Category: Issue Comments

TC Energy Corporation has announced:

that it does not intend to exercise its right to redeem its Cumulative Redeemable First Preferred Shares, Series 9 (Series 9 Shares) on October 30, 2019. As a result, subject to certain conditions, the holders of Series 9 Shares have the right to choose one of the following options with regard to their shares:

to retain any or all of their Series 9 Shares and continue to receive a fixed rate quarterly dividend; or

to convert, on a one-for-one basis, any or all of their Series 9 Shares into Cumulative Redeemable First Preferred Shares, Series 10 (Series 10 Shares) of TC Energy and receive a floating rate quarterly dividend.
The dividend rate applicable to the Series 9 Shares for the five-year period commencing on October 30, 2019 to, but excluding, October 30, 2024 will equal the Government of Canada five-year bond yield on October 1, 2019 plus 2.35 per cent. The dividend rate applicable to the Series 10 Shares for the three-month period commencing on October 30, 2019 to, but excluding, January 30, 2020 will equal the Government of Canada 90-day treasury bill rate on October 1, 2019 plus 2.35 per cent. Both rates will be calculated according to the terms of the prospectus supplement dated January 13, 2014 and announced by way of a news release on October 1, 2019.

Beneficial owners of Series 9 Shares who want to exercise their right of conversion 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 5 p.m. (EDT) on October 15, 2019. Any notices received after this deadline will not be valid. As such, it is recommended that this be done well in advance of the deadline in order to provide the broker or other nominee with time to complete the necessary steps.

The foregoing conversions are subject to the conditions that: (i) if TC Energy determines that there would be less than one million Series 9 Shares outstanding after October 30, 2019, then all remaining Series 9 Shares will automatically be converted into Series 10 Shares on a one-for-one basis on October 30, 2019 and (ii) alternatively, if TC Energy determines that there would be less than one million Series 10 Shares outstanding after October 30, 2019, no Series 9 Shares will be converted into Series 10 Shares. In either case, TC Energy will issue a news release to that effect no later than October 23, 2019.

Beneficial owners of Series 9 Shares who do not provide notice or communicate with their broker or other nominee by the deadline will retain their Series 9 Shares and receive the new annual fixed dividend rate applicable to the Series 9 Shares, subject to the conditions stated above.

Holders of the Series 9 Shares and the Series 10 Shares will have the opportunity to convert their shares again on October 30, 2024 and every five years thereafter as long as the shares remain outstanding.

For more information on the terms of, and risks associated with an investment in the Series 9 Shares and the Series 10 Shares, please see the Corporation’s prospectus supplement dated January 13, 2014 which is available on sedar.com or on the Corporation’s website.

TRP.PR.E is a FixedReset, 4.25%+235, that commenced trading 2014-1-20 after being announced 2014-1-13. It is tracked by HIMIPref™ and assigned to the FixedReset-Discount subindex.

I will have more to say once the reset rate is announced October 1.

Dundee Corporation has announced:

that 651,862 of its Cumulative 5-Year Rate Reset First Preference Shares, Series 2 (“Series 2 Shares”) will be converted, on a one for one basis, into Cumulative Floating Rate First Preference Shares, Series 3 (“Series 3 Shares”) of the Company and 349,755 Series 3 Shares will be converted into Series 2 Shares, in each case effective September 30, 2019. As a result, on September 30, 2019, Dundee will have 3,177,278 Series 2 Shares and 2,022,722 Series 3 Shares issued and outstanding, less any Series 2 Shares and Series 3 Shares purchased by the Company for cancellation pursuant to the previously announced normal course issuer bids.

Holders will again have the opportunity to convert their Series 2 Shares into Series 3 or to convert their Series 3 Shares into Series 2 Shares on September 30, 2024, and every five years thereafter as long as the Series 2 Shares and Series 3 Shares remain outstanding.

So that’s a net conversion of just under 6% from DC.PR.B, the FixedReset, to DC.PR.D, the FloatingReset, leaving DC.PR.B with about 61% of the total.

