PrefBlog

It will be recalled that BCE.PR.M will reset to 2.764% effective March 31.

Holders of BCE.PR.M have the option to convert to FloatingResets, which will pay 3-month bills plus 209bp on the par value of $25.00. The deadline for notifying the company of the intent to convert is 5:00 p.m. (EST) on March 16, 2016; but note that this is a company deadline and that brokers will generally set their deadlines a day or two in advance, so there’s not much time to lose if you’re planning to convert! However, if you miss the brokerage deadline they’ll probably do it on a ‘best efforts’ basis if you grovel in a sufficiently entertaining fashion. The ticker for the new FloatingReset is not yet known.

The most logical way to analyze the question of whether or not to convert is through the theory of Preferred Pairs, for which a calculator is available. Briefly, a Strong Pair is defined as a pair of securities that can be interconverted in the future (e.g., PWF.PR.P and the FloatingReset that will exist if enough holders convert). Since they will be interconvertible on this future date, it may be assumed that they will be priced identically on this date (if they aren’t then holders will simply convert en masse to the higher-priced issue). And since they will be priced identically on a given date in the future, any current difference in price must be offset by expectations of an equal and opposite value of dividends to be received in the interim. And since the dividend rate on one element of the pair is both fixed and known, the implied average rate of the other, floating rate, instrument can be determined. Finally, we say, we may compare these average rates and take a view regarding the actual future course of that rate relative to the implied rate, which will provide us with guidance on which element of the pair is likely to outperform the other until the next interconversion date, at which time the process will be repeated.

We can show the break-even rates for each FixedReset / FloatingReset Strong Pair graphically by plotting the implied average 3-month bill rate against the next Exchange Date (which is the date to which the average will be calculated).

Click for Big

The market appears to have a distaste at the moment for floating rate product; almost all of the implied rates until the next interconversion are lower than the current 3-month bill rate and the averages for investment-grade and junk issues are both well below zero, at -0.79% and -0.73%, respectively! Whatever might be the result of the next few Bank of Canada overnight rate decisions, I suggest that it is unlikely that the average rate over the next five years will be lower than current – but if you disagree, of course, you may interpret the data any way you like.

Since credit quality of each element of the pair is equal to the other element, it should not make any difference whether the pair examined is investment-grade or junk, although we might expect greater variation of implied rates between junk issues on grounds of lower liquidity, and this is just what we see.

If we plug in the current bid price of the BCE.PR.M FixedReset, we may construct the following table showing consistent prices for its soon-to-be-issued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:

Based on current market conditions, I suggest that the FloatingResets that will result from conversion are likely to be cheap and trading below the price of their FixedReset counterparts. Therefore, I recommend that holders of BCE.PR.M continue to hold the issue and not to convert. I will note that, given the apparent cheapness of the FloatingResets, it may be a good trade to swap the FixedReset for the FloatingReset in the market once both elements of each pair are trading and you can – presumably, according to this analysis – do it with a reasonably good take-out in price, rather than doing it through the company on a 1:1 basis. But that, of course, will depend on the prices at that time and your forecast for the future path of policy rates. There are no guarantees – my recommendation is based on the assumption that current market conditions with respect to the pairs will continue until the FloatingResets commence trading and that the relative pricing of the two new pairs will reflect these conditions.

Note as well that conversion rights are dependent upon at least one million shares of each series being outstanding after giving effect to holders’ instructions; e.g., if only 100,000 shares of BCE.PR.M are tendered for conversion, then no conversions will be allowed; but if only 100,000 shares of BCE.PR.M will remain after the rest are all tendered, then conversion will be mandatory. However, this is relatively rare: all 39 Strong Pairs currently extant have some version of this condition and all but four have both series outstanding.

It will be recalled that FN.PR.A will reset to 2.79% effective April 1.

Holders of FN.PR.A have the option to convert to FloatingResets, which will pay 3-month bills plus 207bp on the par value of $25.00. The deadline for notifying the company of the intent to convert is 5:00 p.m. (EST) on March 16, 2016; but note that this is a company deadline and that brokers will generally set their deadlines a day or two in advance, so there’s not much time to lose if you’re planning to convert! However, if you miss the brokerage deadline they’ll probably do it on a ‘best efforts’ basis if you grovel in a sufficiently entertaining fashion. The ticker for the new FloatingReset is not yet known.

