PrefBlog

Enbridge Inc. has announced:

it has closed its previously announced public offering of Cumulative Redeemable Preference shares, Series 7 (Series 7 Preferred Shares) by a syndicate of underwriters led by Scotiabank, CIBC, RBC Capital Markets, and TD Securities Inc. Enbridge issued 10 million Series 7 Preferred Shares for gross proceeds of $250 million which includes the exercise of the underwriters’ option. The Series 7 Preferred Shares will begin trading on the TSX today under the symbol ENB.PR.J. Proceeds will be used to partially fund capital projects, reduce existing indebtedness and for other general corporate purposes of the Corporation and its affiliates.

ENB.PR.J is a FixedReset, 4.40%+257, announced December 3. The issue will be tracked by HIMIPref™ and is assigned to the FixedResets subindex.

The issue traded 436,827 shares today within a range of 24.76-89, before closing at 24.80-85, 10×28.

ENB.PR.J is rated Pfd-2(low) by DBRS.

Vital statistics are:

Power Financial Corporation has announced:

the successful completion and closing of an offering of 8,000,000 4.20% Non-Cumulative 5-Year Rate Reset First Preferred Shares, Series T (the “Series T Shares”) priced at $25.00 per share to raise gross proceeds of $200 million.

The issue was bought by an underwriting syndicate co-led by BMO Capital Markets, RBC Capital Markets and Scotiabank.

The Series T Shares will be listed and posted for trading on the Toronto Stock Exchange under the symbol “PWF.PR.T”. The net proceeds from the issue will be used to supplement the Corporation’s financial resources and for general corporate purposes. The Corporation intends to redeem all of its $175 million First Preferred Shares, Series M on January 31, 2014.

PWF.PR.T is a FixedReset, 4.20%+237, announced December 2. It will be tracked by HIMIPref™ and is assigned to the FixedReset subindex.

The issue traded 728,130 shares today in a range of 25.22-35 before closing at 25.27-30, 17×96. Vital statistics are:

Fortis Inc. has announced:

that it has entered into an agreement and plan of merger to acquire UNS Energy Corporation (“UNS Energy”) (NYSE:UNS) for US$60.25 per common share in cash, representing an aggregate purchase price of approximately US$4.3 billion, including the assumption of approximately US$1.8 billion of debt on closing (the “Acquisition”). The closing of the Acquisition, which is expected to occur by the end of 2014, is subject to receipt of UNS Energy common shareholder approval and certain regulatory and government approvals, including approval by the Arizona Corporation Commission (“ACC”), Federal Energy Regulatory Commission and compliance with any applicable requirements under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the satisfaction of customary closing conditions.

UNS Energy is a vertically integrated utility services holding company, headquartered in Tucson, Arizona, engaged through three subsidiaries in the regulated electric generation and energy delivery business, primarily in the State of Arizona. UNS Energy’s fiscal 2012 operating revenues totalled approximately US$1.5 billion and, as at September 30, 2013, UNS Energy had total assets of approximately US$4.3 billion. UNS Energy serves approximately 654,000 electricity and gas customers.

Following the Acquisition, based on pro forma financial information as at September 30, 2013, total assets of Fortis will increase by approximately 33.5% to approximately $23.5 billion and regulated utility assets will comprise approximately 92% of total assets. Regulated assets in Canada and the United States will comprise approximately 55% and 34%, respectively, of total assets. The Corporation’s consolidated rate base is expected to increase by approximately US$3 billion at the time of closing of the Acquisition. Following the Acquisition, Fortis utilities will serve more than 3,000,000 electricity and gas customers.

They also announced a big chunk of financing:

its direct wholly owned subsidiary, FortisUS Holdings Nova Scotia Limited (the “Selling Debentureholder”), has agreed to sell $1,594,000,000 aggregate principal amount of 4.00% convertible unsecured subordinated debentures (“Debentures”) of Fortis in a secondary offering on a “bought deal” basis to the public (the “Public Offering”) and separately has agreed to sell $206,000,000 aggregate principal amount of Debentures to certain institutional investors on a private placement basis (the “Private Placement” and together with the Public Offering, the “Offerings”). In connection with the Public Offering, the underwriters have also been granted an over-allotment option to purchase up to an additional $239,100,000 aggregate principal amount of Debentures at the offering price, within 30 days from the date of the closing of the Public Offering solely to cover over-allotments, if any, and for market stabilization purposes.

All Debentures are being sold on an instalment basis at a price of $1,000 per Debenture, of which $333 is payable on the closing of the Offerings and the remaining $667 is payable on a date (“Final Instalment Date”) to be fixed following satisfaction of all conditions precedent to the closing of Fortis’ acquisition of UNS Energy Corporation (NYSE:UNS).
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The Debentures will mature on January 9, 2024 and will bear interest at an annual rate of 4.00% per $1,000 principal amount of Debentures (an effective annual yield of 12.00% based on a first instalment of $333) until and including the Final Instalment Date, after which the interest rate will be 0%.

