PrefBlog

Intact Financial Corporation has announced:

that it has closed its $300 million offering of medium term notes (the “Notes”) and its $250 million offering of Non-cumulative Rate Reset Class A Shares Series 3 (the “Series 3 Preferred Shares”).

The Notes were offered on a best efforts basis through a syndicate led by CIBC World Markets Inc., RBC Dominion Securities Inc. and TD Securities Inc. and including Scotia Capital Inc., BMO Nesbitt Burns Inc., National Bank Financial Inc. and Casgrain & Company Limited. The Notes will be direct unsecured obligations of IFC and will rank equally with all other unsecured and unsubordinated indebtedness of IFC. The Notes will bear interest at a fixed annual rate of 4.70% until maturity on August 18, 2021.

The Series 3 Preferred Share offering was underwritten on a bought deal basis by a syndicate of underwriters led by CIBC World Markets Inc., RBC Dominion Securities Inc., Scotia Capital Inc., and TD Securities Inc. and including National Bank Financial Inc., BMO Nesbitt Burns Inc., Canaccord Genuity Corp., GMP Securities L.P., Desjardins Securities Inc., HSBC Securities (Canada) Inc., Macquarie Capital Markets Canada Ltd. and Raymond James Ltd. (the “Underwriters”). IFC entered into an underwriting agreement dated August 11, 2011 with the Underwriters under which the Underwriters agreed to purchase from IFC and sell to the public 9,000,000 Series 3 Preferred Shares at a price of $25.00 per Series 3 Preferred Share for gross proceeds to IFC of $225,000,000. The Underwriters have exercised their over-allotment option and purchased an additional 1,000,000 Series 3 Preferred Shares at a price of $25.00 per Series 3 Share for gross proceeds to IFC of $25,000,000.

The holders of Series 3 Preferred Shares will be entitled to receive fixed non-cumulative preferential cash dividends, as and when declared by the Board of Directors of IFC, on a quarterly basis (with the first quarterly dividend to be paid on September 30, 2011), for the initial fixed rate period ending on September 30, 2016, based on an annual rate of 4.20%. The dividend rate will be reset on September 30, 2016 and every five years thereafter at a rate equal to the 5-year Government of Canada bond yield plus 2.66%. The Board of Directors has approved and declared the initial dividend of $0.12370 per Series 3 Preferred Share which is payable on September 30, 2011 to holders of record on September 15, 2011.

Holders of the Series 3 Preferred Shares will have the right, at their option, to convert their Series 3 Preferred Shares into Non-cumulative Floating Rate Class A Shares Series 4 (the “Series 4 Preferred Shares”), subject to certain conditions, on September 30, 2016 and on September 30 every five years thereafter. The holders of Series 4 Preferred Shares will be entitled to receive floating rate non-cumulative preferential cash dividends, as and when declared by the Board of Directors of IFC, at a rate equal to the 90-day Canadian Treasury Bill rate plus 2.66%.

IFC intends to use the net proceeds of the Series 3 Preferred Share offering and the Note offering, together with borrowings under acquisition credit facilities previously arranged by IFC, the proceeds of a previously announced subscription receipt offering, the net proceeds from a previously announced private placement of medium term notes, the net proceeds of a previously announced preferred share offering and a portion of IFC’s existing cash resources, to fund the purchase price for its previously announced acquisition of all of the issued and outstanding shares of AXA Canada (the “Acquisition”). The closing of the Acquisition is expected to occur in the fall of 2011 subject to receipt of required competition and insurance regulatory approvals and the satisfaction of certain closing conditions. The Series 3 Preferred Share offering and the Note offering are not conditional upon closing of the Acquisition; if the Acquisition is not completed, the net proceeds from these offerings will be used for general corporate purposes.

The Notes have been given a rating of A(low) with a Stable trend by DBRS Limited and a rating of A3, under review for possible downgrade by Moody’s Investors Service, Inc. DBRS Limited has assigned a rating of Pfd-2(low) with a Stable trend for the Series 3 Preferred Shares.

