PrefBlog

Standard & Poor’s has announced:

• •On Sept. 18, 2014, we published our global criteria for rating bank hybrid capital instruments (see “Bank Hybrid Capital And Nondeferrable Subordinated Debt Methodology And Assumptions”).
• •Following the criteria publication, we are lowering our issue credit ratings on 68 Canadian bank hybrid capital instruments and removing the “Under Criteria Observation” designation from the ratings.
• •We believe that banking regulators are adopting a tougher “bail-in” stance (where investors share in the cost of a government’s rescue of a failing bank) toward hybrid capital instruments compared with our expectations in late 2011.
• •This increases the possibility that banks might have to use hybrid capital instruments to a greater extent to absorb losses, and that regulators would be prepared to see such instruments absorb losses as a response to a bank stress.

Standard & Poor’s Ratings Services today said it lowered its issue credit ratings on 68 bank hybrid capital instruments issued by Canadian banks, and affirmed the ratings on 60 instruments. In addition, we removed the “Under Criteria Observation” (UCO) designation from the ratings, which we had labeled as UCO following the release of our new bank hybrid criteria on Sept. 18 (for more information, see “Bank Hybrid Capital And Nondeferrable Subordinated Debt Methodology And Assumptions” published Sept. 18, 2014, on RatingsDirect).

We have lowered the ratings one notch on Tier 1 preferred shares issued by Bank of Montreal, The Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Laurentian Bank of Canada, National Bank of Canada, Royal Bank of Canada, and The Toronto-Dominion Bank. We have affirmed the ratings on subordinated debt issues of the same issuers that had been placed under criteria observation. We have lowered the ratings on HSBC Bank Canada’s preferred shares and subordinated debt by two and one notches, respectively, based on our group rating methodology and the parent-level ratings on HSBC.

The downgrades reflect our view that regulators in Canada and elsewhere are adopting a tougher “bail-in” stance (where investors share in the cost of a government’s rescue of a failing bank) toward hybrid capital instruments compared with our expectations in late 2011. This increases the possibility that banks might have to use hybrid capital instruments to a greater extent to absorb losses, for example, through coupon nonpayment or conversion to common equity. We believe new regulations position regulators to stop banks from making their payments to hybrid capital investors at what we consider to be earlier-than-before points in the deterioration of a bank’s financial strength. (For details, see “Increasing Bail-In Risks For Bank Hybrid Capital Instruments Are Behind Our Proposed Criteria Change,” published Feb. 6, 2014.
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In our view, the risks for hybrid capital instruments are higher in jurisdictions such as Canada that are adopting the Basel III framework. The updated criteria provide a consistent basis for applying notches to reflect heightened risks of coupon nonpayment due to the Basel III capital conservation buffer mechanism, and to reflect the risk associated with a contractual or statutory conversion or write-down mechanism. The changes to Tier 1 hybrid instrument ratings in Canada reflect the application of an additional notch for coupon nonpayment risk arising from implementation of the Basel III framework.
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COMPANIES WITH AFFECTED OUTSTANDING ISSUES (PARENTS ONLY LISTED)
Bank of Montreal
The Bank of Nova Scotia
Caisse centrale Desjardins
Central 1 Credit Union
Canadian Imperial Bank of Commerce
HSBC Bank Canada
Laurentian Bank of Canada
National Bank of Canada
Royal Bank of Canada
Toronto-Dominion Bank (The)

Affected issues are:

All this follows the S&P announcement discussed on PrefBlog in the post S&P Sets Outlook-Negative on Canadian Banks.

The “tougher ‘bail-in’ stance” referred to in the S&P release was discussed on PrefBlog in the post Feds Consulting on Bank Recapitalization Regime.

A full year ago, DGS.PR.A extended term from 2014-11-30 to 2019-11-28, but did not announce a dividend rate for the coming period – this was fine for preferred shareholders since part of the deal was a retraction at par, exercisable for the original maturity date.

Since then, DGS.PR.A has gotten bigger three times – in October 2013, January 2014 and July 2014 – as, clearly, the sponsor is prepared to put some money into marketing a Split Share Corp as long as it has a decent time to run. I haven’t been recommending it, though, pending notification of the new rate.

Brompton Group announced the new rate on September 23:

Dividend Growth Split Corp. (the “Fund”) announced today that the distribution rate for the Preferred Shares for the 5 year term from December 1, 2014 to November 28, 2019 will be $0.525 per annum (5.25% on the original issue price of $10) payable quarterly. This rate is unchanged from the rate for the previous term. The Preferred Share distribution rate is based on current market rates for preferred shares with similar terms. In addition, the Fund intends to maintain the targeted monthly Class A Share distribution at $0.10 per Class A Share.

