PrefBlog

Enbridge announced some very shareholder-friendly moves yesterday:

• 33% dividend increase, payable March 1, 2015
• Plans to transfer Canadian Liquids Pipelines business to Enbridge Income Fund
• New dividend payout policy range of 75% to 85% of adjusted earnings
• 2015 Adjusted EPS guidance of $2.05 to $2.35
• Parallel U.S. restructuring plan under consideration

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These actions are intended to enhance the value to investors of the Company’s record organic growth capital program and enhance the competitiveness of its funding costs for new organic growth opportunities and asset acquisitions.
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The Canadian restructuring plan has been approved in principle by Enbridge’s Board of Directors but remains subject to finalization of preliminary internal reorganization steps and a number of internal and external consents and approvals, including final approval of definitive transfer terms by the Enbridge Board and by the Boards of Holdings and the Fund following a recommendation by an independent committee of the Fund and Holdings, and the receipt of all necessary shareholder and regulatory approvals that may be required.
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Enbridge also has under review a potential parallel U.S. restructuring plan which would involve transfer of its directly held U.S. Liquids Pipelines assets to its U.S. affiliate, Enbridge Energy Partners, L.P. (EEP). This review has not yet progressed to a conclusion.
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Commenting on today’s announcement, Al Monaco, President and Chief Executive Officer, Enbridge Inc., noted the following:

“The 33% increase in our dividend that we announced today and 14% to 16% expected annual average dividend growth rate through 2018 reflects Management’s confidence in the strength and embedded cash flow growth from the existing assets and the capital projects that will be put into service over the next four years. The change in our dividend policy range to 75 – 85% of adjusted earnings is supported by the excellent progress we’ve made on our enterprise-wide funding program, raising some $16 billion in debt and equity capital over the last two years; the expected increase in free cash flow through 2018; and reliable access to effective sources of equity funding including from our sponsored vehicles.

Today, shareholders indicated they are in favour of shareholder friendliness:

Enbridge Inc. (ENB) surged the most in 27 years after Canada’s largest pipeline operator boosted its dividend and said it plans to shift assets to an affiliate.

The shares climbed 10 percent in Toronto, the biggest gain since October 1987. The stock has increased 29 percent this year.

Enbridge said yesterday it plans to move C$17 billion ($15 billion) worth of Canadian liquids pipelines to the Enbridge Income Fund to help pay for capital investment. The company also boosted its dividend 33 percent and said earnings per share next year will be C$2.05 to C$2.35.

The so-called dropdown allows Enbridge “to accelerate dividend growth immediately and for the next 4+ years,” Matthew Akman, a Toronto-based analyst for ScotiaBank, wrote in a note today.

The boost in dividend comes as oil producers are cutting their payouts. Canadian Oil Sands Ltd. yesterday said it would reduce its quarterly dividend by 42 percent to 20 cents a share in late January. Enbridge ships crude from Canadian producers through its network of pipelines across North America.

Assiduous Readers will have no problem with the following pop quiz: “Shareholder-friendly actions are creditor _______________” (for the answer, see the bottom of this post).

Moody’s affirmed the rating but changed the outlook to negative:

Moody’s Investors Service has affirmed its ratings on Enbridge Inc (ENB), Enbridge Energy Partners L.P. (EEP), Enbridge Income Fund (EIF) and Enbridge Energy Limited Partnership (EELP) and Enbridge (U.S.) Inc. At the same time, Moody’s changed the outlooks on ENB, EEP, and EELP to negative. The outlook on EIF has been changed to developing. This follows Enbridge’s news release dated December 3 announcing a material financial restructuring and significant dividend increase. For a complete list of Moody’s ratings actions see the end of this press release.

