Category: Issue Comments

Artis Real Estate Investment Trust has announced:

that it has delivered formal notice to the holder(s) of its Preferred Units, Series G (the “Series G Units”) that, on July 31, 2019, the REIT will redeem all of the 3,140,300 outstanding Series G Units at a price of $25.3125 (the “Redemption Price”) for each Series G Unit, being $25.00 plus $0.3125 in accrued and unpaid distributions thereon up to but excluding July 31, 2019.

The Redemption Price will be payable upon presentation and surrender of the Series G Units called for redemption at the corporate trust offices of AST Trust Company (Canada) at 1 Toronto Street, Suite 1200, Toronto, Ontario, M5C 2V6, Attention: Corporate Actions.

That was a nice surprise for holders of the issue, as AX.PR.G closed at 25.25, up $4.52 (+21.80%!) on volume of 234,839.

AX.PR.G is a FixedReset, 5.00%+313, that commenced trading 2013-7-29 after being announced 2013-7-18. Note that it is not strictly a “preferred share”, it is a trust unit, and that it pays interest and return of capital (see comments), not dividends. The issue has been tracked by HIMIPref™ but relegated to the Scraps – FixedReset (Discount) subindex on credit concerns.

A hint as to why they did this may be found in a June 3 press release:

Artis Real Estate Investment Trust (TSX: AX.UN) (“Artis” or the “REIT”) provided an update today on its normal course issuer bid (“NCIB”) activity in May 2019.

During the month of May, Artis has acquired the following number of units through its NCIB:
• 1,590,993 trust units at a weighted-average price of $11.24;
• 6,800 Series A preferred units at a weighted-average price of $21.96;
• 9,800 Series E preferred units at a weighted-average price of $20.56; and
• 13,100 Series G units at a weighted-average price of $21.99.

From November 1, 2018, when the REIT announced its intention to purchase units through its NCIB, to May 31, 2019, Artis has bought back 12,650,364 trust units at a weighted-average price of $10.46, 51,900 Series A preferred units at a weighted-average price of $21.53, 59,600 Series E preferred units at a weighted-average price of $20.09, and 55,000 Series G preferred units at a weightedaverage price of $21.37.

As of the date hereof, there are 141,283,025 trust units, 3,400,200 Series A preferred units, 3,944,100 Series E preferred units, 3,150,300 Series G preferred units and 5,000,000 Series I preferred units outstanding.

The REIT has an automatic purchase plan in place which allows for the continuous purchase of units and preferred units under its NCIB, including during normal blackout periods.

Their 2018 Financial Report discloses:

The REIT’s weighted-average effective rate at December 31, 2018, on mortgages and other loans secured by properties, inclusive of properties held in joint ty5frgtenture arrangements, was 4.30%, compared to 3.96% at December 31, 2017. The weighted-average nominal interest rate on mortgages and other loans secured by properties, inclusive of properties held in joint venture arrangements, at December 31, 2018, was 4.09%, compared to 3.79% at December 31, 2017.

So in terms of cash, they’re not really saving too much by redeeming AX.PR.G at par, given that it would have reset to about 4.50%. But they’re saving a little bit, and 50bp was enough for RioCan to redeem REI.PR.A and later, REI.PR.C.

Still, holders of AX.PR.G have just been handed a windfall profit of over $14-million, which is about $0.10 per trust unit outstanding, which compares to a reported profit of $158-million in 2018. If I owned the trust units, I’d be ticked off. Why is there such an emphasis on big dramatic moves? What’s wrong with continuing to purchase on the open market at a $4 discount to par, given that the excess financing cost is only about $0.10 – $0.15 per annum? What’s the risk? If you get it wrong, you have another chance to redeem in five years – that’s the beauty of the FixedReset structure – at least, from the issuers’ perspective.

Sure, it’s slow. So what? Slow and steady wins the race!

The Toronto-Dominion Bank has announced (on July 25 June 25, so they say, but it wasn’t on their website yesterday evening!):

that it does not intend to exercise its right to redeem all or any part of the currently outstanding 20 million Non-Cumulative 5-Year Rate Reset Preferred Shares, Series 3 (Non-Viability Contingent Capital (NVCC)) (the “Series 3 Shares”) of TD on July 31, 2019. As a result and subject to certain conditions set out in the prospectus supplement dated July 24, 2014 relating to the issuance of the Series 3 Shares, the holders of the Series 3 Shares have the right to convert all or part of their Series 3 Shares, on a one-for-one basis, into Non-Cumulative Floating Rate Preferred Shares, Series 4 (NVCC) (the “Series 4 Shares”) of TD on July 31, 2019. Holders who do not exercise their right to convert their Series 3 Shares into Series 4 Shares on such date will continue to hold their Series 3 Shares.

