Category: Issue Comments

Quadravest has announced:

Financial 15 Split Corp. (the “Company”) is pleased to announce it will extend the termination date of the Company a further five year period from December 1, 2020 to December 1, 2025.

The term extension allows holders of FTN Class A Shares (“Class A Shares”) to continue to receive ongoing leveraged exposure to a portfolio consisting of high-quality financial services companies made up of Canadian and U.S. issuers, as well as receiving targeted monthly distributions. Since inception of the Company Class A shareholders have received monthly distributions totaling $20.28 per share.

Holders of the FTN.PR.A Preferred Shares (“Preferred Shares”) are expected to continue to benefit from cumulative preferential monthly distributions. The Preferred shareholders have received a total of $8.56 per share since inception.

The extension of the term of the Company is not expected to be a taxable event and should enable 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.

In connection with the extension, the Company will have the right to amend the minimum rate of cumulative preferential monthly dividends to be paid to the Preferred Shares for the five year renewal period, commencing December 1, 2020. Any change to the Preferred Share minimum dividend rate for the extended term will be based on market yields for preferred shares with similar terms at such time and will be announced no later than September 30, 2020. The Company has the right to establish the rate of cumulative preferential monthly dividends to be paid to the Preferred Shares on an annual basis.

The Company invests in a high quality portfolio consisting of 15 financial services companies made up of Canadian and U.S. issuers as follows: Bank of Montreal, The Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Royal Bank of Canada, Toronto-Dominion Bank, National Bank of Canada, Manulife Financial Corporation, Sun Life Financial, Great-West Lifeco, CI Financial Corp, Bank of America, Citigroup Inc., Goldman Sachs Group, JP Morgan Chase & Co. and Wells Fargo & Co.

So we’ll see what dividend rate they’re offering next September! The NAVPU was 11.49 as of 2020-4-15, so unless equities do well over the next five months it will have to be pretty good!

Hat tip to Assiduous Reader JD for bringing this to my attention!

Royal Bank of Canada has announced:

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

With respect to any Series BD shares that remain outstanding after May 24, 2020, holders will be entitled to receive quarterly fixed rate non-cumulative preferential cash dividends, as and when declared by the Board of Directors of Royal Bank of Canada, subject to the provisions of the Bank Act (Canada).

The dividend rate for the 5-year period from and including May 24, 2020 to, but excluding, May 24, 2025 will be 3.20% for the Series BD shares, being equal to the 5-Year Government of Canada bond yield determined as of April 24, 2020 plus 2.74%, as determined in accordance with the terms of the Series BD shares.

With respect to any Series BE shares that may be issued on May 24, 2020, holders will be entitled to receive quarterly floating rate non-cumulative preferential cash dividends, calculated on the basis of the actual number of days elapsed in such quarterly period divided by 365, as and when declared by the Board of Directors of Royal Bank of Canada, subject to the provisions of the Bank Act (Canada).

The dividend rate for the floating rate period from and including May 24, 2020 to, but excluding, August 24, 2020 will be 3.01% for the Series BE shares, being equal to the 3-month Government of Canada Treasury Bill yield determined as of April 24, 2020 plus 2.74%, as determined in accordance with the terms of the Series BE shares.

Beneficial owners of Series BD shares who wish to exercise their conversion rights should instruct their broker or other nominee to exercise such rights on or prior to the deadline for notice of intention to convert, which is 5:00 p.m. (EST) on May 11, 2020.

RY.PR.J is a FixedReset, 3.60%+274, NVCC-compliant, that commenced trading 2015-1-30 after being announced 2015-1-26. The issue is tracked by HIMIPref™ and is assigned to the FixedReset (Discount) subindex.

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., RY.PR.J and the FloatingReset that will exist 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). Inspection of the graph and the overall average break-even rates for extant pairs will provide a guide for estimating the break-even rate for the pair now under consideration assuming, of course, that enough conversions occur so that the pair is in fact created.

