Category: Issue Comments

Enbridge Inc. has announced:

that it does not intend to exercise its right to redeem its currently outstanding Cumulative Redeemable Preference Shares, Series 7 (Series 7 Shares) (TSX: ENB.PR.J) on March 1, 2024. As a result, subject to certain conditions, the holders of the Series 7 Shares have the right to convert all or part of their Series 7 Shares on a one-for-one basis into Cumulative Redeemable Preference Shares, Series 8 of Enbridge (Series 8 Shares) on March 1, 2024. Holders who do not exercise their right to convert their Series 7 Shares into Series 8 Shares will retain their Series 7 Shares.

The foregoing conversion right is subject to the conditions that: (i) if Enbridge determines that there would be less than 1,000,000 Series 7 Shares outstanding after March 1, 2024, then all remaining Series 7 Shares will automatically be converted into Series 8 Shares on a one-for-one basis on March 1, 2024; and (ii) alternatively, if Enbridge determines that there would be less than 1,000,000 Series 8 Shares outstanding after March 1, 2024, no Series 7 Shares will be converted into Series 8 Shares. There are currently 10,000,000 Series 7 Shares outstanding.

With respect to any Series 7 Shares that remain outstanding after March 1, 2024, holders thereof will be entitled to receive quarterly fixed cumulative preferential cash dividends, as and when declared by the Board of Directors of Enbridge. The new annual dividend rate applicable to the Series 7 Shares for the five-year period commencing on March 1, 2024 to, but excluding, March 1, 2029 will be 5.988 percent, being equal to the five-year Government of Canada bond yield of 3.418 percent determined as of today plus 2.57 percent in accordance with the terms of the Series 7 Shares.

With respect to any Series 8 Shares that may be issued on March 1, 2024, holders thereof will be entitled to receive quarterly floating rate cumulative preferential cash dividends, as and when declared by the Board of Directors of Enbridge. The dividend rate applicable to the Series 8 Shares for the three-month floating rate period commencing on March 1, 2024 to, but excluding, June 1, 2024 will be 1.91038 percent, based on the annual rate on three month Government of Canada treasury bills for the most recent treasury bills auction of 5.03 percent plus 2.57 percent in accordance with the terms of the Series 8 Shares (the Floating Quarterly Dividend Rate). The Floating Quarterly Dividend Rate will be reset every quarter.

Beneficial holders of Series 7 Shares who wish to exercise their right of conversion during the conversion period, which runs from January 31, 2024 until 5:00 p.m. (EST) on February 15, 2024, should communicate as soon as possible with their broker or other intermediary for more information. It is recommended that this be done well in advance of the deadline in order to provide the broker or other intermediary time to complete the necessary steps. Any notices received after this deadline will not be valid.

ENB.PR.J was issued as a FixedReset, 4.40%+257, that commenced trading 2013-12-12 after being announced 2013-12-3. Notice of the reset to 4.449% was published 2019-1-30. I recommended against conversion and there was no conversion. The issue is tracked by HIMIPref™ but relegated to the Scraps – FixedResets (Discount) subindex on credit concerns.

Thanks to Assiduous Reader newbiepref for bringing this to my attention!

Update, 2024-2-18: No conversion.

Enbridge Inc. (TSX: ENB) (NYSE: ENB) (Enbridge) announced today that none of its outstanding Cumulative Redeemable Preference Shares, Series 7 (Series 7 Shares) will be converted into Cumulative Redeemable Preference Shares, Series 8 (Series 8 Shares) on March 1, 2024.

After taking into account all conversion notices received from holders of its outstanding Series 7 Shares by the February 15, 2024 deadline for the conversion of the Series 7 Shares into Series 8 Shares, less than the 1,000,000 Series 7 Shares required to give effect to conversions into Series 8 Shares were tendered for conversion.

Royal Bank of Canada has announced:

the applicable dividend rates for its Non-Viability Contingent Capital (NVCC) Non-Cumulative 5-Year Rate Reset First Preferred Shares, Series BO (the “Series BO shares”) and NVCC Non-Cumulative Floating Rate First Preferred Shares, Series BP (the “Series BP shares”).

With respect to any Series BO shares that remain outstanding after February 24, 2024, holders will be entitled to receive quarterly fixed rate non-cumulative preferential cash dividends, as and when declared by the Board of Directors of Royal Bank of Canada, subject to the provisions of the Bank Act (Canada).

The dividend rate for the 5-year period from and including February 24, 2024 to, but excluding, February 24, 2029 will be 5.885% for the Series BO shares, being equal to the 5-Year Government of Canada bond yield determined as of January 25, 2024 plus 2.38%, as determined in accordance with the terms of the Series BO shares.

With respect to any Series BP shares that may be issued on February 24, 2024, holders will be entitled to receive quarterly floating rate non-cumulative preferential cash dividends, calculated on the basis of the actual number of days elapsed in such quarterly period divided by 365, as and when declared by the Board of Directors of Royal Bank of Canada, subject to the provisions of the Bank Act (Canada).

