Category: Issue Comments

Issue Comments

CCS.PR.C Upgraded to Pfd-2 by DBRS

DBRS has announced that it:

upgraded the ratings of Co-operators Financial Services Limited (CFSL or the Company), including its Issuer Rating, to BBB (high) from BBB. The ratings of Co-operators General Insurance Company (CGIC) were also upgraded, including its Financial Strength Rating, to “A” from A (low). Lastly, a Financial Strength Rating was assigned to Co-operators Life Insurance Company at “A.” The trends are all Stable.

KEY RATING CONSIDERATIONS
The ratings upgrades reflect the Company’s strong and consistent growth and improved underwriting profitability. While the Company’s strong 2021 performance was supported by extraordinarily favourable Canadian auto insurance results that benefitted from the pandemic, DBRS Morningstar views CFSL as well positioned to maintain adequate underwriting profitability going forward, which will allow it to fund its strategic initiatives.

The ratings and Stable trend reflect the Company’s prudent liquidity, leverage, and capital positions. Moreover, the franchise benefits from a diversified product offering, although its core property and casualty (P&C) business is by far the largest contributor to earnings. CFSL has been able to expand into new product lines, relying on its distribution strengths. The ratings also consider that the life insurance and wealth management businesses would benefit from additional scale to improve profitability.

RATING DRIVERS
Given the recent upgrades, further positive ratings movement is unlikely in the near term. Over the longer term, a significant improvement in profitability that includes a greater contribution from CFSL’s life insurance and asset management businesses would result in a ratings upgrade.

Conversely, a sustained deterioration in underwriting and overall profitability combined with lower capital levels would result in a ratings downgrade.

RATING RATIONALE
CFSL is one of Canada’s leading P&C insurers with a growing presence in life insurance, wealth, and asset management services. It has a resilient business model with solid brand recognition and access to multiple distribution channels, including proprietary agency and brokerage networks as well as a unique partnership with Canadian credit unions. CFSL is ranked fourth in the Canadian P&C insurance market and 14th in the life insurance market according to MSA Research 2021 direct written premium data. The Company continues to dedicate significant resources to strengthening its customer relationships through digitalization, client engagement, and advertising.

CFSL is exposed to a diversified portfolio of insurance risks, with individual P&C insurance being its largest exposure. Its investment portfolio is mainly composed of high-quality fixed-income assets but also includes sizable allocations to equities, preferred shares, and mortgages. CFSL has a comprehensive risk management and stress testing framework that it uses to set adequate risk limits consistent with its risk appetite. CFSL’s insurance operating subsidiaries maintain prudent reinsurance coverage, which mitigates large losses caused by catastrophic claims events.

CFSL has consistently grown revenues over the past five years, and earnings have benefitted. For 2021, the Company reported record earnings of $477 million and a return on average shareholders’ equity of 13.1%, reflecting strong financial markets and favourable P&C claims experience. In 2022, financial market volatility and rising interest rates have affected profitability with net income decreasing to $86 million for H1 2022 from $476 million in H1 2021. Going forward, the Company is expected to maintain adequate underwriting profitability and is also likely to be affected by any further financial market volatility.

CFSL has a healthy liquidity position with a large buffer of highly liquid assets in excess of its liquidity requirements. It has a $98 million undrawn credit facility and has surplus capital held at the holding company level, which is invested in liquid assets and is sufficient to cover the principal of its senior debentures.

CFSL maintains adequate capital buffers in its insurance subsidiaries with the minimal capital test ratio of its P&C subsidiary at 219% and the life insurance capital adequacy test ratio of its life subsidiary at 152% at Q2 2022; both are well above regulatory targets of 150% and 100%, respectively. These capital ratios have declined since YE2021 because of rising interest rates and equity market declines in the first half of the year. CFSL’s consolidated financial leverage ratio (including preferred shares of CGIC) was 12.3% as at Q2 2022, which is conservative. The Company’s earnings are sufficient to easily cover interest payments on its debt.

The affected issue is CCS.PR.C.

Issue Comments

NA.PR.C To Reset To 7.027%

National Bank of Canada has announced:

the dividend rates applicable to the Non-Cumulative 5-Year Rate Reset First Preferred Shares, Series 38 Non-Viability Contingent Capital (NVCC) (the “Series 38 Shares”) and the Non-Cumulative Floating Rate First Preferred Shares, Series 39 (NVCC) (the “Series 39 Shares”).

