PrefBlog

Standard & Poor’s has announced:

• •We are affirming our ratings on Innergex Renewable Energy Inc., including our ‘BBB-‘ long-term corporate credit rating on the company, and removing the ratings from CreditWatch with positive implications.
• •We believe the acquisition of Alterra Power Corp. increases Innergex’s scale and improves diversity by geography and fuel-type or resource.
• •We are revising our financial risk profile to significant from
  intermediate after the additional debt used to fund the cash portion of the acquisition.

• •The stable outlook reflects our expectation that Innergex’s portfolio of power generation facilities will continue to operate under long-term contracts with investment-grade counterparties and generate fairly predictable cash flows to support its holding-company debt obligations.

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S&P Global Ratings today affirmed its ‘BBB-‘ long-term corporate credit rating on Longueuil, Que.-based Innergex Renewable Energy Inc. At the same time, S&P Global Ratings affirmed its ‘BB’ global scale rating and ‘P-3’ Canada scale rating on the company’s preferred shares. S&P Global Ratings removed the ratings from CreditWatch with positive implications, where they were placed Nov. 2, 2017. The outlook is stable.
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A downgrade could happen if FFO-to-debt ratio consistently falls below 23% over our outlook period. This could result from increased costs at projects under construction resulting in increased capital contributions from Innergex funded through debt, or from a significant reduction in cash flows from its
projects due to operational challenges.

An upgrade could happen if Innergex continues to meet projections while FFO-to-debt moves materially higher than 35%. This could result from increased cash flows from new projects or new acquisitions or deleveraging with paying
down of debt or lower balances outstanding on the credit facility.

Affected issues are INE.PR.A and INE.PR.C.

Manulife Financial Corporation has announced:

that it has completed its offering of 10 million Non-cumulative Rate Reset Class 1 Shares Series 25 (the “Series 25 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 RBC Capital Markets, Scotiabank and TD Securities. The Series 25 Preferred Shares commence trading on the Toronto Stock Exchange today under the ticker symbol MFC.PR.Q.

The Series 25 Preferred Shares were issued under a prospectus supplement dated February 12, 2018 to Manulife’s short form base shelf prospectus dated December 15, 2017.

MFC.PR.Q is a FixedReset, 4.70%+255, announced 2018-2-12. It will be tracked by HIMIPref™ and has been assigned to the FixedReset sub-index.

As this issue is not NVCC compliant and it is an insurance issue, it is analyzed as having a Deemed Retraction, effective 2025-1-31 (this date may change in the future).

The issue traded 798,808 shares today in a range of 24.70-94 before closing at 24.90-94. Vital statistics are:

This issue looks quite expensive to me, according to Implied Volatility Analysis:

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We see in this chart many of the same features we saw when reviewing the recent BIP.PR.E, BEP.PR.M, CM.PR.S and NA.PR.E: the curve is very steep, with Implied Volatility equal to 40% (a ridiculously large figure).

The ludicrously high figure of Implied Volatility is something I take to mean that the underlying assumption of the Black-Scholes model, that of no directionality of prices, is not accepted by the market; the market seems to be taking the view that since things seem rosy now, they will always be rosy and everything will trade near par in the future.

If the MFC series were an isolated example of this behaviour, I would grin smugly to myself and declare that the implied directionality was a strong indication that the market is starting to take my predictions of Deemed Retraction seriously; but it’s not isolated. In addition, if the market was accounting for future redemption, I would expect the projected yields-to-deemed-retraction to be lower.

In the absence of DeemedRetraction, I balk at ascribing a 100% probability to the ‘all issues will be called, or at least exhibit price stability’ hypothesis. There may still be a few old geezers amongst the Assiduous Readers of this blog who can still (faintly) remember the Great Bear Market of 2014-16, in which quite a few similar assumptions made earlier turned out to be slightly inaccurate. The extra cushion implied by an Issue Reset Spread that is well over the market spread is worth something, even if nothing gets called.

All told, though, I have no hesitation in slapping an ‘Expensive’ label on this issue – according to the Implied Volatility analysis shown above, the theoretical price of the new issue without any accounting for the potential of a DeemedRetraction is 23.76. The two near-par issues, MFC.PR.Q and MFC.PR.J, form a noticeably expensive pothole in the plotted curve.

BCE Inc. has released the conversion notice for BCE.PR.C (Fixed-Floater) and a matching notice for BCE.PR.D (Ratchet Rate).

These issues constitute a Strong Pair.

The effective date of the interconversion is 2018-3-1. The deadline for instructing the company to convert shares is 5:00 p.m. (Eastern time) on February 19, 2018 – but note that brokers serving the public will probably have internal deadlines a day or two in advance of this. The new dividend rate on BCE.PR.C will be published 2018-2-7.

The outstanding shares of BCE.PR.C have paid 3.55% since the last conversion in 2013. Prime was at 3.00% when the last conversion was effective … 45bp lower than the current rate!

These shares are trading at very nearly the same price … alas, there isn’t much of a last-minute arbitrage possibility here!

I will post more when the fixed rate (for the next five years) is known.

Enbridge Inc. has announced (on January 30):

that it does not intend to exercise its right to redeem its currently outstanding Cumulative Redeemable Preference Shares, Series D (Series D Shares) (TSX: ENB.PR.D) on March 1, 2018. As a result, subject to certain conditions, the holders of the Series D Shares have the right to convert all or part of their Series D Shares on a one-for-one basis into Cumulative Redeemable Preference Shares, Series E of Enbridge (Series E Shares) on March 1, 2018. Holders who do not exercise their right to convert their Series D Shares into Series E Shares will retain their Series D Shares.