If the Final Instalment Date occurs on a day that is prior to the first anniversary of the closing of the Offering, holders of Debentures who have paid the final instalment on or before the Final Instalment Date will be entitled to receive, on the business day following the Final Instalment Date, in addition to the payment of accrued and unpaid interest to and including the Final Instalment Date, an amount equal to the interest that would have accrued from the day following the Final Instalment Date to, but excluding, the first anniversary of the closing of the Offering had the Debentures remained outstanding until such date (the “Make-Whole Payment”). No Make-Whole Payment will be payable if the Final Instalment Date occurs on or after the first anniversary of the closing of the Offering.

At the option of investors and provided that payment of the final instalment has been made, each Debenture will be convertible into common shares of Fortis (“Common Shares”) at any time after the Final Instalment Date but prior to maturity or redemption by the Corporation at a conversion price of $30.72 per Common Share, being a conversion rate of 32.5521 Common Shares per $1,000 principal amount of Debentures, subject to adjustment in certain circumstances.

The Debentures will not be redeemable except that Fortis will redeem the Debentures at a price equal to their principal amount plus accrued and unpaid interest following the earlier of: (i) notification to holders that the conditions necessary to approve the acquisition of UNS Energy Corporation will not be satisfied; (ii) termination of the acquisition agreement; and (iii) July 2, 2015, if notice of the Final Instalment Date has not been given to investors on or before June 30, 2015. Upon any such redemption, the Corporation will pay for each Debenture: (i) $333 plus accrued and unpaid interest to the holder of the Instalment Receipt; and (ii) $667 to the Selling Debentureholder on behalf of the holder of the Instalment Receipt in satisfaction of the final instalment. In addition, after the Final Instalment Date, any Debentures not converted may be redeemed by Fortis at a price equal to their principal amount plus unpaid interest, which accrued prior to the Final Instalment Date.

At maturity, Fortis will have the right to pay the principal amount due in Common Shares, which will be valued at 95% of their weighted average trading price on the Toronto Stock Exchange for the 20 consecutive trading days ending five trading days preceding the maturity date.

Mark Chediak and Rebecca Penty of Bloomberg note:

The transaction is Fortis’s second announced purchase of a U.S. utility in the past two years. The company completed its $969 million acquisition of CH Energy Group Inc. in June, after agreeing to freeze rates for New York customers. Fortis has been focused on the U.S. for acquisitions because there are “many more opportunities” than in Canada, where most utilities are owned by the government, Chief Financial Officer Barry Perry said on a conference call last month.

DBRS has announced that it:

has today placed the A (low) Issuer Rating, A (low) Unsecured Debentures and Pfd-2 (low) Preferred Shares ratings of Fortis Inc. (Fortis or the Company) Under Review with Developing Implications. This action follows the announcement that the Company has agreed to acquire UNS Energy Corporation (UNS) for a total consideration of approximately $4.3 billion, including the assumption of $1.8 billion of debt on closing (the Acquisition). The rating action reflects DBRS’s view that the proposed Acquisition would have a modestly negative impact on Fortis’ business risk profile while the impact on the financial risk profile is uncertain since the financing plan has not been finalized.
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The focus of DBRS’s analysis is on Fortis’ non-consolidated capital structure (parent level) and cash flow from the subsidiaries to the parent to service the parent’s debt and corporate expenses. On a non-consolidated basis, the cash flow-to-interest expense ratio was strong at 9.17 times in 9M2013, while debt-to-capital was approximately 21%. DBRS notes that the non-consolidated leverage of 21% is slightly above the acceptable range for a holding company with respect to DBRS’s one-notch criteria. However, this increase is expected to be temporary and the leverage will fall in-line with the current rating category following the completion of the Waneta project. Currently, it is uncertain as to how Fortis plannts to finance the proposed Acquisition. As a result, DBRS has placed the ratings of Fortis Under Review with Developing Implications. DBRS will further review the Company’s financing plan when it is finalized. Upon final review, if the Company finances the proposed Acquisition or any cost overruns of its current projects in such a way that its non-consolidated debt-to-capital structure is significantly above 20% and its other non-consolidated credit metrics deteriorate significantly without corrective action within a reasonable time frame, then negative rating action is likely to occur.

Fortis Inc. has several preferred issues trading on the Toronto Exchange: FTS.PR.E (OperatingRetractible); FTS.PR.F and FTS.PR.J (PerpetualDiscount); and FTS.PR.G, FTS.PR.H and FTS.PR.K (FixedReset).

DBRS has announced that it:

has today discontinued its rating of Royal Bank of Canada’s (RBC) Non-Cumulative First Preferred Shares, Series W (Series W). DBRS had placed the Series W, which is convertible to common equity at the issuer’s option, Under Review with Negative Implications on August 17, 2011.

