Category: New Issues

Issue Comments

RS.PR.A Strong on Excellent Volume

Middlefield Group has announced:

Middlefield Group, on behalf of Real Estate & E-Commerce Split Corp. (the “Company”), is pleased to announce the Company has completed its initial public offering of 1,613,887 class A shares and 1,613,887 preferred shares for total gross proceeds of $40 million. The class A and preferred shares are listed on the Toronto Stock Exchange under the symbols RS and RS.PR.A, respectively.

The Company will invest in a diversified, actively managed portfolio of dividend-paying securities of issuers operating in the real estate or related sectors, including real estate investment trusts, that the Advisor (as defined below) believes are well-positioned to benefit from low interest rates, the rapid adoption of e-commerce, the growth of data infrastructure as well as attractive valuations in various areas of the real estate sector.

The Company’s investment objectives for the:

  • Class A shares are to provide holders with:
    • non-cumulative monthly cash distributions; and
    • the opportunity for capital appreciation through exposure to the portfolio
  • Preferred shares are to:
    • provide holders with fixed cumulative preferential quarterly cash distributions; and
    • return the original issue price of $10.00 to holders upon maturity

The initial target distribution yield for the class A shares is 8% per annum based on the original subscription price (or $0.10 per month or $1.20 per annum).

The initial target distribution yield for the preferred shares is 5.25% per annum based on the original subscription price (or $0.13125 per quarter or $0.525 per annum).

Middlefield Capital Corporation (the “Advisor”) will provide investment management advice to the Company.

The syndicate of agents was co-led by CIBC Capital Markets and RBC Capital Markets, and includes BMO Capital Markets, Scotiabank, TD Securities Inc., Canaccord Genuity Corp., National Bank Financial Inc., Industrial Alliance Securities, Manulife Securities Incorporated, Raymond James Ltd., Richardson GMP, Middlefield Capital Corporation, Echelon Wealth Partners Inc. and Mackie Research Capital Corporation.

For further information, please visit our website at www.middlefield.com or contact Nancy Tham or Michael Bury in our Sales and Marketing Department at 1.888.890.1868.

Highlights from the prospectus are:

Real Estate & E-Commerce Split Corp. (the “Company”) is a mutual fund established as a corporation under the laws of the Province of Ontario. The Company proposes to offer preferred shares (“Preferred Shares”) and class A shares (“Class A Shares”) at a price of $10.00 per Preferred Share and $15.00 per Class A Share (the “Offering”). Preferred Shares and Class A Shares are issued only on the basis that an equal number of Preferred Shares and Class A Shares will be outstanding at all material times.

The Company will invest in a diversified, actively managed portfolio (the “Portfolio”) of dividend-paying securities of issuers operating in the real estate or related sectors, including real estate investment trusts, that the Advisor (as defined below) believes are well-positioned to benefit from low interest rates, the rapid adoption of e-commerce, the growth of data infrastructure as well as attractive valuations in various areas of the real estate sector (“Real Estate & E-Commerce Issuers”). See “Investment Strategy.”

The investment objectives for the Preferred Shares are to provide holders with fixed cumulative preferential quarterly cash distributions and to return the original issue price of $10.00 to holders on December 31, 2025 (the “Maturity Date”), subject to extension for successive terms of up to five years as determined by the Company’s board of directors. See “Investment Objectives”. The quarterly cash distribution will be $0.13125 per Preferred Share ($0.525 per annum), representing a yield of 5.25% per annum on the issue price of $10.00 per Preferred Share until December 31, 2025. See “Distribution Policy”
…
The first distribution will be pro-rated to reflect the period from the Closing Date to December 31, 2020.
…
No distributions will be paid on the Class A Shares if (i) the distributions payable on the Preferred Shares are in arrears, or (ii) in respect of a cash distribution by the Company, the net asset value (“NAV” or “Net Asset Value”) per “Unit”, comprised of one Preferred Share and one Class A Share, would be less than $15.00 following the payment of such distributions.
…
The Preferred Shares have been provisionally rated Pfd-2 (low) by DBRS Limited.
…
The Preferred Shares will be redeemed by the Company on the Maturity Date, subject to extension for successive terms of up to five years as determined by the Board of Directors. The redemption price payable by the Company for a Preferred Share on that date will be equal to the lesser of (i) $10.00 plus any accrued and unpaid distributions thereon and (ii) the NAV of the Company on that date divided by the total number of Preferred Shares then outstanding.
…
Monthly: Preferred Shares may be surrendered at any time for retraction to Middlefield Capital Corporation (in such capacity, the “Registrar and Transfer Agent”), the Company’s registrar and transfer agent, but will be retracted only on the second last business day of a month (the “Retraction Date”). Preferred Shares surrendered for retraction by 5:00 p.m. (Toronto time) on or before the twentieth business day prior to the Retraction Date will be retracted on such Retraction Date and the holder will be paid on or before the last business day of the following month (the “Retraction Payment Date”).

