Category: Issue Comments

p>Brompton Funds has announced:

Brompton Lifeco Split Corp. (the “Company”) is pleased to announce it is undertaking an overnight treasury offering of class A and preferred shares.

The class A shares will be offered at a price of $7.65 for a distribution rate of 11.8% on the issue price, and the preferred shares will be offered at a price of $10.05 for a yield to maturity of 5.4%. The closing price on the Toronto Stock Exchange (“TSX”) for each of the class A and preferred shares on January 24, 2018 was $7.83 and $10.32, respectively. The class A and preferred share offering prices were determined so as to be non-dilutive to the most recently calculated net asset value per unit of the Company prior to pricing, as adjusted for dividends and certain expenses to be accrued prior to or upon settlement of the offering.

The sales period of this overnight offering will end at 9:00 a.m. (ET) on January 26, 2018. The offering is expected to close on or about February 6, 2017 and is subject to certain closing conditions including approval by the TSX.
The Company invests in a portfolio of common shares of Canada’s four largest publicly-listed life insurance companies on an approximately equal weight basis: Great-West Lifeco Inc., Industrial Alliance Insurance and Financial Services Inc., Manulife Financial Corporation and Sun Life Financial Inc.

The investment objectives for the class A shares are to provide holders with regular monthly cash distributions targeted to be $0.075 per class A share and to provide the opportunity for growth in the net asset value per class A share.

The investment objectives for the preferred shares are to provide holders with fixed cumulative preferential quarterly cash distributions, currently in the amount of $0.14375 per preferred share, and to return the original issue price plus accrued dividends (if any) to holders of preferred shares on April 29, 2019.

The syndicate of agents for the offering is being led by RBC Capital Markets, CIBC Capital Markets, National Bank Financial Inc. and Scotiabank.

So the offering price for a Whole Unit is 17.70, against a NAVPU of 17.26 as of January 24. That’s a premium of 2.5% … not as much as we’ve seen on other recent deals, but still a pretty nice business!

Update, 2018-1-26: They raised $38.6-million. Not great, but not too shabby!

Brompton Lifeco Split Corp. (the “Company”) is pleased to announce a successful overnight treasury offering of class A and preferred shares. Gross proceeds of the offering are expected to be approximately $38.6 million. The offering is expected to close on or about February 6, 2018 and is subject to certain closing conditions including approval by the Toronto Stock Exchange (the “TSX”).

p>Brookfield Infrastructure hasn’t announced anything, but their new issue of BIP.PR.E settled today.

BIP.PR.E is a FixedReset, 5.00%+300M500, ROC, announced January 15. It will be tracked by HIMIPref™ and has been assigned to the FixedResets subindex on the basis of its P-2(low) rating from S&P (it is not rated by DBRS).

The issue traded 421,809 shares today in a range of 24.85-00 before closing at 24.93-95. 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 new issues of NA.PR.E, BEP.PR.M and CM.PR.S:

• The curve is very steep, with Implied Volatility equal to 40% (a ridiculously large figure), and
• The prior issues are trading relatively near to, or well above par

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.

I balk at ascribing a 100% probability to this outcome. 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.

For the long term, I suggest that any change in the slope of the curve will be a flattening, with a very high degree of confidence. This will imply that the higher-spread issues will outperform the lower-spread issues.

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 is 23.41, down from the announcement day estimate of 23.50 – and, remember, that is before making any adjustments for the ridiculously steep Implied Volatility calculation curve.

National Bank of Canada has announced:

that it has closed its domestic public offering of non-cumulative 5-year rate reset first preferred shares series 40 (non-viability contingent capital (NVCC)) (the “Series 40 Preferred Shares”). National Bank issued 12 million Series 40 Preferred Shares at a price of $25.00 per share to raise gross proceeds of $300 million.

The offering was underwritten by a syndicate led by National Bank Financial Inc.

The Series 40 Preferred Shares will commence trading on the Toronto Stock Exchange today under the ticker symbol NA.PR.E.

The Series 40 Preferred Shares were issued under a prospectus supplement dated January 15, 2018 to National Bank’s short form base shelf prospectus dated November 21, 2016.

NA.PR.E is a FixedReset, 4.60%+258, NVCC-Compliant, announced January 12. It will be tracked by HIMIPref™ and has been assigned to the FixedReset subindex.

The issue traded 357,595 shares today in a range of 24.77-89 before closing at 24.78-80. 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 BPO new issue and BEP.PR.M and CM.PR.S:

• The curve is very steep, with Implied Volatility equal to 40% (a ridiculously large figure), and
• The extant issues are trading relatively near to, or well above par

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.

I balk at ascribing a 100% probability to this outcome. 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.

For the long term, I suggest that any change in the slope of the curve will be a flattening, with a very high degree of confidence. This will imply that the higher-spread issues will outperform the lower-spread issues.

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 is 23.77, down sharply from the announcement day estimate of 24.01.

Canadian Imperial Bank of Commerce has announced:

that it has completed the offering of 18 million Basel III-compliant Non-cumulative Rate Reset Class A Preferred Shares Series 47 (Non-Viability Contingent Capital (NVCC)) (the “Series 47 Shares”) priced at $25.00 per share to raise gross proceeds of $450 million.

The offering was made through a syndicate of underwriters led by CIBC Capital Markets. The Series 47 Shares commence trading on the Toronto Stock Exchange today under the ticker symbol CM.PR.S.

The Series 47 Shares were issued under a prospectus supplement dated January 11, 2018, to CIBC’s short form base shelf prospectus dated March 16, 2016.

CIBC has designated the Series 47 Shares as eligible to participate in the CIBC Shareholder Investment Plan along with Series 41, 43 and 45. Holders of eligible shares may elect to have dividends on those preferred shares reinvested in common shares if they reside in Canada, or may elect stock dividends if they reside in the U.S. See “CIBC Shareholder Investment Plan” at www.cibc.com for more information.

The CIBC Shareholder Investment Plan – hard to find on their website! – is described here.

CM.PR.S is a FixedReset, 4.50%+245, NVCC-compliant, announced January 10. It will be tracked by HIMIPref™ and is assigned to the FixedReset subindex.

The issue traded 734,395 shares today in a range of 24.94-00 before closing at 24.96-97. Vital statistics are:

This issue looks quite expensive to me, but quantifying the degree of richness is difficult. According to Implied Volatility Analysis:

Click for Big

Well, it’s starting to get monotonous, but we see in this chart many of the same features we saw when reviewing the recent BIP new issue as well as last week’s BEP.PR.M issue, the CM issue and NA issue:

• The curve is very steep, with Implied Volatility equal to 40% (a ridiculously large figure), and
• The extant issues are trading relatively near to par

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; in turn, I suggest that this reflects a rather touching faith that the existence of a minimum rate guarantee on reset also indicates that the issues will never, ever trade below par. There will be a lot of long faces when this test gets failed in the future! All it will take is a spread-widening, whether market-wide or company-specific.

However, for the long term, I suggest that any change in the slope of the curve will be a flattening, with a very high degree of confidence. This will imply that the higher-spread issues will outperform the lower-spread issues.

I cannot even begin to imagine what the buyers of this issue must have been thinking. For example, CM.PR.O is a FixedReset, 3.90%+232, that commenced trading 2014-6-11 after being announced 2014-6-2. It resets 2019-7-31. It closed today at 23.71, very close to the fair value calculated by the above analysis of 23.68. How in the name of God’s Green Earth can anybody reconcile the prices of these two issues? [Hint: Maybe the 3% stockbrokers’ selling commission has something to do with it.]

All told, though, I have no hesitation in slapping a ‘Very Expensive’ label on this issue. According to the analysis illustrated by the above chart, the fair price is 23.94.

Quadravest has announced:

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

The Preferred Shares will be offered at a price of $10.00 per Preferred Share to yield 5.25% and the Class A Shares will be offered at a price of $10.90 per Class A Share to yield 11.01%.

The closing price on the TSX of each of the Preferred Shares and the Class A Shares on January 15, 2018 was $10.28 and $10.94, respectively.

