PrefBlog

Enbridge Inc. has announced (on August 19):

that none of its outstanding Cumulative Redeemable Preference Shares, Series 3 (Series 3 Shares) will be converted into Cumulative Redeemable Preference Shares, Series 4 of Enbridge (Series 4 Shares) on September 1, 2019.

After taking into account all conversion notices received from holders of its outstanding Series 3 Shares by the August 19, 2019 deadline for the conversion of the Series 3 Shares into Series 4 Shares, less than the 1,000,000 Series 3 Shares required to give effect to conversions into Series 4 Shares were tendered for conversion.

ENB.PR.Y is a FixedReset, 4.00%+238, that commenced trading 2013-6-6 after being announced 2013-5-28. The issue will reset at 3.737% effective September 1, 2019. I recommended against conversion. ENB.PR.Y is tracked by HIMIPref™ but relegated to the Scraps – FixedReset (Discount) subindex on credit concerns.

Element Fleet Management Corp. has announced (although not yet on their website):

that, pursuant to the rights, privileges, restrictions and conditions attaching to the Cumulative 5-Year Rate Reset Preferred Shares, Series E of the Corporation (the “Series E shares”), as provided in the Corporation’s restated articles of incorporation dated October 4, 2016, the holders of Series E shares have the right, at their option, on September 30, 2019 (the “Series E Conversion Date”) to convert all, or any part, of the then outstanding Series E shares into Cumulative Floating Rate Preferred Shares, Series F of the Corporation (the “Series F shares”) on the basis of one Series F share for each Series E share converted (the “Series E Conversion Privilege”).

The dividend rate applicable to the Series E shares for the period from and including September 30, 2019 up to, but excluding, September 30, 2024, and the dividend rate applicable to the Series F shares for the period from and including September 30, 2019 up to, but excluding, December 31, 2019, will be determined by the Corporation and announced by way of a news release on September 3, 2019.

Beneficial owners of Series E shares who wish to exercise their Series E Conversion Privilege should communicate with their broker or other nominee to obtain instructions for exercising such Series E Conversion Privilege during the notice period, which will run from September 3, 2019 until 5:00 p.m. (Toronto time) on September 16, 2019.

The foregoing Series E Conversion Privilege is subject to the following: (i) holders of Series E shares shall not be entitled to convert their Series E shares into Series F shares on the Series E Conversion Date if the Corporation determines that there would remain outstanding on the Series E Conversion Date less than 500,000 Series F shares, after taking into account all Series E shares tendered for conversion into Series F shares, and (ii) alternatively, if the Corporation determines that there would remain outstanding on the Series E Conversion Date less than 500,000 Series E shares after taking into account all Series E shares tendered for conversion into Series F shares, then all, but not part, of the remaining Series E shares shall automatically be converted into Series F shares on the basis of one Series F share for each Series E share on the Series E Conversion Date. In either case, the Corporation will give written notice to that effect to the sole registered holder of the Series E shares at least seven days prior to the Series E Conversion Date.

EFN.PR.E is a FixedReset, 6.40%+472, that was announced 2014-6-2 but not immediately tracked by HIMIPref™ as it was unrated. Coverage commenced in September, 2015 after the company’s preferreds were rated Pfd-3 by DBRS.

I will have more to say once the reset rate is announced on September 3.

Assiduous Reader coolmesh asked on the August 20 post:

I’ve been watching TD.PF.M getting hammered the last four weeks. Good rate, good reset rate and good quality company. Any thoughts on what’s going there?

TD.PF.M is a FixedReset 5.10%+356, NVCC, that commenced trading 2019-6-4 after being announced 2019-5-24. It is tracked by HIMIPref™ and is assigned to the FixedReset (Discount) subindex.

CM.PR.Y is a FixedReset, 5.15%+362, NVCC, that commenced trading 2019-6-4 after announced May 24. It is tracked by HIMIPref™ and is assigned to the FixedReset (Discount) subindex.

