Category: Issue Comments

Power Financial Corporation has announced:

the applicable dividend rates on its Non-Cumulative 5-Year Rate Reset First Preferred Shares, Series T (the “Series T shares”) and on its Non-Cumulative Floating Rate First Preferred Shares, Series U (the “Series U shares”).

With respect to any Series T shares that will remain outstanding after January 31, 2019, holders thereof will be entitled to receive quarterly fixed non-cumulative preferential cash dividends, if, as and when declared by the Board of Directors of Power Financial. The dividend rate for the 5-year period from and including January 31, 2019 to but excluding January 31, 2024 will be 4.215%, being equal to the 5-year Government of Canada bond yield determined as of today plus 2.37%, in accordance with the terms of the Series T shares.

With respect to any Series U shares that may be issued on January 31, 2019, holders thereof will be entitled to receive quarterly floating rate non-cumulative preferential cash dividends, if, as and when declared by the Board of Directors of Power Financial. The dividend rate for the 3-month floating rate period from and including January 31, 2019 to but excluding April 30, 2019 will be 4.040%, being equal to the 3-month Government of Canada Treasury Bill yield determined as of today plus 2.37%, calculated on the basis of the actual number of days in such quarterly period divided by 365, in accordance with the terms of the Series U shares.

Beneficial owners of Series T shares who wish to exercise their conversion right should communicate with their broker or other nominee to ensure their instructions are followed so that the registered holder of the Series T shares can meet the deadline to exercise such conversion right, which is 5:00 p.m. (EST) on January 16, 2019.

They previously announced (on December 3; emphasis added):

that it does not intend to exercise its right to redeem all or part of the currently outstanding 8,000,000 Non-Cumulative 5-Year Rate Reset First Preferred Shares, Series T (the “Series T shares”) on January 31, 2019. As a result, subject to certain conditions, the holders of the Series T shares have the right to convert all or part of their Series T shares, on a one-for-one basis, into Non-Cumulative Floating Rate First Preferred Shares, Series U (the “Series U shares”) on January 31, 2019 (the “Conversion Date”) in accordance with the prospectus supplement dated December 4, 2013.

Holders of Series T shares who do not exercise their right to convert their Series T shares into Series U shares on the Conversion Date will retain their Series T shares.

The dividend rate applicable to the Series T shares for the 5-year period from January 31, 2019 to but excluding January 31, 2024, and the dividend rate applicable to the Series U shares for the 3-month period from January 31, 2019 to but excluding April 30, 2019, will be determined and announced by way of a news release on January 2, 2019.

Beneficial owners of Series T shares who wish to exercise their conversion right should communicate with their broker or other nominee to obtain instructions for exercising such right during the conversion period, which will run from January 2, 2019 until January 16, 2019 at 5:00 p.m. (EST).

The foregoing conversion rights are subject to the conditions that: (i) if Power Financial determines that there would remain outstanding on the Conversion Date less than 1,000,000 Series U shares, after having taken into account all Series T shares tendered for conversion into Series U shares, then holders of Series T shares will not be entitled to convert their shares into Series U shares, and (ii) alternatively, if Power Financial determines that there would remain outstanding on the Conversion Date less than 1,000,000 Series T shares, after having taken into account all Series T shares tendered for conversion into Series U shares, then all remaining Series T shares will automatically be converted into Series U shares without the consent of the holders, on a one-for-one basis, on the Conversion Date.

In either case, Power Financial will give written notice to that effect to the registered holder of Series T shares no later than January 24, 2019.

PWF.PR.T is a FixedReset, 4.20%+237, that commenced trading 2013-12-11 after being announced 2013-12-2. It is be 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., PWF.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 recent 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 +1.44% and +1.38%, 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 PWF.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, PWF.PR.T. Therefore, it seems likely that I will recommend that holders of PWF.PR.T continue to hold the issue and not to convert, but I will wait until it’s closer to the January 16 notification deadline before making a final pronouncement. I will note that once the 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.

