Category: Issue Comments

DBRS has announced:

DBRS Limited (DBRS Morningstar) placed certain preferred shares issued by various split share companies Under Review with Negative Implications. Each of these split share companies invests in a portfolio of securities funded by issuing two classes of shares: dividend-yielding preferred shares or securities (the Preferred Shares) and capital shares or units (the Capital Shares). In such structure, the Preferred Shares normally benefit from the downside protection provided by the net asset value (NAV) of the Capital Shares. Following the stock market sell-off in response to the worldwide spread of Coronavirus Disease (COVID-19) and various geopolitical news, the Preferred Shares experienced substantial declines in their downside protection. As a result, DBRS Morningstar placed the Preferred Shares listed below Under Review with Negative Implications. DBRS Morningstar will take final rating action on these Preferred Shares once a longer-term trend has been established for the NAVs of the affected split share companies.

Affected issues, with my estimates of the current (as of the close, March 24) Net Asset Value of the Whole Units, are:

Update, 2020-6-25: LCS.PR.A should have been in the table.

Standard & Poor’s has announced:

• In the weaker macroeconomic environment we anticipate, in large part because of the COVID-19 outbreak, Bombardier Inc.’s capital structure appears to be unsustainable in the long term.
• As a result, S&P Global Ratings lowered its ratings on Bombardier by one notch, including its issuer credit rating on the company to ‘CCC+’ from ‘B-‘.
• At present, we don’t believe Bombardier will face a near-term liquidity crisis given the ample cash on its balance sheet at the beginning of the year.
• The negative outlook reflects the possibility of another downgrade if macroeconomic conditions further deteriorate from our expectations leading to our view that Bombardier is likely to consider a distressed exchange offer or sub-par redemption in the near term.

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In our Feb. 19, 2020, research update on Bombardier, we were expecting S&P Global Ratings’ adjusted debt-to-EBITDA of 6x-7x in 2021. However, we now believe leverage is likely to be higher given our view that earnings and free cash flow prospects for the company’s business jet division have deteriorated, at least over the next couple of years. While we recognize that large cabin business jets, which will make up the majority of Bombardier’s sales in future will see less downward pressure than small cabin jets, we expect demand will be lower than previously expected. Given Bombardier’s high debt load and our expectation for lower earnings and free cash flow generation, we Bombardier’s financial commitments appear unsustainable in the long term. We acknowledge that our forecast is highly uncertain at this time and the company has yet to provide updated guidance.

The negative outlook reflects our view that Bombardier could pursue a distressed exchange or other debt restructuring in the next 12 months to reduce its debt obligations, which we consider unsustainable in the long-term. In our view, key risks include weaker-than-expected demand from a global recession, and operating disruptions that could lead to a meaningful free cash flow deficit.

We could lower our rating on Bombardier if the company announces a distressed exchange or we consider such an event to be highly likely. This could occur if macroeconomic conditions further deteriorate from our expectations, contributing to a weaker outlook for business jet demand, and a large free cash flow deficit. It could also occur if we believe the acquisition of the company’s Bombardier Transportation (BT) segment by Alstom S.A. is unlikely to close as proposed.

We could revise the outlook to stable if we see a lower likelihood that Bombardier could pursue a distressed exchange or debt restructuring in the next twelve months. This could be the case if we expect a strong recovery in the second half of this year, leading us to believe that Bombardier’s capital structure is sustainable in the long-term.

The rating on these preferreds is now so low that S&P doesn’t offer a ‘Canadian National Scale’ equivalent with a “P” prefix … all the preferreds get is a straight transcription to CC.

Affected issues are BBD.PR.B, BBD.PR.C and BBD.PR.D.