“The negative outlook reflects the uncertainty surrounding the announced financial restructuring plans and the prospects for increased structural subordination at ENB, the company’s weak consolidated financial metrics and the reduction in financial flexibility associated with the proposed increase in dividends.” said Gavin MacFarlane, Vice President/Senior Analyst.
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The company’s financial restructuring plans represent a substantial change in the company’s structure, with approximately C$17 billion in assets to be transferred to EIF from ENB. This compares to current total assets at ENB of C$67 billion and EIF of C$2.7 billion at 30 September 2014. One of the entities being transferred, Enbridge Pipelines (Athabasca) Inc. has no external debt, highlighting the increased structural subordination that will result at ENB going forward. The Canadian liquids pipeline business currently with assets of $16 billion and an associated capital program of $15 billion dominates the proposed transfer. Management has also indicated that it is contemplating a potential parallel U.S. restructuring plan that would transfer all of ENB’s US liquids assets to EEP.

Consolidated FFO/debt of 10.2% on an LTM basis remains weak and is slightly above the 10% adjusted FFO/debt level we have associated with a potential downgrade. The proposed increase in the dividend payout ratio from a range of 60-70% to 75-85% weakens the company’s financial flexibility as it moves forward with its current consolidated capital program of about $44 billion over the period 2014-2018. The increase is slightly mitigated by being tied to the execution of the capital program and any associated moderation in spend. On a consolidated basis, the business risk profile of ENB is unchanged.
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We will look to resolve the outlooks when there is greater certainty and clarity surrounding the proposed restructuring in 2015.

It was only two weeks ago that I reported that S&P changed the outlook on ENB to Negative. Now the other shoe has dropped:

• •We are placing our ratings on Calgary, Alta.-based Enbridge Inc. and Enbridge Pipelines Inc., Toronto-based Enbridge Gas Distribution Inc., and Houston-based Enbridge Energy Partners L.P. on CreditWatch with negative implications.
• •The CreditWatch placements follows the announcement of dropdown of assets from parent Enbridge to Enbridge Income Fund (EIF), as well as a change to the company’s dividend policy.
• •We believe that there is a potential for financial metrics to weaken further due to the additional dividend expense.
• •In addition, the dropdown into EIF could raise the issue of subordination of debt at the Enbridge level.

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The CreditWatch placements reflect our assessment of the existing weak forecast financial metrics at parent Enbridge, combined with the announced change in dividend policy and the dropdown of assets to subsidiary Enbridge Income Fund (EIF). Enbridge intends to increase its dividend payout ratio to 75%-85% of adjusted net income, from 60%-70%, effective March 2015. In addition, the dropdown plan covers US$17 billion of assets, comprising the Canadian liquids pipeline and renewable energy portfolio.
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“We believe that there is a potential for financial metrics to weaken further due to the additional dividend expense, depending on the ultimate financing strategy,” said Standard & Poor’s credit analyst Gerry Hannochko. “As well, the dropdown to EIF could raise the issue of subordination of debt at the Enbridge level,” Mr. Hannochko added.

In addition, the company is contemplating transferring Enbridge’s U.S.-based liquids pipeline assets to subsidiary EEP.

On Nov. 21, 2014, we revised the outlook on the Enbridge group to negative based on weak forecast financials that we assess to be below the threshold for the “significant” financial risk profile category.

Compared with this, DBRS has been quite restrained:

DBRS Limited (DBRS) has today placed all ratings of Enbridge Inc. (ENB), Enbridge Pipelines Inc. (EPI) and Enbridge Income Fund (EIF or the Fund) as follows Under Review with Developing Implications:
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The current rating actions reflect uncertainty associated with the ongoing corporate developments, percentage take-up of the debt exchange and the future funding strategy among the entities within ENB’s organization. For clarity, DBRS does not rule out potential future rating changes for any of the entities placed Under Review today and will provide updates as more information becomes available
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From a financial risk perspective, DBRS expects a mix of factors to affect ENB’s future ratings. Firstly, a material increase in dividend payout combined with the proposed Transaction would mean that ENB would have to rely more on external funds to finance its portion of capex which, while substantial over the 2014 to 2018 period, would be reduced on a direct-to-ENB basis. Secondly, direct external debt at ENB would be reduced by the proposed debt exchange, although the sizable preferred shares outstanding at ENB would remain unchanged and would continue to weigh on ENB’s credit metrics. Finally, since all assets of EPI and EPA would be transferred to the Fund, holders of ENB’s direct external debt would be further away from the cash flow of the Transferred Assets than is currently the case. Dividend distributions from the Transferred Assets would have to be used to support debt service at the Fund before dividends could then be distributed to ENB. At this time, there are uncertainties with respect to the debt exchange details and the future financing needs at the ENB level as well as the amount of dividends to be received at ENB. Consequently, while DBRS believes that Under Review with Developing Implications is the appropriate rating action at this time, DBRS does not rule out a negative rating action in the future based on further analysis.

Enbridge Inc. is the issuer of (deep breath) ENB.PR.A (Straight Perpetual), ENB.PR.B, ENB.PR.D, ENB.PR.F, ENB.PR.H, ENB.PR.J, ENB.PR.N, ENB.PR.P, ENB.PR.T, ENB.PR.Y, ENB.PF.A, ENB.PF.C, ENB.PF.E and ENB.PF.G (FixedResets) and ENB.PR.U, ENB.PR.V, ENB.PF.U and ENB.PF.V (US-Pay FixedResets).

All told, I believe that total issuance comprises roughly 10% of the Canadian preferred share market, virtually all of which has come out since the issue of ENB.PR.B just over three years ago. A downgrade to junk would certainly make the market a bit more interesting for a while!

Answer to Pop-Quiz : ʎlpuǝᴉɹɟun ɹoʇᴉpǝɹɔ ǝɹɐ suoᴉʇɔɐ ʎlpuǝᴉɹɟ-ɹǝploɥǝɹɐɥS

Manulife Financial Corporation has announced:

that it has completed its offering of 10 million Non-cumulative Rate Reset Class 1 Shares Series 19 (the “Series 19 Preferred Shares”) at a price of $25 per share to raise gross proceeds of $250 million.

The offering was underwritten by a syndicate of investment dealers co-led by Scotia Capital Inc., CIBC World Markets and RBC Capital Markets. The Series 19 Preferred Shares commence trading on the Toronto Stock Exchange today under the ticker symbol MFC.PR.N.

The Series 19 Preferred Shares were issued under a prospectus supplement dated November 26, 2014 to Manulife’s short form base shelf prospectus dated June 23, 2014.

MFC.PR.N is a FixedReset, 3.80%+230, announced November 26. It will be tracked by HIMIPref™ and has been assigned to the FixedResets index.

Note that since this is issued by an Insurance Holding Company and is not convertible (or otherwise potentially NVCC-compliant), I have added a DeemedMaturity to the option schedule for analytical purposes, at $25.00 for 2025-1-31.

MFC.PR.N traded 1,163,652 shares today (consolidated exchanges) in a range of 24.95-12 before closing at 25.07-10. Vital statistics are:

Implied volatility theory suggests that this issue is fairly priced relative to other MFC issues … but remember that the Implied Volatility calculation ignores DeemedMaturities and the calculated volatility is very high!

We have been treated to the spectacle of three FixedResets resetting their dividend on the same day … TRP.PR.A To Reset To 3.266%, AZP.PR.B To Reset To 5.57% and FFH.PR.C To Reset To 4.578%.

Let’s have a little look at how all these rates were calculated. I regret I cannot link directly to the prospectuses because the Canadian Securities Administrators insist that this public information be available to retail scum only in an inconvenient manner.

TRP.PR.A: SEDAR TransCanada Corporation Sep 23 2009 16:14:12 ET Prospectus supplement – English PDF 127 K

‘‘Fixed Rate Calculation Date’’ means, for any Subsequent Fixed Rate Period, the 30th day prior to the first day of such Subsequent Fixed Rate Period.

‘‘Government of Canada Yield’’ on any date means the yield to maturity on such date (assuming semi-annual compounding) of a Canadian dollar denominated non-callable Government of Canada bond with a term to maturity of five years as quoted as of 10:00 a.m. (Toronto time) on such date and that appears on the Bloomberg Screen GCAN5YR Page on such date; provided that if such rate does not appear on the Bloomberg Screen GCAN5YR Page on such date, then the Government of Canada Yield shall mean the arithmetic average of the yields quoted to the Corporation by two registered Canadian investment dealers selected by the Corporation as being the annual yield to maturity on such date, compounded semi-annually, that a non-callable Government of Canada bond would carry if issued, in Canadian dollars, at 100% of its principal amount on such date with a term to maturity of five years.

AZP.PR.B: SEDAR Atlantic Power Preferred Equity Ltd. Oct 21 2009 17:20:19 ET Final short form prospectus – English PDF 229 K:

“Bloomberg Screen GCAN5YR Page” means the display designated on page “GCAN5YR” on the Bloomberg Financial L.P. service (or such other page as may replace the GCAN5YR page on that service for purposes of displaying Government of Canada Bond yields).

“Fixed Rate Calculation Date” means, for any Subsequent Fixed Rate Period, the 30th day prior to the first day of such Subsequent Fixed Rate Period.

“Government of Canada Bond Yield” on any date means the yield to maturity on such date (assuming semi-annual compounding) of a Canadian dollar denominated non-callable Government of Canada bond with a term to maturity of five years as quoted as of 10:00 a.m. (Toronto time) on such date and which appears on the Bloomberg Screen GCAN5YR Page on such date; provided that, if such rate does not appear on the Bloomberg Screen GCAN5YR Page on such date, the Government of Canada Bond Yield will mean the arithmetic average of the yields quoted to the Corporation by two registered Canadian investment dealers selected by the Corporation as being the annual yield to maturity on such date, compounded semi-annually, which a non-callable Government of Canada bond would carry if issued, in Canadian dollars in Canada, at 100% of its principal amount on such date with a term to maturity of five years.

FFH.PR.C: SEDAR Fairfax Financial Holdings Limited Sep 29 2009 18:40:58 ET Prospectus supplement – English PDF 419 K

“Bloomberg Screen GCAN5YR Page” means the display designated as page “GCAN5YRGINDEXH” on the Bloomberg Financial L.P. service (or such other page as may replace the GCAN5YR page on that service) for purposes of displaying Government of Canada bond yields.

“Fixed Rate Calculation Date” means, for any Subsequent Fixed Rate Period, the 30th day prior to the first day of such Subsequent Fixed Rate Period.

“Government of Canada Yield” on any date means the yield to maturity on such date (assuming semi-annual compounding) of a Canadian dollar denominated non-callable Government of Canada bond with a term to maturity of five years as quoted as of 10:00 a.m. (Toronto time) on such date and which appears on the Bloomberg Screen GCAN5YR Page on such date; provided that, if such rate does not appear on the Bloomberg Screen GCAN5YR Page on such date, the Government of Canada Yield will mean the average of the yields determined by two registered Canadian investment dealers selected by the Company, as being the yield to maturity on such date (assuming semi-annual compounding) which a Canadian dollar denominated non-callable Government of Canada bond would carry if issued in Canadian dollars at 100% of its principal amount on such date with a term to maturity of five years.

OK, so according to me these reset yields are calculated in all the same way at the same time. So let’s look at the announced reset yields and see what the GOC-5 yield was:

Eight basis points difference? On a five year Canada? When all the calculations are supposed to be performed the same way at the same time?

This is very odd.

Accordingly, I have sent the following eMail to investor_relations@transcanada.com:

Sirs,

I understand that the dividend on TRP.PR.A is to be reset to 3.266% in accordance with the terms of the prospectus, which implies that the “Government of Canada Yield”, as defined in the prospectus, was 1.346% at 10am on December 1.