The most logical way to analyze the question of whether or not to convert is through the theory of Preferred Pairs, for which a calculator is available. Briefly, a Strong Pair is defined as a pair of securities that can be interconverted in the future (e.g., PWF.PR.P and the FloatingReset that will exist if enough holders convert). Since they will be interconvertible on this future date, it may be assumed that they will be priced identically on this date (if they aren’t then holders will simply convert en masse to the higher-priced issue). And since they will be priced identically on a given date in the future, any current difference in price must be offset by expectations of an equal and opposite value of dividends to be received in the interim. And since the dividend rate on one element of the pair is both fixed and known, the implied average rate of the other, floating rate, instrument can be determined. Finally, we say, we may compare these average rates and take a view regarding the actual future course of that rate relative to the implied rate, which will provide us with guidance on which element of the pair is likely to outperform the other until the next interconversion date, at which time the process will be repeated.

We can show the break-even rates for each FixedReset / FloatingReset Strong Pair graphically by plotting the implied average 3-month bill rate against the next Exchange Date (which is the date to which the average will be calculated).

Click for Big

The market appears to have a distaste at the moment for floating rate product; almost all of the implied rates until the next interconversion are lower than the current 3-month bill rate and the averages for investment-grade and junk issues are both well below zero, at -0.79% and -0.73%, respectively! Whatever might be the result of the next few Bank of Canada overnight rate decisions, I suggest that it is unlikely that the average rate over the next five years will be lower than current – but if you disagree, of course, you may interpret the data any way you like.

Since credit quality of each element of the pair is equal to the other element, it should not make any difference whether the pair examined is investment-grade or junk, although we might expect greater variation of implied rates between junk issues on grounds of lower liquidity, and this is just what we see.

If we plug in the current bid price of the FN.PR.A FixedReset, we may construct the following table showing consistent prices for its soon-to-be-issued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:

Based on current market conditions, I suggest that the FloatingResets that will result from conversion are likely to be cheap and trading below the price of their FixedReset counterparts. Therefore, I recommend that holders of FN.PR.A continue to hold the issue and not to convert. I will note that, given the apparent cheapness of the FloatingResets, it may be a good trade to swap the FixedReset for the FloatingReset in the market once both elements of each pair are trading and you can – presumably, according to this analysis – do it with a reasonably good take-out in price, rather than doing it through the company on a 1:1 basis. But that, of course, will depend on the prices at that time and your forecast for the future path of policy rates. There are no guarantees – my recommendation is based on the assumption that current market conditions with respect to the pairs will continue until the FloatingResets commence trading and that the relative pricing of the two new pairs will reflect these conditions.

Note as well that conversion rights are dependent upon at least one million shares of each series being outstanding after giving effect to holders’ instructions; e.g., if only 100,000 shares of FN.PR.A are tendered for conversion, then no conversions will be allowed; but if only 100,000 shares of FN.PR.A will remain after the rest are all tendered, then conversion will be mandatory. However, this is relatively rare: all 39 Strong Pairs currently extant have some version of this condition and all but four have both series outstanding.

It will be recalled that GMP.PR.B will reset to 3.611% effective March 31.

Holders of GMP.PR.B have the option to convert to FloatingResets, which will pay 3-month bills plus 289bp on the par value of $25.00. The deadline for notifying the company of the intent to convert is 5:00 p.m. (EST) on March 16, 2016; but note that this is a company deadline and that brokers will generally set their deadlines a day or two in advance, so there’s not much time to lose if you’re planning to convert! However, if you miss the brokerage deadline they’ll probably do it on a ‘best efforts’ basis if you grovel in a sufficiently entertaining fashion. The ticker for the new FloatingReset is not yet known.

The most logical way to analyze the question of whether or not to convert is through the theory of Preferred Pairs, for which a calculator is available. Briefly, a Strong Pair is defined as a pair of securities that can be interconverted in the future (e.g., PWF.PR.P and the FloatingReset that will exist if enough holders convert). Since they will be interconvertible on this future date, it may be assumed that they will be priced identically on this date (if they aren’t then holders will simply convert en masse to the higher-priced issue). And since they will be priced identically on a given date in the future, any current difference in price must be offset by expectations of an equal and opposite value of dividends to be received in the interim. And since the dividend rate on one element of the pair is both fixed and known, the implied average rate of the other, floating rate, instrument can be determined. Finally, we say, we may compare these average rates and take a view regarding the actual future course of that rate relative to the implied rate, which will provide us with guidance on which element of the pair is likely to outperform the other until the next interconversion date, at which time the process will be repeated.

