PrefBlog

TransAlta Corporation has announced:

that it does not intend to exercise its right to redeem all or any part of the currently outstanding Cumulative Redeemable Rate Reset First Preferred Shares, Series E (“Series E Shares”) (TSX: TA.PR.H) on September 30, 2017 (the “Conversion Date”).

As a result, and subject to certain conditions set out in the prospectus supplement dated August 3, 2012 relating to the issuance of the Series E Shares, the holders of the Series E Shares will have the right to elect to convert all or any of their Series E Shares into Cumulative Redeemable Floating Rate First Preferred Shares, Series F of the Company (“Series F Shares”) on the basis of one Series F Share for each Series E Share on the Conversion Date.

With respect to any Series E Shares that remain outstanding after September 30, 2017, holders thereof will be entitled to receive quarterly fixed cumulative preferential cash dividends, if, as and when declared by the Board of Directors of TransAlta. The annual dividend rate for the Series E Shares for the five-year period from and including September 30, 2017 to but excluding September 30, 2022, will be 5.194%, being equal to the five-year Government of Canada bond yield of 1.544% determined as of today plus 3.65%, in accordance with the terms of the Series E Shares.

With respect to any Series F Shares that may be issued on September 30, 2017, holders thereof will be entitled to receive quarterly floating rate cumulative preferential cash dividends, if, as and when declared by the Board of Directors of TransAlta. The annual dividend rate for the 3-month floating rate period from and including September 30, 2017 to but excluding December 31, 2017 will be 4.392%, being equal to the annual rate for the most recent auction of 90-day Government of Canada Treasury Bills of 0.742% plus 3.65%, in accordance with the terms of the Series F Shares (the “Floating Quarterly Dividend Rate”). The Floating Quarterly Dividend Rate will be reset every quarter.

As provided in the share conditions of the Series E Shares: (i) if TransAlta determines that there would remain outstanding immediately following the conversion, less than 1,000,000 Series E Shares, all remaining Series E Shares shall be converted automatically into Series F Shares on a one-for one basis effective September 30, 2017; or (ii) if TransAlta determines that there would remain outstanding immediately after the conversion, less than 1,000,000 Series F Shares, holders of Series E Shares shall not be entitled to convert their shares into Series F Shares on the Conversion Date. There are currently 9,000,000 Series E Shares outstanding.

The Series E Shares are issued in “book entry only” form and must be purchased or transferred through a participant in the CDS depository service (“CDS Participant”). All rights of holders of Series E Shares must be exercised through CDS or the CDS Participant through which the Series E Shares are held. The deadline for the registered shareholder to provide notice of exercise of the right to convert Series E Shares into Series F Shares is 3:00 p.m. (MST) / 5:00 p.m. (EST) on September 15, 2017. Any notices received after this deadline will not be valid. As such, holders of Series E Shares who wish to exercise their right to convert their shares should contact their broker or other intermediary for more information and it is recommended that this be done well in advance of the deadline in order to provide the broker or other intermediary with time to complete the necessary steps.

If TransAlta does not receive an election notice from a holder of Series E Shares during the time fixed therefor, then the Series E Shares shall be deemed not to have been converted (except in the case of an automatic conversion). Holders of the Series E Shares and the Series F Shares will have the opportunity to convert their shares again on September 30, 2022, and every five years thereafter as long as the shares remain outstanding.

The Toronto Stock Exchange (TSX) has conditionally approved the listing of the Series F Shares effective upon conversion. Listing of the Series F Shares is subject to TransAlta fulfilling all the listing requirements of the TSX.

TA.PR.H is a FixedReset, 5.00%+365, that commenced trading 2012-8-10 after being announced 2012-8-2. The issue is tracked by HIMIPref™ but has been assigned to the Scraps index on credit concerns.

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., TA.PR.H 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).

