Category: Issue Comments

It will be recalled that MFC.PR.J will reset at 4.731% effective March 20.

MFC.PR.J is currently a FixedReset, 4.00%+261, that commenced trading 2012-12-4 after being announced 2012-11-27. It is tracked by HIMIPref™ and is assigned to the FixedReset sub-index.

As this issue is not NVCC compliant and it is an insurance issue, it is analyzed as having a Deemed Retraction, effective 2025-1-31 (this date may change in the future).

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.J 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 quite different, at +1.27% and +1.86%, respectively – although these break-even rates are much closer to the market rate than has been case for recent resets! 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.J FixedReset, we may construct the following table showing consistent prices for its soon-may-be-issued FloatingReset counterpart, MFC.PR.S, 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.J continue to hold the issue and not to convert.

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

p>Industrial Alliance Insurance and Financial Services Inc. has announced (emphasis added):

that, following its February 5, 2018 announcement of its intention to create a holding company, it has entered into an arrangement agreement (the “Arrangement Agreement”) with a newly created entity, iA Financial Corporation Inc. (“iAFC”), and that its Board of Directors is unanimously recommending that common shareholders vote in favour of a plan of arrangement (the “Plan of Arrangement”) that, upon completion, would result in iAFC becoming a holding company as well as the parent corporation of the Company.

The purpose of the arrangement transaction (the “Arrangement”) is to adapt the Company’s legal and corporate structure to the group’s current size, allow greater financial and, commercial flexibility in pursuing its growth strategy and better reflect the diversification of its business. It will also provide the Company with a corporate structure that is as flexible as and substantially similar to that of its principal competitors.

In recommending that common shareholders vote in favour of the Plan of Arrangement, the Board of Directors considered and relied on, among other factors, an opinion received from National Bank Financial Inc. to the effect that, subject to the assumptions, limitations and qualifications set out in such opinion, the proposed Arrangement is fair, from a financial point of view, to the Company’s common shareholders.

Under the Plan of Arrangement, the existing assets and liabilities of the Company would, immediately following the Arrangement, remain with the Company, and iAFC would own all of the outstanding common shares of the Company. Common shareholders of the Company would become common shareholders of the new publicly-traded iAFC. Upon shareholder, Court and all statutory and regulatory approvals having been obtained and the subsequent effectiveness of the Plan of Arrangement, the Company’s common shares would be exchanged for common shares of iAFC, on a one-to-one basis, and shareholders would not be required to take any action for the exchange of shares.

Holders of the Company’s then publicly issued and outstanding preferred shares (collectively, the “Preferred Shares”) will remain holders of the Company’s Preferred Shares, and holders of the Company’s then publicly issued and outstanding debentures (collectively, the “Debentures”) will remain holders of Debentures of the Company. The Arrangement Agreement provides as a condition, among others, that iAFC must sign and deliver unconditional and irrevocable guarantees with respect to the Company’s payment obligations on the outstanding Preferred Shares and Debentures.

Further details of the Arrangement will be included in the Company’s Management Proxy Circular (the “Circular”) for the 2018 Annual Meeting of Shareholders and Participating Policyholders to be combined with a Special Meeting of Shareholders to consider the Arrangement that will be held on May 10, 2018 (the “Meeting”), which Circular is expected to be mailed to shareholders in early April. Assuming shareholder approval, the Arrangement would become effective following the Meeting, pending the approval and sanction of the Arrangement by the Superior Court of Quebec (the “Court”) and the authorization of the minister of Finance (Québec) following a report in respect thereof by the Autorité des marchés financiers (Québec) under the applicable provisions of the Act respecting insurance (Québec). It is currently anticipated that the Company will be filing the relevant materials with a view to obtaining an Interim Order from the Court for the Arrangement and the Meeting in the coming weeks.

In addition, the Company notes that it has tabled a private bill with the National Assembly of Quebec, the purpose of which is to specifically permit the Company to proceed with the Arrangement notwithstanding the existing provision in the special statute governing it that prohibits any person (together with its associates) from acquiring, directly or indirectly, voting shares representing 10% or more of the voting rights attached to such shares (the “10% Voting and Ownership Limitation”) and, following which the 10% Voting and Ownership Limitation would apply at the level of iAFC as the new parent and publicly traded holding company. As tabled, the private bill also contemplates that it shall be prohibited for any person to proceed with a transaction as a result of which, following the Arrangement, iAFC would cease to hold, directly or indirectly, 100% of the voting rights attached to the Company’s voting shares.

Norton Rose Fulbright is acting as external legal advisors to the Company with respect to the Arrangement.

I’m very pleased to see that the preferred shares will remain at the operating level – it’s always better to be closer to the money! Structural subordination can, on occasion, be deemed by the Credit Rating Agencies to be worth a notch of credit.

Affected issues are IAG.PR.A and IAG.PR.G, as well as the new issue announced today.

AllBanc Split Corp. has announced:

The Board of Directors of AllBanc Split Corp. (the “Company”) has today declared dividends of $0.3164 per Preferred Share and $0.5600 per Capital Share, payable on March 9, 2018 to holders of record at the close of business on March 7, 2018.

The Class A Capital Shares (“Capital Shares”) and Class C Preferred Shares, Series 1 (“Preferred Shares”) will be redeemed by the Company in accordance with their terms on March 9, 2018 and the Company will wind up and terminate as soon as practicable after such date. Pursuant to these provisions, the Preferred Shares will be redeemed at a price per share equal to the lesser of $31.64 and the net asset value per unit. The Capital Shares will be redeemed at a price per share equal to the amount by which the net asset value per unit exceeds $31.64.

Holders of Capital Shares who requested to receive their redemption payment in portfolio shares and gave notice to this effect and tendered $31.64 for each Capital Share by February 9, 2018 will receive their pro rata share of the portfolio shares. The redemption of Capital Shares and Preferred Shares will constitute a taxable disposition of the Company’s shares at the time of the redemption whether the payment is received in the form of cash or portfolio shares.

A further press release will be issued by the Company in connection with the redemption prices on March 8, 2018. Payment of the amounts due to holders of Capital Shares and Preferred Shares will be made by the Company on March 9, 2018.

AllBanc Split Corp. is a mutual fund corporation created to hold a portfolio of publicly listed common shares of selected Canadian chartered banks. Class A Capital Shares, and Class C Preferred Shares of AllBanc Split Corp. are listed for trading on The Toronto Stock Exchange under the symbols ABK.A and ABK.PR.C respectively.

ABK.PR.C is a SplitShare paying 4.00% that commenced trading 2013-3-8 after being announced 2013-1-29. It has been tracked by HIMIPref™ but relegated to the Scraps index on volume concerns.

Despite the company’s caution regarding the expected redemption price of the issue, full payment seems assured given the NAVPU of 106.78 on 2018-2-15.

Allbanc Split Corp. II has announced (on 2018-2-15):

that it has called 42,667 Preferred Shares for cash redemption on February 28, 2018 (in accordance with the Company’s Articles of Incorporation, as amended) representing approximately 7.282% of the outstanding Preferred Shares as a result of the special annual retraction of 85,334 Capital Shares by the holders thereof. The Preferred Shares shall be redeemed on a pro rata basis, so that each holder of Preferred Shares of record on February 26, 2018 will have approximately 7.282% of their Preferred Shares redeemed. The redemption price for the Preferred Shares will be $25.67 per share.

Holders of Preferred Shares that are on record for dividends but have been called for redemption will be entitled to receive dividends thereon which have been declared but remain unpaid up to but not including February 28, 2018.

Payment of the amount due to holders of Preferred Shares will be made by the Company on February 28, 2018. From and after February 28, 2018 the holders of Preferred Shares that have been called for redemption will not be entitled to dividends or to exercise any right in respect of such shares except to receive the amount due on redemption.

Allbanc Split Corp. II is a mutual fund corporation created to hold a portfolio of publicly listed common shares of selected Canadian chartered banks. Capital Shares and Preferred Shares of Allbanc Split Corp. II are listed for trading on The Toronto Stock Exchange under the symbols ALB and ALB.PR.C respectively.

ALB.PR.C is a SplitShare “yielding approximately 4.75% annually on the initial issue price”, maturing 2021-2-28, that commenced trading 2016-2-26. It is tracked by HIMIPref™ but relegated to the Scraps index on volume concerns.

Enbridge Inc. has announced:

that after having taken into account all conversion notices received from holders of its outstanding Cumulative Redeemable Preference Shares, Series D (Series D Shares) by the February 14, 2018 deadline for the conversion of the Series D Shares into Cumulative Redeemable Preference Shares, Series E of Enbridge (Series E Shares), less than the 1,000,000 Series D Shares required to give effect to conversions into Series E Shares were tendered for conversion. As a result, none of Enbridge’s outstanding Series D Shares will be converted into Series E Shares on March 1, 2018.

