PrefBlog

Emera Incorporated has announced:

that it will issue 12,000,000 Cumulative Minimum Rate Reset First Preferred Shares, Series H (the “Series H Preferred Shares”) at a price of $25.00 per share and at an initial annual dividend rate of 4.90 per cent, for aggregate gross proceeds of $300 million on a bought deal basis to a syndicate of underwriters in Canada led by Scotiabank, CIBC Capital Markets, RBC Capital Markets and TD Securities Inc. Emera 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 H Preferred Shares at a price of $25.00 per share (the “Underwriters Option”). If the Underwriters Option is exercised in full, the aggregate gross proceeds to Emera will be $350 million.

The holders of the Series H Preferred Shares will be entitled to receive fixed cumulative preferential cash dividends at an annual rate of $1.225 per share, payable quarterly, as and when declared by the board of directors of Emera, yielding 4.90 per cent per annum, for the initial period ending on August 15, 2023. The first of such dividends, if declared, shall be payable on August 15, 2018, and shall be $0.25507 per Series H Preferred Share, based on the anticipated closing of the offering on May 31, 2018. The dividend rate will be reset on August 15, 2023 and every five years thereafter at a rate equal to the sum of the then five-year Government of Canada bond yield plus 2.54 per cent, provided that, in any event, such rate shall not be less than 4.90 per cent per annum. The Series H Preferred Shares are redeemable by Emera, at its option, on August 15, 2023 and on August 15 of every fifth year thereafter.

The holders of Series H Preferred Shares will have the right to convert their shares into Cumulative Floating Rate First Preferred Shares, Series I (the “Series I Preferred Shares”), subject to certain conditions, on August 15, 2023 and on August 15 of every fifth year thereafter. The holders of the Series I Preferred Shares will be entitled to receive quarterly floating rate cumulative preferential cash dividends, as and when declared by the board of directors of Emera, at a rate equal to the sum of the then 90-day Government of Canada treasury bill rate plus 2.54 per cent.

The offering is subject to the receipt of all necessary regulatory and stock exchange approvals. The net proceeds of the offering will be used for general corporate purposes.

This issue was announced almost simultaneously with a new issue from Intact Financial Corporation, a FixedReset 4.90%+255. Barry Critchley remarks:

While the two deals shared similar terms, investors treated them differently. By early afternoon only Intact’s order was completely filled. But sources indicated investors could still post expressions of interest for the Emera offering. On TD Investing’s website, the offering is indicated as open.

This seems quite rational, since the new issue is ridiculously expensive.

according to Implied Volatility Analysis:

Click for Big

According to the analysis above, the fair value is a bit under $24.00 … note, however, that complainers will triumphantly point out that this assigns a value of zero to the Floor Rate Guarantee. But as I stated in the February, 2018, edition of PrefLetter:

It is often asserted that a horrific fall of FixedReset prices is a completely logical expectation; that the 2014-16 bear market was completely justified; that similar experiences will happen again; and that floor rates are an excellent way to protect investors from the decline in income.

This assertion does not make a lot of sense to me. Suppose an investor holds a FixedReset with a coupon rate of 5% and that a decline in government yields makes a reduction to 4% seem both likely and imminent. If the bear market scenario is to play out, this investor and many like him will be selling to avoid experiencing the reset.

But where is this money to be deployed? Yields are already down in the government market and all other fixed income markets will be affected to some degree; corporate-government spreads increased during the recent episode (see Chart FR-63 ), but corporate yields did decline – they just didn’t decline as much. I see no reason for an expectation that FixedReset yields should magically remain constant if the face of global interest rate declines.
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However, any increase in the price of the floor-rate issue is capped by the call price. In the simplest scenario, the non-floor issue will remain priced at par and reset to a 4% distribution, while the floored issue will be called; the investor will then have to reinvest his funds … and find that he is reinvesting at contemporary rates and experiencing transaction costs that are not borne by the investor in the non-floored issue. It’s not much of a win!

In order for the floor rate to have value, both issues must be trading at a discount to par; this will give the floored issue room to rise in price on the secondary market. Such a price rise will be determined by the excess yield to be gained over the next five years until the next reset plus, perhaps, an allowance for the possibility that current conditions will persist and give the holder another chance to reset. The benefit will be capped by the distribution rate difference multiplied by the Modified Duration of the issues (which will normally be in the range of 20 to 25), so a price difference of between 20% and 25% for a one percent decline in government yields. However, this potential gain is capped by the potential for a call, so the issues must already be trading at a 20%-25% discount to par for this maximum to be reached … and to work out the value of this scenario, we must then calculate the probability of such a decline in government yields.

