Category: Issue Comments

It will be recalled that AX.PR.E will reset at 5.472% effective October 1.

AX.PR.E is a FixedReset, 4.75%+330, that commenced trading 2013-3-31 after being announced 2013-3-12. It must be remembered that these are not actually preferred shares, as the term is usually used; they are preferred units and the distributions will be characterized in the same manner as distributions to the Capital units. The company publishes the characterization of the distributions on its website. Because of the company’s structure, conversion between the FixedReset and FloatingReset is probably (!) a taxable event; i.e., investors will take a capital gain or loss for tax purposes on conversion and reset the Adjusted Cost Base on their new position.

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., AX.PR.E and the FloatingReset that will exist if enough holders convert). Since they will be interconvertible on this future date, it may be assumed that they will be priced identically on this date (if they aren’t then holders will simply convert en masse to the higher-priced issue). And since they will be priced identically on a given date in the future, any current difference in price must be offset by expectations of an equal and opposite value of dividends to be received in the interim. And since the dividend rate on one element of the pair is both fixed and known, the implied average rate of the other, floating rate, instrument can be determined. Finally, we say, we may compare these average rates and take a view regarding the actual future course of that rate relative to the implied rate, which will provide us with guidance on which element of the pair is likely to outperform the other until the next interconversion date, at which time the process will be repeated.

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

Click for Big

The market appears to be relatively uninterested in floating rate product; most of the implied rates until the next interconversion are scattered around the current 3-month bill rate although the averages for investment-grade and junk issues are have diverged slightly, at +1.73% and +1.46%, respectively – pretty close to the market rate. 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 AX.PR.E FixedReset, we may construct the following table showing consistent prices for its soon-may-be-issued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:

Based on current market conditions, I suggest that the FloatingResets that will result from conversion are likely to be cheap and trading below the price of their FixedReset counterparts. Therefore, I recommend that holders of AX.PR.E continue to hold the issue and not to convert.

If you do wish to convert, note that the deadline for notifying the company is 5:00 p.m. (Toronto time) on September 17, 2018.. Brokerages and other intermediaries will normally set their internal deadlines a few days prior to this, so if you want to convert don’t waste any time! Such intermediaries may accept instructions after their internal deadline (but prior to the company deadline, of course) if you grovel in a sufficiently entertaining fashion, but this will only be done on a ‘best efforts’ basis.

I will note that once the FloatingResets commence trading (if, in fact, they do) it may be a good trade to swap the FixedReset for the FloatingReset in the market once both elements of each pair are trading and you can – presumably, according to this analysis – do it with a reasonably good take-out in price, rather than doing it through the company on a 1:1 basis. But that, of course, will depend on the prices at that time and your forecast for the path of policy rates over the next five years. There are no guarantees – my recommendation is based on the assumption that current market conditions with respect to the pairs will continue until the FloatingResets commence trading and that the relative pricing of the two new pairs will reflect these conditions.

It will be recalled that BAM.PF.A will reset at 5.061% effective October 1.

BAM.PF.A is a FixedReset, 4.50%+290 that commenced trading 2012-3-13 after being announced 2012-3-5. It is tracked by HIMIPref™ and assigned to the FixedResets 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., BAM.PF.A and the FloatingReset, BAM.PF.K, that will exist if enough holders convert). Since they will be interconvertible on this future date, it may be assumed that they will be priced identically on this date (if they aren’t then holders will simply convert en masse to the higher-priced issue). And since they will be priced identically on a given date in the future, any current difference in price must be offset by expectations of an equal and opposite value of dividends to be received in the interim. And since the dividend rate on one element of the pair is both fixed and known, the implied average rate of the other, floating rate, instrument can be determined. Finally, we say, we may compare these average rates and take a view regarding the actual future course of that rate relative to the implied rate, which will provide us with guidance on which element of the pair is likely to outperform the other until the next interconversion date, at which time the process will be repeated.

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

Click for Big

The market appears to be relatively uninterested in floating rate product; most of the implied rates until the next interconversion are scattered around the current 3-month bill rate although the averages for investment-grade and junk issues are have diverged slightly, at +1.73% and +1.46%, respectively – pretty close to the market rate. 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 BAM.PF.A FixedReset, we may construct the following table showing consistent prices for its soon-may-be-issued FloatingReset counterpart, BAM.PF.K, given a variety of Implied Breakeven yields consistent with issues currently trading:

Based on current market conditions, I suggest that the FloatingResets that will result from conversion are likely to be cheap and trading below the price of their FixedReset counterparts. Therefore, I recommend that holders of BAM.PF.A continue to hold the issue and not to convert.

If you do wish to convert, note that the deadline for notifying the company is 5:00 p.m. (Toronto time) on September 17, 2018. Brokerages and other intermediaries will normally set their internal deadlines a few days prior to this, so if you want to convert don’t waste any time! Such intermediaries may accept instructions after their internal deadline (but prior to the company deadline, of course) if you grovel in a sufficiently entertaining fashion, but this will only be done on a ‘best efforts’ basis.

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.

BCE Inc. has announced:

NOTICE IS HEREBY GIVEN THAT:

1. Holders of BCE Inc. fixed-rate Series AQ Preferred Shares have the right to convert all or part of their shares, effective on October 1, 2018, on a one-for-one basis, into floating-rate Cumulative Redeemable First Preferred Shares, Series AR of BCE Inc. (the “Series AR Preferred Shares”). In order to convert their shares, holders must exercise their right of conversion during the conversion period, which runs from September 4, 2018 until 5:00 p.m. (Montréal/Toronto time) on September 14, 2018.

2. Holders not wishing to convert or who do not comply with the instructions set out in paragraph 3 below by the appropriate deadline will, subject to paragraph 6 below, retain their Series AQ Preferred Shares and, accordingly, will continue to receive a fixed quarterly dividend as described in paragraph 4 below. However, but subject to paragraph 6 below, on September 30, 2023, and every five years thereafter, holders of both Series AQ Preferred Shares and Series AR Preferred Shares will have the right to convert their shares into shares of the other series.

3. In order to exercise its conversion right in respect of all or part of its Series AQ Preferred Shares, the registered holder must provide a written notice thereof, accompanied by its Series AQ Preferred Share certificates with the transfer form on the back thereof or other appropriate stock transfer power of attorney duly endorsed, and deliver them, at the latest by 5:00 p.m. (Montréal/Toronto time) on September 14, 2018, to one of the following addresses of AST Trust Company (Canada):
By Mail:
By Personal Delivery, Courier or Registered Mail:
P.O. Box 1036 Adelaide Street Postal Station Toronto, (Ontario) M5C 2K4
CANADA Attention: Corporate Actions
1 Toronto Street, Suite 1200
Toronto (Ontario) M5C 2V6
CANADA
Attention: Corporate Actions
Delivery may be done in person, by courier, by registered mail or by mail. However, if share certificates are delivered by courier, by registered mail or by mail, the registered shareholder must ensure that they are sent sufficiently in advance so that they are received by AST Trust Company (Canada) by the above-mentioned deadline.
Beneficial holders 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.

4. The Series AQ Preferred Shares will, should they remain outstanding, pay, on a quarterly basis, as and when declared by the Board of Directors of BCE Inc., a fixed cash dividend for the following five years that will be based on a fixed rate equal to the sum of: (a) the yield to maturity compounded semi-annually (the “Government of Canada Yield”), computed on August 31, 2018 in accordance with the articles of BCE Inc., of a Canadian dollar denominated non-callable Government of Canada bond with a term to maturity of five years, and (b) 2.64%. The “Government of Canada Yield” computed on August 31, 2018 is 2.172%. Accordingly, the annual fixed dividend rate applicable to the Series AQ Preferred Shares for the period of five years beginning on September 30, 2018 will be 4.812%.

5. The Series AR Preferred Shares, if issued, will pay, for each quarterly period beginning with the quarterly period from and including September 30, 2018 up to but excluding December 31, 2018, as and when declared by the Board of Directors of BCE Inc., a quarterly floating dividend rate equal to the “Floating Quarterly Dividend Rate” for such quarterly period. The “Floating Quarterly Dividend Rate” for any such quarterly period shall be equal to the rate, expressed as a percentage, equal to the sum of: (a) the “T-Bill Rate”, calculated in accordance with the articles of BCE Inc. on the 30th day prior to the first day of the new quarterly period, and (b) 2.64%, calculated on the basis of the actual number of days in such quarterly period divided by 365. The “T-Bill Rate” means, for any quarterly period, the average yield expressed as a percentage per annum on three-month Government of Canada Treasury Bills, as reported by the Bank of Canada, for the most recent treasury bills auction preceding the applicable calculation date. The “Floating Quarterly Dividend Rate” computed on August 31, 2018 and applicable to the Series AR Preferred Shares for the quarterly period beginning on September 30, 2018 will be 1.04578% (annual rate of 4.149%, based on an initial T-Bill Rate of 1.509%).

