Category: Issue Comments

Brompton Funds has announced:

As a result of strong performance, Brompton Split Banc Corp. (the “Company”) is pleased to announce that the board of directors has approved an extension of the maturity date of the Class A and Preferred shares of the Company for an additional 5-year term to November 29, 2027. The reset preferred share dividend rate for the extended term will be announced at least 60 days prior to the original November 29, 2022 maturity date and will be based on market yields for preferred shares with similar terms at that time.

The term extension allows Class A shareholders to continue to invest in the Canadian bank sector with an attractive distribution rate of 8.4% based on the March 22, 2022 closing price and the opportunity for capital appreciation. Canadian banks continue to offer attractive dividend yields and return on equity. As well, the extension of the term of the Company is not a taxable event and enables shareholders to defer potential capital gains tax liability that would have otherwise been realized on the redemption of the Class A shares or Preferred Shares at the end of the term, until such time as such shares are disposed of by shareholders.

Since inception in November 2005 to February 28, 2022, the Class A shares have delivered a 13.2% per annum total return, outperforming the S&P/TSX Capped Financials Index by 3.8% per annum and the S&P/TSX Composite Index by 5.8% per annum.(1) Since inception to February 28, 2022, Class A shareholders have received cash distributions of $19.15 per share. Class A shareholders also have the option to reinvest their cash distributions in a dividend reinvestment plan which is commission free to participants.

The term extension offers Preferred shareholders the opportunity to enjoy preferential cash dividends until November 29, 2027. Since inception, the Preferred shares have delivered a 5.1% per annum total return, outperforming the S&P/TSX Preferred Share Index by 2.2% per annum with lower volatility.(1)

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 TorontoDominion 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.

Brookfield Asset Management Inc. has announced:

that 147,537 of its Cumulative Class A Preference Shares, Series 26 (the “Series 26 Shares”) (TSX: BAM.PR.T) and 27,550 of its Cumulative Class A Preference Shares, Series 46 (the “Series 46 Shares”) (TSX: BAM.PF.I), were tendered for conversion into Cumulative Class A Preference Shares, Series 27 (the “Series 27 Shares”) and Cumulative Class A Preference Shares, Series 47 (the “Series 47 Shares”), respectively.

After taking into account all shares tendered for conversion, there would be less than one million shares outstanding for each of the Series 27 Shares and the Series 47 Shares, as of March 31, 2022, the conversion date. Accordingly, as provided in the share conditions of each of the series, there will be no conversion of Series 26 Shares into Series 27 Shares, nor of Series 46 Shares into Series 47 Shares and holders of Series 26 Shares and of Series 46 Shares will retain their Series 26 Shares and Series 46 Shares, respectively.

BAM.PF.I was issued as a FixedReset, 4.80%+385M480 that commenced trading 2016-11-18 after being announced 2016-11-10. BAM.PF.I will reset at 5.386% effective April 1, 2022. I recommended against conversion.

Brookfield Asset Management Inc. has announced:

that 147,537 of its Cumulative Class A Preference Shares, Series 26 (the “Series 26 Shares”) (TSX: BAM.PR.T) and 27,550 of its Cumulative Class A Preference Shares, Series 46 (the “Series 46 Shares”) (TSX: BAM.PF.I), were tendered for conversion into Cumulative Class A Preference Shares, Series 27 (the “Series 27 Shares”) and Cumulative Class A Preference Shares, Series 47 (the “Series 47 Shares”), respectively.

After taking into account all shares tendered for conversion, there would be less than one million shares outstanding for each of the Series 27 Shares and the Series 47 Shares, as of March 31, 2022, the conversion date. Accordingly, as provided in the share conditions of each of the series, there will be no conversion of Series 26 Shares into Series 27 Shares, nor of Series 46 Shares into Series 47 Shares and holders of Series 26 Shares and of Series 46 Shares will retain their Series 26 Shares and Series 46 Shares, respectively.

BAM.PR.T was issued as a FixedReset, 4.50%+231, that commenced trading 2010-10-29 after being announced 2010-10-21. In 2017 it reset to 3.471%; I recommended against conversion; and there was no conversion. In 2022, the issue reset to 3.846%.

