PrefBlog

Moody’s Investor Service has announced:

today downgraded the senior unsecured ratings of Enbridge Inc. (ENB) to Baa3 from Baa2. In addition, Moody’s changed the short term commercial paper rating for Enbridge (US) Inc. to P-3 from P-2 and the subordinate ratings to Ba2 from Ba1. At the same time, Moody’s changed the rating outlook for Enbridge to stable from negative.
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The downgrade reflects ongoing high leverage at Enbridge Inc. For example, Moody’s calculates a ratio of debt to EBITDA at 6.4x for the twelve months ended September 2017. Attaining a ratio below 5.5x, for a sustained period of time, is an important threshold to maintain the Baa2 rating. On a prospective basis, taking into consideration the actions announced, the ratio could fall to the 5.3x — 5.5x range, but Moody’s views the execution risks associated with Enbridge’s stated actions to be sufficiently high that achieving those levels in 2018 would be challenging.
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Outlook

The change in rating outlook to stable from negative reflects Enbridge’s predictable cash flow generation and large, low business risk asset base. The stable outlook reflects an expectation that Enbridge will follow through on its announced strategic plans, which include some non-core asset divestitures and financing plans that encompasses a balanced mix of both debt and equity. The stable outlook also incorporates a view that Enbridge’s key financial credit metrics, including a ratio of debt to EBITDA, will decline towards 5.5x during 2018, setting a path for further improvements to financial metrics in 2019 and 2020.

Factors that Could Lead to an Upgrade

• • Moody’s adjusted debt to EBITDA is sustained comfortably below 5.5x.
• • A large reduction in its organizational complexity and structural subordination

Factors that Could Lead to a Downgrade

• • Moody’s adjusted debt to EBITDA is sustained well above 6x.
• • Increases in structural subordination, more aggressive financial policies or a material change in the company’s business risk could also lead to a downgrade.

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Pref. Stock Preferred Stock, Downgraded to Ba2 from Ba1

The story attracted notice from the Globe & Mail.

Affected issues are (deep breath) ENB.PF.A, ENB.PF.C, ENB.PF.E, ENB.PF.G, ENB.PF.I, ENB.PF.K, ENB.PR.A, ENB.PR.B, ENB.PR.C, ENB.PR.D, ENB.PR.F, ENB.PR.H, ENB.PR.J, ENB.PR.N, ENB.PR.P, ENB.PR.T and ENB.PR.Y

Brookfield Asset Management Inc. has announced:

that after having taken into account all election notices received by the December 18, 2017 deadline for the conversion of the Cumulative Class A Preference Shares, Series 30 (the “Series 30 Shares”) (TSX:BAM.PR.Z) into Cumulative Class A Preference Shares, Series 31 (the “Series 31 Shares”), the holders of Series 30 Shares are not entitled to convert their Series 30 Shares into Series 31 Shares. There were 119,204 Series 30 Shares tendered for conversion, which is less than the one million shares required to give effect to conversions into Series 31 Shares.

It will be recalled that BAM.PR.Z will reset to 4.685% and that I recommended against conversion.

BAM.PR.Z is a FixedReset, 4.80%+296, that commenced trading 2011-11-2 after being announced 2011-10-24. It is tracked by HIMIPref™ and assigned to the FixedReset subindex.

Northland Power Inc. has announced:

that as fewer than one million of its Cumulative Rate Reset Preferred Shares, Series 3 (“Series 3 Shares”) were tendered for conversion into Cumulative Floating Rate Preferred Shares, Series 4 (the “Series 4 Shares”), no Series 3 Shares will be converted into Series 4 Shares. Consequently, effective December 31, 2017, Northland will continue to have 4,800,000 Series 3 Shares and no Series 4 Shares issued and outstanding.

The fixed quarterly dividends on the Series 3 Shares for the period from January 2, 2018 until December 31, 2022 will be paid at an annual rate of 5.08% (Cdn. $0.3175 per share per quarter).

The Series 3 Shares are listed on the Toronto Stock Exchange under the symbol “NPI.PR.C”.

It will be recalled that NPI.PR.C will reset to 5.08% effective January 1 and I recommended against conversion.

NPI.PR.C is a FixedReset, 5.00%+346, that commenced trading 2012-5-24 after being announced 2012-5-14. It is tracked by HIMIPref™ but relegated to the Scraps index on credit concerns.

S&P Global Ratings has announced:

• •Montreal-based Laurentian Bank of Canada recently disclosed mortgage documentation and client representation issues, with a sample of mortgage loans sold to third-party purchasers, that have generated some concern, on our part, with respect to the rigor of the company’s underwriting procedures and risk control functions.
• •While there is currently no evidence of weakened asset quality in the sample or overall mortgage portfolio, we believe aggressive residential loan growth as well as the bank’s exposure to the nonprime residential mortgage segment of the Canadian mortgage market has increased the near-term downside to the risk profile for Laurentian Bank.
• •We are therefore placing our ratings on Laurentian Bank of Canada on CreditWatch with negative implications.

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The CreditWatch placement reflects our view that the bank’s aggressive loan growth could have negative repercussions for LBC’s creditworthiness. Although the bank’s asset-quality metrics remain strong, we believe the recent disclosures around lapses in mortgage documentation based on a sample of mortgages sold to a third-party purchaser (TPP) and inadvertent inclusion of ineligible loans in another third-party transaction suggest the company’s underwriting procedures and risk control functions may be weaker than the assumptions our current ratings incorporate.