Click for Big

The market shows odd differences in its enthusiasm for floating rate product; the implied rates until the next interconversion are generally above the current 3-month bill rate as the averages for investment-grade and junk issues are at +0.82% (ignoring the outlier FTS.PR.H / FTS.PR.I, which Exchanges 2020-6-1) and +0.28% (ignoring the outliers EMA.PR.A / EMA.PR.B (Exchanges 2020-8-15), and TA.PR.A / TA.PR.D (Exchanges 2021-3-31)), respectively. The utility of this approach, frankly, has been compromised in recent weeks by continued poor quality of closing quotes provided by the Toronto Stock Exchange; dispersion of the results is even higher than normal!

The breakeven rate for the junk pairs has been relatively high recently; I confess I’m not quite sure what to make of it.

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 RY.PR.J 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 at a slightly higher price than their FixedReset counterparts, RY.PR.J, although this conclusion is more speculative than usual due to the poor quality of the quotes. Therefore, it seems likely that I will recommend that holders of RY.PR.J make their own decision based on their own portfolios and financial circumstances, with a very slight bias towards the FloatinReset option, but I will wait until it’s closer to the May 11 notification deadline before making a final pronouncement. I will note that once the conversion period has passed 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.

Royal Bank of Canada has announced (on April 9):

that it does not intend to exercise its right to redeem all or any part of the currently outstanding Non-Viability Contingent Capital (NVCC) Non-Cumulative 5-Year Rate Reset First Preferred Shares, Series BD (the “Series BD shares”) on May 24, 2020. There are currently 24,000,000 Series BD shares outstanding.

Subject to certain conditions set out in the prospectus supplement dated January 27, 2015 relating to the issuance of the Series BD shares, the holders of the Series BD shares have the right to convert all or part of their Series BD shares, on a one-for-one basis, into NVCC Non-Cumulative Floating Rate First Preferred Shares Series BE (the “Series BE shares”) on May 24, 2020. On such date, holders who do not exercise their right to convert their Series BD shares into Series BE shares will continue to hold their Series BD shares. The conversion will occur on May 25 being the first business day following the conversion date of May 24 as identified in the prospectus, which falls on a Sunday. The foregoing conversion rights are subject to the following:

if Royal Bank of Canada determines that there would be less than 1,000,000 Series BE shares outstanding after taking into account all shares tendered for conversion on May 24, 2020, then holders of Series BD shares will not be entitled to convert their shares into Series BE shares, and
alternatively, if Royal Bank of Canada determines that there would remain outstanding less than 1,000,000 Series BD shares after May 24, 2020, then all remaining Series BD shares will automatically be converted into Series BE shares on a one-for-one basis on May 24, 2020.
In either case, Royal Bank of Canada will give written notice to that effect to holders of Series BD shares no later than May 17, 2020.

The dividend rate applicable for the Series BD shares for the 5-year period from and including May 24, 2020 to, but excluding, May 24, 2025, and the dividend rate applicable to the Series BE shares for the 3-month period from and including May 24, 2020 to, but excluding, August 24, 2020, will be determined and announced by way of a press release on April 24, 2020.

Beneficial owners of Series BD shares who wish to exercise their conversion rights should instruct their broker or other nominee to exercise such rights during the conversion period, which runs from April 24, 2020 until 5:00 p.m. (EST) on May 11, 2020.

Inquiries should be directed to Shareholder Relations Officer, Shirley Boudreau, at 416-955-7806.

I will have more to say when the reset rate is announced April 24.

DBRS has announced that it:

downgraded its rating on Canaccord Genuity Group Inc.’s (CF or the Company) Cumulative Preferred Shares to Pfd-4 (high) from Pfd-3 (low) and maintained the trend at Negative. The Company has a Support Assessment of SA3, which implies no expected systemic support.