However, as discussed at http://prefblog.com/?p=26996 , measurements of this yield taken at the same time, in the same manner and for the same purpose by two other companies resulted in assessments of 1.39% and 1.428%, which are very different numbers when one considers what is being measured.

I would appreciate receiving further details of your calculation of the “Government of Canada Yield”, as defined, with any supporting material that you choose to provide.

Sincerely,

… but it appears that I will have to call John Varnell of Fairfax at (416) 367-4941 and Computershare on behalf of Atlantic Power at (800) 564-6253 because those companies haven’t implemented eMail yet, as far as I can tell.

Update, 2014-12-3: TRP got back to me with a link to the prospectus and a quote from it which duplicates part of the text I’ve quoted above. I’ve left a message with John Varnell of FFH, and with the Investor Relations department of AZP.

Update #2, 2014-12-3: TRP’s Investor Relations department has forwarded the query to Treasury, and expect to hear back tomorrow.

Update, 2014-12-5: See the post Deriving Reset Yields: Mystery Partially Resolved

Fairfax Financial Holdings Limited has announced:

that it has determined the fixed dividend rate on its Cumulative 5-Year Rate Reset Preferred Shares, Series C (“Series C Shares”) (TSX:FFH.PR.C) for the five years commencing January 1, 2015 and ending December 31, 2019, with the result that the quarterly dividends on the Series C Shares during that period will be paid at an annual rate equal to Cdn.$1.14450 per share.

Holders of Series C Shares have the right, at their option, to convert all or part of their Series C Shares, on a one-for-one basis, into Cumulative Floating Rate Preferred Shares, Series D (the “Series D Shares”), effective December 31, 2014. The deadline for exercising this conversion privilege is 5:00 p.m. (Toronto time) on December 16, 2014.

The quarterly floating rate dividends on the Series D Shares will be paid at an annual rate, calculated for each quarter, of 3.15% over the annual yield on three-month Government of Canada treasury bills (calculated as set out in the prospectus supplement relating to the public offering of the Series C Shares dated September 29, 2009). The quarterly dividend amount in respect of the initial dividend period will be Cdn.$0.25212 per share, payable on March 31, 2015.

As provided in the share conditions of the Series C Shares, (i) if Fairfax determines that there would be fewer than 1,000,000 Series C Shares outstanding after December 31, 2014, all remaining Series C Shares will be automatically converted into Series D Shares on a one-for-one basis effective December 31, 2014; and (ii) if Fairfax determines that there would be fewer than 1,000,000 Series D Shares outstanding after December 31, 2014, no Series C Shares will be permitted to be converted into Series D Shares. There are currently 10,000,000 Series C Shares outstanding.

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

FFH.PR.C is a FixedReset, 5.75%+315, which commenced trading 2009-10-5 after being announced 2009-9-29.

From a 5.75% coupon to 4.578% is a big hit – a reduction in income of just over 20%.

The new rate of 4.578% implies that the five-year Canada was at 1.428% at time of measurement, significantly higher than 1.346%”used for TRP.PR.A. Very curious.

Using similar arguments to those made with respect to TRP.PR.A, I suggest that conversion to the FloatingReset issue is currently favoured, with a projected price on the FloatingReset of 25.06 compared to 24.78 for the FixedReset. However, any decision should be made at the last possible moment – which will be earlier than the company’s last possible moment of 5pm, December 16, 2014. Check with your broker to determine what their deadline is!

Atlantic Power Corporation and Atlantic Power Preferred Equity Ltd. have announced:

the dividend rate on Preferred Equity’s outstanding Cumulative Rate Reset Preferred Shares, Series 2 (the “Series 2 Shares”) will be reset on December 31, 2014, using a reset dividend rate (the “Reset Dividend Rate”) calculated on December 1, 2014.

The Reset Dividend Rate was calculated on December 1, 2014 to be 5.57%, representing the sum of the Canadian Government five-year bond yield of 1.39% plus 4.18%.