As noted in our June 16 report on the bank, we believe that LBC’s ambitious transformation plan, largely focused on growth in commercial lending and increased use of the B2B (via brokers and third-party financial advisers) channel, may negatively affect the bank’s asset-quality profile. In 2017, LBC’s residential mortgage loans were up 10% from last year, reflecting organic growth through independent brokers and advisors.
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Specifically, we could lower our ratings on LBC if we see:

• •Further findings regarding mortgage document falsification that show the problem to be deeper than initially described;
• •Weakening funding and liquidity profile, such that our stable funding ratio and broad liquid assets as a proportion of short-term wholesale funding for Laurentian Bank meaningfully weaken;
• •Deterioration in loan performance and asset quality metrics owing to the aforementioned documentation issues or otherwise; or
• •Legal or regulatory actions affecting the company’s financials or reputation.

We could affirm the ratings, and revise the outlook to negative, if we observe receding near-term risks, including:

• •The mortgage document falsification proves to be small in impact and largely contained to a minor segment of the portfolio.

Affected issues are LB.PR.H and LB.PR.J.

This move follows coverage by Canadian media:

Laurentian Bank of Canada is trying to calm jittery investors, suggesting shareholders overreacted when they sent its share price tumbling after the bank disclosed problems with some mortgages it issued.

The Montreal-based bank played down documentation gaps and misrepresentation affecting up to $300-million in mortgages as largely a paperwork issue, even as it admitted staff had failed to get necessary documents to verify some loans, while a lesser number of clients had embellished their means to qualify.

Executives at the lender have stressed that it has ample excess cash to repurchase $180-million in problematic loans in the near term, and more if necessary. Audits turned up no evidence that staff did anything intentionally wrong, and found no notable concentration of improper loans coming from any particular mortgage brokers, the bank said. And so far, the loans at issue have performed well.

Intact Financial Corporation has announced:

that, after having taken into account all elections received before the December 15, 2017, 5:00 p.m. (ET) conversion deadline, with respect to the Non-cumulative Rate Reset Class A Shares Series 1 of IFC (the “Series 1 Preferred Shares”) tendered for conversion on December 31, 2017 into Non-cumulative Floating Rate Class A Shares Series 2 of IFC (the “Series 2 Preferred Shares”), the holders of Series 1 Preferred Shares are not entitled to convert their shares. There were 181,136 Series 1 Preferred Shares tendered for conversion, which is fewer than the 1,000,000 Series 1 Preferred Shares required for the ability to proceed with the conversion, in accordance with the terms of the Series 1 Preferred Shares.

There are 10,000,000 Series 1 Preferred Shares listed on the Toronto Stock Exchange (“TSX”) under the symbol IFC.PR.A. The annual dividend rate for the Series 1 Preferred Shares for the five-year period from and including December 31, 2017 to but excluding December 31, 2022, will be 3.396%, as determined in accordance with the terms of the Series 1 Preferred Shares.

Subject to certain conditions described in IFC’s prospectus dated July 5, 2011, IFC may redeem the Series 1 Preferred Shares, in whole or in part, on December 31, 2022 and on December 31 every five years thereafter.

For more information on the terms of, and risks associated with an investment in, the Series 1 Preferred Shares, see IFC’s prospectus dated July 5, 2011 which is available on www.sedar.com.

It will be recalled that IFC.PR.A will reset at 3.396% effective December 31, 2017, and I recommended against conversion.

IFC.PR.A is a FixedReset, 4.20%+172, that commenced trading 2011-7-12 after being announced 2011-6-22. The issue is tracked by HIMIPref™ and has been assigned to the FixedReset subindex.

As this issue is not NVCC compliant and it is an insurance issue, it is analyzed as having a Deemed Retraction. Note that I am less certain with respect to this decision than I am with life insurers – it is by no means assured that property and casualty insurers will be treated the same as life insurers once all the regulatory dust settles.

Kinder Morgan Canada Limited has announced:

that it has completed its previously announced offering of cumulative redeemable minimum rate reset preferred shares, Series 3 (the “Series 3 Preferred Shares”) for aggregate gross proceeds of $250 million. The Company issued 10,000,000 Series 3 Preferred Shares, including 2,000,000 Series 3 shares issued as a result of the full exercise of the underwriter’s option, through a syndicate of underwriters led by CIBC Capital Markets, Scotiabank, RBC Capital Markets and TD Securities.

The Company intends to use the proceeds from the offering to indirectly subscribe for preferred units in Kinder Morgan Canada Limited Partnership, which, in turn, intends to use such proceeds to, directly or indirectly, finance the development, construction and completion of the Trans Mountain Expansion Project and Base Line Terminal project as well as potential future growth opportunities, to repay indebtedness and for general corporate purposes.
The Series 3 Preferred Shares will begin trading today on the TSX under the symbol KML.PR.C. S&P and DBRS have assigned this series a rating of P-3 (High) and Pfd-3 (high), respectively.

Dividends on the Series 3 Preferred Shares are expected to be $1.3000 per share annually, payable quarterly on the 15th day of February, May, August and November, as and when declared by the Board of Directors of the Company, for the initial fixed rate period to but excluding February 15, 2023. The first dividend, if declared, will be payable February 15, 2018, in the amount of $0.22082 per share.

All of the Company’s dividends are designated “eligible dividends” for Canadian income tax purposes.

KML.PR.C is a FixedReset, 5.20%+351M520, announced 2017-12-6. It will be tracked by HIMIPref™ but relegated to the Scraps subindex on credit concerns.

The issue traded 508,130 shares today in a range of 24.94-00 before closing at 24.99-00. Vital statistics are: