Category: Issue Comments

Dividend 15 Split Corp. has released its Annual Report to November 30, 2019.

Figures of interest are:

MER: “A separate base management expense ratio has been presented to reflect the normal operating expenses of the Company excluding any one time offering expenses. Management expense ratio is based on total expenses for the stated year and is expressed as an annualized percentage of average net asset value during the year.” The figure reported for 2019 is 1.14%

Average Net Assets: The fund increased in size (measure by Whole Units outstanding) by about 20% in 2019; Net Asset Values at the end and beginning of the year were $968.3-million and $778.2-million, for an average of 873.2-million. Preferred share distributions for the year were 25,917,422; at 0.525 per preferred share, this implies an average of 49.367-million units outstanding; the average NAVPU was (18.01 + 17.31)/2 = 17.66; so this calculation implies average net assets of 871.8-million. There’s pretty close agreement between the two methods; call it Average Net Assets of 872.5-million.

Underlying Portfolio Yield: Dividends received of 33.088-million + interest of 0.696-million is 33.784-million divided by average net assets of 872.5-million is 3.87%

Income Coverage: Net Investment Income of 23.555-million divided by Preferred Share Distributions of 25.917-million is 91%.

Enbridge Inc. has announced (on May 4):

that it does not intend to exercise its right to redeem its currently outstanding Cumulative Redeemable Preference Shares, Series 13 (Series 13 Shares) (TSX: ENB.PF.E) on June 1, 2020. As a result, subject to certain conditions, the holders of the Series 13 Shares have the right to convert all or part of their Series 13 Shares on a one-for-one basis into Cumulative Redeemable Preference Shares, Series 14 of Enbridge (Series 14 Shares) on June 1, 2020. Holders who do not exercise their right to convert their Series 13 Shares into Series 14 Shares will retain their Series 13 Shares.

The foregoing conversion right is subject to the conditions that: (i) if Enbridge determines that there would be less than 1,000,000 Series 13 Shares outstanding after June 1, 2020, then all remaining Series 13 Shares will automatically be converted into Series 14 Shares on a one-for-one basis on June 1, 2020; and (ii) alternatively, if Enbridge determines that there would be less than 1,000,000 Series 14 Shares outstanding after June 1, 2020, no Series 13 Shares will be converted into Series 14 Shares. There are currently 14,000,000 Series 13 Shares outstanding.

With respect to any Series 13 Shares that remain outstanding after June 1, 2020, holders thereof will be entitled to receive quarterly fixed cumulative preferential cash dividends, as and when declared by the Board of Directors of Enbridge. The new annual dividend rate applicable to the Series 13 Shares for the five-year period commencing on June 1, 2020 to, but excluding, June 1, 2025 will be 3.043 percent, being equal to the five-year Government of Canada bond yield of 0.383 percent determined as of today plus 2.66 percent in accordance with the terms of the Series 13 Shares.

With respect to any Series 14 Shares that may be issued on June 1, 2020, holders thereof will be entitled to receive quarterly floating rate cumulative preferential cash dividends, as and when declared by the Board of Directors of Enbridge. The dividend rate applicable to the Series 14 Shares for the three-month floating rate period commencing on June 1, 2020 to, but excluding, September 1, 2020 will be 0.73650 percent, based on the annual rate on three month Government of Canada treasury bills for the most recent treasury bills auction of 0.27 percent plus 2.66 percent in accordance with the terms of the Series 14 Shares (the Floating Quarterly Dividend Rate). The Floating Quarterly Dividend Rate will be reset every quarter.

Beneficial holders of Series 13 Shares who wish to exercise their right of conversion during the conversion period, which runs from May 1, 2020 until 5:00 p.m. (EST) on May 19, 2020, should communicate as soon as possible with their broker or other intermediary for more information. It is recommended that this be done well in advance of the deadline in order to provide the broker or other intermediary time to complete the necessary steps. Any notices received after this deadline will not be valid.

ENB.PR.E is a FixedReset, 4.40%+266, that commenced trading 2014-7-17 after being announced 2014-7-8. It is tracked by HIMIPref™ and has been assigned to the Scraps – FixedReset (Discount) subindex on credit concerns.