DC.PR.B is a FixedReset, 5.688%+410, that commenced trading 2009-9-15 with a 6.75% coupon after being announced 2009-8-25. It reset to 5.688% effective 2014-09-30. I made no recommendation regarding conversion. Now, DC.PR.B will reset at 5.284% effective September 30, 2019. I recommended retaining, or converting to, DC.PR.B. It is tracked by HIMIPref™ but is relegated to the Scraps – FixedReset (Discount) subindex on credit concerns.

DC.PR.D is a FloatingReset, +410, that came into existence via a partial conversion from DC.PR.B. It is tracked by HIMIPref™ but relegated to the Scraps – FloatingReset subindex on credit concerns.

Quadravest has announced:

Dividend 15 Split Corp. (the “Company”) previously announced on February 21, 2019 it will extend the termination date of the Company a further five year period from December 1, 2019 to December 1, 2024.

In connection with the extension, the Company will amend the dividend entitlement of the DFN.PR.A Preferred Shares (“Preferred Shares”) for the five year renewal period effective December 1, 2019, to pay a fixed cumulative preferential monthly dividend at an annual rate equivalent to 5.5% based on the $10 repayment value. The Preferred Share distribution rate is based on current market rates for preferred shares with similar terms. Preferred shareholders have received a total of $8.11 per share in distributions since inception. The dividend policy for the DFN Class A Shares (“Class A Shares”) will remain unchanged.

In relation to the term extension and the Preferred Share rate increase, the Company has an additional retraction right for those shareholders not wishing to continue holding their investment, allowing existing shareholders to tender one or both classes of Shares and receive a retraction price based on the November 29, 2019 net asset value per unit.

Alternatively, shareholders may sell their shares 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.

The Company invests in a high quality portfolio of leading Canadian dividend-yielding stocks as follows: Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Royal Bank of Canada, TorontoDominion Bank, National Bank of Canada, CI Financial Corp., BCE Inc., Manulife Financial, Enbridge, Sun Life Financial, TELUS Corporation, Thomson Reuters Corporation, TransAlta Corporation, TC Energy Corporation.

DFN.PR.A was first traded 2004-3-16 as a 5.25% Split Share scheduled to mature 2009-12-1. A Special Resolution was proposed in April 2007 to extend term to 2014-12-1 with an unchanged dividend. The proposal was approved and shareholders had a wild ride during the Credit Crunch. There was another term extension approved in June 2013 with the dividend remaining unchanged. The fund then swallowed up CGQ & CGQ.E as well as STQ / STQ.E. The extension to 2024 was announced in February, 2019.

The NAVPU of the Whole Units of the fund is 17.79 as of 2019-09-13. Frequent treasury offerings of Whole Units have increased the size of the company to $864-million as of 2019-8-30.

Quadravest has announced:

Dividend 15 Split Corp. II (the “Company”) previously announced on February 21, 2019 it will extend the termination date of the Company a further five year period from December 1, 2019 to December 1, 2024.

In connection with the extension, the Company will amend the dividend entitlement of the DF.PR.A Preferred Shares (“Preferred Shares”) for the five year renewal period effective December 1, 2019, to pay a fixed cumulative preferential monthly dividend at an annual rate equivalent to 5.75% based on the $10 repayment value. The Preferred Share distribution rate is based on current market rates for preferred shares with similar terms. Preferred shareholders have received a total of $6.71 per share in distributions since inception. The dividend policy for the DF Class A Shares (“Class A Shares”) will remain unchanged.

In relation to the term extension and the Preferred Share rate increase, the Company has an additional retraction right for those shareholders not wishing to continue holding their investment, allowing existing shareholders to tender one or both classes of Shares and receive a retraction price based on the November 29, 2019 net asset value per unit. Alternatively, shareholders may sell their shares 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.

