Category: Issue Comments

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).

Click for Big

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:

Click for Big

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).
…
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;
• …

…
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.
…
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!