The Fund previously announced on October 1, 2013 the extension of the term of the Class A Shares and the Preferred Shares to November 28, 2019 from November 30, 2014. The extension allows shareholders to continue to enjoy the benefit of the Funds’ portfolio of common shares of high quality, large capitalization companies, which have among the highest dividend growth rates of those companies included in the S&P/TSX Composite Index. Currently, the portfolio consists of common shares of the following 20 companies:

Great-West Lifeco Inc.	The Bank of Nova Scotia	AGF Management Limited	Shaw Communications Inc.
Industrial Alliance Insurance and Financial Services Inc.	Canadian Imperial Bank of Commerce	IGM Financial Inc.	TELUS Corporation
Manulife Financial Corporation	National Bank of Canada	Power Corporation of Canada	Canadian Utilities Limited
Sun Life Financial Inc.	Royal Bank of Canada	Manitoba Telecom Services	Enbridge Inc.
Bank of Montreal	The Toronto-Dominion Bank	Rogers Communications Inc.	TransCanada Corporation

In connection with the extension, shareholders who do not wish to continue their investment in the Fund, may retract their Preferred Shares or Class A Shares on November 28, 2014 pursuant to a special retraction right and receive a retraction price that is calculated in the same way that such price would be calculated if the Fund were to terminate on November 30, 2014. Notice must be given by November 14, 2014 at 5:00 p.m. (Toronto time) in order to exercise this right.

I received an eMail about this:

I am one of your newsletter subscribers and I purchased DGS.PR.A on your advice last year (thank-you!).

You are probably aware that it is maturing soon with the option to extend for another five years at the same rate (see below). If you had any advice about whether I should bail out or stay in I would be very appreciative.

Also, I have never been in this situation before… do I contact Dividend Growth Split Corp directly or do I contact my stock broker and ask them to inform Dividend Growth Split Corp if I want to retract?

Flattery will get you everywhere! Well, I know nothing of this client’s financial situation or what else he has in his portfolio, but I will say that the reset of 5.25% is very good for holders; if the position made sense for him a year ago, it almost certainly makes sense for him today. Barring unusual portfolio goals and issuer concentration issues, I say hold on to it.

At today’s bid of 10.13, the issue yields 5.05% to maturity 2019-11-28, which is quite good considering that the issue has quite good credit quality, given a NAV of $18.75 as of September 25 to back up each $10 preferred share.

And if you do want to get rid of it, don’t retract! Unless you have very high transaction costs, you’ll get more money selling in the market, given the current bid of $10.13.

DGS.PR.A is tracked by HIMIPref™ but is relegated to the Scraps index on credit concerns; note that these credit concerns relate only to the Probability of Default and completely ignore the prospects for Recovery Given Default – and this latter figure will be quite substantial, particularly when compared with that of Operating Companies, which is expected to be zero.

Assiduous Reader prefQC gently reminds me that DC.PR.D, the FloatingReset recently converted from DC.PR.B has commenced trading – and I forgot all about it!

At any rate, it has started on a strong note, closing at 24.91-15 today vs. DC.PR.B’s 24.56-68, a very nice premium for the exchange. Vital statistics are:

Assiduous Readers might be a little upset that they missed this, particularly since I said:

It is difficult to formulate a recommendation regarding whether holders of DC.PR.B should convert. The two issues resulting after partial conversion will, of course, form a Strong Pair and may be analyzed with the Pairs Equivalency Calculator. Performing an analysis of all current FixedReset/FloatingReset pairs results in the following chart:

Click for Big

This chart was created with the assumed price of the new DC FloatingReset set to 25.22, the same as the price of DC.PR.B. According to this, the DC FloatingReset looks a little bit cheap … but not much. To get to the average Breakeven 3-Month Bill Yield of 1.67%, the price would only need to increase by $0.08, to 25.30.

Mind you, I also said:

Those with a taste for speculation, however, will find the conversion to the FloatingReset attractive, since there’s not much downside and potentially quite a bit of upside.

However, look at the current chart of break-even T-bill yields:

Click for Big

That’s the implied rate for the DC.PR.B / DC.PR.D pair way over on the right, the only member so far of the “Junk” group – I remain very interested regarding whether the implied rates for junk and investment-grade will diverge. They shouldn’t … but you never know!

