Category: Issue Comments

Brompton Group has announced:

) Brompton Split Banc Corp. (the “Company”) is pleased to announce it 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. (ET) on Tuesday, February 4, 2020. The offering is expected to close on or about February 13, 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 $13.00 per Class A Share for a distribution rate of 9.2% on the issue price, and the Preferred Shares will be offered at a price of $10.25 per Preferred Share for a yield to maturity of 4.3%. (1) The closing price on the TSX for each of the Class A and Preferred Shares on January 31, 2020 was $13.11 and $10.60, respectively. The Class A 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 January 31, 2020), as adjusted for dividends and certain expenses to be accrued prior to or upon settlement of the offering.

The Company invests in a portfolio (the “Portfolio”) consisting of common shares of the six largest Canadian banks: Royal Bank of Canada, The Bank of Nova Scotia, National Bank of Canada, The Toronto-Dominion Bank, Canadian Imperial Bank of Commerce and Bank of Montreal. In addition, the Company may hold up to 10% of the total assets of the Portfolio in investments in global financial companies for the purpose of enhanced diversification and return potential.

The investment objectives for the Class A Shares are to provide holders with regular monthly cash distributions targeted to be at least $0.10 per Class A Share and to provide the opportunity for growth in the net asset value per Class A Share.

The investment objectives for the Preferred Shares are to provide holders with fixed cumulative preferential quarterly cash distributions, currently in the amount of $0.125 per Preferred Share, and to return the original issue price to holders of Preferred Shares on November 29, 2022.

The syndicate of agents for the offering is being led by RBC Capital Markets, CIBC Capital Markets, National Bank Financial Inc. and Scotiabank.

The NAVPU of the Whole Units (determined by adding the NAVPU of the Capital Units to the NAVPU of the preferred shares) is 22.76 and the Whole Units are being offered at 23.25, so that’s a premium of a little under 2.2%. What a great business this is, when it works! It’s very interesting to see that the preferreds are being offered at a significant discount to their market value … I’ve had a look at the Underwriting agreement for the 2019 Treasury offering (available on SEDAR; search for “Brompton Split Banc Corp. Feb 21 2019 19:20:04 ET Underwriting or agency agreements (or amendment thereto) PDF 260 K”) but can’t quite make out what happens to all that loose cash when retail clients purchase only Capital Units. Are the preferreds scooped up by the dealers’ inventories? That would be a nice incentive to sell only Capital Units!

Update, 2020-2-17: The offering raised just under $53-million.

Enbridge Inc. has announced:

that it does not intend to exercise its right to redeem its currently outstanding Cumulative Redeemable Preference Shares, Series 11 (Series 11 Shares) (TSX: ENB.PF.C) on March 1, 2020. As a result, subject to certain conditions, the holders of the Series 11 Shares have the right to convert all or part of their Series 11 Shares on a one-for-one basis into Cumulative Redeemable Preference Shares, Series 12 of Enbridge (Series 12 Shares) on March 1, 2020. Holders who do not exercise their right to convert their Series 11 Shares into Series 12 Shares will retain their Series 11 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 11 Shares outstanding after March 1, 2020, then all remaining Series 11 Shares will automatically be converted into Series 12 Shares on a one-for-one basis on March 1, 2020; and (ii) alternatively, if Enbridge determines that there would be less than 1,000,000 Series 12 Shares outstanding after March 1, 2020, no Series 11 Shares will be converted into Series 12 Shares. There are currently 20,000,000 Series 11 Shares outstanding.

With respect to any Series 11 Shares that remain outstanding after March 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 11 Shares for the five-year period commencing on March 1, 2020 to, but excluding, March 1, 2025 will be 3.938 percent, being equal to the five-year Government of Canada bond yield of 1.298 percent determined as of today plus 2.64 percent in accordance with the terms of the Series 11 Shares.

With respect to any Series 12 Shares that may be issued on March 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 12 Shares for the three-month floating rate period commencing on March 1, 2020 to, but excluding, June 1, 2020 will be 1.07879 percent, based on the annual rate on three month Government of Canada treasury bills for the most recent treasury bills auction of 1.64 percent plus 2.64 percent in accordance with the terms of the Series 12 Shares (the Floating Quarterly Dividend Rate). The Floating Quarterly Dividend Rate will be reset every quarter.

