Category: Issue Comments

Bank of Montreal has announced:

that none of its 20 million Non-Cumulative 5-Year Rate Reset Class B Preferred Shares, Series 27 (the “Preferred Shares Series 27”) will be converted on May 27, 2019, being the first business day following the conversion date of May 25, 2019, into Non-Cumulative Floating Rate Class B Preferred Shares, Series 28 of the Bank (the “Preferred Shares Series 28”).

During the conversion period which ran from April 25, 2019 to May 10, 2019, 412,564 Preferred Shares Series 27 were tendered for conversion into Preferred Shares Series 28, which is less than the minimum 1,000,000 required to give effect to the conversion, as described in the Preferred Shares Series 27 prospectus supplement dated April 16, 2014. As a result, no Preferred Shares Series 28 will be issued on May 27, 2019 and holders of Preferred Shares Series 27 will retain their shares.

The Preferred Shares Series 27 are currently listed on the Toronto Stock Exchange under the symbol BMO.PR.S. As previously announced on April 25, 2019, the dividend rate for the five-year period commencing on May 25, 2019, and ending on May 24, 2024, will be 3.852 per cent.

BMO.PR.S is a FixedReset, 4.00%+233, NVCC-compliant issue that commenced trading 2014-4-23 after being announced 2014-4-14. The issue will reset At 3.852% effective May 25, 2019. I recommended against conversion. It is tracked by HIMIPref™ and is assigned to the FixedReset-Discount Sub-Index.

Laurentian Bank of Canada has announced:

the applicable dividend rates for its Non-Cumulative Class A Preferred Shares, Series 13 (the “Preferred Shares Series 13”) and Non-Cumulative Class A Preferred Shares, Series 14 (the “Preferred Shares Series 14”).

With respect to any Preferred Shares Series 13 that remain outstanding after June 17, 2019, being the first business day following the conversion date of June 15, 2019, identified in the prospectus supplement dated March 27, 2014 relating to the issuance of the Preferred Shares Series 13, which falls on a Saturday, holders thereof will be entitled to receive fixed rate non-cumulative preferential cash dividends on a quarterly basis, as and when declared by the Board of Directors of the Bank and subject to the provisions of the Bank Act (Canada). The dividend rate for the five-year period commencing on June 15, 2019, and ending on June 14, 2024, will be 4.123% per annum, being equal to the sum of the five-year Government of Canada bond yield as at May 16, 2019, plus 2.55%, as determined in accordance with the terms of the Preferred Shares Series 13.

With respect to any Preferred Shares Series 14 that may be issued on June 17, 2019, holders thereof will be entitled to receive floating rate non-cumulative preferential cash dividends on a quarterly basis, calculated on the basis of the actual number of days elapsed in each quarterly floating rate period divided by 365, as and when declared by the Board of Directors of the Bank and subject to the provisions of the Bank Act (Canada). The dividend rate for the three-month period commencing on June 15, 2019, and ending on September 14, 2019, will be 4.226% on an annualized basis, being equal to the sum of the three-month Government of Canada Treasury bill yield as at May 16, 2019, plus 2.55%, as determined in accordance with the terms of the Preferred Shares Series 14.

Beneficial owners of Preferred Shares Series 13 who wish to exercise their right of conversion should instruct their broker or other nominee to exercise such right before 5:00 p.m. (Montreal time) on May 31, 2019. Conversion inquiries should be directed to the Bank’s Registrar and Transfer Agent, Computershare Investor Services Inc., at 1-800-564-6253.

The Toronto Stock Exchange (“TSX”) has conditionally approved the listing of the Preferred Shares Series 14 effective upon conversion. Listing of the Preferred Shares Series 14 subject to the Bank fulfilling all the listing requirements of the TSX and, upon approval, the Preferred Shares Series 14 will be listed on the TSX under the trading symbol “LB.PR.I”.