The Bank of Nova Scotia has announced (on December 21):

that it intends to exercise its right to redeem all outstanding Non-cumulative 5-Year Rate Reset Preferred Shares Series 22 of Scotiabank (the “Series 22 Shares”) and Non-cumulative Floating Rate Preferred Shares Series 23 of Scotiabank (the “Series 23 Shares”) on January 28, 2019, at a price equal to $25.00 per share, together with all declared and unpaid dividends. Formal notice will be issued to holders of the Series 22 Shares and Series 23 Shares in accordance with the share conditions. The redemption has been approved by the Office of the Superintendent of Financial Institutions.

On November 27, 2018, the Board of Directors of Scotiabank announced a quarterly dividend of $0.239375 per Series 22 Share, and $0.215885 per Series 23 Share. This will be the final dividend on the Series 22 Shares and Series 23 Shares, and will be paid on the date of the redemption, January 28, 2019, to shareholders of record at the close of business on January 2, 2019. After January 28, 2019, the Series 22 Shares and Series 23 Shares will cease to be entitled to dividends.

BNS.PR.R was issued as a FixedReset, 5.00%+188, that commenced trading 2008-9-9 after being announced 2008-8-26. It was the eighth FixedReset issue. It reset to 3.83% in January 2014.

BNS.PR.C commenced trading as a FloatingReset +188 that came into being as a partial exchange from BNS.PR.R in January 2014.

These issues were not NVCC-compliant and so are considered to be more of the nature of ‘expensive debt’ rather than ‘cheap equity’ – so they are being redeemed.

Brookfield Office Properties Inc. has announced:

that after having taken into account all election notices following the December 17, 2018 conversion deadline for the Class AAA Preference Shares, Series T (the “Series T Shares”) (TSX: BPO.PR.T) tendered for conversion into Class AAA Preference Shares, Series U (the “Series U Shares”), the holders of Series T Shares are not entitled to convert their Series T Shares into Series U Shares. There were 65,139 Series T Shares tendered for conversion, which is less than the 1,000,000 shares required to give effect to conversions into Series U Shares.

The Series T Shares will pay on a quarterly basis, for the five-year period beginning on January 1, 2019, as and when declared by the board of directors of Brookfield, a fixed dividend based on an annual dividend rate of 5.383% per annum (C$0.336438 per share per quarter).

It will be recalled that BPO.PR.T will reset at 5.383% effective January 1, 2019.

BPO.PR.T is a FixedReset, 4.60%+316, that commenced trading 2012-9-13 after being announced 2012-9-5. It is tracked by HIMIPref™, but relegated to the Scraps – FixedReset Discount index on credit concerns.

I recommended against conversion.

Standard & Poor’s has announced:

• •On Dec. 27, 2019, S&P Global Ratings revised its outlook on Innergex Renewable Energy Inc. to negative from stable, and affirmed its ratings, including its ‘BBB-‘ long-term issuer credit rating, on Innergex.
• •We expect Innergex to have weak financial metrics in 2018 due to the timing and financing of acquisitions, although it expects these to improve in 2019.
• •Innergex is issuing nonrecourse debt at the asset level and intends to sell its HS Orka geothermal assets in Iceland, using proceeds to reduce parent-level debt; however, this introduces incremental execution risk.
• •If the debt reduction strategy is delayed or the amount is lower than expected, financial metrics might not recover to the 24%-26% range, which could result in a downgrade.

…
. Innergex has completed a number of acquisitions in 2018 that have increased leverage both through acquired debt and development financing at the corporate level. Although the company expects to de-lever in 2019 through asset level financing and asset sales, we believe that there is execution risk with this strategy. Our financial forecasts project Innergex moving back into the stable range of 24%-26% funds from operations (FFO)-to-debt in 2019. However, they are predicated on completing asset sales, which raises significant execution risk and reflects our outlook revision to negative from stable.

