Category: Issue Comments

Fortis Inc. has announced:

Fortis has declared and hereby gives notice of a corrected second quarter dividend of $0.2455625 per share on its Cumulative Redeemable Fixed Rate Reset First Preference Shares, Series K (the “Series K Shares”), payable on June 1, 2019 to the shareholders of record of the Series K Shares at the close of business on May 17, 2019. This notice replaces and supersedes the dividend of $0.2453125 declared on the Series K Shares and disclosed in a news release dated February 14, 2019, which was the first dividend declared following the January 30, 2019 reset of the fixed dividend rate pursuant to the terms of the Series K Shares.

The dividend on the Series K Shares has been designated by the Corporation as an eligible dividend for federal and provincial dividend tax credit purposes.

This has been quite the saga! Fortis made selective disclosure of the reset rate which was eventually revealed to be 3.925%, which was inconsistent with others determined with identical timing. I recommended that holders not convert and there was no conversion. Fortis was recalcitrant in responding to inquiries but eventually admitted their error, while stating that public disclosure would occur in early April. This was later delayed until May 1 and now, finally, the issue can be put to bed.

Errors happen. Big deal. The real issue in this abominable display of incompetent arrogance is Fortis’ disgraceful communication practices. They really need to think about how well they communicate with their financiers.

IGM Financial Inc. announced (on March 20):

– IGM Financial Inc. (TSX:IGM) (“IGM Financial”) announced today that it has completed its previously announced offering of $250 million principal amount of 4.206% debentures due March 21, 2050.

The debentures were offered through a group of agents led by BMO Capital Markets and RBC Capital Markets.

The net proceeds of the offering will be used by IGM Financial to fund the intended redemption of all six million of its issued and outstanding 5.90% Non-Cumulative First Preferred Shares, Series B (the “Series B Preferred Shares”) and for general corporate purposes. IGM Financial intends to issue a notice later today to redeem the Series B Preferred Shares on or about April 30, 2019. In accordance with the terms of the Series B Preferred Shares, the redemption price will be $25.00 for each Series B Preferred Share plus an amount equal to all declared and unpaid dividends, net of any tax required to be withheld by IGM Financial.

IGM.PR.B commenced trading 2009-12-8 after being announced 2009-11-30. The offering was not very successful and I reported an inventory blow-out sale 2009-12-17.

As noted in some comments on this redemption, it is particularly noteworthy that the redemption is explicitly being financed with a 31-year bond issue yielding 4.206%, compared to the 5.90% dividend on the issue, which is equivalent to 7.67%, implying a Seniority Spread of almost 350bp; within a few basis points of the 350bp Seniority Spread reported March 20, the announcement date. The redemption is another data point in my collection illustrating the current cheapness of the preferred share market relative to bonds, last discussed April 10.

Brompton Group has announced (on February 28):

Brompton Lifeco Split Corp. (the “Fund”) announces that the distribution rate for the preferred shares (the “Preferred Shares”) for the 5-year term from April 30, 2019 to April 29, 2024 will be $0.625 per preferred share per annum (6.25% on the original issue price of $10) payable quarterly. The Preferred Share distribution rate is based on current market rates for preferred shares with similar terms. The Fund previously announced the extension of the term of the class A shares (the “Class A Shares”) and the Preferred Shares from April 30, 2019 to April 29, 2024. The term extension offers preferred shareholders the opportunity to enjoy preferential cash dividends until April 29, 2024. Since inception in April 2007 to January 31, 2019, the Preferred Share has delivered a 5.6% per annum return. In addition, the Fund intends to maintain the targeted monthly Class A Share distribution rate at $0.075 per Class A Share when the net asset value per unit (consisting of one Class A Share and one Preferred Share) is greater than $15.00, after taking in consideration the payment of the Class A Share distribution.

Over the past 10-year period to January 31, 2019, the Class A share has outperformed the S&P/TSX Composite Index (the “TSX Composite”) by 5.7% per annum (LCS 14.8% per annum, TSX Composite 9.1% per annum). The Preferred share has delivered consistent returns with less volatility and has outperformed the S&P/TSX Preferred Share Index over the past 10-year period by 1.8% per annum. Since inception on April 18, 2007 to January 31, 2019, Class A shareholders have received cash distributions of $5.73 per share. Class A shareholders have the option to benefit by reinvesting their cash distributions in a distribution reinvestment plan (“DRIP”) which is commission free to participants. Class A shareholders can enroll in the DRIP program by contacting their investment advisor.

