Fortis Inc has announced that they will be issuing a new series of prefs: perpetuals paying 4.9% (= $1.225 per share annually).
These become redeemable Dec. 1, 2011 at $26.00, the redemption price declining by $0.25 annually until redeemable at $25.00 on and after Dec. 1, 2015.
It’s a bought deal by Nesbitt, issue size 5-million shares = $125-million. The issue is rated only Pfd-3(high) by DBRS [but P-2(low) by S&P], so if purchased, it should be purchased cautiously. Don’t put a lot of eggs in this basket! I’ll comment on relative valuation later today.
Update: OK, I’m looking at it … a final opinion will have to await the final prospectus, but preliminary indications are not good.
There’s not much to which it can be directly compared: There are only two other P3H (DBRS) fixed-rate perpetuals: FAL.PR.H, with an annual dividend of $1.625; and LB.PR.D, paying $1.50. Both are high-coupon with imminent call dates and cannot be considered directly comparable.
There are three index-included issues to look at, priced near par:
| Issue |
Price (bid, 2006-09-13 close) |
DBRS Rating |
Dividend |
| MFC.PR.B |
25.00 |
Pfd-1(low) |
1.1625 |
| RY.PR.B |
25.20 |
Pfd-1(low) |
1.175 |
| RY.PR.A |
24.73 |
Pfd-1(low) |
1.1125 |
The MFC.PR.B commence their redemption eligibility 2010-3-19 at $26.00, declining by $0.25 annually until redeemable at par commencing 2014-03-19. So even from this very rough comparison, you’re giving up the credit quality of Pfd-1(low) to buy Pfd-3(high) and only picking up $0.0625 annual dividend for the exchange, which seems pretty niggardly. According to Royal Bank trading prices, if we can assume for a minute they’re trading fairly (not really!) that’s worth less than $0.50.
When we perform an indirect comparison (via the yield curve) vs. every issue in the (HIMIPref™) universe, we come up with a total intrinsic value of the cash flows of $23.07, which isn’t very good:
| Price due to base-rate |
24.06 |
| Price due to short-term |
0.07 |
| Price due to long-term |
0.73 |
| Price due to Cumulative Dividends |
0.00 |
| Price due to Credit Spread (3) |
-1.85 |
| Price due to error |
0.06 |
which to a large extent confirms our suspicions that arose when we looked at the better quality near-par perps: This thing is basically being priced as a high quality issue even though it’s a Pfd-3(high).
The other Fortis issues, FTS.PR.C and FTS.PR.E are both trading about $0.25 above thier intrinsic cash values – so it would appear that the market likes the prospects for this firm and is rating them at “Pfd-3(high)(and a bit)”, if I can be permitted so qualitative an assessment. Note that these two issues are illiquid enough that a “liquidity discount” of about $0.20 each is assessed against them, so they’re trading at maybe $0.45 above their expected “fair” price.
I’ll hasten to add that Pfd-3(high) isn’t all that bad! Hymas Investment Management will have to get an AWFUL lot bigger and more profitable before it’s able to issue Pfd-3(high) prefs. According to DBRS, “Pfd-3 ratings generally correspond with companies whose senior bonds are rated in the higher end of the BBB category”.
But, at least until I’ve had a look at the prospectus, I’ll be advising against the purchase of these instruments. Not only should holdings of Pfd-3 instruments be limited within a portfolio (even when (high)), but it looks like these are simply being priced too aggressively to be worth going after.
Note added 2006-09-15 : These have been added to HIMIPref™ with the ticker symbol “FTS.PR.?”
Note added 2006-09-27 : Looks like the TSX will be listing this issue with the ticker symbol “FTS.PR.F”
BCE.PR.S
Wednesday, September 6th, 2006Here’s an interesting issue.
You can get quick overview of it at BCE’s website or go through all the detail in the prospectus (which BCE has published on their site! Good for them!).
There are a few major points:
Looking at all the above information, we can draw some interesting conclusions: like, f’rinstance, for people who actually want to own floating-rate prefs, this seems like a reasonable deal (PROVIDED, of course, that you can trade cheaply! Full-Service brokerage charges of $0.25/share bugger up ALL the calculations!).
Say we can buy this issue in the size we want at $24.50. There are two things that can happen:
BCE Inc. was recently confirmed at Pfd-2(low) by DBRS. Short of default, the only* risk I can see to this strategy is that BCE might announce a really lousy rate on the Series T shares, but practically all holders of the Series S converts anyway.
It is interesting! I wonder who’s selling and forcing the price down? People may be comparing to BC.PR.C and assuming that there will be a forced-conversion into an issue with a 4.65% coupon that will trade below par … but BC.PR.C is holding its own, quoted at 25.05-23 today on heavy volume.
*I mean, “only risk” OTHER THAN that of actually holding a floater, of course. I don’t like floaters, not in this environment at these prices, I don’t. But they can make sense for people who are offsetting a specific liability.
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