The rating downgrade recognizes the considerable headwinds facing all nonbank financial institutions, particularly those with more limited or weaker business models that lack the breadth and scale to overcome significant near-term challenges. CF is a Canadian-based financial institution with $4.5 billion in assets as of Q3 2020, operating in the U.S., the United Kingdom (UK), and Australia, with a focus on capital markets activities and wealth management. Given the abruptness and severity of the economic contraction caused by the Coronavirus Disease (COVID-19), combined with uncertainty about the magnitude or duration of the downturn, DBRS Morningstar has concerns about potential impact on the Company’s capital markets businesses. DBRS Morningstar sees near-term challenges for participants in the capital markets as significant, with potential issues including reduced investment banking volumes, asset value declines, unmet margin calls/collateral liquidation at lower prices, illiquid assets stalled on the balance sheet, and limited market access for funding, all of which could adversely affect the financials of firms such as CF in DBRS Morningstar’s opinion. Additionally, while CF’s trading businesses will likely benefit from the significant market volatility, the magnitude of these revenues will likely be insufficient to offset the other notable headwinds.

In maintaining the Negative trend, DBRS Morningstar notes the leverage utilized in recent wealth management and other acquisitions in Canada, the U.S., the UK, and Australia where CF expected the combined businesses’ success and efficiencies to drive profits and reduce leverage over time. With unsupportive revenue headwinds in wealth management, DBRS Morningstar remains concerned that the impact of the coronavirus-related downturn could impede CF’s ability to comfortably meet contractual payments.

Affected issues are CF.PR.A and CF.PR.C

Fairfax Financial Holdings Limited has announced:

preliminary unaudited financial information which will be finalized for the Company’s first quarter of 2020 unaudited financial results, including information reflecting key developments as a result of the COVID-19 pandemic and its impact on global financial markets. We are currently estimating a net loss in the first quarter of 2020 of approximately $1.4 billion and an approximate 12% decrease in book value adjusted for the $10 per common share dividend paid in the first quarter of 2020.

• “These are unprecedented turbulent times and we wanted to provide our shareholders with preliminary indications of some key developments for Fairfax’s first quarter of 2020 financial results. Our insurance companies continued to have strong underwriting performance in the first quarter of 2020 with a consolidated combined ratio below 100%, favourable reserve development and strong growth in gross premiums written of approximately 12%. Net losses on investments currently estimated at approximately $1.5 billion primarily reflects unrealized losses in the fair value of our common stock and bond portfolio from the sudden shock of COVID -19 and reverses a significant amount of the $1.7 billion net gains on investments we reported in 2019. We remain focused on continuing to be soundly financed and have drawn on our credit facility solely to ensure that we maintain high levels of liquid assets during these uncertain times. Fairfax had approximately $2.5 billion in cash and marketable securities in its holding company at March 31, 2020,” said Prem Watsa, Chair and Chief Executive Officer.

…

• Since mid-March 2020, Fairfax has been reinvesting its cash and short term investments into higher yielding investment grade U.S. corporate bonds with an average maturity date of 4 years and average interest rates of 4.25%, that will benefit interest income in the future. To date, taking advantage of the increase in corporate spreads, Fairfax has purchased about $2.9 billion of such bonds.
• Share of losses of associates of approximately $250 million will reflect impairment losses related to Fairfax’s investments in Quess, Resolute and Astarta of approximately $200 million, as well as the Company’s share of losses of associates.
• Net losses on investments of approximately $1.5 billion will reflect unrealized losses on the Company’s equity and equity-related holdings and bonds.
• Fairfax has drawn, solely as extra security, approximately $1.8 billion from its credit facility for liquidity purposes to support its insurance and reinsurance operations if these unprecedented turbulent times continue for an extended period. Fairfax was able to borrow these funds at no net cost to the Company as we were able to reinvest the proceeds into short term investments at a favourable spread while maintaining access to the funds if needed. Including the approximately $600 million proceeds from the sale of its 40% interest in Fairfax’s UK run-off group, RiverStone UK, which closed on March 31, 2020, Fairfax had approximately $2.5 billion cash and marketable securities in its holding company at March 31, 2020. During the first quarter of 2020, Fairfax utilized approximately $400 million and $300 million of its cash and marketable securities to provide capital support to its insurance and reinsurance operations and to pay common and preferred share dividends, respectively.
• …
• At March 31, 2020, the decrease in common shareholders’ equity will primarily be as a result of a net loss currently estimated at approximately $1.4 billion, principally from net losses on investments, unrealized foreign currency translation losses of approximately $200 million on foreign subsidiaries and foreign operations which will be recorded in accumulated other comprehensive income as a component of common shareholders’ equity on the consolidated balance sheet (principally as a result of the strengthening of the U.S. dollar), and the payment in the first quarter of the annual common share dividend of approximately $276 million.