Assiduous Reader JD contacted me last night about my choice of words in the March PrefLetter:

Hi James
Prefletter gave me the impression that the TRP.PR.K redemption was not officially confirmed.
“skeptical” posted a link to the official announcement by TRP in one of his comments to the March 9 Prefblog.

Well, if one person asks, that means at least ten people are curious, so here’s the answer:

See also the update to my post at https://prefblog.com/?p=43058.

It’s tricky. The press release states “The Company intends to use the proceeds to redeem its issued and outstanding Cumulative RedeemableMinimum Rate First Preferred Shares, Series 15 (TSX:TRP.PR.K) pursuant to their terms, …”

… and therefore PrefLetter states “The issuer has announced its intention to redeem TRP.PR.K at par at the end of May, 2022.”. The phrasing in PrefLetter was deliberately chosen to reflect the phrasing of the press release.

My point is that they have not yet issued an official notice of redemption to the registered shareholder. Until they do that they have full discretion to change their intentions … although the market would certainly punish a reversal.

James

I should also point out that according to the prospectus for TRP.PR.K:

Notice of any redemption of Series 15 Shares will be given by the Corporation not more than 60 days and not less than 30 days prior to the date fixed for redemption.

… so at this point they cannot give formal notice of redemption even if they want to. (Update for clarity, 2022-3-18: ; they will have to wait until the redemption notice window opens in early April and may possibly wait until later). Those terms are fairly standard for preferred share redemptions, but I admit I cannot quote any statistics on the point.
It is also worthwhile quoting the disclamatory statements at the end of the release … all that boilerplate that we all read once in our lives and forget about (emphasis added):

This release contains certain information that is forward-looking and is subject to important risks and uncertainties (such statements are usually accompanied by words such as “anticipate”, “expect”, “believe”, “may”, “will”, “should”, “estimate”, “intend” or other similar words). Forward-looking statements in this document are intended to provide TC Energy security holders and potential investors with information regarding TC Energy and its subsidiaries, including management’s assessment of TC Energy’s and its subsidiaries’ future plans and financial outlook. All forward-looking statements reflect TC Energy’s beliefs and assumptions based on information available at the time the statements were made and as such are not guarantees of future performance. As actual results could vary significantly from the forward-looking information, you should not put undue reliance on forward-looking information and should not use future-oriented information or financial outlooks for anything other than their intended purpose. We do not update our forward-looking information due to new information or future events, unless we are required to by law. For additional information on the assumptions made, and the risks and uncertainties which could cause actual results to differ from the anticipated results, refer to the most recent Quarterly Report to Shareholders and Annual Report filed under TC Energy’s profile on SEDAR at www.sedar.com and with the U.S. Securities and Exchange Commission at www.sec.gov.

So I’ll continue to be very cautious about saying ‘to be redeemed’ and won’t commit myself any more than the company does!

Intact Financial Corporation has announced:

that it has closed its previously announced bought deal offering (the “Offering”) of Non-Cumulative Class A Shares, Series 11 (the “Series 11 Preferred Shares”) underwritten by a syndicate of underwriters led by TD Securities Inc. together with BMO Capital Markets, CIBC Capital Markets, National Bank Financial, RBC Capital Markets and Scotiabank, resulting in aggregate gross proceeds (including the proceeds resulting from the exercise of their option) to Intact of $150 million. The net proceeds are expected to be used by Intact to fund a portion of the redemption price of all of the outstanding floating rate restricted notes (approximately $445 million, based on the exchange rate as of March 4, 2022) of the Company’s subsidiary, RSA Insurance Group Limited (formerly RSA Insurance Group plc) and/or for general corporate purposes.

Each Series 11 Preferred Share entitles the holder thereof to receive quarterly non-cumulative preferential cash dividends, if, as and when declared by the Board of Directors, on the last day of March, June, September and December in each year at a rate equal to $0.328125 per share. The initial dividend, if declared, will be paid on June 30, 2022 and will be $0.3848 per share.

The Series 11 Preferred Shares will commence trading today on the Toronto Stock Exchange under the symbol IFC.PR.K.

IFC.PR.K is a Straight Perpetual, 5.25%, announced 2022-03-07.