Once we see floor-rate issues trading at large discounts in an environment in which a significant decline in government rates has a reasonable probability, I will revisit my opinion of the value of such guarantees. I’m not holding my breath.

However, even those unimpressed by all that “Implied Volatility” blather and tiresome pettifogging regarding Floor Guarantees should be, at the very least, tempted by EMA.PR.A in preference to the new issue. Sure, it only pays 2.555% at present … but it will reset on 2020-8-15 at GOC-5 + 184, or – given today’s GOC-5 yield of 2.33% – 4.17%. It was quoted today at 19.09-25, an Expected Future Current Yield of 5.46%, which ain’t bad for investment grade!

Brompton Group has announced:

Brompton Funds Limited (the “Manager”) is pleased to announce that Global Dividend Growth Split Corp. (the “Company”) has filed a preliminary prospectus dated April 24, 2018 in respect of an initial public offering of preferred shares and class A shares (the “Preliminary Prospectus”).

The Company will invest in a diversified portfolio (the “Portfolio”) of equity securities of large capitalization global dividend growth companies selected by the Manager. In order to qualify for inclusion in the Portfolio, at the time of investment and at the time of each periodic reconstitution and/or rebalancing of the Portfolio, each global dividend growth company included in the Portfolio must (i) have a market capitalization of at least US$10 billion; and (ii) have a history of dividend growth or, in the Manager’s view, have high potential for future dividend growth.

The Manager expects that at least 20 global dividend growth companies will comprise the Portfolio. The indicative portfolio includes: Airbus SE, Apple Inc., AstraZeneca plc, BCE Inc., Carnival Corporation, Cisco Systems Inc., Deutsche Post AG, Enbridge Inc., HSBC Holdings plc, Intel Corporation, IBM Corporation, Johnson & Johnson, JP Morgan Chase & Co., Manulife Financial Corporation, Novartis AG, Pfizer Inc., Proctor & Gamble Co., Sanofi SA, Siemens AG, Sun Life Financial Inc., TELUS Corporation, Texas Instruments Inc., Toronto-Dominion Bank, UBS Group AG, and Vinci SA.

The class A shares will be offered at a price of $12.00 per share. The investment objectives for the class A shares are to provide holders with regular monthly non-cumulative cash distributions and the opportunity for capital appreciation through exposure to the Portfolio. The monthly cash distribution is targeted to be $0.10 per class A share representing a yield on the issue price of the class A shares of 10.0% per annum.

The preferred shares will be offered at a price of $10.00 per share. 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 June 30, 2021, subject to extension for successive terms of up to five years as determined by the board of directors of the Company. The quarterly cash distribution will be $0.1250 per preferred share ($0.50 per annum, or 5.0% per annum on the issue price of $10.00 per preferred share), until June 30, 2021. The preferred shares have been provisionally rated Pfd-3 (high) by DBRS Limited.

Prospective purchasers investing in the Company will have the option of paying for shares in cash or by an exchange of freely-tradable listed securities of any eligible issuers listed in the Preliminary Prospectus (the “Exchange Option”). Prospective purchasers who utilize the Exchange Option are required to deposit their securities of exchange eligible issuers by no later than 5:00 p.m. (Toronto time) on May 24, 2018 through CDS. Please contact your investment advisor or refer to the Preliminary Prospectus for detailed information on how to participate in the offering by way of either cash purchase or the exchange option.

Brompton Funds Limited will act as the manager and portfolio manager of the Company. The Manager currently manages five split share corporations with combined assets of over $1.3 billion.

The syndicate of agents for the offering is being led by RBC Capital Markets, CIBC Capital Markets, National Bank Financial Inc. and Scotiabank and includes BMO Capital Markets, TD Securities Inc., Canaccord Genuity Corp., GMP Securities L.P., Raymond James Ltd., Echelon Wealth Partners., Industrial Alliance Securities Inc., Desjardins Securities Inc., and Mackie Research Capital Corporation.

This follows yesterday’s announcement of a provisional Pfd-3(high) rating from DBRS.

DBRS has announced that it:

assigned a provisional rating of Pfd-3 (high) to the Preferred Shares to be issued by Global Dividend Growth Split Corp. (the Company). The Company will issue an equal number of Preferred Shares and Class A Shares at an issue price of $10.00 per Preferred Share and $12.00 per Class A Share. The Preferred Shares will be scheduled to mature on June 30, 2021.