Such Reset Dividend Rate will commence with the March 31, 2015 dividend payment to the holders of the Series 2 Shares and continue through the December 31, 2019 dividend payment to the holders of the Series 2 Shares, at which time such Reset Dividend Rate will again be reset.

On December 31, 2014 and again on December 31 of every fifth year thereafter, the holders of Series 2 Shares have the right to convert their Series 2 Shares, on a one-for-one basis, into Cumulative Floating Rate Preferred Shares (the “Series 3 Shares”).

The Series 3 Shares dividend rate was calculated on December 1, 2014 to be 5.09%, representing the sum of the Canadian Government 90-day Treasury Bill yield (using the three-month average result of .91%) plus 4.18%.

Holders of Series 2 Shares who wish to convert such securities to Series 3 Shares should contact the financial institution, broker or other intermediary through which they hold the Series 2 Shares to exercise this conversion privilege. Notice of the exercise of the conversion privilege must be received by Preferred Equity not earlier than December 1, 2014 and not later than 5:00 p.m. (Toronto time) on December 16, 2014.

If after giving effect to all Election Notices, there would remain outstanding less than 1 million Series 2 Shares, then all remaining outstanding Series 2 Shares will automatically convert into Series 3 Shares, on a one-for-one basis on December 31, 2014. Holders of the Series 2 Shares will not be permitted to convert their Series 2 Shares into Series 3 Shares if, after giving effect to all Election Notices, there would be outstanding less than 1 million Series 3 Shares.

Inquiries should be directed to Preferred Equity’s registrar and transfer agent, Computershare Trust Company of Canada, at (800) 564-6253.

AZP.PR.B used to be CZP.PR.B, which used to be EPP.PR.B, and throughout has been a FixedReset, 7.00%+418, which commenced trading 2009-11-2 after being announced 2009-10-13. You can’t tell your players without a programme!

The new rate of 5.57% is a sharp drop from 7.00%, just over 20% of the coupon in fact. This probably explains recent weakness in the issue’s price, although the company has not exactly been a picture of health lately.

Using similar arguments to those made with respect to TRP.PR.A, I suggest that conversion to the FloatingReset issue is currently favoured, with a projected price on the FloatingReset of 12.35 compared to 12.10 for the FixedReset … which looks better in percentage terms than absolutes! However, any decision should be made at the last possible moment – which will be earlier than the company’s last possible moment of 5pm, December 16, 2014. Check with your broker to determine what their deadline is!

TransCanada Corporation has announced:

that it has notified the registered shareholder of its Cumulative Redeemable First Preferred Shares, Series 1 (Series 1 Shares) of the Conversion Privilege and Dividend Rate Notice.

Beginning on December 1, 2014 and ending on December 16, 2014, holders of the Series 1 Shares will have the right to choose one of the following options with regard to their shares:
1.To retain any or all of their Series 1 Shares and continue to receive a fixed quarterly dividend; or
2.To convert, on a one-for-one basis, any or all of their Series 1 Shares into Cumulative Redeemable First Preferred Shares, Series 2 (Series 2 Shares) of TransCanada and receive a floating quarterly dividend.

Holders of the Series 1 Shares and the Series 2 Shares will have the opportunity to convert their shares again on December 31, 2019, and every five years thereafter as long as the shares remain outstanding.

Effective December 1, 2014, the Annual Fixed Dividend Rate for the Series 1 shares was set for the next five year period at 3.266 per cent.

Effective December 1, 2014, the Floating Quarterly Dividend for the Series 2 Shares was set for the first Quarterly Floating Rate Period (being the period from and including December 31, 2014, to but excluding March 31, 2015) at 2.815 per cent. The Floating Quarterly Dividend Rate will be reset every quarter.

The Series 1 Shares are issued in “book entry only” form and, as such, the sole registered holder of the Series 1 Shares is the Canadian Depositary for Securities Limited (CDS). All rights of beneficial holders of Series 1 Shares must be exercised through CDS or the CDS participant through which the Series 1 Shares are held. The deadline for the registered shareholder to provide notice of exercise of the right to convert Series 1 Shares into Series 2 Shares is 5 p.m. (ET) on December 16, 2014. Any notices received after this deadline will not be valid. As such, holders of Series 1 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.