The dividend rate for the floating rate period from and including February 24, 2024 to, but excluding, May 24, 2024 will be 7.421% for the Series BP shares, being equal to the 3-month Government of Canada Treasury Bill yield determined as of January 25, 2024 plus 2.38%, as determined in accordance with the terms of the Series BP shares.

Beneficial owners of Series BO shares who wish to exercise their conversion rights should instruct their broker or other nominee to exercise such rights on or prior to the deadline for notice of intention to convert, which is 5:00 p.m. (EST) on February 9, 2024.

RY.PR.S was issued as a FixedReset, 4.80+238, that commenced trading 2018-11-2 after being announced 2018-10-25. Notice of extension was reported previously. The issue is tracked by HIMIPref™ and is assigned to the Fixed-Resets (Discount) subindex.

Thanks to Assiduous Reader IrateAR for bringing this to my attention!

Royal Bank of Canada has announced:

that it does not intend to exercise its right to redeem all or any part of the currently outstanding Non-Viability Contingent Capital (NVCC) Non-Cumulative 5-Year Rate Reset First Preferred Shares, Series BO (the “Series BO shares”) on February 24, 2024. There are currently 14,000,000 Series BO shares outstanding.

Subject to certain conditions set out in the prospectus supplement dated October 29, 2018 (the “Prospectus”) relating to the issuance of the Series BO shares, the holders of the Series BO shares have the right to convert all or part of their Series BO shares, on a one-for-one basis, into NVCC Non-Cumulative Floating Rate First Preferred Shares Series BP (the “Series BP shares”) on February 24, 2024. On such date, holders who do not exercise their right to convert their Series BO shares into Series BP shares will continue to hold their Series BO shares. The conversion will occur on February 26 being the first business day following the conversion date of February 24 as identified in the Prospectus, which falls on a Saturday. The foregoing conversion rights are subject to the following:

if Royal Bank of Canada determines that there would be less than 1,000,000 Series BP shares outstanding after taking into account all shares tendered for conversion on February 24, 2024, then holders of Series BO shares will not be entitled to convert their shares into Series BP shares, and
alternatively, if Royal Bank of Canada determines that there would remain outstanding less than 1,000,000 Series BO shares after February 24, 2024, then all remaining Series BO shares will automatically be converted into Series BP shares on a one-for-one basis on February 24, 2024.
In either case, Royal Bank of Canada will give written notice to that effect to holders of Series BO shares no later than February 17, 2024.

The dividend rate applicable for the Series BO shares for the 5-year period from and including February 24, 2024 to, but excluding, February 24, 2029, and the dividend rate applicable to the Series BP shares for the 3-month period from and including February 24, 2024 to, but excluding, May 24, 2024, will be determined and announced by way of a press release on January 25, 2024.

Beneficial owners of Series BO shares who wish to exercise their conversion rights should instruct their broker or other nominee to exercise such rights during the conversion period, which runs from January 25, 2024 until 5:00 p.m. (EST) on February 9, 2024.

RY.PR.S was issued as a FixedReset, 4.80+238, that commenced trading 2018-11-2 after being announced 2018-10-25. It is tracked by HIMIPref™ and is assigned to the Fixed-Resets (Discount) subindex.

Thanks to Assiduous Reader IrateAR for bringing this to my attention!

Dundee Corporation has announced (on 2023-12-28):

the results of its substantial issuer bid (the “Offer”) to purchase for cancellation from the holders thereof who chose to participate up to 975,610 of its issued and outstanding Cumulative Floating Rate First Preference Shares, Series 3 in the capital of the Corporation (the “Series 3 Shares”) at a purchase price of C$20.50 per Series 3 Share, for a maximum aggregate purchase price of C$20,000,005. The Offer expired at 11:59 p.m. (Toronto time) on December 27, 2023.

Based on the report of Computershare Investor Services Inc., as depositary for the Offer (the “Depositary”), 914,040 Series 3 Shares were tendered to the Offer. In accordance with the terms and conditions of the Offer and based on the Depositary’s report, the Corporation has taken up and will pay for 914,040 Series 3 Shares at a purchase price of C$20.50 per Series 3 Share for an aggregate purchase price of C$18,737,820. All Series 3 Shares purchased by the Corporation under the Offer will be cancelled in due course. The Series 3 Shares purchased under the Offer represent approximately 55.8% of the Series 3 Shares issued and outstanding before giving effect to the Offer. After giving effect to the cancellation of the Series 3 Shares purchased by the Corporation under the Offer, 724,982 Series 3 Shares will be issued and outstanding.

The Corporation has made payment for the Series 3 Shares tendered and accepted for purchase by tendering to the Depositary the aggregate purchase price payable on the Series 3 Shares validly tendered, taken up and paid for under the Offer, all in accordance with the Offer and applicable laws. Payment to shareholders for the Series 3 Shares will be made in cash, without interest, and will be completed by the Depositary as soon as practicable. Any Series 3 Shares invalidly tendered will be returned to the tendering shareholder promptly by the Depositary.

