Category: Issue Comments

TransCanada Corporation has announced:

that 12,501,577 of its 22,000,000 fixed rate Cumulative Redeemable First Preferred Shares, Series 1 (Series 1 Shares) were tendered for conversion today, on a one-for-one basis into floating-rate Cumulative Redeemable First Preferred Shares, Series 2 (Series 2 Shares). As a result of the conversion TransCanada has 9,498,423 Series 1 Shares and 12,501,577 Series 2 Shares issued and outstanding. The Series 1 Shares will continue to be listed on the Toronto Stock Exchange (TSX) under the symbol TRP.PR.A. The Series 2 Shares will begin trading on the TSX today under the symbol TRP.PR.F

The Series 1 Shares will continue to pay on a quarterly basis, for the five-year period beginning on December 31, 2014, as and when declared by the Board of Directors of TransCanada, a fixed dividend based on an annual fixed dividend rate of 3.266 per cent.

The Series 2 Shares will pay a floating quarterly dividend for the five-year period beginning on December 31, 2014, as and when declared by the Board of Directors of TransCanada. The floating quarterly dividend rate for the Series 2 Shares for the first quarterly floating rate period (being the period from December 31, 2014 to but excluding March 31, 2015) is 2.815 per cent and will be reset every quarter.

For more information on the terms of, and risks associated with an investment in, the Series 1 Shares and the Series 2 Shares, please see the Corporation’s prospectus supplement dated September 22, 2009 which can be found under the Corporation’s profile on SEDAR at www.sedar.com.

So both the FixedReset TRP.PR.A, with 9.5-million shares outstanding, and the FloatingReset TRP.PR.F (12.5-million) are good-sized, liquid issues, which is a good result for trading purposes.

In my post immediately before the conversion deadline, I had recommended conversion to the FloatingReset, TRP.PR.F.

Faircourt Asset Management has announced (although not yet on their websit):

Faircourt Asset Management Inc., the manager of Faircourt Split Trust (the “Trust”) (TSX: FCS.UN; FCS.PR.B), is pleased to announce that the Trust has completed a public offering (the “Offering”) of 1,500,000 6.00% preferred securities due June 30, 2019 (the “Preferred Securities”) at a price of $10.00 per Preferred Security. The Offering raised gross proceeds of $15,000,000.

The Preferred Securities commence trading today on the Toronto Stock Exchange under the symbol “FCS.PR.C”.

The syndicate of agents for the Offering was co-led by National Bank Financial Inc. and CIBC, and includes Canaccord Genuity Corp., GMP Securities L.P. and Raymond James Ltd.

The net proceeds of the Offering of Preferred Securities will be used to fund the redemption of the 6.25% preferred securities of the Trust which mature on December 31, 2014 (the “6.25% Preferred Securities”). As the Offering has been completed without any matched Preferred Securities and trust units of the Trust being issued, there are insufficient proceeds to fully repay the aggregate principal amount of the outstanding 6.25% Preferred Securities (the “6.25% Outstanding Principal”) from the proceeds of the Offering. The balance of the 6.25% Outstanding Principal will be funded by the Trust through cash currently held by the Trust and the sale of securities from the portfolio of securities held by the Trust. Payment of the 6.25% Outstanding Principal will be made to holders of the 6.25 Preferred Securities in accordance with the provisions of the trust indenture and first supplemental indenture governing the 6.25% Preferred Securities.

For further information about the Offering, please contact: Faircourt Asset Management Inc. at (416) 364-8989 or 1-800-831-0304 or visit our website at www.faircourtassetmgt.com.

This issue has been rated Pfd-3(low) by DBRS:

The Trust has advised DBRS that the initial downside protection available to holders of the 6.00% Preferred Securities is expected to be approximately 36.7% after the payment of all issuance expenses. The downside protection is provided by the Trust Units. Dividends received on the Portfolio will be used to pay a fixed cumulative quarterly distribution to holders of the 6.00% Preferred Securities, while holders of the Trust Units are expected to receive a monthly distribution of $0.02. Based on the current dividend yield on the Portfolio as of December 17, 2014, the 6.00% Preferred Securities dividend coverage ratio is expected to be approximately 0.02 times.

According to the terms of the Trust’s Declaration of Trust, the Trust has the ability to borrow up to 10% of Total Assets (as defined in the Declaration of Trust) under a loan facility in order to meet its investment objectives. Under the terms of the Company’s Trust Indenture, the loan facility is considered Senior Indebtedness, and all amounts owing under the loan facility will be paid in priority to the 6.00% Preferred Securities. There is currently no loan facility in place and therefore, there are currently no amounts owing under a loan facility; however, to the extent that the Trust borrows under a loan facility, the rating on the 6.00% Preferred Securities could be negatively impacted. DBRS will continue to monitor the situation in connection with the ongoing surveillance of the rating on the 6.00% Preferred Securities, and will take appropriate ratings action as necessary.

The DBRS release is largely a copy-paste of their provisional release reported on PrefBlog.

FCS.PR.C will be tracked by HIMIPref™ but assigned to the Scraps index on credit concerns.

There are two items of particular interest in the prospectus, which Faircourt cannot be bothered to publish on their website and which is available on SEDAR via “Faircourt Split Trust Dec 22 2014 12:50:39 ET Final short form prospectus – English PDF 382 K”. A direct link is not permitted because the Alberta Securities Commission does not believe retail scum should have convenient access to public documents.

Asset Coverage Test

The Trust Indenture and the Declaration of Trust provide that the Trust may not make any cash distributions on the Units if, after giving effect to the proposed distribution, the Total Assets less the amount outstanding under the Loan Facility equals less than 1.4 times the principal amount of the 6.00% Preferred Securities then outstanding.
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Redemption of 6.00% Preferred Securities by the Trust

6.00% Preferred Securities may be redeemed in whole or in part by the Trust upon notice to 6.00% Preferred Securityholders in accordance with the Trust Indenture at any time that the aggregate principal amount outstanding of the 6.00% Preferred Securities exceeds 40% of the Total Assets. All 6.00% Preferred Securities then outstanding will be redeemed by the Trust at maturity or immediately prior to the termination of the Trust, if earlier. The 6.00% Preferred Securities would, in any such case, be redeemed at par, plus any accrued but unpaid interest.

So that’s a NAV Test of 1.4x, inferior to the more usual 1.5x; given that the 36.7% downside protection referred to by DBRS (quoted above) is Asset Coverage of only 1.6-:1, Faircourt might have felt that there wasn’t enough danger space available with a 1.5x NAV Test.

The other highly significant item is that these shares can be redeemed at any time at par; there’s no capital gains potential for these shares at all given current conditions and in general a little more symmetricallity in potential returns is preferred. It will be noted in the vital statistics, below, that the YTW scenario after its first day of trading in an immediate call.

The issue traded 76,995 shares today (consolidated exchanges) in a range of 9.99-09 before closing at 10.01-05. Vital statistics are:

Quadravest has announced:

New Commerce Split (the “Company”) announced today that it will redeem 1,011,720 Class I Preferred Shares (YCM.PR.A) and 1,011,720 Class II Preferred Shares (YCM.PR.B) for cash redemption on January 5, 2015. This redemption represents approximately 36.91% of the outstanding Preferred Shares and allows the Company to fulfill the requirement to maintain an equal number of shares of all classes after holders of 1,011,720 Capital Shares (YCM) exercised their 2014 Special Retraction rights. The 2014 Special Retraction right was given to all shareholders in connection with the extension of the termination date from December 1, 2014 to December 1, 2019 as approved at the May 14, 2014 Special Meeting of Shareholders.

The Class I and Class II Preferred Shares will be redeemed on a pro rata basis, so that Preferred Shareholders of record on the close of business on December 31, 2014 will have approximately 36.91% of their Preferred Shares redeemed. The redemption price of $5.00 per Class I Preferred Share and $5.00 per Class II Preferred Share will be paid on January 5, 2015. Holders of Class I and Class II Preferred Shares that have been called for redemption will be entitled to receive the regular monthly dividends declared for the December 31, 2014 record date, payable January 9, 2015.

