Category: New Issues

TransCanada Corporation has announced:

that it will issue 12 million cumulative redeemable minimum rate reset first preferred shares, series 13 (the “Series 13 Preferred Shares”) at a price of $25.00 per share for aggregate gross proceeds of $300 million on a bought deal basis to a syndicate of underwriters in Canada co-led by TD Securities Inc., BMO Capital Markets and Scotiabank.

The holders of Series 13 Preferred Shares will be entitled to receive fixed cumulative dividends at an annual rate of $1.375 per share, payable quarterly on the last business day of February, May, August and November, as and when declared by the board of directors of TransCanada. The Series 13 Preferred Shares will yield 5.50 per cent per annum for the initial fixed rate period ending May 31, 2021 with the first dividend payment date scheduled for May 31, 2016. The dividend rate will reset on May 31, 2021 and on the last business day of May in every fifth year thereafter to a rate equal to the sum of the then five-year Government of Canada bond yield plus 4.69 per cent, provided that, in any event, such rate shall not be less than 5.50 per cent per annum. The Series 13 Preferred Shares are redeemable by TransCanada, at its option, on May 31, 2021 and on the last business day of May in every fifth year thereafter at a price of $25.00 per share plus accrued and unpaid dividends.

The holders of Series 13 Preferred Shares will have the right to convert their shares into cumulative redeemable first preferred shares, series 14 (the “Series 14 Preferred Shares”), subject to certain conditions, on May 31, 2021 and on the last business day of May in every fifth year thereafter. The holders of Series 14 Preferred Shares will be entitled to receive quarterly floating rate cumulative dividends, as and when declared by the board of directors of TransCanada, at an annualized rate equal to the sum of the then 90-day Government of Canada treasury bill rate plus 4.69 per cent.

TransCanada has granted to the underwriters an option, exercisable at any time up to 48 hours prior to the closing of the offering, to purchase up to an additional two million Series 13 Preferred Shares at a price of $25.00 per share.

The anticipated closing date is April 20, 2016. The net proceeds of the offering will be used for general corporate purposes and to reduce short term indebtedness of TransCanada and its affiliates, which short term indebtedness was used to fund TransCanada’s capital program and for general corporate purposes.

The Series 13 Preferred Shares will be offered to the public in Canada pursuant to a prospectus supplement that will be filed with securities regulatory authorities in Canada under TransCanada’s short form base shelf prospectus dated December 23, 2015. The securities referred to herein have not been and will not be registered under the United States Securities Act of 1933, as amended, and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.

They later announced:

that as a result of strong investor demand for its previously announced offering of cumulative redeemable minimum rate reset first preferred shares, series 13 (the “Series 13 Preferred Shares”), the size of the offering has been increased to 20 million shares. The offering no longer includes the previously granted underwriters’ option. The aggregate gross proceeds of the offering will now be $500 million. The syndicate of underwriters is co-led by TD Securities Inc., BMO Capital Markets and Scotiabank.

Note that (as pointed out by Assiduous Reader FletcherLynd) the company is on Review-Developing by DBRS and Outlook-Negative by S&P.

Implied Volatility analysis must be taken with a grain of salt since the Issue Reset Spread for the new issue (469bp) is so much higher than that of the previous high for this issuer (TRP.PR.G, +296). In addition, this is the first TRP issue with a floor on the reset rate.

However, the fit is reasonable and the Implied Volatility, while very high, is in line with other series:

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So on the one hand, it’s a decent (although not especially good) fit. On the other hand, the Implied Volatility is unreasonably high (I would expect that the long term value for implied volatility would be in the high single-digits). So it boils down to what we’ve been seeing a lot of lately: if you believe that current conditions are the new normal, you’ll like the new issue. If you believe that Market Reset Spreads are currently elevated, you like the lower-spread issues.

Marketting has begun for Global Resource Champions Split Corp.

A red-herring prospectus has been filed on SEDAR (Global Resource Champions Split Corp. Mar 31 2016 17:49:50 ET Preliminary long form prospectus – English PDF 400 K )

It’s another Brookfield move to gain leverage:

Global Resource Champions Split Corp. (the “Company”) is a mutual fund corporation established under the laws of the Province of Ontario. This prospectus qualifies the distribution the “Offering”) of Class A Preferred Shares, Series 1 (the “Series 1 Shares”) of the Company.

The Company’s investment objectives with respect to the Series 1 Shares are:
(a) to provide holders of Series 1 Shares with fixed cumulative preferential quarterly cash distributions in the amount of $ per Series 1 Share to yield % per annum on the original issue price of the Series 1 Shares; and
(b) on or about May 25, 2023 (the “Final Series 1 Redemption Date”), to pay the holders of Series 1 Shares the original issue price of $25.00 per share, through the redemption of each Series 1 Share held on the Final Series 1 Redemption Date.

The Company was created to invest in a diversified portfolio (the “Portfolio”) of large capitalization resource companies that Brookfield Investment Management (Canada) Inc. (the “Manager”) believes are best in class. The Company will invest in the Portfolio in order to generate fixed cumulative quarterly cash distributions for holders of the Company’s preferred shares (the “Preferred Shares”) and to enable the holders of the Company’s capital shares (the “Capital Shares”) to participate in any capital appreciation in the securities that comprise the Portfolio (the “Portfolio Securities”). Under normal market conditions, the Portfolio will be comprised primarily of equity securities. See “Investment Objectives”.

The Series 1 Shares have been provisionally rated Pfd-2 (low) by DBRS Limited.

Initially, the Portfolio will consist of 15 large capitalization resource companies and will be approximately equally weighted on a U.S. dollar equivalent basis. The intention of the Company is to hold these investments to the Final Series 1 Redemption Date and not actively trade the Portfolio; however, the Manager will have discretion to make changes to the composition of the Portfolio that it deems appropriate, subject to the investment restrictions as described herein. See “Investment Restrictions.” It is expected that cash distributions to the holders of the Preferred Shares will be derived from dividends received (net of applicable foreign withholding taxes) on the Portfolio Securities.

The Manager will act as manager and investment manager of the Company. See “Organization and Management Details of the
Company and the Manager”.

The Series 1 Shares and the Capital Shares are being offered separately but will be issued only on the basis that an equal number of Series 1 Shares and Capital Shares will be outstanding. Partners Value Investments Inc. (formerly Partners Value Fund Inc.) (“Partners Value Investments”) will acquire all of the Capital Shares to be issued in connection with the Offering of the Series 1 Shares under this prospectus. The Capital Shares will be issued at a price of $ per share.

The Series 1 Shares may be surrendered for retraction at any time. A holder retracting Series 1 Shares may not receive cash but may instead receive debentures (the “Debentures”) issued by the Company. See “Details of the Offering – Debentures”.

The Company will redeem all outstanding Series 1 Shares on or about May 25, 2023 for a cash amount per share equal to the lesser of (i) $25.00 plus any accrued and unpaid dividends and (ii) the Net Asset Value per Unit (as defined herein). See “Calculation of Net Asset Value” and “Dividend Policy”.

There’s not much point in analyzing this deeply in the absence of information about the coupon, but it’s nice to see another split on the way.

Canadian Western Bank has announced (but not yet on their website):

its intent to issue $100 million non-cumulative 5-year rate reset First Preferred Shares Series 7 (Non-Viability Contingent Capital (NVCC)) (the “Series 7 Preferred Shares”). The offering will be underwritten on a bought deal basis by a syndicate led by National Bank Financial Inc. The expected closing date is on or about March 31, 2016.

Under the terms of the offering, CWB will issue 4,000,000 Series 7 Preferred Shares at a price of $25.00 per share. CWB has also granted the underwriters an over-allotment option, solely to cover over-allotments, if any, exercisable for a period of 30 days following the closing date of the offering, to purchase up to an additional 600,000 Series 7 Preferred Shares on the same terms. Should the underwriters choose to exercise this option in full, the maximum gross proceeds raised under the offering will be $115 million.