We can show the break-even rates for each FixedReset / FloatingReset Strong Pair graphically by plotting the implied average 3-month bill rate against the next Exchange Date (which is the date to which the average will be calculated).

Click for Big

The market appears to have a distaste at the moment for floating rate product; almost all of the implied rates until the next interconversion are lower than the current 3-month bill rate and the averages for investment-grade and junk issues are both well below zero, at -0.79% and -0.73%, respectively! Whatever might be the result of the next few Bank of Canada overnight rate decisions, I suggest that it is unlikely that the average rate over the next five years will be lower than current – but if you disagree, of course, you may interpret the data any way you like.

Since credit quality of each element of the pair is equal to the other element, it should not make any difference whether the pair examined is investment-grade or junk, although we might expect greater variation of implied rates between junk issues on grounds of lower liquidity, and this is just what we see.

If we plug in the current bid price of the GMP.PR.B FixedReset, we may construct the following table showing consistent prices for its soon-to-be-issued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:

Based on current market conditions, I suggest that the FloatingResets that will result from conversion are likely to be cheap and trading below the price of their FixedReset counterparts. Therefore, I recommend that holders of GMP.PR.B continue to hold the issue and not to convert. I will note that, given the apparent cheapness of the FloatingResets, it may be a good trade to swap the FixedReset for the FloatingReset in the market once both elements of each pair are trading and you can – presumably, according to this analysis – do it with a reasonably good take-out in price, rather than doing it through the company on a 1:1 basis. But that, of course, will depend on the prices at that time and your forecast for the future path of policy rates. There are no guarantees – my recommendation is based on the assumption that current market conditions with respect to the pairs will continue until the FloatingResets commence trading and that the relative pricing of the two new pairs will reflect these conditions.

Note as well that conversion rights are dependent upon at least one million shares of each series being outstanding after giving effect to holders’ instructions; e.g., if only 100,000 shares of GMP.PR.B are tendered for conversion, then no conversions will be allowed; but if only 100,000 shares of GMP.PR.B will remain after the rest are all tendered, then conversion will be mandatory. However, this is relatively rare: all 39 Strong Pairs currently extant have some version of this condition and all but four have both series outstanding.

It will be recalled that HSE.PR.A will reset to 2.404% effective March 31.

Holders of HSE.PR.A have the option to convert to FloatingResets, which will pay 3-month bills plus 173bp on the par value of $25.00. The deadline for notifying the company of the intent to convert is 5:00 p.m. (EST) on March 16, 2016; but note that this is a company deadline and that brokers will generally set their deadlines a day or two in advance, so there’s not much time to lose if you’re planning to convert! However, if you miss the brokerage deadline they’ll probably do it on a ‘best efforts’ basis if you grovel in a sufficiently entertaining fashion. The ticker for the new FloatingReset is not yet known.

The most logical way to analyze the question of whether or not to convert is through the theory of Preferred Pairs, for which a calculator is available. Briefly, a Strong Pair is defined as a pair of securities that can be interconverted in the future (e.g., PWF.PR.P and the FloatingReset that will exist if enough holders convert). Since they will be interconvertible on this future date, it may be assumed that they will be priced identically on this date (if they aren’t then holders will simply convert en masse to the higher-priced issue). And since they will be priced identically on a given date in the future, any current difference in price must be offset by expectations of an equal and opposite value of dividends to be received in the interim. And since the dividend rate on one element of the pair is both fixed and known, the implied average rate of the other, floating rate, instrument can be determined. Finally, we say, we may compare these average rates and take a view regarding the actual future course of that rate relative to the implied rate, which will provide us with guidance on which element of the pair is likely to outperform the other until the next interconversion date, at which time the process will be repeated.

We can show the break-even rates for each FixedReset / FloatingReset Strong Pair graphically by plotting the implied average 3-month bill rate against the next Exchange Date (which is the date to which the average will be calculated).