Holders of Preferred Shares whose Preferred Shares are surrendered for retraction will be entitled to receive a retraction price per Preferred Share equal to 96% of the lesser of (i) the NAV per Unit determined as of such Retraction Date, less the cost to the Company of the purchase of a Class A Share for cancellation; and (ii) $10.00. For this purpose, the cost of the purchase of a Class A Share will include the purchase price of the Class A Share, and commission and such other costs, if any, related to the liquidation of any portion of the Portfolio to fund the purchase of the Class A Share.
…
On the Maturity Date and upon any subsequent maturity date as determined by the Board of Directors, a holder of Preferred Shares may retract such Preferred Shares. The Company will provide at least 60 days’ notice to holders of Preferred Shares of such right. The retraction price payable by the Company for a Preferred Share pursuant to the non-concurrent retraction right will be equal to the lesser of (i) $10.00 plus any accrued and unpaid distributions thereon and (ii) the NAV of the Company on that date divided by the total number of Preferred Shares then outstanding.

DBRS rates the shares Pfd-2(low):

DBRS Limited (DBRS Morningstar) finalized its provisional rating of Pfd-2 (low) assigned to the Preferred Shares issued by Real Estate & E-Commerce Split Corp. (the Company), managed by Middlefield Limited (the Manager). Middlefield Capital Corporation (the Investment Advisor) will provide investment advice to the Company.
…
The initial downside protection available to holders of the Preferred Shares is approximately 58% (after offering expenses). Downside protection available to the Preferred Shares consists of the net asset value (NAV) of the Class A Shares. The fixed distributions of dividends on the Preferred Shares will be funded from the dividends received on the securities in the Portfolio, which are expected to cover approximately 1.8 times the annual Preferred Shares distributions.

It’s very nice to see another issue qualifying for the SplitShares index! Vital statistics are:

RS.PR.A SplitShare YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-12-31
Maturity Price : 10.00
Evaluated at bid price : 10.10
Bid-YTW : 5.03 %
New Issues

New Issue: PVS 5-Year SplitShare, 4.75%

Partners Value Split Corp. has announced:

that it has entered into an agreement to sell 4,000,000 Class AA Preferred Shares, Series 11 (the “Series 11 Preferred Shares”) to a syndicate of underwriters led by Scotiabank, BMO Capital Markets, CIBC Capital Markets, RBC Capital Markets and TD Securities Inc. on a bought deal basis.

The Series 11 Preferred Shares will be issued at a price of $25.00 per share, for gross proceeds of $100,000,000. The Series 11 Preferred Shares will carry a fixed coupon of 4.75% and will have a final maturity of October 31, 2025. The Series 11 Preferred Shares have a provisional rating of Pfd-2 (low) from DBRS Limited. The net proceeds of the offering will be used to partially fund the redemption of the Company’s Class AA Preferred Shares, Series 6.

The Company has granted the underwriters an option, exercisable in whole or part prior to closing, to purchase up to an additional 2,000,000 Series 11 Preferred Shares at the same offering price, which, if exercised, would increase the gross offering size to $150,000,000. Closing of the offering is expected to occur on or about October 6, 2020.

The Company owns a portfolio consisting of 119,611,449 Class A Limited Voting Shares of Brookfield Asset Management Inc. (the “Brookfield Shares”) which is expected to yield quarterly dividends that are sufficient to fund quarterly fixed cumulative preferential dividends for the holders of the Company’s preferred shares and to enable the holders of the Company’s capital shares to participate in any capital appreciation of the Brookfield Shares. Brookfield Asset Management Inc. (“BAM”) is a leading global alternative asset manager with approximately US$550 billion of assets under management across real estate, infrastructure, renewable power, private equity and credit. BAM owns and operates long-life assets and businesses, many of which form the backbone of the global economy. Utilizing its global reach, access to large-scale capital and operational expertise, BAM offers a range of alternative investment products to investors around the world — including public and private pension plans, endowments and foundations, sovereign wealth funds, financial institutions, insurance companies and private wealth investors. BAM is listed on the New York Stock Exchange and Toronto Stock Exchange under the symbol BAM and BAM.A respectively.

They later announced:

that as a result of strong investor demand for its previously announced offering, the underwriters have exercised their option to increase the size of the offering to 6,000,000 Class AA Preferred Shares, Series 11 (the “Series 11 Preferred Shares”). The Series 11 Preferred Shares will be issued at a price of $25.00 per share, for gross proceeds of $150,000,000. The Series 11 Preferred Shares are being issued on a bought deal basis to a syndicate of underwriters led by Scotiabank, BMO Capital Markets, CIBC Capital Markets, RBC Capital Markets and TD Securities Inc.

The Series 11 Preferred Shares will carry a fixed coupon of 4.75% and will have a final maturity of October 31, 2025. The Series 11 Preferred Shares have a provisional rating of Pfd-2 (low) from DBRS Limited. The net proceeds of the offering will be used to partially fund the redemption of the Company’s Class AA Preferred Shares, Series 6. Closing of the offering is expected to occur on or about October 6, 2020.

The new issue has been provisionally rated Pfd-2(low) by DBRS:

DBRS Limited (DBRS Morningstar) assigned a provisional rating of Pfd-2 (low) to the Class AA Preferred Shares, Series 11 (the Series 11 Preferred Shares) to be issued by Partners Value Split Corp. (the Company) that will rank pari passu with the existing Class AA Preferred Shares, Series 6; the Class AA Preferred Shares, Series 7; the Class AA Preferred Shares, Series 8; the Class AA Preferred Shares, Series 9; the Class AA Preferred Shares, Series 10 (collectively, the Class AA Preferred Shares).

