Category: Issue Comments

Emera Incorporated has announced (on 2020-1-16):

the applicable dividend rates for its Cumulative Rate Reset First Preferred Shares, Series F (the “Series F Shares”) and Cumulative Floating Rate First Preferred Shares, Series G (the “Series G Shares”), in each case, payable if, as and when declared by the Board of Directors of the Company:

• 4.202% per annum on the Series F Shares ($0.262625 per Series F Share per quarter), being equal to the sum of the Government of Canada bond yield as at January 16, 2020, plus 2.63%, payable quarterly on the 15th of February, May, August and November of each year during the five-year period commencing on February 15, 2020 and ending on (and inclusive of) February 14, 2025; and
• 4.278% on the Series G Shares for the three-month period commencing on February 15, 2020 and ending on (and inclusive of) May 14, 2020 ($0.263712 per Series G Share for the quarter), being equal to the sum of the three-month Government of Canada treasury bill yield rate as at January 16, 2020, plus 2.63% (calculated on the basis of the actual number of days elapsed during the quarter divided by 365), payable on the 15th of May, 2020. The quarterly floating dividend rate will be reset every quarter.

Holders of the Series F Shares have the right, at their option, to convert all or any of their Series F Shares, on a one-for-one basis, into Series G Shares on February 15, 2020 (the “Conversion Date”). On such date, holders who do not exercise their right to convert their Series F Shares into Series G Shares will continue to hold their Series F Shares. The foregoing conversion right is subject to the following:

• if the Company determines that there would be less than 1,000,000 Series G Shares outstanding on the Conversion Date, then holders of Series F Shares will not be entitled to convert their shares into Series G Shares, and
• alternatively, if the Company determines that there would remain outstanding less than 1,000,000 Series F Shares on the Conversion Date, then all remaining Series F Shares will automatically be converted into Series G Shares on a one-for-one basis on the Conversion Date.

Beneficial owners of Series F Shares who wish to exercise their conversion right should communicate with their broker or other nominee to obtain instructions for exercising such right during the conversion period, which runs from January 16, 2020 until 5:00 p.m. (EST) on January 31, 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 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 +0.61% (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 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, it seems likely that I will recommend that holders of EMA.PR.F 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.

It will be recalled that CM.PR.P will reset at 3.909% effective January 31, 2020.

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 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. CM.PR.P 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 +0.64% and +1.10%, 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 CM.PR.P 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, CM.PR.P. Therefore, I recommend that holders of CM.PR.P 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. (Eastern Standard Time) on January 16, 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.

It will be recalled that TD.PF.C will reset at 3.876% effective January 31, 2020.

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 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. TD.PF.C 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 +0.64% and +1.10%, 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 TD.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, TD.PF.C. Therefore, I recommend that holders of TD.PF.C 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. (Toronto time) on January 16, 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. published their conversion notice for BCE.PR.F on December 18, 2019:

Holders of fixed-rate BCE Inc. Series AF Preferred Shares have the right to convert all or part of their shares, effective on February 1, 2020, on a one-for-one basis into floating-rate Cumulative Redeemable First Preferred Shares, Series AE of BCE Inc. (the “Series AE Preferred Shares”). In order to convert their shares, holders must exercise their right of conversion during the conversion period which runs from December 18, 2019 until 5:00 p.m. (Eastern time) on January 20, 2020.
…
As of February 1, 2020, the Series AF Preferred Shares will, should they remain outstanding, pay, on a quarterly basis, as and when declared by the Board of Directors of BCE Inc., a fixed cash dividend for the following five years that will be based on a fixed rate equal to the product of: (a) the yield to maturity compounded semi-annually (the “Government of Canada Yield”), computed on January 13, 2020 by two investment dealers appointed by BCE Inc., that would be carried by a non-callable Government of Canada bond with a 5-year maturity, multiplied by (b) the “Selected Percentage Rate”. The “Selected Percentage Rate” determined by BCE Inc. is 239%. The annual dividend rate applicable to the Series AF Preferred Shares will be published on January 16, 2020 in the national edition of The Globe and Mail, the Montreal Gazette and Le Devoir and will be posted on the BCE Inc. website at www.bce.ca.

There is a similar conversion notice for BCE.PR.E.

The Five-Year Canada rate is now 1.60%, if that is the case on the determination date of 2020-1-13, the dividend rate of BCE.PR.F will be 3.824%, or $0.956 p.a.

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.

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 4.15%, close to the current prime of 3.95% although 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:

Based on current market conditions, I suggest that BCE.PR.E will likely to trade roughly equal to the price of their counterparts, BCE.PR.F. Therefore, it seems likely that I will recommend that holders of either issue make their decision based on their own portfolio and other financial circumstances and outlook, but I will wait until it’s closer to the January 20 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 after the conversion and that the relative pricing of the two new pairs will reflect these conditions.

Emera Incorporated has announced (on 2020-1-7):

that it does not intend to exercise its right to redeem all or any part of the currently outstanding Cumulative Rate Reset First Preferred Shares, Series F of the Company (the “Series F Shares”) on February 15, 2020. There are currently 8,000,000 Series F Shares outstanding.

Subject to certain conditions set out in the prospectus supplement of the Company dated June 2, 2014, to the short form base shelf prospectus dated May 2, 2013, relating to the issuance of the Series F Shares, the holders of the Series F Shares have the right, at their option, to convert all or any of their Series F Shares, on a one-for-one basis, into Cumulative Floating Rate First Preferred Shares, Series G of the Company (the “Series G Shares”) on February 15, 2020 (the “Conversion Date”).

On such date, holders who do not exercise their right to convert their Series F Shares into Series G Shares will continue to hold their Series F Shares.

The foregoing conversion right is subject to the following:

if the Company determines that there would be less than 1,000,000 Series G Shares outstanding on the Conversion Date, then holders of Series F Shares will not be entitled to convert their shares into Series G Shares, and
alternatively, if the Company determines that there would remain outstanding less than 1,000,000 Series F Shares on the Conversion Date, then all remaining Series F Shares will automatically be converted into Series G Shares on a one-for-one basis on the Conversion Date.
In either case, Emera will give written notice to that effect to holders of Series F Shares no later than February 8, 2020.

The dividend rate applicable for the Series F Shares for the five-year period commencing on February 15, 2020 and ending on (and inclusive of) February 14, 2025, and the dividend rate applicable to the Series G Shares for the 3-month period commencing on February 15, 2020 and ending on (and inclusive of) May 14, 2020, will be determined on January 16, 2020 and notice of such dividend rates shall be provided to the holders of the Series F Shares on that day.

Beneficial owners of Series F Shares who wish to exercise their conversion right should communicate with their broker or other nominee to obtain instructions for exercising such right during the conversion period, which runs from January 16, 2020 until 5:00 p.m. (EDT) on January 31, 2020.

EMA.PR.F is a FixedReset, 4.25%+263, that commenced trading 2014-6-9 after being being announced 2014-5-29. It is tracked by HIMIPref™ and assigned to the FixedReset Discount subindex.

National Bank of Canada has announced (on 2019-12-19):

that it does not intend to exercise its right to redeem all or part of the currently outstanding 12,000,000 Non-Cumulative 5-Year Rate Reset First Preferred Shares, Series 32 (the “Series 32 Preferred Shares”) on February 15, 2020. As a result, subject to certain conditions, the holders of the Series 32 Preferred Shares have the right to convert all or part of their Series 32 Preferred Shares on a one-for-one basis into Non-cumulative Floating Rate First Preferred Shares Series 33 (the “Series 33 Preferred Shares”) on February 15, 2020 in accordance with the terms of the Series 32 Preferred Shares described in the prospectus supplement dated October 2, 2014 to the short form base shelf prospectus dated October 5, 2012.