ENB.PR.D is now a FixedReset, 4.46%+237, that commenced trading (with a 4.00% coupon) 2011-11-23 after being announced 2011-11-14. It is tracked by HIMIPref™ but relegated to the Scraps subindex on credit concerns.

It will be recalled that ENB.PR.D will reset to 4.46% effective March 1 and I recommended against conversion.

Manulife Financial Corporation has announced (emphasis added):

the applicable dividend rates for its Non-cumulative Rate Reset Class 1 Shares Series 11 (the “Series 11 Preferred Shares”) (TSX: MFC.PR.J) and Non-cumulative Floating Rate Class 1 Shares Series 12 (the “Series 12 Preferred Shares”).

With respect to any Series 11 Preferred Shares that remain outstanding after March 19, 2018, holders thereof will be entitled to receive fixed rate non-cumulative preferential cash dividends on a quarterly basis, as and when declared by the Board of Directors of Manulife and subject to the provisions of the Insurance Companies Act (Canada). The dividend rate for the five-year period commencing on March 20, 2018, and ending on March 19, 2023, will be 4.73100% per annum or $0.295688 per share per quarter, being equal to the sum of the five-year Government of Canada bond yield as at February 20, 2018, plus 2.61%, as determined in accordance with the terms of the Series 11 Preferred Shares.

With respect to any Series 11 Preferred Shares that may be issued on March 19, 2018 in connection with the conversion of the Series 11 Preferred Shares into the Series 12 Preferred Shares, holders thereof will be entitled to receive floating rate non-cumulative preferential cash dividends on a quarterly basis, calculated on the basis of actual number of days elapsed in each quarterly floating rate period divided by 365, 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 three-month period commencing on March 20, 2018, and ending on June 19, 2018, will be 0.96209% (3.81700% on an annualized basis) or $0.240523 per share, being equal to the sum of the three-month Government of Canada Treasury bill yield as at February 20, 2018, plus 2.61%, as determined in accordance with the terms of the Series 12 Preferred Shares.

Beneficial owners of Series 11 Preferred Shares who wish to exercise their right of conversion should instruct their broker or other nominee to exercise such right before 5:00 p.m. (Toronto time) on March 5, 2018. The news release announcing such conversion right was issued on February 12, 2018 and can be viewed on SEDAR or Manulife’s website. Conversion inquiries should be directed to Manulife’s Registrar and Transfer Agent, AST Trust Company (Canada), at 1‑800-783-9495.

The Toronto Stock Exchange (“TSX”) has conditionally approved the listing of the Series 12 Preferred Shares effective upon conversion. Listing of the Series 12 Preferred Shares is subject to Manulife fulfilling all the listing requirements of the TSX and, upon approval, the Series 12 Preferred Shares will be listed on the TSX under the trading symbol “MFC.PR.S”.

MFC.PR.J is a FixedReset, 4.00%+261, that commenced trading 2012-12-4 after being announced 2012-11-27. It is tracked by HIMIPref™ and is assigned to the FixedReset sub-index.

As this issue is not NVCC compliant and it is an insurance issue, it is analyzed as having a Deemed Retraction, effective 2025-1-31 (this date may change in the future).

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.J 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 slightly below current market rates, at +1.23% and +0.93%, respectively – although these break-even rates are much closer to the market rate than has been case for recent resets! 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.J FixedReset, we may construct the following table showing consistent prices for its soon-may-be-issued FloatingReset counterpart, MFC.PR.S, 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 MFC.PR.J continue to hold the issue and not to convert, but I will wait until it’s closer to the March 5, 2018 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.

Standard & Poor’s has announced:

• •We are affirming our ratings on Innergex Renewable Energy Inc., including our ‘BBB-‘ long-term corporate credit rating on the company, and removing the ratings from CreditWatch with positive implications.
• •We believe the acquisition of Alterra Power Corp. increases Innergex’s scale and improves diversity by geography and fuel-type or resource.
• •We are revising our financial risk profile to significant from
  intermediate after the additional debt used to fund the cash portion of the acquisition.

• •The stable outlook reflects our expectation that Innergex’s portfolio of power generation facilities will continue to operate under long-term contracts with investment-grade counterparties and generate fairly predictable cash flows to support its holding-company debt obligations.

