Category: Issue Comments

S Split Corp. has released its Semi-Annual Report to June 30, 2014.

Figures of interest are:

MER: According to the report:

The management expense ratio (“MER”) is the sum of all fees and expenses for the stated period, including federal and provincial sales taxes but excluding transaction fees and Preferred share distributions, divided by the average net asset value, excluding the Redeemable Preferred Share liability.

Given that the NAVPU at the beginning of the period was 19.86, and 20.97 at the end, we may approximate the total assets as double the amount ‘excluding the Redeemable Preferred Share liability’, which results in a MER for analytical purposes of about 1.25%.

Average Net Assets: We need this to calculate portfolio yield.The beginning of period assets is the sum of Capital Unitholders equity and Preferred Share value: ($30.73-million + $31.16-million) = 61.9-million, while end of period assets are (32.11-million + 29.26-million) = 61.4-million. So call the average assets $61.6-million.

Underlying Portfolio Yield: Total Income (dividends, securities lending and interest) of $1.753-million over half a year (but getting three quarterly dividends, due to Scotia’s strange dividend policies, so only multiply by four-thirds!) divided by average net assets of $61.6-million is 3.79% p.a. This is reasonably close to Scotia’s currently quoted yield of 4.19%.

Income Coverage: Two thirds of dividend income (see above) is 1.168-million and expenses are 0.772-million, for net income of 0.396-million to cover preferred dividends of $0.818-million is 48%.

BCE Inc. has announced:

1. Holders of BCE Inc. Series AF Preferred Shares have the right to convert all or part of their shares, effective on February 1, 2015, on a one-for-one basis into Cumulative Redeemable First Preferred Shares, Series AE of BCE Inc. (the “Series AE Preferred Shares”).

2. Holders not wishing to convert or who do not comply with the instructions set out in paragraph 3 below by the appropriate deadline will, subject to paragraph 6 below, retain their Series AF Preferred Shares and, accordingly, will continue to receive a fixed quarterly dividend as described in paragraph 5 below. However, but subject to paragraph 6 below, on February 1, 2020, and every five years thereafter, holders of both Series AF Preferred Shares and Series AE Preferred Shares will have the right to convert their shares into shares of the other series.

3. Registered holders electing to convert all or part of their Series AF Preferred Shares into Series AE Preferred Shares must complete and sign the conversion panel on the back of their Series AF Preferred Share certificate and deliver it, at the latest by 5:00 p.m. (Eastern time) on January 19, 2015, to one of the following addresses of CST Trust Company:…

…
5. As of February 1, 2015, the Series AF Preferred Shares will, should they remain outstanding, pay, on a quarterly basis, as and when declared by the Board of Directors of BCE Inc., a fixed cash dividend for the following five years that will be based on a fixed rate equal to the product of: (a) the yield to maturity compounded semi-annually (the “Government of Canada Yield”), computed on January 12, 2015 by two investment dealers appointed by BCE Inc., that would be carried by non-callable Government of Canada bonds with a 5-year maturity, multiplied by (b) the “Selected Percentage Rate”. The “Selected Percentage Rate” determined by BCE Inc. is 259.4%. The annual dividend rate applicable to the Series AF Preferred Shares will be published on January 14, 2015 in the national edition of The Globe and Mail, the Montreal Gazette and La Presse and will be posted on the BCE Inc. website at www.bce.ca.

Given that the GOC-5 rate is currently 1.22%, paragraph 5 implies that the new rate will be about 3.165%, although the precise figure won’t be known until January 12 … at which point, according to paragraph 3, holders will have only a week to make their decision regarding conversion and instruct their broker. Note that broker deadlines will, in almost all cases, be prior to the January 19, 2015, deadline of the company.

Holders of BCE.PR.E also have the right to convert to BCE.PR.F. Note that the company can force conversion to (or retention of) a particular element of this Strong Pair if there will not be many of the other one outstanding if everybody gets their first choice. However, given recent conversion ratios of AZP.PR.B / AZP.PR.C, FFH.PR.C / FFH.PR.D and TRP.PR.A / TRP.PR.F, it seems reasonably likely that both elements will remain outstanding.

Following the 2010 conversion, only about 1.4-million BCE.PR.E (the RatchetRate issue) were left outstanding, compared to about 14.6-million BCE.PR.F (the FixedFloater). BCE.PR.F reset to 4.451% in 2010 implying that the projected future rate of 3.165% is a 29% reduction in dividend.