Standard & Poor’s has announced:

• Halifax, Nova Scotia-based utility holding company Emera Inc. has closed on the sale of its Emera Maine subsidiary to ENMAX Corp.
• Although we expect the sale to improve Emera Inc.’s consolidated financial measures in the near term, the transaction does not fully mitigate other factors that weigh on the company’s credit quality, including our expectation that the company’s funds from operation (FFO) to debt will be consistently above 12%.
• As a result, we no longer expect Emera to maintain its financial measures at the upper end of its financial risk category, removing support for our use of a positive comparable ratings analysis modifier.
• Therefore, we are lowering our issuer credit rating on Emera to ‘BBB’ from ‘BBB+’. The outlook is stable.
• At the same time, we are lowering the senior unsecured debt rating to ‘BBB-‘ from ‘BBB’, subordinated notes rating to ‘BB+’ from ‘BBB-‘, and preferred shares rating to ‘BB+’ from ‘BBB-‘ on the global scale and to ‘P-3 (High)’ from ‘P-2 (Low)’ on the Canada National Scale ratings.
• We are also downgrading intermediate holding company TECO Energy Inc. (TECO) and financing company TECO Finance Inc. to ‘BBB’ from ‘BBB+’.
• We also reviewed our ratings on operating subsidiaries Nova Scotia Power Inc. (NSPI) and Tampa Electric Co. (TEC) and conclude that the cumulative value of the structural protections in place between these two operating companies and parent Emera are sufficient to insulate our issuer credit rating on both entities for up to one notch from the group credit profile of parent Emera.
• As such, we are affirming our ratings on NSPI and TEC, including the ‘BBB+’ issuer credit ratings.
• For NSPI, we are affirming the A-1 (Low) Canadian National Scale Commercial Paper Ratings.
• For TEC, are affirming the ‘A-2’ short-term ratings.
• The stable outlook on all these entities largely reflects our expectation that Emera will maintain its financial measures, including FFO to debt at about 11% over the next two years.

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We could downgrade Emera over the next 12-24 months if the company’s financial measures deteriorates with FFO to debt of below 10% with no prospect for improvement. This could happen if there are material adverse regulatory outcomes, a material delay in the completion of capital projects, or if the COVID-19 pandemic persists and has a material long-term impact on the company’s financial measures.

We could raise ratings on Emera if its financial measures improve with FFO to debt approaching 13% on a sustained basis, indicative of the higher end of the financial risk profile category.

Affected issues are EMA.PR.A, EMA.PR.B, EMA.PR.C, EMA.PR.E, EMA.PR.F and EMA.PR.H.

Brompton Life & Banc Split Corp. has released its Semi-Annual Report to June 30, 2019.

Figures of interest are:

MER: “The MER per unit, excluding Preferred share distributions (which were covered by the portfolio’s dividend income and issue costs), was 0.92% for the first six months of 2019, compared to 0.91% for 2018.”

Average Net Assets: We need this to calculate portfolio yield. There was issuance of units on April 4, 2019, so our first estimate is calculated as [412.0-million (NAV at beginning of period) + 470.4-million (NAV at end of period)] / 2 = 441.2-million. The second estimate is based on total preferred share dividends of 7.246-million divided by 0.2725/share, implies 26.590-million units outstanding, with an initial NAVPU of 15.91 and a final NAVPU of 17.23, average 16.57, implies average assets of 440.6-million, which is surprisingly good agreement! Call it average Net Assets of $440.9-million.

Underlying Portfolio Yield: (9.886-million dividends + negligible securities income) times two because it’s only half a year divided by average net assets of 440.9-million is 4.48%

Income Coverage: Net Investment Income (excluding capital gains and issuance costs; and after expenses) of 7.766-million divided by Preferred Share Distributions of 7.246-million is 107%.

Brompton Split Banc Corp. has released its Semi-Annual Report to June 30, 2019.

Figures of interest are:

MER: “The MER per unit, excluding Preferred share distributions, agents’ fees and issuance costs, was 1.02% for the first six months of 2019, compared to 0.98% in 2018.”

Average Net Assets: We need this to calculate portfolio yield. There was issuance of units in early 2019, so our first estimate is calculated as [162.0-million (NAV at beginning of period) + 192.1-million (NAV at end of period)] / 2 = 177.0-million. The second estimate is based on total preferred share dividends of 2.177-million divided by 0.25/share, implies 8.708-million units outstanding, with an initial NAVPU of 20.66 and a final NAVPU of 22.06, average 21.36, implies average assets of 186.0-million, which is surprisingly good agreement! Call it average Net Assets of $182-million.

Underlying Portfolio Yield: (3.689-million dividends + negligible securities income) times two because it’s only half a year divided by average net assets of 182-million is 4.05%

Income Coverage: Net Investment Income (excluding capital gains and issuance costs; and after expenses) of 2.798-million divided by Preferred Share Distributions of 2.177-million is 129%.

Husky Energy has announced:

that 40,800 Cumulative Redeemable Preferred Shares, Series 5 (Series 5 Shares) were tendered for conversion, which is less than the one million shares required to give effect to conversions into Cumulative Redeemable Preferred Shares, Series 6 (Series 6 Shares). As a result, none of the Series 5 Shares will be converted into Series 6 Shares on March 31, 2020.

HSE.PR.E is a FixedReset, 4.50%+357, that commenced trading 2015-3-12 after being announced 2015-3-4. It will reset at 4.591% effective 2020-3-31. I made a preliminary recommendation not to convert. The issue is tracked by HIMIPref™ and has been assigned to the FixedReset (Discount) subindex.

Brookfield Asset Management Inc. has announced:

that after having taken into account all election notices received by the March 16, 2020 deadline for the conversion of its Cumulative Class A Preference Shares, Series 38 (the “Series 38 Shares”) (TSX: BAM.PF.E) into Cumulative Class A Preference Shares, Series 39 (the “Series 39 Shares”), there were 33,415 Series 38 Shares tendered for conversion, which is less than the one million shares required to give effect to conversions into Series 39 Shares. Accordingly, there will be no conversion of Series 38 Shares into Series 39 Shares, and holders of Series 38 Shares will retain their Series 38 Shares.

BAM.PF.E is a FixedReset, 4.40%+255, that commenced trading 2014-3-13 after being announced 2014-3-6. It will reset to 3.568% effective 2020-4-1. I made a preliminatry recommendation not to convert. The issue is tracked by HIMIPref™ and is assigned to the FixedReset (Discount) subindex.

The Bank of Nova Scotia has announced:

its intention to redeem all outstanding Non-cumulative 5-Year Rate Reset Preferred Shares Series 30 (“Series 30 Shares”) and Non-cumulative Floating Rate Preferred Shares Series 31 (“Series 31 Shares”) of Scotiabank on April 26, 2020 at a price equal to $25.00 per share (the “Redemption Price”), together with all declared and unpaid dividends to the date fixed for redemption. Formal notice will be issued to the shareholders in accordance with the share conditions.

The redemption has been approved by the Office of the Superintendent of Financial Institutions and will be financed out of the general funds of Scotiabank. This redemption is part of the Bank’s ongoing management of its Tier 1 capital.

On February 25, 2020, the Board of Directors of Scotiabank declared quarterly dividends of $0.113750 per Series 30 Share and $0.166480 per Series 31 Share. These will be the final dividends on the Series 30 Shares and Series 31 Shares, respectively, and will be paid on the date of redemption, April 26, 2020, to shareholders of record at the close of business on April 7, 2020, as previously announced. After April 26, 2020, the Series 30 Shares and the Series 31 Shares will cease to be entitled to dividends.

BNS.PR.Y was issued as a FixedReset, 3.85%+100, NVCC non-compliant, that commenced trading 2010-4-12 after being announced 2010-3-25. Extension was announced in March, 2015 and the issue issue reset to 1.82% effective 2015-4-26. I recommended against conversion, but 42% converted to the FloatingReset, BNS.PR.D.

BNS.PR.D is a FloatingReset, 3-Month Bills + 100, NVCC non-compliant, that resulted from a 42% conversion from BNS.PR.Y.

It will be noted that there has been (relatively!) heavy trading in these issues lately, with about 40,000 shares of BNS.PR.Y trading this week with a VWAP of under $24.00, together with about 55,000 shares of BNS.PR.D trading with a VWAP of under 23.00.

I’ll bet a nickel that Scotia made this announcement a few days in advance of original intentions, just to put an end to this nonsense.

On March 16 GMP Capital announced:

In light of the ongoing COVID-19 outbreak and recent market volatility, the Company, RFGL and the two elected investment advisor representatives on the board of Richardson GMP no longer expect that the definitive agreement concerning the Potential RGMP Transaction will be entered into in the time period initially anticipated and, therefore, the special meeting of common shareholders called for April 21, 2020 has been postponed. The parties are continuing to work toward entering into a definitive agreement and remain hopeful that they will do so in the future.