Net proceeds from the offering will be used to invest in a portfolio of equity securities of large capitalization global dividend growth companies (the Portfolio).

A search of SEDAR reveals the following documents:

Global Dividend Growth Split Corp. Apr 25 2018 10:33:25 ET Decision Document (Preliminary) PDF 70 K

Global Dividend Growth Split Corp. Apr 24 2018 20:54:40 ET Preliminary long form prospectus – English PDF 871 K

Global Dividend Growth Split Corp. Apr 24 2018 20:54:40 ET Preliminary long form prospectus – French PDF 898 K

As usual, I am not permitted to link directly to these public documents as the Canadian Securities Administrators would prefer that you buy a GIC instead.

Canoe EIT Income Fund has announced:

that it has entered into an agreement with a syndicate of underwriters (the “Underwriters”) led by Scotia Capital Inc. (“Scotia Capital”) to sell, 2,800,000 Cumulative Redeemable Series 2 Preferred Units (3,220,000 Cumulative Redeemable Series 2 Preferred Units if the over-allotment described below is exercised in full) of the Fund (“Series 2 Preferred Units”), on a “bought deal” basis, at a price of $25.00 per Series 2 Preferred Unit (the “Offering Price”) for gross proceeds of approximately $70 million (approximately $80.5 million if the over-allotment option is exercised in full) (the “Offering”).

Holders of the Series 2 Preferred Units will be entitled to fixed cumulative preferential cash distributions of $1.20 per Series 2 Preferred Unit per annum, as and when declared, which will accrue from the date of issue and will be payable quarterly on the 15th day of March, June, September and December in each year. On or after March 15, 2025, the Series 2 Preferred Units will be retractable for cash, at the option of the holder, for $25.00 per Series 2 Preferred Unit, together with any accrued and unpaid distribution in respect of such Series 2 Preferred Units, less any tax required by law to be deducted therefrom. The Series 2 Preferred Units are provisionally rated Pfd-2 (high) by Dominion Bond Rating Service Limited.

The Fund has agreed to grant the Underwriters an over-allotment option to purchase up to an additional 420,000 Series 2 Preferred Units at the Offering Price on the same terms and conditions, exercisable in whole or in part at any time for a period of up to 30 days following closing of the Offering.

The Fund intends to use the proceeds from the Offering in accordance with the investment objectives and investment strategies of the Fund, subject to the investment restrictions of the Fund.

DBRS has issued a provisional rating of Pfd-2(high):

DBRS Limited (DBRS) assigned a provisional rating of Pfd-2 (high) to the Cumulative Redeemable Series 2 Preferred Units (the Series 2 Preferred Units) to be issued by Canoe EIT Income Fund (the Fund) that will rank pari passu with the existing Cumulative Redeemable Series 1 Preferred Units (the Series 1 Preferred Units; collectively with the Series 2 Preferred Units, the Preferred Units). The Fund can issue an unlimited number of capital units (the Fund Units) and can also issue in series Preferred Units up to a maximum aggregate amount equal to 25% of the Fund’s total assets after giving effect to the proposed offering of Preferred Units

As of March 14, 2018, assuming no capital distributions or special dividends paid, the net asset value of the Fund would have to fall by approximately 81% for the holders of the Preferred Units to be in a loss position. The Series 1 Preferred Unit holders currently receive quarterly cumulative preferential cash distributions of $0.30 (or $1.20 annually), representing a 4.80% per-annum return on the issue price of $25.00. The holders of the Fund Units receive targeted monthly cash distributions of $0.10, amounting to $1.20 per annum. In addition, up to 10% of the aggregate outstanding Units may be redeemed at the option of the Unit holders each calendar year on a date determined by the Fund. The Series 1 Preferred Units are retractable for cash at the option of the holder on or after March 15, 2024.

In assigning the provisional rating, DBRS has considered the expected level of downside protection available to holders of the Series 2 Preferred Units and the composition and diversification of the portfolio. In addition, DBRS has taken into account the potential grind on the portfolio arising from the distributions to the Units and redemption rights, the potential foreign exchange risk because of some investments in foreign currencies not being hedged and the fact that the lenders under the Credit Facility have priority over the Fund’s assets up to the amount of credit outstanding. Because of the amount of the Credit Facility compared with the current total assets, DBRS does not consider the latter risk to be significant.