The issue traded 818,601 shares today in a range of 25.00-14 before closing at 25.08-12. Vital statistics are:

It will be recalled that BAM.PF.I will reset at 5.386% effective April 1, 2022.

BAM.PF.I was issued as a FixedReset, 4.80%+385M480 that commenced trading 2016-11-18 after being announced 2016-11-10.

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. BAM.PF.I 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 not pricing in a particularly aggressive or lengthy policy tightening cycle by the BoC: the implied rates until the next interconversion are not far above the current 3-month bill rate of 0.53%, with the averages for investment-grade and junk issues at +0.64% and +1.16%, respectively.

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.

If we plug in the current bid price of the BAM.PF.I 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:

Based on current market conditions, I suggest that the FloatingResets that will result from conversion are likely to trade below the price of their FixedReset counterparts, BAM.PF.I. Therefore, I recommend that holders of BAM.PF.I continue to hold the issue and not to convert. 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 BAM.PF.I 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 FloatingRate instrument is better suited for you, you might wish to elect to hold the FixedReset 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 lower 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. The same action is indicated if you take a strong view that the average bill rate over the next five years will be far higher than that currently priced by the market – in this case, you want to hold the FloatingReset, but attempting to perform the conversion on better terms than the 1:1 exchange offered by the company is still a good risk.

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 March 16, 2022. 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.

Fairfax Financial Holdings Limited has announced:

that it has determined the fixed dividend rate on its Cumulative 5-Year Rate Reset Preferred Shares, Series K (“Series K Shares”) (TSX: FFH.PR.K) for the five years commencing April 1, 2022 and ending March 31, 2027. The fixed quarterly dividends on the Series K Shares during that period, if and when declared, will be paid at an annual rate of 5.045% (C$0.315313 per share per quarter).

Holders of Series K Shares have the right, at their option, exercisable not later than 5:00 pm (Toronto time) on March 16, 2022, to convert all or part of their Series K Shares, on a one-for-one basis, into Cumulative Floating Rate Preferred Shares, Series L (“Series L Shares”), effective March 31, 2022. The quarterly floating rate dividends on the Series L Shares will be paid at an annual rate, calculated for each quarter, of 3.51% over the annual yield on three-month Government of Canada treasury bills. The actual quarterly dividend rate in respect of the April 1, 2022 to June 29, 2022 dividend period for the Series L Shares will be 1.01712% (4.12500% on an annualized basis) and the dividend for such dividend period, if and when declared, will be C$0.25428 per share, payable on June 29, 2022.

Holders of Series K Shares are not required to elect to convert all or any part of their Series K Shares into Series L Shares. Holders of the Series K Shares who do not elect to convert their shares by the conversion deadline will retain their Series K Shares and will receive the fixed-rate dividend as described above (subject to the automatic conversion features described below).

As provided in the share conditions of the Series K Shares, (i) if Fairfax determines that there would be fewer than 1,000,000 Series K Shares outstanding after March 31, 2022, all remaining Series K Shares will be automatically converted into Series L Shares on a one-for-one basis effective March 31, 2022; and (ii) if Fairfax determines that there would be fewer than 1,000,000 Series L Shares outstanding after March 31, 2022, no Series K Shares will be permitted to be converted into Series L Shares. There are currently 9,500,000 Series K Shares outstanding.

The Toronto Stock Exchange (“TSX”) has conditionally approved the listing of the Series L Shares effective upon conversion. Listing of the Series L Shares is subject to Fairfax fulfilling all the listing requirements of the TSX and, upon approval, the Series L Shares will be listed on the TSX under the trading symbol “FFH.PR.L”.

FFH.PR.K was issued as a FixedReset, 5.00%+351, that commenced trading 2012-3-21 after being announced 2012-3-12. In 2017 the issue reset to 4.671%; I recommended against conversion; and there was no conversion.

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

the reset dividend rate on its …Class AAA Preference Shares, Series EE (“Series EE Shares”) (TSX: BPO.PR.E).
…
Series EE Shares

If declared, the fixed quarterly dividends on the Series EE Shares for the five years commencing April 1, 2022 and ending March 31, 2027 will be paid at an annual rate of 5.496% ($0.3435 per share per quarter).