This was released early on the evening of April 14, according to Globe Newswire, so the market has not reacted at time of writing.

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

Canoe EIT Income Fund has released its Annual Report to December 31, 2019.

Sadly, they did not publish a “whole fund” return.

Figures of interest are:

MER: “Management expense ratio excluding issue costs, interest, and distributions to preferred redeemable unit” “as a percentage of net asset value” (which I take to mean, based only on the equity represented by the Capital Units) 1.61% “as a percentage of net asset value” (which I take to mean, based only on the equity represented by the Capital Units).

Average Net Assets: There was no particularly enormous change in either the number of capital units outstanding or of the net asset value per capital unit, so let’s just take the average of the year-beginning and year-ending NAVs, including preferred shares: (1,067-million + 215-million + 1,281-million + 216-million) / 2 = 1,390-million

Underlying Portfolio Yield: Dividends received of 29.503-million + interest of 5.301-million is 34.804-million divided by average net assets of 1,390-million is 2.50%

Income Coverage: Net Investment Income of 7.935-million divided by Preferred Share Distributions of 10.683-million is 74%.

Asset Coverage: NET ASSETS ATTRIBUTABLE TO HOLDERS OF COMMON REDEEMABLE UNITS of 1,281-million + Preferred redeemable units of 216-million, all divided by Preferred redeemable units of 216-million is 6.9+:1 (downside protection of about 86%)

DBRS has announced:

hanged the trend on Brookfield Property Partners L.P.’s (BPP) Senior Unsecured Debt to Negative from Stable. DBRS Morningstar also confirmed the rating at BBB. Additionally, DBRS Morningstar changed the trends on Brookfield Property Finance ULC’s Senior Unsecured Notes and Brookfield Office Properties Inc.’s Senior Unsecured Notes and Cumulative Redeemable Preferred Shares, Class AAA to Negative from Stable. DBRS Morningstar also confirmed the ratings at BBB, BBB, and Pfd-3, respectively. DBRS Morningstar notes that the ratings are based on the credit risk profile of the consolidated entity, including BPP and its subsidiaries (collectively, BPY or the Partnership).

The Negative trends reflect BPY’s weaker-than-expected key financial risk metrics, particularly total debt-to-EBITDA (14.4 times (x) on a last-12-months (LTM) basis at December 31, 2019), combined with material deterioration in the outlook and heightened uncertainty with respect to the Partnership’s ability to delever the balance sheet by way of its capital recycling initiatives in light of the ongoing Coronavirus Disease (COVID-19) pandemic and consequent economic slowdown.

Near-term challenges for BPY in light of coronavirus include substantial exposure to enclosed shopping centres (i.e., discretionary retail exposure and prospects for accelerating tenant bankruptcies) through its Core Retail segment (46% net operating income (NOI) contribution LTM), exposure to hotels (6% NOI contribution LTM) through its LP Investments segment, and a highly levered balance sheet that, in DBRS Morningstar’s view, may limit the Partnership’s financial flexibility.
…
DBRS Morningstar will likely consider rating downgrades within the next 12 months if deterioration in BPY’s operating environment is worse than anticipated or BPY fails to demonstrate material credit accretive transaction activity such that total debt-to-EBITDA remains above 14.0x on a sustained basis or if DBRS Morningstar changes its views on the level and strength of implicit support provided by BAM.

Affected issues are: BPO.PR.A, BPO.PR.C, BPO.PR.E, BPO.PR.G, BPO.PR.I, BPO.PR.N, BPO.PR.P, BPO.PR.R, BPO.PR.S, BPO.PR.T, BPO.PR.W, BPO.PR.X and BPO.PR.Y. The rating on all these issues remains at Pfd-3.