Nice to see a new issue of an investment-grade SplitShare! The Series 6 Preferreds that are going to be redeemed are PVS.PR.D, currently redeemable at 25.50, redeemable commencing 2020-10-8 at 25.25 and maturing 2021-10-8 at 25.00. It only pays 4.50%, so it’s a bit surprising that they’re going to call it at a premium – although that is not yet 100% certain. PVS.PR.D was originally issued as BNA.PR.F, which commenced trading 2014-7-4 after being announced 2014-6-16.

Issue Comments

New Issue : Big Banc Split Corp., 6%, 3-Year

Assiduous Reader PD writes in and informs me of a new issue SplitShare, Big Banc Split Corp., 6%, 3-Year:

Big Banc Split Corp. (the “Company”) is a mutual fund corporation incorporated under the laws of the Province of Ontario. The Company proposes to offer preferred shares (“Preferred Shares”) and class A shares (“Class A Shares”) at a price of $10.00 per Preferred Share and $10.00 per Class A Share (the “Offering”). Preferred Shares and Class A Shares will be issued only on the basis that an equal number of Preferred Shares and Class A Shares will be outstanding at all material times.

The investment objectives for the Preferred Shares are to provide their holders with fixed cumulative preferential monthly cash distributions in the amount of $0.05 per Preferred Share ($0.60 per annum or 6.0% per annum on the issue price of $10.00 per Preferred Share) until November 30, 2023 (the “Maturity Date”) and to return the original issue price of $10.00 to holders on the Maturity Date. See “Investment Objectives”.
…
The Company will invest on an approximately equally-weighted basis in a portfolio (the “Portfolio”) of equity securities (the “Portfolio Shares”) of the following publicly traded Canadian banks: Bank of Montreal; Canadian Imperial Bank of Commerce; National Bank of Canada; Royal Bank of Canada; The Bank of Nova Scotia; and The Toronto-Dominion Bank. In order to seek to generate additional returns and enhance the Portfolio’s income, the Manager may write covered call options and cash covered put options in respect of some or all of the Portfolio Shares held in the Portfolio. See “Investment Objectives” and “Investment Strategies”.

The Preferred Shares will not be rated by any rating organization. See “Description of the Securities”. Based on the initial expected net asset value per unit (consisting of one Preferred Share and one Class A Share (each, a “Unit”)), after taking into account offering expenses, the asset coverage ratio based on the Preferred Share original issue price of $10.00 is 190% and the Downside Protection is 47.5%. “Downside Protection” refers to the percentage that the Portfolio would have to decline in value before holders of the Preferred Shares would be in a first-dollar loss position.
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“Maturity Date” means November 30, 2023, subject to extension for successive terms of up to 3 years as determined by the Company’s Board of Directors.
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The policy of the Board of Directors of the Company will initially be to pay monthly noncumulative distributions to the holders of Class A Shares in the amount of $0.067 per Class A Share. Such distributions will be paid on or before the 15th day of the month following the month in respect of which the distribution is declared payable. No distributions will be paid on the Class A Shares (i) if the distributions payable on the Preferred Shares are in arrears, or (ii) if after paying a cash distribution, the NAV per Unit would be less than $15.00.
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Holders of Preferred Shares whose Preferred Shares are surrendered for [monthly] retraction will be entitled to receive a retraction price per Preferred Share equal to the lesser of (i) 95% of the NAV per Unit determined as of such Retraction Date, less the cost to the Company of the purchase of a Class A Share for cancellation; and (ii) $10.00 (the “Preferred Share Retraction Price”).
…
On a Maturity Date, a holder of Preferred Shares may retract such Preferred Shares. The Company will provide at least 60 days’ notice by way of a press release to holders of Preferred Shares of such right. The Preferred Shares must be surrendered for retraction by 5:00 p.m. (Toronto time) on the last Business Day of the month prior to the Maturity Date or subsequent maturity date, as applicable. The redemption price payable by the Company for a Preferred Share pursuant to the non-concurrent retraction right will be equal to the lesser of (i) $10.00 plus any accrued and unpaid distributions thereon, and (ii) the Net Asset Value of the Company on the Maturity Date divided by the total number of Preferred Shares then outstanding.

As these securities will not be rated, they will not be tracked by HIMIPref™. As I am always quick to explain, this is not because I worship the Credit Rating Agencies or because I can’t do it myself, but because nobody really cares what Hymas Investment Management Inc. thinks of an issue’s credit quality. Something from the agencies, though, gets the attention of management, directors and thousands of salesmen pretty quickly.

It’s nice to see some competition for Brompton Split Banc Corp., SBC and Canadian Banc Corp, BK.

New Issues

New Issue : PVS SplitShare, 4.70%, 7-Year

Partners Value Split Corp. has announced:

that it has entered into an agreement to sell 6,000,000 Class AA Preferred Shares, Series 10 (the “Series 10 Preferred Shares”) to a syndicate of underwriters led by Scotiabank, BMO Capital Markets, CIBC Capital Markets, RBC Capital Markets and TD Securities Inc. on a bought deal basis.

The Series 10 Preferred Shares will be issued at a price of $25.00 per share, for gross proceeds of $150,000,000. The Series 10 Preferred Shares will carry a fixed coupon of 4.70% and will have a final maturity of February 28, 2027. The Series 10 Preferred Shares have a provisional rating of Pfd-2 (low) from DBRS Limited. The net proceeds of the offering will be used to pay a special dividend on the Company’s capital shares.

The Company has granted the underwriters an option, exercisable in whole or part prior to closing, to purchase up to an additional 2,000,000 Series 10 Preferred Shares at the same offering price, which, if exercised, would increase the gross offering size to $200,000,000. Closing of the offering is expected to occur on or about March 2, 2020.

