PrefBlog

DBRS has announced that it:

upgraded the long-term ratings of the Royal Bank of Canada (RBC or the Bank) and its related entities, including RBC’s Long-Term Issuer Rating, to AA (high) from AA. DBRS also changed the trend on all long-term ratings to Stable from Positive. The Bank’s Short-Term Issuer Rating was confirmed at R-1 (high) with a Stable trend. RBC’s Long-Term Issuer Rating is composed of an Intrinsic Assessment (IA) of AA and Support Assessment of SA2, which reflect the expectation of timely systemic support from the Government of Canada (rated AAA with a Stable trend by DBRS). The SA2 designation results in a one-notch uplift to the Long-Term Issuer Rating. Under the new Canadian Bank Recapitalization Regime (the Bail-In Regime), DBRS expects to eventually remove the uplift from systemic support, once the Bank has issued a sufficient level of bail-inable senior debt, which would thereby provide an adequate buffer for non-bail-inable obligations and is then expected to offset the removal of systemic support.
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DBRS remains concerned over the combination of Canadian household indebtedness and elevated housing prices, particularly in and around Vancouver and Toronto, and the potential impact of a housing downturn on the Canadian economy as well as to other consumer-related loan portfolios. Nonetheless, RBC’s residential-secured portfolio, like all the large Canadian banks, appears conservatively underwritten, with 37% of RBC’s Canadian residential mortgage loans insured. The average loan-to-value ratio of the uninsured portfolio is a conservative 57%, providing a substantial buffer for a decline in housing prices.
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RBC’s Q2 2019 Common Equity Tier 1 ratio increased 90 basis points YoY to 11.8%, primarily due to strong earnings generation. While overall capital levels remain well above regulatory minimums, they are at the low end of some global peers. However, DBRS views capital levels as strong given the Bank’s asset mix and ability to generate capital. The Bank has begun issuing Bail-inable Senior Debt as part of the Bail-In Regime. It is expected that the Bank will exceed the total loss absorbing capacity requirements issued by the Office of the Superintendent of Financial Institutions as it replaces maturing legacy senior debt.
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18-Jun-19 NVCC Preferred Shares Upgraded Pfd-2 (high) Stb
18-Jun-19 Non-Cumulative Preferred Shares (Excluding Series W) Upgraded Pfd-1 (low) Stb
18-Jun-19 Preferred Shares, Series C-1 Upgraded A Stb
18-Jun-19 Preferred Shares, Series C-2 Upgraded A Stb

Affected issues are:
NVCC-compliant : (Straights) RY.PR.N, RY.PR.O, RY.PR.P
(FixedReset) RY.PR.H, RY.PR.J, RY.PR.M, RY.PR.Q, RY.PR.R, RY.PR.S, RY.PR.Z

NVCC-non-compliant: (Straight) RY.PR.A, RY.PR.C, RY.PR.E, RY.PR.F, RY.PR.G

Specifically Excluded from being rated: RY.PR.W

It’s a bit odd that the Series C-1 shares were upgraded – they have been redeemed as I reported in August 2017; this was confirmed in the 2017 Annual Report:

On November 13, 2017, we redeemed all 82,050 issued and outstanding Non-cumulative Perpetual First Preferred Shares, Series C-1, for cash at a redemption price of US$1,000 per share.

The C-series preferreds were issued in connection with the takeover of City National in 2015.

Brompton Lifeco Split Corp. has released its Annual Report to December 31, 2018.

Note that the benchmarking isn’t ideal, since the Financial index will include banks, while the fund has a mandate only for insurers.

Figures of interest are:

MER: The MER per unit of the Fund, excluding Preferred share distributions (which were largely covered by the Fund’s dividend income), was 0.98% in 2018, down from 1.05% in 2017 as a result of better fixed-cost absorption.

Average Net Assets: We need this to calculate portfolio yield; and it’s tricky because “The Fund completed a treasury offering of Class A shares and Preferred shares for aggregate gross proceeds of approximately $38.6 million on February 6, 2018.”. Preferred Share distributions of 4,055,809 @ 0.575 / share implies 7.054-million shares out on average. Average Unit Value (beginning & end of year) = (16.82 + 12.71) / 2 = 14.76. Therefore 7.054-million @ 14.76 = 104.1-million average net assets.