“This Offer represents a critical step towards optimizing our capital structure to support the successful execution of our strategic business plan with a focus on capital allocation in the junior mining space. By reducing the demands on our capital from the payment of preferred share dividends, we can deploy more resources to fund our core strategy,” said Jonathan Goodman, President and Chief Executive Officer.

“We believe this is an effective way of simplifying our balance sheet, reducing our cost of capital, and lowering our recurring cash needs to unlock value for all of our shareholders. By partially funding the purchase of the Series 3 Shares tendered with cash from treasury, we minimize debt obligations and run-rate cash outflows,” said Lila Murphy, Executive Vice President and Chief Financial Officer.

The full details of the Offer are described in the Corporation’s offer to purchase and issuer bid circular dated November 22, 2023, as well as the related letter of transmittal and notice of guaranteed delivery, copies of which were filed and are available under Dundee’s profile on SEDAR+ at www.sedarplus.ca and are posted on Dundee’s website at www.dundeecorporation.com.

Dundee retained Cassels Brock & Blackwell LLP to act as its external legal advisor and appointed Computershare Investor Services Inc. to act as depositary for the Offer.

The Board of Directors of the Corporation will continue to review various options for the allocation of capital. Beginning in early 2018, the Corporation has focused on the implementation of its strategy of rationalizing its portfolio of investments and monetizing non-core assets as it exits business lines which are no longer deemed to be aligned with its longer-term mining-focused strategy. As part of this process, the Corporation has taken significant steps to streamline its capital structure and strengthen its balance sheet.

This news release is for informational purposes only and does not constitute an offer to buy or the solicitation of an offer to sell any Series 3 Shares.

Update Regarding the Loan

As previously announced by the Corporation on November 20, 2023, in connection with the Offer, the Corporation entered into a loan agreement dated November 17, 2023 (the “Loan Agreement”) among the Corporation, as borrower, Dundee Resources Limited, as guarantor, and Earlston Investments Corp. (the “Lender”), as lender, pursuant to which the Lender agreed to make a loan in a principal amount of up to C$20,000,000 upon satisfaction of certain customary conditions precedent. Pursuant to the Loan Agreement and in connection with the completion of the Offer, the Lender has advanced to the Corporation a loan in the principal amount of C$14,000,000 for purposes of funding the purchase of the Series 3 Shares tendered, taken up and paid for under the Offer. For further details relating to the Loan and the Loan Agreement, including certain material terms and conditions thereof, please see the Corporation’s news release dated November 20, 2023.

The SIB was previously discussed on PrefBlog.

Thanks to Assiduous Reader paullo for bringing this to my attention!

Power Financial Corporation has announced:

the applicable dividend rates for its Non-Cumulative 5-Year Rate Reset First Preferred Shares, Series T (the “Series T shares”) and Non-Cumulative Floating Rate First Preferred Shares, Series U (the “Series U shares”).

With respect to any Series T shares that remain outstanding after January 31, 2024, holders thereof will be entitled to receive quarterly fixed non-cumulative preferential cash dividends, if, as and when declared by the Board of Directors of Power Financial. The dividend rate for the 5-year period from and including January 31, 2024 to but excluding January 31, 2029 will be 5.595%, being equal to the 5-year Government of Canada bond yield determined as of today plus 2.37%, in accordance with the terms of the Series T shares.

With respect to any Series U shares that may be issued on January 31, 2024, holders thereof will be entitled to receive quarterly floating rate non-cumulative preferential cash dividends, if, as and when declared by the Board of Directors of Power Financial. The dividend rate for the 3-month floating rate period from and including January 31, 2024 to but excluding April 30, 2024 will be 7.407%, being equal to the 3-month Government of Canada Treasury Bill yield determined as of today plus 2.37%, calculated on the basis of the actual number of days in such quarterly period divided by 365, in accordance with the terms of the Series U shares.

Beneficial owners of Series T shares who wish to exercise their conversion right should communicate with their broker or other nominee to ensure their instructions are followed so that the registered holder of the Series T shares can meet the deadline to exercise such conversion right, which is 5:00 p.m. (Eastern Time) on January 16, 2024.

PWF.PR.T was issued as a FixedReset, 4.20%+237, that commenced trading 2013-12-11 after being announced 2013-12-2. PWF.PR.T reset at 4.215% effective 2019-1-31. I recommended against conversion and there was no conversion. Notice of extension was provided in December, 2023. The issue is tracked by HIMIPref™ and is assigned to the FixedReset Discount subindex.

Thanks to Assiduous Reader NK for bringing this to my attention!