The Company owns a portfolio consisting of 79,740,966 Class A Limited Voting Shares of Brookfield Asset Management Inc. (the “Brookfield Shares”) which is expected to yield quarterly dividends that are sufficient to fund quarterly fixed cumulative preferential dividends for the holders of the Company’s preferred shares and to enable the holders of the Company’s capital shares to participate in any capital appreciation of the Brookfield Shares. Brookfield Asset Management Inc. (“BAM”) is a leading global alternative asset manager with over US$540 billion of assets under management across real estate, infrastructure, renewable power, private equity and credit. BAM owns and operates long-life assets and businesses, many of which form the backbone of the global economy. Utilizing its global reach, access to large-scale capital and operational expertise, BAM offers a range of alternative investment products to investors around the world—including public and private pension plans, endowments and foundations, sovereign wealth funds, financial institutions, insurance companies and private wealth investors. BAM is listed on the New York Stock Exchange and Toronto Stock Exchange under the symbol BAM and BAM.A respectively.

DBRS has assigned a provisional rating of Pfd-2(low) to the issue:

DBRS Limited (DBRS Morningstar) assigned a provisional rating of Pfd-2 (low) to the Class AA Preferred Shares, Series 10 (the Series 10 Preferred Shares) to be issued by Partners Value Split Corp. (the Company) that will rank pari passu with the existing Class AA Preferred Shares, Series 6; the Class AA Preferred Shares, Series 7; the Class AA Preferred Shares, Series 8; and the Class AA Preferred Shares, Series 9 (collectively, the Class AA Preferred Shares).
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Following the issuance of the Series 10 Preferred Shares, the downside protection available to the Class AA Preferred Shares is expected to be approximately 89% and the dividend coverage ratio is expected to be approximately 2.1 times (x; based on the Canadian-dollar and U.S.-dollar exchange rate as of February 12, 2020)
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The main constraints to the rating are the following:

(1) The downside protection available to holders of the Class AA Preferred Shares depends solely on the market value of the BAM Shares held in the Portfolio, which will fluctuate over time.

(2) There is a lack of diversification, as the Portfolio is entirely made up of BAM Shares.

(3) Changes in the dividend policy of BAM may result in reductions in Class AA Preferred Share dividend coverage.

(4) As BAM declares dividends in U.S. dollars, the Company is exposed to foreign currency risk relating to the Canadian–U.S. exchange rate, specifically the appreciation of the Canadian dollar versus the U.S. dollar. This may have a negative impact on the dividend coverage ratio of the Class AA Preferred Shares, as these dividends are paid in Canadian dollars.

(5) Downside protection available to the Class AA Preferred Shares may be negatively affected by the retraction of the Junior Preferred Shares.

The issue looks well-priced!

Ticker Coupon Quote Yield-to-worst at Bid Modified Duration
PVS.PR.D 1.125 25.33-40 3.55% 1.57
PVS.PR.E 1.375 25.85-92 3.03% 0.68
PVS.PR.F 1.20 25.45-55 4.34% 4.13
PVS.PR.G 1.225 25.45-50 4.54% 5.21
PVS.PR.?
New Issue		 1.175 25.00
Issue Price		 4.69% 5.97
New Issues

New Issue: IFC Straight Preferred, 5.40%

Intact Financial Corporation has announced:

that it has entered into an agreement with a syndicate of underwriters led by TD Securities Inc. together with BMO Capital Markets, CIBC Capital Markets, National Bank Financial, RBC Capital Markets and Scotiabank pursuant to which the underwriters have agreed to purchase, on a bought deal basis, 5,000,000 Non-Cumulative Class A Shares, Series 9 (the “Series 9 Shares”) from Intact for sale to the public at a price of $25.00 per Series 9 Share, representing aggregate gross proceeds of $125 million.

Intact has granted the underwriters an underwriters’ option to purchase up to an additional 1,000,000 Series 9 Shares at the same offering price exercisable at any time up to 48 hours before closing. Should the underwriters’ option be fully exercised, the total gross proceeds of the Series 9 Shares offering will be $150 million.

The Series 9 Shares will yield 5.40% per annum, payable quarterly, as and when declared by the Board of Directors of the Company. The Series 9 Shares will not be redeemable prior to March 31, 2025. On and after March 31, 2025, Intact may, on not less than 30 nor more than 60 days’ notice, redeem for cash the Series 9 Shares in whole or in part, at the Company’s option, at $26.00 per share if redeemed on or after March 31, 2025 and prior to March 31, 2026; $25.75 per share if redeemed on or after March 31, 2026 and prior to March 31, 2027; $25.50 per share if redeemed on or after March 31, 2027 and prior to March 31, 2028; $25.25 per share if redeemed on or after March 31, 2028 and prior to March 31, 2029; and $25.00 per share if redeemed on or after March 31, 2029, in each case together with all declared and unpaid dividends up to but excluding the date of redemption.

The Series 9 Share offering is expected to close on February 18, 2020. The net proceeds will be used for general corporate purposes.

Stop the presses! This is the first new issue announcement since CM.PR.Y in May, 2019, and the first Straight since … since … for a long time!

This issue joins IFC.PR.E and IFC.PR.F as Intact Straight Perpetuals – sadly, no Implied Volatility analysis is possible since there are now only three of them.