Beneficial holders of Series 11 Shares who wish to exercise their right of conversion during the conversion period, which runs from January 31, 2020 until 5:00 p.m. (EST) on February 18, 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.PF.C is a FixedReset, 4.40%+264, that commenced trading 2014-5-22 after being announced 2014-5-12. The issue is tracked by HIMIPref™ but is relegated to the Scraps – FixedReset – Discount subindex on credit concerns.

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., ENB.PF.C 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 has little 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 +0.84% and +1.09% (ignoring the outlier AIM.PR.A / AIM.PR.B – the latter issue was quoted at 7.63-17.50, due to either inadequate Toronto Stock Exchange reporting or inadequate Toronto Stock Exchange supervision of market-makers), 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.

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 ENB.PF.C FixedReset, we may construct the following table showing consistent prices for its soon-may-be-issued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:

Based on current market conditions, I suggest that the FloatingResets that will result from conversion are likely to trade below the price of their FixedReset counterparts, ENB.PF.C. Therefore, it seems likely that I will recommend that holders of ENB.PF.C continue to hold the issue and not to convert, but I will wait until it’s closer to the February 18 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.

Brompton Group has announced (although not yet on their website):

As previously announced, the board of directors of Brompton Oil Split Corp. (the “Fund”) determined that it would extend the maturity date of the class A and preferred shares of the Company for a period of up to five years beyond the current maturity date of March 31, 2020. Today, the board of directors announces that the new term of the Fund will be 3 years to March 30, 2023. In addition, the distribution rate for the preferred shares (the “Preferred Shares”) for the new 3 year term from April 1, 2020 to March 30, 2023 has been increased to $0.65 per Preferred Share per annum (6.5% on the original issue price of $10) payable quarterly. The new Preferred Share distribution rate was determined considering current market rates for preferred shares with similar terms, as well as the current Preferred Share coverage level of the Fund. Based on the net asset value of the portfolio holdings as of January 29, 2020, in order to meet the new Preferred Share distribution rate and maintain the net asset value per unit, the Fund’s portfolio requires capital appreciation of approximately 4.0% per annum. In addition, the Fund confirmed that it will maintain the targeted monthly Class A Share distribution rate of at least $0.10 per Class A Share which will become payable when the net asset value per unit (consisting of one Class A Share and one Preferred Share) is greater than $15.00, after taking into consideration the payment of the Class A Share distribution.

The Fund invests in a portfolio of equity securities of large capitalization North American oil and gas issuers, primarily focused on those with significant exposure to oil.

In connection with the extension, shareholders who do not wish to continue their investment in the Fund, may retract their Preferred Shares and Class A Shares on March 31, 2020 pursuant to a special retraction right and receive a retraction price that is calculated in the same way that such price would be calculated if the Fund were to terminate on March 31, 2020. Pursuant to this option, the retraction price may be less than the market price if the security is trading at a premium to net asset value. To exercise this retraction right shareholders must provide notice to their investment dealer by their dealer’s deadline which in any event cannot be later than February 28, 2020 at 5:00 p.m. (Toronto time). Alternatively, shareholders may sell their shares through their securities dealer for the market price at any time, potentially at a higher price than would be achieved through retraction, or shareholders may take no action and continue to hold their shares.

In the event that more Class A Shares than Preferred Shares have been redeemed pursuant to the non-concurrent retraction right, the Company may redeem Preferred Shares on a pro rata basis in a number to be determined by the Company reflecting the extent to which the number of Preferred Shares outstanding following the non-concurrent retraction exceeds the number of Class A Shares outstanding following the non-concurrent retraction. Conversely, in the event that more Preferred Shares than Class A Shares have been redeemed pursuant to the non-concurrent retraction right, the Company may redeem Class A Shares on a pro rata basis in a number to be determined by the Company reflecting the extent to which the number of Class A Shares outstanding following the non-concurrent retraction exceeds the number of Preferred Shares outstanding following the non-concurrent retraction.

The extension was announced in March, 2019.