The Series 3 Preferred Shares will commence trading on the Toronto Stock Exchange on August 18, 2011 under the symbol IFC.PR.C.

IFC.PR.C is a FixedReset, 4.20%+266, announced August 9. As the issue does not have a NVCC clause, I have followed my current policy and added a Deemed Maturity entry to the call schedule for 2022-1-31 in the expectation that the NVCC rules will be imposed on insurers and insurance holding companies in the reasonably near future. The issue will be tracked by HIMIPref™ and is assigned to the FixedReset subindex.

The issue traded 425,905 shares today in a range of 24.87-95 before closing at 24.90-94, 30×100.

Vital statistics are:

TD.PR.M & TD.PR.N:

DBRS has today placed the Non-Cumulative Class A 1st Preferred Shares, Series M and Non-Cumulative Class A 1st Preferred Shares, Series M (collectively, the Convertible Preferred Securities) ratings of The Toronto-Dominion Bank (TD or the Bank) Under Review with Negative Implications. The Convertible Preferred Securities are convertible to common equity at the issuer’s option. Today’s actions apply only to the Convertible Preferred Shares that DBRS rates; all other preferred share ratings of the Bank are unaffected.
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Our review will consider the changing Canadian regulatory landscape as it relates to resolution mechanisms, the ability of the issuer to convert the preferred shares into common equity and the expected losses incurred as a result of the conversion. Additionally, the review will incorporate whether convertible preferred securities will have wider notching, based on the global standard notching for preferred shares, because of additional risk associated with conversion. As guidance, subordinated debt non-viability contingent capital will likely be rated no higher than the standard rating for preferred shares and the preferred share non-viability contingent capital will likely be rated one notch below the standard rating for preferred shares.

For clarity, global standard notching for preferred shares means the starting point for notching preferred share ratings is the intrinsic assessment (IA) rating rather than the final senior debt rating, and the degree of notching from the IA rating to the preferred share rating widens to reflect our perception of the increased risk in these capital instruments. The base notching policy is three notches for AA, four notches for “A” and five notches for BBB and lower IA ratings. Note that when DBRS implemented the changes in the preferred share methodology, on June 29, 2009, to increase the base notching at even the strongest rating categories and the expansion of the base notching as the credit quality of the bank migrates downward, most banks in Canada had their preferred share ratings downgraded to only one notch above the global standard notching for preferred shares.

The language for the other issues is similar, if not identical, so I’ll only quote the first paragraph of each press release.

RY.PR.W:

DBRS has today placed the Non-Cumulative First Preferred Shares, Series W (the Convertible Preferred Security) of Royal Bank of Canada (RBC or the Bank) Under-Review with Negative Implications. The Convertible Preferred Security is convertible to common equity at the issuer’s option. Today’s action applies only to the Convertible Preferred Security that DBRS rates; all other preferred share ratings of the Bank are unaffected.

CM.PR.D, CM.PR.E, CM.PR.G:

DBRS has today placed the ratings of the Non-Cumulative Class A Preferred Shares, Series 26 , Non-Cumulative Class A Preferred Shares, Series 27 and Non-Cumulative Class A Preferred Shares, Series 29 (collectively, the Convertible Preferred Securities) of Canadian Imperial Bank of Commerce (CIBC or the Bank) Under Review with Negative Implications. The Convertible Preferred Securities are convertible to common equity at the issuer’s option. Today’s actions apply only to the Convertible Preferred Securities that DBRS rates; all other preferred share ratings of the Bank are unaffected.

BMO.PR.V (which rarely gets mentioned on PrefBlog because it’s US Funds):

DBRS has today placed the Non-Cumulative Perpetual Class B Preferred Shares, Series 10 (the Convertible Preferred Security) rating of Bank of Montreal (BMO or the Bank) Under Review with Negative Implications. The Convertible Preferred Security is convertible to common equity at the issuer’s option. Today’s action applies only to the Convertible Preferred Security that DBRS rates; all other preferred share ratings of the Bank are unaffected.