The Fund invests in a portfolio of common shares of Canada’s four largest publicly-listed life insurance companies, on an approximately equal weight basis: Great-West Lifeco Inc., Industrial Alliance Insurance and Financial Services Inc., Manulife Financial Corporation and Sun Life Financial Inc.

In connection with the extension, shareholders who do not wish to continue their investment in the Fund, may retract their Preferred Shares or Class A Shares on April 29, 2019 pursuant to a special retraction right and receive a retraction price that is calculated in the same way that such price would be calculated if the Fund were to terminate on April 29, 2019. Pursuant to this option, the retraction price may be less than the market price if the security is trading at a premium to net asset value. Notice must be provided to your investment dealer by March 29, 2019 at 5:00 p.m. (Toronto time) in order to exercise this right; however, investment dealers may have earlier deadlines.

LCS.PR.A was added to the HIMIPref™ database in October, 2014, backdated to 2014-5-1, following its term extension and treasury offering earlier in the year. Capital Units dividends were suspended in January 2015, but reinstated in November, 2016. The company announced the five year extension in Marcy, 2018. The issue is tracked by HIMIPref™ but relegated to the Scraps – Splitshares subindex on credit concerns.

Bank of Montreal has announced:

the applicable dividend rates for its Non-Cumulative 5-Year Rate Reset Class B Preferred Shares, Series 27 (the “Preferred Shares Series 27”) and Non-Cumulative Floating Rate Class B Preferred Shares, Series 28 (the “Preferred Shares Series 28”).

With respect to any Preferred Shares Series 27 that remain outstanding after May 25, 2019, commencing as of such date, 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 May 25, 2019, and ending on May 24, 2024, will be 3.852 per cent, being equal to the sum of the five-year Government of Canada bond yield as at April 25, 2019, plus 2.33 per cent, as determined in accordance with the terms of the Preferred Shares Series 27.

With respect to any Preferred Shares Series 28 that may be issued on May 27, 2019, being the first business day following the conversion date of May 25, 2019, identified in the Preferred Shares Series 27 prospectus, which falls on a Saturday, 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 May 25, 2019, and ending on August 24, 2019, will be 4.002 per cent, being equal to the sum of the three-month Government of Canada Treasury bill yield as at April 25, 2019, plus 2.33 per cent, as determined in accordance with the terms of the Preferred Shares Series 28.

Beneficial owners of Preferred Shares Series 27 who wish 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 ensure that they meet the deadline to exercise such right, which is 5:00 p.m. (EDT) on May 10, 2019.

Conversion enquiries should be directed to BMO’s Registrar and Transfer Agent, Computershare Trust Company of Canada, at 1-800-340-5021.

They previously announced:

that it does not intend to exercise its right to redeem the currently outstanding Non-Cumulative 5-Year Rate Reset Class B Preferred Shares, Series 27 of the Bank (the “Preferred Shares Series 27”) on May 25, 2019. As a result, subject to certain conditions, the holders of Preferred Shares Series 27 have the right, at their option, to convert all or part of their Preferred Shares Series 27 on a one-for-one basis into Non-Cumulative Floating Rate Class B Preferred Shares, Series 28 of the Bank (the “Preferred Shares Series 28”) on May 27, 2019. This date is the first business day following the conversion date of May 25, 2019, identified in the Preferred Shares Series 27 prospectus, which falls on a Saturday. Holders who do not exercise their right to convert their Preferred Shares Series 27 into Preferred Shares Series 28 on such date will retain their Preferred Shares Series 27, unless automatically converted in accordance with the conditions below.