…
S&P Global Ratings today affirmed its ‘BBB-‘ long-term corporate credit rating on Longueuil, Que.-based Innergex Renewable Energy Inc. At the same time, S&P Global Ratings affirmed its ‘BB’ global scale rating and ‘P-3’ Canada scale rating on the company’s preferred shares. S&P Global Ratings removed the ratings from CreditWatch with positive implications, where they were placed Nov. 2, 2017. The outlook is stable.
…
A downgrade could happen if FFO-to-debt ratio consistently falls below 23% over our outlook period. This could result from increased costs at projects under construction resulting in increased capital contributions from Innergex funded through debt, or from a significant reduction in cash flows from its
projects due to operational challenges.

An upgrade could happen if Innergex continues to meet projections while FFO-to-debt moves materially higher than 35%. This could result from increased cash flows from new projects or new acquisitions or deleveraging with paying
down of debt or lower balances outstanding on the credit facility.

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

Manulife Financial Corporation has announced:

that it has completed its offering of 10 million Non-cumulative Rate Reset Class 1 Shares Series 25 (the “Series 25 Preferred Shares”) at a price of $25 per share to raise gross proceeds of $250 million.

The offering was underwritten by a syndicate of investment dealers co-led by RBC Capital Markets, Scotiabank and TD Securities. The Series 25 Preferred Shares commence trading on the Toronto Stock Exchange today under the ticker symbol MFC.PR.Q.

The Series 25 Preferred Shares were issued under a prospectus supplement dated February 12, 2018 to Manulife’s short form base shelf prospectus dated December 15, 2017.

MFC.PR.Q is a FixedReset, 4.70%+255, announced 2018-2-12. It will be tracked by HIMIPref™ and has been assigned to the FixedReset sub-index.

As this issue is not NVCC compliant and it is an insurance issue, it is analyzed as having a Deemed Retraction, effective 2025-1-31 (this date may change in the future).

The issue traded 798,808 shares today in a range of 24.70-94 before closing at 24.90-94. Vital statistics are:

This issue looks quite expensive to me, according to Implied Volatility Analysis:

Click for Big

We see in this chart many of the same features we saw when reviewing the recent BIP.PR.E, BEP.PR.M, CM.PR.S and NA.PR.E: the curve is very steep, with Implied Volatility equal to 40% (a ridiculously large figure).

The ludicrously high figure of Implied Volatility is something I take to mean that the underlying assumption of the Black-Scholes model, that of no directionality of prices, is not accepted by the market; the market seems to be taking the view that since things seem rosy now, they will always be rosy and everything will trade near par in the future.

If the MFC series were an isolated example of this behaviour, I would grin smugly to myself and declare that the implied directionality was a strong indication that the market is starting to take my predictions of Deemed Retraction seriously; but it’s not isolated. In addition, if the market was accounting for future redemption, I would expect the projected yields-to-deemed-retraction to be lower.

In the absence of DeemedRetraction, I balk at ascribing a 100% probability to the ‘all issues will be called, or at least exhibit price stability’ hypothesis. There may still be a few old geezers amongst the Assiduous Readers of this blog who can still (faintly) remember the Great Bear Market of 2014-16, in which quite a few similar assumptions made earlier turned out to be slightly inaccurate. The extra cushion implied by an Issue Reset Spread that is well over the market spread is worth something, even if nothing gets called.

All told, though, I have no hesitation in slapping an ‘Expensive’ label on this issue – according to the Implied Volatility analysis shown above, the theoretical price of the new issue without any accounting for the potential of a DeemedRetraction is 23.76. The two near-par issues, MFC.PR.Q and MFC.PR.J, form a noticeably expensive pothole in the plotted curve.

BCE Inc. has released the conversion notice for BCE.PR.C (Fixed-Floater) and a matching notice for BCE.PR.D (Ratchet Rate).

These issues constitute a Strong Pair.

The effective date of the interconversion is 2018-3-1. The deadline for instructing the company to convert shares is 5:00 p.m. (Eastern time) on February 19, 2018 – but note that brokers serving the public will probably have internal deadlines a day or two in advance of this. The new dividend rate on BCE.PR.C will be published 2018-2-7.

The outstanding shares of BCE.PR.C have paid 3.55% since the last conversion in 2013. Prime was at 3.00% when the last conversion was effective … 45bp lower than the current rate!

These shares are trading at very nearly the same price … alas, there isn’t much of a last-minute arbitrage possibility here!

I will post more when the fixed rate (for the next five years) is known.