6. After the end of the conversion period on September 14, 2018, if BCE Inc. determines that there would be less than 1,000,000 Series AQ Preferred Shares outstanding after the conversion date (October 1, 2018), BCE Inc. will automatically convert all remaining Series AQ Preferred Shares into Series AR Preferred Shares. However, if BCE Inc. determines that there would be less than 1,000,000 Series AR Preferred Shares outstanding after the conversion date, then no Series AQ Preferred Shares will be converted into Series AR Preferred Shares.

7. For any questions about the steps to be followed, please contact AST Trust Company (Canada) at 1-800-561-0934, the transfer agent and registrar for BCE Inc.’s preferred shares.

DATED in Montréal, this 31st day of August, 2018
(signed)
Glen LeBlanc
Executive Vice-President and Chief Financial Officer
BCE Inc.

BCE.PR.Q is a FixedReset that came into being through an Exchange from BAF.PR.E which in turn commenced trading 2013-2-14 as a FixedReset, 4.25%+264, after being announced 2013-1-30.

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., BCE.PR.Q and the FloatingReset that will exist if enough holders convert). Since they will be interconvertible on this future date, it may be assumed that they will be priced identically on this date (if they aren’t then holders will simply convert en masse to the higher-priced issue). And since they will be priced identically on a given date in the future, any current difference in price must be offset by expectations of an equal and opposite value of dividends to be received in the interim. And since the dividend rate on one element of the pair is both fixed and known, the implied average rate of the other, floating rate, instrument can be determined. Finally, we say, we may compare these average rates and take a view regarding the actual future course of that rate relative to the implied rate, which will provide us with guidance on which element of the pair is likely to outperform the other until the next interconversion date, at which time the process will be repeated.

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

Click for Big

The market appears to be relatively uninterested in floating rate product; the implied rates until the next interconversion bracket the current 3-month bill rate as the averages for investment-grade and junk issues are at +1.44% and +1.34%, 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 BCE.PR.Q FixedReset, we may construct the following table showing consistent prices for its soon-may-be-issued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:

Based on current market conditions, I suggest that the FloatingResets that will result from conversion are likely to be cheap and trading below the price of their FixedReset counterparts. Therefore, it seems likely that I will recommend that holders of BCE.PR.Q continue to hold the issue and not to convert, but I will wait until it’s closer to the September 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.

Brookfield Asset Management Inc. has announced:

that it has determined the fixed dividend rate on its Cumulative Class A Preference Shares, Series 32 (“Series 32 Shares”) (TSX: BAM.PF.A) for the five years commencing October 1, 2018 and ending September 30, 2023…
…
Series 32 Shares and Series 33 Shares

If declared, the fixed quarterly dividends on the Series 32 Shares during the five years commencing October 1, 2018 will be $0.3163125 per share per quarter, which represents a yield of 5.019% on the most recent trading price, similar to the current yield. The new fixed dividend rate that will apply for the five years commencing October 1, 2018 represents a yield of 5.061% based on the redemption price of $25 per share.

Holders of Series 32 Shares have the right, at their option, exercisable not later than 5:00 p.m. (Toronto time) on September 17, 2018, to convert all or part of their Series 32 Shares, on a one-for-one basis, into Cumulative Class A Preference Shares, Series 33 (the “Series 33 Shares”), effective September 30, 2018.

The quarterly floating rate dividends on the Series 33 Shares will be paid at an annual rate, calculated for each quarter, of 2.90% over the annual yield on three-month Government of Canada treasury bills. The actual quarterly dividend rate in respect of the October 1, 2018 to December 31, 2018 dividend period for the Series 33 Shares will be 1.11131% (4.409% on an annualized basis) and the dividend, if declared, for such dividend period will be $0.2778275 per share, payable on December 31, 2018.

Holders of Series 32 Shares are not required to elect to convert all or any part of their Series 32 Shares into Series 33 Shares.

