PrefBlog

Pembina Pipeline Corporation has announced:

that none of Pembina’s Cumulative Redeemable Rate Reset Class A Preferred Shares, Series 5 (“Series 5 Shares”) (TSX: PPL.PR.E) will be converted into Cumulative Redeemable Floating Rate Class A Preferred Shares, Series 6 of Pembina (“Series 6 Shares”) on June 3, 2019.

After taking into account all conversion notices received from holders of its outstanding Series 5 Shares by the May 17, 2019 deadline for the conversion of the Series 5 Shares into Series 6 Shares, less than the 1,000,000 Series 5 Shares required to give effect to conversions into Series 6 Shares were tendered for conversion.

PPL.PR.E is a FixedReset, 5.00%+300, that commenced trading 2014-1-16 after being announced 2014-1-7. It will reset At 4.573% effective June 1, 2019. I recommended against conversion. The issue is tracked by HIMIPref™ but relegated to the Scraps – FixedReset Discount index on credit concerns.

Enbridge Inc. has announced (on May 17):

that none of Enbridge’s outstanding Cumulative Redeemable Preference Shares, Series R (Series R Shares) will be converted into Cumulative Redeemable Preference Shares, Series S of Enbridge (Series S Shares) on June 1, 2019.

After taking into account all conversion notices received from holders of its outstanding Series R Shares by the May 17, 2019 deadline for the conversion of the Series R Shares into Series S Shares, less than the 1,000,000 Series R Shares required to give effect to conversions into Series S Shares were tendered for conversion.

ENB.PR.T is a FixedReset, 4.00%+250, that commenced trading 2012-12-5 after being announced 2012-11-26. It will reset At 4.073% effective June 1, 2019. I recommended against conversion. It is tracked by HIMIPref™ but relegated to the Scraps – FixedReset (Discount) subindex on credit concerns.

Manulife Financial Corporation has announced:

the applicable dividend rates for its Non-cumulative Rate Reset Class 1 Shares Series 15 (the “Series 15 Preferred Shares”) (TSX: MFC.PR.L) and Non-cumulative Floating Rate Class 1 Shares Series 16 (the “Series 16 Preferred Shares”).

With respect to any Series 15 Preferred Shares that remain outstanding after June 19, 2019, holders thereof will be entitled to receive fixed rate non-cumulative preferential cash dividends on a quarterly basis, as and when declared by the Board of Directors of Manulife and subject to the provisions of the Insurance Companies Act (Canada). The dividend rate for the five-year period commencing on June 20, 2019, and ending on June 19, 2024, will be 3.78600% per annum or $0.236625 per share per quarter, being equal to the sum of the five-year Government of Canada bond yield as at May 21, 2019, plus 2.16%, as determined in accordance with the terms of the Series 15 Preferred Shares.

With respect to any Series 16 Preferred Shares that may be issued on June 19, 2019 in connection with the conversion of the Series 15 Preferred Shares into the Series 16 Preferred Shares, holders thereof will be entitled to receive floating rate non-cumulative preferential cash dividends on a quarterly basis, calculated on the basis of actual number of days elapsed in each quarterly floating rate period divided by 365, as and when declared by the Board of Directors of Manulife and subject to the provisions of the Insurance Companies Act (Canada). The dividend rate for the three-month period commencing on June 20, 2019, and ending on September 19, 2019, will be 0.96688% (3.83600% on an annualized basis) or $0.241720 per share, being equal to the sum of the three-month Government of Canada Treasury bill yield as at May 21, 2019, plus 2.16%, as determined in accordance with the terms of the Series 16 Preferred Shares.

Beneficial owners of Series 15 Preferred Shares who wish to exercise their right of conversion should instruct their broker or other nominee to exercise such right before 5:00 p.m. (Toronto time) on June 4, 2019. The news release announcing such conversion right was issued on May 6, 2019 and can be viewed on SEDAR or Manulife’s website. Conversion inquiries should be directed to Manulife’s Registrar and Transfer Agent, AST Trust Company (Canada), at 1‑800-783-9495.

The Toronto Stock Exchange (“TSX”) has conditionally approved the listing of the Series 16 Preferred Shares effective upon conversion. Listing of the Series 16 Preferred Shares is subject to Manulife fulfilling all the listing requirements of the TSX and, upon approval, the Series 16 Preferred Shares will be listed on the TSX under the trading symbol “MFC.PR.S”.