The foregoing conversions are subject to the conditions that: (i) if, after May 10, 2019, the Bank determines that there would be less than 1,000,000 Preferred Shares Series 27 outstanding on May 25, 2019, then all remaining Preferred Shares Series 27 will automatically be converted into an equal number of Preferred Shares Series 28 on May 25, 2019; and (ii) alternatively, if the Bank determines that there would be less than 1,000,000 Preferred Shares Series 28 outstanding on May 25, 2019, no Preferred Shares Series 27 will be converted into Preferred Shares Series 28. In either case, the Bank will give written notice to that effect to any registered holders of Preferred Shares Series 27 affected by the preceding minimums on or before May 17, 2019.

The dividend rate applicable to the Preferred Shares Series 27 for the 5-year period commencing on May 25, 2019, and ending on May 24, 2024, and the dividend rate applicable to the Preferred Shares Series 28 for the 3-month period commencing on May 25, 2019, and ending on August 24, 2019, will be determined and announced by way of a news release on April 25, 2019. The Bank will also give written notice of these dividend rates to the registered holders of Preferred Shares Series 27.

Beneficial owners of Preferred Shares Series 27 who, on or after April 25, 2019, wish to exercise their right of conversion should instruct their broker or other nominee to exercise such right before 5:00 p.m. (EDT) on May 10, 2019.

Conversion inquiries should be directed to BMO’s Registrar and Transfer Agent, Computershare Trust Company of Canada, at 1-800-340-5021.

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 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 +0.69% and +1.39%, 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 trade below the price of their FixedReset counterparts, BMO.PR.S. Therefore, it seems likely that I will recommend that holders of BMO.PR.S continue to hold the issue and not to convert, but I will wait until it’s closer to the May 10 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.

TransCanada Corporation has announced (on April 23):

that 725,094 of its 24,000,000 fixed rate Cumulative Redeemable First Preferred Shares, Series 7 (Series 7 Shares) were deposited for conversion on April 30, 2019 on a one-for-one basis into floating rate Cumulative Redeemable First Preferred Shares, Series 8 (Series 8 Shares).

As previously announced in the Company’s news release dated March 15, 2019, the conversions are subject to the conditions that: (i) if TransCanada determines that there would be less than one million Series 7 Shares outstanding after April 30, 2019, then all remaining Series 7 Shares will automatically be converted into Series 8 Shares on a one-for-one basis on April 30, 2019, and (ii) alternatively, if TransCanada determines that there would be less than one million Series 8 Shares outstanding after April 30, 2019, no Series 7 Shares will be converted into Series 8 Shares.

As the total number of Series 7 Shares tendered for conversion did not meet the threshold set out above, no Series 7 Shares will be converted into Series 8 Shares on April 30, 2019.

For more information on the terms of and risks associated with an investment in the Series 7 Shares and the Series 8 Shares, please see the prospectus supplement dated February 25, 2013 which is available on sedar.com or on the TransCanada website.

TRP.PR.D is a FixedReset, 4.00%+238, that commenced trading 2013-3-4 after being announced 2013-2-25. The extension was announced 2019-3-15. The issue will reset at 3.903% effective April 30, 2019. I recommended against conversion. TRP.PR.D is tracked by HIMIPref™ and assigned to the FixedReset (Discount) subindex.

Royal Bank of Canada has announced:

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

With respect to any Series AZ shares that remain outstanding after May 24, 2019, holders of the Series AZ shares will be entitled to receive quarterly fixed rate non-cumulative preferential cash dividends, as and when declared by the Board of Directors of Royal Bank of Canada, subject to the provisions of the Bank Act (Canada).

The dividend rate for the 5-year period from and including May 24, 2019 to, but excluding, May 24, 2024 will be 3.70%for Series AZ shares, being equal to the 5-Year Government of Canada bond yield determined as of April 24, 2019 plus 2.21%, as determined in accordance with the terms of the Series AZ shares.
…
Beneficial owners of Series AZ shares who wish to exercise their conversion rights should instruct their broker or other nominee to exercise such rights on or prior to the deadline for notice of intention to convert, which is 5:00 p.m. (EST) on May 9, 2019.

Inquiries should be directed to Shareholder Relations Officer, Shirley Boudreau, at 416-955-7806.