Holders of Series EE Shares have the right, at their option, exercisable not later than 5:00 p.m. (Toronto time) on March 15, 2022, to convert all or part of their Series EE Shares, on a one-for-one basis, into Class AAA Preference Shares, Series FF (the “Series FF Shares”), effective March 31, 2022.

The quarterly floating rate dividends on the Series FF Shares have an annual rate, calculated for each quarter, of 3.96% over the annual yield on three-month Government of Canada treasury bills. The actual quarterly dividend rate for the April 1, 2022 to June 30, 2022 dividend period for the Series FF Shares will be 1.14186% (4.58% on an annualized basis) and the dividend, if declared, for such dividend period will be $0.285465 per share, payable on June 30, 2022.

Holders of Series EE Shares are not required to elect to convert all or any part of their Series EE Shares into Series FF Shares.

As provided in the share conditions of the Series EE Shares, (i) if Brookfield determines that there would be fewer than 1,000,000 Series EE Shares outstanding after March 31, 2022, all remaining Series EE Shares will be automatically converted into Series FF Shares on a one-for-one basis effective March 31, 2022; and (ii) if Brookfield determines that there would be fewer than 1,000,000 Series FF Shares outstanding after March 31, 2022, no Series EE Shares will be permitted to be converted into Series FF Shares. There are currently 11,000,000 Series EE Shares outstanding.

The Toronto Stock Exchange (“TSX”) has conditionally approved the listing of the Series FF Shares effective upon conversion. Listing of the Series FF Shares is subject to Brookfield fulfilling all the listing requirements of the TSX and, upon approval, the Series FF Shares will be listed on the TSX under the trading symbol “BPO.PR.F”.

BPO.PR.E was issued as a FixedReset, 5.10%+396M510, that commenced trading 2017-2-17 after being announced 2017-2-9. It is tracked by HIMIPref™ but relegated to the Scraps index on credit concerns.

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

the reset dividend rate on its Class AAA Preference Shares, Series P (“Series P Shares”) (TSX: BPO.PR.P
…
Series P Shares

If declared, the fixed quarterly dividends on the Series P Shares for the five years commencing April 1, 2022 and ending March 31, 2027 will be paid at an annual rate of 4.536% ($0.2835 per share per quarter).

Holders of Series P Shares have the right, at their option, exercisable not later than 5:00 p.m. (Toronto time) on March 15, 2022, to convert all or part of their Series P Shares, on a one-for-one basis, into Class AAA Preference Shares, Series Q (the “Series Q Shares”), effective March 31, 2022.

The quarterly floating rate dividends on the Series Q Shares have an annual rate, calculated for each quarter, of 3.0% over the annual yield on three-month Government of Canada treasury bills. The actual quarterly dividend rate for the April 1, 2022 to June 30, 2022 dividend period for the Series Q Shares will be 0.90252% (3.62% on an annualized basis) and the dividend, if declared, for such dividend period will be $0.22563 per share, payable on June 30, 2022.

Holders of Series P Shares are not required to elect to convert all or any part of their Series P Shares into Series Q Shares.

As provided in the share conditions of the Series P Shares, (i) if Brookfield determines that there would be fewer than 1,000,000 Series P Shares outstanding after March 31, 2022, all remaining Series P Shares will be automatically converted into Series Q Shares on a one-for-one basis effective March 31, 2022; and (ii) if Brookfield determines that there would be fewer than 1,000,000 Series Q Shares outstanding after March 31, 2022, no Series P Shares will be permitted to be converted into Series Q Shares. There are currently 12,000,000 Series P Shares outstanding.

The Toronto Stock Exchange (“TSX”) has conditionally approved the listing of the Series Q Shares effective upon conversion. Listing of the Series Q Shares is subject to Brookfield fulfilling all the listing requirements of the TSX and, upon approval, the Series Q Shares will be listed on the TSX under the trading symbol “BPO.PR.Q”.

BPO.PR.P was issued as a FixedReset, 5.15%+300, that commenced trading 2010-10-21 after being announced 2010-10-13. The issue reset to 4.161% in 2016; I recommended against conversion; and there was no conversion.