The net asset value per unit as of the close of business on December 17, 2014 was $11.35 per unit after giving effect to the Capital Shares Special Retraction payment and the Class I and Class II Preferred Share redemption. Preferred shares are only redeemable by the Company on the set redemption dates, the next such date being December 1, 2019.

YCM.PR.A and YCM.PR.B were last mentioned on PrefBlog in connection with the recent warrant expiry (it doesn’t look like there was much, if any, exercise – the news page has no announcement). YCM.PR.A and YCM.PR.B are not tracked by HIMIPref™.

The 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 41 (the “Series 41 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 41 Shares commence trading on the Toronto Stock Exchange today under the ticker symbol CM.PR.P.

The Series 41 Shares were issued under a prospectus supplement dated December 8, 2014, to CIBC’s short form base shelf prospectus dated March 11, 2014.

CM.PR.P is a FixedReset, 3.75%+224, announced December 8. This issue will be tracked by HIMIPref™ and has been added to the FixedResets index.

The issue traded 862,850 shares today (consolidated exchanges) in a range of 24.75-94 before closing at 24.75-76.

Vital statistics are:

TD.PF.C is a FixedReset, 3.75%+225, announced December 5, which TD did not honour with an announcement of the closing. The issue will be tracked by HIMIPref™ and has been assigned to the FixedReset subindex.

The issue traded a very respectable 1,005,216 shares today in a range of 24.80-96 before closing at 24.87-88.

Vital statistics are:

Implied Volatility is:

Click for Big

Talisman Energy Inc. has announced:

•A cash price of C$25 plus accrued and unpaid dividends per Talisman preferred share if holders approve their participation in the transaction
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that it has entered into a definitive agreement (the “Arrangement Agreement”) with Repsol S.A. under which Repsol will acquire all of the outstanding common shares of Talisman for US$8.00 (C$9.33) per share in cash.
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Following an extensive review and analysis of the proposed transaction and other available alternatives, the Talisman Board has unanimously approved the transaction and recommends that Talisman’s common shareholders and preferred shareholders vote in favor of the arrangement at a special meeting of shareholders to be held mid February 2015. In addition, certain of the directors and all of the executive officers of Talisman have signed agreements to vote their shares in favor of the transaction.
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The transaction is to be effected pursuant to an arrangement under the Canada Business Corporations Act. The Arrangement Agreement between Talisman and Repsol provides for, among other things, a non-solicitation covenant on the part of Talisman, subject to customary “fiduciary out” provisions, that entitles Talisman to consider and accept a superior proposal if Repsol does not match the superior proposal. If the Arrangement Agreement is terminated in certain circumstances, including if Talisman enters into an agreement with respect to a superior proposal, Repsol is entitled to a termination payment of US$270 million.

Completion of the transaction is subject to customary closing conditions, including court approval of the Arrangement Agreement, approval of two-thirds of the votes cast by holders of common shares at the special meeting, and applicable government and regulatory approvals. The transaction is targeted to close in the second quarter of 2015.

Under the Arrangement Agreement, if approved by the holders in a separate class vote, Repsol will acquire the outstanding preferred shares of Talisman. However, closing of the Arrangement Agreement is not conditioned on approval by the holders of the Talisman preferred shares. If the requisite preferred shareholder approval is not obtained, the preferred shares will be excluded from the arrangement and will remain outstanding following completion of the arrangement.

Tim Kiladze comments in the Globe:

Combined, the two companies are expected to have net debt that amounts to 1.9 times earnings before interest, taxes, depreciation and amortization next year, which could fall to 1.2 times by 2017. However, that’s the base case scenario, which assumes $85 oil next year, and $99 oil in 2017. In a stress case with $71 oil next year and $79 oil in 2017, net debt is 2.3 times EBITDA next year and 1.7 times EBITDA in 2017.

As for the broad strategy, Repsol is willing to bet against the market. Most energy firms were punished for tacking on too many assets and projects as oil prices soared, and they are now scrambling to shed non-core positions and slash capital spending. Repsol believes adding diversity will help it through this energy downturn – so long as the assets are in politically safe regions like the Americas.

Rebecca Penty of Bloomberg notes:

Analysts widely recommended that shareholders accept Repsol’s bid, including those from BMO Capital Markets, CIBC World Markets Inc. and Raymond James Ltd.