New Issues

New Issue : TD FixedReset 5.10%+356, NVCC

The Toronto-Dominion Bank has announced (although not yet on their website):

a domestic public offering of Non-Cumulative 5-Year Rate Reset Preferred Shares (non-viability contingent capital (NVCC)), Series 24 (the “Series 24 Shares”).

TD has entered into an agreement with a group of underwriters led by TD Securities Inc. to issue, on a bought deal basis, 10 million Series 24 Shares at a price of $25.00 per share to raise gross proceeds of $250 million. TD has also granted the underwriters an option to purchase, on the same terms, up to an additional 2 million Series 24 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 Series 24 Shares will yield 5.10% annually, with dividends payable quarterly, as and when declared by the Board of Directors of TD, for the initial period ending July 31, 2024. Thereafter, the dividend rate will reset every five years at a level of 3.56% over the then five-year Government of Canada bond yield.

Subject to regulatory approval, on July 31, 2024 and on July 31 every 5 years thereafter, TD may redeem the Series 24 Shares, in whole or in part, at $25.00 per share. Subject to TD’s right of redemption and certain other conditions, holders of the Series 24 Shares will have the right to convert their shares into Non-Cumulative Floating Rate Preferred Shares (NVCC), Series 25 (the “Series 25 Shares”), on July 31, 2024, and on July 31 every five years thereafter. Holders of the Series 25 Shares will be entitled to receive quarterly floating rate dividends, as and when declared by the Board of Directors of TD, equal to the three-month Government of Canada Treasury Bill yield plus 3.56%.

The expected closing date is June 4, 2019. TD will make an application to list the Series 24 Shares as of the closing date on the Toronto Stock Exchange. The net proceeds of the offering will be used for general corporate purposes.

They later announced (not on their website either):

that as a result of strong investor demand for its previously announced domestic public offering of Non-Cumulative 5-Year Rate Reset Preferred Shares (non-viability contingent capital (NVCC)), Series 24 (the “Series 24 Shares”), the size of the offering has been increased to 18 million Series 24 Shares. The gross proceeds of the offering will now be $450 million. The offering will be underwritten by a group of underwriters led by TD Securities Inc.

The expected closing date is June 4, 2019. TD will make an application to list the Series 24 Shares as of the closing date on the Toronto Stock Exchange. The net proceeds of the offering will be used for general corporate purposes.

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

impvol_td_190524
Click for Big

According to this analysis, the fair price of the new issue is 24.27.

It is most interesting to compare this issue with TD.PF.L, a FixedReset, 5.20%+327, that commenced trading 2019-1-28 after being announced 2019-01-17. Alert Assiduous Readers will have noticed that although the initial dividends of the two issues are similar, the spreads are 29bp different, which is significant. The fair price of TD.PF.L according to the analysis above is only 23.23, yet the issue was down only $0.17 on the day to close at 25.01-24 on volume of 109,265. I am reminded of the BCE.PR.K Ridiculous Rip-off Wrinkle, in which BCE was able to reopen the issue since – presumably – the initial coupon rate was in-line with the market even though the spread to the Canada 5-year for the re-opened portion was 87bp lower than it should have been.

So I guess TD’s happy enough with the pricing of this issue – after all, given that the calculated spread for a notional perpetual non-callable annuity is 346bp and the spread on the issue is 356bp. They didn’t quite get their call options for free, but close!

New Issues

New Issue : CM FixedReset, 5.15%+362, NVC

Canadian Imperial Bank of Commerce has announced:

that it had entered into an agreement with a group of underwriters led by CIBC Capital Markets for an issue of 10 million Basel III-compliant Non-cumulative Rate Reset Class A Preferred Shares Series 51 (Non-Viability Contingent Capital (NVCC)) (the “Series 51 Shares”) priced at $25.00 per Series 51 Share to raise gross proceeds of $250 million.

CIBC has granted the underwriters an option to purchase up to an additional 2 million Series 51 Shares at the same offering price, exercisable at any time up to two days prior to closing. Should the underwriters’ option be fully exercised, the total gross proceeds of the financing will be $300 million.

The Series 51 Shares will yield 5.15% per annum, payable quarterly, as and when declared by the Board of Directors of CIBC, for an initial period ending July 31, 2024. On July 31, 2024, and on July 31 every five years thereafter, the dividend rate will reset to be equal to the then current five-year Government of Canada bond yield plus 3.62%.

Subject to regulatory approval and certain provisions of the Series 51 Shares, on July 31, 2024 and on July 31 every five years thereafter, CIBC may, at its option, redeem all or any part of the then outstanding Series 51 Shares at par.

Subject to the right of redemption, holders of the Series 51 Shares will have the right to convert their shares into Non-cumulative Floating Rate Class A Preferred Shares Series 52 (Non-Viability Contingent Capital (NVCC)) (the “Series 52 Shares”), subject to certain conditions, on July 31, 2024 and on July 31 every five years thereafter. Holders of the Series 52 Shares will be entitled to receive a quarterly floating rate dividend, as and when declared by the Board of Directors of CIBC, equal to the three-month Government of Canada Treasury Bill yield plus 3.62%.

Holders of the Series 52 Shares may convert their Series 52 Shares into Series 51 Shares, subject to certain conditions, on July 31, 2029 and on July 31 every five years thereafter.

The expected closing date is June 4, 2019. CIBC will make an application to list the Series 51 Shares as of the closing date on the Toronto Stock Exchange. The net proceeds of this offering will be used for general purposes of CIBC.