Investors should note that distributions will be a mix of eligible dividends, capital gains and return of capital. I anticipate that the following language from the EIT.PR.A prospectus will be essentially repeated:

A Holder will generally be required to include in computing the Holder’s income for tax purposes in each year the amount of income and net taxable capital gains, if any, paid or payable, or deemed to be paid or payable, to the Holder in the year by the Fund to the extent that the Fund deducts such amount in computing its income for tax purposes. The Fund’s income and net taxable gains for the purposes of the Tax Act will be allocated to the holders of Units and Preferred Units in the same proportion as the distributions received by such holders.

The amount of the non-taxable portion of any net realized capital gains of the Fund that is paid or payable to a Holder in a taxation year will not be included in computing the Holder’s income for the year. The Holder will not be required to reduce the adjusted cost base of the Holder’s Series 1 Preferred Units by such an amount.

Any other amount in excess of the income for tax purposes of the Fund that is paid or payable to a Holder in that year generally will not be included in the Holder’s income for the year, but the Holder will be required to reduce the adjusted cost base of the Holder’s Series 1 Preferred Units by that amount. To the extent that the adjusted cost base of a Series 1 Preferred Unit would otherwise be a negative amount, the negative amount will be deemed to be a capital gain and the adjusted cost base of the Series 1 Preferred Unit to the Holder will then be nil. The taxation of capital gains is described below (see “Capital Gains and Capital Losses”).

Provided that appropriate designations are made by the Fund, such portion of: (a) the net realized taxable capital gains of the Fund; (b) the foreign source income of the Fund and foreign taxes paid by the Fund eligible for the foreign tax credit; and (c) the taxable dividends (including eligible dividends) received, or deemed received, by the Fund on shares of taxable Canadian corporations, (including distributions from SIFT trusts or SIFT partnerships deemed to be taxable dividends under the SIFT Rules) as is paid or payable to a Holder will effectively retain their character and be treated as such in the hands of the Holder for purposes of the Tax Act. Amounts which retain their character in the hands of a Holder as taxable dividends on shares of taxable Canadian corporations will, in the case of a Holder who is an individual, be eligible for the normal gross-up and dividend tax credit rules under the Tax Act; and will, in the case of a Holder who is a corporation, generally be deducted in computing taxable income.

For the 2017 tax year the breakdown was:

Announcement of this issue knocked hell out of the trading price of EIT.PR.A, (also with a 4.8% coupon, retractible one year prior to the new issue) which commenced trading 2017-3-17 after being announced 2017-3-8 with marketting beginning 2017-2-22. It closed with a quote of 25.55-26.55 yesterday (last price 25.75) and today was 25.35-38, last price 25.28 on volume of 21,200. Today’s relative prices seem about right to me.

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 18 (the “Series 18 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 18 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 18 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 18 Shares will yield 4.70% annually, with dividends payable quarterly, as and when declared by the Board of Directors of TD, for the initial period ending April 30, 2023. Thereafter, the dividend rate will reset every five years at a level of 2.70% over the then five-year Government of Canada bond yield.

Subject to regulatory approval, on April 30, 2023 and on April 30 every 5 years thereafter, TD may redeem the Series 18 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 18 Shares will have the right to convert their shares into Non-Cumulative Floating Rate Preferred Shares (NVCC), Series 19 (the “Series 19 Shares”), on April 30, 2023, and on April 30 every five years thereafter. Holders of the Series 19 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 2.70%.

The expected closing date is March 14, 2018. TD will make an application to list the Series 18 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 18 (the “Series 18 Shares”), the size of the offering has been increased to 14 million Series 18 Shares. The gross proceeds of the offering will now be $350 million. The offering will be underwritten by a group of underwriters led by TD Securities Inc.

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

Click for Big

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

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

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.

According to the analysis shown above, the fair value of this issue is 24.17. Careful Assiduous Readers will note that TD.PF.I, a FixedReset 4.50%+301 that commenced trading 2017-7-14, closed today at 25.04-20. The extra 20bp of initial dividend rate is worth $0.05 annually, or a total of a little over $0.20 extra for the new issue … but if they both reset then TD.PF.I will get – to the extent reset rates nine months apart are the same – $0.0775 p.a. more than the new issue. According to the Implied Volatility analysis above, the fair value of TD.PF.I is 24.91.