LB.PR.H is a NVCC-compliant FixedReset, 4.30%+255, that commenced trading 2014-4-3 after being announced 2014-3-25. The extension was announced 2019-5-7. This issue is tracked by HIMIPref™ but relegated to the Scraps FixedReset-Discount subindex on credit concerns.

The most logical way to analyze the question of whether or not to convert is through the theory of Preferred Pairs, for which a calculator is available. Briefly, a Strong Pair is defined as a pair of securities that can be interconverted in the future (e.g., LB.PR.H 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 has regained a little enthusiasm for 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 +1.27% and +1.48%, 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 LB.PR.H 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 close to the price of their FixedReset counterparts, LB.PR.H. Therefore, it seems likely that I will recommend that holders of LB.PR.H determine whether or not to convert based on their own portfolio considerations and forecast for policy rates, but I will wait until it’s closer to the May 31 notification deadline before making a final pronouncement. 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.

Capital Power Corporation has announced:

that it has closed its previously announced offering of 6,000,000 Cumulative Minimum Rate Reset Preference Shares, Series 11 (the “Series 11 Shares”) at a price of $25.00 per Series 11 Share for aggregate gross proceeds of $150 million on a bought deal basis with a syndicate of underwriters, co-led by TD Securities Inc. and RBC Capital Markets.

The Series 11 Shares will pay fixed cumulative dividends of $1.4375 per share per annum, yielding 5.75% per annum, payable on the last business day of March, June, September and December of each year, as and when declared by the board of directors of Capital Power, for the initial period ending June 30, 2024. With an issue date of May 16, 2019, the first quarterly dividend of $0.1772 per share is expected to be paid on June 30, 2019 (with actual payment to be made on June 28, 2019, being the last business day of June 2019). The dividend rate will be reset on June 30, 2024 and every five years thereafter at a rate equal to the sum of the then five-year Government of Canada bond yield and 4.15%, provided that, in any event, such rate shall not be less than 5.75%. The Series 11 Shares are redeemable by Capital Power, at its option, on June 30, 2024 and on June 30 of every fifth year thereafter.

Holders of Series 11 Shares will have the right to convert all or any part of their shares into Cumulative Floating Rate Preference Shares, Series 12 (the “Series 12 Shares”), subject to certain conditions, on June 30, 2024 and every five years thereafter. Holders of Series 12 Shares will be entitled to receive a cumulative quarterly floating dividend at a rate equal to the sum of the then 90-day Government of Canada Treasury Bill yield plus 4.15%, as and when declared by the Board of Directors of Capital Power.

S&P Global Ratings has assigned a rating of P-3 for the Series 11 Shares and DBRS Limited has assigned a rating of Pfd-3 (low) for the Series 11 Shares.

The Series 11 Shares will begin trading today on the TSX under the symbol CPX.PR.K.

CPX.PR.K is a FixedReset 5.75%+415M575 issue announced May 7. It will be tracked by HIMIPref™ but relegated to the Scraps – FixedReset (Discount) subindex on credit concerns.

The issue traded 364,660 shares today in a range of 24.76-97 before closing at 24.97-98. Vital statistics are:

Given that CPX has six FixedReset issues, including this one, of which three have no floor (CPX.PR.A, CPX.PR.C and CPX.PR.E) and three do (CPX.PR.G, CPX.PR.I and CPX.PR.K), it is difficult to obtain any meaning from a volatility analysis. However, I will note that CPX.PR.I, a FixedReset, 5.75%+412M575, that commenced trading 2017-8-9 after being announced 2017-7-27, has near-identical terms and closed today at 25.04-07 to yield 5.74%-5.74%, while CPX.PR.A, a FixedReset, 3.06%+217, that commenced trading 2010-12-16 with a 4.60% dividend after being announced 2010-12-1, and reset to 3.06% effective 2015-12-31, is now quoted at 13.77-80 to yield 6.81-6.79%. I find it very difficult to believe that the dividend floor is worth a full point of yield, even before considering the additional call risk of the new issue.