June 4 was the last date we saw a new issue start to trade, as the new issue market is currently ‘closed for re-pricing’, we might say. We might normally expect a bank issue or two to be announced once the banks have gotten their 19Q3 earnings announcements out of the way, but given the tone of the market it won’t be surprising if they just give this opportunity a miss. On the other hand, the grossly foreshortened 5-year call-lockout period for FixedResets means that issuers have relatively little at risk in offering so-called perpetual product in times of elevated yields (this has always been a crucial point with this structure) so who knows?

It will be recalled that with respect to the issue-date pricing of TD.PF.M, I concluded:

According to this [Implied Volatility] analysis, the fair price of the new issue is 23.58, down 0.69 from the announcement day fair value of 24.27.

… while the conclusion for CM.PR.Y was:

According to this analysis, the fair price of the new issue is 23.71, down from the announcement day fair-value of 24.85, but alert Assiduous Readers will have noticed that the Implied Volatility plot is very peculiar, having three expensive issues and four cheap ones, with nothing in between.

So let’s update the Implied Volatility Analyses:

Click for Big

Click for Big

According to these analyses, TD.PF.M continues to be very expensive, bid at 23.86 with a fair price of 22.54; the same applies to CM.PR.Y, bid at 23.50 with a fair value of 22.44.

And now we can turn to relative performance for the month-to-date:

Click for Big

So neither TD.PF.M (Spread +356bp, Performance -4.71%) nor CM.PR.Y (+362bp, -5.81%) are too far out of line with either the series for their issuers or with the general “Pfd-2 Group” (which includes Pfd-2(high) and Pfd-2(low) issues). In fact, they’ve done relatively well due to their relatively high Issue Reset Spreads, although correlation is poor.

There are three obvious outliers that are ruining the correlation analysis: CIU.PR.C (+136bp, -1.55%); BAM.PF.J (+310bp, -0.76%); and VNR.PR.A (+281bp, +0.40%); the last of which is inching towards acquisition at par. If we perform the correlation analysis without these three, we find a correlation of 19% – which isn’t bad, given three weeks of chaos – and it is this correlation that is shown on the chart.

So the short answer to the question:

Any thoughts on what’s going there?

is … the market’s blown up and these issues are not immune. Note that both of these recent new issues remain expensive relative to their peers and I expect this premium pricing to decay over the next twelve months or so, which is equivalent to saying that I expect them both to underperform.

Pembina Pipeline Corporation has announced:

that it has entered into agreements pursuant to which it will acquire Kinder Morgan Canada Limited (TSX: KML) (“Kinder Morgan Canada” or “KML”) (the “Corporate Acquisition”) and the U.S. portion of the Cochin Pipeline system (“Cochin US”) from Kinder Morgan, Inc. (“KMI”) (the “Cochin US Acquisition”) for a total purchase price of approximately $4.35 billion (the “Transaction”). The Transaction values Kinder Morgan Canada at approximately $2.3 billion, or $15.02 per share, based on an all-share exchange ratio of 0.3068 of a common share of Pembina per KML security and Pembina’s 30-day volume weighted average price on the date hereof; and Cochin US at approximately $2.05 billion for cash consideration.

Subject to closing of the Transaction, Pembina’s board of directors has also approved a $0.01 per common share, or approximately five percent, increase to its monthly common share dividend rate.

Through the Transaction, Pembina will acquire strategically located assets including the Cochin Pipeline System, the Edmonton storage and terminal business and Vancouver Wharves, a bulk storage and export/import business. Upon closing, the Transaction immediately provides Pembina with well-established business platforms and substantial opportunities for growth.
…
Under the terms of the arrangement agreement governing the Corporate Acquisition, Pembina will acquire all of the issued and outstanding restricted voting shares (the “Restricted Voting Shares”) and special voting shares (the “Special Voting Shares”) of Kinder Morgan Canada and all of the class B units (the “Class B Units”) of Kinder Morgan Canada Limited Partnership by way of a plan of arrangement under the Business Corporations Act (Alberta). Pembina is offering to acquire each of the outstanding Restricted Voting Shares and each Class B Unit in exchange for 0.3068 of a common share of Pembina, which represents a 32 percent premium, based on Pembina and Kinder Morgan Canada’s 30-day volume weighted average prices of $48.96 and $11.37, respectively, on the date hereof. The Corporate Acquisition is valued at approximately $2.3 billion including the assumption of Kinder Morgan Canada’s preferred shares and outstanding net debt.

