Fortis Inc has announced that they will be issuing a new series of prefs: perpetuals paying 4.9% (= $1.225 per share annually).
These become redeemable Dec. 1, 2011 at $26.00, the redemption price declining by $0.25 annually until redeemable at $25.00 on and after Dec. 1, 2015.
It’s a bought deal by Nesbitt, issue size 5-million shares = $125-million. The issue is rated only Pfd-3(high) by DBRS [but P-2(low) by S&P], so if purchased, it should be purchased cautiously. Don’t put a lot of eggs in this basket! I’ll comment on relative valuation later today.
Update: OK, I’m looking at it … a final opinion will have to await the final prospectus, but preliminary indications are not good.
There’s not much to which it can be directly compared: There are only two other P3H (DBRS) fixed-rate perpetuals: FAL.PR.H, with an annual dividend of $1.625; and LB.PR.D, paying $1.50. Both are high-coupon with imminent call dates and cannot be considered directly comparable.
There are three index-included issues to look at, priced near par:
| Issue | Price (bid, 2006-09-13 close) | DBRS Rating | Dividend |
| MFC.PR.B | 25.00 | Pfd-1(low) | 1.1625 |
| RY.PR.B | 25.20 | Pfd-1(low) | 1.175 |
| RY.PR.A | 24.73 | Pfd-1(low) | 1.1125 |
The MFC.PR.B commence their redemption eligibility 2010-3-19 at $26.00, declining by $0.25 annually until redeemable at par commencing 2014-03-19. So even from this very rough comparison, you’re giving up the credit quality of Pfd-1(low) to buy Pfd-3(high) and only picking up $0.0625 annual dividend for the exchange, which seems pretty niggardly. According to Royal Bank trading prices, if we can assume for a minute they’re trading fairly (not really!) that’s worth less than $0.50.
When we perform an indirect comparison (via the yield curve) vs. every issue in the (HIMIPref™) universe, we come up with a total intrinsic value of the cash flows of $23.07, which isn’t very good:
| Price due to base-rate | 24.06 |
| Price due to short-term | 0.07 |
| Price due to long-term | 0.73 |
| Price due to Cumulative Dividends | 0.00 |
| Price due to Credit Spread (3) | -1.85 |
| Price due to error | 0.06 |
which to a large extent confirms our suspicions that arose when we looked at the better quality near-par perps: This thing is basically being priced as a high quality issue even though it’s a Pfd-3(high).
The other Fortis issues, FTS.PR.C and FTS.PR.E are both trading about $0.25 above thier intrinsic cash values – so it would appear that the market likes the prospects for this firm and is rating them at “Pfd-3(high)(and a bit)”, if I can be permitted so qualitative an assessment. Note that these two issues are illiquid enough that a “liquidity discount” of about $0.20 each is assessed against them, so they’re trading at maybe $0.45 above their expected “fair” price.
I’ll hasten to add that Pfd-3(high) isn’t all that bad! Hymas Investment Management will have to get an AWFUL lot bigger and more profitable before it’s able to issue Pfd-3(high) prefs. According to DBRS, “Pfd-3 ratings generally correspond with companies whose senior bonds are rated in the higher end of the BBB category”.
But, at least until I’ve had a look at the prospectus, I’ll be advising against the purchase of these instruments. Not only should holdings of Pfd-3 instruments be limited within a portfolio (even when (high)), but it looks like these are simply being priced too aggressively to be worth going after.
Note added 2006-09-15 : These have been added to HIMIPref™ with the ticker symbol “FTS.PR.?”
Note added 2006-09-27 : Looks like the TSX will be listing this issue with the ticker symbol “FTS.PR.F”
