Category: Issue Comments

Brookfield Office Properties Inc. (“Brookfield”), a subsidiary of Brookfield Property Partners L.P., has announced:

that after having taken into account all election notices received by the December 16, 2022 deadline for the conversion of the Class AAA Preference Shares, Series II (the “Series II Shares”) (TSX: BPO.PR.I) into Class AAA Preference Shares, Series JJ (the “Series JJ Shares”), the holders of Series II Shares are not entitled to convert their Series II Shares into Series JJ Shares. There were 142,807 Series II Shares tendered for conversion, which is less than the one million shares required to give effect to conversion into Series JJ Shares.

The Series II Shares will pay on a quarterly basis, for the five-year period beginning on January 1, 2023, as and when declared by the board of directors of Brookfield, a fixed dividend based on an annual dividend rate of 6.359% ($0.397438 per share per quarter).

BPO.PR.I was issued as a FixedReset, 4.85%+323M485, that commenced trading 2017-12-7 after being announced 2017-11-29. BPO.PR.I will reset at 6.359% effective 2023-1-1; I recommended conversion.

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

DBRS Limited (DBRS Morningstar) has announced that it:

upgraded Cenovus Energy Inc.’s (Cenovus or the Company) Issuer Rating and Senior Unsecured Debt rating to BBB (high) from BBB and the Company’s Preferred Shares rating to Pfd-3 (high) from Pfd-3. All trends are Stable. The upgrades follow the significant reduction in gross debt ($4.3 billion in 2022), which has improved the Company’s credit metrics and financial risk profile. The Stable trends reflect DBRS Morningstar’s expectation that the reduction in gross debt will allow the Company to maintain its lease-adjusted debt-to-cash flow ratio at around 1.50 times (x) under DBRS Morningstar’s base-case commodity price assumptions (see “DBRS Morningstar Updates Oil and Natural Gas Price Forecasts: Midcycle Pricing Band Widened and Oil Price Forecast Raised” dated September 26, 2022).

Stronger commodity prices, noncore asset sales, and a focus on reducing debt have allowed Cenovus to deleverage materially and well ahead of DBRS Morningstar’s expectation at the close of the acquisition of Husky Energy Inc (Husky Acquisition). Cenovus continues to prioritize deleveraging and expects to direct approximately 50% of the expected excess free funds flow (cash flow less capex, base dividends on common and preferred shares, decommissioning liabilities, and principal repayment of leases, plus proceeds from asset divestitures) surplus toward the balance sheet until it achieves its revised net debt (debt excluding operating leases and netting out of cash) target of $4.0 billion (Q3 2022: $5.28 billion). Based on its base-case commodity price assumptions, DBRS Morningstar expects Cenovus to reach its net debt target in Q1 2023. The rating upgrade is driven by DBRS Morningstar’s assessment that the reduction in gross debt in 2022 and achievement of its net debt target should allow the Company to maintain its financial risk profile commensurate with the rating through commodity price cycles. DBRS Morningstar also believes that the improvement in balance sheet strength provides the Company the flexibility to address challenges and costs associated with meeting voluntary and regulatory mandated greenhouse gas (GHG) emission reduction targets.

Cenovus’ business risk profile is strong and is underpinned by its (1) significant size (production of 777.9 thousand barrels of oil equivalent per day (Mboe/d) and upgrader/refinery throughput of 533.5 thousand barrels (bbl) per day in Q3 2022); (2) integrated upstream and downstream operations; and (3) long-life, low-cost oil sands assets at Foster Creek and Christina Lake and contracted production in Asia-Pacific. DBRS Morningstar expects the Company to maintain its business risk profile with a modest increase in near-term production driven by the Sunrise acquisition and optimization/debottlenecking projects at the Company’s oil sands assets and medium term growth through further optimization of oil sands assets and the West White Rose (WWR) project. Cenovus’ downstream integration is also expected to improve with the acquisition of the remaining stake in the Toledo refinery (expected to close in 2023), startup of the Superior refinery in Q1 2023, and capital investments aimed at optimizing and reducing operating costs at its downstream operations. The Company’s business risk profile remains constrained by its exposure to lower margin heavy and thermal oil and high concentration of oil-producing assets in Western Canada.