Holders of Series 38 Shares, should any remain outstanding after November 15, 2022, will be entitled to receive fixed rate non-cumulative preferential cash dividends on a quarterly basis, as and when declared by the Board of Directors of the Bank and subject to the provisions of the Bank Act (Canada). The dividend rate for the five-year period commencing on November 16, 2022, and ending on November 15, 2027, will be 7.027% being equal to the sum of the five-year Government of Canada Bond yield (3.597%) plus 3.43%, as determined in accordance with the terms of the Series 38 Shares.

Holders of Series 39 Shares, should any be issued on November 15, 2022, will be entitled to receive floating rate non-cumulative preferential cash dividends on a quarterly basis, as and when declared by the Board of Directors of the Bank and subject to the provisions of the Bank Act (Canada). The dividend rate for the three-month period commencing on November 16, 2022, and ending on February 15, 2023, will be 7.256%, being equal to the sum of the 90-day Government of Canada Treasury Bill yield (3.826%) plus 3.43%, calculated on the basis of actual number of days elapsed in such quarterly floating rate period divided by 365, as determined in accordance with the terms of the Series 39 Shares.

Holders of the Series 38 Shares have, subject to certain conditions, the right to convert all or part of their Series 38 Shares on a one-for-one basis into Series 39 Shares on November 15, 2022.

Beneficial owners of Series 38 shares who wish to exercise their conversion right should communicate as soon as possible with their broker or other nominee and ensure that they follow their instructions in order to meet the deadline to exercise such right, which is October 31, 2022, at 5:00 p.m. (EDT).

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. It is tracked by HIMIPref™ and has been assigned to the FixedResets (Discount) subindex.

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

Issue Comments

PPL.PF.C To Be Redeemed

Pembina Pipeline Corporation has announced:

its intention to redeem its issued and outstanding Cumulative Redeemable Minimum Rate Reset Class A Preferred Shares, Series 23 (“Series 23 Shares”) (TSX: PPL.PF.C) on November 15, 2022 (the “Redemption Date”).

Pembina intends to redeem all of its 12,000,000 issued and outstanding Series 23 Shares, in accordance with the terms of the Series 23 Shares, as set out in the Company’s articles of amendment dated December 16, 2019, on the Redemption Date for a redemption price equal to $25.00 per Series 23 Share (the “Redemption Price”), less any tax required to be deducted or withheld by the Company. The total redemption price to Pembina will be $300 million.

As previously announced, the dividend payable on November 15, 2022, to holders of the Series 23 Shares of record on October 31, 2022, will be $0.328125 per Series 23 Share. This will be the final quarterly dividend on the Series 23 Shares. Upon payment of the November 15, 2022, dividend, there will be no accrued and unpaid dividends on the Series 23 Shares as at the Redemption Date.

The Company has provided notice today of the Redemption Price and the Redemption Date to the sole registered holder of the Series 23 Shares in accordance with the terms of the Series 23 Shares, as set out in the Company’s articles of amendment dated December 16, 2019. For non-registered holders of Series 23 Shares, no further action is required however, they should contact their broker or other intermediary with any questions regarding the redemption process for the Series 23 Shares in which they hold a beneficial interest. The Company’s transfer agent for the Series 23 Shares is Computershare Investor Services Inc. Questions regarding the redemption process may also be directed to Computershare at 1-800-564-6253 or by email to corporateactions@computershare.com.

PPL.PF.C was originally issued as KML.PR.A; the ticker changed in December, 2019. KML.PR.A was a FixedReset 5.25%+365M525 that commenced trading 2017-8-15 after being announced 2017-8-3. It has been tracked by HIMIPref™ but relegated to the Scraps – FixedReset Discount subindex on credit concerns. There was some, although not universal, expectation of redemption; PPL.PF.C was yielding significantly less than its peers at today’s closing quote of 24.05-20; however, the low yield may be more reflective of the Minimum Rate Guarantee than of redemption expectations.

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

Issue Comments

DBRS Upgrades IFC Trend to Positive

DBRS has announced that it:

changed the trend to Positive from Stable, and confirmed all ratings of Intact Financial Corporation (Intact or the Company) and its operating insurance subsidiaries, including the Financial Strength Rating (FSR) of its main operating insurance subsidiaries at AA (low) and Intact’s “A” Issuer Rating. The trend on the ratings of RSA Insurance Group Limited, Intact’s UK-based subsidiary, was also changed to Positive (see “DBRS Morningstar Changes Trend on RSA Insurance Group Limited and its Operating Entities to Positive from Stable; Confirms Financial Strength Ratings at AA (low)”).

The Company’s risk profile reflects its prudent approach to risk management, and its high-quality investment portfolio is based on a high proportion of readily marketable bonds and equities. Derivatives are utilized strictly for hedging purposes. Intact’s approach to managing its investment portfolio has allowed it to earn significant investment returns over the years and to withstand market volatility reasonably well. The commercial products portfolio is well diversified, but DBRS Morningstar notes that it is exposed to systemic risk arising from its cyber insurance offerings. In addition to traditional catastrophic risk exposures, which it mitigates primarily through reinsurance and policy terms and conditions, the Company has undertaken actions to reduce its earthquake risk exposure in Canada, which DBRS Morningstar views positively.

Intact’s earnings ability reflects its strong underwriting and pricing discipline across its business segments and geographies, combined with solid revenue generation from its distribution businesses. The Company’s net earnings have proven to be strong and resilient over time with a very good combined ratio of 90%, based on a three-year weighted average, as calculated by DBRS Morningstar.

The Company maintains ample liquidity resources to deal with potential cash demands under reasonably severe stress scenarios. Its investment portfolio consists of a high proportion of marketable bonds and equities, in addition to its substantial cash and short-term investment holdings. Reinsurance cover is available to limit the impact of losses that exceed retention thresholds.

Intact’s regulatory capital ratios for its standalone entities reflect appropriate buffers above required solvency levels, allowing the Company to handle reasonably adverse events. Fixed charge coverage ratios are high as a result of Intact’s consistently strong net earnings. Financial leverage has also returned to its pre-acquisition level.

Affected issues are IFC.PR.A, IFC.PR.C, IFC.PR.E, IFC.PR.F, IFC.PR.G, IFC.PR.I and IFC.PR.K.

Issue Comments

NA.PR.C To Be Extended

National Bank of Canada has announced:

that it does not intend to exercise its right to redeem all or part of the currently outstanding 16,000,000 Series 38 Shares on November 15, 2022. As a result, subject to certain conditions, the holders of the Series 38 Shares have the right to convert all or part of their Series 38 Shares on a one-for-one basis into Non-Cumulative Floating Rate First Preferred Shares, Series 39 (NVCC) (the “Series 39 Shares”) on November 15, 2022, in accordance with the terms of the Series 38 Shares described in the prospectus supplement dated June 5, 2017.

Holders who do not exercise their right to convert their Series 38 Shares into Series 39 Shares on November 15, 2022, will retain their Series 38 Shares.

The foregoing conversions are subject to the conditions that: (i) if National Bank determines that there would remain outstanding on November 15, 2022, less than 1,000,000 Series 39 Shares, after having taken into account all Series 38 Shares tendered for conversion into Series 39 Shares, then holders of Series 38 Shares will not be entitled to convert their shares into Series 39 Shares, and (ii) alternatively, if National Bank determines that there would remain outstanding on November 15, 2022, less than 1,000,000 Series 38 Shares, after having taken into account all Series 38 Shares tendered for conversion into Series 39 Shares, then all remaining Series 38 Shares will automatically be converted into Series 39 Shares without the consent of the holders on November 15, 2022.

In either case, National Bank shall give a notice to that effect to all registered holders of Series 38 Shares no later than November 8, 2022.

On October 17, 2022, National Bank will give notice of:

i. the annual fixed dividend rate applicable to the Series 38 Shares to which a holder of Series 38 Shares will be entitled for the 5-year period from November 16, 2022, up to and including November 15, 2027; and

ii. the floating quarterly dividend rate applicable to the Series 39 Shares to which a holder of Series 39 Shares will be entitled for the 3-month period from November 16, 2022, up to and including February 15, 2023.

Beneficial owners of Series 38 shares who wish to exercise their conversion right should communicate with their broker or other nominee to obtain instructions for exercising such right during the conversion period, which will run from October 17, 2022, until October 31, 2022, at 5:00 p.m. (EDT).

NA.PR.C is a FixedReset, 4.45%+343, NVCC-compliant, that commenced trading 2017-6-13 after being announced 2017-6-1. It is tracked by HIMIPref™ and has been assigned to the FixedResets (Discount) subindex.

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

Issue Comments

TD.PF.I To Reset To 6.301%

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 14 million Non-Cumulative 5-Year Rate Reset Preferred Shares, Series 16 (Non-Viability Contingent Capital (NVCC)) (the “Series 16 Shares”) of TD on October 31, 2022. As a result, and subject to certain conditions set out in the prospectus supplement dated July 7, 2017 relating to the issuance of the Series 16 Shares, the holders of the Series 16 Shares have the right to convert all or part of their Series 16 Shares, on a one-for-one basis, into Non-Cumulative Floating Rate Preferred Shares, Series 17 (NVCC) (the “Series 17 Shares”) of TD on October 31, 2022. Holders who do not exercise their right to convert their Series 16 Shares into Series 17 Shares on such date will continue to hold their Series 16 Shares.

The foregoing conversion right is subject to the conditions that: (i) if TD determines that there would be less than 1,000,000 Series 17 Shares outstanding after taking into account all shares tendered for conversion on October 31, 2022, then holders of Series 16 Shares will not be entitled to convert their shares into Series 17 Shares, and (ii) alternatively, if TD determines that there would remain outstanding less than 1,000,000 Series 16 Shares after taking into account all shares tendered for conversion on October 31, 2022, then all remaining Series 16 Shares will automatically be converted into Series 17 Shares on a one-for-one basis on October 31, 2022. In either case, TD will give written notice to that effect to holders of Series 16 Shares no later than October 24, 2022.

The dividend rate applicable to the Series 16 Shares for the 5-year period from and including October 31, 2022 to but excluding October 31, 2027 is 6.301%. The dividend rate applicable to the Series 17 Shares for the 3-month period from and including October 31, 2022 to but excluding January 31, 2023, is 6.662%.

Beneficial owners of Series 16 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 during the conversion period, which runs from the date hereof until 5:00 p.m. (Toronto time) on October 17, 2022.

TD.PF.I was issued as a FixedReset, 4.50%+301, NVCC-compliant issue that commenced trading 2017-7-14 after being announced 2017-07-05. It is tracked by HIMIPref™ and is assigned to the FixedResets (Discount) subindex.

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

Issue Comments

FTN.PR.A To Reset To 7.50%

Quadravest has announced:

Financial 15 Split Corp. (the “Company”) is pleased to announce the Preferred Share dividend rate for the fiscal year beginning December 1, 2022. Based on current market rates for preferred shares with similar terms, monthly payments to FTN.PR.A will be $0.06250 per share for an annual yield of 7.50% on their $10 redemption value. This is an increase of three quarters of one percent over the current rate.

I must say, I am growing to dislike these annual resets intensely. The minimum rate on these resets is only 5.5% and apart from this the company has full discretion. A prudent analysis must therefore assume that next year the rate will reset to 5.5% but there is every possibility, of course, that it will not. So refusing to buy these things might result in leaving money on the table. All in all, though, assuming the worst is always the way to go in securities analysis!

Thanks to Assiduous Reader RAV4guy for bringing this to my attention!

Issue Comments

FFN.PR.A To Reset To 7.75%

Quadravest has announced:

North American Financial 15 Split Corp. (the “Company”) is pleased to announce the Preferred Share dividend rate for the fiscal year beginning December 1, 2022. Based on current market rates for preferred shares with similar terms, monthly payments to FFN.PR.A will be $0.06458 per share for an annual yield of 7.75% on their $10 redemption value. This is an increase of one percent over the current rate.

I must say, I am growing to dislike these annual resets intensely. The minimum rate on these resets is only 5.5% and apart from this the company has full discretion. A prudent analysis must therefore assume that next year the rate will reset to 5.5% but there is every possibility, of course, that it will not. So refusing to buy these things might result in leaving money on the table. All in all, though, assuming the worst is always the way to go in securities analysis!

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

Issue Comments

SBC.PR.A To Reset to 6.25%

Brompton Group has announced:

Brompton Split Banc Corp. (the “Fund”) announces that the distribution rate for the Preferred Shares for the new 5-year term from November 30, 2022 to November 29, 2027 will be $0.625 per annum (6.25% on the original issue price of $10) payable quarterly. The new distribution rate represents a $0.125 increase per annum from the previous $0.50 distribution rate. The Preferred Share distribution rate is based on current market rates for preferred shares with similar terms. In addition, the Fund intends to maintain the targeted monthly Class A Share distribution rate at $0.10 per Class A Share. The new 5-year term extension offers Preferred shareholders the opportunity to enjoy preferential cash dividends until November 29, 2027. Since inception on November 15, 2005 to August 31, 2022, the Preferred share has delivered an attractive 5.0%(1) per annum return.

Since inception to August 31, 2022, Class A shareholders have received cash distributions of $19.75 per share, which when combined with capital appreciation represents a total return of 10.7% per annum(1). Class A shareholders have the option to benefit by reinvesting their cash distributions in a distribution reinvestment plan (“DRIP”) which is commission free to participants. Class A shareholders can enroll in the DRIP program by contacting their investment advisor.

Brompton Split Banc Corp. invests, on an approximately equal weighted basis in a portfolio consisting of common shares of the six largest Canadian banks (currently, Bank of Montreal, Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada, The Bank of Nova Scotia and The Toronto-Dominion Bank). In addition, the Company may hold up to 10% of the total assets of the Portfolio in investments in global financial companies for the purposes of enhanced diversification and return potential.