MFC.PR.L is a FixedReset, 3.90%+216, that commenced trading 2014-2-25 after being announced 2014-2-18. The extension was announced 2019-5-7. As it is issued by an Insurance Holding Company and is not compliant with the banks’ NVCC rules, I have added a “Deemed Maturity” entry to the call schedule, which was adjusted in December 2018 to 20130-1-31, at 25.00. MFC.PR.L is tracked by HIMIPref™ and assigned to the FixedReset – Insurance Non-NVCC subindex.

The most logical way to analyze the question of whether or not to convert is through the theory of Preferred Pairs, for which a calculator is available. Briefly, a Strong Pair is defined as a pair of securities that can be interconverted in the future (e.g., MFC.PR.L and the FloatingReset that will exist if enough holders convert). Since they will be interconvertible on this future date, it may be assumed that they will be priced identically on this date (if they aren’t then holders will simply convert en masse to the higher-priced issue). And since they will be priced identically on a given date in the future, any current difference in price must be offset by expectations of an equal and opposite value of dividends to be received in the interim. And since the dividend rate on one element of the pair is both fixed and known, the implied average rate of the other, floating rate, instrument can be determined. Finally, we say, we may compare these average rates and take a view regarding the actual future course of that rate relative to the implied rate, which will provide us with guidance on which element of the pair is likely to outperform the other until the next interconversion date, at which time the process will be repeated.

We can show the break-even rates for each FixedReset / FloatingReset Strong Pair graphically by plotting the implied average 3-month bill rate against the next Exchange Date (which is the date to which the average will be calculated).

The market has regained a little enthusiasm for floating rate product; the implied rates until the next interconversion are below the current 3-month bill rate as the averages for investment-grade and junk issues are at +1.35% and +1.54%, respectively. Whatever might be the result of the next few Bank of Canada overnight rate decisions, I suggest that it is unlikely that the average rate over the next five years will be lower than current – but if you disagree, of course, you may interpret the data any way you like.

Since credit quality of each element of the pair is equal to the other element, it should not make any difference whether the pair examined is investment-grade or junk, although we might expect greater variation of implied rates between junk issues on grounds of lower liquidity, and this is just what we see.

If we plug in the current bid price of the MFC.PR.L FixedReset, we may construct the following table showing consistent prices for its soon-may-be-issued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:

Based on current market conditions, I suggest that the FloatingResets that will result from conversion are likely to trade close to the price of their FixedReset counterparts, MFC.PR.L. Therefore, it seems likely that I will recommend that holders of MFC.PR.L determine whether or not to convert based on their own portfolio considerations and forecast for policy rates, but I will wait until it’s closer to the June 4 notification deadline before making a final pronouncement. I will note that once the FloatingResets commence trading (if, in fact, they do) it may be a good trade to swap one issue for the other in the market once both elements of each pair are trading and you can – hopefully – do it with a reasonably good take-out in price, rather than doing it through the company on a 1:1 basis. But that, of course, will depend on the prices at that time and your forecast for the path of policy rates over the next five years. There are no guarantees – my recommendation is based on the assumption that current market conditions with respect to the pairs will continue until the FloatingResets commence trading and that the relative pricing of the two new pairs will reflect these conditions.

Royal Bank of Canada has announced (on May 14):

that, during the conversion notice period which ran from April 24, 2019 to May 9, 2019, 647,939 Non-Viability Contingent Capital (NVCC) Non-Cumulative 5-Year Rate Reset First Preferred Shares, Series AZ (the “Series AZ shares”) were elected for conversion, on a one-for-one basis, into NVCC Non-Cumulative Floating Rate First Preferred Shares, Series BA (the “Series BA shares”). As per the conditions set out in the prospectus supplement dated January 23, 2014, since less than 1,000,000 Series BA shares would be outstanding after May 24, 2019, holders of Series AZ shares will not be entitled to convert their shares into Series BA shares. As a result, Series BA shares will not be issued at this time.

On May 24, 2019, Royal Bank of Canada will have 20,000,000 Series AZ shares issued and outstanding. The Series AZ shares are currently listed on the Toronto Stock Exchange under the symbol RY.PR.Z.

RY.PR.Z is a NVCC-compliant FixedReset, 4.00%+221, that commenced trading 2014-1-30 after being announced 2014-1-21. The extension was announced 2019-4-12. The issue will reset At 3.700% effective May 24, 2019. I recommended against conversion. This issue is tracked by HIMIPref™ and is assigned to the FixedReset-Discount subindex.