As provided in the share conditions of the Series 32 Shares, (i) if Brookfield determines that there would be fewer than 1,000,000 Series 32 Shares outstanding after September 30, 2018, all remaining Series 32 Shares will be automatically converted into Series 33 Shares on a one-for-one basis effective September 30, 2018; and (ii) if Brookfield determines that there would be fewer than 1,000,000 Series 33 Shares outstanding after September 30, 2018, no Series 32 Shares will be permitted to be converted into Series 33 Shares. There are currently 11,982,568 Series 32 Shares outstanding.

The Toronto Stock Exchange (“TSX”) has conditionally approved the listing of the Series 33 Shares effective upon conversion. Listing of the Series 33 Shares is subject to Brookfield fulfilling all the listing requirements of the TSX and, upon approval, the Series 33 Shares will be listed on the TSX under the trading symbol “BAM.PF.K”.

BAM.PF.A is a FixedReset, 4.50%+290 that commenced trading 2012-3-13 after being announced 2012-3-5. It is tracked by HIMIPref™ and assigned to the FixedResets 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., BAM.PF.A and the FloatingReset BAM.PF.K that will exist if enough holders convert). Since they will be interconvertible on this future date, it may be assumed that they will be priced identically on this date (if they aren’t then holders will simply convert en masse to the higher-priced issue). And since they will be priced identically on a given date in the future, any current difference in price must be offset by expectations of an equal and opposite value of dividends to be received in the interim. And since the dividend rate on one element of the pair is both fixed and known, the implied average rate of the other, floating rate, instrument can be determined. Finally, we say, we may compare these average rates and take a view regarding the actual future course of that rate relative to the implied rate, which will provide us with guidance on which element of the pair is likely to outperform the other until the next interconversion date, at which time the process will be repeated.

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

Click for Big

The market appears to be relatively uninterested in floating rate product; the implied rates until the next interconversion bracket the current 3-month bill rate as the averages for investment-grade and junk issues are at +1.44% and +1.34%, 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 BAM.PR.A 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, BAM.PF.K, that will result from conversion are likely to be cheap and trading below the price of their FixedReset counterparts, BAM.PF.A. Therefore, it seems likely that I will recommend that holders of BAM.PF.A continue to hold the issue and not to convert, but I will wait until it’s closer to the September 17 notification deadline before making a final pronouncement. I will note that once the FloatingResets commence trading (if, in fact, they do) it may be a good trade to swap the FixedReset for the FloatingReset in the market once both elements of each pair are trading and you can – presumably, according to this analysis – do it with a reasonably good take-out in price, rather than doing it through the company on a 1:1 basis. But that, of course, will depend on the prices at that time and your forecast for the path of policy rates over the next five years. There are no guarantees – my recommendation is based on the assumption that current market conditions with respect to the pairs will continue until the FloatingResets commence trading and that the relative pricing of the two new pairs will reflect these conditions.

Manulife Financial Corporation has announced (although not yet on their website):

that after having taken into account all election notices received by the September 4, 2018 deadline for conversion of its currently outstanding 8,000,000 Non-cumulative Rate Reset Class 1 Shares Series 13 (the “Series 13 Preferred Shares”) (TSX: MFC.PR.K) into Non-cumulative Floating Rate Class 1 Shares Series 14 of Manulife (the “Series 14 Preferred Shares”), the holders of Series 13 Preferred Shares are not entitled to convert their Series 13 Preferred Shares into Series 14 Preferred Shares. There were 140,179 Series 13 Preferred Shares elected for conversion, which is less than the minimum one million shares required to give effect to conversions into Series 14 Preferred Shares.

As announced by Manulife on August 21, 2018, after September 19, 2018, holders of Series 13 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 Manulife and subject to the provisions of the Insurance Companies Act (Canada). The dividend rate for the five-year period commencing on September 20, 2018, and ending on September 19, 2023, will be 4.41400% per annum or $0.275875 per share per quarter, being equal to the sum of the five-year Government of Canada bond yield as at August 21, 2018, plus 2.22%, as determined in accordance with the terms of the Series 13 Preferred Shares.

Subject to certain conditions described in the prospectus supplement dated June 17, 2013 relating to the issuance of the Series 13 Preferred Shares, Manulife may redeem the Series 13 Preferred Shares, in whole or in part, on September 19, 2023 and on September 19 every five years thereafter.