Manulife Financial Corporation has announced:

that it does not intend to exercise its right to redeem all or any of its currently outstanding 8,000,000 Non-cumulative Rate Reset Class 1 Shares Series 15 (the “Series 15 Preferred Shares”) (TSX: MFC.PR.L) on June 19, 2019. As a result, subject to certain conditions described in the prospectus supplement dated February 18, 2014 relating to the issuance of the Series 15 Preferred Shares (the “Prospectus”), the holders of the Series 15 Preferred Shares have the right, at their option, to convert all or part of their Series 15 Preferred Shares on a one-for-one basis into Non-cumulative Floating Rate Class 1 Shares Series 16 of Manulife (the “Series 16 Preferred Shares”) on June 19, 2019. A formal notice of the right to convert Series 15 Preferred Shares into Series 16 Preferred Shares will be sent to the registered holders of the Series 15 Preferred Shares in accordance with the share conditions of the Series 15 Preferred Shares. Holders of Series 15 Preferred Shares are not required to elect to convert all or any part of their Series 15 Preferred Shares into Series 16 Preferred Shares. Holders who do not exercise their right to convert their Series 15 Preferred Shares into Series 16 Preferred Shares on such date will retain their Series 15 Preferred Shares, unless automatically converted in accordance with the conditions below.

The foregoing conversion right is subject to the conditions that: (i) if, after June 4, 2019, Manulife determines that there would be less than 1,000,000 Series 15 Preferred Shares outstanding on June 19, 2019, then all remaining Series 15 Preferred Shares will automatically be converted into an equal number of Series 16 Preferred Shares on June 19, 2019, and (ii) alternatively, if, after June 4, 2019, Manulife determines that there would be less than 1,000,000 Series 16 Preferred Shares outstanding on June 19, 2019, then no Series 15 Preferred Shares will be converted into Series 16 Preferred Shares. In either case, Manulife will give written notice to that effect to any registered holders of Series 15 Preferred Shares affected by the preceding minimums on or before June 11, 2019.

The dividend rate applicable to the Series 15 Preferred Shares for the 5-year period commencing on June 20, 2019, and ending on June 19, 2024, and the dividend rate applicable to the Series 16 Preferred Shares for the 3-month period commencing on June 20, 2019, and ending on September 19, 2019, will be determined and announced by way of a news release on May 21, 2019. Manulife will also give written notice of these dividend rates to the registered holders of Series 15 Preferred Shares.

Beneficial owners of Series 15 Preferred Shares who wish to exercise their right of conversion should instruct their broker or other nominee to exercise such right before 5:00 p.m. (Toronto time) on June 4, 2019. Conversion inquiries should be directed to Manulife’s Registrar and Transfer Agent, AST Trust Company (Canada), at 1-800-783-9495.

Subject to certain conditions described in the Prospectus, Manulife may redeem the Series 15 Preferred Shares, in whole or in part, on June 19, 2024 and on June 19 every five years thereafter and may redeem the Series 16 Preferred Shares, in whole or in part, after June 19, 2019.

The Toronto Stock Exchange (“TSX”) has conditionally approved the listing of the Series 16 Preferred Shares effective upon conversion. Listing of the Series 16 Preferred Shares is subject to Manulife fulfilling all the listing requirements of the TSX and, upon approval, the Series 16 Preferred Shares will be listed on the TSX under the trading symbol “MFC.PR.S”.

MFC.PR.L is a FixedReset, 3.90%+216, that commenced trading 2014-2-25 after being announced 2014-2-18. This issue is tracked by HIMIPref™ an assigned to the FixedReset-Insurance-nonNVCC subindex. As it is issued by an Insurance Holding Company and is not compliant with the banks’ NVCC rules which I expect to be extended to the insurance sector, I have added a “Deemed Maturity” entry to the call schedule for analytical purposes, dated 2030-1-31, at 25.00.

I will have more commentary when the reset rate is announced on May 21.

Laurentian Bank of Canada has announced:

that it does not intend to exercise its right to redeem all or any of its currently outstanding Non-Cumulative Class A Preferred Shares, Series 13 (the “Preferred Shares Series 13”) (TSX: LB.PR.H) on June 15, 2019. As a result, subject to certain conditions described in the prospectus supplement dated March 27, 2014 relating to the issuance of the Preferred Shares Series 13 (the “Prospectus”), the holders of the Preferred Shares Series 13 have the right, at their option, to convert any or all of their Preferred Shares Series 13 into an equal number of the Bank’s Non-Cumulative Class A Preferred Shares, Series 14 (the “Preferred Shares Series 14”) on June 17, 2019. This date is the first business day following the conversion date of June 15, 2019, identified in the Prospectus, which falls on a Saturday. In accordance with the share conditions, a written notice of the right to convert Preferred Shares Series 13 into Preferred Shares Series 14 will be sent to the registered holders of the Preferred Shares Series 13. Holders of Preferred Shares Series 13 are not required to elect to convert all or any part of their Preferred Shares Series 13 into Preferred Shares Series 14. Holders who do not exercise their right to convert their Preferred Shares Series 13 into Preferred Shares Series 14 on such date will retain their Preferred Shares Series 13, unless automatically converted in accordance with the conditions below.

The foregoing conversion right is subject to the conditions that: (i) if, after May 31, 2019, the Bank determines that there would be less than 1,000,000 Preferred Shares Series 14 outstanding on June 17, 2019, then no Preferred Shares Series 13 will be converted into Preferred Shares Series 14, and (ii) alternatively, if after, May 31, 2019, the Bank determines that there would be less than 1,000,000 Preferred Shares Series 13 outstanding on June 17, 2019, then all remaining Preferred Shares Series 13 will automatically be converted into an equal number of Preferred Shares Series 14 on June 17, 2019. In either case, the Bank will give written notice to that effect to any registered holders of Preferred Shares Series 13 affected by the preceding minimums on or before June 7, 2019.

The dividend rate applicable to the Preferred Shares Series 13 for the five-year period from and including June 15, 2019 to, but excluding, June 15, 2024, and the dividend rate applicable to the Preferred Shares Series 14 for the three-month period from and including June 15, 2019 to, but excluding, September 15, 2019, will be determined and announced by way of a news release on May 16, 2019. The Bank will also give written notice of these dividend rates to the registered holders of Preferred Shares Series 13.

Beneficial owners of Preferred Shares Series 13 who wish to exercise their right of conversion should instruct their broker or other nominee to exercise such right before 5:00 p.m. (Montreal time) on May 31, 2019. Conversion inquiries should be directed to the Bank’s Registrar and Transfer Agent, Computershare Investor Services Inc., at 1-800-564-6253.

The Toronto Stock Exchange (“TSX”) has conditionally approved the listing of the Preferred Shares Series 14 effective upon conversion. Listing of the Preferred Shares Series 14 is subject to the Bank fulfilling all the listing requirements of the TSX.

LB.PR.H is a NVCC-compliant FixedReset, 4.30%+255, that commenced trading 2014-4-3 after being announced 2014-3-25. This issue is tracked by HIMIPref™ but relegated to the Scraps FixedReset-Discount subindex on credit concerns.

I will have more commentary when the reset rate is announced on May 16.

It will be recalled that BMO.PR.S will reset At 3.852% effective May 25, 2019.

BMO.PR.S is a FixedReset, 4.00%+233, NVCC-compliant issue that commenced trading 2014-4-23 after being announced 2014-4-14. It is tracked by HIMIPref™ and is assigned to the FixedReset-Discount Sub-Index.

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., BMO.PR.S 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 above the current 3-month bill rate as the averages for investment-grade and junk issues are at +0.63% and +1.33%, 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 BMO.PR.S 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 be cheap and trading below the price of their FixedReset counterparts, BMO.PR.S. Therefore I recommend that holders of BMO.PR.S 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 the FixedReset for the FloatingReset in the market once both elements of each pair are trading and you can – presumably, according to this analysis – 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 anyway are advised that the deadline for notifying the company of such a desire is 5:00 p.m. (EDT) on May 10, 2019. 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.

Enbridge Inc. has announced (on May 2, so they say, but I looked around for the press release in the small hours of May 3 and couldn’t find it):

that it does not intend to exercise its right to redeem its currently outstanding Cumulative Redeemable Preference Shares, Series R (Series R Shares) (TSX: ENB.PR.T) on June 1, 2019. As a result, subject to certain conditions, the holders of the Series R Shares have the right to convert all or part of their Series R Shares on a one-for-one basis into Cumulative Redeemable Preference Shares, Series S of Enbridge (Series S Shares) on June 1, 2019. Holders who do not exercise their right to convert their Series R Shares into Series S Shares will retain their Series R Shares.

The foregoing conversion right is subject to the conditions that: (i) if Enbridge determines that there would be less than 1,000,000 Series R Shares outstanding after June 1, 2019, then all remaining Series R Shares will automatically be converted into Series S Shares on a one-for-one basis on June 1, 2019; and (ii) alternatively, if Enbridge determines that there would be less than 1,000,000 Series S Shares outstanding after June 1, 2019, no Series R Shares will be converted into Series S Shares. There are currently 16,000,000 Series R Shares outstanding.

With respect to any Series R Shares that remain outstanding after June 1, 2019, holders thereof will be entitled to receive quarterly fixed cumulative preferential cash dividends, as and when declared by the Board of Directors of Enbridge. The new annual dividend rate applicable to the Series R Shares for the five-year period commencing on June 1, 2019 to, but excluding, June 1, 2024 will be 4.073 percent, being equal to the five-year Government of Canada bond yield of 1.573 percent determined as of today plus 2.50 percent in accordance with the terms of the Series R Shares.

With respect to any Series S Shares that may be issued on June 1, 2019, holders thereof will be entitled to receive quarterly floating rate cumulative preferential cash dividends, as and when declared by the Board of Directors of Enbridge. The dividend rate applicable to the Series S Shares for the three-month floating rate period commencing on June 1, 2019 to, but excluding, September 1, 2019 will be 1.05107 percent, based on the annual rate on three month Government of Canada treasury bills for the most recent treasury bills auction of 1.67 percent plus 2.50 percent in accordance with the terms of the Series S Shares (the Floating Quarterly Dividend Rate). The Floating Quarterly Dividend Rate will be reset every quarter.

Beneficial holders of Series R Shares who wish to exercise their right of conversion during the conversion period, which runs from May 2, 2019 until 5:00 p.m. (EST) on May 17, 2019, should communicate as soon as possible with their broker or other intermediary for more information. It is recommended that this be done well in advance of the deadline in order to provide the broker or other intermediary time to complete the necessary steps. Any notices received after this deadline will not be valid.

ENB.PR.T is a FixedReset, 4.00%+250, that commenced trading 2012-12-5 after being announced 2012-11-26. It is tracked by HIMIPref™ but relegated to the Scraps – FixedReset (Discount) subindex on credit concerns.

The most logical way to analyze the question of whether or not to convert is through the theory of Preferred Pairs, for which a calculator is available. Briefly, a Strong Pair is defined as a pair of securities that can be interconverted in the future (e.g., ENB.PR.T 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 has lost its fleeting enthusiasm for 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 +0.63% and +1.33%, respectively. Whatever might be the result of the next few Bank of Canada overnight rate decisions, I suggest that it is unlikely that the average rate over the next five years will be lower than current – but if you disagree, of course, you may interpret the data any way you like.

Since credit quality of each element of the pair is equal to the other element, it should not make any difference whether the pair examined is investment-grade or junk, although we might expect greater variation of implied rates between junk issues on grounds of lower liquidity, and this is just what we see.