Click for Big

The market appears to have a distaste at the moment for floating rate product; almost all of the implied rates until the next interconversion are lower than the current 3-month bill rate and the averages for investment-grade and junk issues are both well below zero, at -0.79% and -0.73%, respectively! Whatever might be the result of the next few Bank of Canada overnight rate decisions, I suggest that it is unlikely that the average rate over the next five years will be lower than current – but if you disagree, of course, you may interpret the data any way you like.

Since credit quality of each element of the pair is equal to the other element, it should not make any difference whether the pair examined is investment-grade or junk, although we might expect greater variation of implied rates between junk issues on grounds of lower liquidity, and this is just what we see.

If we plug in the current bid price of the HSE.PR.A FixedReset, we may construct the following table showing consistent prices for its soon-to-be-issued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:

Based on current market conditions, I suggest that the FloatingResets that will result from conversion are likely to be cheap and trading below the price of their FixedReset counterparts. Therefore, I recommend that holders of HSE.PR.A continue to hold the issue and not to convert. I will note that, given the apparent cheapness of the FloatingResets, it may be a good trade to swap the FixedReset for the FloatingReset in the market once both elements of each pair are trading and you can – presumably, according to this analysis – do it with a reasonably good take-out in price, rather than doing it through the company on a 1:1 basis. But that, of course, will depend on the prices at that time and your forecast for the future path of policy rates. There are no guarantees – my recommendation is based on the assumption that current market conditions with respect to the pairs will continue until the FloatingResets commence trading and that the relative pricing of the two new pairs will reflect these conditions.

Note as well that conversion rights are dependent upon at least one million shares of each series being outstanding after giving effect to holders’ instructions; e.g., if only 100,000 shares of HSE.PR.A are tendered for conversion, then no conversions will be allowed; but if only 100,000 shares of HSE.PR.A will remain after the rest are all tendered, then conversion will be mandatory. However, this is relatively rare: all 39 Strong Pairs currently extant have some version of this condition and all but four have both series outstanding.

DBRS has announced that it:

has today confirmed the Issuer Rating, Medium-Term Notes and Debentures ratings of Loblaw Companies Limited (Loblaw or the Company) and the Senior Unsecured Debt rating of Shoppers Drug Mart Corporation (Shoppers) at BBB as well as Loblaw’s Short-Term Issuer Rating at R-2 (middle) and its Second Preferred Shares rating at Pfd-3. DBRS has changed the trends to Positive from Stable.
…
The trend change reflects the Company’s deleveraging efforts and successful integration subsequent to the acquisition of Shoppers as well as its solid operating performance in both food retail and pharmacy through the end of F2015. The ratings continue to be supported by Loblaw’s business profile which is considered very strong for the current BBB rating, featuring industry-leading size, scale and market positions in retail and pharmacy across Canada. The ratings also incorporate the intense competition in food retail in Canada and the risks associated with drug pricing and pharmacy reforms.
…
Loblaw’s financial profile should continue to improve over the medium term, benefiting from growth in earnings and cash flows as balance-sheet debt should remain relatively stable. Cash flow from operations should continue to track operating income while capital expenditures (capex) attributable to the retail operations is expected to decline moderately to approximately $1.0 billion. Retail capex will focus on improving existing stores as well as new food and drug store openings as larger supply chain and IT initiatives have been completed. DBRS believes that dividends on a per-share basis will continue to grow at a steady pace, but the cash outlay for dividends should remain near the $400 million level (as share repurchases are completed). As such, DBRS believes that free cash flow before changes in working capital should increase toward the $900 million to $1.0 billion range. Free cash flow is expected to be used to complete share repurchases. As a result, DBRS believes that balance-sheet debt should remain relatively stable and credit metrics should continue to improve as earnings grow.

If DBRS becomes confident in the next six to 12 months that Loblaw’s operating performance will remain sound and balance-sheet debt will remain fairly stable resulting in continued improvement in credit metrics, a ratings upgrade to the BBB (high) level would likely result.

L.PR.B is a 5.30% Straight Perpetual that commenced trading 2016-3-11 after being announced 2015-6-2. It is tracked by HIMIPref™ but relegated to the Scraps index on credit concerns.