TLM.PR.A was on fire today, rocketing up from yesterday’s closing quote of 19.60-20 to 23.70-72 today.

So what’s going on? First, I suggest that the discount to par represented by today’s quote is an uncertainty discount; if either common or preferred shareholders reject the deal, the price will tank again, since any credit improvement of the combined company will be minimal. DBRS comments:

Overall, DBRS expects this transaction to have a minimal impact on Talisman’s ratings. From a business risk perspective, the acquisition would be a net positive for Talisman given Repsol’s significant size and scale of integrated and geographically well-diversified operations. From a financial risk perspective, the pro forma financial metrics are expected to be reasonable to support an investment-grade rating.

Note that when DBRS talks about “investment grade” they are talking about the bonds, which are BBB. There is subordination notching for the preferreds, which are junk.

In May 2014, S&P affirmed Repsol at BBB- [Outlook Positive]:

• •Spain-based energy company Repsol S.A. has executed its debt reduction measures by completing the sale of its liquefied natural gas (LNG) division. In addition, Repsol has sold its remaining stake in Argentina-based YPF and the related restitution bonds.
• •Following this, the new higher level of Repsol’s credit ratios will depend on its uses of the cash and our forecast of growing production.
• •We are therefore revising our outlook on Repsol to “positive” from “stable,” and affirming our ‘BBB-‘ long-term corporate credit rating on the company.
• •The positive outlook mostly reflects our belief that the company will be able to generate higher operating cash flows, and have an increased ability to internally fund ongoing investments in exploration and development.

… and downgraded TLM to BBB- in October:

• •We expect Talisman Energy Inc.’s operating performance, specifically its production and cost profile, to show limited improvement in the next 18-24 months, constraining any significant cash-flow growth.
• •At the same time, we expect Talisman to significantly outspend internally generated cash flow through 2015. Even if the company meets its US$2 billion asset sale target in the next 12-18 months, we do not think its credit profile is commensurate with that of its ‘BBB’ rated peers.
• •As a result, we are lowering our long-term corporate credit and senior unsecured debt ratings on Talisman to ‘BBB-‘ from ‘BBB’.
• •We are also lowering our global scale rating on its preferred stock to ‘BB’ from ‘BB+’ and its Canada scale rating on the preferred stock to ‘P-3’ from ‘P-3 (High)’.
• •The stable outlook reflects our view that Talisman’s cash flow from its increasing liquids production combined with any asset sales will allow the company to maintain its funds from operations-to-debt at more than 30% through 2015.

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At the same time, Standard & Poor’s lowered its global scale rating on its preferred stock to ‘BB’ from ‘BB+’ and its Canada scale rating on the stock to ‘P-3’ from ‘P-3 (High)’.
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The outlook is stable.

The latter action was reported on PrefBlog.

This is a tricky one. Remember the BCE Plan of Arrangement with its huge prices for the preferred shares? And remember how Prefs plunged when the deal got into trouble? And then the deal died? All this could – conceivably – happen again with the TLM.PR.A deal. Even if the deal is simply replaced by a better deal for common shareholders – a bid by the CPPIB has been mooted – the new plan might not necessarily involve taking out the preferreds.

So I don’t really have any advice for investors on this one. On December 10 the issue was quoted at 15.95-24 and oil hasn’t exactly rebounded since then. So if common shareholders reject the deal, the price will be … pick a number. If common shareholders accept the deal but preferred shareholders reject it (a very low probability scenario, according to me!) then the issue will remain outstanding and the price will be … pick a number. And if both common and preferred shareholders accept the deal, the price will be $25.00.

So there’s huge deal risk here, and I do preferred shares and yield curves. Deal risk is for charlatans magicians wiser heads than mine. My own inclination is that investors should unload the deal risk to speculators and try not to obsess too much about the potential upside being given up. But it’s all up to you.

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

Standard & Poor’s has announced:

it reviewed its ratings on 37 global asset managers by applying its new ratings criteria for the sector (see “Key Credit Factors For Asset Managers,” published Dec. 9, 2014). As a result, we have taken rating actions on these entities (see ratings list). We also took rating actions on certain subsidiaries as a result of applying our new criteria to their parents. The rating actions were driven by revisions to our criteria rather than a sudden change of the issuers’ creditworthiness.