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 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 +0.70% 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 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 trade below the price of their FixedReset counterparts, RY.PR.Z. Therefore, it seems likely that I will recommend that holders of RY.PR.Z continue to hold the issue and not to convert, but I will wait until it’s closer to the May 9 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.

Quadravest has announced:

Financial 15 Split Corp. (the “Company”) is pleased to announce it will undertake an offering of Preferred Shares and Class A Shares of the Company. The offering will be co-led by National Bank Financial Inc., CIBC World Markets Inc., Scotia Capital Inc. and RBC Capital Markets, and will also include BMO Capital Markets, Canaccord Genuity Corp., Industrial Alliance Securities Inc., Echelon Wealth Partners, GMP Securities L.P., Raymond James Ltd., Desjardins Securities Inc., Mackie Research Capital Corporation, and Manulife Securities Incorporated.

The Preferred Shares will be offered at a price of $9.85 per Preferred Share to yield 5.6% and the Class A Shares will be offered at a price of $8.15 per Class A Share to yield 18.5%.

The closing price on the TSX of each of the Preferred Shares and the Class A Shares on April 22, 2019 was $9.97 and
$8.22, respectively.

Since inception of the Company, the aggregate dividends declared on the Preferred Shares have been $8.15 per share and the aggregate dividends declared on the Class A Shares have been $19.27 per share, for a combined total of $27.42. All distributions to date have been made in tax advantage eligible Canadian dividends or capital gains dividends.

The net proceeds of the offering will be used by the Company to invest in an actively managed, high quality portfolio consisting of 15 financial services companies made up of Canadian and U.S. issuers as follows:

Bank of Montreal	National Bank of Canada	Bank of America Corp.
The Bank of Nova Scotia	Manulife Financial Corporation	Citigroup Inc.
Canadian Imperial Bank of Commerce	Sun Life Financial Services of Canada Inc.	Goldman Sachs Group Inc.
Royal Bank of Canada	Great-West Lifeco Inc.	JP Morgan Chase & Co.
The Toronto-Dominion Bank	CI Financial Corp.	Wells Fargo & Co.

The Company’s investment objectives are:
Preferred Shares:
i. to provide holders of the Preferred Shares with fixed, cumulative preferential monthly cash dividends currently in the amount of 5.50% annually, to be set by the Board of Directors annually subject to a minimum of 5.25% until 2020; and
ii. on or about the termination date, currently December 1, 2020 (subject to further 5 year extensions thereafter), to pay the holders of the Preferred Shares $10.00 per Preferred Share.

Class A Shares:
i. to provide holders of the Class A Shares with regular monthly cash dividends in an amount to be determined by the Board of the Directors; and
ii. to permit holders to participate in all growth in the net asset value of the Company above $10 per Unit, by paying holders on or about the termination date of December 1, 2020 (subject to further 5 year extensions thereafter) such amounts as remain in the Company after paying $10 per Preferred Share.

The sales period of this overnight offering will end at 9:00 a.m. EST on April 24, 2019. The offering is expected to close on or about April 30, 2019 and is subject to certain closing conditions including approval by the TSX.

So they’re selling Whole Units for $18.00 at a time when the NAVPU is about $15.90, a premium of about 13.2%. What an awesome business it is!

Royal Bank of Canada has announced (on April 12):

that it does not intend to exercise its right to redeem all or any part of the currently outstanding Non-Viability Contingent Capital (NVCC) Non-Cumulative 5-Year Rate Reset First Preferred Shares, Series AZ (the “Series AZ shares”) on May 24, 2019. There are currently 20,000,000 Series AZ shares outstanding.

Subject to certain conditions set out in the prospectus supplement dated January 23, 2014 relating to the issuance of the Series AZ shares, the holders of the Series AZ shares have the right to convert all or part of their Series AZ shares, on a one-for-one basis, into NVCC Non-Cumulative Floating Rate First Preferred Shares, Series BA (the “Series BA shares”) on May 24, 2019. On such date, holders who do not exercise their right to convert their Series AZ shares into Series BA shares, will continue to hold their Series AZ shares. The foregoing conversion rights are subject to the following:
if Royal Bank of Canada determines that there would be less than 1,000,000 Series BA shares outstanding after taking into account all shares tendered for conversion on May 24, 2019, then holders of Series AZ shares will not be entitled to convert their shares into Series BA shares, and
alternatively, if Royal Bank of Canada determines that there would remain outstanding less than 1,000,000 Series AZ shares after May 24, 2019, then all remaining Series AZ shares will automatically be converted into Series BA shares on a one-for-one basis on May 24, 2019.