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

impvol_cm_190524
Click for Big

According to this analysis, the fair price of the new issue is 24.85, but alert Assiduous Readers will have noticed that the Implied Volatility plot is very peculiar, having twp expensive issues and four cheap ones, with the new issue being the sole occupant of No Man’s Land.

The two rich issues are:

The extremely perplexing issue is CM.PR.R, a FixedReset, 4.40%+338, NVCC Compliant issue that commenced trading 2017-6-2 after being announced 2017-5-25. It traded 44,632 shares today in a range of 22.66-80 before closing at 22.72-76.

I confess I don’t know quite what to make of this. It is common – normal, even – for a new issue to remain rich for quite some time, but I am at a loss to explain why CM.PR.S should remain rich after being on the market for sixteen months. CM.PR.R is just silly … but note that its current coupon is low relative to the new issue and it won’t reset until 2022-7-31 … three years, roughly, thirteen coupon payments, but that’s only a total of about $0.60 and doesn’t explain the differential with CM.PR.S anyway.

Fortunately, I don’t have to explain it! All I have to do is avoid buying the new issue and favour other, cheaper, choices for any allocation to CM that I care to make.

New Issues

New Issue: CPX FixedReset, 5.75%+415M575

Capital Power Corporation has announced:

that it will issue 6,000,000 Cumulative Minimum Rate Reset Preference Shares, Series 11 (the “Series 11 Shares”) at a price of $25.00 per Series 11 Share (the “Offering”) for aggregate gross proceeds of $150 million on a bought deal basis with a syndicate of underwriters, co-led by TD Securities Inc. and RBC Capital Markets. In addition, Capital Power has granted the underwriters an option, exercisable in whole or in part anytime up to two business days prior to closing, to purchase up to an additional 2,000,000 Series 11 Shares on the same terms, for additional gross proceeds of up to $50 million.

The Series 11 Shares will pay fixed cumulative dividends of $1.4375 per share per annum, yielding 5.75% per annum, payable on the last business day of March, June, September and December of each year, as and when declared by the board of directors of Capital Power, for the initial period ending June 30, 2024. Assuming an issue date of May 16, 2019, the first quarterly dividend of $0.1772 per share is expected to be paid on June 30, 2019 (with actual payment to be made on June 28, 2019, being the last business day of June 2019). The dividend rate will be reset on June 30, 2024 and every five years thereafter at a rate equal to the sum of the then five-year Government of Canada bond yield and 4.15%, provided that, in any event, such rate shall not be less than 5.75%. The Series 11 Shares are redeemable by Capital Power, at its option, on June 30, 2024 and on June 30 of every fifth year thereafter.

Holders of Series 11 Shares will have the right to convert all or any part of their shares into Cumulative Floating Rate Preference Shares, Series 12 (the “Series 12 Shares”), subject to certain conditions, on June 30, 2024 and every five years thereafter. Holders of Series 12 Shares will be entitled to receive a cumulative quarterly floating dividend at a rate equal to the sum of the then 90-day Government of Canada Treasury Bill yield plus 4.15%, as and when declared by the Board of Directors of Capital Power.

Net proceeds of the offering will be used to repay indebtedness under Capital Power’s credit facilities which will then be available to be redrawn to partially fund the acquisition of Goreway Power Station Holdings Inc. that was previously announced on April 29, 2019 and for general corporate purposes.

S&P Global Ratings has assigned a provisional rating of P-3 for the Series 11 Shares and DBRS Limited has assigned a preliminary rating of Pfd-3 (low) for the Series 11 Shares.

The Series 11 Shares will be issued pursuant to a prospectus supplement to Capital Power’s short form base shelf prospectus dated May 11, 2018. The prospectus supplement will be filed with securities regulatory authorities in all provinces and territories in Canada. The Offering is subject to receipt of all necessary regulatory and stock exchange approvals.

Given that CPX has six FixedReset issues, including this one, of which three have no floor (CPX.PR.A, CPX.PR.C and CPX.PR.E) and three do (CPX.PR.G, CPX.PR.I and this), it is difficult to obtain any meaning from a volatility analysis. However, I will note that CPX.PR.I, a FixedReset, 5.75%+412M575, that commenced trading 2017-8-9 after being announced 2017-7-27, has near-identical terms and closed today at 25.06-10 to yield 5.73%-5.72%, while CPX.PR.A, a FixedReset, 3.06%+217, that commenced trading 2010-12-16 with a 4.60% dividend after being announced 2010-12-1, and reset to 3.06% effective 2015-12-31, is now quoted at 13.76-00 to yield 6.80%-6.66%. I find it very difficult to believe that the dividend floor is worth a full point of yield, even before considering the additional call risk of the new issue.

New Issues

New Issue: Brookfield Infrastructure Subsidiary, FixedReset, 5.85%+396M585

Brookfield Infrastructure has announced (although not yet on their website) (emphasis added):

that it has agreed to issue 4,000,000 Senior Preferred Shares, Series 1 (“Series 1 Shares”) on a bought deal basis to a syndicate of underwriters led by TD Securities Inc., BMO Capital Markets, CIBC Capital Markets, RBC Capital Markets and Scotiabank. The Series 1 Shares are being issued by BIP Investment Corporation (“BIPIC”), a wholly-owned subsidiary of Brookfield Infrastructure, and will be fully and unconditionally guaranteed by Brookfield Infrastructure and certain of its key holding subsidiaries. The Series 1 Shares will be issued at a price of $25.00 per share, for gross proceeds of $100,000,000. Holders of the Series 1 Shares will be entitled to receive a cumulative quarterly fixed dividend at a rate of 5.85% annually for the initial period ending March 31, 2024. Thereafter, the dividend rate will be reset every five years at a rate equal to the greater of: (i) the 5-year Government of Canada bond yield plus 3.96%, and (ii) 5.85%. The Series 1 Shares are redeemable by BIPIC on or after March 31, 2024.

