Category: Issue Comments

The Toronto-Dominion Bank has announced:

that it does not intend to exercise its right to redeem all or any part of the currently outstanding 10 million Non-Cumulative 5-Year Rate Reset Preferred Shares, Series S (the “Series S Shares”) of TD on July 31, 2013. As a result and subject to certain conditions set out in the prospectus dated May 30, 2008 relating to the issuance of the Series S Shares, the holders of the Series S Shares have the right to convert all or part of their Series S Shares, on a one-for-one basis, into Non-Cumulative Floating Rate Preferred Shares, Series T (the “Series T Shares”) of TD on July 31, 2013. Holders who do not exercise their right to convert their Series S Shares into Series T Shares on such date will continue to hold their Series S Shares.

The foregoing conversion right is subject to the conditions that: (i) if TD determines that there would be less than 750,000 Series T Shares outstanding after July 31, 2013, then holders of Series S Shares will not be entitled to convert their shares into Series T Shares, and (ii) alternatively, if TD determines that there would remain outstanding less than 750,000 Series S Shares after July 31, 2013, then all remaining Series S Shares will automatically be converted into Series T Shares on a one-for-one basis on July 31, 2013. In either case, TD will give written notice to that effect to holders of Series S Shares no later than July 24, 2013.

The dividend rate applicable to the Series S Shares for the 5-year period from and including July 31, 2013 to but excluding July 31, 2018, and the dividend rate applicable to the Series T Shares for the 3-month period from and including July 31, 2013 to but excluding October 31, 2013, will be determined and announced by way of a press release on July 2, 2013.

Beneficial owners of Series S Shares who wish to exercise their conversion right should communicate as soon as possible with their broker or other nominee to obtain instructions for exercising such right on or prior to the deadline for exercise, which is 5:00 p.m. (Toronto time) on July 16, 2013.

The default recommendation is to retain the five-year fixed rate; as of June 26, according to the Bank of Canada, the GOC-5 rate is 1.84% while Three Month CTBs are at 1.03%. This spread, although very generous by post-Crunch standards, is pretty skinny by longer term standards.

From a practical standpoint, however, it will be recalled that BNS.PR.P (FixedReset, +205bp) was partially converted into the Floating Reset BNS.PR.A on its Exchange Date in April. Given the GOC-5 rate at the time, BNS.PR.P reset to 3.35% while BNS.PR.A pays 3-month CTB+205.

Given the Canada yields mentioned above, TD.PR.S will reset to a shade higher than BNS.PR.P: 1.84%+160 = about 3.45%, while the new FloatingReset will pay 3-Month CTB+160, significantly less than BNS.PR.A. We are thus left with the rather odd situation that the FixedReset should trade higher and the FloatingReset should trade lower than the BNS comparable.

As always with this type of decision, we can look and see what kind of increase is required in the CTB rate to provide a break-even: given the Canada rates quoted above, a ballpark figure is a steady increase over the next five years to a CTB rate of about 265bp … i.e., if it pays 81bp less today, then an increase to 81bp more in five years will approximately break even (ignoring the time value of money: 81bp less today does quite offset 81bp more in five years. But considering the uncertainty of the prediction itself, that’s close enough for government work).

2.65% is certainly not an unreasonable prediction for three-month bills in five years time. However, there is another consideration: the market loves floating rating instruments. LOVES them. BNS.PR.A (FloatingReset +205) closed last night at 25.91-00, well above its current 25.50 call price, while BNS.PR.P (FixedReset, 3.35%+205) closed last night at 25.25-30.

While a decision should be put off until the new FixedReset rate has been announced (July 2, according to TD), it seems to me that a reasonable plan is to convert to the FloatingReset with the intent of selling them immediately.

Standard & Poor’s has announced:

• We are placing our ratings on Westcoast Energy Inc. on CreditWatch with negative implications.
• The CreditWatch placement reflects that on parent Spectra Energy Corp.
• The CreditWatch listing on Spectra reflects our expectation that we could lower the ratings following the sale of its U.S. gas transmission and storage asset to Spectra Energy Partners L.P. by the end of 2013.
• We will resolve the CreditWatch placement on Westcoast when we resolve the placement on Spectra.