In either case, Royal Bank of Canada will give written notice to that effect to holders of Series AZ shares no later than May 17, 2019.

The dividend rate applicable for the Series AZ shares for the 5-year period from and including May 24, 2019 to but excluding May 24, 2024, and the dividend rate applicable to the Series BA shares for the 3-month period from and including May 24, 2019 to but excluding August 24, 2019, will be determined and announced by way of a press release on April 24, 2019.

Beneficial owners of Series AZ shares who wish to exercise their conversion rights should instruct their broker or other nominee to exercise such rights during the conversion period, which runs from April 24, 2019 until 5:00 p.m. (EST) on May 9, 2019.

Inquiries should be directed to Shareholder Relations Officer, Shirley Boudreau, at 416-955-7806.

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

I will have more commentary when the reset rate is announced on April 24.

Canadian Western Bank has announced:

that after having taken into account all election notices received by the April 15, 2019 deadline for conversion of its currently outstanding 5,000,000 non-cumulative 5-year rate reset First Preferred Shares Series 5 (the “Series 5 Preferred Shares”) (TSX: CWB.PR.B) into non-cumulative floating rate First Preferred Shares Series 6 of CWB (the “Series 6 Preferred Shares”), no Series 5 Preferred Shares will be converted into Series 6 Preferred Shares. There were 294,756 Series 5 Preferred Shares elected for conversion, which is less than the minimum 500,000 shares required to give effect to conversion into Series 6 Preferred Shares.

As announced by CWB on April 1, 2019, after April 30, 2019, holders of Series 5 Preferred Shares 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 CWB and subject to the provisions of the Bank Act (Canada). The dividend rate for the five-year period commencing on May 1, 2019, and ending on April 30, 2024, will be 4.301% per annum or $0.2688125 per share per quarter, being equal to the sum of the five-year Government of Canada bond yield as at April 1, 2019, plus 2.76%, as determined in accordance with the terms of the Series 5 Preferred Shares. The quarterly cash dividend was previously $0.275 per Series 5 Preferred Share up to and including the dividend to be paid on April 30, 2019 to shareholders of record on April 23, 2019.

Subject to certain conditions described in the prospectus supplement dated February 3, 2014 relating to the issuance of the Series 5 Preferred Shares, CWB may redeem the Series 5 Preferred Shares, in whole or in part, on April 30, 2024 and on April 30 every five years thereafter.

CWB.PR.B is a FixedReset, 4.40%+276, that commenced trading 2014-2-10 after being announced 2014-1-31. The extension was announced 2019-3-11. It will reset at 4.301% effective May 1, 2019. I recommended against conversion. The issue is tracked by HIMIPref™ but relegated to the Scraps – FixedReset (Discount) index on credit concerns.

National Bank of Canada has announced:

the dividend rates applicable to the Non-Cumulative 5-Year Rate Reset First Preferred Shares, Series 30 (the “Series 30 Preferred Shares”) and the Non-Cumulative Floating Rate First Preferred Shares, Series 31 (the “Series 31 Preferred Shares”).

Holders of Series 30 Preferred Shares, should any remain outstanding after May 15, 2019, 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 May 16, 2019 and ending on May 15, 2024 will be 4.025%, being equal to the sum of the five-year Government of Canada Bond yield (1.625%) plus 2.40%, as determined in accordance with the terms of the Series 30 Preferred Shares.

Holders of Series 31 Preferred Shares, should any be issued on May 15, 2019, will be entitled to receive floating rate non-cumulative preferential cash dividends on a quarterly basis, as and when declared by the Board of Directors of the Bank and subject to the provisions of the Bank Act (Canada). The dividend rate for the three-month period commencing on May 16, 2019 and ending on August 15, 2019, will be 4.060%, being equal to the sum of the 90-day Government of Canada Treasury Bill yield (1.66%) plus 2.40%, calculated on the basis of actual number of days elapsed in such quarterly floating rate period divided by 365, as determined in accordance with the terms of the Series 31 Preferred Shares.