The Corporate Acquisition is subject to approval of: (a) at least 66 2/3 percent of holders of Restricted Voting Shares and Special Voting Shares, voting together as a single class; and (b) a majority of holders of Restricted Voting Shares, in each case present in person or by proxy at a special meeting of the holders of Restricted Voting Shares and Special Voting Shares to be called to consider the Corporate Acquisition, approval of the Court of Queen’s Bench of Alberta, certain regulatory approvals in Canada, and other customary conditions.

KMI, who holds all of the Special Voting Shares (an approximate 70 percent of the voting rights of KML) and a corresponding 70 percent economic interest in Kinder Morgan Canada’s business and assets (by way of its ownership of all the Class B Units), has entered into a support agreement pursuant to which it has agreed to vote its Special Voting Shares in favor of the Corporate Acquisition. The Corporate Acquisition is also subject to clearance under the Competition Act (Canada) and the Canada Transportation Act.

The Corporate Acquisition is valued at approximately $2.3 billion including the assumption of Kinder Morgan Canada’s preferred shares and outstanding net debt. is the crucial phrase for preferred shareholders. There is no huge change in credit quality – KML was downgraded to Pfd-3 by DBRS in March, 2019, while PPL was confirmed at Pfd-3 in April, 2019. Meanwhile, S&P shows both KML and PPL at P-3(high).

The press release does not specify that preferred shareholders will be voting on this arrangement; I have checked with and been told:

The transaction requires 2 votes: (1) a favorable 66 2/3 vote by KML common shareholders in total (KMI will vote its shares in support of the transaction) and (2) a majority approval from holders of the restricted voting shares. So no, the pref holders will not be voting.

I confess I’m a little surprised by this. It may be because this is a plan of arrangement under the Business Corporations Act (Alberta) and we more often see a plan of arrangement under the Canada Business Corporations Act.

Following receipt of the eMail above, I received another one:

There will be a vote of preferred shareholders on whether or not they wish to convert the pref shares to PPL pref shares (under the same terms) if not they will remain as is (KML pref shares under the same terms).

Should you have any further question please reach out.

Thanks,

DBRS comments:

DBRS views the proposed Transaction as having a modestly positive impact on Pembina’s business risk profile,
…
Based on the current proposed financing plan, DBRS expects a modestly negative impact on Pembina’s credit metrics because of the issuance of incremental debt of approximately $2.05 billion for the Transaction. Although Pembina’s credit metrics are expected to weaken, the impact is modest and would not affect the current ratings. Pembina’s financial profile remained strong in 2018 and during the LTM 2019 with solid liquidity and strong credit metrics. For the LTM 2019, the cash flow-to-debt ratio was approximately 26%, EBIT interest coverage was approximately 6.65 times, and debt-to-capital (adjusted for the debt treatment of preferred shares) was under 40%. DBRS has done a pro forma assessment on the impact of the $2.05 billion acquisition debt on the three above-mentioned metrics and is satisfied that these metrics would still solidly support the BBB ratings.

Affected issues are KML.PR.A and KML.PR.C. Both issues were up smartly on the day; KML.PR.A up $0.68 to 22.35 (close/close) and KML.PR.C up $0.80 to 22.25 (close/close).

KML.PR.A is a FixedReset 5.25%+365M525 that commenced trading 2017-8-15 after being announced 2017-8-3. It is tracked by HIMIPref™ but relegated to the Scraps-FixedReset Discount subindex on credit concerns.

KML.PR.C is a FixedReset, 5.20%+351M520, that commenced trading 2017-12-15 after being announced 2017-12-6. It is tracked by HIMIPref™ but relegated to the Scraps-FixedReset Discount subindex on credit concerns.

Update, 2019-08-22: KML.PR.A & KML.PR.C On Review-Developing by DBRS until additional information becomes available with respect to Pembina’s intention for the Preferred Shares and the proposed capital structure at KMU post completion of the Acquisition.