Holders of Series 32 Preferred Shares who do not exercise their right to convert their Series 32 Preferred Shares into Series 33 Preferred Shares on February 15, 2020 will retain their Series 32 Preferred Shares.

The foregoing conversions are subject to the conditions that: (i) if National Bank determines that there would remain outstanding on February 15, 2020 less than 1,000,000 Series 33 Preferred Shares, after having taken into account all Series 32 Preferred Shares tendered for conversion into Series 33 Preferred Shares, then holders of Series 32 Preferred Shares will not be entitled to convert their shares into Series 33 Preferred Shares, and (ii) alternatively, if National Bank determines that there would remain outstanding on February 15, 2020 less than 1,000,000 Series 32 Preferred Shares, after having taken into account all Series 32 Preferred Shares tendered for conversion into Series 33 Preferred Shares, then all remaining Series 32 Preferred Shares will automatically be converted into Series 33 Preferred Shares without the consent of the holders on February 15, 2020.

In either case, National Bank shall give a notice to that effect to all registered holders of Series 32 Preferred Shares no later than February 7, 2020.

On January 17, 2020, National Bank will give notice of:

i. the annual fixed dividend rate applicable to the Series 32 Preferred Shares to which a holder of Series 32 Preferred Shares will be entitled for the 5-year period from February 16, 2020 up to and including February 15, 2025; and

ii. the floating quarterly dividend rate applicable to the Series 33 Preferred Shares to which a holder of Series 33 Preferred Shares will be entitled for the 3-month period from February 16, 2020 up to and including May 15, 2020.

Beneficial owners of Series 32 shares who wish to exercise their conversion right should communicate with their broker or other nominee to obtain instructions for exercising such right during the conversion period, which will run from January 17, 2020 until 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. It is tracked by HIMIPref™ and is assigned to the FixedReset (Discount) subindex.

Canadian Imperial Bank of Commerce has announced (on December 31):

the dividend rates applicable to its Non-cumulative Rate Reset Class A Preferred Shares Series 41 (Non-Viability Contingent Capital (NVCC)) (the “Series 41 Shares”) and Non-cumulative Floating Rate Class A Preferred Shares Series 42 (Non-Viability Contingent Capital (NVCC)) (the “Series 42 Shares”).

The fixed dividend rate applicable to the Series 41 Shares, should any remain outstanding after January 31, 2020, 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.

The floating dividend rate applicable to the Series 42 Shares, should any be issued, for the three-month period from and including January 31, 2020 to but excluding April 30, 2020 is 3.911%, payable for the period as defined as and when declared by the Board of Directors of CIBC. CIBC has designated the Series 42 Shares as eligible to participate in the CIBC Shareholder Investment Plan.

Beneficial owners of Series 41 Shares who wish to exercise their conversion right should instruct their broker or other nominee to exercise such right during the conversion period, which runs from January 1, 2020 until 5:00 p.m. (Eastern Standard Time) on January 16, 2020. Any notices received after this deadline will not be valid.

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 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., CM.PR.P 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 +0.75% and +1.41%, respectively, ignoring the outliers FTS.PR.H/FTS.PR.I and SLF.PR.G/SLF.PR.J for investment grade (due to a very short term until the next reset) and AIM.PR.A/AIM.PR.B for junk (due to a ludicrous quotation spread on AIM.PR.B). 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 CM.PR.P 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, TD.PF.C. Therefore, it seems likely that I will recommend that holders of CM.PR.P continue to hold the issue and not to convert, but I will wait until it’s closer to the January 16 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.

The Toronto-Dominion Bank has announced (on January 2):

the applicable dividend rates for its Non-Cumulative 5-Year Rate Reset Preferred Shares, Series 5 (Non-Viability Contingent Capital (NVCC)) (the “Series 5 Shares”) and Non-Cumulative Floating Rate Preferred Shares, Series 6 (NVCC) (the “Series 6 Shares”).