Industrial Alliance Insurance and Financial Services Inc. has announced (emphasis from original) that it and:

PPI Management Inc. (PPI), a leading Canadian insurance marketing firm, today announced that they have reached an agreement for iA Financial Group to acquire PPI. The transaction is effective immediately.
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The Company announces that it has today entered into an agreement pursuant to which a syndicate of underwriters co-led by TD Securities Inc. and National Bank Financial Inc. (the “Common Share Underwriters”) will purchase, on a bought deal basis, 2,500,000 common shares from iA Financial Group at a price of $54.10 per common share, representing aggregate gross proceeds of $135 million (the “Common Share Offering”).
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Series I Preferred Share Offering
The Company announces that it today also entered into an agreement with a syndicate of underwriters co-led by TD Securities Inc. and National Bank Financial Inc. (the “Preferred Share Underwriters”), under which the Preferred Share Underwriters have agreed to buy, on a bought deal basis, 6,000,000 Non-Cumulative 5-Year Rate Reset Class A Preferred Shares Series I (the “Series I Preferred Shares”) from iA Financial Group at a price of $25.00 per Series I Preferred Share, representing aggregate gross proceeds of $150 million (the “Series I Preferred Share Offering” and, together with the Common Share Offering, the “Offerings”). iA Financial Group has also granted the Preferred Share 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 2,000,000 Series I Preferred Shares at a price of $25.00 per share for additional aggregate gross proceeds of up to $50 million.

Holders of the Series I Preferred Shares will be entitled to receive a non-cumulative quarterly fixed dividend of $1.20 per Series I Preferred Share, yielding 4.80% per annum, as and when declared by the Board of Directors of iA Financial Group, for the initial period up to but excluding March 31, 2023. On March 31, 2023 and on March 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 2.75%. Holders of the Series I Preferred Shares will have the right, at their option, to convert their shares into Non-Cumulative Floating Rate Class A Preferred Shares Series J (the “Series J Preferred Shares”), subject to certain conditions and the Company’s right to redeem the Series I Preferred Shares as described below, on March 31, 2023 and on March 31 every five years thereafter. Holders of the Series J Preferred Shares will be entitled to receive a quarterly non-cumulative floating rate dividend, as and when declared by the Board of Directors of iA Financial Group, equal to the 90-day Government of Canada Treasury Bill Rate plus 2.75%. Holders of the Series J Preferred Shares will have the right, at their option, to convert their shares into Series I Preferred Shares, subject to certain conditions and the Company’s right to redeem the Series J Preferred Shares as described below, on March 31, 2028 and on March 31 every five years thereafter.

The Series I Preferred Shares will not be redeemable by iA Financial Group prior to March 31, 2023. On March 31, 2023 and on March 31 every five years thereafter, iA Financial Group may, subject to certain conditions (including regulatory approval), redeem all or any part of the Series I Preferred Shares at a cash redemption price per share of $25.00 together with all declared and unpaid dividends. The Company may redeem all or any part of the Series J Preferred Shares at a cash redemption price per share of $25.00 together with all declared and unpaid dividends in the case of redemptions on March 31, 2028 and on March 31 every five years thereafter or $25.50 together with all declared and unpaid dividends in the case of redemptions on any other date after March 31, 2023.

The net proceeds of the Offerings will be used for general corporate purposes and to maintain and replenish iA Financial Group’s capital base, including after giving effect to the payment of the purchase price for the Acquisition.

On a pro forma basis, after giving effect to the Offerings (but without giving effect to any potential exercise of the over-allotment option under the Common Share Offering or the Preferred Share Underwriters’ option), the Company estimates that, as at December 31, 2017, its solvency ratio would increase by 12 percentage points, from 209% to 221%. After giving effect to the PPI acquisition completed today on February 26, 2018 (-8 percentage points) and the DAC acquisition completed earlier on January 23, 2018 (-8 percentage points), the solvency ratio would be 205%.

The Common Share Offering and the Series I Preferred Share Offering are each expected to separately close on or about March 7, 2018, subject to certain conditions, including Toronto Stock Exchange and other customary regulatory approvals. The Offerings will be made pursuant to separate prospectus supplements to iA Financial Group’s short form base shelf prospectus dated June 22, 2017, which will be filed with the Canadian securities regulatory authorities and will be available on SEDAR at www.sedar.com.

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

This issue isn’t all that badly priced. IAG.PR.G, the only other FixedReset issued by the company, is currently described as 3.777%+285 and will reset 2022-6-30 – prior to the reset of this new issue. It closed today at 24.15-22. You’re losing about a point in dividends every year for the four years-odd until reset on a $25.00 par value, so that’s worth a buck; this correction means the issues are reasonably close to being fairly-priced relative to each other. The yields to the Deemed Maturity 2025-1-31 are 4.88% for IAG.PR.G and 4.82% for the new issue, after accounting for resets at the current GOC-5 level.