…
We have equalized our ratings on Westcoast with those on parent Spectra. We link the parent and operating company’s credit profiles based on our methodology for holding company structures. Accordingly, any rating action on Spectra would likely flow through to our ratings on Westcoast. In our view, there are no adequately robust regulatory or legal provisions that would constrain Spectra’s ability to extract economic value from Westcoast. However, we believe that Westcoast’s wholly owned subsidiary, Union Gas Ltd. (BBB+/Watch Neg/A-2), possesses some regulatory provisions that diminish the parent’s economic recourse to it. Union Gas makes up approximately 43% of the company’s consolidated debt. We have equalized Westcoast’s management and governance score with Spectra.

The action on UNG was previously reported on PrefBlog.

Westcoast is the proud issuer of two series of preferred shares, W.PR.H and W.PR.J, both Straight Perpetuals.

Dividend 15 Split Corp. II has released its Annual Report to November 30, 2012.

Using the S&P TSX 60 index rather than “Dividend Aristocrats” seems a little odd to me – but we’ll let them choose their benchmark!

Figures of interest are:

MER: 1.28% of the whole unit value

Average Net Assets: We need this to calculate portfolio yield. Not much change in Number of Units Outstanding, so the average of the beginning and end of year figures can be used: $77.8-million

Underlying Portfolio Yield: Dividends received of 3,208,211 divided by average net assets of 77.8-million is 4.1%

Income Coverage: Net Investment Income of 2,216,165 divided by Preferred Share Distributions of 2,663,184 is 83%.

Manulife Financial Corp. has announced:

that it has completed its offering of 8 million Non-cumulative Rate Reset Class 1 Shares Series 13 (the “Series 13 Preferred Shares”) at a price of $25 per share to raise gross proceeds of $200 million.

The offering was underwritten by a syndicate of investment dealers co-led by Scotia Capital Inc. and RBC Capital Markets. The Series 13 Preferred Shares commence trading on the Toronto Stock Exchange today under the ticker symbol MFC.PR.K.

The Series 13 Preferred Shares were issued under a prospectus supplement dated June 17, 2013 to Manulife’s short form base shelf prospectus dated July 18, 2012.

MFC.PR.K is a FixedReset, 3.80%+222, announced June 17. All told, the FixedReset subindex has lost 96bp since Monday’s close, so the issue has modestly underperformed, but nothing worth despairing over.

The issue traded 235,745 shares today in a range of 24.50-70 before closing at 24.55-64, 131×10.

MFC.PR.K will be tracked by HIMIPref™ and assigned to the FixedReset subindex. Since it is an insurance holding company issue without a NVCC clause, a Deemed Maturity at par as of 2025-1-31 has been added to the redemption schedule as is my normal practice. Vital statistics are:

Standard & Poor’s has announced:

• Following a review under our revised insurance criteria, we are raising our ratings on Co-operators Financial Services Ltd. and its operating subsidiaries Co-operators General Insurance Co. and Co-operators Life Insurance Co.
• Our ratings on the group reflect its strong business risk profile as a top multiline insurer in Canada with well-established multichannel distribution platforms, as well as its very strong financial profile.
• The stable outlook reflects our view that the group will sustain its strong competitive position and very strong capital adequacy.

…
In our view, Co-operators’ life insurance operations are exposed to low industry risks due to high barriers to entry in a market dominated by a small number of life insurers and a strong institutional framework where the primary regulator, the Office of the Superintendent of Financial Institutions (OSFI), maintains highly effective oversight of the industry. OSFI’s primary solvency metric, the minimum continuing capital and surplus requirements (MCCSR) ratio, comprehensively captures all insurance risks in each domestic life insurer and their respective international subsidiaries.

Insurance products in Canada generally have less aggressive guarantees, bolstering our view of low industry risk, which has a strong track record of very tight asset-liability matching. This matching is needed because of financial reporting and a regulatory framework that applies fair-value accounting principles equally to both sides of the balance sheet. The framework also tends to be pro-cyclical, leading to earlier recognition of
long-term adverse macroeconomic effects and reporting of relatively conservative financial results. But we see sensitivity to interest rates and equity-market volatility as somewhat offsetting these strengths and burdening long-term operating return prospects. We believe a weak global economy, persistent low interest rates, and established competition limit the sector’s growth prospects and potential for higher operating margins.

This follows the positive outlook announced in October 2012.

Cooperators’ is the proud issuer of CCS.PR.C and CCS.PR.D. The S&P rating on these issues is now P-2, up from P-2(low).

Standard and Poor’s has announced:

• We are placing our ratings on Union Gas Ltd. On CreditWatch with negative implications.
• The placement reflects that on parent Spectra Energy Corp.
• We will resolve this CreditWatch placement when we resolve the placement on Spectra.

The ratings on Union Gas, an Ontario-based natural gas distribution company, reflect Standard & Poor’s view of the consolidated credit profile of its ultimate parent, Spectra, and the parent’s “strong” business risk profile, “significant” financial risk profile, and “satisfactory” management and governance score. Union Gas’ monopoly-like market position, largely regulated asset base, and stable cash flow generation also support the ratings, in our opinion. We believe that the company’s significant financial risk profile and softer key credit ratios counterbalance these strengths.

I mentioned the review of Spectra on June 12, but was more concerned about Westcoast.

Union Gas is the proud issuer of two preferred shares: UNG.PR.C and UNG.PR.D, which have been discussed in passing on PrefBlog.

Brookfield Asset Management has announced:

the completion of its previously announced 4.90% perpetual Class A Preference Shares, Series 37 (“Preferred Shares”) issue in the amount of C$200,000,000. Brookfield issued 8,000,000 Preferred Shares at a price of C$25.00 per share, for total gross proceeds of C$200,000,000. The Preferred Shares will commence trading on the Toronto Stock Exchange this morning under the ticker symbol BAM.PF.D.

BAM.PF.D is a Straight Perpetual, 4.90%, announced May 28 … just before the floor dropped out of the market. Surprisingly, it seems that the greenshoe was fully exercised, so perhaps the underwriters weren’t left holding the bag on this one.

The issue will be tracked by HIMIPref™ and has been assigned to the PerpetualDiscount subindex.

BAM.PF.D traded 454,120 shares today in a range of 21.75-40 before closing at 22.30-35, 100×5000. Vital statistics are:

EMA.PR.A is a Straight Perpetual, 4.50%, announced May 30.

The issue traded 194,975 shares today in a range of 23.28-20 (!) before closing at 23.60-65, 100×500. I assume the underwriters are taking a bath on this issue. Sadly for them, they fully exercised their greenshoe of 1-million shares, taking the issue size up to $125-million; of which about 6% has just evaporated.

EMA.PR.E will be tracked by HIMIPref™ but assigned to the Scraps index on credit concerns. Vital statistics are:

Enbridge Inc. has announced:

it has closed its previously announced public offering of Cumulative Redeemable Preference shares, Series 3 (the “Series 3 Preferred Shares”) by a syndicate of underwriters led by TD Securities Inc., CIBC, RBC Capital Markets and Scotiabank. Enbridge issued 24 million Series 3 Preferred Shares for gross proceeds of CAD $600 million. The Series 3 Preferred Shares will begin trading on the TSX today under the symbol ENB.PR.Y. Proceeds will be used to partially fund capital projects, to reduce existing indebtedness and for other general corporate purposes of the Corporation and its affiliates.

ENB.PR.Y is a FixedReset, 4.00%+238, announced May 28.

The issue traded 1,492,004 shares today in a range of 25.03-18 before closing at 25.16-17, 67×20.

ENB.PR.Y will be tracked by HIMIPref™ and is assigned to the FixedResets subindex. Vital statistics are: