Category: Issue Comments

Sun Life Financial Inc. has announced (on June 19):

that 116,341 of its 5,192,686 Class A Non-cumulative Rate Reset Preferred Shares Series 8R (the “Series 8R Shares”) have been elected for conversion on June 30, 2020, on a one-for-one basis, into Class A Non-cumulative Floating Rate Preferred Shares Series 9QR (the “Series 9QR Shares”), and 1,140,986 of its 6,007,314 Series 9QR Shares have been elected for conversion on June 30, 2020 on a one-for-one basis, into Series 8R Shares. Consequently, on June 30, 2020, Sun Life will have 6,217,331 Series 8R Shares and 4,982,669 Series 9QR Shares issued and outstanding. The Series 8R Shares and Series 9QR Shares will be listed on the Toronto Stock Exchange under the symbols SLF.PR.G and SLF.PR.J, respectively.

Subject to regulatory approval, Sun Life may redeem all or any part of the outstanding Series 8R Shares, at Sun Life’s option, by the payment of an amount in cash for each share so redeemed of $25.00, together with all declared and unpaid dividends to the date fixed for redemption, on June 30, 2025 and on the 30th of June in every fifth year thereafter. Subject to regulatory approval, Sun Life may redeem all or any part of the then outstanding Series 9QR Shares, at Sun Life’s option, by the payment of an amount in cash for each share so redeemed of (i) $25.00, together with all declared and unpaid dividends to the date fixed for redemption in the case of redemptions on June 30, 2025 and on June 30 every five years thereafter, or (ii) $25.50, together with all declared and unpaid dividends to the date fixed for redemption in the case of redemptions on any other date.

SLF.PR.G was issued as a FixedReset, 4.35%+141, announced 2010-5-13 and commenced trading 2010-5-25. It reset to 2.275% effective 2015-6-30, which triggered a 50% conversion to the FloatingReset SLF.PR.J. I recommended against conversion. SLF.PR.G resets to 1.825% effective 2020-6-30. The issue is tracked by HIMIPref™ and is assigned to the FixedReset (Discount) subindex.

SLF.PR.J is a FloatingReset, Bills+141, that arose from a 50% conversion from the FixedReset SLF.PR.G. It commenced trading 2015-6-30.

DBRS has announced that it:

downgraded five ratings of preferred shares issued by various split-share companies as follows:

— the Preferred Shares issued by Dividend Growth Split Corp. to Pfd-4 (high) from Pfd-3
— the Preferred Shares issued by Brompton Lifeco Split Corp. to Pfd-4 (low) from Pfd-3 (low)
— the Preferred Shares issued by Life & Banc Split Corp to Pfd-3 (low) from Pfd-3
— the Preferred Shares issued by Prime Dividend Corp to Pfd-3 from Pfd-3 (high)
— the Preferred Shares issued by S Split Corp. to Pfd-4 from Pfd-3 (collectively, the Preferred Shares)

Each of these split-share companies invests in a portfolio of securities (the Portfolio) funded by issuing two classes of shares: dividend-yielding preferred shares or securities and capital shares or units (the Capital Shares). In such structure, preferred shares normally benefit from downside protection provided by the net asset value (NAV) of the Capital Shares.

On March 24, 2020, DBRS Morningstar placed the Preferred Shares Under Review with Negative Implications. Each of the Preferred Shares has experienced a considerable reduction in downside protection since February 2020 as a result of the rapid decline in the net asset value (NAV) of the respective portfolios in response to the stock market sell-off, which was triggered by the worldwide spread of Coronavirus Disease (COVID-19) and various geopolitical events.

DBRS Morningstar downgraded the ratings of the Preferred Shares based on longer-term trends being established for the NAVs of the affected split-share companies. Although the downside protection has experienced some recovery in all five Portfolios in the past three months, its current levels remain below the required levels for the corresponding ratings of the Preferred Shares, which they had had before they were placed Under Review with Negative Implications. Ratings assigned are also dependent on the credit quality and management of the Portfolios. For many of the split-share companies listed above, distributions to holders of the Capital Shares are now suspended due to the failure to pass the asset-coverage tests. This feature ensures greater excess income for the Company and decreases the reliance on other income-generating methods, such as option writing, when downside protection has been significantly reduced.