Underlying Portfolio Yield: Dividends, interest and lending income received of 4.249-million divided by average net assets of 104.1-million is 4.08%

Income Coverage: Gross Investment Income (before capital gains & losses) of $4.250-million less expenses of 1.818-million is net investment income of $2.432-million divided by Preferred Share Distributions of 4.056-million is 60%.

Canadian Imperial Bank of Commerce has announced:

that it has completed the offering of 10 million Non-cumulative Rate Reset Class A Preferred Shares Series 51 (Non-Viability Contingent Capital (NVCC)) (the “Series 51 Shares”) priced at $25.00 per share to raise gross proceeds of $250 million.

The offering was made through a syndicate of underwriters led by CIBC Capital Markets. The Series 51 Shares commence trading on the Toronto Stock Exchange today under the ticker symbol CM.PR.Y.

The Series 51 Shares were issued under a prospectus supplement dated May 27, 2019, to CIBC’s short form base shelf prospectus dated July 11, 2018.

CIBC has designated the Series 51 Shares as eligible to participate in the CIBC Shareholder Investment Plan along with Series 41, 43, 45, 47 and 49. Holders of eligible shares may elect to have dividends on those preferred shares reinvested in common shares if they reside in Canada, or may elect stock dividends if they reside in the U.S. See “CIBC Shareholder Investment Plan” at www.cibc.com for more information.

CM.PR.Y is a FixedReset, 5.15%+362, NVCC, announced May 24. It will be tracked by HIMIPref™ and has been assigned to the FixedReset (Discount) subindex.

The issue traded 1,022,019 shares today in a range of 24.35-65 before closing at 24.37-40. Vital statistics are:

Given that the PerpetualDiscount index is down 5.64% from its pre-announcement close on May 23, this was actually a pretty good day for the issue!

The new issue is somewhat expensive according to Implied Volatility Analysis:

Click for Big

According to this analysis, the fair price of the new issue is 23.71, down from the announcement day fair-value of 24.85, but alert Assiduous Readers will have noticed that the Implied Volatility plot is very peculiar, having three expensive issues and four cheap ones, with nothing in between.

The other two rich issues are:

• CM.PR.S, a FixedReset, 4.50%+245, NVCC-compliant issue that commenced trading 2018-1-18 after being announced 2018-1-10. It is 0.89 rich, being bid at 19.01 compared to a fair value of 18.12.
• CM.PR.T, a FixedReset, 5.20%+331, NVCC-compliant issue that commenced trading 2019-1-22 after being announced 2019-1-14. It is 2.17 rich, being bid at 24.40 compared to a fair value of 22.23. Alert readers will note that is is bid higher than CM.PR.Y despite having an Issue Reset Spread 31bp lower. Sometimes I despair of this market.

The extremely perplexing issue is CM.PR.R, a FixedReset, 4.40%+338, NVCC Compliant issue that commenced trading 2017-6-2 after being announced 2017-5-25. It is bid at 21.30 compared to a fair value of 22.56. Alert readers will note that it is bid much lower than CM.PR.T despite having an Issue Reset Spread 7bp higher.

I confess I don’t know quite what to make of this. It is common – normal, even – for a new issue to remain rich for quite some time, but I am at a loss to explain why CM.PR.S should remain rich after being on the market for sixteen months. CM.PR.R is just silly … but note that its current coupon is low relative to the new issue and it won’t reset until 2022-7-31 … three years, roughly, thirteen coupon payments, but that’s only a total of about $0.60 and doesn’t explain the differential with CM.PR.S anyway.

Fortunately, I don’t have to explain it! All I have to do is avoid buying the new issue and favour other, cheaper, choices for any allocation to CM that I care to make.

The Toronto Dominion Bank’s new issue closed today without an announcement on their website.

TD.PF.M is a FixedReset 5.10%+356, NVCC, announced 2019-5-24. It will be tracked by HIMIPref™ and has been assigned to the FixedReset (Discount) subindex.

The issue traded 680,093 shares today in a range of 24.60-78 before closing at 24.70-71. Vital statistics are:

Given that the PerpetualDiscount index is down 5.64% from its pre-announcement close on May 23, this was actually a pretty good day for the issue!

The new issue remains expensive according to Implied Volatility Analysis:

Click for Big

According to this analysis, the fair price of the new issue is 23.58, down 0.69 from the announcement day fair value of 24.27.