Standard & Poor’s has announced:

• Our positive outlook was predicated on Fairfax Financial Holdings Ltd. achieving a redundant capitalization at the ‘AA’ confidence level.
• While capital management actions are supportive, robust business growth, investment redeployment, and financial markets volatility will make it difficult for the company to achieve the ‘AA’ capitalization level over the next 12 months.
• Therefore, we are revising our outlook to stable from positive and affirming all of our ratings on Fairfax and its operating subsidiaries. The stable outlook reflects our view that Fairfax will maintain strong business and financial risk profiles supported by improving re/insurance pricing.

…
We could lower the ratings in the next two years if, contrary to our expectations:

• Capitalization declines sustainably below the ‘A’ confidence level; or
• The volatility profile changes due to an increase in risk tolerance or shifts in investment or business mix resulting in high-risk exposure.

We could raise our ratings on the company in the next two years if Fairfax is able to:

• Strengthen its risk-adjusted capitalization and maintain redundancy at the ‘AA’ confidence level;
• Sustain strong earnings in line with those of higher-rated peers; and
• Keep a fixed-charge coverage ratio sustainably above 4x and financial leverage (excluding nonrecourse debt held at non-insurance operations) less than 35%.

The outlook revision reflects our view that Fairfax’s capitalization will likely remain below the ‘AA’ confidence level this year despite active capital management actions and strong earnings over the past two years. Although capital grew in this period, robust insurance business growth, investment repositioning, financial markets volatility, and interest rate declines diminish S&P Global Ratings’ view of total available capital relative to increased capital requirements.

Fairfax’s proportion of risky assets (equities, non-investment-grade bonds, and alternative investments) is relatively high compared with that of peers and stood at 36.9% of total consolidated investments (including cash) at year-end 2019. This investment allocation exposes the company’s capital to market volatility. Even though its investments in associates (including private equity), which represented 12.4% of its total investments, are not exposed to mark-to-market volatility, the underlying economic trends will equally affect such holdings as well. However, the company’s large holdings of cash and short-duration securities partially mitigate the risk from the recent increase in credit spreads. The company’s consolidated investment portfolio of $39 billion as of Dec. 31, 2019, is composed of bonds (41.8%), public and private equity investments (29.1%), short-term investments (16.3%), and cash and cash equivalents (11.1%). Of the bonds holdings of $16.3 billion, investment-grade securities constituted 85.3% (includes ‘BBB’ rated securities, which were 19.7% of the total).

The May, 2018, setting of the Outlook to Positive was reported on PrefBlog.

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

Brookfield Renewable Partners L.P. has announced (on April 1, they say, but I swear I looked on their site and on Globe Newswire that night and didn’t find anything):

Brookfield Renewable Power Preferred Equity Inc. (“BRP Equity”) has determined the fixed dividend rate on its Class A Preference Shares, Series 1 (“Series 1 Shares”) (TSX:BRF.PR.A) for the five years commencing May 1, 2020 and ending April 30, 2025. If declared, the fixed quarterly dividends on the Series 1 Shares during that period will be paid at an annual rate of 3.137% ($0.196063 per share per quarter).

Holders of Series 1 Shares have the right, at their option, exercisable not later than 5:00 p.m. (Toronto time) on April 15, 2020, to convert all or part of their Series 1 Shares, on a one-for-one basis, into Class A Preference Shares, Series 2 (“Series 2 Shares”) (TSX:BRF.PR.B), effective April 30, 2020. Holders of Series 1 Shares are not required to elect to convert all or any part of their Series 1 Shares into Series 2 Shares.

The quarterly floating rate dividends on the Series 2 Shares will be paid at an annual rate, calculated for each quarter, of 2.62% over the annual yield on three-month Government of Canada treasury bills. The actual quarterly dividend rate in respect of the May 1, 2020 to July 31, 2020 dividend period for the Series 2 Shares will be 0.71911% (2.853% on an annualized basis) and the dividend, if declared, for such dividend period will be $0.179778 per share, payable on July 31, 2020.

Holders of Series 2 Shares have the right, at their option, exercisable not later than 5:00 p.m. (Toronto time) on April 15, 2020, to convert all or part of their Series 2 Shares, on a one-for-one basis, into Series 1 Shares, effective April 30, 2020. Holders of Series 2 Shares are not required to elect to convert all or any part of their Series 2 Shares into Series 1 Shares.