Click for Big

The market appears to have a distaste at the moment for floating rate product; most of the implied rates until the next interconversion are lower than the current 3-month bill rate and the averages for investment-grade and junk issues are both below current market rates, at +0.32% and +0.42%, 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 TA.PR.H 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 be cheap and trading below the price of their FixedReset counterparts. Therefore, it seems likely that I will recommend that holders of TA.PR.H continue to hold the issue and not to convert, but I will wait until it’s closer to the September 15 notification deadline before making a final pronouncement. I will note that, given the apparent cheapness of the FloatingResets, it may be a good trade to swap the FixedReset for the FloatingReset in the market once both elements of each pair are trading and you can – presumably, according to this analysis – 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

BCE Inc. has announced:

that 965,769 of its 10,144,302 fixed-rate Cumulative Redeemable First Preferred Shares, Series AA (“Series AA Preferred Shares”) have been tendered for conversion on September 1, 2017, on a one-for-one basis, into floating-rate Cumulative Redeemable First Preferred Shares, Series AB (“Series AB Preferred Shares”). In addition, 2,219,863 of its 9,855,698 Series AB Preferred Shares have been tendered for conversion on September 1, 2017, on a one-for-one basis, into Series AA Preferred Shares. Consequently, on September 1, 2017, BCE will have 11,398,396 Series AA Preferred Shares and 8,601,604 Series AB Preferred Shares issued and outstanding. The Series AA Preferred Shares and the Series AB Preferred Shares will continue to be listed on the Toronto Stock Exchange under the symbols BCE.PR.A and BCE.PR.B, respectively.

The Series AA Preferred Shares will pay on a quarterly basis, for the 5-year period beginning on September 1, 2017, as and when declared by the Board of Directors of BCE, a fixed cash dividend based on an annual fixed dividend rate of 3.61%.

The Series AB Preferred Shares will continue to pay a monthly floating adjustable cash dividend for the 5-year period beginning on September 1, 2017, as and when declared by the Board of Directors of BCE. The monthly floating adjustable dividend for any particular month will continue to be calculated based on the prime rate for such month and using the Designated Percentage for such month representing the sum of an adjustment factor (based on the market price of the Series AB Preferred Shares in the preceding month) and the Designated Percentage for the preceding month.

It will be recalled that after the sending of the conversion notice, the company announced that BCE.PR.A will pay 3.61% of par for the next five years, while BCE.PR.B will continue to pay 100% of Canadian Prime [currently 2.95%], reset quarterly, based on par.

The most logical way to analyze relative pricing of these issues 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., BCE.PR.A and BCE.PR.B). 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 FixedFloater / RatchetRate Strong Pair graphically by plotting the implied average Prime rate against the next Exchange Date (which is the date to which the average will be calculated).

Click for Big

To my surprise, the BCE.PR.A / BCE.PR.B pair is not currently showing a significant price differential, resulting in a break-even average prime rate of 3.69% for the period to 2022-9-1. We’ll see how long that lasts!

Royal Bank of Canada has announced:

its intention, subject to the approval of the Office of the Superintendent of Financial Institutions (OSFI), to redeem all of its issued and outstanding Non-Cumulative First Preferred Shares Series AB (the “Series AB shares”) on September 27, 2017, for cash at a redemption price of CDN $25.00 per share, together with all declared and unpaid dividends. Royal Bank of Canada also announced its intention, subject to the approval of OSFI, to redeem all of its issued and outstanding Non-Cumulative Perpetual First Preferred Shares Series C-1 (the “Series C-1 shares”) on November 13, 2017, for cash at a redemption price of U.S. $1,000 per share (equivalent to U.S. $25.00 per related depositary share), together with all declared and unpaid dividends. The NYSE-listed Series C-1 depositary shares, each of which represents a 1/40th interest in a Series C-1 share will be redeemed concurrently with the redemption of the Series C-1 shares.

