Category: Issue Comments

Enbridge Inc. has announced:

that it does not intend to exercise its right to redeem its currently outstanding Cumulative Redeemable Preference Shares, Series P (Series P Shares) (TSX: ENB.PR.P) on March 1, 2019. As a result, subject to certain conditions, the holders of the Series P Shares have the right to convert all or part of their Series P Shares on a one-for-one basis into Cumulative Redeemable Preference Shares, Series Q of Enbridge (Series Q Shares) on March 1, 2019. Holders who do not exercise their right to convert their Series P Shares into Series Q Shares will retain their Series P 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 P Shares outstanding after March 1, 2019, then all remaining Series P Shares will automatically be converted into Series Q Shares on a one-for-one basis on March 1, 2019; and (ii) alternatively, if Enbridge determines that there would be less than 1,000,000 Series Q Shares outstanding after March 1, 2019, no Series P Shares will be converted into Series Q Shares. There are currently 16,000,000 Series P Shares outstanding.

With respect to any Series P Shares that remain outstanding after March 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 P Shares for the five-year period commencing on March 1, 2019 to, but excluding, March 1, 2024 will be 4.379 percent, being equal to the five-year Government of Canada bond yield of 1.879 percent determined as of today plus 2.50 percent in accordance with the terms of the Series P Shares.

With respect to any Series Q Shares that may be issued on March 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 Q Shares for the three-month floating rate period commencing on March 1, 2019 to, but excluding, June 1, 2019 will be 1.04099 percent, based on the annual rate on three month Government of Canada treasury bills for the most recent treasury bills auction of 1.63 percent plus 2.50 percent in accordance with the terms of the Series Q Shares (the Floating Quarterly Dividend Rate). The Floating Quarterly Dividend Rate will be reset every quarter.

Beneficial holders of Series P Shares who wish to exercise their right of conversion during the conversion period, which runs from January 30, 2019 until 5:00 p.m. (EST) on February 14, 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.P is a FixedReset, 4.00%+250, that commenced trading 2012-9-14 after being announced 2012-9-4. It is tracked by HIMIPref™ but is 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., ENB.PR.P 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 +1.41% and +1.22%, 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.P 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.P. Therefore, it seems likely that I will recommend that holders of ENB.PR.P continue to hold the issue and not to convert, but I will wait until it’s closer to the February 14 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.

Enbridge Inc. has announced:

that it does not intend to exercise its right to redeem its currently outstanding Cumulative Redeemable Preference Shares, Series 7 (Series 7 Shares) (TSX: ENB.PR.J) on March 1, 2019. As a result, subject to certain conditions, the holders of the Series 7 Shares have the right to convert all or part of their Series 7 Shares on a one-for-one basis into Cumulative Redeemable Preference Shares, Series 8 of Enbridge (Series 8 Shares) on March 1, 2019. Holders who do not exercise their right to convert their Series 7 Shares into Series 8 Shares will retain their Series 7 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 7 Shares outstanding after March 1, 2019, then all remaining Series 7 Shares will automatically be converted into Series 8 Shares on a one-for-one basis on March 1, 2019; and (ii) alternatively, if Enbridge determines that there would be less than 1,000,000 Series 8 Shares outstanding after March 1, 2019, no Series 7 Shares will be converted into Series 8 Shares. There are currently 10,000,000 Series 7 Shares outstanding.

With respect to any Series 7 Shares that remain outstanding after March 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 7 Shares for the five-year period commencing on March 1, 2019 to, but excluding, March 1, 2024 will be 4.449 percent, being equal to the five-year Government of Canada bond yield of 1.879 percent determined as of today plus 2.57 percent in accordance with the terms of the Series 7 Shares.

With respect to any Series 8 Shares that may be issued on March 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 8 Shares for the three-month floating rate period commencing on March 1, 2019 to, but excluding, June 1, 2019 will be 1.05863 percent, based on the annual rate on three month Government of Canada treasury bills for the most recent treasury bills auction of 1.63 percent plus 2.57 percent in accordance with the terms of the Series 8 Shares (the Floating Quarterly Dividend Rate). The Floating Quarterly Dividend Rate will be reset every quarter.

Beneficial holders of Series 7 Shares who wish to exercise their right of conversion during the conversion period, which runs from January 30, 2019 until 5:00 p.m. (EST) on February 14, 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.J is a FixedReset, 4.40%+257, that commenced trading 2013-12-12 after being announced 2013-12-3. The issue is tracked by HIMIPref™ but relegated to the Scraps – FixedResets (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.J and the FloatingReset that will exist if enough holders convert). Since they will be interconvertible on this future date, it may be assumed that they will be priced identically on this date (if they aren’t then holders will simply convert en masse to the higher-priced issue). And since they will be priced identically on a given date in the future, any current difference in price must be offset by expectations of an equal and opposite value of dividends to be received in the interim. And since the dividend rate on one element of the pair is both fixed and known, the implied average rate of the other, floating rate, instrument can be determined. Finally, we say, we may compare these average rates and take a view regarding the actual future course of that rate relative to the implied rate, which will provide us with guidance on which element of the pair is likely to outperform the other until the next interconversion date, at which time the process will be repeated.

We can show the break-even rates for each FixedReset / FloatingReset Strong Pair graphically by plotting the implied average 3-month bill rate against the next Exchange Date (which is the date to which the average will be calculated).