Cenovus expects production in 2023 to average between 800 Mboe/d and 840 Mboe/d with a budgeted capex of $4.0 billion to $4.5 billion. While capex in 2023 is higher relative to 2022 because of cost inflation and committed capital spend on the WWR project, it also includes a growth/discretionary component of $0.5 billion to $1 billion (excluding the WWR project), which could be scaled back if required. DBRS Morningstar expects the Company to generate a material free cash flow (cash flow after capex and dividends) surplus in 2023 and 2024 despite DBRS Morningstar’s expectation that the WTI price of crude oil will decline to the middle of DBRS Morningstar’s midcycle pricing band of USD 50 to USD 70 per barrel (/bbl) over the period. DBRS Morningstar expects the Company’s liquidity position to remain strong with its committed credit facilities totalling $5.5 billion remaining largely unused.

A further upgrade would require the Company to reduce gross debt and improve its lease-adjusted debt-to-cash flow ratio to consistently around 1.00x. Conversely, should oil prices weaken materially (below USD $45/bbl) and credit metrics stay weak for an extended period, DBRS Morningstar may take a negative rating action.

Affected issues are CVE.PR.A, CVE.PR.B, CVE.PR.C, CVE.PR.E and CVE.PR.G.

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

Intact Financial Corporation has announced:

that, after having taken into account all elections received before the December 16, 2022, 5:00 p.m. (ET) conversion deadline, with respect to the Non-cumulative Rate Reset Class A Shares Series 1 of IFC (the “Series 1 Preferred Shares”) tendered for conversion on December 31, 2022 into Non-cumulative Floating Rate Class A Shares Series 2 of IFC (the “Series 2 Preferred Shares”), the holders of Series 1 Preferred Shares are not entitled to convert their shares. There were 577,852 Series 1 Preferred Shares tendered for conversion, which is fewer than the 1,000,000 Series 1 Preferred Shares required for the ability to proceed with the conversion, in accordance with the terms of the Series 1 Preferred Shares.

There are 10,000,000 Series 1 Preferred Shares listed on the Toronto Stock Exchange (“TSX”) under the symbol IFC.PR.A. The annual dividend rate for the Series 1 Preferred Shares for the five-year period from and including December 31, 2022 to but excluding December 31, 2027, will be 4.841%, as determined in accordance with the terms of the Series 1 Preferred Shares.

Subject to certain conditions described in IFC’s prospectus dated July 5, 2011, IFC may redeem the Series 1 Preferred Shares, in whole or in part, on December 31, 2027 and on December 31 every five years thereafter.

For more information on the terms of, and risks associated with an investment in, the Series 1 Preferred Shares, see IFC’s prospectus dated July 5, 2011 which is available on www.sedar.com.

IFC.PR.A will reset at 4.841% effective 2022-12-31. IFC.PR.A was issued as a FixedReset, 4.20%+172, that commenced trading 2011-7-12 after being announced 2011-6-22. IFC.PR.A reset at 3.396% effective December 31, 2017, and I recommended against conversion. There was no conversion. In 2022 I recommended conversion.

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

Canadian Imperial Bank of Commerce has announced:

that it does not intend to exercise its right to redeem all or any part of its currently outstanding 18,000,000 Non-cumulative Rate Reset Class A Preferred Shares Series 47 (Non-Viability Contingent Capital (NVCC)) (the “Series 47 Shares”) on January 31, 2023.

Subject to certain conditions set out in the prospectus supplement dated January 11, 2018 to the short form base shelf prospectus of CIBC dated March 16, 2016 relating to the issuance of the Series 47 Shares, the holders of Series 47 Shares have the right to convert all or any of their Series 47 Shares, on a one-for-one basis, into Non-cumulative Floating Rate Class A Preferred Shares Series 48 (Non-Viability Contingent Capital (NVCC)) of CIBC (the “Series 48 Shares”) on January 31, 2023.