The foregoing conversion right is subject to the conditions that: (i) if TD determines that there would be less than 1,000,000 Series 4 Shares outstanding after taking into account all shares tendered for conversion on July 31, 2019, then holders of Series 3 Shares will not be entitled to convert their shares into Series 4 Shares, and (ii) alternatively, if TD determines that there would remain outstanding less than 1,000,000 Series 3 Shares after taking into account all shares tendered for conversion on July 31, 2019, then all remaining Series 3 Shares will automatically be converted into Series 4 Shares on a one-for-one basis on July 31, 2019. In either case, TD will give written notice to that effect to holders of Series 3 Shares no later than July 24, 2019.

The dividend rate applicable to the Series 3 Shares for the 5-year period from and including July 31, 2019 to but excluding July 31, 2024, and the dividend rate applicable to the Series 4 Shares for the 3-month period from and including July 31, 2019 to but excluding October 31, 2019, will be determined and announced by way of a press release on July 2, 2019.

Beneficial owners of Series 3 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 during the conversion period, which runs from July 2, 2019 until 5:00 p.m. (Toronto time) on July 16, 2019.

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.B is a FixedReset 3.80%+227, NVCC-compliant, issue that commenced trading 2014-7-31 after being announced 2014-7-22. It is tracked by HIMIPref™ and is assigned to the FixedReset (Discount) subindex.

I will have more to say when the reset rate is announced on July 2.

Canadian Imperial Bank of Commerce has announced (on June 12):

that it does not intend to exercise its right to redeem all or any part of its currently outstanding 16,000,000 Non-cumulative Rate Reset Class A Preferred Shares Series 39 (Non-Viability Contingent Capital (NVCC)) (the “Series 39 Shares”) on July 31, 2019.

Subject to certain conditions set out in the prospectus supplement dated June 2, 2014 relating to the issuance of the Series 39 Shares, the holders of Series 39 Shares have the right to convert all or any of their Series 39 Shares, on a one-for-one basis, into Non-cumulative Floating Rate Class A Preferred Shares Series 40 (Non-Viability Contingent Capital (NVCC)) of CIBC (the “Series 40 Shares”) on July 31, 2019.

On such date, holders who do not exercise their right to convert their Series 39 Shares into Series 40 Shares, will continue to hold their Series 39 Shares. The foregoing conversion rights are subject to the following:

• if CIBC determines that there would remain outstanding less than 1,000,000 Series 40 Shares, after having taken into account all Series 39 Shares tendered for conversion on July 31, 2019, then holders of Series 39 Shares will not be entitled to convert their shares into Series 40 Shares, and
• alternatively, if CIBC determines that there would remain outstanding less than 1,000,000 Series 39 Shares, after having taken into account all Series 39 Shares tendered for conversion on July 31, 2019, then all, but not part, of the remaining outstanding Series 39 Shares will automatically be converted into Series 40 Shares on a one-for-one basis on July 31, 2019.

In either case, CIBC will give written notice to that effect to the registered holder of Series 39 Shares no later than July 24, 2019.

The dividend rate applicable to the Series 39 Shares, should any remain outstanding after July 31, 2019, for the five-year period from and including July 31, 2019 to but excluding July 31, 2024 , and the dividend rate applicable to the Series 40 Shares, should any be issued, for the three-month period from and including July 31, 2019 to but excluding October 31, 2019, as and when declared by the Board of Directors of CIBC, will be calculated and announced on June 28, 2019. CIBC has designated the Series 40 Shares as eligible to participate in the CIBC Shareholder Investment Plan.

Beneficial owners of Series 39 Shares who wish to excise their conversion right should instruct their broker or other nominee to exercise such right during the conversion period, which runs from July 1, 2019 until 5:00 p.m. (Eastern Daylight Time) on July 16, 2019. It is recommended that this be done well in advance of the deadline in order to provide the broker or other nominee time to complete the necessary steps. Any notices received after this deadline will not be valid.