It will be recalled that MFC.PR.K will reset at 4.414% effective September 19.

MFC.PR.K is a FixedReset, 3.80%+222, that commenced trading 2013-6-21 after being announced 2013-6-17. The announcement of extension has been previously reported. The issue is tracked by HIMIPref™ and is assigned to the FixedReset subindex. Since it is an insurance holding company issue without a NVCC clause, a Deemed Maturity at par as of 2025-1-31 has been added to the redemption schedule as is my normal practice.

I previously recommended against conversion.

Tim Kiladze wrote a piece in the Globe today titled Dundee Corp. faces investor spat over preferred share repayment:

On Tuesday, Maryland-based Roumell Asset Management, which says it holds 3.6 million shares, or 6.4 per cent of Dundee, released a public letter to the company’s board of directors asking for Dundee’s preferred shares that come due in 2019 to be extended and given a new, discounted price.
…
Dundee declined to comment Tuesday, but on an August conference call, executive chairman Jonathan Goodman addressed the complexity of the matter. “We’re in the very unique position that the preferred shareholders don’t want us to give them stock and neither do a lot of the common shareholders. But I think we have to be pragmatic,” he said, alluding to the company’s cash levels.

Assiduous Readers will remember that I wrote about DC.PR.E in August – that post contains links to posts from all the huffing and puffing in 2016 about the previous arrangement that gave rise to the existence of the issue.

The Roumell letter advocates:

We believe the company should offer the current Series 5 preferred shareholders appropriately discounted (from par value), and extended, preferred shares. Dundee’s financial position has deteriorated significantly since January 2016 and the discount offered to the Series 5 preferred shareholders must reflect this new reality. In the absence of the Series 5 preferred shareholders accepting a newly discounted, and extended, security, Roumell Asset Management would support honoring the obligation by issuing common stock. While we speak only for ourselves, we believe other large shareholders view the situation similarly.

So who’s Roumell? They run a fund:

The Roumell Opportunistic Value Fund (Institutional share/RAMSX) follows the same deep-value, Opportunistic Capital Allocation (OCA) strategy that we have adhered to since 1998. The Roumell Opportunistic Value Fund seeks to achieve its objective by holding a combination of equity, debt and cash reflecting a broad mandate to pursue value where we find it. In the absence of sufficient investment opportunities, the Fund will hold cash. The Fund is managed by Jim Roumell.

The appropriate benchmark for this kind of fund is difficult to determine, but they mention the Russell 2000 Value Index in their quarterly fact sheet, so let’s go with that until we’re told differently. The fund has achieved an “Average Annual Total Return as of Quarter Ending 6/30/2018” of 0.77% over the past five years compared to 11.72% for the Vanguard Russell 2000 Value Index Fund Institutional Shares VRTVX in the five years to 2018-8-31. Sorry about the period mismatch, but it seems we’re not talking about fractions of a basis point here! Let’s just say I’m not busy mortgaging my house so I can place money with Roumell! They do give returns for other strategies in the 18Q2 Investors’ Letter … you can decide for yourselves whether you want to mortgage your houses.

DC.PR.E closed at 18.47 today … a good bounce off the lows, but hardly a vote of confidence in the company’s ability to redeem at par next year.

It will be recalled that MFC.PR.K will reset at 4.414% effective September 19.

MFC.PR.K is a FixedReset, 3.80%+222, that commenced trading 2013-6-21 after being announced 2013-6-17. The announcement of extension has been previously reported. The issue is tracked by HIMIPref™ and is assigned to the FixedReset subindex. Since it is an insurance holding company issue without a NVCC clause, a Deemed Maturity at par as of 2025-1-31 has been added to the redemption schedule as is my normal practice.

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., MFC.PR.K and the FloatingReset, MFC.PR.S, that will exist if enough holders convert). Since they will be interconvertible on this future date, it may be assumed that they will be priced identically on this date (if they aren’t then holders will simply convert en masse to the higher-priced issue). And since they will be priced identically on a given date in the future, any current difference in price must be offset by expectations of an equal and opposite value of dividends to be received in the interim. And since the dividend rate on one element of the pair is both fixed and known, the implied average rate of the other, floating rate, instrument can be determined. Finally, we say, we may compare these average rates and take a view regarding the actual future course of that rate relative to the implied rate, which will provide us with guidance on which element of the pair is likely to outperform the other until the next interconversion date, at which time the process will be repeated.

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

Click for Big

The market appears to be relatively uninterested in floating rate product; most of the implied rates until the next interconversion are scattered around the current 3-month bill rate and the averages for investment-grade and junk issues are similar, at +1.58% and +1.29%, respectively – pretty close to the market rate. 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 MFC.PR.K FixedReset, we may construct the following table showing consistent prices for its soon-may-be-issued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:

Based on current market conditions, I suggest that the FloatingResets that will result from conversion are likely to be cheap and trading below the price of their FixedReset counterparts. Therefore, I recommend that holders of MFC.PR.K continue to hold the issue and not to convert.

If you do wish to convert, note that the deadline for notifying the company is 5:00 p.m. (Toronto time) on September 4, 2018. Brokerages and other intermediaries will normally set their internal deadlines a few days prior to this, so if you want to convert don’t waste any time! Such intermediaries may accept instructions after their internal deadline (but prior to the company deadline, of course) if you grovel in a sufficiently entertaining fashion, but this will only be done on a ‘best efforts’ basis.

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.

Artis Real Estate Investment Trust has announced:

that it does not intend to exercise its right to redeem all or any part of the currently outstanding Preferred Units, Series E (“Series E Units”) (AX.PR.E) on September 30, 2018.

As a result, and subject to certain conditions set forth in the certificate of preferred units terms relating to the Series E Units dated effective March 21, 2013 (the “Certificate of Series E Unit Terms”), the holders of Series E Units will have the right to elect to reclassify all or any of their Series E Units into Preferred Units, Series F (“Series F Units”) of Artis on the basis of one Series F Unit for each Series E Unit on September 30, 2018.

With respect to any Series E Units that remain outstanding after September 30, 2018, holders thereof will be entitled to receive distributions, if, as and when declared by the Board of Trustees of Artis, in an annual amount per Series E Unit determined by multiplying the Annual Fixed Distribution Rate for such subsequent fixed rate period by $25.00, and shall be payable quarterly on the last business day of each of March, June, September and December in each year during such subsequent fixed rate period. For the initial subsequent fixed rate period commencing on October 1, 2018, the Annual Fixed Distribution Rate is 5.472% per annum.

With respect to any Series F Units that may be issued on September 30, 2018, holders thereof will be entitled to receive distributions, if, as and when declared by the Board of Trustees of Artis, in an amount per Series F Unit determined by multiplying the Floating Quarterly Distribution Rate (calculated on the basis of the actual number of days elapsed in such quarterly floating rate period, divided by 365) by $25.00, which shall be payable quarterly on the last business day of such quarterly floating rate period. For the initial quarterly floating rate period commencing October 1, 2018, the Floating Quarterly Distribution Rate is 4.809% per annum.

As provided in the Certificate of Series E Unit Terms: (i) if Artis determines that there would remain outstanding on September 30, 2018 less than 500,000 Series E Units, all remaining Series E Units shall be reclassified automatically into Series F Units on a one-for-one basis, effective September 30, 2018; or (ii) if Artis determines that less than 500,000 Series F Units would be issued based upon the elections of holders, then holders of Series E Units shall not be entitled to reclassify their Series E Units into Series F Units.

As at the date hereof, there are an aggregate of 4,000,000 Series E Units issued and outstanding.

The Series E Units are issued in “book entry only” form and must be purchased or transferred through a participant in the CDS depository service (each, a “CDS Participant”). All rights of holders of Series E Units must be exercised through CDS or the CDS Participant through which the Series E Units are held. The deadline for the registered holder of Series E Units to provide notice of exercise of the right to reclassify Series E Units into Series F Units is 5:00 p.m. (Toronto time) on September 17, 2018. Any notices received after this deadline will not be valid. As such, holders of Series E Units who wish to exercise their right to reclassify their Series E Units into Series F Units should contact their broker or intermediary for more information and it is recommended that this be done well in advance of the deadline in order to provide the broker or other intermediary with time to complete the necessary steps.