Increasing the dividend rate to 6.5% is just the usual investment manager flim-flam, as the NAVPU of the fund (determined by adding the Capital Unit NAV of 0.00 to the preferred share NAV of 10.01) is basically equal to the preferred share obligations. Therefore, preferred share holders currently have an investment in which they are fully exposed to declines in the market value of the underlying portfolio, but their upside is capped.

All the value of this fund, every single penny of current and future value, rightfully belongs to the preferred shareholders. They could raise the dividend rate to 20% and downside exposure would still be equal to that of a straight-out investment in the underlying portfolio and the upside would still be capped. I strongly recommend that preferred shareholders exercise their Special Retraction rights, although the more hopeful among us may wish to delay notification until closer to the February 28, 2020 at 5:00 p.m. (Toronto time) notification deadline, just in case the fund does really well in February and the preferred shares become an attractive investment again.

As noted, the Special Retraction notification deadline is February 28, 2020 at 5:00 p.m. (Toronto time); brokers and other intermediaries will generally have internal deadlines a day or two in advance of this date, although they will generally accept instructions until the last minute on a ‘best efforts’ basis.

It will be recalled that NA.PR.W will reset at 3.839% effective February 16, 2020.

NA.PR.W is a FixedReset, 3.90%+225, that commenced trading 2014-10-9 after being announced 2014-9-30. The company announced the extension on 2019-12-19. 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. NA.PR.W and the FloatingReset that will arise if enough holders convert). Since they will be interconvertible on this future date, it may be assumed that they will be priced identically on this date (if they aren’t then holders will simply convert en masse to the higher-priced issue). And since they will be priced identically on a given date in the future, any current difference in price must be offset by expectations of an equal and opposite value of dividends to be received in the interim. And since the dividend rate on one element of the pair is both fixed and known, the implied average rate of the other, floating rate, instrument can be determined. Finally, we say, we may compare these average rates and take a view regarding the actual future course of that rate relative to the implied rate, which will provide us with guidance on which element of the pair is likely to outperform the other until the next interconversion date, at which time the process will be repeated.

We can show the break-even rates for each FixedReset / FloatingReset Strong Pair graphically by plotting the implied average 3-month bill rate against the next Exchange Date (which is the date to which the average will be calculated).

Click for Big

The market appears to have lost its fleeting interest in floating rate product; the implied rates until the next interconversion are below the current 3-month bill rate as the averages for investment-grade and junk issues are at +0.92% and +1.46%, respectively, after discarding the junk outlying pair AIM.PR.A / AIM.PR.B, which resets on 2020-3-31. 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.

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 NA.PR.W FixedReset, we may construct the following table showing consistent prices for its soon-may-be-issued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:

Based on current market conditions, I suggest that the FloatingResets that will result from conversion are likely to trade below the price of their FixedReset counterparts, NA.PR.W. Therefore, I recommend that holders of NA.PR.W continue to hold the issue and not to convert. I will note that once the FloatingResets commence trading (if, in fact, they do) it may be a good trade to swap one issue for the other in the market once both elements of each pair are trading and you can – hopefully – do it with a reasonably good take-out in price, rather than doing it through the company on a 1:1 basis. But that, of course, will depend on the prices at that time and your forecast for the path of policy rates over the next five years. There are no guarantees – my recommendation is based on the assumption that current market conditions with respect to the pairs will continue until the FloatingResets commence trading and that the relative pricing of the two new pairs will reflect these conditions.

Those who wish to convert are advised that the deadline for notifying the company of such a desire is January 31, 2020 at 5:00 p.m. (EST). Brokers and other intermediaries generally set their internal deadlines a day or two in advance of this date, so if you wish to convert there’s no time to waste! Note that brokers will, in general, try to execute the instruction on a ‘best efforts’ basis if received between the two deadlines, provided that the procrastinating shareholder grovels entertainingly enough.

It will be recalled that EMA.PR.F will reset at 4.202% effective February 15, 2020.