We define asset managers as companies that derive a majority of their revenues from management and performance fees for managing third-party money or assets on the behalf of retail or institutional investors. We rate asset managers under a similar framework to our corporate criteria. Our assessment reflects these companies’ business risk profiles, their financial risk profiles, and other factors that may modify the stand-alone credit profile.

We have now removed the under criteria observation (UCO) identifier from our ratings on all of the entities listed below.

We anticipate publishing, for most issuer credit ratings or outlooks that change, research updates within 30 business days. We anticipate publishing research updates in the first or second quarters of 2015 for those entities that we did not change our issuer credit ratings or outlooks on under the new criteria.
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IGM Financial Inc.
Issuer Credit Rating A/Stable/A-1 A+/Stable/A-1
Senior Unsecured A A+
Preferred Stock BBB+ A-
P-2(High) P-1(Low)

The criteria have been published and discussed by S&P. We can look forward to publication of the specific reasons for the IGM downgrade.

It seems that some of the communications received by shareholders on the conversion are not particularly enlightening – I received the following complaint earlier this week:

Just to let you know that the conversion of series C to D is based on the 90 day Tbill rate not the 5 year GOC rate as noted on your prefinfo.com listing. I wish I would have checked this before as shares are now converting Dec 31. I do not understand notice from FFH that I would be getting $1.1445 per share which works out to 4.578 % share. I assume the 90 day rate is 0.90 + 3.15 % works out to 4.05 %.

I answered him:

Yes, if you convert to D, you will receive the 90-day bill rate plus 315bp, reset quarterly, with the first quarter’s dividend having been set at $0.25212 per share, payable on March 31, 2015.

However, if you retain your C, you will receive the 5 Year GOC Rate plus 315bp, which on December 2 was equal to a total of 4.578%, or $1.14450 per share per year, which is what the prefinfo.com description is referring to. This rate will not be reset until the next exchange date, 2019-12-31.

It is your choice as to whether you retain your C or convert to D. It’s a difficult question which I will address on PrefBlog.com on Thursday night. The first link in the next paragraph has some preliminary advice on the matter.

For more information on the reset, see http://prefblog.com/?p=26994, http://prefblog.com/?p=26996 and http://prefblog.com/?p=27036
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If you have any ideas on how the prefinfo.com description can be made more clear, please let me know!

So the resets for the three captioned issues have been set, but the question remains – should they be converted into the FixedResets, which will pay a spread over three-month bills, reset quarterly, or not?

First, we will construct a table:

Next, we will take a look at similar pairs currently trading:

For further details of how the Break-Even Bill Rate is calculated, see the posts Pairs Equivalency Calculator and Strong Pairs. Basically, the idea is that the next time you have to make a choice, you won’t care which one of the pairs you are holding, because you’ll be able to convert. Therefore, the break-even bill rate is the rate at which the difference in total expected dividends equals the current difference in price.

The above table provides the material for the following chart:

At some point in the future, there might be a sufficient spread of future exchange dates, sufficient data points and sufficient knowledge by the market that there will be slope to the curve drawn, whence it will be possible to calculate the predicted future course of 3-month bill rates … but we’re not there yet!

The average for the investment grade issues is 2.03%, but this is distorted by the high figure of 2.71% for the BMO.PR.M / BMO.PR.R pair. The lowest reasonable expectation for break-even rates on the three issues of interest is about 1.80% and the high is about 2.00%. So let’s plug in those numbers and see what we get.

Given these data, I recommend that all the FixedResets be converted to FloatingResets, on the grounds that a worth-while capital gain may result from conversion if these new pairs trade comparably to current pairs; but I will note that in the conversion of DC.PR.B / DC.PR.D the average break-even rate traded by the market changed substantially between the decision date and the first trading date of the FloatingReset and made a mockery of my calculations. All you can do is play the odds … and cross your fingers!

As stated above, the company deadline for receipt of instructions is 2014-12-16-5pm for each of these issues, but brokerage deadlines will be earlier, so don’t waste any time instructing your broker to instruct the company to convert your shares if you wish to convert.