Anyway, the implied break-even three-month T-bill rate until the next exchange in September 2019 for this pair is 1.95%, just a hair over the 1.88% average for investment-grade and clearly inside the range. The interesting part of this, however, is what has happened to the average break-even rate since my recommendation as of September 2: the investment-grade average has increased from 1.67% to 1.88%. That’s a big move and has resulted in the big gap between the prices of DC.PR.B and DC.PR.D. What has happened, more or less, is that FixedResets have moved down in price, while FloatingResets are largely unchanged.

I will note that, assuming the three-month bill rate increases uniformly over the five years until the next exchange, this is predicting a yield in September 2019 of about 3%. Fancier expectations should be higher, since most pundits expect policy rates to be kept on hold for the next year, maybe two.

DC.PR.D will be tracked by HIMIPref™, but relegated to the Scraps index on credit concerns.

The Canadian Imperial Bank of Commerce has announced:

its intention to redeem all of its issued and outstanding Non-cumulative Class A Preferred Shares Series 26 (TSX: CM.PR.D), for cash. The redemptions will occur on October 31, 2014. The redemption price is $25.00 per Series 26 share.

The $0.359375 quarterly dividend announced on August 28, 2014 will be the final dividend on the Series 26 shares and will be paid on October 28, 2014, covering the period to October 31, 2014, to shareholders of record on September 29, 2014.

Holders of the Series 26 shares should contact the financial institution, broker or other intermediary through which they hold the shares to confirm how they will receive their redemption proceeds.

CM.PR.D is a NVCC compliant Straight Perpetual, paying 5.75%.

Standard and Poor’s has announced:

• •Brookfield Property Partners L.P. completed its acquisition of former affiliate and large office landlord Brookfield Office Properties Inc.
• •Operating fundamentals have improved for office landlords as the U.S. economy has recovered, employment has strengthened, and new office supply additions have been muted.
• •We are affirming our ‘BBB-‘ corporate credit rating on Brookfield Office and removing all ratings from CreditWatch with developing implications. The outlook is stable.
• •The stable outlook reflects our view that the company’s competitively positioned office portfolio, with improving occupancy, good quality tenants, and below market rents will support leverage and fixed-charge coverage at current levels.

Standard & Poor’s Ratings Services today affirmed its ‘BBB-‘ corporate credit rating on Brookfield Office Properties Inc. (Brookfield Office), ‘BB+’ rating on the company’s unsecured debt, and ‘BB’ rating on its preferred stock. We removed all ratings on the company from CreditWatch, where we placed them with developing implications on Oct. 4, 2013. These actions affect roughly $1.7 billion of rated corporate debt and preferred securities.
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We would lower ratings if leverage rises to 60%, fixed-charge coverage measures deteriorate to the 1.3x level, or the common dividend is not adequately supported by operations, since these measures would be more reflective of an “aggressive” financial risk profile. An increase in speculative development activity would also pressure ratings.

We don’t see potential for upgrade momentum over the next few years despite the company’s “strong” business risk profile until the financial risk profile is more firmly positioned within the “significant” category. Specifically, we would look for fixed-charge coverage measures above 1.7x, debt to EBITDA of less than 10x, and stronger coverage of the common dividend. The prudent pursuit and financing of the company’s expanding development pipeline would also be an important consideration for ratings improvement.

The “Watch – Developing” status was previously reported on PrefBlog.

The ultimate parent, Brookfield Asset Management, has the following preferred shares outstanding:
FixedResets BAM.PF.A, BAM.PF.B, BAM.PF.E, BAM.PF.F, BAM.PR.R, BAM.PR.T, BAM.PR.X, BAM.PR.Z
Floaters BAM.PR.B, BAM.PR.C, BAM.PR.K
RatchetRate BAM.PR.E
FixedFloater BAM.PR.G
OperatingRetractible BAM.PR.J
Straight Perpetual BAM.PR.M, BAM.PR.N, BAM.PF.C, BAM.PF.D

BPO has the following preferred share issues outstanding:
OperatingRetractible BPO.PR.H, BPO.PR.J, BPO.PR.K,
FixedReset BPO.PR.L, BPO.PR.N, BPO.PR.P, BPO.PR.R, BPO.PR.T,
Floaters BPO.PR.W, BPO.PR.X, BPO.PR.Y

In addition, there are the following split shares dependent upon BPO:
BPS.PR.U, BPS.PR.A, BPS.PR.B and BPS.PR.C