Holders of the Series 1 Shares will have the right, at their option, to convert their Series 1 Shares into Senior Preferred Shares, Series 2 (the “Series 2 Shares”), subject to certain conditions, on March 31, 2024 and on March 31 every five years thereafter. Holders of Series 2 Shares will be entitled to receive a cumulative quarterly floating dividend at a rate equal to the 90-day Canadian Treasury Bill yield plus 3.96%.

The Series 1 Shares will be offered in all provinces and territories of Canada by way of a supplement to BIPIC’s existing short form base shelf prospectus.

The net proceeds of the issue of the Series 1 Shares will be used to fund new investments and/or for general working capital purposes. The offering of Series 1 Shares is expected to close on or about February 5, 2019.

Note the redemption terms, because this is very important. These are not redeemable only on exchange dates, they are redeemable at any time after the first exchange date. This marks a new low in the quality of the swill that gets offered to new issue investors. I do not believe this is a mere typo – though I will be checking the prospectus supplement! – because in the very next sentence the company is careful to say that conversion rights exist “on March 31, 2024 and on March 31 every five years thereafter.”

But, such is the state of investment management in Canada that there will be many who think increased opportunity for calls by the issuers is a good thing, in the charming belief that it’s good to get called out of a position.

S&P further muddies the waters (emphasis added):

S&P Global Ratings today said it assigned its ‘BBB-‘ global scale rating and ‘P-2(Low)’ Canada scale rating to BIP Investment Corp.’s (BIPIC) C$100 million proposed cumulative minimum rate reset senior preferred shares, series 1. The company intends to use the net proceeds from the offering to fund new investments and for general working capital purposes.

We classify the series 1 preferred shares as having minimal equity content because in our view the retraction feature, which gives the investors the option to put the preferred share securities at any time, undermines the
permanence of these securities. Consequently, we will treat 100% of the principal outstanding as debt and will treat 100% of the related dividends on these securities as interest expense in our analysis.

BIPIC is a newly formed subsidiary of Brookfield Infrastructure Partners L.P. (BBB+/Stable/–), which will fully guarantee BIPIC’s series 1 preferred shares.

I’m not quite sure how to interpret this mention of a retraction feature. If the shares are retractible into cash at any time, then that is of course an extremely valuable feature; but if they’re only retractible into debentures, a la PVS Split Share Preferreds, then it’s worth … not so much. And if this is just a stenographical error by S&P, then it’s worth nothing! I’ll wait until the prospectus supplement is available.

The prospectus (available on SEDAR at “BIP Investment Corporation Nov 23 2018 14:13:23 ET Final short form prospectus – English PDF 826 K”, but I’m not allowed to link to it directly because Canadian regulators think you’re scum) states:

The Preference Shares of each series will rank on a parity with the Preference Shares of every other series with respect to accumulated dividends and return of capital. Each series of Preference Shares will participate rateably with every other series of Preference Shares in respect of accumulated dividends and return of capital.

So I think we can assume that distributions will be a mixture of dividends and return of capital – no ordinary income! – although that’s yet another thing I will have to check when the prospectus supplement comes out.

Update, 2019-2-1: The prospectus supplement is now available on SEDAR via a search for “BIP Investment Corporation Jan 29 2019 21:10:15 ET Prospectus (non pricing) supplement – English PDF 882 K”. The regulators won’t allow me to link to it directly, sorry. If you don’t like it, move to the States, where the SEC treats investors as having some importance.

There were three things badly in need of checking.

First, redemption. From page 16 of the PDF:

The Series 1 Shares will not be redeemable by the Corporation prior to March 31, 2024. On March 31, 2024 and on March 31 every five years thereafter (or, if such date is not a business day, the immediately following business day), and subject to the provisions of the BCBCA and certain other restrictions set out in “Description of the Series 1 Shares — Restrictions on Dividends and Retirement and Issue of Shares”, the Corporation may, at its option, on at least 30 days and not more than 60 days prior written notice, redeem all or from time to time any part of the outstanding Series 1 Shares by payment in cash of a per share sum equal to C$25.00, in each case together with all accrued and unpaid dividends up to but excluding the date fixed for redemption (less any tax required to be deducted or withheld by the Corporation).

If less than all of the outstanding Series 1 Shares are to be redeemed, the shares to be redeemed shall be selected on a pro rata basis disregarding fractions or, if such shares are at such time listed on such exchange, with the consent of the TSX, in such manner as the Board of Directors in its sole discretion may, by resolution, determine.

So Assiduous Reader dodoi‘s report of the TDDI description, which was later confirmed by Assiduous Reader prefguy is all correct – and a damn sight better than the execrable press release!

The second thing to check was the retraction terms. From page 16 of the prospectus supplement:

The Series 1 Shares may be surrendered for retraction at any time, subject to the provisions of the BCBCA and certain other restrictions set out in “Description of the Series 1 Shares — Restrictions on Dividends and Retirement and Issue of Shares”. Retraction payments for Series 1 Shares will be made on or before the 15th day of each month (the “Series 1 Retraction Payment Date”) provided the Series 1 Shares have been surrendered for retraction at least five business days (the “Series 1 Deposit Date”) before the last business day of the preceding month. If a holder makes such surrender after 5:00 p.m. (Toronto time) on a Series 1 Deposit Date, the retraction payment will be made on the next succeeding Series 1 Retraction Payment Date.

The Corporation will enter into a remarketing agreement (the “Series 1 Remarketing Agreement”) with a registered dealer that will provide that the registered dealer will use its commercially reasonable efforts to find purchasers for any Series 1 Shares tendered for retraction at a price that is not less than (after expenses) the Series 1 Retraction Price (as defined herein), provided that a retracting holder has not withheld consent to the sale of such Series 1 Shares. If a purchaser cannot be found pursuant to the terms of the Series 1 Remarketing Agreement or the retracting holder has withheld its consent, the retracting holder will receive, per Series 1 Share retracted, cash in an amount equal to the Series 1 Retraction Price. The “Series 1 Retraction Price” will be equal to the lesser of (i) 95% of the volume weighted average price of the Series 1 Shares on the principal exchange or market on which the Series 1 Shares are listed or quoted for trading for the three business days ending on the applicable Series 1 Deposit Date and (ii) C$23.75 (less any tax required to be deducted or withheld by the Corporation).

So this provision is not quite entirely useless, although it approaches that state. It is possible, albeit not at all probable, that something happens on the Deposit Date that really hurts the fundamentals of the company; holders will then have until 5pm to submit them for retraction at a price which can at least be guessed at (since the VWAP is determined for the three days up to and including the Deposit Date) and, possibly, completely known (for those who are able to instruct their intermediaries between the 4pm market close and the 5pm deadline).

But it’s still basically useless. At best, the retraction price is only 95% of the VWAP – in all but the most contrived circumstances, investors will be better off just selling them on the market.

For this reason, I will be ignoring this provision when specifying the issue on HIMIPref™.

The puzzle is – why include such a useless provision at all? The only publicly stated effect, so far, is that S&P won’t give the issue any equity credit, which is contrary to the company’s interest. It may be ‘some tax thing’ or it might even be a bit of flim-flam, taken with the aim of getting the issue onto lists of retractible issues (it will not appear on HIMIPref™’s list!). There are thousands and thousands of clowns out there who call themselves market professionals and rarely, if ever, do anything more than read the Bloomberg description of issue terms.

So Assiduous Reader prefhound‘s description of the feature taken from Scotia iTrade was correct, and I agree with prefguy‘s succinct “useless” summary.

The third thing to check was the tax status of the distributions. From page 26 of the PDF:

Taxable dividends received on the Shares by a holder will be included in computing the holder’s income.

In the case of a holder that is an individual, taxable dividends will be subject to the gross-up and dividend tax credit rules under the Tax Act normally applicable to taxable dividends received from a taxable Canadian corporation. Such taxable dividends will be eligible for the enhanced gross-up and dividend tax credit if the Corporation designates the taxable dividends as “eligible dividends”. There may be limitations on the Corporation’s ability to designate taxable dividends as eligible dividends.
…
The amount of any dividend that the Corporation elects to pay from its “capital gains dividend account” (as defined in the Tax Act) (“Capital Gains Dividend”) received by a holder of the Shares from the Corporation will be considered to be a capital gain of such holder from the disposition of capital property in the taxation year of the holder in which the Capital Gains Dividend is received.

I don’t see anything explicit about distributions being treated as a return of capital in the prospectus supplement, but I don’t know of any reason why the company couldn’t designate them as such.

New Issues

New Issue: RY FixedReset, 4.80%+238, NVCC

Royal Bank of Canada has announced (on October 25):

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

Royal Bank of Canada will issue 12 million Preferred Shares Series BO 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 BO at the same offering price.

The Preferred Shares Series BO will yield 4.80 per cent annually, payable quarterly, as and when declared by the Board of Directors of Royal Bank of Canada, for the initial period ending February 24, 2024. Thereafter, the dividend rate will reset every five years at a rate equal to 2.38 per cent over the 5-year Government of Canada bond yield.

Subject to regulatory approval, on or after February 24, 2024, the bank may redeem the Preferred Shares Series BO in whole or in part at par. Holders of Preferred Shares Series BO 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 BP on February 24, 2024 and on February 24 every five years thereafter.

Holders of the Preferred Shares Series BP 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 2.38 per cent. Holders of Preferred Shares Series BP will, subject to certain conditions, have the right to convert all or any part of their shares to Preferred Shares Series BO on February 24, 2029 and on February 24 every five years thereafter.

The offering will be underwritten by a syndicate led by RBC Capital Markets. The expected closing date is November 2, 2018.

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 BO, the size of the offering has been increased to 14 million shares. The gross proceeds of the offering will now be $350 million. The offering will be underwritten by a syndicate led by RBC Capital Markets. The expected closing date is November 2, 2018.

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.

Thanks to Assiduous Reader dodoi for pointing out I was late posting this announcement.

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

impvol_ry_180826
Click for Big

According to this analysis, the fair value of the new issue on October 26 is 23.77.

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 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. Or, to put it another way, one can buy a whole lot of downside protection for very little extra money, relative to this issue.