And now DBRS announced that:

DBRS Limited (DBRS Morningstar) maintained its Under Review with Developing Implications status on GMP Capital Inc.’s (GMP or the Company) Cumulative Preferred Shares rating of Pfd-4 (high). DBRS Morningstar initially put GMP’s rating Under Review with Developing Implications on June 18, 2019, following the Company’s announcement that it had agreed to sell substantially all of its capital markets business to Stifel Financial Corp. DBRS Morningstar first maintained its Under Review status on September 18, 2019, as the sale transaction had yet to close, then again on December 17, 2019, as the Company was still in discussions with Richardson Financial Group Limited (RFGL) to consolidate full ownership of Richardson GMP Limited (Richardson GMP).
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KEY RATING CONSIDERATIONS
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.

GMP was downgraded to Pfd-4(high) by DBRS in 2016. It was put on Review-Developing in June, 2019 and the review was extended in September, 2019 and again in December, 2019.

Aimia Inc. has announced:

that all of its 2,161,865 Cumulative Floating Rate Preferred Shares, Series 2 (the “Series 2 Preferred Shares”) will be converted into Cumulative Rate Reset Preferred Shares, Series 1 (the “Series 1 Preferred Shares”) on March 31, 2020. During the conversion notice period, which commenced on March 2, 2020 and ended at 5:00 p.m. (Montreal time) on March 16, 2020, 1,774,254 Series 2 Preferred Shares were tendered for conversion into Series 1 Preferred Shares. In accordance with the rights, privileges, restrictions and conditions attaching to the Series 2 Preferred Shares and the Series 1 Preferred Shares, since there would be fewer than 1,000,000 Series 2 Preferred Shares outstanding on March 31, 2020, after having taken into account all Series 2 Preferred Shares tendered for conversion into Series 1 Preferred Shares, all Series 2 Preferred Shares will be automatically converted into Series 1 Preferred Shares on March 31, 2020.

In addition, despite the fact that, during the conversion notice period, 17,370 Series 1 Preferred Shares were tendered for conversion into Series 2 Preferred Shares, since there would be fewer than 1,000,000 Series 2 Preferred Shares outstanding on March 31, 2020, after having taken into account all Series 1 Preferred Shares tendered for conversion into Series 2 Preferred Shares, holders of Series 1 Preferred Shares who elected to tender their shares for conversion will not have their Series 1 Preferred Shares converted into Series 2 Preferred Shares on March 31, 2020 in accordance with the rights, privileges, restrictions and conditions attaching to the Series 1 Preferred Shares and the Series 2 Preferred Shares. As a result, no Series 2 Preferred Shares will be issued on March 31, 2020, all 2,161,865 Series 2 Preferred Shares will be automatically converted into Series 1 Preferred Shares on March 31, 2020 and no Series 2 Preferred Shares will remain issued and outstanding after March 31, 2020. As a result of the foregoing, after March 31, 2020, there will be 5,083,140 issued and outstanding Series 1 Preferred Shares, all of which will be listed on the Toronto Stock Exchange.

AIM.PR.A is a FixedReset, 4.50%+375, assigned to the Scraps-FixedReset (Discount) subindex. It commenced trading as AER.PR.A with an initial dividend rate of 6.50% on 2010-1-20 after being announced 2010-1-12. AIM.PR.A changed its ticker from AER.PR.A in October, 2011. The first extension was reported on PrefBlog and the reset to 4.50% was announced 2015-3-2. I recommended against conversion. There was a 43% conversion to the FloatingReset, AIM.PR.B in 2015. The 2020 extension was announced 2020-2-25. AIM.PR.A will reset to 4.802% effective 2020-3-31; at that time I opined that a decision on whether to convert or hold should be made according to each investor’s circumstances.

AIM.PR.B commenced trading 2015-3-31 as the result of the 43% conversion from AIM.PR.A noted above. I opined that a decision on whether to convert or hold should be made according to each investor’s circumstances. AIM.PR.B will cease to exist on 2020-3-31.