PrefBlog

TransCanada Corporation has announced:

that it will issue 12 million cumulative redeemable minimum rate reset first preferred shares, series 13 (the “Series 13 Preferred Shares”) at a price of $25.00 per share for aggregate gross proceeds of $300 million on a bought deal basis to a syndicate of underwriters in Canada co-led by TD Securities Inc., BMO Capital Markets and Scotiabank.

The holders of Series 13 Preferred Shares will be entitled to receive fixed cumulative dividends at an annual rate of $1.375 per share, payable quarterly on the last business day of February, May, August and November, as and when declared by the board of directors of TransCanada. The Series 13 Preferred Shares will yield 5.50 per cent per annum for the initial fixed rate period ending May 31, 2021 with the first dividend payment date scheduled for May 31, 2016. The dividend rate will reset on May 31, 2021 and on the last business day of May in every fifth year thereafter to a rate equal to the sum of the then five-year Government of Canada bond yield plus 4.69 per cent, provided that, in any event, such rate shall not be less than 5.50 per cent per annum. The Series 13 Preferred Shares are redeemable by TransCanada, at its option, on May 31, 2021 and on the last business day of May in every fifth year thereafter at a price of $25.00 per share plus accrued and unpaid dividends.

The holders of Series 13 Preferred Shares will have the right to convert their shares into cumulative redeemable first preferred shares, series 14 (the “Series 14 Preferred Shares”), subject to certain conditions, on May 31, 2021 and on the last business day of May in every fifth year thereafter. The holders of Series 14 Preferred Shares will be entitled to receive quarterly floating rate cumulative dividends, as and when declared by the board of directors of TransCanada, at an annualized rate equal to the sum of the then 90-day Government of Canada treasury bill rate plus 4.69 per cent.

TransCanada 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 two million Series 13 Preferred Shares at a price of $25.00 per share.

The anticipated closing date is April 20, 2016. The net proceeds of the offering will be used for general corporate purposes and to reduce short term indebtedness of TransCanada and its affiliates, which short term indebtedness was used to fund TransCanada’s capital program and for general corporate purposes.

The Series 13 Preferred Shares will be offered to the public in Canada pursuant to a prospectus supplement that will be filed with securities regulatory authorities in Canada under TransCanada’s short form base shelf prospectus dated December 23, 2015. The securities referred to herein have not been and will not be registered under the United States Securities Act of 1933, as amended, and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.

They later announced:

that as a result of strong investor demand for its previously announced offering of cumulative redeemable minimum rate reset first preferred shares, series 13 (the “Series 13 Preferred Shares”), the size of the offering has been increased to 20 million shares. The offering no longer includes the previously granted underwriters’ option. The aggregate gross proceeds of the offering will now be $500 million. The syndicate of underwriters is co-led by TD Securities Inc., BMO Capital Markets and Scotiabank.

Note that (as pointed out by Assiduous Reader FletcherLynd) the company is on Review-Developing by DBRS and Outlook-Negative by S&P.

Implied Volatility analysis must be taken with a grain of salt since the Issue Reset Spread for the new issue (469bp) is so much higher than that of the previous high for this issuer (TRP.PR.G, +296). In addition, this is the first TRP issue with a floor on the reset rate.

However, the fit is reasonable and the Implied Volatility, while very high, is in line with other series:

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So on the one hand, it’s a decent (although not especially good) fit. On the other hand, the Implied Volatility is unreasonably high (I would expect that the long term value for implied volatility would be in the high single-digits). So it boils down to what we’ve been seeing a lot of lately: if you believe that current conditions are the new normal, you’ll like the new issue. If you believe that Market Reset Spreads are currently elevated, you like the lower-spread issues.