Holders of the Series 7 Preferred Shares will be entitled to receive a non-cumulative fixed dividend in the amount of $1.5625 annually, payable quarterly, as and when declared by the Board of Directors of CWB, for the initial period ending July 31, 2021. The quarterly dividend represents an annual yield of 6.25% based on the stated issue price per share. Thereafter, the dividend rate will reset every five years at a level of 547 basis points over the then 5-year Government of Canada bond yield. The first of such dividends, if declared, will be payable on July 31, 2016 and will be $0.5223 per Series 7 Preferred Share, based on the anticipated closing date of the offering of March 31, 2016. CWB maintains the right to redeem, subject to the approval of the Office of the Superintendent of Financial Institutions (“OSFI”), up to all of the then outstanding Series 7 Preferred Shares on July 31, 2021, and on July 31 every five years thereafter at a price of $25.00 per share.

Should CWB choose not to exercise its right to redeem the Series 7 Preferred Shares, holders of these shares will have the right to convert their shares into an equal number of non-cumulative floating rate First Preferred Shares Series 8 (Non-Viability Contingent Capital (NVCC)) (the “Series 8 Preferred Shares”), subject to certain conditions, on July 31, 2021, and on July 31 every five years thereafter. Holders of the Series 8 Preferred Shares will be entitled to receive quarterly floating dividends, as and when declared by the Board of Directors of CWB, equal to the 90-day Government of Canada Treasury Bill rate plus 547 basis points.

Net proceeds from the offering will be added to CWB’s capital base and used for general corporate purposes and are expected to qualify as Tier 1 capital for CWB. The offering will be completed by way of short form prospectus to be filed in all provinces and territories of Canada.

This issue will be tracked by HIMIPref™ and assigned to the Scraps index on credit concerns.

This issue looks like it’s priced with a small concession. The bank’s extant FixedReset, CWB.PR.B, 4.40%+276 is currently bid at 16.35 to yield 5.66% to perpetuity, compared to 6.13% to perpetuity for the new issue (assuming a thirty year end-price of 23.14). Thus, the 271bp difference in Issue Reset Spread gives rise to a 47bp difference in yield, slightly above the norm.

Laurentian Bank of Canada has announced:

that it has entered into an agreement with a syndicate of underwriters led by BMO Capital Markets, TD Securities Inc. and RBC Capital Markets (collectively, the “Underwriters”), under which the Underwriters have agreed to buy on a bought deal basis an aggregate of 4 million Non-Cumulative Class A Preferred Shares, Series 15 (Non-Viability Contingent Capital (NVCC)) (the “Preferred Shares Series 15”), at a price of $25.00 per Preferred Share Series 15 for gross proceeds of $100 million (the “Offering”). Laurentian has granted to the Underwriters an option to purchase up to an additional 2 million Preferred Shares Series 15 exercisable at any time up to 48 hours before closing. Should the option be fully exercised, the total gross proceeds of the Preferred Shares Series 15 offering will be $150 million. The Preferred Shares Series 15 will be offered for sale to the public in each of the provinces of Canada pursuant to a prospectus supplement to Laurentian’s short form base shelf prospectus dated November 10, 2014, which supplement will be filed with Canadian securities regulatory authorities in all Canadian provinces.

Holders of Preferred Shares Series 15 will be entitled to receive non-cumulative preferential fixed quarterly dividends for the initial period ending on, but excluding, June 15, 2021, as and when declared by the board of directors of the Bank, payable in the amount of $1.4625 per Preferred Share Series 15, to yield 5.85 per cent annually.

Thereafter, the dividend rate will reset every five years to be equal to the 5-Year Government of Canada Bond Yield plus 5.13 per cent. Subject to certain conditions, holders may elect to convert any or all of their Preferred Shares Series 15 into an equal number of Non-Cumulative Class A Preferred Shares, Series 16 (Non-Viability Contingent Capital (NVCC)) (the “Preferred Shares Series 16”) on June 15, 2021 and on June 15 every five years thereafter. Holders of the Preferred Shares Series 16 will be entitled to receive non-cumulative preferential floating rate quarterly dividends, as and when declared by the board of directors of the Bank, equal to the then 3-month Government of Canada Treasury Bill yield plus 5.13 per cent. The Offering is expected to close on or about March 17, 2016 and is subject to Laurentian receiving all necessary regulatory approvals.

The net proceeds of the Offering will be added to Laurentian’s general funds and will be used for general corporate purposes.

Laurentian has one other NVCC-compliant FixedReset outstanding, LB.PR.H, 4.30%+255, resetting 2019-6-15, bid at 16.15 to yield 5.38% to perpetuity. The new issue yields 5.78% (assuming an end-price of 23.14) so the new issue offers a yield pick-up of 40bp for a spread increase of 258bp; this is more or less in line with other series of issues.

The Bank of Nova Scotia has announced:

a domestic public offering of Non-cumulative 5-Year Rate Reset Preferred Shares Series 36 (Non-Viability Contingent Capital (NVCC)) (the “Preferred Shares Series 36”).

Scotiabank has agreed to sell 12 million of Preferred Shares Series 36 to a syndicate of underwriters led by Scotia Capital Inc. on a bought deal basis. Scotiabank has granted the Underwriters an option, exercisable in whole or in part up to 48 hours before closing, to purchase up to an additional 2 million Preferred Shares Series 36 at the same offering price.

Scotiabank will issue Preferred Shares Series 36 priced at $25 per share and holders will be entitled to receive a non-cumulative quarterly fixed dividend, as and when declared by the Board of Directors of Scotiabank, for the initial period ending on and including July 25, 2021 at an annual rate of $1.3750 per share to yield 5.50 per cent annually.

On July 26, 2021 and on July 26 every five years thereafter, Scotiabank may, at its option, with the prior approval of the Superintendent of Financial Institutions (Canada), redeem all or any number of the then outstanding Preferred Shares Series 36 at a redemption price which is equal to par. Thereafter, the dividend rate will reset every five years at a rate equal to 4.72% over the 5-year Government of Canada bond yield. Holders of Preferred Shares Series 36 will, subject to certain conditions, have the right to convert all or any part of their shares to Non-cumulative Floating Rate Preferred Shares Series 37 (Non-Viability Contingent Capital (NVCC)) (the “Preferred Shares Series 37”) of Scotiabank on July 26, 2021 and on July 26 every five years thereafter.

Holders of the Preferred Shares Series 37 will be entitled to receive a non-cumulative quarterly floating dividend at a rate equal to the 3-month Government of Canada Treasury Bill yield plus 4.72%, as and when declared by the Board of Directors of Scotiabank. Holders of Preferred Shares Series 37 will, subject to certain conditions, have the right to convert all or any part of their shares to Preferred Shares Series 36 on July 26, 2026 and on July 26 every five years thereafter.

Closing is expected to occur on or after March 14, 2016. This domestic public offering is part of Scotiabank’s ongoing and proactive management of its Tier 1 capital structure.

Net proceeds from this transaction will be added to Scotiabank’s funds and will be used for general business purposes.

They later announced:

that as a result of strong investor demand for its previously announced domestic public offering of Non-cumulative 5-Year Rate Reset Preferred Shares Series 36 (Non-Viability Contingent Capital (NVCC)) (the “Preferred Shares Series 36”), the size of the offering has been increased to 20 million shares. The gross proceeds of the offering will now be $500 million. The offering will be underwritten by a syndicate of underwriters led by Scotia Capital Inc.

Closing is expected to occur on or after March 14, 2016. This domestic public offering is part of Scotiabank’s ongoing and proactive management of its Tier 1 capital structure. Scotiabank intends to file a prospectus supplement to its June 27, 2014 base shelf prospectus in respect of this issue.