Since inception of the Company, the aggregate dividends paid on the Preferred Shares have been $7.24 per share and the aggregate dividends paid on the Class A Shares have been $20.00 per share (including five special distributions of $0.25 per share, one special distribution of $0.50 per share and one special stock dividend of $1.75 per share), for a combined total of $27.24 per unit. All distributions to date have been made in tax advantage eligible Canadian dividends or capital gains dividends.

The net proceeds of the offering will be used by the Company to invest in an actively managed, high quality portfolio
consisting of 15 dividend yielding Canadian companies as follows:

Bank of Montreal	Enbridge Inc.	TELUS Corporation
The Bank of Nova Scotia	Manulife Financial Corp.	Thomson-Reuters Corporation
BCE Inc.	National Bank of Canada	The Toronto-Dominion Bank
Canadian Imperial Bank of Commerce	Royal Bank of Canada	TransAlta Corporation
CI Financial Corp.	Sun Life Financial Inc.	TransCanada Corporation

The Company’s investment objectives are:
Preferred Shares:
i. to provide holders of the Preferred Shares with fixed, cumulative preferential monthly cash dividends in the
amount of 5.25% annually; and
ii. on or about the termination date, currently December 1, 2019 (subject to further 5 year extensions thereafter), to pay the holders of the Preferred Shares $10.00 per Preferred Share.

Class A Shares:
i. to provide holders of the Class A Shares with regular monthly cash dividends currently targeted to be $0.10 per share; and
ii. on or about the termination date, currently December 1, 2019 (subject to further 5 year extensions thereafter) to
pay holders of Class A Shares at least the original issue price of those shares.

The sales period of this overnight offering will end at 9:00 a.m. EST on January 17, 2018. The offering is expected to close on or about January 30, 2018 and is subject to certain closing conditions including approval by the TSX.

So new Whole Units are being sold for 20.90, against a NAVPU of 19.44 as of December 29, 2017, a premium of 7.5%, ignoring valuation changes since year-end. What a great business! If I had better contacts in the underwriting community, I’d start a Split Share Fund with the underlying investment being CryptoCurrencies.

Update, 2018-1-17 Wow! They raised over $100-million!

Dividend 15 Split Corp. (the “Company”) is pleased to announce it has completed the overnight marketing of up to 4,971,000 Preferred Shares and up to 4,971,000 Class A Shares of the Company. Total proceeds of the offering are expected to be approximately $103.9 million.

There was no announcement from Brookfield Renewable Partners L.P., but BEP.PR.M closed today.

BEP.PR.M is a FixedReset 5.00%+300M500 ROC announced 2018-01-09. The issue will be tracked by HIMIPref™ but relegated to the Scraps subindex on credit concerns.

The issue traded 437,036 shares today in a range of 24.75-00 before closing at 24.99-00. Vital statistics are:

This issue looks quite expensive to me, but quantifying the degree of richness is difficult. According to Implied Volatility Analysis:

Click for Big

Well, it’s starting to get monotonous, but we see in this chart many of the same features we saw when reviewing the recent BIP new issue as well as last week’s BEP issue, the CM issue and NA issue:

• The curve is very steep, with Implied Volatility equal to 40% (a ridiculously large figure), and
• The extant issues are trading relatively near to, or well above par

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; in turn, I suggest that this reflects a rather touching faith that the existence of a minimum rate guarantee on reset also indicates that the issues will never, ever trade below par. There will be a lot of long faces when this test gets failed in the future! All it will take is a spread-widening, whether market-wide or company-specific.

However, for the long term, I suggest that any change in the slope of the curve will be a flattening, with a very high degree of confidence. This will imply that the higher-spread issues will outperform the lower-spread issues.

Complicating the above analysis is a high probability that the three extant issues will each be called at the first opportunity. I will certainly agree that this is likely to happen, but I balk at ascribing a 100% probability to this outcome. 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.

All told, though, I have no hesitation in slapping a ‘Very Expensive’ label on this issue. According to the analysis illustrated by the above chart, the fair price is 23.36.

Update: Demonstration – to prepare the following chart I have constrained Implied Volatility to 10% (a much more reasonable figure, I think) and done a very, very, rough approximation to the error-minimizing Market Spread.