The current Strong Pair prime breakeven rates are widely scattered, but average about 3.8%:

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If we assume that the new rate on BCE.PR.F will be 3.165% and that the pair will have a break-even prime rate of 3.84%, then the current bid of 20.67 on BCE.PR.E implies a bid of 19.96 on BCE.PR.F, compared to its actual current bid of 20.27, so we may see a little bit more of a drop once the new rate is announced. One way or another, it looks likely at this point that conversion to the RatchetRate BCE.PR.E will be the preferred course of action at decision time.

The price difference over the past year of the two issues (bid price BCE.PR.F less bid price BCE.PR.E):

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Strathbridge Asset Management Inc. has announced (although not yet on their website):

that securityholders of the Funds have approved a proposal to change the investment restrictions and/or investment strategy of each of the Funds.

As a result, the Manager will have greater flexibility in managing each Fund’s portfolio securities such that each Fund may (i) invest in certain portfolio securities (known as the basket) to enhance returns beyond the Fund’s core portfolio holdings, (ii) invest in other investment funds (including exchange traded funds and other Strathbridge funds) to assist in achieving its investment objectives in an efficient manner, (iii) invest up to 10% of its net assets to purchase call options on securities in which it is permitted to invest and (iv) invest portfolio assets entirely in cash or cash equivalents, in the Manager’s discretion, for defensive or other purposes.

The special meetings were previously reported on PrefBlog.

There are now about 1.66-million shares of AZP.PR.C outstanding following a 42% conversion from AZP.PR.B – which are going to be a nightmare for novices to trace, since this was issued as EPP.PR.B, then changed to CZP.PR.B, then changed to AZP.PR.B and finally converted to AZP.PR.C.

AZP.PR.C is a FloatingReset, paying the three-month bill rate +418bp, reset quarterly. It is convertible back to AZP.PR.B on 2019-12-31 at the option of the holder.

This issue will be tracked by HIMIPref™ but relegated to the Scraps subindex on credit concerns.

The Toronto Stock Exchange reports no volume on its debut.

Vital statistics are:

The Pair Equivalency of AZP.PR.C to its FixedReset sibling AZP.PR.B shows it to be very cheaply bid at 12.50, compared to the 13.30 bid on the latter issue; but given that there was no volume at all and that the quote was 12.50-14.00, no real conclusions can be drawn. At the bid prices, three-month bills need only average 0.42% over the next five years to achieve equivalent total returns.

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There are now about 4.0-million shares of FFH.PR.D outstanding following a 40% conversion from FFH.PR.C.

FFH.PR.D is a FloatingReset, paying the three-month bill rate +315bp, reset quarterly. It is convertible back to FFH.PR.C on 2019-12-31 at the option of the holder.

This issue will be tracked by HIMIPref™ but relegated to the Scraps subindex on credit concerns.

The Toronto Stock Exchange reports 29,200 shares trading on its debut in a very wide range of 22.60-23.99 (!) before closing at 23.87-25.

Vital statistics are:

The Pair Equivalency of FFH.PR.D to its FixedReset sibling FFH.PR.C shows it to be expensive at 23.87, compared to the 22.75 bid on the latter issue. At the bid prices, three-month bills will have to average 2.55% over the next five years to achieve equivalent total returns.

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There are now about 12.0-million shares of TRP.PR.F outstanding following a 57% conversion from TRP.PR.A.

TRP.PR.F is a FloatingReset, paying the three-month bill rate +192bp, reset quarterly. It is convertible back to TRP.PR.A on 2019-12-31 at the option of the holder.

This issue will be tracked by HIMIPref™ and is assigned to the FloatingReset subindex.

The Toronto Stock Exchange reports 37,925 shares trading on its debut in a range of 22.41-85 before closing at 22.26-75.

Vital statistics are:

The Pair Equivalency of TRP.PR.F to its FixedReset sibling TRP.PR.A shows it to be very rich at 22.26, compared to the 20.65 bid on the latter issue; but potential sellers in retail won’t have received access to their shares yet. At the bid prices, three-month bills will have to average 2.89% over the next five years to achieve equivalent total returns.

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I must emphasize that the headline judgement of “extremely rich” applies only within the TRP.PR.A / TRP.PR.F pair: with a yield to perpetuity of 3.11%, the issue looks reasonably priced, if not a little cheap, against other investment-grade Floating Rate perpetuals (BAM.PR.B, BAM.PR.C, BAM.PR.K and PWF.PR.A). Note that the only other investment grade FloatingResets at this time are NVCC non-compliant banks; the presumption of a Deemed Maturity makes them not particularly comparable to TRP.PR.F.

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.