The Company invests in a high quality portfolio of leading Canadian dividend-yielding stocks as follows: Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Royal Bank of Canada, Toronto-Dominion Bank, National Bank of Canada, CI Financial Corp., BCE Inc., Manulife Financial, Enbridge, Sun Life Financial, TELUS Corporation, Thomson Reuters Corporation, TransAlta Corporation, TC Energy Corporation.

DF.PR.A was added to the HIMIPref™ universe in May 2008, as a 5.25% Split Share maturing 2014-12-1. It was hammered in the Credit Crunch, but survived and a five year term extension with unchanged dividend was proposed in May 2013 which was approved in June 2013. Notice of extension to 2024 was given in February, 2019

The NAVPU (for Whole Units) was 15.14 as of 2019-9-13. Opportunistic treasury issuance of Whole Units over the years has increased the assets of the fund to $242-million as of 2019-8-30.

Brookfield Asset Management Inc. has announced:

that after having taken into account all election notices received by the September 16, 2019 deadline for the conversion of its Cumulative Class A Preference Shares, Series 40 (the “Series 40 Shares”) (TSX: BAM.PF.F) into Cumulative Class A Preference Shares, Series 41 (the “Series 41 Shares”), there were 116,560 Series 40 Shares tendered for conversion, which is less than the one million shares required to give effect to conversions into Series 41 Shares. Accordingly, there will be no conversion of Series 40 Shares into Series 41 Shares, and holders of Series 40 Shares will retain their Series 40 shares.

BAM.PF.F is a FixedReset, 4.50%+286, that commenced trading 2014-6-5 after being announced 2014-5-27. The issue will reset at 4.029% effective October 1, 2019. I recommended against conversion. BAM.PF.F is tracked by HIMIPref™ and is assigned to the FixedReset – Discount subindex.

Element Fleet Management Corp. has announced:

that none of its outstanding Cumulative 5-Year Rate Reset Preferred Shares, Series E (the “Series E shares”) will be converted into Cumulative Floating Rate Preferred Shares, Series F (the “Series F shares”) on September 30, 2019.

During the conversion notice period, which commenced on September 3, 2019 and ended at 5:00 p.m. (Toronto time) on September 16, 2019, 90,430 Series E shares were tendered for conversion into Series F shares. In accordance with Section 8.03(a)(iii) of the rights, privileges, restrictions and conditions attaching to the Series E shares, as provided in the Corporation’s restated articles of incorporation dated October 4, 2016, since there would be outstanding on September 30, 2019 less than 500,000 Series F shares, after having taken into account all Series E shares tendered for conversion into Series F shares,

holders of Series E shares who elected to tender their shares for conversion will not have their Series E shares converted into Series F shares on September 30, 2019.

As a result, no Series F shares will be issued in connection with the current conversion privilege.

EFN.PR.E is a FixedReset, 6.40%+472, that was announced 2014-6-2 but not immediately tracked by HIMIPref™ as it was unrated. Coverage commenced in September, 2015 after the company’s preferreds were rated Pfd-3 by DBRS. The extension was announced 2019-8-27. The issue will reset at 5.903% effective September 30, 2019. I recommended against conversion. The issue is tracked by HIMIPref™ and is assigned to the Scraps – FixedReset – Discount subindex.

TransAlta Corporation has announced:

that after taking into account all election notices received for the conversion of the Cumulative Redeemable Rate Reset Preferred Shares, Series G (the “Series G Shares”) into Cumulative Redeemable Floating Rate Preferred Shares, Series H (the “Series H Shares”), there were only 140,730 Series G Shares tendered for conversion, which is less than the one million shares required to give effect to conversions into Series H Shares. As a result, none of the Series G Shares will be converted into Series H Shares on September 30, 2019.

TA.PR.J is a FixedReset, 5.30%+380, that commenced trading 2014-8-14 after being announced 2014-8-6. TA.PR.J will reset at 4.988% effective September 30, 2019. I recommended against conversion. The issue is tracked by HIMIPref™ and has been assigned to the Scraps index on credit concerns. It was recently downgraded to P-4(high by S&P but remains at Pfd-3(low) with DBRS.

Pembina Pipeline Corporation has announced:

that it has agreed with Kinder Morgan Canada Limited (TSX: KML) (“KML”) to amend and restate the previously announced arrangement agreement dated August 20, 2019 (the “Arrangement Agreement”) to include the preferred shares of KML in the arrangement transaction pursuant to which Pembina will acquire KML (the “Transaction”). If requisite approval by the holders of KML preferred shares is obtained, upon closing of the Transaction, each outstanding KML preferred share of a series will be exchanged for one preferred share of Pembina with the same commercial terms and conditions as that series of KML preferred shares. The inclusion of KML preferred shares in the Transaction is subject to approval by at least 66 2/3 percent of the votes cast by holders of KML preferred shares, voting together as a single class, present in person or represented by proxy at the special meeting of the holders of KML preferred shares to be held to approve the Transaction, but is not a condition to closing of the Transaction. If KML preferred shareholders do not approve the Transaction but all other conditions to closing are satisfied or waived by the applicable party, the KML preferred shares will remain outstanding as shares in the capital of KML, which will be part of the Pembina group following completion of the Transaction.

Further information regarding the Transaction will be contained in a proxy statement of KML that it will prepare, file and mail to its shareholders in due course in connection with KML voting and preferred special shareholders meetings.

A copy of the amended and restated Arrangement Agreement with respect to the Transaction will be filed under Pembina’s profile on SEDAR at www.sedar.com and on the Company’s website at www.pembina.com.

This follows news that PPL To Acquire KML Under Proposed Plan of Arrangement and that the two KML issues were on Review-Developing by DBRS due to uncertainty.

KML.PR.A is a FixedReset 5.25%+365M525 that commenced trading 2017-8-15 after being announced 2017-8-3. It is tracked by HIMIPref™ but relegated to the Scraps-FixedReset Discount subindex on credit concerns.

KML.PR.C is a FixedReset, 5.20%+351M520, that commenced trading 2017-12-15 after being announced 2017-12-6. It is tracked by HIMIPref™ but relegated to the Scraps-FixedReset Discount subindex on credit concerns.

Hat tip to Assiduous Reader CanSiamCyp for ensuring I was aware of this development.

Update, 2019-09-12: The price movement left the PPL and VSN preferreds trading as equivalents:

Click for Big

The results of this Implied Volatility analysis are a little puzzling, if we look solely at those issues with a minimum reset guarantee.

It’s very strange. Each of the five issues has approximately the same unexplained value, which we may conjecture is equal to the market value of the Reset Floor, even though:

• The GOC-5 yields at which these guarantees become applicable varies widely, with three being in-the-money and two out.
• Two issues are trading at a premium to par, three at a discount

I’m not sure what to make of it. But I will say I’m glad I’m not the guy in the PPL treasury department who has to decide whether or not to call the two issues trading at a premium!

It will be recalled that TA.PR.J will reset at 4.988% effective September 30, 2019

TA.PR.J is a FixedReset, 5.30%+380, that commenced trading 2014-8-14 after being announced 2014-8-6. It is tracked by HIMIPref™ and has been assigned to the Scraps index on credit concerns. It was recently downgraded to P-4(high by S&P but remains at Pfd-3(low) with DBRS.

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. TA.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).

Click for Big

The market appears to have lost its fleeting interest in floating rate product; the implied rates until the next interconversion are well below the current 3-month bill rate as the averages for investment-grade and junk issues are at +0.79% and +1.10%, respectively (after ignoring FFH.PR.C/FFH.PR.D, which is a huge outlier today). 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 TA.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 below the price of their FixedReset counterparts, TA.PR.J. Therefore, I recommend that holders of TA.PR.J 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 3:00 p.m. (MST) / 5:00 p.m. (EST) on September 15, 2019. This is a Sunday, but I can only report what the press releases tell me! 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.