PrefBlog

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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Pembina Pipeline Corporation has announced:

that it has entered into an agreement with a syndicate of underwriters co-led by Scotiabank, BMO Capital Markets and RBC Capital Markets (together, the “Underwriters”) pursuant to which the Underwriters have agreed to purchase from Pembina 6,000,000 cumulative redeemable minimum rate reset class A preferred shares, Series 11 (the “Series 11 Preferred Shares”) at a price of $25.00 per share for distribution to the public.

The holders of Series 11 Preferred Shares will be entitled to receive fixed cumulative dividends at an annual rate of $1.4375 per share, payable quarterly on the 1st day of March, June, September and December, as and when declared by the Board of Directors of Pembina, yielding 5.75 per cent per annum, for the initial fixed rate period to but excluding March 1, 2021. The first quarterly dividend payment date is scheduled for March 1, 2016. The dividend rate will reset on March 1, 2021 and every five years thereafter at a rate equal to the sum of the then five-year Government of Canada bond yield plus 5.00 per cent, provided that, in any event, such rate shall not be less than 5.75 percent per annum. The Series 11 Preferred Shares are redeemable by Pembina, at its option, on March 1, 2021 and on March 1 of every fifth year thereafter at a price of $25.00 per share plus accrued and unpaid dividends.

The holders of Series 11 Preferred Shares will have the right to convert their shares into cumulative redeemable floating rate class A preferred shares, Series 12 (the “Series 12 Preferred Shares”), subject to certain conditions, on March 1, 2021 and on March 1 of every fifth year thereafter. The holders of Series 12 Preferred Shares will be entitled to receive quarterly floating rate cumulative dividends, as and when declared by the Board of Directors of Pembina, at a rate equal to the sum of the then 90-day Government of Canada treasury bill rate plus 5.00 per cent.

Pembina 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 2,000,000 Series 11 Preferred Shares at a price of $25.00 per share.

Closing of the offering is expected on January 15, 2016, subject to customary closing conditions.

The Company intends to use the net proceeds from the offering of Series 11 Preferred Shares to reduce indebtedness of the Company under its credit facilities as well as for capital expenditures and working capital requirements in connection with the Company’s 2016 capital program. The indebtedness of the Company was incurred in the normal course of business to fund the Company’s capital program.

The offering is being made by means of a prospectus supplement under the short form base shelf prospectus filed by the Company on March 18, 2015 in each of the provinces of Canada.

Implied Volatility analysis shows that the issue is reasonably priced. While the curve-fitting implies that the issue is a little rich [theoretical price is $24.57], the high level of Implied Volatility leads to the conclusion that there is a very high degree of directional bias in the pricing of PPL’s FixedResets – which is also something affecting other series of other issuers. 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 issue) will significantly outperform the lower-spread issues.

On the other hand, the directional bias could be quite right! There will be many among us who think that +500 is a ridiculous spread, even for a resource-centric junk issue 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 350bp Spread and 10% Implied Volatility implies that the extant PPL preferreds will enjoy total capital gains in the area of 20%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; even then, all but one of the extant issues will be trading at a discount!

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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The Toronto-Dominion Bank has announced:

a domestic public offering of Non-Cumulative 5-Year Rate Reset Preferred Shares (non-viability contingent capital (NVCC)), Series 12 (the “Series 12 Shares”).

TD has entered into an agreement with a group of underwriters led by TD Securities Inc. to issue, on a bought deal basis, 12 million Series 12 Shares at a price of $25.00 per share to raise gross proceeds of $300 million. TD has also granted the underwriters an option to purchase, on the same terms, up to an additional 2 million Series 12 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 12 Shares will yield 5.5% annually, with dividends payable quarterly, as and when declared by the Board of Directors of TD, for the initial period ending April 30, 2021. Thereafter, the dividend rate will reset every five years at a level of 4.66% over the then five-year Government of Canada bond yield.

Subject to regulatory approval, on April 30, 2021 and on April 30 every 5 years thereafter, TD may redeem the Series 12 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 12 Shares will have the right to convert their shares into Non-Cumulative Floating Rate Preferred Shares (NVCC), Series 13 (the “Series 13 Shares”), on April 30 2021, and on April 30 every five years thereafter. Holders of the Series 13 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 4.66%.

The expected closing date is January 14, 2016. TD will make an application to list the Series 12 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:

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 12 (the “Series 12 Shares”), the size of the offering has been increased to 28 million Series 12 Shares. The gross proceeds of the offering will now be $700 million. The offering will be underwritten by a group of underwriters led by TD Securities Inc.

The expected closing date is January 14, 2016. TD will make an application to list the Series 12 Shares as of the closing date on the Toronto Stock Exchange. The net proceeds of the offering will be used for general corporate purposes.

Holy smokes! $700-million! Monster!

Implied Volatility analysis shows that the issue is attractively priced. While the curve-fitting implies a decent price concession of $0.25 [theoretical price is $25.25], 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 issue) will significantly outperform the lower-spread issues.

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 +466 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 20% (more precisely, the average of the five extant NVCC-compliant issues is +18.4%) 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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The Bank of Nova Scotia has announced:

a domestic public offering of Non-cumulative 5-Year Rate Reset Preferred Shares, Series 34 (Non-Viability Contingent Capital (NVCC)) (the “Preferred Shares Series 34”).

Scotiabank has agreed to sell 12 million of Preferred Shares Series 34 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 34 at the same offering price.

Scotiabank will issue Preferred Shares Series 34 priced at $25 per share and holders will be entitled to receive a non-cumulative quarterly fixed dividend for the initial period ending on and including April 25, 2021 in the amount of $1.3750 per share, to yield 5.50 per cent annually.

On or after April 26, 2021, Scotiabank may, at its option, with the prior approval of the Superintendent of Financial Institutions (Canada), redeem in whole at any time or in part from time to time at a redemption price which is equal to par. Thereafter, the dividend rate will reset every five years at a rate equal to 4.51% over the 5-year Government of Canada bond yield. Holders of Preferred Shares Series 34 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 35 (Non-Viability Contingent Capital (NVCC)) (the “Preferred Shares Series 35”) of Scotiabank on April 26, 2021 and on April 26 every five years thereafter.

Holders of the Preferred Shares Series 35 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 4.51%, as and when declared by the Board of Directors of Scotiabank. Holders of Preferred Shares Series 35 will, subject to certain conditions, have the right to convert all or any part of their shares to Preferred Shares Series 34 on April 26, 2026 and on April 26 every five years thereafter.

Closing is expected to occur on or after December 17, 2015. 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.

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

DBRS Limited (DBRS) has today assigned a provisional rating of Pfd-2 with a Stable trend to the Bank of Nova Scotia’s Non-Cumulative 5-Year Rate Reset Preferred Shares Series 34 (NVCC Preferred Shares or Series 34).

DBRS assigned the NVCC Preferred Shares a rating equal to the Bank’s intrinsic assessment of AA (low) less four rating notches, consistent with DBRS’s criteria titled “Rating Bank Capital Securities — Subordinated, Hybrid, Preferred & Contingent Capital Securities.”

This is Scotia’s first NVCC-compliant FixedReset issue, so there is no real point in performing an Implied Volatility analysis.

Royal Bank of Canada has announced:

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

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

The Preferred Shares Series BK 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 May 24, 2021. Thereafter, the dividend rate will reset every five years at a rate equal to 4.53 per cent over the 5-year Government of Canada bond yield.

Subject to regulatory approval, on or after May 24, 2021, the bank may redeem the Preferred Shares Series BK in whole or in part at par. Holders of Preferred Shares Series BK 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 BL on May 24, 2021 and on May 24 every five years thereafter.

Holders of the Preferred Shares Series BL 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 4.53 per cent. Holders of Preferred Shares Series BL will, subject to certain conditions, have the right to convert all or any part of their shares to Preferred Shares Series BK on May 24, 2026 and on May 24 every five years thereafter.

The offering will be underwritten by a syndicate led by RBC Capital Markets. The expected closing date is December 16, 2015.

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 BK, the size of the offering has been increased to 27 million shares. The gross proceeds of the offering will now be $675 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 BK at the same offering price. The offering will be underwritten by a syndicate led by RBC Capital Markets. The expected closing date is December 16, 2015.

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.

$675-million! That’s a monster issue!

Implied Volatility analysis reveals that this issue – contrary to most new issues – is attractively priced, with a good concession to the market. Although the four extant NVCC-compliant issues appear to form a steeper curve without the influence of the new issue than with it, the Implied Volatility with the new issue included in the analysis is still a very high 24%. I consider this value to be ridiculously high; hence I expect a flattening of the curve; hence I consider the new issue more likely to outperform its peers than otherwise.

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Update: Assiduous Reader prefQC reminds me in the comments that I neglected to discuss the lack of a floor rate on future resets of the issue.

The question of whether banks could issue NVCC-compliant preferred shares with a floor on future resets was first discussed when the feature first appeared, in the post New Issue: CU FixedReset, 4.50%+369M450, with a little information coming later in the comments to New Issue (Private): BMO FixedReset (?) 5.85%+???.

There is no authoritative new information available – but I will infer from the absence of a reset floor from this issue and from the New Issue: BNS FixedReset 5.50%+451 that was also announced today that the feature has been disallowed by OSFI. So, whatever one might think of my reasoning, I came up with the wrong answer.

As is always the case, OSFI’s traditions of secrecy, contempt for investors and general incompetence are well summed up in the fact that they have published no commentary on this issue.

Update, 2015-12-10: I’ve heard a whisper from the street that OSFI said ‘no’ to a minimum reset.

Update, 2015-12-18: Assiduous Reader prefobsessed alerted me to a Barry Critchley column titled Banks have to pay up if they want to issue preferred shares: Royal and BNS offer 5.50% in which he makes a passing, but unsupported assertion regarding OSFI’s views on floor rates for NVCC-compliant issues:

Other pref share issuers also face a similar environment: if they want to raise capital in this form they have to pay up. Last week, Brookfield Infrastructure Partners raised $125 million at a coupon of 5.50 per cent. But other issuers have more flexibility than the banks: they can include a so-called floor coupon, which means that the new rate in five years will at least be equal to the current coupon. The bank’s regulator OSFI has ruled that option out for the banks, at least for the time being.

Spectra Energy has announced that its subsidiary:

Westcoast Energy Inc. (the “Corporation”) announced today that it has entered into an agreement with a syndicate of underwriters co-led by BMO Capital Markets and Scotiabank. The underwriters have agreed to buy 4,000,000 Cumulative 5-Year Minimum Rate Reset Redeemable First Preferred Shares, Series 10 (the “Series 10 First Preferred Shares”) at a price of $25.00 per share for aggregate gross proceeds of $100,000,000. The proceeds are expected to be used to refinance upcoming debt maturities and for general corporate purposes.

Westcoast Energy Inc. has granted the underwriters an option to purchase at the offering price an additional 15% of the Series 10 First Preferred Shares exercisable in whole or in part at any time up to 30 days following closing to cover over-allotments, if any. Should the option be fully exercised, the total gross proceeds of the Series 10 First Preferred Share offering will be $115,000,000.

The Series 10 First Preferred Shares will be issued to the public at a price of $25.00 per share and holders will be entitled to receive fixed cumulative preferential cash dividends, payable by quarterly installments for an initial period of five years, as and when declared by the Board of Directors of the Corporation, at a rate of $1.3125 per share per annum, to yield 5.25% annually. Thereafter, the dividend rate will reset every five years to the sum of the then current 5-Year Government of Canada Bond yield and 4.26%, provided that, in any event, such rate shall not be less than 5.25%. On January 15, 2021, and on January 15 of every fifth year thereafter, the Corporation may redeem the Series 10 First Preferred Shares in whole or in part at par.

Holders will have the right to elect to convert all or any of their Series 10 First Preferred Shares into an equal number of Cumulative Floating Rate Redeemable First Preferred Shares, Series 11 (the “Series 11 First Preferred Shares”) on January 15, 2021, and on January 15 of every fifth year thereafter. Holders of the Series 11 First Preferred Shares will be entitled to receive quarterly floating rate cumulative preferential cash dividends, as and when declared by the Board of Directors of the Corporation, equal to the sum of the then current 3-month Government of Canada Treasury Bill yield and 4.26%. On January 15, 2026 and on January 15, of every fifth year thereafter, the Corporation may redeem the Series 11 First Preferred Shares in whole or in part at par. On any other date after January 15, 2026, the Corporation may redeem the Series 11 First Preferred Shares in whole or in part by the payment of $25.50 for each share to be redeemed.

The offering is being made only in the provinces of Canada by means of a short form prospectus. The closing date of the offering is expected to be on or about December 15, 2015.