Holders of the Series 30 Preferred Shares have, subject to certain conditions, the right to convert all or part of their Series 30 Preferred Shares on a one-for-one basis into Series 31 Preferred Shares on May 15, 2019.

Beneficial owners of Series 30 shares who wish to exercise their conversion right should communicate as soon as possible with their broker or other nominee and ensure that they follow their instructions in order to meet the deadline to exercise such right, which is April 30, 2019 at 5:00 p.m. (EST).

They previously announced (on March 18):

that it does not intend to exercise its right to redeem all or part of the currently outstanding 14,000,000 Non-Cumulative 5-Year Rate Reset First Preferred Shares, Series 30 (the “Series 30 Preferred Shares”) on May 15, 2019. As a result, subject to certain conditions, the holders of the Series 30 Preferred Shares have the right to convert all or part of their Series 30 Preferred Shares on a one-for-one basis into Non-cumulative Floating Rate First Preferred Shares Series 31 (the “Series 31 Preferred Shares”) on May 15, 2019 in accordance with the terms of the Series 30 Preferred Shares described in the prospectus supplement dated January 31, 2014 to the short form base shelf prospectus dated October 5, 2012.

Holders of Series 30 Preferred Shares who do not exercise their right to convert their Series 30 Preferred Shares into Series 31 Preferred Shares on May 15, 2019 will retain their Series 30 Preferred Shares.

The foregoing conversions are subject to the conditions that: (i) if National Bank determines that there would remain outstanding on May 15, 2019 less than 1,000,000 Series 31 Preferred Shares, after having taken into account all Series 30 Preferred Shares tendered for conversion into Series 31 Preferred Shares, then holders of Series 30 Preferred Shares will not be entitled to convert their shares into Series 31 Preferred Shares, and (ii) alternatively, if National Bank determines that there would remain outstanding on May 15, 2019 less than 1,000,000 Series 30 Preferred Shares, after having taken into account all Series 30 Preferred Shares tendered for conversion into Series 31 Preferred Shares, then all remaining Series 30 Preferred Shares will automatically be converted into Series 31 Preferred Shares without the consent of the holders on May 15, 2019.

In either case, National Bank shall give a notice to that effect to all registered holders of Series 30 Preferred Shares no later than May 8, 2019.

On April 15, 2019, National Bank will give notice of:

i. the annual fixed dividend rate applicable to the Series 30 Preferred Shares to which a holder of Series 30 Preferred Shares will be entitled for the 5-year period from May 16, 2019 up to and including May 15, 2024; and

ii. the floating quarterly dividend rate applicable to the Series 31 Preferred Shares to which a holder of Series 31 Preferred Shares will be entitled for the 3-month period from May 16, 2019 up to and including August 15, 2019.

Beneficial owners of Series 30 shares who wish to exercise their conversion right should communicate with their broker or other nominee to obtain instructions for exercising such right during the conversion period, which will run from April 15, 2019 until April 30, 2019 at 5:00 p.m. (EST).

NA.PR.S is a NVCC-compliant FixedReset, 4.10%+240, that commenced trading 2014-2-7 after being announced 2014-1-29. It is tracked by HIMIPref™ and assigned to the FixedResets-Discount subindex.

The most logical way to analyze the question of whether or not to convert is through the theory of Preferred Pairs, for which a calculator is available. Briefly, a Strong Pair is defined as a pair of securities that can be interconverted in the future (e.g., NA.PR.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 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 +0.68% and +1.42%, respectively. Whatever might be the result of the next few Bank of Canada overnight rate decisions, I suggest that it is unlikely that the average rate over the next five years will be lower than current – but if you disagree, of course, you may interpret the data any way you like.

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

If we plug in the current bid price of the NA.PR.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 trade below the price of their FixedReset counterparts, NA.PR.S. Therefore, it seems likely that I will recommend that holders of NA.PR.S continue to hold the issue and not to convert, but I will wait until it’s closer to the April 30 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.