CORONAVIRUS-RELATED ANALYTICAL CONSIDERATIONS
Global macroeconomic forecasts have shifted dramatically amid the rapid spread of the coronavirus and associated responses from governments, corporations, and households. In the context of this highly uncertain environment, DBRS Morningstar initially published macroeconomic scenarios on April 16, 2020. The scenarios were updated on June 1, 2020, and are reflecting the updated scenarios in DBRS Morningstar’s rating analysis. The updated scenarios can be found at https://www.dbrsmorningstar.com/document/361867.

To summarize in tabular form, the downgrades are as follows:

The mass review was announced by DBRS in March, 2020.

Husky Energy has announced:

that 212,461 Cumulative Redeemable Preferred Shares, Series 7 (Series 7 Shares) were tendered for conversion, which is less than the one million shares required to give effect to conversion into Cumulative Redeemable Preferred Shares, Series 8 (Series 8 Shares). As a result, none of the Series 7 Shares will be converted into Series 8 Shares on June 30, 2020.

HSE.PR.G is a FixedReset, 4.60%+352, that commenced trading 2015-6-17 after being announced 2015-6-9. The issue will reset to 3.935% effective 2020-6-30. It is tracked by HIMIPref™ and is assigned to the FixedReset subindex.

Brookfield Infrastructure has announced:

that after having taken into account all election notices received by the June 15, 2020 deadline for the reclassification of its Cumulative Class A Preferred Limited Partnership Units, Series 1 (the “Series 1 Units”) (TSX: BIP.PR.A) into Cumulative Class A Preferred Limited Partnership Units, Series 2 (the “Series 2 Units”), there were 298,234 Series 1 Units tendered for reclassification, which is less than the 1,000,000 units required to give effect to reclassifications of Series 1 Units into Series 2 Units. Accordingly, there will be no reclassification of Series 1 Units into Series 2 Units, and holders of Series 1 Units will retain their Series 1 Units.

BIP.PR.A is a FixedReset, 4.50%+356, that commenced trading 2015-3-12 after being announced 2015-3-4. The issue will reset to 3.974% effective 2020-7-1. It is tracked by HIMIPref™ and is assigned to the FixedResets (Discount) subindex.

Note that the tax treatment of distributions on BIP.PR.A are complex and change annually.

DBRS has announced that it:

downgraded Husky Energy Inc.’s (Husky or the Company) Issuer Rating and Senior Unsecured Notes and Debentures rating to BBB (high) from A (low), its Commercial Paper rating to R-2 (high) from R-1 (low), and its Preferred Shares – Cumulative rating to Pfd-3 (high) from Pfd-2 (low). All trends are Negative. DBRS Morningstar also removed the ratings from Under Review with Negative Implications, where they were placed on March 26, 2020.
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Under normal circumstances, Husky’s downstream refining assets provide a buffer against lower crude oil prices; however, the coronavirus has caused a simultaneous and steep decline in demand for crude oil and refined products. Consequently, DBRS Morningstar expects earnings at the Company’s upstream and downstream segments to be materially weaker in 2020 relative to 2019. In response to the current downturn, Husky has reduced its budgeted capital expenditures (capex) by 50% in 2020 to between $1.6 billion and $1.8 billion; reduced its common dividend payments by 90%; curtailed lower-margin production; and initiated cost-reduction measures. Despite these measures, DBRS Morningstar expects the Company to generate a material free cash flow (FCF; cash flow after capex and dividends) deficit in 2020 under its base-case Western Texas Intermediate and Brent price assumption of USD 32 per barrel (/bbl) and USD 37/bbl, respectively. Husky will likely fund the FCF deficit primarily from available cash balances ($1.3 billion at March 31, 2020). DBRS Morningstar anticipates that, as coronavirus lockdowns ease, demand and margins in the downstream segment will recover faster and stronger relative to the upstream segment. Based on DBRS Morningstar’s price forecasts, it expects the Company to generate a modest FCF surplus in 2021, which should increase materially in 2022 as Husky benefits from higher commodity prices, lower capex, and reduced dividend payments. DBRS Morningstar forecasts that gross debt levels will remain relatively flat, but also expects key credit metrics under its base-case commodity price assumptions to remain weak in 2020 and 2021 before improving in 2022 (lease-adjusted debt-to-cash flow at or around 2.0 times) as earnings and operating cash flow increase because of higher commodity price assumptions and the Company uses FCF surplus to reduce debt. However, the improvement in credit metrics is not sufficient to support the previous A (low) rating, leading to a downgrade.