S&P Global Ratings has announced:

• Brookfield Property Partners L.P.’s (BPY) credit quality has been impaired by persistent secular headwinds within its office segment and deteriorating metrics related to higher financing costs.
  Therefore, we lowered the issuer credit ratings on both BPY and Brookfield Properties Retail (BPR; a core subsidiary within BPY’s group structure) to ‘BB’ from ‘BBB-‘.
• We also lowered the issue-level rating on BPY’s unsecured notes to ‘BB-‘ from ‘BB+’ and assigned a ‘5’ recovery rating (rounded estimate: 10%) to the notes.
• In addition, we lowered the issue-level rating on BPR’s senior secured notes to ‘B+’ from ‘BB+’ and assigned a ‘6’ recovery rating (rounded estimate: 5%) to the notes.
• Lastly, we lowered our rating on the company’s preferred shares to ‘B’ from ‘BB’ to reflect increased subordination risk for speculative-grade issuers.
• The negative outlook reflects our view that BPY’s liquidity could be pressured by upcoming recourse maturities over the next two years, while secular headwinds within the office segment could further deteriorate its operating performance.

PRINCETON (S&P Global Ratings) Dec. 21, 2023– S&P Global Ratings today took the rating actions listed above.

Secular headwinds in the office sector have weakened our assessment of BPY’s business risk. BPY owns one of the largest real estate portfolios of any rated real estate company, with approximately $130 billion in total assets. Moreover, we view the company’s high-quality properties and its diversification across product type and geography favorably.

However, while BPY’s retail assets have recovered to pre- pandemic levels (occupancy was 95.1% as of Sept. 30, 2023), occupancy in the office portfolio has continued to erode. As of Sept. 30, 2023, occupancy in the office portfolio slipped to 85.4%, a year-over-year decrease of 140 basis points and well below pre-pandemic levels of 93%. We acknowledge that within the office segment, BPY’s core properties–64 out of its 131 assets, representing a majority of office segment net operating income (NOI)–continue to perform well (95.2% occupancy as of Sept. 30, 2023). The remaining assets (which BPY believes have significant value-add opportunities through development and leasing activities) have languished, with occupancy below 80%. Weighted by asset values, occupancy was 91.1% for BPY’s office assets, demonstrating resilience for premier class ‘A’ workplaces.

We expect sector headwinds facing commercial office real estate will generally remain in place over the next several years, with weaker tenant retention, lower occupancy, and heightened incentives (through tenant inducements) to attract new tenants. We expect occupancy at class ‘A’ properties to be more resilient as the bifurcation of performance between class ‘A’ and class ‘B’ widens. However, we believe capital expenditures (capex) to attract new tenants will reduce BPY’s future cash flows and operating metrics will also be slow to recover. As a result, we revised our business risk assessment on BPY to strong from excellent.

Refinancing risks are rising given BPY’s elevated near-term debt maturities.Excluding extension options, BPY’s weighted-average debt maturity shrunk below three years in recent quarters (to 2.6 years as of Sept. 30, 2023), which we believe poses elevated risks.

We acknowledge that the vast amount of upcoming debt is nonrecourse secured debt and most of the maturing debt contains extension options that BPY can exercise. We believe the company maintains a solid position with its lenders due to parent Brookfield Corp.’s (BN; A-/Stable/A-1) scale and platform (BN is a large owner of real assets with over $140 billion of its own invested capital, including a 75% ownership in Brookfield Asset Management [BAM], a global asset manager with $865 billion of assets under management). Moreover, we think banks are reluctant to take back any commercial real estate assets secured by loans in the current market.

While we believe banks are heavily scrutinizing new commercial real estate loans, particularly those secured by office properties, they are generally willing to refinance existing loans. For example, BPY successfully refinanced over $30 billion in loans across more than 120 individual transactions in 2023, and we expect the company to successfully refinance upcoming secured debt. In many cases, we expect banks to provide extensions on maturing debt.

In some cases, particularly when weaker operating fundamentals (low occupancy or high lease rollover risk) reduce asset values, we would expect BPY to hand back the asset. As of Sept. 30, 2023, BPY has suspended approximately 3% of its contractual payments on nonrecourse mortgage debt. We view this as a portfolio management exercise by BPY, not a default, but could view it more negatively if loan defaults became frequent because it would erode our view of the company’s asset quality. We revised our capital structure modifier score to negative from neutral given BPY’s elevated debt maturities over the next few years.

While BPY’s recourse corporate notes and bank loan maturities (revolving credit facilities and term loans) look manageable in 2024 (approximately $442 million of unsecured notes due in March), its maturities will increase in 2025 with approximately $2.3 billion of total debt coming due. Lack of progress in addressing these maturities well ahead of maturity could hinder our view of the company’s liquidity.

BPY’s relationship with BN enhances its credit. Following the privatization of BPY by BN in July 2021, we continue to view BPY’s group status to BN as moderately strategic. We believe BN would provide financial support to BPY under some circumstances and could help facilitate future refinancing efforts including repayment of its March 2024 bond maturity. BPY is BN’s main vehicle for real estate investments and its largest investment vehicle. This group support provides a one-notch uplift to BPY’s stand-alone credit profile.

The negative outlook indicates a one in three chance of a downgrade over the next 12 months. This reflects our view that upcoming recourse maturities over the next two years could pressure BPY’s liquidity, while secular headwinds within the office segment could further deteriorate operating performance. We project S&P Global Ratings-adjusted debt to EBITDA will be maintained in the 15x area in both 2023 and 2024, with fixed-charge coverage (FCC) sustained at about 1x.

We could lower our ratings on BPY by one notch if:

BPY fails to refinance its upcoming recourse maturities well in advance, pressuring our view of the company’s liquidity;
Its operating performance deteriorates, with occupancy in the company’s core office segment weakening to the low-80% area; or
Its key credit metrics weaken further, with FCC declining below 1x or S&P Global Ratings-adjusted debt to EBITDA rising back above 16x.
We could revise the outlook back to stable if:

BPY bolsters its liquidity, potentially through asset sales, such that upcoming recourse maturities don’t threaten our liquidity assessment;
Its operating performance improves modestly, with a recovery to office occupancy; and
Key credit metrics stabilize or strengthen, with FCC maintained comfortably above 1.0x.

This follows an earlier CreditWatch-Negative placed on the parent company on 2023-10-5.

• Brookfield Property Partners L.P.’s (BPY) fixed-charge coverage deteriorated to below 1.0x in the second quarter of 2023, and we don’t forecast material near-term improvement given our economists’ view that interest rates will remain higher for longer.
• The company also faces heightened refinancing risk, with a capital structure that has significant maturities over the next two years and outsized exposure to floating-rate debt.
• S&P Global Ratings placed all its ratings on the company, including the ‘BBB-‘ issuer credit rating, on CreditWatch with negative implications.
• The CreditWatch negative placement reflects our expectation that we could lower the ratings on BPY, possibly by more than one notch, if we don’t envision the company implementing a near-term plan to reduce refinancing risk and boost coverage levels.

BPY’s deteriorating credit protection measures are unlikely to recover materially over the next two years.As of June 30, 2023, BPY’s adjusted debt to EBITDA increased to 17.3x from 15.2x at year-end 2022 while fixed-charge coverage (FCC) fell to 0.9x from 1.4x. A notable portion of the deterioration was caused by the consolidation of one of its funds’ (BSREP IV) U.S. investments in December 2022 and foreign investments in January 2023, which added a material amount of new debt to BPY while EBITDA has not fully cycled through on our trailing-12 month adjusted metrics. BPY owns a 23% financial stake in the fund but fully consolidates it within its financial statements.

That said, interest rates have risen materially over the past year, and BPY’s substantial exposure to floating-rate debt (45% net of interest rate hedges as of June 30, 2023) has rapidly deteriorated coverage metrics. S&P Global Ratings economists expect interest rates to remain higher for longer, with one additional rate hike expected in 2023. While we acknowledge that BPY’s sizable liquidity position and consistent execution of asset sales mitigate the risk of the company not being able to pay its fixed charges over the near term, BPY has one of the weakest financial risk profiles within our North America real estate coverage given elevated leverage and thin interest coverage. We project adjusted debt to EBITDA to improve slightly to the low-16x area over the next two years but expect FCC to be sustained at about 1x. While we expect BPY to execute meaningful asset sales over the coming years, we anticipate that the majority of proceeds will continue to be distributed up to its parent Brookfield Corp. (BN; A-/Stable/A-1) rather than allocated for debt repayment.

Near-term maturities pose additional risks.BPY has substantial upcoming debt maturities that will need to be refinanced, likely at significantly higher rates. The company’s weighted average debt maturity was slightly below three years as of June 30, 2023 (not including extension options). We believe that BPY maintains a solid position with its lenders due to its parent’s scale and platform (BN is a global asset manager with over $850 billion of assets under management) and the reluctance of banks to take back any commercial real estate assets secured by loans in the current market. In many cases, we expect the banks to provide extensions on maturing debt, albeit at higher rates. In some cases, particularly when weaker operating fundamentals (low occupancy or high lease rollover risk) are reducing asset values, we would expect BPY to hand back the asset to the servicer. As of June 30, 2023, BPY has suspended approximately 3% of its contractual payments on non-recourse mortgage debt. We view this as a portfolio management exercise by BPY, not a default, but could view it more negatively if loan defaults became frequent because it would erode our view of the company’s asset quality.

That said, as one- to three-year extensions are granted by banks or exercised by BPY on its non-recourse CMBS loans, its weighted average debt maturity could narrow further. We believe BPY maintains access to the capital markets where it could issue unsecured debentures or preferred shares, but that its weakening capital structure adds a modest amount of refinancing risk.

The CreditWatch placement reflects the company’s deteriorating interest coverage metrics, continued secular challenges facing the company’s office properties, and a capital structure with a material amount of near-term, floating-rate debt. We will seek to resolve the CreditWatch placement within the next three months.

BPY is a global, diversified real estate company that was taken private by BN in July 2021. BPY is BN’s primary vehicle to make investments across the real estate sector and is also BN’s largest investment vehicle, with approximately $130 billion in total assets as of June 30, 2023. It is the largest real estate company that we rate by total assets. BPY invests primarily in high-quality office properties located in gateway markets and class-A malls in the U.S., with approximately 198 million square feet of office and retail properties (including active development projects) within its core office and core retail platforms.

It will be remembered that BPO’s preferreds are guaranteed by BPY, its parent. The issues remain at Pfd-3(low) by DBRS.

Affected issues are: BPO.PR.A, BPO.PR.C, BPO.PR.E, BPO.PR.G, BPO.PR.I, BPO.PR.N, BPO.PR.P, BPO.PR.R, BPO.PR.T, BPO.PR.W, BPO.PR.X and BPO.PR.Y.

The market took the news badly, with BPO.PR.R down 9.34% on the day (close/close) and BPO.PR.N down 8.43%.

It will be interesting to see what happens with ZPR – as detailed in the December PrefLetter, ZPR’s weight in BPO was 3.10% in mid-November, while the index had exposure of 5.65%. ZPR’s extreme underweighting has been a huge factor in the index fund’s idiotic (positive) tracking error over the past year – but the regulatory problem remains the situation with reset date bucketting.

Thanks to Assiduous Reader hrseymour for bringing this to my attention.

Brompton Funds Limited has announced:

e that the name of Brompton Oil Split Corp. (the “Fund”) has changed to “Brompton Energy Split Corp.” and, commencing today, the class A shares and preferred shares of the Fund are trading under new Toronto Stock Exchange (“TSX”) ticker symbols: ESP and ESP.PR.A, respectively.

As previously announced, at a special meeting of preferred and class A shareholders (“Shareholders”) of the Fund held on December 5, 2023, Shareholders approved a special resolution to implement amendments to update and modernize the investment objectives and investment restrictions of the Fund, among other things (the “Amendments”), including the Fund’s name change.

Details regarding the Amendments are outlined in the Fund’s management information circular dated October 31, 2023 which is available at www.sedarplus.ca and www.bromptongroup.com.

The Fund invests in an actively managed portfolio consisting primarily of equity securities of dividend paying (at the time of investment) global energy issuers with a market capitalization of at least $2 billion (at the time of investment) which may include companies operating in energy subsectors and related industries such as oil & gas exploration and production, equipment, services, pipelines, transportation, infrastructure, utilities, among others. The Fund may also invest up to 25% of the value of the portfolio (as measured at the time of investment) in equity securities of other global natural resource issuers which include companies that own, explore, mine, process or develop natural resource commodities or supply goods and services to those companies, including directly or indirectly through exchange-traded funds.

The affected issue is OSP.PR.A, now ESP.PR.A.

DBRS has announced that it:

downgraded its credit ratings on Laurentian Bank of Canada (LBC or the Bank), including the Bank’s Long-Term Issuer Rating to BBB (high) from A (low). Concurrently, DBRS Morningstar confirmed the Bank’s Short-Term Issuer Rating at R-1 (low). The trend for all credit ratings is Negative. The Bank’s Intrinsic Assessment (IA) is BBB (high) while its Support Assessment (SA) remains SA3. The SA3 designation, which reflects no expectation of timely external support, results in the Bank’s Long-Term Issuer Rating being equivalent to the IA. These credit rating actions resolve the Under Review with Negative Implications status under which LBC was placed on November 3, 2023.

KEY CREDIT RATING CONSIDERATIONS
The credit rating downgrades and Negative trends reflect DBRS Morningstar’s view that LBC’s franchise strength and profitability prospects have significantly weakened with a limited visibility on the Bank’s long-term strategic path. The fundamental challenges faced by the Bank’s Personal Banking franchise in recent years has led to a sustained weakness in financial performance. Further, the Bank’s ability to improve earnings and growth prospects in the near to medium term will likely be affected by the adverse series of recent events, including the unexpected and sudden departure of the former President and CEO and the rapid succession of executive leadership departures, while there remains the uncertainty related to the delay in the Bank’s renewed strategic plan. Of note, LBC continues to report the lowest levels of profitability among Canadian medium-size banks rated by the DBRS Morningstar. The Bank is dealing with these fundamental changes and operational issues amid an uncertain economic environment with increasing headwinds. As a result, the challenging operating environment will likely make the timely and successful execution of a new strategic plan more complicated. The credit ratings also consider LBC’s relatively high proportion of brokered deposits and higher cost base.

Supporting its credit ratings, LBC has demonstrated good credit quality with low impairments and loan losses; however, DBRS Morningstar expects that asset quality metrics will deteriorate from current levels in F2024 as a result of the high interest rate environment, which has materially increased debt-servicing costs. Despite recent events, the Bank’s balance sheet fundamentals remain stable with higher levels of liquidity to deal with any potential deposit outflows. LBC’s capital position is adequate with sufficient buffers to absorb stressed levels of loan losses.

CREDIT RATING DRIVERS
Given the Negative trends, credit rating upgrades are unlikely. DBRS Morningstar would change the trends to Stable if LBC’s new leadership demonstrates a sustained improvement in the Bank’s franchise position and financial performance while maintaining a similar risk profile.

Conversely, additional operational missteps and/or a failure to execute on the strategic initiatives leading to further deterioration in franchise strength and earnings generation would result in a credit ratings downgrade. Furthermore, increased pressure on funding and liquidity would also result in a credit ratings downgrade.

CREDIT RATING RATIONALE
Franchise Combined Building Block (BB) Assessment: Good/Moderate
LBC is Canada’s eighth-largest Schedule I bank with assets of $49.9 billion as at October 31, 2023. The Bank offers retail services in Québec through its branch network as well as commercial lending across Canada and in the U.S. LBC also distributes financial products to brokers and financial advisors across Canada through its wholesale arm, B2B Bank. Over the past few years through 2022, LBC’s franchise has been faced with fundamental challenges in its Personal Banking business, which resulted in customer attrition, shrinking loans, and stagnant deposits. Two years into the current strategic plan that was unveiled on December 10, 2021, the Bank has undertaken a digital-first approach and introduced new and enhanced digital capabilities to close gaps in its Personal Banking business, particularly across mortgage, Visa, and deposit products. On October 2, 2023, following the mainframe outage, the Bank announced the sudden and unexpected departure of its president and CEO, Rania Llewellyn, and the resignation of its board chair, Michael Mueller. With Éric Provost only recently being appointed as president and CEO, DBRS Morningstar has limited visibility into LBC’s long-term strategic direction, although the Bank’s current focus is on improving operating efficiency and simplifying the organizational structure.

Earnings Combined Building Block (BB) Assessment: Moderate
Relative to its peers, LBC has demonstrated lower profitability although it has a higher share of noninterest income at about 27% of total revenue as at October 31, 2023. The Bank’s net income decreased by about 20.1% year over year (YOY) to $181.1 million in F2023 as a result of lower noninterest income and higher provision for credit losses and operating expenses. While a decrease in noninterest income was largely driven by reduced capital markets revenue, noninterest expenses increased on higher salaries, employee benefits, and ongoing investments in technology. Noninterest expenses included restructuring charges of $18.2 million resulting from changes in the Bank’s management structure, as well as strategic review-related charges of $5.9 million. As a result, the operating efficiency ratio deteriorated to 71.1% in F2023 from 67.7% in the prior year. Partly offsetting the downward pressure on net earnings, net interest income grew 1.8% YOY to $746.3 million in F2023; however, the net interest margin as calculated by DBRS Morningstar compressed by 6 basis points (bps) to 1.51% on higher funding costs, which outpaced growth in asset yields.

Risk Combined Building Block (BB) Assessment: Good
Amounting to $37.1 billion as at October 31 2023, gross loans contracted by 1.1% YOY in F2023, compared with 11.4% YOY growth in the prior-year period. A reduction in commercial and nonmortgage personal loans was partly offset by an increase in residential mortgages. The bulk of credit risk lies in the commercial book, which accounted for about 48% of total loans as at October 31, 2023 and has concentrations in commercial real estate and inventory financing. Overall, the Bank’s asset quality is good with low impairments and loan losses. The gross impaired loans ratio increased by 19 bps YOY to 62 bps in F2023, largely because of increased impairments in commercial mortgages. As with the rest of the banking sector, DBRS Morningstar expects asset quality metrics to further deteriorate from current levels amid the challenging macroeconomic environment. Furthermore, if not managed prudently, the Bank’s continued realignment of the loan portfolio and geographic expansion, as well as any additional deficiencies in IT capabilities and uncertainties around its new strategic direction, could expose LBC to heightened levels of operational and credit risk.

Funding and Liquidity Combined Building Block (BB) Assessment: Good/Moderate
LBC’s overall funding and liquidity position remains sound. Accounting for about 65% of the funding base, total deposits, including capital markets deposits, declined by 4.1% YOY to $26.0 billion in F2023. Personal deposits, which represented 86% of total deposits, remained broadly stable at $22.3 billion in F2023 on the back of an uptick in direct retail deposits. Broker-sourced deposits marginally declined to $10.7 billion and accounted for about 41% of total deposits. The Bank expects to attract more direct client deposits on a national level in the coming years, which DBRS Morningstar would view favourably over broker deposits. Liquidity levels are strong, with liquid assets forming 23% of total assets as at Q4 2023.

Capitalisation Combined Building Block (BB) Assessment: Good/Moderate
LBC’s capital ratios under the standardized approach are above regulatory minimums and provide adequate buffers to absorb stressed levels of loan losses. DBRS Morningstar would view favourably a larger capital buffer, sufficient to absorb significant losses, especially as the Bank undertakes an “accelerated evolution of its strategic plan” and continues to grow its commercial loan book, which may be more susceptible to weakness in the event of a sustained economic downturn. The CET1 capital ratio increased to 9.9% as at Q4 2023, compared with 9.1% for the same period of F2022, primarily reflecting lower risk-weighted assets as well as internal capital generation.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/425414.

The affected issue is LB.PR.H. It remains rated at P-3(low) by S&P.

AQN.PR.A’s reset rate was announced last week, but there was a problem: it looked like the company calculated the rate on the wrong day.

Following the lead of Assiduous Reader longtimelurker, I wrote the following eMail to Algonquin Power Investor Relations last week:

I understand from your press release at https://investors.algonquinpower.com/news-market-information/news/news-details/2023/Algonquin-Power–Utilities-Corp.-Announces-Dividend-Rates-on-Cumulative-Rate-Reset-Preferred-Shares-Series-A-and-Cumulative-Floating-Rate-Preferred-Shares-Series-B/default.aspx that the new dividend rate for AQN.PR.A has been set at 6.469%, based on a spread to five-year Canadas of 2.94% and, therefore, an implied yield of 3.529% for the Canadas.

According to the prospectus for the issue at [Link redacted because (i) it doesn’t work any more and (ii) links to SEDAR+ documents continue to violate the Terms of Use. Public documents are TOP SECRET!] :

i) “Subsequent Fixed Rate Period” means for the initial Subsequent Fixed Rate Period, the period from and including December 31, 2018 to, but excluding, December 31, 2023 and for each succeeding Subsequent Fixed Rate Period, the period commencing on the day immediately following the end of the immediately preceding Subsequent Fixed Rate Period to, but excluding, December 31 in the fifth year thereafter.

ii) “Fixed Rate Calculation Date” means, for any Subsequent Fixed Rate Period, the 30th day prior to the first day of such Subsequent Fixed Rate Period.

Since the first day of the “Subsequent Fixed Rate Period” just calculated is December 31, 2023, the “Fixed Rate Calculation Date” must be December 1, 2023, and

iii) “Annual Fixed Dividend Rate” means, for any Subsequent Fixed Rate Period, the annual rate (expressed as a percentage rounded to the nearest one hundred-thousandth of one percent (with 0.000005% being rounded up)) equal to the sum of the Government of Canada Yield on the applicable Fixed Rate Calculation Date plus 2.94%.

I find it surprising that your implied GOC rate of 3.529% is at such variance with another issuer, Capital Power Corporation, which in a press release December 1 (the day of calculation) announced a rate implying a GOC yield of 3.63%, while your press release was issued December 4.

Can you please confirm the “Fixed Rate Calculation Date” used for the calculation of the reset date for AQN.PR.A ?

Two follow-ups later, I received a reply:

You are correct; we have provided CDS with an amended notice for delivery to participants that updates the rate to 6.576% (an increase of 10.7 basis points), being the rate as of December 1, 2023.

So all’s well that ends well.

The Bank of Nova Scotia has announced:

its intention to redeem (i) all outstanding CDN $1,750 million 3.89% Subordinated Debentures (Non-Viability Contingent Capital (NVCC)) due January 18, 2029 (the “Debentures”) at 100% of their principal amount plus accrued and unpaid interest to but excluding the date fixed for redemption, and (ii) all outstanding Non-cumulative 5-Year Rate Reset Preferred Shares Series 40 (Non-Viability Contingent Capital (NVCC)) (“Series 40 Shares”) at a price equal to $25.00 per share together with dividends declared and unpaid prior to the redemption. The redemptions of the Debentures and Series 40 Shares will occur on January 18, 2024, and January 29, 2024, respectively. Formal notice will be delivered to the debenture holders in accordance with the terms and conditions set forth in the related trust indenture.

On November 28, 2023, the Board of Directors of Scotiabank declared a quarterly dividend of $0.303125 per Series 40 Share. This will be the final dividend of the Series 40 Shares and will be paid on January 29, 2024, to shareholders of record at the close of business on January 3, 2024, as previously announced. Subsequent to this final dividend payment, the Series 40 Shares will cease to be entitled to dividends.

The redemptions of the Debentures and Series 40 Shares have been approved by the Office of the Superintendent of Financial Institutions and will be financed out of the general funds of Scotiabank. These redemptions are part of the Bank’s ongoing management of its Tier 1 and Tier 2 capital.

BNS.PR.I is a FixedReset, 4.85%+243, NVCC, issue that commenced trading 2018-10-12 after being announced 2018-10-2. It has been tracked by HIMIPref™ and has been assigned to the FixedReset-Discount sub-index.

This obviously comes as a surprise, since the issue closed today with a quote of 23.20-25. Sometimes, Santa comes early!

Thanks to Assiduous Reader Peculiar_Investor for bringing this to my attention!