On such date, holders who do not exercise their right to convert their Series 47 Shares into Series 48 Shares, will continue to hold their Series 47 Shares. The foregoing conversion rights are subject to the following:

• if CIBC determines that there would remain outstanding less than 1,000,000 Series 48 Shares, after having taken into account all Series 47 Shares tendered for conversion on January 31, 2023, then holders of Series 47 Shares will not be entitled to convert their shares into Series 48 Shares, and
• alternatively, if CIBC determines that there would remain outstanding less than 1,000,000 Series 47 Shares, after having taken into account all Series 47 Shares tendered for conversion on January 31, 2023, then all, but not part, of the remaining outstanding Series 47 Shares will automatically be converted into Series 48 Shares on a one-for-one basis on January 31, 2023.

In either case, CIBC will give written notice to that effect to the registered holder of Series 47 Shares no later than January 24, 2023.

The fixed dividend rate applicable to the Series 47 Shares, should any remain, for the five-year period from and including January 31, 2023 to but excluding January 31, 2028, as and when declared by the Board of Directors, and the floating dividend rate applicable to the Series 48 Shares, should any be issued, for the three-month period from and including January 31, 2023 to but excluding April 30, 2023, as and when declared by the Board of Directors of CIBC, will be determined and communicated on December 30, 2022. CIBC has designated the Series 48 Shares as eligible to participate in the CIBC Shareholder Investment Plan.

Beneficial owners of Series 47 Shares who wish to exercise their conversion right should instruct their broker or other nominee during the conversion period, which runs from January 1, 2023 until 5:00 p.m. (Eastern Standard Time) on January 16, 2023. It is recommended that this be done well in advance of the deadline in order to provide the broker or other nominee time to complete the necessary steps. Any notices received after this deadline will not be valid.

CM.PR.S was issued as a FixedReset, 4.50%+245, NVCC-compliant, that commenced trading 2018-1-18 after being announced January 10. It will be tracked by HIMIPref™ and is assigned to the FixedReset (Discount) subindex.

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

Brookfield Corporation accomplished most of it latest reorg on December 9:

Brookfield Corporation (NYSE: BN, TSX: BN) (the “Corporation”) and Brookfield Asset Management Ltd. (NYSE: BAM, TSX: BAM) (the “Manager”) today jointly announced the completion of the public listing and distribution of a 25% interest in the Corporation’s asset management business, through the Manager, by way of a plan of arrangement (“Arrangement”).

The Corporation has changed its name from Brookfield Asset Management Inc. to Brookfield Corporation, with effect from today and at the open of markets on December 12, 2022, its shares will trade under the new ticker “BN” on both stock exchanges. The Manager takes the name Brookfield Asset Management Ltd. and has been successfully listed on the New York Stock Exchange and the Toronto Stock Exchange. At the open of markets on December 12, 2022, its shares will trade under the ticker “BAM” on both stock exchanges.

The preferred shares have nearly all tranformed from BAM.xx.x to BN.xx.x, retaining all but the ‘issuer’ part of their ticker symbols, but there are two exceptions: BAM.PR.E Transforms To BN.PF.K and BAM.PR.G Transforms To BN.PF.L

Brookfield has updated its Official Preferred Share Page.

Other transformations, painstakingly spelled out here in order to make the Issue Comments section of this blog searchable (to search for BAM.PR.G in “Issue Comments”, put https://prefblog.com/?cat=14&s=BAM.PR.G in your browser address bar).

Brookfield Corporation accomplished most of it latest reorg on December 9:

Brookfield Corporation (NYSE: BN, TSX: BN) (the “Corporation”) and Brookfield Asset Management Ltd. (NYSE: BAM, TSX: BAM) (the “Manager”) today jointly announced the completion of the public listing and distribution of a 25% interest in the Corporation’s asset management business, through the Manager, by way of a plan of arrangement (“Arrangement”).