EMA.PR.F is a FixedReset, 4.25%+263, that commenced trading 2014-6-9 after being being announced 2014-5-29. The company announced the extension on 2020-1-7. EMA.PR.F is tracked by HIMIPref™ and 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. EMA.PR.F and the FloatingReset that will arise if enough holders convert). Since they will be interconvertible on this future date, it may be assumed that they will be priced identically on this date (if they aren’t then holders will simply convert en masse to the higher-priced issue). And since they will be priced identically on a given date in the future, any current difference in price must be offset by expectations of an equal and opposite value of dividends to be received in the interim. And since the dividend rate on one element of the pair is both fixed and known, the implied average rate of the other, floating rate, instrument can be determined. Finally, we say, we may compare these average rates and take a view regarding the actual future course of that rate relative to the implied rate, which will provide us with guidance on which element of the pair is likely to outperform the other until the next interconversion date, at which time the process will be repeated.

We can show the break-even rates for each FixedReset / FloatingReset Strong Pair graphically by plotting the implied average 3-month bill rate against the next Exchange Date (which is the date to which the average will be calculated).

Click for Big

The market appears to have lost its fleeting interest in floating rate product; the implied rates until the next interconversion are below the current 3-month bill rate as the averages for investment-grade and junk issues are at +0.92% and +1.46%, respectively, after discarding the junk outlying pair AIM.PR.A / AIM.PR.B, which resets on 2020-3-31. 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.

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 EMA.PR.F FixedReset, we may construct the following table showing consistent prices for its soon-may-be-issued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:

Based on current market conditions, I suggest that the FloatingResets that will result from conversion are likely to trade below the price of their FixedReset counterparts, EMA.PR.F. Therefore, I recommend that holders of EMA.PR.F continue to hold the issue and not to convert. I will note that once the FloatingResets commence trading (if, in fact, they do) it may be a good trade to swap one issue for the other in the market once both elements of each pair are trading and you can – hopefully – do it with a reasonably good take-out in price, rather than doing it through the company on a 1:1 basis. But that, of course, will depend on the prices at that time and your forecast for the path of policy rates over the next five years. There are no guarantees – my recommendation is based on the assumption that current market conditions with respect to the pairs will continue until the FloatingResets commence trading and that the relative pricing of the two new pairs will reflect these conditions.

Those who wish to convert are advised that the deadline for notifying the company of such a desire is 5:00 p.m. (EST) on January 31, 2020. Brokers and other intermediaries generally set their internal deadlines a day or two in advance of this date, so if you wish to convert there’s no time to waste! Note that brokers will, in general, try to execute the instruction on a ‘best efforts’ basis if received between the two deadlines, provided that the procrastinating shareholder grovels entertainingly enough.

BCE Inc. has announced (on January 21):

that 506,975 of its 6,707,867 fixed-rate Cumulative Redeemable First Preferred Shares, Series AF (“Series AF Preferred Shares”) have been tendered for conversion on February 1, 2020, on a one-for-one basis, into floating-rate Cumulative Redeemable First Preferred Shares, Series AE (“Series AE Preferred Shares”). In addition, 3,283,795 of its 9,292,133 Series AE Preferred Shares have been tendered for conversion on February 1, 2020, on a one-for-one basis, into Series AF Preferred Shares. Consequently, on February 1, 2020, BCE will have 9,484,687 Series AF Preferred Shares and 6,515,313 Series AE Preferred Shares issued and outstanding. The Series AF Preferred Shares and the Series AE Preferred Shares will continue to be listed on the Toronto Stock Exchange under the symbols BCE.PR.F and BCE.PR.E, respectively.

The Series AF Preferred Shares will pay on a quarterly basis, for the five-year period beginning on February 1, 2020, as and when declared by the Board of Directors of BCE, a fixed cash dividend based on an annual fixed dividend rate of 3.865%.

The Series AE Preferred Shares will continue to pay a monthly floating adjustable cash dividend for the five-year period beginning on February 1, 2020, as and when declared by the Board of Directors of BCE. The monthly floating adjustable dividend for any particular month will continue to be calculated based on the prime rate for such month and using the Designated Percentage for such month representing the sum of an adjustment factor (based on the market price of the Series AE Preferred Shares in the preceding month) and the Designated Percentage for the preceding month.

BCE.PR.F is a FixedFloater which was added to the HIMIPref™ database in December 2008, when it was paying 4.40%. It reset in 2010 to 4.541% and after a net conversion to BCE.PR.F the issue pair was about 90% FixedFloater. It reset in 2015 to 3.110% and after a massive conversion the issue pair was about 60% RatchetRate. Notice of Extension/Conversion was published 2019-12-18. It reset to 3.865% in 2020; I recommended BCE.PR.E as the better part of the pair. The issue pair is now about 59% FixedFloater.