Update, 2011-8-18: DBRS is holding a teleconference:

DBRS will be holding a teleconference at 10.30 a.m. today to discuss its recent rating actions on Canadian banks’ non-cumulative preferred shares. Yesterday, DBRS placed various non-cumulative preferred shares of Bank of Montreal, Canadian Imperial Bank of Commerce, Royal Bank of Canada and The Toronto-Dominion Bank Under Review with Negative Implications following the review of the Office of the Superintendent of Financial Institutions Canada (OSFI) Advisory on Non-Viability Contingent Capital, issued on August 16, 2011 (NVCC Advisory).

The rating actions follow the revision of how DBRS views the elevated risk of conversion in an environment where OSFI is encouraging Canadian banks to put in place resolution mechanisms, including the release of the NVCC Advisory, and the regulator’s ongoing push toward loss absorption from capital instruments, including convertible preferred securities, to generate common equity prior to the declaration of non-viability by OSFI. On conversion, there is the potential for the holder of this instrument to incur losses.

The teleconference, hosted by Brenda Lum, Managing Director, and Robert Long, Senior Vice President, will cover the key analytical considerations in the DBRS rating action and allow for a question-and-answer period
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A replay will be available immediately after the teleconference until September 1, 2011, at the following numbers:

REPLAY CALL-IN DETAILS
Available until 11:59 p.m. on September 1, 2011
Telephone: +1 905 694 9451 or toll-free at +1 800 408 3053
Pass Code: 5608110

DBRS will also publish a full transcript of the teleconference by the end of business on August 19, 2011. The transcript will be available at www.dbrs.com or by contacting us at info@dbrs.com

Update, 2011-8-22: DBRS released a minor correction to the TD release:

In the DBRS press release published on August 17, 2011, in which DBRS placed the Non-Cumulative Class A 1st Preferred Shares, Series M and Non-Cumulative Class A 1st Preferred Shares, Series N ratings of The Toronto-Dominion Bank Under Review with Negative Implications, the first paragraph referred to only the Series M. The press release has been corrected below and is available at www.dbrs.com or by contacting us at info@dbrs.com

The Canadian Imperial Bank of Commerce has announced:

that it has received confirmation from the Office of the Superintendent of Financial Institutions (OSFI) that its non-cumulative Class A preferred shares, Series 26, 27 and 29 (the Convertible Preferred Shares) will be treated as non-viability contingent capital (NVCC) for the purposes of determining regulatory capital under Basel III.

On May 26, 2011, CIBC announced that it intended to seek to have the Convertible Preferred Shares treated as NVCC once OSFI finalized its advisory on NVCC (the NVCC Advisory). OSFI published the final NVCC Advisory on August 16, 2011.

In connection with receiving this confirmation, CIBC has taken the following actions:

• (i) CIBC has irrevocably renounced its rights to convert the Convertible Preferred Shares into CIBC common shares by way of a deed poll except in circumstances that would be a “Trigger Event” as described in the NVCC Advisory; and
• (ii) CIBC has provided an undertaking to OSFI that CIBC will immediately exercise its rights to convert each of the Convertible Preferred Shares into CIBC common shares upon the occurrence of a Trigger Event.

These are unilateral actions taken at CIBC’s discretion and do not change any of the other terms of the Convertible Preferred Shares including CIBC’s redemption rights.

By renouncing CIBC’s conversion rights except upon the occurrence of a Trigger Event, the Convertible Preferred Shares will continue to not be dilutive to earnings per share following the adoption of International Financial Reporting Standards (IFRS) commencing November 1, 2011 nor for the portion of the IFRS comparative year ending October 31, 2011 that is subsequent to August 16, 2011 the date the conversion rights were renounced.

CIBC announcement that it would seek this status was previously reported on PrefBlog. I discussed the probable rationale for their action in this matter in the June, 2011, edition of PrefLetter.

CM.PR.D, CM.PR.E and CM.PR.G are all tracked by HIMIPref™. All are currently assigned to the PerpetualPremium subindex.