover, better overall results have also improved earnings metrics and modestly reduced leverage. Demonstrating improved execution through both acquisitions and organic growth, the reported gross premiums written for YE2022 have more than doubled over the past five years to $27.6 billion (from $12.2 billion in 2017).

The credit ratings and Stable trends reflect Fairfax’s resilient, diversified, and growing franchise, including an expanding market position as a major international Property and Casualty (P&C) insurance and reinsurance group. Higher interest rates have increased risk-adjusted investment income substantially. The Company maintains ample liquid assets at both the holding and operating companies, as well as access to committed lines of credit. Its subsidiaries maintain appropriate regulatory capital ratios with buffers above required solvency levels, allowing Fairfax to handle adverse events.

The credit ratings and Stable trends also consider Fairfax’s earnings volatility that could be caused by exposure to natural catastrophe losses and the impact of financial market fluctuations on unrealized investment gains and losses. Moreover, Fairfax is a large provider of cyber insurance cover in the U.S., ranked number 2 by the NAIC in 2022, which presents some concentration risk.

CREDIT RATING DRIVERS
Over the longer term, less volatile earnings and an improvement in the Company’s risk profile would result in a credit ratings upgrade.

Conversely, the credit ratings would be downgraded if there was a sustained material deterioration in the Company’s risk profile, and overall profitability or capitalization.

CREDIT RATING RATIONALE
Fairfax has developed an extensive and diverse portfolio of global insurance and reinsurance subsidiaries over time, which the Company continues to expand through organic growth and prudent strategic acquisitions. Management of the Company’s insurance and reinsurance operating subsidiaries is decentralized, with each organization having its own autonomous management team. The breakdown of premiums written by line of business has remained consistent over the past five years, with casualty insurance accounting for more than half of the gross premiums written. Gross premiums written from insurance operations in 2022 comprised three broad categories: casualty (56.9%), property (35.2%), and specialty (7.9%).

Fairfax’s risk profile is supported by the Company’s strong underwriting and risk-limit controls, effective claims management, and reinsurance coverage for aggregate claim events or large losses. Moreover, Fairfax has strong internal controls and has been able to operate successfully in multiple jurisdictions. Fairfax’s investment portfolio has good credit quality. The Company continues to hold a significant amount of AAA-rated bonds, which account for more than half of its total fixed income assets as at 9M 2023; however, we note that there has been an increase in the proportion of bonds rated BBB and below as well. This was partly driven by the recent acquisition of approximately 95% interest in specific real estate construction loans from California-based Pacific Western Bank. While this asset class has been under pressure, we note that the loans are secured by real estate located in the United States with a conservative average loan-to-value ratio of approximately 51% and are supported by completion guarantees issued by the project equity sponsors. DBRS Morningstar notes that Fairfax is a large provider of Cyber insurance cover in the U.S., which DBRS Morningstar took into consideration in its assessment of product risk.

The Company reported strong results for the first nine months of 2023 (9M 2023). Fairfax has been successful in transforming Brit’s underwriting results, which has helped improve overall underwriting profitability. The Company is on track for a record year in 2023 with a consolidated net income of $3.4 billion as of 9M 2023 driven by strong underwriting results and positive investment income. The ongoing favorable insurance pricing environment coupled with higher reinsurance prices that benefit its significant reinsurance businesses is expected to contribute positively to Fairfax’s earnings in the short to medium term.

Fairfax’s credit ratings benefit from a sizable holding of liquid assets at the parent-holding company level with approximately $1.2 billion in total for cash and liquid investments as at 9M 2023. DBRS Morningstar considers this level of cash and investments as providing an important liquidity cushion for any potential uptick in insurance claims from the Company’s subsidiaries or potential catastrophe losses. Additionally, Fairfax maintains a committed credit facility of $2 billion that is available to support liquidity needs. The credit facility was undrawn as at September 30, 2023.

Fairfax’s insurance and reinsurance operating subsidiaries are appropriately capitalized, with each major subsidiary having available capital exceeding the required regulatory targets. The Company’s fixed-charge coverage ratios have been volatile over time because of the impact of the accounting treatment of unrealized capital gains and losses within the investment portfolio. The volatility is partly mitigated by the holding company’s strong liquidity position, which provides comfort that fixed charges can be paid under stressed market conditions. The Company’s financial leverage ratio (calculated by DBRS Morningstar on a consolidated basis as debt plus preferred shares to capital) decreased to 29.1% at 9M 2023, in part because of the material improvement in net earnings, and the transition to IFRS 17. The main drivers were adjustments for the discounting of provision for losses and loss adjustment expenses on transition to IFRS 17, which resulted in an increase in common shareholders’ equity.

The S&P rating for FFH continues to be P-3(high). S&P did an annual review for FFH dated 2023-5-30.

Affected issues are: FFH.PR.C, FFH.PR.D, FFH.PR.E, FFH.PR.F, FFH.PR.G, FFH.PR.H, FFH.PR.I, FFH.PR.J, FFH.PR.K and FFH.PR.M.