Click for Big

In this calculation, the calculated fair values for the issues BEP.PR.G / I / K / M, with the difference from the actual market price in brackets, are 27.11 (+1.56), 28.23 (+2.48), 25.29 (+0.20) and 22.53 (-2.46). The values for N(d2) are 72%, 88%, 41% and 7%, respectively.

See the comments for the discussion.

Update #2, 2018-1-23: From January’s PrefLetter, here are charts FR-16, FR-31 and FR-37 … the numbering is consistent with the Fixed Reset Review of October 2016 that is referred to in the comments:

Chart FR-16, 2018-1-12
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Chart FR-31, 2018-1-12
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Chart FR-37, 2018-1-12
Click for Big

See the comments for discussion.

Brompton Split Banc Corp. has released its Semi-Annual Report to June 30, 2017.

Figures of interest are:

MER: “The MER per Class A share, excluding Preferred share distributions (which were covered by the portfolio’s dividend income), was 1.64% for the first six months of 2017 compared to 1.77% for 2016. The MER per unit, excluding Preferred share distributions, was 0.94% for the first six months of 2017 and 0.99% for 2016. This ratio is more representative of the ongoing efficiency of the administration of the Fund.”

Average Net Assets: We need this to calculate portfolio yield. The Total Assets of the fund at year end was $172.0-million, compared to $183.1-million on June 30, however “On April 6, 2017, the Fund announced the split of its Class A shares (“Share Split”) and the concurrent private placement of Preferred shares (“Private Placement’) effective April 25, 2017. Pursuant to the Private Placement, 1,382,784 Preferred shares were offered to investors at a price of $10.03 per Preferred share.” So instead of giving equal weight to the beginning and end figures, we’ll assign a two-thirds weight to the year-end figure to arrive at a weighted average of $175.7-million.

Distributions to preferred shareholders were 1,596,090, at a rate of 0.225, so the average preferred shares outstanding was 7,093,733. The Unit Value was 23.10 at year-end, 22.73 on June 30, average 22.92, for average assets of $162.6-million.

Split the difference between the two methods and say average assets were $169.2-million.

Underlying Portfolio Yield: Semi-annual dividends, interest and security lending income received of 3.412-million divided by average net assets of 169.2-million is 4.03% p.a.

Income Coverage: Gross investment income of 3.412-million less expenses of 1.161-million is Net Investment Income of 2.251-million, divided by Preferred Share Distributions of 1.596-million is 141%.

DBRS has announced that it:

upgraded Fairfax Financial Holdings Limited’s (Fairfax or the Company) Issuer Rating to BBB (high) from BBB, its Senior Unsecured Debt rating to BBB (high) from BBB and its Preferred Shares rating to Pfd-3 (high) from Pfd-3.
…
The upgrade of Fairfax’s ratings primarily reflects the application of the “Global Insurance Methodology” and the assignment of an FSR of “A” to its operating insurance companies. As the parent holding company, Fairfax’s Issuer Rating of BBB (high) is positioned two notches below this FSR.
…
In upgrading the Issuer Rating to BBB (high), DBRS takes into account Fairfax’s good franchise strength and risk profile, including its good net earnings, liquidity and capitalization. DBRS also considered the successful completion of the acquisition of Allied World (AWAC), which enhances the Company’s global market share, product offering and geographic reach while strengthening Fairfax’s position in the U.S. Excess & Surplus insurance market, increasing the Company’s rank to within the top five.

Fairfax has eliminated all of its equity index hedges, sold the majority of its long-dated bonds and reduced the duration of its fixed-income portfolios. This is expected to result in more stable investment income and net earnings going forward. Indicative of its franchise strength, the Company is the third-largest commercial property and casualty (P&C) insurer in Canada in terms of market share based on 2016 direct written premiums, and it is one of the top 15 global non-life reinsurers after the acquisition of AWAC.
…
The Company’s value-based investment strategy, though effective and historically successful, tends to yield volatile results. Consequently, despite historically stable and profitable underwriting results, the earnings volatility from investment income and past hedging activities are affecting fixed-charge coverage ratios that are averaging 3.0 times (x) lower than desired levels for an “A”-rated company. Fairfax’s high cash balances and the subsidiaries’ dividend capacity alleviate concerns about Fairfax’s meeting its capital servicing requirements.

The Stable trend considers the Company’s improving fundamentals, including its expanding global operations and strengthening franchise as well as its ability to adapt to the current challenging operating environment.

RATING DRIVERS

Positive ratings pressure could arise if the Company demonstrates a sustained improvement in profitability through consistently high returns on equity accompanied by well-managed risk exposures with continuous protection of capital, evidenced by strong regulatory capital ratios, along with material reduction in leverage, significantly improved fixed-charge coverage ratios and a material reduction in investment income volatility. Negative ratings pressure could arise through the inadequate monitoring and oversight of assumed risks, resulting in a material deterioration in underwriting results, a sustained material decline in the regulatory capital ratios of the operating subsidiaries, a material reduction in holdco liquidity levels or a sustained significant deterioration in investment income.

Affected issues are FFH.PR.C, FFH.PR.D, FFH.PR.E, FFH.PR.F, FFH.PR.G, FFH.PR.H, FFH.PR.I, FFH.PR.J, FFH.PR.K and FFH.PR.M.

Note that Fairfax Financial Holdings Limited is not regulated by OSFI although Northbridge, its P&C subsidiary, is:

In Canada, property and casualty companies are regulated by the Office of the Superintendent of Financial Institutions on the basis of a minimum supervisory target of 150% of a minimum capital test (‘‘MCT’’) formula. At December 31, 2016 and 2015 Northbridge’s subsidiaries had a weighted average MCT ratio in excess of the 150% minimum supervisory target.

Therefore, I do not consider FFH issues to be subject to the potential DeemedRetraction of insurers.

Moody’s Investor Service has announced:

today downgraded the senior unsecured ratings of Enbridge Inc. (ENB) to Baa3 from Baa2. In addition, Moody’s changed the short term commercial paper rating for Enbridge (US) Inc. to P-3 from P-2 and the subordinate ratings to Ba2 from Ba1. At the same time, Moody’s changed the rating outlook for Enbridge to stable from negative.
…
The downgrade reflects ongoing high leverage at Enbridge Inc. For example, Moody’s calculates a ratio of debt to EBITDA at 6.4x for the twelve months ended September 2017. Attaining a ratio below 5.5x, for a sustained period of time, is an important threshold to maintain the Baa2 rating. On a prospective basis, taking into consideration the actions announced, the ratio could fall to the 5.3x — 5.5x range, but Moody’s views the execution risks associated with Enbridge’s stated actions to be sufficiently high that achieving those levels in 2018 would be challenging.
…
Outlook

The change in rating outlook to stable from negative reflects Enbridge’s predictable cash flow generation and large, low business risk asset base. The stable outlook reflects an expectation that Enbridge will follow through on its announced strategic plans, which include some non-core asset divestitures and financing plans that encompasses a balanced mix of both debt and equity. The stable outlook also incorporates a view that Enbridge’s key financial credit metrics, including a ratio of debt to EBITDA, will decline towards 5.5x during 2018, setting a path for further improvements to financial metrics in 2019 and 2020.

Factors that Could Lead to an Upgrade

• • Moody’s adjusted debt to EBITDA is sustained comfortably below 5.5x.
• • A large reduction in its organizational complexity and structural subordination

Factors that Could Lead to a Downgrade

• • Moody’s adjusted debt to EBITDA is sustained well above 6x.
• • Increases in structural subordination, more aggressive financial policies or a material change in the company’s business risk could also lead to a downgrade.

…
Pref. Stock Preferred Stock, Downgraded to Ba2 from Ba1

The story attracted notice from the Globe & Mail.

Affected issues are (deep breath) ENB.PF.A, ENB.PF.C, ENB.PF.E, ENB.PF.G, ENB.PF.I, ENB.PF.K, ENB.PR.A, ENB.PR.B, ENB.PR.C, ENB.PR.D, ENB.PR.F, ENB.PR.H, ENB.PR.J, ENB.PR.N, ENB.PR.P, ENB.PR.T and ENB.PR.Y