For more information on the terms of, and risks associated with an investment in, the Series 1 Shares and the Series 2 Shares, please see the Corporation’s prospectus supplement dated September 22, 2009 which can be found under the Corporation’s profile on SEDAR at www.sedar.com.

TRP.PR.A is a FixedReset, 4.60%+192, which closed 2009-9-30 after being announced 2009-9-22.

From 4.60% coupon to 3.266% is a big hit – a 29% reduction. And it’s a big issue – $550-million par value. I anticipate a lot of highly unhappy brokerage customers who may, as has been speculated previously, be overselling the issue so they don’t have to see any reduced dividends.

The new rate of 3.266% implies that the GOC-5 rate at time of measurement was 1.346%, which sounds about right according to what I saw yesterday (the BoC says yesterday’s close was 1.38%), but it is most interesting to note that CBID says today’s close 1.45%. Conspiracy theories regarding manipulation of the GOC-5 rate on a day when three issues reset may be recorded in the comments.

Prices for the TRP issues are very strange: consider that TRP.PR.A, bid at 21.15, is priced lower than TRP.PR.C, which is a FixedReset, 4.40%+154, resetting 2016-1-30, bid at 21.77. One can only suppose that the market expects some dramatic changes in the five year Canada yield over the next year! Implied Volatility analysis – which assumes, among many other things, that GOC-5 will not change, ever – suggests that TRP.PR.A is now $1.44 cheap while TRP.PR.C is $1.73 expensive (both relative only to other TRP FixedResets, not to anything else). Well … place yer bets, gennelmen, place yer bets!

So, the perennial question was most recently asked by Assiduous Reader janbjarne and will be highlighted because of the flattering introduction:

Thank you for the very informative Prefblog and PrefLetter.

Your comments on how underpriced TRP.PR.A appears are interesting. Any thoughts on the pending conversion? A few months ago I thought that converting to the floater was a no-brainer. Now I am not so sure as both the TD.PR.Y/Z and the DC.PR.B/D pairs are trading at the same price.

Well, I’m not sure either! If you want absolute certainty, ask a stockbroker! Just don’t be so rude as to remind him of his prediction later!

We can make an informed guess, though, using the Pair Equivalency Calculator which is explained in the article Preferred Pairs. We can examine all the currently trading FixedReset / FloatingReset pairs and determine the break-even average three-month bill rate for each pair:

Click for Big

There’s a fair bit of scatter, but the average for investment grade is 1.70% … that is, for each member of each pair to have an identical total return over the period until the next Exchange Date, the average bill rate until that date must be X, and the average of the Xs calculated for each pair is 1.70%, implying (assuming a steady increase in yields) a rate on the end date of 2.55%.

If we then reverse the calculation, the predicted price for the TRP FloatingReset is, given a bid of 21.15 for TRP.PR.A and an average bill rate of 1.70%, equal to 21.53: that is to say, we predict an immediate profit of $0.38 to result from conversion.

Even if we say that the average bill rate will be 1.54%, the lowest of the estimates, the predicted price of the FloatingReset should be 21.36, a profit of $0.21 … no great shakes, but it does indicate that the expectations of at least not losing are reasonably well-founded.

It should be remembered, though, that things can change dramatically in the course of even just a few weeks. The DC.PR.B / DC.PR.D conversion was a missed opportunity, because the break-even rate observed in the market changed dramatically between the date at which the estimate was made and the date the newly issued FloatingReset commenced trading..

Instructions are required by the company by December 16. I suggest holders first check with their broker to see what their broker’s deadline is (it’s usually a day or two earlier) and wait until the last minute before repeating the calculation and making up their mind. But at this point, it looks as if conversion to FloatingReset is the better bet.