It is most interesting to compare this issue with TD.PF.L, a FixedReset, 5.20%+327, that commenced trading 2019-1-28 after being announced 2019-01-17. Alert Assiduous Readers will have noticed that although the initial dividends of the two issues are similar, the spreads are 29bp different, which is significant. The fair price of TD.PF.L according to the analysis above is only 22.39 (down 0.84 from the TD.PF.M announcement day value of 23.23), yet the issue closed today at 24.63-68, not much below TD.PF.M’s 24.70-71. I am reminded of the BCE.PR.K Ridiculous Rip-off Wrinkle, in which BCE was able to reopen the issue since – presumably – the initial coupon rate was in-line with the market even though the spread to the Canada 5-year for the re-opened portion was 87bp lower than it should have been.

On March 26, S&P placed TA on Creditwatch-Negative:

• Calgary, Alta.-based TransAlta Corp. has announced that it entered into an agreement with Brookfield Renewable Partners L.P. with respect to the partial sale of TransAlta’s Alberta hydro assets.
• As part of this transaction, TransAlta will issue C$350 million in debentures to Brookfield over the coming weeks, mainly to fund future shareholder returns and subsequently issue C$400 million in preferred stock in October 2020 to repay debt maturing in November 2020. Brookfield will also increase its equity investment in TransAlta to 9%. The debentures and preferred shares are expected to convert to a partial interest in TransAlta’s hydro assets in 2025.
• S&P Global Ratings placed its ‘BBB-‘ issuer credit rating on TransAlta and its issue-level ratings on the company’s debt on CreditWatch with negative implications.
• TransAlta’s leverage remains elevated for the rating, and the CreditWatch placement reflects a greater than 1-in-2 chance of a downgrade if we are not convinced that the company can improve its funds from operations (FFO) to debt to about 22% or debt to EBITDA would not decrease below 3.5x by 2020.
• We expect to resolve the CreditWatch over the next 90 days after meeting with company management to evaluate its plans to reduce leverage over the next two years and to manage execution risk while increasing its natural gas and renewables generation portfolio.

They have now downgraded Transalta:

• Calgary, Alberta-based TransAlta Corp.’s leverage is expected to remain elevated over the next two years following its agreement with Brookfield to borrow $350 million in subordinated debentures and planned $400 million preferred stock issuance (which we view as debt) to fund share repurchases, refinance debt, and accelerate coal-to-gas power plant conversion.
• We expect the company’s funds from operations (FFO) to debt to remain below 22% and debt to EBITDA above 3.5x (our downgrade thresholds for the rating) for a prolonged period. Consequently, we are lowering our issuer credit rating and senior unsecured issue-level ratings on TransAlta to ‘BB+’ from ‘BBB-‘. We are also lowering our preferred stock rating to ‘B+’ from ‘BB’ and our Canadian preferred stock rating to ‘P-4’ (high) from ‘P-3’.
• We are assigning our ‘3’ recovery rating to the company’s senior unsecured debt, reflecting our expectation of meaningful recovery in a default scenario.
• We are removing the ratings from CreditWatch, where we placed them March 26, 2019, with negative implications following the announcement of the Brookfield transaction. The outlook is stable.
• The stable outlook reflects our expectation of relatively stable operating performance under transitionary industry conditions toward cleaner burning fuels. We expect FFO to debt to remain 16%-17% through 2020 and leverage reduction in the longer term to be driven by improved realizations for its hydroelectric plants following the expiration of under-market-price power purchase agreements (PPAs) in 2020 and the placement of a capacity market in Alberta in November 2021.

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We could lower our ratings if we expect FFO to debt to fall below 14% or debt to EBITDA to increase above 4.75x for a prolonged period. This could likely result from significant declines in capacity and power prices in Alberta or significant operating challenges resulting from the coal-to-gas conversion. While less likely, we could lower ratings because of aggressive financial policy changes characterized by meaningful increases in dividends or share repurchases, or a weaker business profile characterized by the sale of contracted assets such that less than 50% of EBITDA is generated by contracted assets.

While unlikely over the next 24 months, we could consider an upgrade if TransAlta successfully pursues coal-to-gas conversions, exhibits good profitability from the converted plants, and materially improves financial performance. More specifically, an upgrade would require sustained FFO to debt above 22% and debt to EBITDA below 3.5x.

Affected issues are TA.PR.D, TA.PR.E, TA.PR.F, TA.PR.H and TA.PR.J.