The Company’s size, highly integrated heavy and thermal oil business, capital flexibility, and portfolio of lower-cost growth opportunities underpin its business risk profile, which supports the BBB (high) rating. Factors tempering the ratings include the Company’s higher percentage of production from Western Canada, relatively shorter proved developed reserve life, and a reserve base geared more toward heavy and thermal oil (69% of total proved reserves at YE2019). The majority equity stake held effectively by Mr. Li Ka-shing’s family trust and indirectly by CK Hutchinson Holdings Limited, which has been important in the implementation of Husky’s growth plans, also supports the ratings.

DBRS Morningstar notes that Husky has maintained a relatively conservative financial profile relative to most of its domestic peers. The Company has built up a sizable cash balance that should allow it to navigate the current downturn without a material increase in gross debt, but the improvement in key credit metrics is predicated on higher crude oil prices and improved refining margins. DBRS Morningstar’s approach is to rate through the cycle and give due weight to projected credit metrics when it anticipates a return to more normalized market conditions; however, the outlook for demand remains fluid and there is a risk that the recovery in commodity prices may fall short of DBRS Morningstar’s base-case price assumptions and Husky’s overall financial risk profile will not support the current ratings. The Negative trends reflect this risk, which DBRS Morningstar assesses to be elevated.

DBRS Morningstar believes that the Company has sufficient liquidity to navigate the current downturn. Husky’s committed credit facilities consist of two tranches: $2.0 billion maturing in June 2022 and $2.0 billion maturing in March 2024. As at March 31, 2020, the Company had $3.0 billion available under its committed credit facilities and $1.3 billion in available cash balances. In April 2020, the Company also availed a $500.0 million committed credit facility with a two-year term. Husky’s long-term debt maturities over the next three years are reasonable with USD 500 million maturing in 2022. DBRS Morningstar expects the Company to repay the maturities primarily from FCF surplus under DBRS Morningstar’s base-case price assumptions. DBRS Morningstar also expects Husky to remain in compliance with the applicable covenant on the credit facilities, including debt-to-capitalization of less than 65%, even if commodity prices trend lower than expected.

DBRS Morningstar may change the trend to Stable if the demand/supply dynamics in the crude oil markets continue to improve, leading to greater confidence that commodity prices and, consequently, the Company’s key credit metrics improve in line with DBRS Morningstar’s base-case assumptions. Conversely, DBRS Morningstar may take a negative rating action if commodity prices and key credit metrics fall below DBRS Morningstar’s expectations.

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

The DBRS Review-Negative was reported on PrefBlog in March. HSE is also Outlook-Negative at S&P.

Pembina Pipeline Corporation has announced:

that none of Pembina’s Cumulative Redeemable Rate Reset Class A Preferred Shares, Series 19 (“Series 19 Shares”) (TSX: PPL.PR.S) will be converted into Cumulative Redeemable Floating Rate Class A Preferred Shares, Series 20 of Pembina (“Series 20 Shares”) on June 30, 2020.

After taking into account all the conversion notices received from holders of its outstanding Series 19 Shares by the June 15, 2020 deadline for the conversion of the Series 19 Shares into Series 20 Shares, less than the 1,000,000 Series 19 Shares required to give effect to conversions into Series 20 Shares were tendered for conversion.

PPL.PR.S is a FixedReset, 5.00%+427, that commenced trading 2015-4-1 as VSN.PR.E after being announced 2015-03-23. The ticker change became effective 2017-10-5 after the closing of a merger between the companies. The issue will reset to 4.684% effective 2020-6-30. The issue is tracked by HIMIPref™ but relegated to the Scraps index on credit concerns.

DBRS has announced that it:

maintained the Under Review with Developing Implications status on GMP Capital Inc.’s (GMP or the Company) Cumulative Preferred Shares rating of Pfd-4 (high).
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DBRS Morningstar once again maintained the Under Review with Developing Implications status on March 17, 2020, as GMP had called a special meeting of common shareholders on April 21, 2020, to approve the consolidation.

However, in light of concerns over the Coronavirus Disease (COVID-19), GMP postponed the special meeting. All three of Richardson GMP’s shareholder groups (GMP, RFGL, and two elected investment advisor representatives on the board of RGMP) agreed to extend the contractual negotiation period between GMP and RFGL. This agreement was set to occur on April 16, 2020, and has been extended until 60 days following the date that the Declaration of Emergency ordered by the Lieutenant Governor of Ontario has been withdrawn or terminated by the Government of Ontario. In the interim, the parties involved (GMP, RFGL, and the Richardson GMP investment advisors) continue to work toward entering into a definitive agreement, but without any assurances about the outcome of these discussions.

Under the terms of the proposed transaction, GMP will acquire all common shares of Richardson GMP that it does not already own (65.5% stake). The DBRS Morningstar-rated Cumulative Preferred Shares would remain with the consolidated entity.

KEY RATING CONSIDERATIONS
While DBRS Morningstar would ideally like to resolve this Under Review with Developing Implications status as quickly as possible, the ratings implications for GMP remain unclear. The continued Under Review period considers that the consolidation of GMP with Richardson GMP has yet to be finalized. DBRS Morningstar will assess GMP’s pro forma structure once it consolidates full ownership of Richardson GMP. This assessment will review the Company’s assets and liabilities composition, ownership, future strategic direction, and management’s ability to execute on this plan. If the consolidation were not to occur, DBRS Morningstar would need to assess GMP’s standalone intrinsic strength, including its credit fundamentals, prospects for growth, and ability to maintain debt service payments on its Cumulative Preferred Shares.

The Review was last extended in March, 2020.

Affected issues are GMP.PR.B and GMP.PR.C.

Middlefield Group has announced:

Middlefield Group, on behalf of E Split Corp. (TSX: ENS and ENS.PR.A) (the “Company”), is pleased to announce that the Company is undertaking an overnight treasury offering of class A and preferred shares (the “Class A Shares” and “Preferred Shares”, respectively).

The sales period for this overnight offering will end at 9:00 a.m. (EDT) on Tuesday, June 16, 2020. The offering is expected to close on or about June 23, 2020 and is subject to certain closing conditions including approval by the Toronto Stock Exchange (“TSX”).

The Class A Shares will be offered at a price of $12.00 per Class A Share to yield 13.0% and the Preferred Shares will be offered at a price of $10.00 per Preferred Share to yield 5.3%. The closing price on the TSX for each of the Class A Shares and Preferred Shares on June 12, 2020 was $12.30 and $10.05, respectively. The Class A Share and Preferred Share offering prices were determined so as to be non-dilutive to the most recently calculated net asset value per unit of the Company (calculated as at June 12, 2020), as adjusted for dividends and certain expenses to be accrued prior to or upon settlement of the offering.

The Company invests in common shares of Enbridge Inc., a North American oil and gas pipeline, gas processing and natural gas distribution company.

The Company’s investment objectives for the:

Class A Shares are to provide holders with:

(i) non-cumulative monthly cash distributions; and
(ii) the opportunity for capital appreciation through exposure to the portfolio

Preferred Shares are to:

(i) provide holders with fixed cumulative preferential quarterly cash distributions; and
(ii) return the original issue price of $10.00 to holders upon maturity.