In connection with the extension, shareholders who do not wish to continue their investment in the Fund, will be able to retract Preferred Shares or Class A Shares on November 29, 2022 pursuant to a special retraction right and receive a retraction price that is calculated in the same way that such price would be calculated if the Fund were to terminate on November 29, 2022. Pursuant to this option, the retraction price may be less than the market price if the share is trading at a premium to net asset value. To exercise this retraction right, shareholders must provide notice to their investment dealer by October 31, 2022 at 5:00 p.m. (Toronto time). Alternatively, shareholders may sell their Preferred Shares and/or Class A Shares through their securities dealer for the market price at any time, potentially at a higher price than would be achieved through retraction, or shareholders may take no action and continue to hold their shares

Notice of the extension was released last March.

Issue Comments

PRM.PR.A To Be Tracked By HIMIPref™

Big Pharma Split Corp will soon be added to the HIMIPref™ database.

The preferred shares pay eligible dividends; the cash drag on the portfolio is massive.

DBRS rates the issue Pfd-3(high):

DBRS Limited (DBRS Morningstar) confirmed the rating of Pfd-3 (high) on the Preferred Shares issued by Big Pharma Split Corp. (the Company). The Company invests in a portfolio of approximately equally weighted common shares and securities (the Portfolio) convertible into or exchangeable for common shares (Equity Securities) of 10 issuers from the investable universe that must (1) be listed on a North American exchange, (2) pay a dividend, and (3) have sufficiently liquid options for their Equity Securities to permit the Portfolio Manager (i.e., Harvest Portfolio Group Inc.) to write options regarding such securities. The Portfolio Manager reconstitutes and rebalances the Portfolio at least semi-annually. No more than 20% of the net asset value (NAV) of the Company can be invested in securities other than from the 10 largest pharmaceutical issuers.

Holders of the Preferred Shares receive a quarterly fixed cumulative dividend in the amount of $0.125 per share to yield 5.00% per year on the issue price of $10.00. Holders of the Class A Shares receive regular monthly noncumulative distributions targeted to be $0.1031 per Class A Share to yield 8.25% per year on the issue price of $15.00. The Class A Share distributions are subject to the asset coverage test, which does not permit any distributions to holders of the Class A Shares if the NAV of the Company falls below $15.00 or if the dividends of the Preferred Shares are in arrears.

As of August 31, 2022, the downside protection available to the Preferred Shares was 57.2%. Considering the main focus of the Portfolio is the pharmaceutical industry, the underlying share prices may be sensitive to the market and industry developments. The dividend coverage ratio was 0.4 times. Regular distributions to holders of the Class A Shares, along with the Company’s operational expenses, are projected to cause an average annual portfolio grind of about 6.6% in the remaining term. To supplement Portfolio income, the Portfolio Manager engages in call option writing.

On June 7, 2021, the Company announced the establishment of an at-the-market equity program (the ATM Program) that is effective until December 4, 2022. The ATM Program allows the Company to issue up to $75 million of each of the Preferred Shares and the Class A Shares to the public from time to time at the Company’s discretion. Under the ATM Program, 166,300 Class A Shares and 166,300 Preferred Shares were issued during the year ended December 31, 2021, raising gross proceeds of $2.3 million and $1.7 million, respectively.

The redemption date for both classes of shares is December 31, 2022. The Company’s board of directors may extend the term beyond the redemption date for additional terms of five years each. On maturity, the holders of the Preferred Shares will be entitled to the value of the Portfolio up to the face value of the Preferred Shares and any accrued but unpaid dividends in priority to the holders of the Class A Shares.

Considering the credit quality and diversification of the Portfolio, as well as the amount of downside protection available to the Preferred Shares and a consistent dividend-paying history of the underlying companies in the Portfolio, DBRS Morningstar confirmed the rating on the Preferred Shares at Pfd-3 (high).

The main constraints to the rating are the following:

(1) Market fluctuations resulting from high inflation, interest rate hikes, oil prices, and global supply chain issues could further affect the Company’s NAV. The downside protection available to holders of the Preferred Shares depends on the value of the common shares held in the Portfolio.

(2) Volatility of price and changes in the dividend policies of the underlying issuers may result in significant reductions in the Preferred Shares dividend coverage or downside protection from time to time.

(3) Reliance on the manager to generate a high yield on the investment portfolio to meet distributions and other trust expenses without having to liquidate portfolio securities.

(4) The concentration of the Portfolio in one industry.

(5) Potential foreign-exchange risk because the income received on the Portfolio is not hedged.