If we plug in the current bid price of the ENB.PR.T FixedReset, we may construct the following table showing consistent prices for its soon-may-be-issued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:

Based on current market conditions, I suggest that the FloatingResets that will result from conversion are likely to trade below the price of their FixedReset counterparts, ENB.PR.T. Therefore, it seems likely that I will recommend that holders of ENB.PR.T continue to hold the issue and not to convert, but I will wait until it’s closer to the May 17 notification deadline before making a final pronouncement. I will note that once the FloatingResets commence trading (if, in fact, they do) it may be a good trade to swap the FixedReset for the FloatingReset in the market once both elements of each pair are trading and you can – presumably, according to this analysis – 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 RY.PR.Z will reset At 3.700% effective May 24, 2019.

RY.PR.Z is a NVCC-compliant FixedReset, 4.00%+221, that commenced trading 2014-1-30 after being announced 2014-1-21. The extension was announced 2019-4-12. This issue is tracked by HIMIPref™ and is assigned to the FixedReset-Discount subindex.

The most logical way to analyze the question of whether or not to convert is through the theory of Preferred Pairs, for which a calculator is available. Briefly, a Strong Pair is defined as a pair of securities that can be interconverted in the future (e.g., RY.PR.Z 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 above the current 3-month bill rate as the averages for investment-grade and junk issues are at +0.94% and +1.37%, 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 RY.PR.Z 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 be cheap and trading below the price of their FixedReset counterparts, RY.PR.Z. Therefore I recommend that holders of RY.PR.Z 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 the FixedReset for the FloatingReset in the market once both elements of each pair are trading and you can – presumably, according to this analysis – 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 anyway are advised that the deadline for notifying the company of such a desire is 5:00 p.m. (EST) on May 9, 2019. 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.

Pembina Pipeline Corporation has announced:

that it does not intend to exercise its right to redeem the currently outstanding Cumulative Redeemable Rate Reset Class A Preferred Shares, Series 5 (“Series 5 Shares”) (TSX: PPL.PR.E) on June 3, 2019 (the “Conversion Date”).

As a result, and subject to certain terms of the Series 5 Shares, the holders of the Series 5 Shares will have the right to elect to convert all or any of their Series 5 Shares into Cumulative Redeemable Floating Rate Class A Preferred Shares, Series 6 of Pembina (“Series 6 Shares”) on the basis of one Series 6 Share for each Series 5 Share on the Conversion Date.

Pursuant to the terms of the Series 5 Shares, as June 1, 2019, the required conversion date for the Series 5 Shares, is not a business day, the actual conversion date will be the next succeeding business day, being June 3, 2019.

With respect to any Series 5 Shares that remain outstanding after the Conversion Date, holders thereof will be entitled to receive quarterly fixed cumulative preferential cash dividends, if, as and when declared by the Board of Directors of Pembina. The annual dividend rate for the Series 5 Shares for the five-year period from and including June 1, 2019 to, but excluding, June 1, 2024 will be 4.573%, being equal to the five-year Government of Canada bond yield of 1.573% determined as of today plus 3.00%, in accordance with the terms of the Series 5 Shares.

With respect to any Series 6 Shares that may be issued on the Conversion Date, holders thereof will be entitled to receive quarterly floating rate cumulative preferential cash dividends, if, as and when declared by the Board of Directors of Pembina. The annual dividend rate for the 3-month floating rate period from and including June 1, 2019 to, but excluding, September 1, 2019 will be 4.666 %, being equal to the annual rate of interest for the most recent auction of 90-day Government of Canada treasury bills of 1.666% plus 3.00%, in accordance with the terms of the Series 6 Shares (the “Floating Quarterly Dividend Rate”). The Floating Quarterly Dividend Rate will be reset every quarter.

As provided in the terms of the Series 5 Shares: (i) if Pembina determines that there would remain outstanding immediately following the conversion less than 1,000,000 Series 5 Shares, all remaining Series 5 Shares will be converted automatically into Series 6 Shares on a one-for-one basis effective as of the Conversion Date; or (ii) if Pembina determines that there would remain outstanding immediately following the conversion less than 1,000,000 Series 6 Shares, holders of Series 5 Shares will not be entitled to convert their Series 5 Shares into Series 6 Shares on the Conversion Date. There are currently 10,000,000 Series 5 Shares outstanding.