The foregoing conversion right is subject to the conditions that: (i) if Enbridge determines that there would be less than 1,000,000 Series D Shares outstanding after March 1, 2018, then all remaining Series D Shares will automatically be converted into Series E Shares on a one-for-one basis on March 1, 2018; and (ii) alternatively, if Enbridge determines that there would be less than 1,000,000 Series E Shares outstanding after March 1, 2018, no Series D Shares will be converted into Series E Shares. There are currently 18,000,000 Series D Shares outstanding.

With respect to any Series D Shares that remain outstanding after March 1, 2018, holders thereof will be entitled to receive quarterly fixed cumulative preferential cash dividends, as and when declared by the Board of Directors of Enbridge. The new annual dividend rate applicable to the Series D Shares for the five-year period commencing on March 1, 2018 to, but excluding, March 1, 2023 will be 4.46 percent, being equal to the five-year Government of Canada bond yield of 2.09 percent determined as of today plus 2.37 percent in accordance with the terms of the Series D Shares.

With respect to any Series E Shares that may be issued on March 1, 2018, holders thereof will be entitled to receive quarterly floating rate cumulative preferential cash dividends, as and when declared by the Board of Directors of Enbridge. The dividend rate applicable to the Series E Shares for the three-month floating rate period commencing on March 1, 2018 to, but excluding, June 1, 2018 will be 0.89984 percent, based on the annual rate on three month Government of Canada treasury bills for the most recent treasury bills auction of 1.20 percent plus 2.37 percent in accordance with the terms of the Series E Shares (the Floating Quarterly Dividend Rate). The Floating Quarterly Dividend Rate will be reset every quarter.

Beneficial holders of Series D Shares who wish to exercise their right of conversion during the conversion period, which runs from January 30, 2018 until 5:00 p.m. (EST) on February 14, 2018, should communicate as soon as possible with their broker or other intermediary for more information. It is recommended that this be done well in advance of the deadline in order to provide the broker or other intermediary time to complete the necessary steps. Any notices received after this deadline will not be valid.

ENB.PR.D is a FixedReset, 4.00%+237, that commenced trading 2011-11-23 after being announced 2011-11-14. It is tracked by HIMIPref™ but relegated to the Scraps subindex 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., BAM.PR.Z and the FloatingReset BAM.PF.K 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).

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The market appears to be relatively uninterested in 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 slightly below current market rates, at +1.10% and +1.12%, respectively – although these break-even rates are much closer to the market rate than has been case for recent resets! 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 ENB.PR.D 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 ENB.PR.D continue to hold the issue and not to convert, but I will wait until it’s closer to the February 14 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 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.

DBRS has noted:

that Aimia Inc. (Aimia or the Company) has sold its Nectar loyalty program and related assets to J Sainsbury plc (Sainsbury’s) for approximately $105 million (the Transaction). As part of the Transaction, Aimia will send to Sainsbury’s (1) $183 million of cash to provide coverage against the Nectar redemption liability and (2) $96 million of working capital related to December redemptions. Aimia will use $100 million of the proceeds from the Transaction to repay amounts outstanding on its credit facility.

Aimia purchased the Nectar loyalty program in 2007 for approximately $755 million. Nectar is the largest component of Aimia’s International Coalitions Segment, which generated $550 million of gross billings for the last 12 months (LTM) ended September 30, 2017 (25% of the Company’s total), and $68 million of adjusted EBITDA for the LTM ended September 30, 2017 (29% of the Company’s total).
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The Transaction weakens Aimia’s business risk profile because of its impact on the Company’s size and scale, geographic diversification and customer concentration risk. Pro forma the Transaction, DBRS believes the Company’s debt profile is more manageable as a result of the repayment of $100 million of debt to a total of $358 million (pro forma, at September 30, 2017) and the $395 million of cash on the balance sheet (pro forma, at September 30, 2017). While the relevance of the Company’s adjusted debt-to-adjusted EBITDA ratio has been substantially reduced, DBRS expects that, pro forma the Transaction, it will remain near 2.0 times, in line with historical levels.

To receive the required lenders’ consent to complete the Transaction, Aimia agreed to make amendments to its credit agreement. These include (1) the repayment of $100 million outstanding on the credit facility, (2) a reduction in the limit of the facility to $208 million from the previous $300 million, (3) a mandatory quarterly cash flow sweep equal to 50% of the prior quarter’s free cash flow, (4) tighter leverage covenants and restrictions around common and preferred dividend payments, (5) the replacement of the Deferred Redemption Reserve Fund with a minimum liquidity covenant and (6) the restriction of using proceeds from the credit facility to repay any Senior Secured Notes. DBRS notes that Aimia’s $250 million of Senior Secured Notes mature prior to the Company’s credit facility in May 2019, and that the Notes will have to be refinanced or repaid using cash, internally generated cash flow and/or the potential for further non-core asset sales.

DBRS will continue to monitor Aimia’s customer engagement, reward redemptions and the competitive environment on a quarter-by-quarter basis, with the next quarterly results to be released on February 14, 2018. Should mileage accumulation decrease and/or redemptions accelerate more than DBRS’ expectations, in the absence of new partnerships, divestitures and/or capital raises, a downgrade could result.

The common equity got whacked:

The parent company of loyalty card Aeroplan faced another brutal day on the Toronto Stock Market as its shares plummeted Friday after rating agency DBRS warned about a possible downgrade on the sale of its Nectar business at a substantial loss.

Shares of Aimia Inc. fell nearly 17 per cent to $2.31 in Friday trading on the Toronto Stock Exchange after losing 25 per cent on Thursday.

And preferred shareholders aren’t too happy either:

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DBRS downgraded the AIM preferreds to Pfd-5(high) in August 2017, following the suspension of preferred share dividends by the company and the subsequent downgrade to P-4(high) by S&P.

Affected issues are AIM.PR.A, AIM.PR.B and AIM.PR.C.