With respect to any Series 5 Shares that remain outstanding after January 31, 2020, holders of the Series 5 Shares will be entitled to receive quarterly fixed non-cumulative preferential cash dividends, as and when declared by the Board of Directors of TD, subject to the provisions of the Bank Act (Canada). The dividend rate for the 5-year period from and including January 31, 2020 to but excluding January 31, 2025 will be 3.876%, being equal to the 5-Year Government of Canada bond yield determined as at January 2, 2020 plus 2.25%, as determined in accordance with the terms of the Series 5 Shares.

With respect to any Series 6 Shares that may be issued on January 31, 2020, holders of the Series 6 Shares 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 TD, subject to the provisions of the Bank Act (Canada). The dividend rate for the floating rate period from and including January 31, 2020 to but excluding April 30, 2020, will be 3.921%, being equal to the 90-day Government of Canada Treasury Bill yield determined as of January 2, 2020 plus 2.25%, as determined in accordance with the terms of the Series 6 Shares.

Beneficial owners of Series 5 Shares who wish to exercise their conversion right should communicate as soon as possible with their broker or other nominee to obtain instructions for exercising such right on or prior to the deadline for exercise, which is 5:00 p.m. (Toronto time) on January 16, 2020.

Inquiries should be directed to TD’s Registrar and Transfer Agent, AST Trust Company (Canada), at 1-800-387-0825 (or in Toronto 416-682-3860).

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 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., TD.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.

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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 +0.75% and +1.41%, respectively, ignoring the outliers FTS.PR.H/FTS.PR.I and SLF.PR.G/SLF.PR.J for investment grade (due to a very short term until the next reset) and AIM.PR.A/AIM.PR.B for junk (due to a ludicrous quotation spread on AIM.PR.B). 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 TD.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, TD.PF.C. Therefore, it seems likely that I will recommend that holders of TD.PF.C continue to hold the issue and not to convert, but I will wait until it’s closer to the January 16 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 that it:

downgraded the rating of the Preferred Shares issued by Brompton Oil Split Corp. (the Company) to Pfd-5 from Pfd-4 (low). The Company invests in common shares of at least 15 large capitalization North American oil and gas issuers (the Portfolio) selected from the S&P 500 Index and the S&P/TSX Composite Index. The Company may also invest up to 25% of the Portfolio value in the common shares of issuers listed on the S&P 500 Index or the S&P/TSX Composite Index that satisfy its investment criteria, operating in energy subsectors including equipment, services, pipelines, transportation, and infrastructure. The Portfolio is approximately equally weighted, actively managed, and rebalanced at least semi-annually. A portion of the Portfolio’s investments are denominated in U.S. dollars; however, substantially all of this exposure is hedged back to Canadian dollars. The Company has the ability to write covered call options or engage in securities lending in order to generate additional income.
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The dividend coverage ratio was approximately 0.3 times as of December 11, 2019.
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As of December 11, 2019, the downside protection available to holders of the Preferred Shares was 0.6%. It has averaged around this level in the last three months as a result of depressed prices of energy stocks and the oil market struggling to recover from lower demand and oversupply. Subsequently, because of the downside protection reduction below acceptable levels for a prolonged period of time and weak dividend coverage, which creates further grind on the Portfolio, DBRS Morningstar downgraded the rating on the Preferred Shares to Pfd-5.

The maturity date of the Preferred Shares is March 31, 2020. On March 9, 2019, the Company announced an extension of the term for another three to five years. The details of the term extension will be announced at least 60 days before the maturity date.

The Whole Unit NAVPU was 10.92 as of December 23, according to Brompton’s figures for the Capital Unit NAVPU and Preferred Share NAVPU, for an Asset Coverage Ratio of 1.1-:1, equivalent to Downside Protection of about 8%. It’s not clear to me how the DBRS figure of 0.6% was derived.