Middlefield Capital Corporation will provide investment management advice to the Company.

The syndicate of agents for the offering is being co-led by CIBC Capital Markets and RBC Capital Markets.

For further information, please visit our website at www.middlefield.com or contact Nancy Tham or Michael Bury in our Sales and Marketing Department at 1.888.890.1868.

So the Whole Units are being offered for $22.00, while the Net Asset Value Per Unit as of June 12, 2020, was 20.88, for a premium of 5.4%. What a great business!

Update, 2020-6-23 : They raised 27.3-million:

Middlefield Group, on behalf of E Split Corp. (TSX: ENS and ENS.PR.A) (the “Company”), is pleased to announce the Company has completed the overnight offering of class A and preferred shares (the “Class A Shares” and “Preferred Shares”, respectively) for aggregate gross proceeds of approximately $27.3 million. The Class A Shares and Preferred Shares will trade on the Toronto Stock Exchange under the existing symbols ENS (Class A Shares) and ENS.PR.A (Preferred Shares).

DBRS has announced:

DBRS Limited (DBRS Morningstar) confirmed the ratings of Laurentian Bank of Canada (LBC or the Bank), including the Bank’s Long-Term Issuer Rating at A (low) and its Short-Term Issuer Rating at R-1 (low). DBRS Morningstar changed the trends for all long-term ratings to Negative from Stable. All short-term ratings have a Stable trend. The Bank’s Intrinsic Assessment of A (low) and Support Assessment (SA) of SA3 are unchanged. The SA3 designation, which reflects no expectation of timely external support, results in the final rating being equivalent to the Intrinsic Assessment.

KEY RATING CONSIDERATIONS
The Negative trend reflects the wide and growing scale of the economic disruption resulting from the Coronavirus Disease (COVID-19) pandemic, which pressured LBC’s Q2 2020 earnings and will negatively affect earnings and asset quality in future quarters. Nevertheless, unprecedented support measures have been put in place through monetary and fiscal stimuli, which in DBRS Morningstar’s view, could help to mitigate some of the negative impact of the crisis. However, should the crisis be prolonged, or if the recovery is muted, additional ratings pressure may occur.

The rating confirmations reflect LBC’s solid regional retail franchise in Québec and its growing national reach through B2B Bank, its commercial Business Services segment, and its online platform LBC Digital. Furthermore, the ratings are supported by LBC’s conservative credit culture and sound balance sheet fundamentals. The ratings also consider LBC’s relatively higher proportion of brokered deposits; its increasing, albeit temporary, operating expenses; as well as its weaker capital position relative to peers.

RATING DRIVERS
Given the Negative trend, an upgrade is unlikely. The trend would revert to Stable if the economic fallout from the coronavirus pandemic is not prolonged and outsized credit losses do not materialize.

Conversely, a material deterioration in loan performance, which results in a significant increase in loan losses because of longer-than-expected adverse coronavirus-related impacts, would lead to a ratings downgrade. Additionally, a reduction in capitalization to levels closer to regulatory minimums would pressure the ratings.
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LBC’s earnings were affected from significantly higher provisions for credit losses (PCL) because of the economic impact of the coronavirus pandemic. As a result, the Bank reported Q2 2020 net income of $8.9 million, a year-over-year decline of 79% as it took provisions of $54.9 million, which was a significantly higher amount than the $9.2 million PCL recorded in Q2 2019. The majority of the increase comprised PCL on performing loans reflecting changes in forward-looking macroeconomic indicators relating to the impact of the pandemic; however, LBC’s income before provisions and taxes remained flat from the previous year at $56 million in Q2 2020. DBRS Morningstar notes that, as a result of the Bank’s various transformation initiatives, LBC’s efficiency ratio remains one of the weakest among peers at 76% for Q2 2020. Management expects operating efficiency to improve over the next three years as it begins phasing out older systems and as the Bank begins to benefit from other investments in the franchise.

Affected issues are LB.PR.H and LB.PR.J.

Laurentian Bank recently slashed its common dividend, as reported on May 29.