If Artis does not receive an election notice from a holder of Series E Units during the time fixed therefor, then the Series E Units shall be deemed not to have been reclassified (other than pursuant to an automatic reclassification). Holders of Series E Units and Series F Units will have the opportunity to reclassify their units again on September 30, 2023, and every five years thereafter as long as such units remain outstanding.

The Toronto Stock Exchange (TSX) has conditionally approved the listing of the Series F Units effective upon reclassification. Listing of the Series F Units is subject to Artis fulfilling all the listing requirements of the TSX.

AX.PR.E is a FixedReset, 4.75%+330, that commenced trading 2013-3-31 after being announced 2013-3-12. It must be remembered that these are not actually preferred shares, as the term is usually used; they are preferred units and the distributions will be characterized in the same manner as distributions to the Capital units. The company publishes the characterization of the distributions on its website. Because of the company’s structure, conversion between the FixedReset and FloatingReset is probably (!) a taxable event; i.e., investors will take a capital gain or loss for tax purposes on conversion and reset the Adjusted Cost Base on their new position.

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., AX.PR.E and the FloatingReset that will exist if enough holders convert). Since they will be interconvertible on this future date, it may be assumed that they will be priced identically on this date (if they aren’t then holders will simply convert en masse to the higher-priced issue). And since they will be priced identically on a given date in the future, any current difference in price must be offset by expectations of an equal and opposite value of dividends to be received in the interim. And since the dividend rate on one element of the pair is both fixed and known, the implied average rate of the other, floating rate, instrument can be determined. Finally, we say, we may compare these average rates and take a view regarding the actual future course of that rate relative to the implied rate, which will provide us with guidance on which element of the pair is likely to outperform the other until the next interconversion date, at which time the process will be repeated.

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

Click for Big

The market appears to be relatively uninterested in floating rate product; the implied rates until the next interconversion bracket the current 3-month bill rate as the averages for investment-grade and junk issues are at +1.58% and +1.33%, respectively. Whatever might be the result of the next few Bank of Canada overnight rate decisions, I suggest that it is unlikely that the average rate over the next five years will be lower than current – but if you disagree, of course, you may interpret the data any way you like.

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

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

Based on current market conditions, I suggest that the FloatingResets that will result from conversion are likely to be cheap and trading below the price of their FixedReset counterparts. Therefore, it seems likely that I will recommend that holders of AX.PR.E continue to hold the issue and not to convert, but I will wait until it’s closer to the September 17 notification deadline before making a final pronouncement. I will note that once the FloatingResets commence trading (if, in fact, they do) it may be a good trade to swap the FixedReset for the FloatingReset in the market once both elements of each pair are trading and you can – presumably, according to this analysis – do it with a reasonably good take-out in price, rather than doing it through the company on a 1:1 basis. But that, of course, will depend on the prices at that time and your forecast for the path of policy rates over the next five years. There are no guarantees – my recommendation is based on the assumption that current market conditions with respect to the pairs will continue until the FloatingResets commence trading and that the relative pricing of the two new pairs will reflect these conditions.

PerpetualDiscounts now yield 5.54%, equivalent to 7.20% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 3.95%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 325bp, a slight (and perhaps spurious) narrowing from the 330bp reported August 22.

Brompton Funds Limited has announced:

that at special meetings of preferred and class A shareholders (“Shareholders”) of Dividend Growth Split Corp. (“DGS”) and Brompton Split Banc Corp. (“SBC”) held today, Shareholders approved special resolutions to implement amendments to update and modernize the investment objectives, investment strategies and investment restrictions of DGS and SBC as well as certain other matters set out in the joint management information circular dated July 27, 2018 (the “Circular”).

For DGS, the changes to the investment objectives, strategy and restrictions are primarily designed to accomplish the following:
i) expand the investable universe of high quality dividend growth companies from which the portfolio manager can select by expanding the financial metrics that may be used to analyze the portfolio constituents, including forward-looking metrics;
ii) provide for up to 20% of the portfolio to be invested, from time to time, in global dividend growth companies; and
iii) allow the Manager to rebalance and/or reconstitute the portfolio more frequently than annually, at its discretion, for reasons other than the suspension of dividends, mergers or fundamental corporate actions or exceptional circumstances, so that DGS may respond to security or market developments on a timely basis.
…
Further information relating to these and other changes are described in more detail in the Circular. These changes are expected to be implemented as soon as reasonably possible.

I do not view this loosening of restrictions as being material.