In addition, the Bank has also declared a 34-day dividend of CDN $0.109452 per Series AB share covering the period from August 24, 2017 (the date of the last dividend payment), up to but excluding the redemption date of September 27, 2017. This results in a total amount of CDN $25.109452 per Series AB share to be paid upon surrender of the Series AB shares.

The final quarterly dividend of U.S. $13.75 per share for the Series C-1 shares (equivalent to U.S. $0.34375 per related depositary share) will be paid in the usual manner on November 13, 2017 to shareholders of record on November 3, 2017.

There are 12,000,000 Series AB shares and 82,050 Series C-1 shares outstanding. The redemption of the Series AB and C-1 shares will be financed out of the general corporate funds of Royal Bank of Canada.

Please visit http://www.rbc.com/investorrelations/share-information.html to view tax Questions & Answers relating to the redemption of the Series C-1 shares.

RY.PR.B is a 4.7% Straight Perpetual that was issued shortly after I started this blog; it commenced trading 2006-7-20.

The Series C-1 shares were issued in exchange for City National Corporation’s preferred shares as part of the takeover consideration in November 2015.

The decision to redeem RY.PR.B has attracted some comment on PrefBlog with respect to the timing. Assiduous Reader Brian noted:

In the past, when a bank had several prefs in this group, they always seemed to redeem the issue with the lowest dividend first (eg. Bank of Nova Scotia redeemed BNS.pr.M [4.5%] and BNS.pr.N [5.25%] before finally redeeming BNS.pr.O [5.6%]). That made no sense and I’m hoping that someone can explain this backward thinking to me!

We can resolve this with a little help from PrefInfo. BNS.PR.O was redeemed 2017-4-26, which was the first day of its par call. BNS.PR.N was redeemed 2017-1-27, the first day of its par call. And BNS.PR.M was redeemed 2016-7-27, the first day of its par call.

The explanation is rather neat and not immediately obvious. In fact, long ago I had a contest about this explanation which was won by Assiduous Reader adrian2. Straight Preferreds will, as a rule, have a redemption price which declines from $26 during the sixth year after issue to $25 (the par value) after it has been in existence for nine years. The decline is at a rate of $0.25 p.a. Therefore, if you are an issuer deciding which of several issues to redeem, you should account for the fact that waiting a while will reduce the price – and $0.25 p.a. is fairly substantial compared with the differences in dividend between two issues!

So if we consider BNS’ position in mid-2016, it had a choice of three issues to call:

• BNS.PR.M, paying $1.125 p.a.
• BNS.PR.N, paying 1.3125, or
• BNS.PR.O, paying 1.40

So, as Brian comments, one would normally expect that BNS.PR.O would be redeemed first. However, by waiting until 2017-4-26, they saved $0.25 on the redemption price, so the net cost to them of waiting was only three dividends (October, January, April) totalling $1.05, less the $0.25 reduction in premium, net $0.80. The reduction in premium was not applicable to BNS.PR.M, so it would have cost them the full amount of three dividends, or $0.84375, to have left it outstanding until April. I’m sure that as well there are operational considerations, like making people all confused about their taxes and angry at the redemption as well, but doing the redemptions in reverse order was cheaper, albeit not by much.

So full marks to Assiduous Reader LD for his explanation.

However, what makes this very interesting is the fact that RY.PR.W has not been redeemed, although it is currently callable at par (and has been since 2014-2-24) and pays more ($1.225 p.a.) than RY.PR.B ($1.175). As was noted a long time ago RY.PR.W is convertible into common at the option of the issuer, a feature which has been used to give NVCC status to preferred shares without the necessity of holding a shareholder vote on a change of terms. All that is necessary is an assignment of the conversion trigger right to OSFI. So, the redemption of RY.PR.B instead of the higher-paying RY.PR.W can be taken as an indication – not a guarantee, but an indication – that Royal Bank will be seeking NVCC status for RY.PR.W in the future … or at least wants to keep its options open for a little longer!