PrefBlog

Quadravest has announced:

Financial 15 Split Corp. (the “Company”) is pleased to announce it will extend the termination date of the Company a further five year period from December 1, 2020 to December 1, 2025.

The term extension allows holders of FTN Class A Shares (“Class A Shares”) to continue to receive ongoing leveraged exposure to a portfolio consisting of high-quality financial services companies made up of Canadian and U.S. issuers, as well as receiving targeted monthly distributions. Since inception of the Company Class A shareholders have received monthly distributions totaling $20.28 per share.

Holders of the FTN.PR.A Preferred Shares (“Preferred Shares”) are expected to continue to benefit from cumulative preferential monthly distributions. The Preferred shareholders have received a total of $8.56 per share since inception.

The extension of the term of the Company is not expected to be a taxable event and should enable shareholders to defer potential capital gains tax liability that would have otherwise been realized on the redemption of the Class A Shares or Preferred Shares at the end of the term, until such time as such shares are disposed of by shareholders.

In connection with the extension, the Company will have the right to amend the minimum rate of cumulative preferential monthly dividends to be paid to the Preferred Shares for the five year renewal period, commencing December 1, 2020. Any change to the Preferred Share minimum dividend rate for the extended term will be based on market yields for preferred shares with similar terms at such time and will be announced no later than September 30, 2020. The Company has the right to establish the rate of cumulative preferential monthly dividends to be paid to the Preferred Shares on an annual basis.

The Company invests in a high quality portfolio consisting of 15 financial services companies made up of Canadian and U.S. issuers as follows: Bank of Montreal, The Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Royal Bank of Canada, Toronto-Dominion Bank, National Bank of Canada, Manulife Financial Corporation, Sun Life Financial, Great-West Lifeco, CI Financial Corp, Bank of America, Citigroup Inc., Goldman Sachs Group, JP Morgan Chase & Co. and Wells Fargo & Co.

So we’ll see what dividend rate they’re offering next September! The NAVPU was 11.49 as of 2020-4-15, so unless equities do well over the next five months it will have to be pretty good!

Hat tip to Assiduous Reader JD for bringing this to my attention!

Royal Bank of Canada has announced:

the applicable dividend rates for its Non-Viability Contingent Capital (NVCC) Non-Cumulative 5-Year Rate Reset First Preferred Shares, Series BD (the “Series BD shares”) and NVCC Non-Cumulative Floating Rate First Preferred Shares, Series BE (the “Series BE shares”).

With respect to any Series BD shares that remain outstanding after May 24, 2020, holders will be entitled to receive quarterly fixed rate non-cumulative preferential cash dividends, as and when declared by the Board of Directors of Royal Bank of Canada, subject to the provisions of the Bank Act (Canada).

The dividend rate for the 5-year period from and including May 24, 2020 to, but excluding, May 24, 2025 will be 3.20% for the Series BD shares, being equal to the 5-Year Government of Canada bond yield determined as of April 24, 2020 plus 2.74%, as determined in accordance with the terms of the Series BD shares.

With respect to any Series BE shares that may be issued on May 24, 2020, holders will be entitled to receive quarterly floating rate non-cumulative preferential cash dividends, calculated on the basis of the actual number of days elapsed in such quarterly period divided by 365, as and when declared by the Board of Directors of Royal Bank of Canada, subject to the provisions of the Bank Act (Canada).

The dividend rate for the floating rate period from and including May 24, 2020 to, but excluding, August 24, 2020 will be 3.01% for the Series BE shares, being equal to the 3-month Government of Canada Treasury Bill yield determined as of April 24, 2020 plus 2.74%, as determined in accordance with the terms of the Series BE shares.

Beneficial owners of Series BD shares who wish to exercise their conversion rights should instruct their broker or other nominee to exercise such rights on or prior to the deadline for notice of intention to convert, which is 5:00 p.m. (EST) on May 11, 2020.