The Corporation has changed its name from Brookfield Asset Management Inc. to Brookfield Corporation, with effect from today and at the open of markets on December 12, 2022, its shares will trade under the new ticker “BN” on both stock exchanges. The Manager takes the name Brookfield Asset Management Ltd. and has been successfully listed on the New York Stock Exchange and the Toronto Stock Exchange. At the open of markets on December 12, 2022, its shares will trade under the ticker “BAM” on both stock exchanges.

Accordingly, the BAM Series 9, BAM.PR.G, shares have transformeed into BN Series 52, BN.PF.L shares:

Dividends
The holders of the Series 52 Preferred Shares are entitled to receive fixed cumulative preferred cash dividends, as and when declared by the board of directors, payable quarterly on the first day of February, May, August and November in each year, in an amount per share per annum equal to the product of C$22.00 and a percentage (which shall not be less than 80%) of the yield on certain Government of Canada bonds, established for each five year period commencing November 1, 2001 (and each fifth anniversary of that date).

For the five-year period from November 1, 2021 until October 31, 2026, the Series 52 Preferred Shares will pay on a quarterly basis, as and when declared by the board of directors, a fixed cash dividend in an amount equal to 2.75% per annum applied to C$22.00 per share.

Redemption
Subject to applicable law and certain restrictions and to the rights, privileges, restrictions and conditions attaching to other shares of the Corporation, on November 1, 2026 and on November 1 in every fifth year thereafter, all, but not less than all, of the Series 52 Preferred Shares will be redeemable at the option of the Corporation at a redemption price of C$22.00 per share, together with all accrued and unpaid dividends thereon up to but excluding the date of redemption. Notice of any redemption must be given by the Corporation at least 45 days and not more than 60 days prior to the date fixed for redemption.

…
Exchange
Subject to certain restrictions, the holders of the Series 52 Preferred Shares will have the right, on November 1, 2026,and on November 1 in every fifth year thereafter, to exchange any or all of the Series 52 Preferred Shares held by them for Series 51 Preferred Shares of the Corporation, on a one-for one basis. An exchange of Series 52 Preferred Shares for Series 51 Preferred Shares must be initiated not less than 14 days and not more than 45 days prior to an exchange date. Under certain circumstances, the Series 52 Preferred Shares automatically convert into Series 51 Preferred Shares, on a one-for-one basis.

Rights of Liquidation
In the event of the liquidation, dissolution or winding-up of the Corporation, the holders of the Series 52 Preferred Shares will be entitled to receive C$22.00 per share together with all dividends accrued and unpaid to the date of payment before any amount will be paid or any assets of the Corporation distributed to the holders of any shares ranking junior to the Series 52 Preferred Shares. The holders of the Series 52 Preferred Shares will not be entitled to share in any further distribution of the assets of the Corporation.
…

Brookfield Corporation accomplished most of it latest reorg on December 9:

Brookfield Corporation (NYSE: BN, TSX: BN) (the “Corporation”) and Brookfield Asset Management Ltd. (NYSE: BAM, TSX: BAM) (the “Manager”) today jointly announced the completion of the public listing and distribution of a 25% interest in the Corporation’s asset management business, through the Manager, by way of a plan of arrangement (“Arrangement”).

The Corporation has changed its name from Brookfield Asset Management Inc. to Brookfield Corporation, with effect from today and at the open of markets on December 12, 2022, its shares will trade under the new ticker “BN” on both stock exchanges. The Manager takes the name Brookfield Asset Management Ltd. and has been successfully listed on the New York Stock Exchange and the Toronto Stock Exchange. At the open of markets on December 12, 2022, its shares will trade under the ticker “BAM” on both stock exchanges.

Accordingly, the BAM Series 8, BAM.PR.E, shares have transformeed into BN Series 51, BN.PF.K shares:

Dividends
The holders of the Series 51 Preferred Shares are entitled to receive monthly floating cumulative preferential cash dividends, accruing daily, as and when declared by the board of directors on the 12th day of each month in an amount per share equal to the product of C$22.00 per share and one-twelfth of the annual floating dividend rate applicable to the month being the average Prime Rate for the month multiplied by a Designated Percentage as provided in the share conditions. The Designated Percentage established for November 2001 was 85%. Thereafter, the Designated Percentage has been adjusted each month based on the average trading price of the Series 51 Preferred Shares, to a maximum of 100% and a minimum of 50%.
…
Redemption
Subject to applicable law and certain restrictions and to the rights, privileges, restrictions and conditions attaching to other shares of the Corporation, all, but not less than all, of the Series 51 Preferred Shares will be redeemable at the option of the Corporation at a redemption price of C$22.44 per share, together with all accrued and unpaid dividends thereon up to but excluding the date of redemption. Notice of any redemption must be given by the Corporation at least 45 days and not more than 60 days prior to the date fixed for redemption.

Purchase for Cancellation
The Corporation may purchase (if obtainable) for cancellation the whole or any part of the Series 51 Preferred Shares in the open market or by private agreement or otherwise, at the lowest price obtainable, in the opinion of the board of directors, plus accrued and unpaid dividends and costs of purchase.

Exchange
Subject to certain restrictions, the holders of the Series 51 Preferred Shares will have the right, on November 1, 2026, and on November 1 in every fifth year thereafter, to exchange any or all of the Series 51 Preferred Shares held by them for Series 52 Preferred Shares of the Corporation, on a one-for one basis. An exchange of Series 51 Preferred Shares for Series 52 Preferred Shares must be initiated not less than 14 days and not more than 45 days prior to an exchange date. Under certain circumstances, the Series 51 Preferred Shares automatically convert into Series 51 Preferred Shares, on a one-for-one basis.

Rights of Liquidation
In the event of the liquidation, dissolution or winding-up of the Corporation, the holders of the Series 51 Preferred Shares will be entitled to receive C$22.00 per share together with all dividends accrued and unpaid to the date of payment before any amount will be paid or any assets of the Corporation distributed to the holders of any shares ranking junior to the Series 51 Preferred Shares. The holders of the Series 51 Preferred Shares will not be entitled to share in any further distribution of the assets of the Corporation.
…

National Bank of Canada has announced (on 2022-11-4):

that none of its outstanding 16,000,000 Series 38 Shares will be converted on November 15, 2022, into Non-Cumulative Floating Rate First Preferred Shares, Series 39 (NVCC) (the “Series 39 Shares”).

During the conversion period, 82,826 Series 38 Shares were tendered for conversion into Series 39 Shares, which is less than the minimum 1,000,000 required to give effect to the conversion, as per the terms of the Series 38 Shares described in the prospectus supplement dated June 5, 2017.

As a result, no Series 39 Shares will be issued on November 15, 2022, and holders of Series 38 Shared will retain their shares.

The Series 38 Shares are currently listed on the Toronto Stock Exchange under the symbol NA.PR.C. The annual dividend rate for such shares for the five-year period commencing on November 16, 2022, and ending on November 15, 2027, will be 7.027%.

NA.PR.C is a FixedReset, 4.45%+343, NVCC-compliant, that commenced trading 2017-6-13 after being announced 2017-6-1. Notice of extension was given in 2022 and it reset to 7.027%. The issue is tracked by HIMIPref™ and has been assigned to the FixedResets (Discount) subindex.

BAM.PF.J will reset at 6.229% effective 2023-1-1. BAM.PF.J was issued as a FixedReset, 4.75%+310M475, that commenced trading 2017-9-13 after being announced 2017-09-06.

BAM.PR.Z will reset at 6.089% effective 2023-1-1. BAM.PR.Z was issued as a FixedReset, 4.80%+296, that commenced trading 2011-11-2 after being announced 2011-10-24. BAM.PR.Z reset to 4.685% effective 2018-1-1; I recommended against conversion; and there was no conversion.

BPO.PR.I will reset at 6.359% effective 2023-1-1. BPO.PR.I was issued as a FixedReset, 4.85%+323M485, that commenced trading 2017-12-7 after being announced 2017-11-29.

IFC.PR.A will reset at 4.841% effective 2022-12-31. IFC.PR.A was issued as a FixedReset, 4.20%+172, that commenced trading 2011-7-12 after being announced 2011-6-22. IFC.PR.A reset at 3.396% effective December 31, 2017, and I recommended against conversion. There was no conversion.

The most logical way to analyze the question of whether or not to convert is through the theory of Preferred Pairs, for which a calculator is available. Briefly, a Strong Pair is defined as a pair of securities that can be interconverted in the future (e.g. IFC.PR.A and the FloatingReset that will arise if enough holders convert). Since they will be interconvertible on this future date, it may be assumed that they will be priced identically on this date (if they aren’t then holders will simply convert en masse to the higher-priced issue). And since they will be priced identically on a given date in the future, any current difference in price must be offset by expectations of an equal and opposite value of dividends to be received in the interim. And since the dividend rate on one element of the pair is both fixed and known, the implied average rate of the other, floating rate, instrument can be determined. Finally, we say, we may compare these average rates and take a view regarding the actual future course of that rate relative to the implied rate, which will provide us with guidance on which element of the pair is likely to outperform the other until the next interconversion date, at which time the process will be repeated.

We can show the break-even rates for each FixedReset / FloatingReset Strong Pair graphically by plotting the implied average 3-month bill rate against the next Exchange Date (which is the date to which the average will be calculated).

Click for Big

It is somewhat surprising to note that the market is pricing in a lengthy policy tightening cycle by the BoC: the implied rates until the next interconversion are not much different from the current 3-month bill rate of 4.26%, with the averages for investment-grade and junk issues at +4.08% and +4.25%, respectively. Some may conclude that investors are making no attempt to forecast the duration of this tightening cycle!

Since credit quality of each element of the pair is equal to the other element, it should not make any difference whether the pair examined is investment-grade or junk, although we might expect greater variation of implied rates between junk issues on grounds of lower liquidity, and this is just what we see.

It should be noted that the data is not of particularly good quality, since of the InvestmentGrade pairs, only SLF.PR.G / SLF.PR.J and TRP.PR.A / TRP.PR.F have FloatingResets of any appreciable liquidity. These two pairs are plotted with the coordinates (2.89 years, 3.62%) and (2.39 years, 4.22%) respectively. So there’s a certain amount of danger that plots could change appreciably if the upcoming conversion options result in FloatingResets that are highly liquid. Be warned!

If we plug in the current bid price of the IFC.PR.A FixedReset, we may construct the following table showing consistent prices for its soon-may-be-issued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:

Similarly, for BAM.PF.J:

Similarly, for BAM.PR.Z:

Similarly, for BPO.PR.I:

Based on current market conditions, I suggest that the FloatingResets that will result from conversion are likely to trade above the price of their FixedReset counterparts. Therefore, I recommend that holders of IFC.PR.A, BAM.PF.J, BAM.PR.Z and BPO.PR.I convert their holdings to the corresponding FloatingResets. I will note that once the FloatingResets commence trading (if, in fact, they do) it may be a good trade to swap one issue for the other in the market once both elements of each pair are trading and you can – hopefully – do it with a reasonably good take-out in price, rather than doing it through the company on a 1:1 basis. But that, of course, will depend on the prices at that time and your forecast for the path of policy rates over the next five years. There are no guarantees – my recommendation is based on the assumption that current market conditions with respect to the pairs will continue until the FloatingResets commence trading and that the relative pricing of the two new pairs will reflect these conditions.

Readers who are not as Assiduous as they should be occasionally get upset at my conversion recommendations because I make no attempt whatsoever to make my own estimate of the average 3-month bill rate for the next five years and tailor a recommendation accordingly. I do not do this because it cannot be done with any degree of conviction whatsoever; anybody who tells you that they can reliably predict market yields five years in advance is a charlatan. Market Timing is a snare and delusion; financial markets form a chaotic system in which things that have no rational relevance today can be the driving forces tomorrow. I did not predict the market effects of the COVID pandemic six months before it happened; I did not predict the market effects of the Russian invasion of Ukraine six months before it happened, either; I don’t know anybody who did. All we can ever do is compare similar instruments and attempt an educated guess about relative value; for example IFC.PR.A vs. its possible Floating Rate counterpart. Comparing either one of them with cash or equity over the short term is an exercise in futility.

So what to do? Construct your portfolio to meet your needs and your risks, based on the long-term characteristics of the various alternatives. If, for instance, you are financing your position with a variable rate mortgage based on prime (not a wise move, but some people do it), your lower risk (higher certainty) option is the FloatingReset, as it will reset every three months in accordance with the three month bill rate, which is closely related to prime. Prime and the three month bill rate are similar instruments; prime and the five-year bond rate are less similar; prime and equity prices are highly dissimilar. My purpose in making these ‘convert or hold’ recommendations is to show the potential for short term trading gains between the FixedReset and its FloatingReset counterpart which are, as previously noted, similar instruments. Thus, for instance, if your portfolio requirements indicate that the FixedReset instrument is better suited for you, you might wish to elect to convert to the FloatingReset anyway; this would be reasonable (but not guaranteed!) to the extent that you have a reasonable (but not guaranteed!) expectation that the FloatingReset will be trading higher than the FixedReset for a long enough period to allow you to swap the issues on the market and maybe take out $0.25/share on the swap.

That’s how you make money in the market, taking out small profits as many times as opportunity permits. That’s what proprietary traders (and properly operated hedge funds, deserving of the name) do – and proprietary trades, backed with sufficient capital, are the only group of market participants that consistently make profits.

Those who wish to convert are advised that the deadline for notifying the company of such a desire is 5:00 p.m. (Toronto time) on December 16, 2022 for each of these issues. Brokers and other intermediaries generally set their internal deadlines a day or two in advance of this date, so if you wish to convert there’s no time to waste! Note that brokers will, in general, try to execute the instruction on a ‘best efforts’ basis if received between the two deadlines, provided that the procrastinating shareholder grovels entertainingly enough.

DBRS has announced that it:

changed the trends on Fairfax Financial Holdings Limited (Fairfax or the Company) and its related entities to Positive from Stable. DBRS Morningstar also confirmed all ratings, including Fairfax’s Issuer Rating, at BBB (high), with Northbridge General Insurance Corporation’s (Northbridge) and Federated Insurance Company of Canada’s Financial Strength Ratings at “A”.

KEY RATING CONSIDERATIONS
The change in the trends to Positive from Stable recognizes Fairfax’s resilient, diversified and growing franchise; consistent underwriting profitability; strong liquidity position; and sound regulatory capital. The Company is a major international property and casualty (P&C) insurance and reinsurance player with a significant presence in key global markets through its geographically diversified insurance and reinsurance operating subsidiaries. Fairfax maintains ample liquid assets at both the holding and operating companies, as well as access to committed lines of credit. Fairfax’s earnings are subject to volatility as a result of exposure to natural catastrophe losses and the impact of financial market fluctuations on unrealized investment gains and losses. The Company’s subsidiaries maintain appropriate regulatory capital ratios with buffers above required solvency levels, allowing Fairfax to handle adverse events. The ratings also consider Fairfax’s improved risk profile, driven by the Company’s recent shift towards investing in highly rated and liquid fixed-income securities while reducing holdings of noninvestment-grade bonds. AAA-rated bonds now account for the majority of Fairfax’s bond portfolio.

RATING DRIVERS
DBRS Morningstar would upgrade the ratings on Fairfax and its subsidiaries, if the Company maintains its improved risk profile and overall profitability while reducing its financial leverage ratio.

Given the Positive trend, a downgrade in the near future is unlikely. However, the trend would revert to Stable if there is deterioration in the risk profile and overall profitability, or sustained elevated financial leverage.