As provided in the share conditions of the Series 1 Shares, (i) if BRP Equity determines that there would be fewer than 1,000,000 Series 1 Shares outstanding after April 30, 2020, all remaining Series 1 Shares will be automatically converted into Series 2 Shares on a one-for-one basis effective April 30, 2020; and (ii) if BRP Equity determines that there would be fewer than 1,000,000 Series 2 Shares outstanding after April 30, 2020, no Series 1 Shares will be permitted to be converted into Series 2 Shares. There are currently 5,449,675 Series 1 Shares outstanding.

As provided in the share conditions of the Series 2 Shares, (i) if BRP Equity determines that there would be fewer than 1,000,000 Series 2 Shares outstanding after April 30, 2020, all remaining Series 2 Shares will be automatically converted into Series 1 Shares on a one-for-one basis effective April 30, 2020; and (ii) if BRP Equity determines that there would be fewer than 1,000,000 Series 1 Shares outstanding after April 30, 2020, no Series 2 Shares will be permitted to be converted into Series 1 Shares. There are currently 4,510,389 Series 2 Shares outstanding.

BRF.PR.A was issued as a FixedReset, 5.25%+262, that commenced trading 2010-3-10 after being announced 2010-2-18. It reset to 3.355% in 2015 and I recommended against conversion. Nevertheless, there was a 45% conversion to the FloatingReset.

BRF.PR.B is a FloatingReset, Float+262, that resulted from a 45% conversion from BRF.PR.A in 2015.

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., FFH.PR.M and the FloatingReset that will exist 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). Inspection of the graph and the overall average break-even rates for extant pairs will provide a guide for estimating the break-even rate for the pair now under consideration assuming, of course, that enough conversions occur so that the pair is in fact created.

Ludicrous quotes supplied at great expense by the Toronto Stock Exchange are not up task of providing a particularly view of market pricing although an overall tendency is clear. I have not checked whether the lamentable state of the quote is due to inadequate Toronto Stock Exchange reporting or inadequate Toronto Stock Exchange supervision of market-makers.

Click for Big

The market shows wide dispersion in its quoted enthusiasm for floating rate product; the implied rates until the next interconversion are generally well below the current 3-month bill rate as the averages for investment-grade and junk issues are at -0.51% (ignoring the outlier FTS.PR.H / FTS.PR.I) and -0.11%, respectively. Whatever might be the result of the next few Bank of Canada overnight rate decisions, I suggest that it is unlikely that the average rate over the next five years will be lower than current – but if you disagree, of course, you may interpret the data any way you like.

The breakeven rate for the junk pairs has been relatively high recently; I confess I’m not quite sure what to make of it.

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 BRF.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:

Before I get eviscerated in the comments, please note that I am well aware that BRF.PR.B is trading and is quoted with a bid of 10.50. Who cares? At the moment, the issues are interconvertible effective May 1 and are therefore exactly same thing (except for a minor difference in final dividend) from an investment perspective. We are interested in predicting what might happen after the potential for conversion has passed.

Based on current market conditions, I suggest that the FloatingResets, BRF.PR.B, that will result from conversion are likely to trade at a lower price than their FixedReset counterparts, BRF.PR.A. Therefore, it seems likely that I will recommend that holders of BRF.PR.A retain their shares, while holders of BRF.PR.B convert to BRF.PR.A, but I will wait until it’s closer to the April 15 notification deadline before making a final pronouncement. I will note that once the conversion period has passed 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.

DBRS has announced (on March 26) that it:

has placed all its North American oil and gas (O&G) issuers and oil field service (OFS) issuers Under Review with Negative Implications. The portfolio review was undertaken in response to the recent extreme price declines and heightened volatility in crude oil and petroleum product markets largely caused by the rapid global spread of the Coronavirus Disease (COVID-19) and the concurrent crude oil price war between OPEC (led by Saudi Arabia) and Russia. Because of the very high level of volatility and uncertain length of time for which weak crude oil and petroleum product markets will persist, the following DBRS Morningstar-publicly-rated North American issuers (11in this press release) have been put Under Review with Negative Implications:

— Chevron Corporation*
— Imperial Oil Limited**
— ConocoPhillips*
— Suncor Energy Inc.**
— Husky Energy Inc**
— Canadian Natural Resources Limited**
— Cenovus Energy Inc.**
— Ovintiv Inc.**
— CES Energy Solutions Corp.**
— Crew Energy Inc.**
— Source Energy Services Canada LP and Source Energy Services Canada Holdings Ltd.**

The Under Review with Negative Implications status accounts for DBRS Morningstar’s view that because of (1) the extreme decline in the price of crude oil and petroleum product prices; (2) the significant rise in market volatility; and (3) the considerable uncertainty regarding the demand outlook for crude oil and petroleum products, DBRS Morningstar expects issuers’ credit profiles to experience considerable downward pressure over the weeks and months to come although the full extent of the recent shock to crude oil and petroleum product markets has yet to be established. The Under Review with Negative Implications status generally reflects DBRS Morningstar’s belief that downgrades for at least a significant part of the portfolio is likely. However, as situations and potential rating implications may vary, the final rating determination may change from the initial assessment. The Under Review with Negative Implications status is generally resolved with a rating action within three months. However, if heightened market uncertainty and volatility persists, DBRS Morningstar may extend the Under Review status for a longer period of time.
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REFINING MARGINS UNDER PRESSURE—NOT PROVIDING SAME BUFFER AS IN PREVIOUS DOWNTURNS
Crude oil is the feedstock for refiners. Historically, for integrated companies, an oil price decline caused upstream profitability to shrink, but resilient profitability from refining (downstream) operations provided a partial offset or buffer to total integrated company margins. However, in the current situation, demand destruction for petroleum-derived products has been so sudden and severe that the squeeze on refining margins and falling demand is forcing operators to cut refining runs. Simply stated, the diversified model has not provided the same margin protection that integrated companies have historically enjoyed. Despite this, DBRS Morningstar expects that when economic activity rebounds and demand for lower-priced gasoline, jet fuel, and other refined products bounces back, downstream profitability will recover before the upstream business.
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Currently, reduced capex programs being implemented or proposed by issuers that DBRS Morningstar has reviewed appear to be below what is needed to sustain their base level of operations. Lastly, the current ability to sell assets and tap equity or debt markets to raise cash is considerably more challenging relative to the 2014–16 market environment.

DBRS MORNINGSTAR ANTICIPATES AN EVENTUAL RECOVERY IN OIL PRICES
DBRS Morningstar believes that the current, very depressed price of crude oil for producers is unsustainable over the long term. Current pricing does not provide an adequate economic return for much of existing production and certainly not for new developments. Inevitably, the lack of investment will cause global oil production volumes to decline. In particular, DBRS Morningstar expects U.S. shale oil volumes to materially drop due to the steep decline rates typically associated with this kind of production. Furthermore, the depressed oil price may eventually inflict enough financial pain on Saudi Arabia, other OPEC members, and Russia to compel them to cooperate. A renewed OPEC plus production cut agreement would help to stabilize the market and accelerate price recovery.

DBRS Morningstar believes the WTI oil price will eventually recover to a midcycle range of USD 50/bbl to USD 60/bbl
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CONCLUSION—HIGH PRICE UNCERTAINTY AND VOLATILITY MAKE ASSESSING CREDIT QUALITY DIFFICULT
Due to the drastic declines recently experienced by oil prices and the especially poor, near-term visibility regarding crude oil and petroleum product markets, DBRS Morningstar is placing all ratings for its North American rated O&G and OFS issuers Under Review with Negative Implications. DBRS Morningstar generally resolves the Under Review status within three months, assuming that greater clarity and stability returns to energy markets. With greater confidence about the direction of energy pricing and updated input from issuers regarding their immediate actions and longer-term plans, DBRS Morningstar will be in a better position to assess each issuer’s credit metrics. However, as denoted by the Under Review with Negative Implications designation, DBRS Morningstar notes that issuer credit profiles have weakened considerably and expects a number of negative rating actions.

This action was taken on the same day as S&P’s announcement of a Negative Outlook for HSE and downgrades for four other major Canadian producers.

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