The negative outlook reflects significantly lower FFO-to-debt ratios of about 18% in 2018, compared with expectations of 23% at the ‘BBB-‘ level. S&P Global Ratings’ expects Innergex to face execution risk with its strategy of improving forecast financial metrics through asset level financing and asset sales, and the outlook reflects the deteriorating financial performance. S&P Global Ratings expects FFO-to-debt to recover to the 24%-26% range in 2019 and 2020.

A downgrade could happen if the FFO-to-debt ratio does not recover and remains above 23% over our two-year outlook period. This could result from Innergex’s inability to execute on its asset sale plan that it would use to reduce nonrecourse debt. In addition, given the limited cushion in financial metrics above the 23% FFO-to-debt downgrade trigger, lower-than-expected distributions from its subsidiary assets or an increase in nonrecourse debt used to finance development or acquisition opportunities could lead to a downgrade.

An outlook revision to stable could occur if Innergex deleverages, by paying down bridge and revolving credit facility with asset sales, such that FFO-to-debt metrics return to, and stay in, the 24%-26% range.

Affected issues are INE.PR.A and INE.PR.C.

Algonquin Power & Utilities Corp. has announced:

that none of its outstanding 4,800,000 Cumulative 5-Year Rate Reset Preferred Shares, Series A (the “Series A Preferred Shares”) will be converted on December 31, 2018 into Cumulative Floating Rate Preferred Shares, Series B (the “Series B Preferred Shares”) of the Company. During the conversion notice period which ran from December 3, 2018 to December 17, 2018, less than 1,000,000 Series A Preferred Shares were tendered for conversion into Series B Preferred Shares. As per the terms and conditions of the Series A Preferred Shares described in the short form prospectus dated November 2, 2012 relating to the issuance of Series A Preferred Shares, since there would remain outstanding on December 31, 2018, after having taken into account all Series A Preferred Shares tendered for conversion into Series B Preferred Shares, less than 1,000,000 Series B Preferred Shares, holders of Series A Preferred Shares who tendered their Series A Preferred Shares for conversion will not be entitled to convert their Series A Preferred Shares into Series B Preferred Shares. As a result, Series B Preferred Shares will not be issued at this time.

All dollar amounts referenced herein are in U.S. dollars unless otherwise noted.

It will be recalled that AQN.PR.A will reset at 5.162% effective December 31, 2018.

AQN.PR.A is a FixedReset, 4.50%+294, that commenced trading 2012-11-9 after being announced 2012-10-25. The 2018-11-28 notice of extension was reported on PrefBlog. The issue is tracked by HIMIPref™, but relegated to the Scraps – FixedReset Discount index on credit concerns.

I recommended against conversion.

Element Fleet Management Corp. has announced:

that none of its outstanding Cumulative 5-Year Rate Reset Preferred Shares, Series A (the “Series A shares”) will be converted into Cumulative Floating Rate Preferred Shares, Series B (the “Series B shares”) on December 31, 2018.

During the conversion notice period, which commenced on December 3, 2018 and ended at 5:00 p.m. (EST) on December 17, 2018, 209,460 Series A shares were tendered for conversion into Series B shares. In accordance with Section 4.03(a)(iii) of the rights, privileges, restrictions and conditions attaching to the Series A shares, as provided in the Corporation’s restated articles of incorporation dated October 4, 2016, since there would be outstanding on December 31, 2018 less than 500,000 Series B shares, after having taken into account all Series A shares tendered for conversion into Series B shares, holders of Series A shares who elected to tender their shares for conversion will not have their Series A shares converted into Series B shares on December 31, 2018.

As a result, no Series B shares will be issued on December 31, 2018.

It will be recalled that EFN.PR.A will reset at 6.933% effective December 31, 2018.

EFN.PR.A is a FixedReset, 6.60%+471, that was announced 2013-12-9; HIMIPref™ commenced tracking the issue in September 2015 after it received a DBRS rating. The notice of extension dated 2018-11-20 was reported on PrefBlog. The issue is relegated to the Scraps – FixedReset Discount subindex on credit concerns.