RATING RATIONALE
DBRS Morningstar views the Company’s franchise strength as Strong/Good, reflecting the size and diversity of its core operations. Fairfax has developed an extensive portfolio of global insurance and reinsurance subsidiaries over time, which the Company continues to expand through organic growth and prudent strategic acquisitions. Management of Fairfax’s insurance and reinsurance operating subsidiaries is decentralized, with each organization having its own autonomous management team. The breakdown of premiums written by line of business has remained consistent over the past five years, with casualty insurance accounting for just more than half of the gross premiums written. The Company ranks among the top five providers of commercial P&C insurance in Canada based on 2021 direct premiums written. Fairfax’s largest U.S.-based subsidiary, Odyssey Group, ranks among the 25 largest global P&C reinsurers. The Company’s U.K. subsidiary, Brit Limited (Brit), is the second largest Lloyd’s of London syndicate and a market leader in specialty insurance and reinsurance. Fairfax can compete with larger global players using various platforms in selected markets where it can achieve underwriting profitability. The Company’s gross written gross premiums have increased progressively over the past five years to $23.8 billion reported for year-end 2021.

Fairfax’s Good risk profile is supported by the Company’s strong underwriting and risk-limit controls, effective claims management, and appropriate reinsurance coverage for aggregate claim events or large losses. Moreover, Fairfax has appropriate internal controls and has been able to operate successfully in multiple jurisdictions. There has been a significant increase in the proportion of AAA rated bonds and a decline in the proportion of bonds rated BBB and below in the bond portfolio, resulting in a material improvement in the credit risk profile of the Company’s fixed-income investment portfolio.

DBRS Morningstar assesses Fairfax’s earnings ability as Good. The Company is characterized by disciplined underwriting, supported by a long-term value investing approach that sometimes may introduce earnings volatility. The Company has a history of acquiring well-managed insurance companies, ensuring that it retains management to continue running these businesses. The results for the first nine months of 2022 (9M 2022) were negatively affected by market volatility, caused in part by the rapid increase in interest rates globally. As a result, Fairfax reported a consolidated net loss of $816 million as of 9M 2022. Nonetheless, Fairfax expects to report a small profit for full year due to realized gains ($1.3 billion on a pre-tax basis) upon the sale of the Company’s pet insurance business, which will be reflected in Q4 2022 earnings. The hardening reinsurance market is expected to contribute positively to Fairfax earnings in the short to medium term.

DBRS Morningstar assesses Fairfax’s liquidity profile as Strong/Good. Fairfax maintains a strong financial position at the holding company level, with approximately a $873.5 million total for cash and liquid investments as at Q3 2022. DBRS Morningstar considers this level of cash and investments as providing an important liquidity cushion for any potential uptick in insurance claims from the subsidiaries or potential catastrophe losses. The Company redeployed a significant amount of cash in 2022 to invest in AAA-rated U.S. Treasuries and Government of Canada bonds. This is expected to help increase earnings through interest income going forward while maintaining the Company’s resilient liquidity position. Fairfax maintains a committed credit facility of $2 billion that is available to support liquidity needs. The credit facility was largely undrawn as at September 30, 2022.

DBRS Morningstar assesses the capitalization of Fairfax as Good/Moderate. The Company’s insurance and reinsurance operating subsidiaries are appropriately capitalized. Fairfax’s fixed-charge coverage ratios have been volatile over time because of the impact of International Financial Reporting Standards’ accounting treatment of unrealized capital gains and losses within the investment portfolio. However, it improved significantly in 2021 because of the Company’s strong earnings. The Company’s financial leverage ratio (calculated by DBRS Morningstar on a consolidated basis as debt plus preferred shares to capital) increased to 35.7% at Q3 2022, in part due to the issuance of $750 million of senior debt in August 2022 and a decline in common equity. Any substantial further increase in leverage would change the Positive trend to Stable.

The rating of Pfd-3(high) was unaffected.

Affected issues are FFH.PR.C, FFH.PR.D, FFH.PR.E, FFH.PR.F, FFH.PR.GM, FFH.PR.H, FFH.PR.I, FFH.PR.J, FFH.PR.K and FFH.PR.M.