BCE.PR.E is a RatchetRate preferred, interconvertible every five years with BCE.PR.F. It was added to the HIMIPref™ database in May, 2012.

The Toronto-Dominion Bank has announced (on January 16):

that none of its 20 million Non-Cumulative 5-Year Rate Reset Preferred Shares, Series 5 (Non-Viability Contingent Capital (NVCC)) (the “Series 5 Shares”) will be converted on January 31, 2020 into Non-Cumulative Floating Rate Preferred Shares, Series 6 (NVCC) (the “Series 6 Shares”) of TD.

During the conversion period, which ran from January 2, 2020 to January 16, 2020, 168,856 Series 5 Shares were tendered for conversion into Series 6 Shares, which is less than the minimum 1,000,000 shares required to give effect to the conversion, as described in the prospectus supplement for the Series 5 Shares dated December 9, 2014. As a result, no Series 6 Shares will be issued on January 31, 2020 and holders of Series 5 Shares will retain their Series 5 Shares.

The Series 5 Shares are currently listed on the Toronto Stock Exchange under the symbol TD.PF.C. As previously announced on January 2, 2020, the dividend rate for the Series 5 Shares for the 5 year period from and including January 31, 2020 to but excluding January 31, 2025 will be 3.876%.

TD.PF.C is a FixedReset, 3.75%+225, that commenced trading 2014-12-16 after being announced 2014-12-5. Notice of extension was reported in December, 2019. TD.PF.C will reset at 3.876% effective January 31, 2020. I recommended against conversion. TD.PF.C is tracked by HIMIPref™ and is assigned to the FixedReset-Discount subindex.

Canadian Imperial Bank of Commerce has announced:

that, during the conversion notice period which ran from January 1, 2020 to January 16, 2020, 70,730 Non-cumulative Rate Reset Class A Preferred Shares Series 41 (Non-Viability Contingent Capital (NVCC)) of CIBC (the “Series 41 Shares”) were tendered for conversion, on a one-for-one basis, into Non-cumulative Floating Rate Class A Preferred Shares Series 42 (Non-Viability Contingent Capital (NVCC)) of CIBC (the “Series 42 Shares”). As per the conditions set out in the prospectus supplement dated December 8, 2014 relating to the issuance of the Series 41 Shares, since less than 1,000,000 Series 42 Shares would be outstanding on January 31, 2020, holders of Series 41 Shares who tendered their Series 41 Shares for conversion will not be entitled to convert their shares into Series 42 Shares. As a result, Series 42 Shares will not be issued at this time.

On January 31, 2020, CIBC will have 12,000,000 Series 41 Shares issued and outstanding. The Series 41 Shares are currently listed on the Toronto Stock Exchange under the symbol CM.PR.P.

The fixed dividend rate applicable to the Series 41 Shares for the five-year period from and including January 31, 2020 to but excluding January 31, 2025 is 3.909%, payable quarterly as and when declared by the Board of Directors of CIBC.

CM.PR.P is a FixedReset, 3.75%+224, that commenced trading 2014-12-16 after being announced 2014-12-8. In December, notice of extension was published. CM.PR.P will reset at 3.909% effective January 31, 2020. I recommended against conversion. The issue is tracked by HIMIPref™ and is assigned to the FixedReset-Discount subindex.

BCE Inc has announced (on 2020-1-16):

Click for Big

BCE.PR.F is a FixedFloater which was added to the HIMIPref™ database in December 2008, when it was paying 4.40%. It reset in 2010 to 4.541% and after a net conversion to BCE.PR.F the issue pair was about 90% FixedFloater. It reset in 2015 to 3.110% and after a massive conversion the issue pair was about 60% RatchetRate. Notice of Extension/Conversion was published 2019-12-18

BCE.PR.E is a RatchetRate preferred, interconvertible every five years with BCE.PR.F. It was added to the HIMIPref™ database in May, 2012.

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., BCE.PR.F and the RatchetRate BCE.PR.E that will continue to exist if enough holders want it). 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 FixedFloater / RatchetRate Strong Pair graphically by plotting the implied average prime 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 seems to be doing a pretty good job of arbitraging this series of issues; the seven BCE issues have an average break-even prime rate of 4.49%, close to the current prime of 3.95% although significantly higher than last week’s figure of 4.15%. There is more variation than might be expected. 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.

If we plug in the current bid price of the BCE.PR.F FixedFloater, we may construct the following table showing consistent prices for its RatchetRate counterpart BCE.PR.E given a variety of Implied Breakeven yields consistent with issues currently trading:

Note that the above table assumes that it will be the price of BCE.PR.E that varies, but the issue will probably continue trading at around 16.00, like the other BCE RatchetRates; it will more likely be the case that the price of BCE.PR.F declines. Everything’s relative!

Based on current market conditions, I suggest that BCE.PR.E will likely trade above the price of their counterparts, BCE.PR.F. Therefore, I recommend that holders of BCE.PR.F convert to BCE.PR.E and I recommend that holders of BCE.PR.E continue to hold the issue. 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 after the conversion and that the relative pricing of the two new pairs will reflect these conditions.

Note that the company deadline to receive notice of conversion is 5:00 p.m. (Eastern time) on January 20, 2020., so there is no time to waste – in fact, internal deadlines at brokerages and other intermediaries has likely passed and people calling in so shortly before the deadline will have to ask for ‘best efforts’ by the brokerage.

National Bank of Canada has announced:

the dividend rates applicable to the Non-Cumulative 5-Year Rate Reset First Preferred Shares, Series 32 (the “Series 32 Preferred Shares”) and the Non-Cumulative Floating Rate First Preferred Shares, Series 33 (the “Series 33 Preferred Shares”).

Holders of Series 32 Preferred Shares, should any remain outstanding after February 15, 2020, will be entitled to receive fixed rate non-cumulative preferential cash dividends on a quarterly basis, as and when declared by the Board of Directors of the Bank and subject to the provisions of the Bank Act (Canada). The dividend rate for the five-year period commencing on February 16, 2020 and ending on February 15, 2025 will be 3.839%, being equal to the sum of the five-year Government of Canada Bond yield (1.589%) plus 2.25%, as determined in accordance with the terms of the Series 32 Preferred Shares.

Holders of Series 33 Preferred Shares, should any be issued on February 15, 2020, will be entitled to receive floating rate non-cumulative preferential cash dividends on a quarterly basis, as and when declared by the Board of Directors of the Bank and subject to the provisions of the Bank Act (Canada). The dividend rate for the three-month period commencing on February 16, 2020 and ending on May 15, 2020, will be 3.898%, being equal to the sum of the 90-day Government of Canada Treasury Bill yield (1.648%) plus 2.25%, calculated on the basis of actual number of days elapsed in such quarterly floating rate period divided by 365, as determined in accordance with the terms of the Series 33 Preferred Shares.

Holders of the Series 32 Preferred Shares have, subject to certain conditions, the right to convert all or part of their Series 32 Preferred Shares on a one-for-one basis into Series 33 Preferred Shares on February 15, 2020.

Beneficial owners of Series 32 shares who wish to exercise their conversion right should communicate as soon as possible with their broker or other nominee and ensure that they follow their instructions in order to meet the deadline to exercise such right, which is January 31, 2020 at 5:00 p.m. (EST).

NA.PR.W is a FixedReset, 3.90%+225, that commenced trading 2014-10-9 after being announced 2014-9-30. The company announced the extension on 2019-12-19. 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., NA.PR.W 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 has little 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 +0.61% (ignoring the outlier FTS.PR.H / FTS.PR.I, which resets 2020-6-1) and +1.48% (including all data points, including 3 very high, very suspicious ones), 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.

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 NA.PR.W FixedReset, we may construct the following table showing consistent prices for its soon-may-be-issued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:

Based on current market conditions, I suggest that the FloatingResets that will result from conversion are likely to trade below the price of their FixedReset counterparts, NA.PR.W. Therefore, it seems likely that I will recommend that holders of NA.PR.W continue to hold the issue and not to convert, but I will wait until it’s closer to the January 31 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.