I recommended against conversion.

Investment Executive reported yesterday:

Toronto-based Faircourt Asset Management Inc. is migrating two closed end funds to the NEO Exchange from the Toronto Stock Exchange (TSX), Aequitas NEO Exchange Inc. announced Wednesday.

Faircourt Split Trust, including both units (FCS.UN) and preferred securities (FCS.PR.C), and Faircourt Gold Income Corp. (FGX) will be voluntarily delisted from the TSX effective Dec. 20, and begin trading on NEO on Dec 21, NEO says in a news release.

“We look forward to migrating our funds to NEO later this week and begin realizing costs savings with our listing fees. We are committed to pass along these savings to our securityholders,” says Charles Taerk, president and CEO, Faircourt, in a statement.

Well, I find it hard to believe that Faircourt’s all that pleased about it – when you’re pleased about a business development, you usually put a notice about it on your website – but the Faircourt website has nothing I can find.

Of course, given their performance as reported in the 2017 Annual Report, perhaps they want to draw as little attention to the fund as possible:

Note that the figures reported above for “Faircourt Split Trust” are for the Capital Units only, which at year-end 2017 and year-end 2016 were levered up with the preferred securites big-time … roughly $2 of preferreds per $1 Capital Unit.

FCS.PR.C commenced trading 2014-12-30 after being announced 2014-12-10. It has been tracked by HIMIPref™ but relegated to the Scraps subindex due to credit concerns. It will no longer by tracked by HIMIPref™

DBRS has announced:

downgraded the Issuer Rating and the Medium-Term Notes (MTNs) ratings of AltaGas Ltd. (AltaGas or the Company) to BBB (low) from BBB, and the Preferred Shares – Cumulative rating to Pfd-3 (low) from Pfd-3. The trends on the ratings are now Stable.

The downgrade removes the ratings from Under Review with Developing Implications where they were initially placed following the announcement that the Company had agreed to acquire WGL Holdings Inc. (WGL) in January 2017. Please refer to the DBRS press releases “DBRS Places AltaGas Ltd. Under Review with Developing Implications Following Announcement of WGL Holdings Acquisition,” January 26, 2017; “DBRS Maintains AltaGas Ltd. Under Review with Developing Implications,” November 6, 2017; and “DBRS Comments on AltaGas Ltd. Closing Its Acquisition of WGL Holdings, Inc.,” July 9, 2018.

DBRS’s rating action reflects the significant structural subordination and the weaker credit profile of the Company. Stand-alone debt at AltaGas is structurally subordinated to debt at its subsidiaries: WGL, Washington Gas Light Co. (Washington Gas) and SEMCO Energy, Inc (SEMCO). As at Q3 2018, $6.4 billion of debt at AltaGas, the parent, was subordinated to $3.5 billion of debt at WGL (including $1.8 billion at Washington Gas) and $469 million at SEMCO. Although the acquisition has added scale and diversification to the Company’s utility footprint in the United Sates, it does not mitigate the structural subordination caused by the acquisition. Following the close of the WGL acquisition, certain ring-fencing provisions were implemented whereby Washington Gas became a wholly owned subsidiary of a bankruptcy-remote entity, Wrangler SPE LLC, to insulate the utility and protect it from the financial policies of AltaGas and the financial risk from the rest of the Company’s operations, including the non-regulated operations of WGL. Regulatory conditions for the acquisition provide for restrictions on dividends should equity level fall below 48% of total capitalization at Washington Gas and a restriction on special dividends for the next three years. DBRS is of the opinion that while these ring-fencing provisions are credit positive for Washington Gas, they are credit negative for AltaGas, the parent.

DBRS notes that the credit profile of AltaGas has weakened since the sale of its unencumbered and contracted Northwest B.C Hydroelectric facilities, the San Joaquin gas-fired generation facilities in California and the monetization of its Canadian utility assets through the IPO of AltaGas Canada Inc. (rated BBB (high), Stable by DBRS) to primarily fund the acquisition of WGL. The acquisition of WGL has resulted in higher debt at AltaGas: non-consolidated debt at the parent company was $6.4 billion at Q3 2018 compared with $3.6 billion at Q3 2017. DBRS estimates that the non-consolidated debt-to-capital ratio at AltaGas was approximately 50% at Q3 2018, which is considered high. As part of the funding plan for the acquisition of WGL, the Company completed the sale of $2.4 billion of assets in 2018 with an additional $1.5 billion to $2.0 billion of asset sales to be completed in the first half of 2019, including the remaining 55% interest in the Northwest B.C. Hydroelectric facilities for $1.39 billion that is expected to close in Q1 2019. The Company recently announced additional asset sales of $1.5 billion to $ 2.0 billion and a 56% dividend cut to repay debt and to fund capex in 2019. DBRS is of the view that should the execution, timing and amount of asset sales not materialize as contemplated, the Company’s leverage could remain high and further pressure its credit profile. DBRS notes that the Company has indicated that new debt and debt maturities at WGL (excluding Washington Gas) will be funded at the parent company, while the utilities, Washington Gas and SEMCO, are expected to access the debt markets directly.
…
While an upgrade to the rating is not contemplated in the near term, DBRS could consider upgrading the rating should the Company’s consolidated debt-to-capital ratio improve and stay at or below the 40% level for a sustained period while AltaGas executes on its capital programs. DBRS could revise the rating down should (1) consolidated debt-to-capital remain at or above 50% for a sustained period; (2) the Company fails to execute on the planned asset sales in 2019; or (3) adverse regulatory changes at Washington Gas or SEMCO affect the Company’s business risk profile.

This follows the S&P one notch downgrade to P-3 reported yesterday.

Affected issues are: ALA.PR.A, ALA.PR.B, ALA.PR.E, ALA.PR.G ALA.PR.I and ALA.PR.K.

Standard & Poor’s has announced:

• •S&P Global Ratings lowered its long-term issuer credit rating on utilities and midstream company AltaGas Ltd. to ‘BBB-‘ from ‘BBB’. S&P Global Ratings lowered its rating on the company’s senior unsecured debt to ‘BBB-‘ from ‘BBB’. It lowered its global scale rating on the company’s preferred shares to ‘BB’ from ‘BB+’ and its Canada scale rating on the preferred shares to ‘P-3’ from ‘P-3(High)’.
• •The company is continuing its capital program with a focus on organic opportunities in its midstream and utilities business.
• •Notwithstanding asset sales and a dividend cut to fund its capital program, AltaGas’ financial metrics remain pressured.
• •The negative outlook reflects the possibility that if the company is not able to undertake the proposed asset sales as forecast, further financial pressure will result.

…
The negative outlook reflects the uncertainty associated with the timing and pricing for the proposed asset sales to meet cash needs for the next two years. We expect the company will reduce debt, and that AFFO-to-debt will stay above 10% on a sustained basis by 2020, with regulated utility EBITDA representing approximately 50% of consolidated EBITDA.

We could lower the ratings if AltaGas is not able to sell the planned assets or receives lower-than-expected proceeds, or acquires debt that results in forecast AFFO-to-debt below 10%. We also expect the company to maintain its business mix, which is highly weighted toward the more stable utility cash flows. A material increase in the proportion of more volatile cash flows, such as from riskier midstream or unregulated power, without a corresponding improvement in financial metrics, could also lead to a downgrade.

We could revise the outlook to stable if AltaGas completes the sale as expected, maintains AFFO-to-debt in the 10%-12% range, and is able to successfully integrate WGL Holdings Inc. (and subsidiaries) (WGL).

Affected issues are: ALA.PR.A, ALA.PR.B, ALA.PR.E, ALA.PR.G ALA.PR.I and ALA.PR.K.