DBRS has announced that it:

has today downgraded Shaw Communications Inc.’s (Shaw or the Company) Issuer Rating and Senior Notes rating to BBB (low) from BBB and its Preferred Shares rating to Pfd-3 (low) from Pfd-3. The trends are Stable. This action follows the closing of the Company’s acquisition of WIND Mobile Corp. (WIND) and the announcement to sell its broadcasting subsidiary, Shaw Media Inc. (Shaw Media) to Corus Entertainment Inc. (Corus). The rating action is caused by a gradual erosion in the core cable business owing to persistent subscriber weakness and the expectation that the recent transactions will result in a material weakening of Shaw’s free cash flow profile over the near to medium term.
…
DBRS notes that Shaw’s earnings profile has been under pressure for some time, owing to continued technological substitution of phone and cable services, increased competition from TELUS Corporation’s (TELUS) Internet protocol television (IPTV) offering and, more recently, economic softness in Alberta, regulatory-driven headwinds. Subscriber erosion accelerated in F2015, with a 3.2% decline recorded in total revenue generating units following a 0.8% decline in F2014. As such, Shaw has had to rely more heavily on price increases to drive earnings growth within its wireline business amid an increasingly competitive telecommunications market. Organic growth was weak in F2015, with much of the revenue and EBITDA increases (4.7% and 5.2%, respectively) attributable to the full-year inclusion of ViaWest. DBRS believes that, independent of the recent transactions, because of mounting pressures on subscribers and expectations of less predictable and potentially more strained organic earnings going forward, Shaw is more appropriately placed in the BBB (low) rating category.
…
In terms of financial profile, DBRS expects leverage to be reasonable for the revised rating category. As proceeds from the sale of the media assets will be used to pay for the WIND transaction, Shaw will not be required to raise additional debt financing. Pro forma total debt is expected rise to $5.9 billion by year-end F2016 from $5.7 billion in F2015, but this is because of a recent debt-financed tuck-in acquisition by ViaWest. EBITDA, however, is expected to decline with the divestiture of Shaw Media’s operating income and the modest contribution of WIND. As such, pro forma gross debt to EBITDA is expected to peak at roughly 2.8 times (x) by year-end F2017 from 2.4x in the last 12 months Q1 F2016. DBRS notes that the Company has reiterated its long-term target of net debt-to-EBITDA of between 2.0x and 2.5x.

This follows the December, 2015, expressions of nervousness regarding Shaw and the assessment of a negative outlook by S&P in January 2016.

DBRS has announced that it:

has today changed the trends of all long-term debt ratings of Capital Power Corporation, Capital Power L.P. and TransAlta Corporation (collectively, the IPPs) to Negative from Stable. DBRS has also changed the trend of TransAlta Corporation’s preferred share rating to Negative from Stable. The rating actions reflect DBRS’s concern that the continued challenging wholesale power market environment and heightened political risk in Alberta may lead the IPPs’ credit risk profile to deteriorate to a level that is no longer consistent with their respective rating categories. The rating actions at this time are limited to trend changes with no immediate rating downgrades, as the negative factors that could lead to downward rating pressure are over the medium to long term. DBRS does not anticipate any material weakness in the IPPs’ financial profile in 2016 from 2015, largely because of strong hedging support and manageable capital spending, despite lower power prices in Alberta.
…
DBRS believes the continued weak operating environment and the effect of Alberta Climate Leadership Plan (ACLP) combined will gradually weaken several primary business risk profile factors for the IPPs, including (a) hedging profile, particularly post-2020, as all long-term Alberta power purchase arrangements (PPAs) expire by 2020; (b) market position; and (c) market structure and environment. A weakening business risk profile will likely result in a one-notch downgrade to BBB (low) from BBB for the IPPs. A multi-notch downgrade below investment grade is unlikely in the foreseeable future, unless the implementation of the ACLP would materially affect the IPPs’ financial flexibility and profitability.
…
While TransAlta is less affected by the Alberta climate change strategy than Capital Power, the phase-out of all coal plants by 2030 and rising carbon compliance costs also have potential negative rating implications for TransAlta. Furthermore, TransAlta’s key credit metrics have remained relatively constrained for the current rating, which provides TransAlta with very limited financial flexibility. DBRS acknowledges that TransAlta has responded to the weak power pricing environment by cutting dividends and implementing cost-saving measures.

There are four issues affected by this trend change: TA.PR.D, TA.PR.F, TA.PR.H and TA.PR.J. The first of these, TA.PR.D, will reset at 2.709% on March 31.

I don’t often publish Implied Volatility Analysis for this series – so here it is:

Click for Big