CM.PR.O is a FixedReset, 3.90%+232, NVCC-compliant, that commenced trading 2014-6-11 after being announced 2014-6-2. It is tracked by HIMIPref™ and is assigned to the FixedReset (Discount) subindex.

I will have more to say when the reset rate is announced on June 28.

Element Fleet Management has announced:

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

During the conversion notice period, which commenced on May 31, 2019 and ended at 5:00 p.m. (Toronto time) on June 17, 2019, 145,926 Series C shares were tendered for conversion into Series D shares. In accordance with Section 6.03(a)(iii) of the rights, privileges, restrictions and conditions attaching to the Series C shares, as provided in the Corporation’s restated articles of incorporation dated October 4, 2016, since there would be outstanding on June 30, 2019 less than 500,000 Series D shares, after having taken into account all Series C shares tendered for conversion into Series D shares, holders of Series C shares who elected to tender their shares for conversion will not have their Series C shares converted into Series D shares on June 30, 2019.

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

EFN.PR.C was announced 2014-2-26 as a FixedReset, 6.50%+481, but was not added to HIMIPref™ at that time as the company did not have a credit rating. The company received an initial rating from DBRS on 2015-9-24 and HIMIPref™ commenced tracking its four issues then outstanding shortly thereafter. The extension of the issue was announced 2019-5-22 and it was later announced that EFN.PR.C will reset At 6.210% effective June 30, 2019. I recommended against conversion. The issue continues to be tracked by HIMIPref™ but is relegated to the Scraps – FixedReset (Discount) subindex on credit concerns.

GMP Capital will soon experience great change:

GMP Capital Inc. has announced plans to exit the capital markets business, selling its investment banking arm to U.S. brokerage house Stifel Financial Corp. for approximately $70-million in a dramatic shift for what was once one of Canada’s most successful independent investment dealers.

In the latest sign of consolidation in financial services, GMP Capital’s bankers and traders will join St. Louis-based Stifel, which has built a national U.S. platform by making more than two dozen acquisitions during chief executive officer Ronald Kruszewski’s 22 years at the helm.

GMP Capital, founded in 1995 by veteran deal makers, made its name raising money for entrepreneurial businesses such as Research in Motion – now BlackBerry Ltd. – and cannabis, mining, and oil and gas companies in recent years. But, like BlackBerry, the Toronto-based investment bank that once boasted a market value of $2-billion is undergoing a transformation. Its core business will now revolve around its 33-per-cent stake in wealth manager Richardson GMP, which has approximately $30-billion in assets and 170 teams of financial advisers.

Once the Stifel transaction closes, GMP Capital plans to buy the remaining 67 per cent of Richardson GMP from its employees and Winnipeg’s Richardson family in a stock swap that will make the Richardson clan the company’s largest shareholder. GMP Capital will hold approximately $198-million in cash. That capital is earmarked for expanding the wealth management platform by recruiting financial advisers and potentially adding new services such as robo-advisers, specialized lending and asset management.

… and DBRS is watching with great interest:

DBRS, Inc. (DBRS) placed GMP Capital Inc.’s (GMP or the Company) Cumulative Preferred Shares rating of Pfd-4 (high) Under Review with Developing Implications. The rating action follows the announcement that GMP has agreed to sell substantially all of its capital markets business to Stifel Financial Corp. (Stifel).

KEY RATING CONSIDERATIONS
The Under Review with Developing Implications status reflects uncertainty surrounding the transaction, including shareholder and regulatory approval that are still required for the transaction to close as well as other strategic initiatives that are occurring in tandem. While certain assets and liabilities will transfer to Stifel with the capital markets business divestiture, the Cumulative Preferred Shares rated by DBRS will remain with GMP.
…
DBRS will assess GMP’s pro-forma structure at the close of the transaction, including the remaining assets and liabilities as well as the Company’s future strategic direction and management’s ability to execute on this plan. DBRS notes that Harris Fricker, Chief Executive Officer of GMP, and other key personnel have agreed to join Stifel.

The rating could be upgraded if GMP’s pro-forma financials post-transaction are deemed to be stronger as a result of shedding the capital markets business, which has been highly volatile and loss-making. The rating could be downgraded if GMP’s credit fundamentals post-transaction are deemed to be weaker or if GMP is not able to acquire majority control of Richardson GMP, limiting its wealth management growth strategy.