Click for Big

The market 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 +1.41% and +1.22%, 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.J FixedReset, we may construct the following table showing consistent prices for its soon-may-be-issued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:

Based on current market conditions, I suggest that the FloatingResets that will result from conversion are likely to trade below the price of their FixedReset counterparts, ENB.PR.J. Therefore, it seems likely that I will recommend that holders of ENB.PR.J continue to hold the issue and not to convert, but I will wait until it’s closer to the February 14 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.

Canadian Western Bank has announced:

that it has closed its domestic public offering of non-cumulative 5-year rate reset First Preferred Shares Series 9 (Non-Viability Contingent Capital (NVCC)) (the “Series 9 Preferred Shares”). CWB issued 5,000,000 Series 9 Preferred Shares at a price of $25 per share to raise gross proceeds of $125 million. The offering was underwritten on a bought deal basis by a syndicate led by National Bank Financial Inc. and BMO Capital Markets. Net proceeds from the offering will be added to CWB’s general funds and utilized for general banking purposes.

The Series 9 Preferred Shares will commence trading on the Toronto Stock Exchange today under the ticker symbol CWB.PR.D. The Series 9 Preferred Shares were issued under a prospectus supplement dated January 22, 2019 to CWB’s short form base shelf prospectus dated January 4, 2019.

CWB.PR.D is a FixedReset, 6.00%+404, NVCC-Compliant, announced 2019-01-21. It will be tracked by HIMIPref™ but is relegated to the Scraps FixedReset-Discount subindex on credit concerns.

CWB.PR.D traded 301,959 shares today in a range of 24.61-89 before settling at 24.83-85. Vital statistics are:

There are only three CWB issues, including the new issue, so we can’t do a meaningful Implied Volatility analysis, but we can look at the comparators:

The new issue has caused a dramatic re-pricing of the two pre-existing issues, with CWB.PR.C down 1.29% since January 18, the last close prior to the announcement, and CWB.PR.B down a horrific 9.52%.

The Toronto-Dominion Bank new issue closed today without a formal announcement from the company.

TD.PF.L is a FixedReset, 5.20%+327, announced 2019-01-17. It has been assigned to the FixedReset-Discount subindex.

TD.PF.L traded 688,942 shares today in a range of 24.75-92 before settling at 24.85-88. Vital statistics are:

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

Click for Big

According to this analysis, the fair value of the new issue on January 28 is 22.93, down from 23.32 on January 19. Note that TD.PF.K, a FixedReset, 4.75%+259, NVCC Compliant issue that commenced trading 2018-9-13 after being announced 2018-9-4, was quoted today at 20.80-21, compared to 22.50-65 on January 19. The fair value of TD.PF.K is 20.68 on January 28, according to the analysis, compared to 21.24 on January 19; it is now merely 0.12 rich, compared to 1.26 rich on the TD.PF.L announcement date.

It’s interesting to note that the theoretical spread (on a notional non-callable perpetual resettable annuity) is just a bit more than the actual issue spread for TD.PF.L – which means that TD is basically not just getting the call options on the issue for free, they’re actually being paid to take them!

DBRS has announced that it:

upgraded the Issuer Rating and Preferred Shares rating of Algonquin Power & Utilities Corp. (APUC or the Company) to BBB and Pdf-3 from BBB (low) and Pfd-3 (low), respectively. Both trends are Stable. The ratings reflect a significant improvement of APUC’s business risk profile following the acquisition of the Empire District Electric Company (Empire) and a successful integration of Empire into the Company’s regulated utility operations. The ratings also reflect stable and strong cash flow from its two principal subsidiaries (1) Liberty Utilities Co. (LUCo) – the guarantor of the debt issued by Liberty Utilities Finance GP1 (rated BBB (high) with Stable trends, recently confirmed by DBRS; and (2) Algonquin Power Co. (APCo; operating as Liberty Power Co., recently upgraded to BBB with Stable trends, from BBB (low) by DBRS).

APUC is a holding company with a sizable and well-diversified portfolio of low risk, regulated assets (owned by LUCo) and long-term contracted, non-regulated assets (largely owned by APCo). Regulated assets account for approximately 70% of APUC’s 2018 cash flow (pro forma) while the remaining contribution of APUC’s cash flow is from non-regulated generation assets with an average remaining contract life of approximately 14 years. APUC also has an approximate 41.5% equity investment interest in Atlantica Yield plc, which owns and operates a globally diverse, long-term contracted portfolio clean generating assets. Based on the Company’s current business strategy, DBRS expects the Company’s cash flow from regulated utilities to be in the 65% to 70% range going forward. Should the portion of the regulated cash flow decrease significantly from the current mix, it could negatively affect the current ratings.

The ratings incorporate structural subordination in that any debt issued by APUC is structurally subordinated by the debt issued by LUCo and APCo. The ratings also incorporate the regulatory risk at its regulated subsidiaries and volume and re-contracting risk at its non-regulated assets. Any adverse changes at either the regulated subsidiaries or non-regulated generation assets that may weaken the credit profile of these two main subsidiaries could have a negative impact on the ratings of APUC.

Currently, APUC does not issue long-term debt and has minimal debt at the corporate level. DBRS expects the Company to maintain its non-consolidated credit metrics at a reasonable level on a sustainable basis. Any material increases in non-consolidated leverage or a significant weakening of APUC’s cash flow-to-non-consolidated debt ratio could result in a negative rating action.

Affected issues are AQN.PR.A and AQN.PR.D

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.