The Series 5 Shares are issued in “book entry only” form and, as such, the sole registered holder of the Series 5 Shares is the Canadian Depositary for Securities Limited (“CDS”). All rights of holders of Series 5 Shares must be exercised through CDS or the CDS participant through which the Series 5 Shares are held. The deadline for the registered shareholder (CDS) to provide notice of exercise of the right to convert Series 5 Shares into Series 6 Shares is 3:00 p.m. (MST) / 5:00 p.m. (EST) on May 17, 2019. Any notices received after this deadline will not be valid. As such, holders of Series 5 Shares who wish to exercise their right to convert their Series 5 Shares into Series 6 Shares should contact their broker or other intermediary for more information and it is recommended that this be done well in advance of the deadline in order to provide the broker or other intermediary with the time to complete the necessary steps.

If Pembina does not receive an election notice from CDS during the time fixed therefor, then the Series 5 Shares shall be deemed not to have been converted (except in the case of an automatic conversion). Holders of Series 5 Shares and Series 6 Shares will have an opportunity to convert their shares again on June 1, 2024, and every five years thereafter as long as the shares remain outstanding.

As previously announced, the dividend payable on June 3, 2019 to holders of the Series 5 Shares of record on May 1, 2019 will be $0.312500 per Series 5 Share, consistent with the dividend rate in effect since the issuance of the Series 5 Shares. For more information on the terms of, and risks associated with an investment in, the Series 5 Shares and the Series 6 Shares, please see Pembina’s prospectus supplement dated January 9, 2014 which can be found on SEDAR at www.sedar.com.

PPL.PR.E is a FixedReset, 5.00%+300, that commenced trading 2014-1-16 after being announced 2014-1-7. It is tracked by HIMIPref™ but relegated to the Scraps – FixedReset Discount index on credit concerns.

The most logical way to analyze the question of whether or not to convert is through the theory of Preferred Pairs, for which a calculator is available. Briefly, a Strong Pair is defined as a pair of securities that can be interconverted in the future (e.g., PPL.PR.E 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 has lost its fleeting enthusiasm for 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 +0.94% and +1.37%, 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 PPL.PR.E 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, PPL.PR.E. Therefore, it seems likely that I will recommend that holders of PPL.PR.E continue to hold the issue and not to convert, but I will wait until it’s closer to the May 17 notification deadline before making a final pronouncement. I will note that once the FloatingResets commence trading (if, in fact, they do) it may be a good trade to swap the FixedReset for the FloatingReset in the market once both elements of each pair are trading and you can – presumably, according to this analysis – 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.

National Bank of Canada has announced:

that none of its outstanding 14,000,000 Non-Cumulative 5-Year Rate Reset First Preferred Shares, Series 30 (the “Series 30 Preferred Shares”) will be converted on May 15, 2019 into Non-Cumulative Floating Rate First Preferred Shares, Series 31 (the “Series 31 Preferred Shares”).

During the conversion period, 344,653 Series 30 Preferred Shares were tendered for conversion into Series 31 Preferred Shares, which is less than the minimum 1,000,000 required to give effect to the conversion, as per the terms of the Series 30 Preferred Shares described in the prospectus supplement dated January 31, 2014.

As a result, no Series 31 Preferred Shares will be issued on May 15, 2019 and holders of Series 30 Preferred Shared will retain their shares.

The Series 30 Preferred Shares are currently listed on the Toronto Stock Exchange under the symbol NA.PR.S. The annual dividend rate for such shares for the five-year period commencing on May 16, 2019, and ending on May 15, 2024, will be 4.025%.

NA.PR.S is a NVCC-compliant FixedReset, 4.10%+240, that commenced trading 2014-2-7 after being announced 2014-1-29. It will reset At 4.025% effective May 16, 2019. I recommended against conversion. It is tracked by HIMIPref™ and assigned to the FixedResets-Discount subindex.