DBRS has announced that it:

changed the trend for all ratings of Fortis Inc. (Fortis) to Positive from Stable and confirmed the ratings as listed below. The Positive trends reflect (1) a significant reduction of nonconsolidated corporate debt following the sale of a 51% interest in the Waneta Hydroelectric Expansion (the Waneta Expansion) and the $1.2 billion common equity issuance in December 2019, (2) solid consolidated credit metrics in 2019 and expected solid consolidated metrics in the near-to-medium term, and (3) a continued strong business risk profile at regulated utilities. The current ratings take into account Fortis’ structural subordination and mitigation factors such as the diversification of regulatory jurisdictions and the size, stability, and sustainability of cash flow.

The confirmations incorporate DBRS Morningstar’s expectation that the ongoing Coronavirus Disease (COVID-19) pandemic will not have a material impact on Fortis’ operations and its major capital projects, as well as its 2020 credit metrics. Most of Fortis’ assets are essential services and are extremely important to maintain the continual economic activities and social and health safety. The coronavirus pandemic is not expected to significantly affected Fortis’ volume distributions as most of Fortis’ regulated utilities either benefit from deferral accounts or decoupling, which significantly reduces the impact of volume volatility. Capital project executions are not expected to experience significant delays at this time but they could face some delays if the coronavirus-related restrictions continue for a longer period of time, and in that case, capital expenditure (capex) is expected to shift to subsequent years of the 2020–24 capex plan. DBRS Morningstar expects any potential cost overruns can be recovered through regulatory applications because the costs are beyond management’s control and expectation.
…
DBRS Morningstar would upgrade Fortis to A (low) if (1) it can maintain its current business risk profile through this challenging period and the macro environment stabilizes; and (2) Fortis can keep its consolidated metrics stable around the current levels, as well as sustain its nonconsolidated debt-to-capital and cash flow-to-nonconsolidated debt ratios in the low-20% range and at least 12.5%, respectively.

Affected issues are FTS.PR.F, FTS.PR.G, FTS.PR.H, FTS.PR.I, FTS.PR.J, FTS.PR.K and FTS.PR.M.

DBRS has announced that it:

confirmed the ratings of National Bank of Canada (National or the Bank) and its related entities, including the Bank’s Long-Term Issuer Rating at AA (low) and Short-Term Issuer Rating at R-1 (middle). DBRS Morningstar also changed the trend on all ratings to Stable from Positive. National’s Long-Term Issuer Rating is composed of an Intrinsic Assessment of A (high) and a Support Assessment of SA2, reflecting the expectation of timely systemic support from the Government of Canada (rated AAA with a Stable trend by DBRS Morningstar). The SA2 designation results in a one-notch uplift to the Long-Term Issuer Rating. Once the Bank has issued a sufficient level of Bail-inable Senior Debt to provide for an adequate buffer for other obligations under the Canadian Bank Recapitalization Regime, DBRS Morningstar expects to remove the uplift from systemic support.

KEY RATING CONSIDERATIONS
The change in trend to Stable from Positive reflects DBRS Morningstar’s concern regarding the negative impact of the Coronavirus Disease (COVID-19) pandemic on the Bank’s revenue, earnings, and asset quality, reflecting the wide and growing scale of the economic disruption it has caused. Nevertheless, there has been unprecedented support measures put in place by governments and regulators around the globe, which will mitigate some of the negative impacts of this crisis. Additionally, National is entering this downturn from a position of strength with a strong balance sheet.
…
Capitalization is strong as National continues to organically generate sufficient capital to support its balance sheet growth and enable the Bank to support its customers during this period. As at January 31, 2020, National’s Common Equity Tier 1 ratio stood at 11.7%, well above the Office of the Superintendent of Financial Institutions’ (OSFI) minimum requirements and at the top range of large Canadian bank peers. On March 13, 2020, OSFI lowered the Domestic Stability Buffer (DSB) requirement for Domestic Systemically Important Banks (D-SIBs) to 1.0%, which effectively reduces the CET1 regulatory minimum to 9.0%. As the DSB was intended, OSFI is providing the D-SIBs with more flexibility to extend loans to their customers during the coronavirus pandemic. Simultaneously, OSFI announced that it expects all D-SIBs to halt any new dividend increases and common share buyback activity.

Affected issues are: NA.PR.A, NA.PR.C, NA.PR.E, NA.PR.G, NA.PR.S, NA.PR.W and NA.PR.X.

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.

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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