Affected issues are GMP.PR.B and GMP.PR.C

DBRS has announced that it:

upgraded the long-term ratings of the Royal Bank of Canada (RBC or the Bank) and its related entities, including RBC’s Long-Term Issuer Rating, to AA (high) from AA. DBRS also changed the trend on all long-term ratings to Stable from Positive. The Bank’s Short-Term Issuer Rating was confirmed at R-1 (high) with a Stable trend. RBC’s Long-Term Issuer Rating is composed of an Intrinsic Assessment (IA) of AA and Support Assessment of SA2, which reflect the expectation of timely systemic support from the Government of Canada (rated AAA with a Stable trend by DBRS). The SA2 designation results in a one-notch uplift to the Long-Term Issuer Rating. Under the new Canadian Bank Recapitalization Regime (the Bail-In Regime), DBRS expects to eventually remove the uplift from systemic support, once the Bank has issued a sufficient level of bail-inable senior debt, which would thereby provide an adequate buffer for non-bail-inable obligations and is then expected to offset the removal of systemic support.
…
DBRS remains concerned over the combination of Canadian household indebtedness and elevated housing prices, particularly in and around Vancouver and Toronto, and the potential impact of a housing downturn on the Canadian economy as well as to other consumer-related loan portfolios. Nonetheless, RBC’s residential-secured portfolio, like all the large Canadian banks, appears conservatively underwritten, with 37% of RBC’s Canadian residential mortgage loans insured. The average loan-to-value ratio of the uninsured portfolio is a conservative 57%, providing a substantial buffer for a decline in housing prices.
…
RBC’s Q2 2019 Common Equity Tier 1 ratio increased 90 basis points YoY to 11.8%, primarily due to strong earnings generation. While overall capital levels remain well above regulatory minimums, they are at the low end of some global peers. However, DBRS views capital levels as strong given the Bank’s asset mix and ability to generate capital. The Bank has begun issuing Bail-inable Senior Debt as part of the Bail-In Regime. It is expected that the Bank will exceed the total loss absorbing capacity requirements issued by the Office of the Superintendent of Financial Institutions as it replaces maturing legacy senior debt.
…
18-Jun-19 NVCC Preferred Shares Upgraded Pfd-2 (high) Stb
18-Jun-19 Non-Cumulative Preferred Shares (Excluding Series W) Upgraded Pfd-1 (low) Stb
18-Jun-19 Preferred Shares, Series C-1 Upgraded A Stb
18-Jun-19 Preferred Shares, Series C-2 Upgraded A Stb

Affected issues are:
NVCC-compliant : (Straights) RY.PR.N, RY.PR.O, RY.PR.P
(FixedReset) RY.PR.H, RY.PR.J, RY.PR.M, RY.PR.Q, RY.PR.R, RY.PR.S, RY.PR.Z

NVCC-non-compliant: (Straight) RY.PR.A, RY.PR.C, RY.PR.E, RY.PR.F, RY.PR.G

Specifically Excluded from being rated: RY.PR.W

It’s a bit odd that the Series C-1 shares were upgraded – they have been redeemed as I reported in August 2017; this was confirmed in the 2017 Annual Report:

On November 13, 2017, we redeemed all 82,050 issued and outstanding Non-cumulative Perpetual First Preferred Shares, Series C-1, for cash at a redemption price of US$1,000 per share.

The C-series preferreds were issued in connection with the takeover of City National in 2015.

Brompton Lifeco Split Corp. has released its Annual Report to December 31, 2018.

Note that the benchmarking isn’t ideal, since the Financial index will include banks, while the fund has a mandate only for insurers.

Figures of interest are:

MER: The MER per unit of the Fund, excluding Preferred share distributions (which were largely covered by the Fund’s dividend income), was 0.98% in 2018, down from 1.05% in 2017 as a result of better fixed-cost absorption.

Average Net Assets: We need this to calculate portfolio yield; and it’s tricky because “The Fund completed a treasury offering of Class A shares and Preferred shares for aggregate gross proceeds of approximately $38.6 million on February 6, 2018.”. Preferred Share distributions of 4,055,809 @ 0.575 / share implies 7.054-million shares out on average. Average Unit Value (beginning & end of year) = (16.82 + 12.71) / 2 = 14.76. Therefore 7.054-million @ 14.76 = 104.1-million average net assets.