Manulife Financial Corporation has announced:

a Canadian public offering of Non-cumulative Rate Reset Class 1 Shares Series 25 (“Series 25 Preferred Shares”). Manulife will issue 10 million Series 25 Preferred Shares priced at $25 per share to raise gross proceeds of $250 million. The offering will be underwritten by a syndicate of investment dealers co-led by RBC Capital Markets, Scotiabank and TD Securities 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 25 Preferred Shares at the same offering price. The gross proceeds raised under the offering will be $300 million should this option be exercised in full. The expected closing date for the offering is February 20, 2018. Manulife intends to file a prospectus supplement to its December 15, 2017 base shelf prospectus in respect of this issue.

Holders of the Series 25 Preferred Shares will be entitled to receive a non-cumulative quarterly fixed dividend yielding 4.70 per cent annually, as and when declared by the Board of Directors of Manulife, for the initial period ending June 19, 2023. Thereafter, the dividend rate will be reset every five years at a rate equal to the 5-year Government of Canada bond yield plus 2.55 per cent.

Holders of Series 25 Preferred Shares will have the right, at their option, to convert their shares into Non-cumulative Floating Rate Class 1 Shares Series 26 (“Series 26 Preferred Shares”), subject to certain conditions, on June 19, 2023 and on June 19 every five years thereafter. Holders of the Series 26 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 2.55 per cent.

Manulife intends to use the net proceeds from the offering for general corporate purposes, including funding the recently announced redemption of The Manufacturers Life Insurance Company’s outstanding $200 million principal amount of 2.819% Fixed/Floating Subordinated Debentures due February 26, 2023.

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

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

Click for Big

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

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

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

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

All told, though, I have no hesitation in slapping an ‘Expensive’ label on this issue – according to the Implied Volatility analysis shown above, the theoretical price of the new issue without any accounting for the potential of a DeemedRetraction is 24.00. Mind you, the Implied Volatility cap rate of 40% is arbitrary; perhaps if I allowed 50% or so the new issue would sit on the curve … but in that case, Implied Volatility has become a completely arbitrary meaningless number.

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 8 million non-cumulative 5-year rate reset first preferred shares series 40 (non-viability contingent capital (NVCC)) (the “Series 40 Preferred Shares”) at a price of $25.00 per share, to raise gross proceeds of $200 million.

National Bank has granted the underwriters an option to purchase, on the same terms, up to an additional 4 million Series 40 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 40 Preferred Shares will yield 4.60% annually, payable quarterly, as and when declared by the Board of Directors of National Bank, for the initial period ending May 15, 2023. The first of such dividends, if declared, shall be payable on May 15, 2018. Thereafter, the dividend rate will reset every five years at a level of 258 basis points over the then 5-year Government of Canada bond yield. Subject to regulatory approval, National Bank may redeem the Series 40 Preferred Shares in whole or in part at par on May 15, 2023 and on May 15 every five years thereafter.

Holders of the Series 40 Preferred Shares will have the right to convert their shares into an equal number of non-cumulative floating rate first preferred shares series 41 (non-viability contingent capital (NVCC)) (the “Series 41 Preferred Shares”), subject to certain conditions, on May 15, 2023, and on May 15 every five years thereafter. Holders of the Series 41 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 258 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, 2018. National Bank intends to file in Canada a prospectus supplement to its November 21, 2016 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 40 (non-viability contingent capital (NVCC)) (the “Series 40 Preferred Shares”), the underwriters have exercised their option to purchase an additional 4,000,000 Series 40 Preferred Shares. The size of the offering has been increased to 12 million shares for gross proceeds of $300 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, 2018.

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

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

Click for Big

We see in this chart many of the same features we saw when reviewing the recent BPO new issue and Tuesday’s BEP issue and yesterday’s CM issue:

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

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

I balk at ascribing a 100% probability to this outcome. There may still be a few old geezers amongst the Assiduous Readers of this blog who can still (faintly) remember the Great Bear Market of 2014-16, in which quite a few similar assumptions made earlier turned out to be slightly inaccurate.

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

All told, though, I have no hesitation in slapping an ‘Expensive’ label on this issue – according to the Implied Volatility analysis shown above, the theoretical price of the new issue is 24.01.