RY.PR.J is a FixedReset, 3.60%+274, NVCC-compliant, that commenced trading 2015-1-30 after being announced 2015-1-26. The issue is tracked by HIMIPref™ and is assigned to the FixedReset (Discount) 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., RY.PR.J 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). Inspection of the graph and the overall average break-even rates for extant pairs will provide a guide for estimating the break-even rate for the pair now under consideration assuming, of course, that enough conversions occur so that the pair is in fact created.

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The market shows odd differences in its enthusiasm for floating rate product; the implied rates until the next interconversion are generally above the current 3-month bill rate as the averages for investment-grade and junk issues are at +0.82% (ignoring the outlier FTS.PR.H / FTS.PR.I, which Exchanges 2020-6-1) and +0.28% (ignoring the outliers EMA.PR.A / EMA.PR.B (Exchanges 2020-8-15), and TA.PR.A / TA.PR.D (Exchanges 2021-3-31)), respectively. The utility of this approach, frankly, has been compromised in recent weeks by continued poor quality of closing quotes provided by the Toronto Stock Exchange; dispersion of the results is even higher than normal!

The breakeven rate for the junk pairs has been relatively high recently; I confess I’m not quite sure what to make of it.

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 RY.PR.J 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 at a slightly higher price than their FixedReset counterparts, RY.PR.J, although this conclusion is more speculative than usual due to the poor quality of the quotes. Therefore, it seems likely that I will recommend that holders of RY.PR.J make their own decision based on their own portfolios and financial circumstances, with a very slight bias towards the FloatinReset option, but I will wait until it’s closer to the May 11 notification deadline before making a final pronouncement. I will note that once the conversion period has passed 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 April 9):

that it does not intend to exercise its right to redeem all or any part of the currently outstanding Non-Viability Contingent Capital (NVCC) Non-Cumulative 5-Year Rate Reset First Preferred Shares, Series BD (the “Series BD shares”) on May 24, 2020. There are currently 24,000,000 Series BD shares outstanding.

Subject to certain conditions set out in the prospectus supplement dated January 27, 2015 relating to the issuance of the Series BD shares, the holders of the Series BD shares have the right to convert all or part of their Series BD shares, on a one-for-one basis, into NVCC Non-Cumulative Floating Rate First Preferred Shares Series BE (the “Series BE shares”) on May 24, 2020. On such date, holders who do not exercise their right to convert their Series BD shares into Series BE shares will continue to hold their Series BD shares. The conversion will occur on May 25 being the first business day following the conversion date of May 24 as identified in the prospectus, which falls on a Sunday. The foregoing conversion rights are subject to the following:

if Royal Bank of Canada determines that there would be less than 1,000,000 Series BE shares outstanding after taking into account all shares tendered for conversion on May 24, 2020, then holders of Series BD shares will not be entitled to convert their shares into Series BE shares, and
alternatively, if Royal Bank of Canada determines that there would remain outstanding less than 1,000,000 Series BD shares after May 24, 2020, then all remaining Series BD shares will automatically be converted into Series BE shares on a one-for-one basis on May 24, 2020.
In either case, Royal Bank of Canada will give written notice to that effect to holders of Series BD shares no later than May 17, 2020.

The dividend rate applicable for the Series BD shares for the 5-year period from and including May 24, 2020 to, but excluding, May 24, 2025, and the dividend rate applicable to the Series BE shares for the 3-month period from and including May 24, 2020 to, but excluding, August 24, 2020, will be determined and announced by way of a press release on April 24, 2020.

Beneficial owners of Series BD shares who wish to exercise their conversion rights should instruct their broker or other nominee to exercise such rights during the conversion period, which runs from April 24, 2020 until 5:00 p.m. (EST) on May 11, 2020.

Inquiries should be directed to Shareholder Relations Officer, Shirley Boudreau, at 416-955-7806.

I will have more to say when the reset rate is announced April 24.