This action follows the application of the updated “DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities,” which was released earlier today. In the updated criteria, the ratings principles for contingent capital instruments (CoCo) indicate that DBRS may not rate CoCo instruments in cases where their triggers are inadequately defined, where they have poorly specified mechanisms for conversion or where the probabilities of their activation are difficult to predict and not closely tied to the issuer’s credit position. If the level of difficulty in assessing these risks is high enough, DBRS may be unable to assign a rating to the instrument.

Because the trigger for conversion into common equity is inadequately defined, DBRS has concluded it is unable to assign a rating to the Series W. Although DBRS believes conversion of the Series W is not likely, the lack of trigger control has led DBRS to conclude the instrument cannot be rated under the updated criteria. This action does not reflect any change in DBRS’s view of RBC’s credit profile and is not related to any issuer-specific credit events.

The Review-Negative was reported on PrefBlog.

As previously noted on PrefBlog, S&P does not discriminate between RY.PR.W and other RY preferred issues.

DBRS has announced that it:

has today downgraded three convertible Non-Cumulative Class A Preferred Shares, Series 26, 27 and 29 of Canadian Imperial Bank of Commerce (CIBC) to Pfd-2 from Pfd-1 (low). The Under Review with Negative Implications status has been removed and the trends are Stable. This action follows the release earlier today of the updated “DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities.”

DBRS had placed the Series 26, 27 and 29 preferred shares, which at the time were convertible to common equity at the issuer’s option, Under Review with Negative Implications on August 17, 2011. Subsequently, CIBC irrevocably passed control of the trigger to the Office of the Superintendent of Financial Institutions (OSFI) to be used only for a non-viability event under OSFI’s capital guidelines. As a result, OSFI confirmed the three series as non-viability contingent capital (NVCC) qualifying instruments.

Under the updated criteria, DBRS has determined that the OSFI NVCC trigger represents a very remote conversion probability and consequently DBRS has rated these instruments Pfd-2, which is the equivalent of four notches below CIBC’s intrinsic assessment of AA (low).

This action does not reflect any change in DBRS’s view of CIBC’s credit profile and is not related to any issuer-specific credit events.

Other rating actions taken today as a result of the criteria update are being published separately.

DBRS has published the DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities:

a) Notching for Preferred Securities Relative to Intrinsic Assessment

Preferred shares are equity instruments that typically pay fixed dividends or floating rate dividends linked to certain index rates. These instruments generally rank above common equity and below the various forms of sub-debt. As preferred dividends have to be approved by the Board of Directors for each payment period, preferred dividends can be halted without resulting in a default on a bank’s debt. Typically, such a halt in dividends has to be preceded by a halt in payment of dividends on common equity.

Certain hybrid instruments can be converted to preferred shares under certain conditions. Typically, these conditions are specified to occur when a bank is under significant stress and its capital position has weakened severely. DBRS treats these instruments like preferred shares in terms of notching.

As preferred shares are equity, various governments during the current crisis have acted to have banks that are under some stress exchange these instruments to bolster their common equity. In some cases, this step has been accomplished through voluntary exchanges. In other cases, banks have engaged in forced exchanges, which DBRS considers tantamount to default. In some cases, preferred shares have been wiped out. This process has helped to bolster these banks’ common equity and helped them avoid being put into receivership. Thus, while senior debt and even subordinated debt have continued to pay as agreed, preferred shares have been subject to greater risk of default. Accordingly, preferred shares and instruments that convert to preferreds are notched from the IA and the notching is wider than for sub debt. Reflecting this increased risk, preferreds are notched by three notches from a bank’s intrinsic assessment.

While the base notching as discussed above is the starting point for rating bank preferred shares, DBRS policy permits wider notching than this base notching to reflect any unique characteristics of individual banks. Various factors may be considered. Notching could be increased by a weaker capital structure, including a higher proportion of preferred shares. Actions taken to reduce or halt common dividends (recognizing that these actions are the first buffer) could also increase notching. Other unique stresses within the domestic financial system, such as expected actions by external parties (regulators, governments) could also add notches.

b) Higher Risk of Nonpayment or Loss on Bank Preferreds Compared to Corporate Preferreds

Compared to other corporate issuers, banks are highly leveraged and may face greater losses relative to the size of their capital bases. Banks therefore may more readily resort to actions to generate common equity; including halting preferred dividends combined with exchange offers. In some cases, regulators or government authorities may require banks to take adverse action against preferreds as a condition of receiving support. Differences in the regimes for resolving distressed banks are also a factor, as these regimes often differ from the bankruptcy laws governing distressed corporates, particularly in giving the resolution authority more powers during resolution. Such actions can include halting preferred dividends or forced exchanges for common shares and/or cash2. Given these differences, DBRS typically notches bank preferred share securities three notches rather than the two notches typically used for non-banking entities.

Due to the NVCC status, S&P downgraded CM.PR.D and CM.PR.E in 2011 (it does not rate CM.PR.G). The action of DBRS in placing the issues on Watch-Negative was reported on PrefBlog.

CM.PR.D, CM.PR.E and CM.PR.G are all tracked by HIMIPref™ all are included in the PerpetualPremium (not DeemedRetractible!) subindex.