Category: Issue Comments

Brookfield Soundvest Capital Management Ltd. has announced (although not yet on their website):

that holders of 1,779,807 Preferred Securities have given notice to the Trust that they wish to exercise the Preferred Special Retraction Right in the event that the extraordinary resolution to extend the term of the Preferred Securities for additional five year renewal terms following the scheduled maturity date of March 31, 2015 is approved at the upcoming meeting of holders of Preferred Securities and holders of trust units on March 27, 2015. Holders of trust units (the “Units”) have until 5:00pm (Toronto time) on March 20, 2015 to give notice to the Trust if they wish to exercise the Unit Special Retraction Right in order to provide the Trust with the ability to maintain an equal number of Units and Preferred Securities outstanding (if the extraordinary resolutions are approved). To vote at the meeting, securityholders must ensure that their voting instruction forms are received no later than 5:00pm (Toronto time) on March 25, 2015.

In addition, the Trust also announced today that the annual redemption right available to holders of Units (whether alone or together with an equal number of Preferred Securities) in November of each year will no longer be suspended in circumstances where the asset coverage on the Preferred Securities is less than 1.4 times. Although quarterly distributions on the Capital Units will remain suspended if the asset coverage continues to be below 1.4 times, recent changes in applicable securities laws have resulted in the Trust terminating the suspension of the annual redemption right in these circumstances (for the upcoming November redemption).

According to TMXMoney there are currently 4,030,225 shares outstanding, so 1,779,807 is a little over 44%.

The directors of the manager, Kevin Charlebois, George Myhal, Gail Cecil, Audrey Charlebois and Gabrielle Lenz, approved a term extension proposal for the fund that was pretty sleazy. It’s a pleasure to note that 44% of the preferred shareholders have managed to jump through their ridiculous hoops and tender to an offer that does not yet exist.

And perhaps there will be another whack of retraction attempts submitted to the company by Friday, in connection with the equally hypothetical Unit Special Retraction Right.

And with a bit of luck the term extension proposal will fail and the trust dissolved. We can hope. This manager should lose all its business.

BSD.PR.A is tracked by HIMIPref™ but is relegated to the Scraps index on credit concerns.

Financial 15 Split Inc. has released its Annual Report to November 30, 2014.

Figures of interest are:

MER: 1.48% of the whole unit value, excluding one time initial offering expenses.

Average Net Assets: We need this to calculate portfolio yield. MER of 1.48% Total Expenses of 3,284,849 implies $222-million net assets. Preferred Share distributions of 6,781,917 @ 0.525 / share implies 12.9-million shares out on average. Average Unit Value (beginning & end of year) = (17.76 + 17.14) / 2 = 17.45. Therefore 12.9-million @ 17.45 = 225-million average net assets. Good agreement between these two methods! Call it 224-million average.

Underlying Portfolio Yield: Dividends received (net of withholding) of 5,526,373 divided by average net assets of 224-million is 2.47%

Income Coverage: Net Investment Income of 2,242,511 divided by Preferred Share Distributions of 6,781,917 is 33%.

Royal Bank of Canada has announced:

it has closed its domestic public offering of Non-Cumulative, 5-Year Rate Reset Preferred Shares Series BF. Royal Bank of Canada issued 12 million Preferred Shares Series BF at a price of $25 per share to raise gross proceeds of $300 million.

The offering was underwritten by a syndicate led by RBC Capital Markets. The Preferred Shares Series BF will commence trading on the Toronto Stock Exchange today under the ticker symbol RY.PR.M.

The Preferred Shares Series BF were issued under a prospectus supplement dated March 9, 2015 to the bank’s short form base shelf prospectus dated December 20, 2013.

RY.PR.M is a FixedReset, 3.60%+262, NVCC-compliant, announced March 5. It will be tracked by HIMIPref™ and has been assigned to the FixedReset subindex.

The issue traded 223,152 shares today (consolidated exchanges) in a range of 23.75-67 (which would be rather breathtaking even if the issuer was not a major bank or Canada’s largest company) before closing at 24.25-49 (which is an equally breathtaking spread). Vital statistics are:

The Implied Volatility calculation is not particularly informative:

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According to the calculation, the two NVCC non-compliant issues, RY.PR.I and RY.PR.L, resetting at +193 and +267, respectively, are quite expensive: this is as it should be, due to the greater certainty that these issues have of being called at the next opportunity.

However, it seems clear that the NVCC-compliant issues, RY.PR.Z, RY.PR.H, RY.PR.J and RY.PR.M are reasonably well aligned with an implied volatility of greater than 40%, which shows continued market confidence that anything issued by a bank will always be worth somewhere close to par value.

Update, 2015-3-19: They had to have an inventory blow-out sale:

Yet RBC’s most recent $300-million deal struggled to find buyers, according to people familiar with the offering, prompting the bank to re-price it. Preferred shares are always sold for $25 each, but RBC’s deal had to be ‘cleaned up,’ or re-priced, at $24.35.

Investors apparently balked because of the coupon RBC tried to offer them. A week before the offering was announced, Toronto-Dominion Bank launched its own preferred share sale, and promised to pay a 3.6 per cent annual coupon. RBC told investors it would pay the same rate – the problem is that underlying bond yields moved between the dates when the deals were offered.

Preferred shares are priced off the five-year Government of Canada bond yield, and this yield climbed roughly 15 basis points higher between the RBC and TD deals. Instead of boosting its preferred share coupon by the same amount, RBC apparently hoped investors wouldn’t notice the shift.

Quadravest has announced:

Financial 15 Split Corp. II (the “Company”) announces a name change to North American Financial 15 Split Corp. Trading on the Toronto Stock Exchange under the new name is expected to commence on Wednesday, March 18, 2015. The Preferred Shares and Class A Shares will continue to trade under the symbols FFN.PR.A and FFN, respectively.

There is no indication of a change in investment policy, which would have to be voted on by shareholders as it’s specified in the prospectus. It may be that Quadravest intends to reposition the fund to take over the space currently occupied by US Financial 15 Split Corp., which was very badly whacked in the Credit Crunch and has a Net Asset Value Per Unit of only $7.24, far below their $10 obligation to FTU.PR.B. The US fund is scheduled for wind-up 2018-12-1.

Husky Energy has announced that it:

has completed its recently announced public offering of 8,000,000 Cumulative Redeemable Preferred Shares, Series 5 (the “Series 5 Shares”) with a syndicate of underwriters led by TD Securities Inc. and RBC Capital Markets.

The aggregate gross proceeds to Husky from the completed upsized offering are $200 million.

The net proceeds of the offering will be used for the partial repayment of short term debt incurred in connection with the Company’s U.S. refining operations.

The Series 5 Shares were offered by way of prospectus supplement to the short form base shelf prospectus of Husky Energy dated February 23, 2015.

Holders of the Series 5 Shares are entitled to receive a cumulative quarterly fixed dividend yielding 4.50 percent annually for the initial period ending March 31, 2020. Thereafter, the dividend rate will be reset every five years at a rate equal to the five-year Government of Canada bond yield plus 3.57 percent.

Holders of Series 5 Shares will have the right, at their option, to convert their shares into Cumulative Redeemable Preferred Shares, Series 6 (the “Series 6 Shares”), subject to certain conditions, on March 31, 2020 and on March 31 every five years thereafter. Holders of the Series 6 Shares will be entitled to receive cumulative quarterly floating dividends at a rate equal to the 90-day Government of Canada Treasury Bill rate plus 3.57 percent.

The Series 5 Shares are listed on the Toronto Stock Exchange under the symbol HSE.PR.E.

HSE.PR.E is a FixedReset, 4.50%+357, announced March 4. It will be tracked by HIMIPref™ and has been assigned to the FixedReset subindex.

The issue traded 743,664 shares today in a range of 24.85-99 before closing at 24.95-97. Vital statistics are:

I am as astonished as I was in the post announcing the issue at the lack of pricing differential between HSE.PR.C, which resets at +313bp on 2019-12-31, and this issue, which resets at +357bp on 2020-3-31, three months later. The former issue closed today at 24.55-60 to yield 4.14-13% to perpetuity, while HSE.PR.E closed at 24.95-97 to yield 4.42%-41 to perpetuity. That is one heck of a lot of yield difference.

DBRS has announced that it:

has today removed Emera Inc.’s (Emera or the Company) Issuer Rating and the ratings of its Medium-Term Notes and Cumulative Preferred Shares from Under Review with Developing Implications. DBRS has also confirmed Emera’s Issuer Rating and Medium-Term Notes rating at BBB (high) and the Cumulative Preferred Shares rating at Pfd-3 (high), all with Stable trends. The rating actions follow DBRS’s review of Emera’s funding strategy for its medium-term growth plans, the repayment of the USD 350 million non-revolving credit facility used to partially finance the acquisition of the merchant New England Gas Generation assets, and the closing of a $250 million non-revolving credit facility by Emera Brunswick Pipeline Company (Emera Brunswick) in February 2015. Pro forma these transactions, Emera’s non-consolidated debt-to-capital has now decreased to below 30%. The rating actions also reflect the Company’s reasonable business risk profile for the current rating category and DBRS’s expectation that Emera will maintain its deconsolidated debt-to-capital metric below the 30% threshold.

It’s been quite a while! The imposition of the Review was reported on PrefBlog in August 2013.

EMA has three preferred share issues outstanding: EMA.PR.A, EMA.PR.C and EMA.PR.F (FixedResetS) and EMA.PR.E (PerpetualDiscount). All are tracked by HIMIPref™; all are relegated to the Scraps index on credit concerns.

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.