Underlying Portfolio Yield: Dividends, interest and lending income received of 4.249-million divided by average net assets of 104.1-million is 4.08%

Income Coverage: Gross Investment Income (before capital gains & losses) of $4.250-million less expenses of 1.818-million is net investment income of $2.432-million divided by Preferred Share Distributions of 4.056-million is 60%.

Canadian Imperial Bank of Commerce has announced:

that it has completed the offering of 10 million Non-cumulative Rate Reset Class A Preferred Shares Series 51 (Non-Viability Contingent Capital (NVCC)) (the “Series 51 Shares”) priced at $25.00 per share to raise gross proceeds of $250 million.

The offering was made through a syndicate of underwriters led by CIBC Capital Markets. The Series 51 Shares commence trading on the Toronto Stock Exchange today under the ticker symbol CM.PR.Y.

The Series 51 Shares were issued under a prospectus supplement dated May 27, 2019, to CIBC’s short form base shelf prospectus dated July 11, 2018.

CIBC has designated the Series 51 Shares as eligible to participate in the CIBC Shareholder Investment Plan along with Series 41, 43, 45, 47 and 49. Holders of eligible shares may elect to have dividends on those preferred shares reinvested in common shares if they reside in Canada, or may elect stock dividends if they reside in the U.S. See “CIBC Shareholder Investment Plan” at www.cibc.com for more information.

CM.PR.Y is a FixedReset, 5.15%+362, NVCC, announced May 24. It will be tracked by HIMIPref™ and has been assigned to the FixedReset (Discount) subindex.

The issue traded 1,022,019 shares today in a range of 24.35-65 before closing at 24.37-40. Vital statistics are:

Given that the PerpetualDiscount index is down 5.64% from its pre-announcement close on May 23, this was actually a pretty good day for the issue!

The new issue is somewhat expensive according to Implied Volatility Analysis:

Click for Big

According to this analysis, the fair price of the new issue is 23.71, down from the announcement day fair-value of 24.85, but alert Assiduous Readers will have noticed that the Implied Volatility plot is very peculiar, having three expensive issues and four cheap ones, with nothing in between.

The other two rich issues are:

• CM.PR.S, a FixedReset, 4.50%+245, NVCC-compliant issue that commenced trading 2018-1-18 after being announced 2018-1-10. It is 0.89 rich, being bid at 19.01 compared to a fair value of 18.12.
• CM.PR.T, a FixedReset, 5.20%+331, NVCC-compliant issue that commenced trading 2019-1-22 after being announced 2019-1-14. It is 2.17 rich, being bid at 24.40 compared to a fair value of 22.23. Alert readers will note that is is bid higher than CM.PR.Y despite having an Issue Reset Spread 31bp lower. Sometimes I despair of this market.

The extremely perplexing issue is CM.PR.R, a FixedReset, 4.40%+338, NVCC Compliant issue that commenced trading 2017-6-2 after being announced 2017-5-25. It is bid at 21.30 compared to a fair value of 22.56. Alert readers will note that it is bid much lower than CM.PR.T despite having an Issue Reset Spread 7bp higher.

I confess I don’t know quite what to make of this. It is common – normal, even – for a new issue to remain rich for quite some time, but I am at a loss to explain why CM.PR.S should remain rich after being on the market for sixteen months. CM.PR.R is just silly … but note that its current coupon is low relative to the new issue and it won’t reset until 2022-7-31 … three years, roughly, thirteen coupon payments, but that’s only a total of about $0.60 and doesn’t explain the differential with CM.PR.S anyway.

Fortunately, I don’t have to explain it! All I have to do is avoid buying the new issue and favour other, cheaper, choices for any allocation to CM that I care to make.

The Toronto Dominion Bank’s new issue closed today without an announcement on their website.

TD.PF.M is a FixedReset 5.10%+356, NVCC, announced 2019-5-24. It will be tracked by HIMIPref™ and has been assigned to the FixedReset (Discount) subindex.

The issue traded 680,093 shares today in a range of 24.60-78 before closing at 24.70-71. Vital statistics are:

Given that the PerpetualDiscount index is down 5.64% from its pre-announcement close on May 23, this was actually a pretty good day for the issue!

The new issue remains expensive according to Implied Volatility Analysis:

Click for Big

According to this analysis, the fair price of the new issue is 23.58, down 0.69 from the announcement day fair value of 24.27.