Net proceeds from this transaction will be added to Scotiabank’s funds and will be used for general business purposes.

$500-million is good size!

Implied Volatility analysis is not very useful for the BNS series, but when performed anyway yields the following chart:

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The reason this analysis is not particularly useful is that the four lower-spread issues are NVCC Non-Compliant while the two higher-spread issues are compliant (the new issue is one of these, with a deemed price of 25.00). So there are really two separate series, with not enough data to examine the compliant issues only.

However, this new issue appears to be quite cheap relative to BNS.PR.E, which is a FixedReset, 5.50%+451, that commenced trading 2016-12-17 after being announced 2015-12-8. At today’s closing bid of 25.37, BNS.PR.E has an Expected Future Current Yield (EFCY) of 5.11%, compared to 5.40% for the new issue given a deemed price of 25.00. So the 21bp of extra spread are resulting in an expected EFCY pick-up of 29bp compared to a normally expected (as of the February PrefLetter, Table FR-11, Charts FR-31 and FR-58) pick-up of 2-8bp.

To make the EFCY pick-up for the new issue equal to 5bp – to strike a happy medium – its price would have to be about 26.15 (given a price of 25.37 for BNS.PR.E) so I suspect we’ll see a certain amount of price adjustment between the two issues!

Regrettably, BNS does not have any NVCC-compliant Straight Perpetuals trading, so it is impossible to compute Break Even Rate Shock.

Royal Bank of Canada has announced:

a domestic public offering of Non-Cumulative, 5-Year Rate Reset Preferred Shares Series BM.

Royal Bank of Canada will issue 12 million Preferred Shares Series BM priced at $25 per share to raise gross proceeds of $300 million. The bank has granted the Underwriters an option, exercisable in whole or in part, to purchase up to an additional 2 million Preferred Shares Series BM at the same offering price.

The Preferred Shares Series BM will yield 5.50 per cent annually, payable quarterly, as and when declared by the Board of Directors of Royal Bank of Canada, for the initial period ending August 24, 2021. Thereafter, the dividend rate will reset every five years at a rate equal to 4.80 per cent over the 5-year Government of Canada bond yield.

Subject to regulatory approval, on or after August 24, 2021, the bank may redeem the Preferred Shares Series BM in whole or in part at par. Holders of Preferred Shares Series BM will, subject to certain conditions, have the right to convert all or any part of their shares to Non-Cumulative Floating Rate Preferred Shares Series BN on August 24, 2021 and on August 24 every five years thereafter.

Holders of the Preferred Shares Series BN will be entitled to receive a non-cumulative quarterly floating dividend, as and when declared by the Board of Directors of Royal Bank of Canada, at a rate equal to the 3-month Government of Canada Treasury Bill yield plus 4.80 per cent. Holders of Preferred Shares Series BN will, subject to certain conditions, have the right to convert all or any part of their shares to Preferred Shares Series BM on August 24, 2026 and on August 24 every five years thereafter.

The offering will be underwritten by a syndicate led by RBC Capital Markets. The expected closing date is March 7, 2016.

We routinely undertake funding transactions to maintain strong capital ratios and a cost effective capital structure. Net proceeds from this transaction will be used for general business purposes.

They later announced:

that as a result of strong investor demand for its previously announced domestic public offering of Non-Cumulative, 5-Year Rate Reset Preferred Shares Series BM, the size of the offering has been increased to 30 million shares. The gross proceeds of the offering will now be $750 million. The offering will be underwritten by a syndicate led by RBC Capital Markets. The expected closing date is March 7, 2016.

We routinely undertake funding transactions to maintain strong capital ratios and a cost effective capital structure. Net proceeds from this transaction will be used for general business purposes.

$750-million! Wow! That’s bigger than TD.PF.G, a shrimpy little issue of only $700-million.

Implied Volatility analysis yields the following chart:

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Interpretation of this chart using the standard assumptions that everything will remain the same forever leads us to believe that the new issue is reasonably priced – fair value is $25.22 when compared to the indicated theoretical values.