It is most interesting to compare this issue with TD.PF.L, a FixedReset, 5.20%+327, that commenced trading 2019-1-28 after being announced 2019-01-17. Alert Assiduous Readers will have noticed that although the initial dividends of the two issues are similar, the spreads are 29bp different, which is significant. The fair price of TD.PF.L according to the analysis above is only 22.39 (down 0.84 from the TD.PF.M announcement day value of 23.23), yet the issue closed today at 24.63-68, not much below TD.PF.M’s 24.70-71. I am reminded of the BCE.PR.K Ridiculous Rip-off Wrinkle, in which BCE was able to reopen the issue since – presumably – the initial coupon rate was in-line with the market even though the spread to the Canada 5-year for the re-opened portion was 87bp lower than it should have been.

On March 26, S&P placed TA on Creditwatch-Negative:

• Calgary, Alta.-based TransAlta Corp. has announced that it entered into an agreement with Brookfield Renewable Partners L.P. with respect to the partial sale of TransAlta’s Alberta hydro assets.
• As part of this transaction, TransAlta will issue C$350 million in debentures to Brookfield over the coming weeks, mainly to fund future shareholder returns and subsequently issue C$400 million in preferred stock in October 2020 to repay debt maturing in November 2020. Brookfield will also increase its equity investment in TransAlta to 9%. The debentures and preferred shares are expected to convert to a partial interest in TransAlta’s hydro assets in 2025.
• S&P Global Ratings placed its ‘BBB-‘ issuer credit rating on TransAlta and its issue-level ratings on the company’s debt on CreditWatch with negative implications.
• TransAlta’s leverage remains elevated for the rating, and the CreditWatch placement reflects a greater than 1-in-2 chance of a downgrade if we are not convinced that the company can improve its funds from operations (FFO) to debt to about 22% or debt to EBITDA would not decrease below 3.5x by 2020.
• We expect to resolve the CreditWatch over the next 90 days after meeting with company management to evaluate its plans to reduce leverage over the next two years and to manage execution risk while increasing its natural gas and renewables generation portfolio.

They have now downgraded Transalta:

• Calgary, Alberta-based TransAlta Corp.’s leverage is expected to remain elevated over the next two years following its agreement with Brookfield to borrow $350 million in subordinated debentures and planned $400 million preferred stock issuance (which we view as debt) to fund share repurchases, refinance debt, and accelerate coal-to-gas power plant conversion.
• We expect the company’s funds from operations (FFO) to debt to remain below 22% and debt to EBITDA above 3.5x (our downgrade thresholds for the rating) for a prolonged period. Consequently, we are lowering our issuer credit rating and senior unsecured issue-level ratings on TransAlta to ‘BB+’ from ‘BBB-‘. We are also lowering our preferred stock rating to ‘B+’ from ‘BB’ and our Canadian preferred stock rating to ‘P-4’ (high) from ‘P-3’.
• We are assigning our ‘3’ recovery rating to the company’s senior unsecured debt, reflecting our expectation of meaningful recovery in a default scenario.
• We are removing the ratings from CreditWatch, where we placed them March 26, 2019, with negative implications following the announcement of the Brookfield transaction. The outlook is stable.
• The stable outlook reflects our expectation of relatively stable operating performance under transitionary industry conditions toward cleaner burning fuels. We expect FFO to debt to remain 16%-17% through 2020 and leverage reduction in the longer term to be driven by improved realizations for its hydroelectric plants following the expiration of under-market-price power purchase agreements (PPAs) in 2020 and the placement of a capacity market in Alberta in November 2021.

…
We could lower our ratings if we expect FFO to debt to fall below 14% or debt to EBITDA to increase above 4.75x for a prolonged period. This could likely result from significant declines in capacity and power prices in Alberta or significant operating challenges resulting from the coal-to-gas conversion. While less likely, we could lower ratings because of aggressive financial policy changes characterized by meaningful increases in dividends or share repurchases, or a weaker business profile characterized by the sale of contracted assets such that less than 50% of EBITDA is generated by contracted assets.

While unlikely over the next 24 months, we could consider an upgrade if TransAlta successfully pursues coal-to-gas conversions, exhibits good profitability from the converted plants, and materially improves financial performance. More specifically, an upgrade would require sustained FFO to debt above 22% and debt to EBITDA below 3.5x.

Affected issues are TA.PR.D, TA.PR.E, TA.PR.F, TA.PR.H and TA.PR.J.