However, the standard assumptions are even more shaky than they usually are. Some will say that the derived value of Implied Volatility, at 21%, is far too high and may be expected to decline in the future. This will cause the theoretical curve to flatten, which implies that the higher-spread issues will outperform the lower spread issues. Some will say, however, that the fundamental assumption of non-directionality in the Black-Scholes theory is wrong; that spreads in general are far too high, will narrow, and therefore the lower-spread issues will outperform the higher-spread issues. Some, like myself, will say that both criticisms are correct but that on balance the lower-spread issues are preferable. If, for instance, you plug in a 250bp spread and 10% Implied Volatility – numbers I would consider more reflective of a normal market – you find that the four lower spread issues increase in price by over 40%, compared to the higher-spread issues, which may well go substantially above the $25 call price, but not 40% worth. Mind you, the critical part of the above analysis is “normal” … i.e., with five year Canadas yielding more than inflation and that’s just for starters! There will be some who believe that current conditions represent the new normal; these players will probably prefer the higher-spread issues.

The Break Even Rate Shock for this issue is a mere 1bp. What a difference a few years make!

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

a Canadian public offering of Non-cumulative Rate Reset Class 1 Shares Series 21 (“Series 21 Preferred Shares”). Manulife will issue 12 million Series 21 Preferred Shares priced at $25 per share to raise gross proceeds of $300 million. The offering will be underwritten by a syndicate of investment dealers co-led by RBC Capital Markets, Scotia Capital Inc. and TD Securities Inc. and is anticipated to qualify as Tier 1 capital for Manulife. Manulife has also granted the underwriters an option, exercisable in whole or in part at any time up to 48 hours prior to closing, to purchase up to an additional 2 million Series 21 Preferred Shares at the same offering price. The maximum gross proceeds raised under the offering will be $350 million should this option be exercised in full. The expected closing date for the offering is February 25, 2016. Manulife intends to file a prospectus supplement to its December 17, 2015 base shelf prospectus in respect of this issue.

Holders of the Series 21 Preferred Shares will be entitled to receive a non-cumulative quarterly fixed dividend yielding 5.60 per cent annually, as and when declared by the Board of Directors of Manulife, for the initial period ending June 19, 2021. Thereafter, the dividend rate will be reset every five years at a rate equal to the 5-year Government of Canada bond yield plus 4.97 per cent.

Holders of Series 21 Preferred Shares will have the right, at their option, to convert their shares into Non-cumulative Rate Reset Class 1 Shares Series 22 (“Series 22 Preferred Shares”), subject to certain conditions, on June 19, 2021 and on June 19 every five years thereafter. Holders of the Series 22 Preferred Shares will be entitled to receive non-cumulative quarterly floating dividends, as and when declared by the Board of Directors of Manulife, at a rate equal to the three-month Government of Canada Treasury Bill yield plus 4.97 per cent.

Manulife intends to use the net proceeds from the offering for general corporate purposes, including future refinancing requirements.

They later announced (also not on their website):

that as a result of strong investor demand for its previously announced Canadian public offering of Non-cumulative Rate Reset Class 1 Shares Series 21 (“Series 21 Preferred Shares”), the size of the offering has been increased to 16 million shares. The gross proceeds of the offering will now be $400 million. The offering will be underwritten by a syndicate of investment dealers co-led by RBC Capital Markets, Scotia Capital Inc. and TD Securities Inc. and is anticipated to qualify as Tier 1 capital for Manulife. The expected closing date for the offering is February 25, 2016.

Manulife has also granted the underwriters an option, exercisable in whole or in part at any time up to 30 days following the closing of the offering, to purchase up to an additional 1 million Series 21 Preferred Shares at the same offering price, for the purpose of covering over-allotments, if any. The maximum gross proceeds raised under the offering will be $425 million should this option be exercised in full. Manulife intends to file a prospectus supplement to its December 17, 2015 base shelf prospectus in respect of this issue.

Manulife intends to use the net proceeds from the offering for general corporate purposes, including future refinancing requirements.

So that’s a nice sized issue!

As this issue is from an insurer and there is no provision for conversion into common shares at the option of the issuer, I consider this to be subject to my Deemed Retraction policy; accordingly I have placed a maturity entry dated 2025-1-31 at par in the call schedule of this instrument for analytical purposes. Note that this approach is due to analysis and there is no contractual provision in the terms of issue for any such maturity.

Based on Implied Volatility analysis, the issue looks rather expensive:

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The Empire Life Insurance Company has announced:

a Canadian public offering of Non-Cumulative Rate Reset Preferred Shares, Series 1 (the “Series 1 Preferred Shares”). Empire Life will issue 5.2 million Series 1 Preferred Shares priced at $25 per share to raise gross proceeds of $130 million. The offering will be underwritten on a bought deal basis by a syndicate of underwriters co-led by Scotia Capital Inc., CIBC World Markets Inc. and TD Securities Inc. Empire Life has granted the underwriters an option to purchase up to an additional 780,000 Series 1 Preferred Shares exercisable at any time up to a period of 30 days from the date of closing.

Holders of Series 1 Preferred Shares will be entitled to receive fixed non-cumulative quarterly dividends yielding 5.75% annually, as and when declared by the Board of Directors of Empire Life, for the initial period ending on and including April 17, 2021. Thereafter, the dividend rate will be reset every five years at a rate equal to the 5-year Government of Canada bond yield plus 4.99%.

Holders of Series 1 Preferred Shares will have the right, at their option, to convert their shares into Non-Cumulative Floating Rate Preferred Shares, Series 2 (“Series 2 Preferred Shares”), subject to certain conditions, on April 17, 2021 and on April 17 every five years thereafter. Holders of the Series 2 Preferred Shares will be entitled to receive non-cumulative quarterly floating dividends, as and when declared by the Board of Directors of Empire Life, at a rate equal to the three-month Government of Canada Treasury Bill yield plus 4.99%.

Empire Life intends to use the net proceeds from the offering for regulatory capital and general corporate purposes.

The offering is expected to close on February 16, 2016, subject to regular closing conditions.

On a pro forma basis, after giving effect to the preferred share issue (but assuming no exercise of the over-allotment option), the Company estimates that, as at September 30, 2015, its MCCSR would have increased from 202% to 220%.

“This is a very positive development for Empire Life,” said Mark Sylvia, President and Chief Executive Officer of Empire Life. “This offering will further build on our solid capital base with additional financing that increases our ability to compete and achieve our business goals.”

The issue has been assigned a provisional Pfd-2 rating by DBRS:

DBRS Limited (DBRS) has today provisionally rated The Empire Life Insurance Company’s (Empire Life or the Company) Non-Cumulative Rate Reset Preferred Shares, Series 1 (Series 1 Preferred Shares) at Pfd-2 with a Stable trend.

The DBRS assigned Preferred Shares rating is in accordance with Empire Life’s Financial Strength Rating of “A.”

Empire Life intends to use the net proceeds from the sale of the Series 1 Preferred Shares for regulatory capital and general corporate purposes.

The rating is consistent with DBRS’s Preferred Share and Hybrid Criteria for Corporate Issuers.

As this issue is from an insurer and there is no provision for conversion into common shares at the option of the issuer, I consider this to be subject to my Deemed Retraction policy; accordingly I have placed a maturity entry dated 2025-1-31 at par in the call schedule of this instrument for analytical purposes. Note that this approach is due to analysis and there is no contractual provision in the terms of issue for any such maturity.

As this is the first issue from Empire Life, it is not possible to run a self-consistent Implied Volatility analysis, but comparison with the MFC series shows that the issue is not out of line … but remember that in this series Implied Volatility is extremely high – so high as to be an indicator that there is a degree of directionality in the valuation of MFC issues. In addition, it is obvious that the new issue is well out of the range of Issue Reset Spreads covered by the MFC issues … so take this chart with a grain of salt!

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National Bank of Canada has announced:

that it has entered into an agreement with a group of underwriters led by National Bank Financial Inc. for the issuance on a bought deal basis of 10 million non-cumulative 5-year rate reset first preferred shares series 34 (non-viability contingent capital (NVCC)) (the “Series 34 Preferred Shares”) at a price of $25.00 per share, to raise gross proceeds of $250 million.

National Bank has granted the underwriters an option to purchase, on the same terms, up to an additional 2 million Series 34 Preferred Shares. This option is exercisable in whole or in part by the underwriters at any time up to two business days prior to closing. The gross proceeds raised under the offering will be $300 million should this option be exercised in full.

The Series 34 Preferred Shares will yield 5.60% annually, payable quarterly, as and when declared by the Board of Directors of National Bank, for the initial period ending May 15, 2021. The first of such dividends, if declared, shall be payable on May 15, 2016. Thereafter, the dividend rate will reset every five years at a level of 490 basis points over the then 5-year Government of Canada bond yield. Subject to regulatory approval, National Bank may redeem the Series 34 Preferred Shares in whole or in part at par on May 15, 2021 and on May 15 every five years thereafter.

Holders of the Series 34 Preferred Shares will have the right to convert their shares into an equal number of non-cumulative floating rate first preferred shares series 35 (non-viability contingent capital (NVCC)) (the “Series 35 Preferred Shares”), subject to certain conditions, on May 15, 2021, and on May 15 every five years thereafter. Holders of the Series 35 Preferred Shares will be entitled to receive quarterly floating dividends, as and when declared by the Board of Directors of National Bank, equal to the 90-day Government of Canada Treasury Bill rate plus 490 basis points.

The net proceeds of the offering will be used for general corporate purposes and added to National Bank’s capital base. The expected closing date is on or about January 22, 2016. National Bank intends to file in Canada a prospectus supplement to its December 1, 2014 base shelf prospectus in respect of this issue.

They later announced:

that as a result of strong investor demand for its previously announced domestic public offering of non-cumulative 5-year rate reset first preferred shares series 34 (non-viability contingent capital (NVCC)) (the “Series 34 Preferred Shares”), the size of the offering has been increased to 16 million shares. The gross proceeds of the offering will now be $400 million. The offering will be underwritten by a syndicate led by National Bank Financial Inc. The expected closing date is on or about January 22, 2016. National Bank will make an application to list the Series 34 Preferred Shares as of the closing date on the Toronto Stock Exchange.

The net proceeds of the offering will be used for general corporate purposes and added to National Bank’s capital base.

Implied Volatility analysis is not possible for the NA issues, since there are only three of them including the new issue. However, comparison to today’s analysis for TD shows that the issue is attractively priced. The very high level of Implied Volatility leads to the conclusion that there is a very high degree of directional bias in the pricing of TD’s NVCC-compliant FixedResets. As this bias recedes (assuming that it ever does!), Implied Volatility will decline, the curve will flatten and the higher-spread issues (most notably the new issues) will significantly outperform the lower-spread issues.

The NA issues are priced very close to the TD curve, with perhaps a slight premium.

Note that the NVCC non-compliant issues are so obviously differentiated from the NVCC-compliant ones that they are not included in the calculation, although they are shown in the chart.

On the other hand, the directional bias could be quite right! There will be many among us who think that +490 is an utterly ridiculous spread for solid bank – NVCC or no NVCC – and that spreads will narrow once memories of 2015 fade. Given this particular scenario, the lower-spread issues will shine: a calculation based on projected calculated values of 250bp Spread and 10% Implied Volatility implies that the extant TD NVCC-compliant preferreds will enjoy total capital gains in the area of 35% which, if achieved in a reasonable timeframe, will dwarf the yield advantage of the new issue for which capital gains will be a big fat zero.

So pays yer money and takes yer chances, gents, roll up, roll up! If you think current market conditions are the new normal, you’ll like the new issue. If you think this is a transitory crash, you won’t.

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