PrefBlog

DBRS has announced that it:

has today downgraded the following ratings of Fortis Inc. (Fortis or the HoldCo) and removed them from Under Review with Negative Implications where they were placed on February 9, 2016:

— Issuer Rating, downgraded to BBB (high), Stable trend, from A (low)
— Unsecured Debentures, downgraded to BBB (high), Stable trend, from A (low)
— Preferred Shares, downgraded to Pfd-3 (high), Stable trend, from Pfd-2 (low)

DBRS’s rating action largely reflects a significant increase in debt at the HoldCo’s level and incorporates the modest improvement of Fortis’s business risk profile following the completion of the acquisition of ITC Holdings Corp. (ITC) on October 14, 2016.
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Based on DBRS’s rating approach to holding companies, DBRS recognizes that Fortis is a holding company of large, diverse and stable cash flow-generating regulated assets. This acts as a partial mitigation on the structural subordination issue. However, the incremental debt resulting from the Acquisition far outweighs the incremental cash flow to Fortis. Based on Fortis’s forecast, its non-consolidated metrics are expected to improve slightly in 2017 and 2018, but it will not be until 2019 that these metrics are expected to improve to the pre-Acquisition level. As a result, a one-notch downgrade is appropriate. The Stable trend reflects DBRS’s expectations as follows: (1) The post-close common equity of approximately $500 million will be issued in 2017, and the proceeds will be used to repay the EBF borrowings. (2) Non-consolidated metrics are expected to improve slightly over the next 24 months and further improve thereafter as ITC and other Fortis capital projects are completed and start generating cash flow. (3) During this period, all capital projects at regulated subsidiaries are expected to be self-financed with no further equity injection to be required from Fortis. The regulated rate base, which excludes the Waneta Expansion, is expected to increase to approximately $25.2 billion in 2017 (pro forma). As such, cash flow in the form of dividends to Fortis is expected to increase without additional debt expected to be issued at the HoldCo level. Combined with Fortis’s plan to slightly reduce its HoldCo debt, DBRS expects Fortis’s non-consolidated financial profile to strengthen over the medium term.

S&P is much more cheerful, maintaining an investment-grade rating of P-2:

• •On Oct. 14 2016, St. John’s, Nfld.-based utility holding company Fortis Inc. announced the closing of its US$11.3 billion acquisition of ITC Holdings Corp., a U.S.-based electricity transmission operator.
• •We are revising our outlook on Fortis and its subsidiaries, FortisAlberta Inc. and Caribbean Utilities Co. Ltd., to stable from negative.
• •We are also affirming our ratings on Fortis and its subsidiaries.
• •The stable outlook reflects the closing of the transaction consistent with our expectations including the sale of 19.9% of ITC to an infrastructure-focused minority investor.

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The stable outlook reflects S&P Global Ratings’ view of Fortis’ stable and predictable cash flow, underpinned by the company’s regulated operations with
generally supportive regulatory frameworks. During our two-year outlook period, we expect Fortis to focus on its regulated businesses, including the ITC integration. Although credit metrics will be weak in 2016 due to the timing of the acquisition’s closing, we expect credit metrics to stabilize and improve during our outlook period, with AFFO-to-debt at about 10.5%.

We could take a negative rating action on Fortis if the company’s AFFO-to-debt were to fall below 10% during our outlook period. This could happen because of cost overruns from post-merger integration efforts with ITC, material adverse regulatory decisions, Fortis encountering operational difficulties that lead to unexpected increased costs or material debt-funded acquisitions.

We could take a positive rating action if Fortis improves its financial position, with AFFO-to-debt approaching 15% with no increase in business risk. However, based on our financial forecast, the ITC acquisition, and the company’s capital programs, we believe the prospect of a positive rating action is highly unlikely during our outlook horizon.

So mark up another example for the “Credit analysis is complicated and subjective” thesis!

Affected issues are: FTS.PR.F, FTS.PR.G, FTS.PR.H, FTS.PR.I, FTS.PR.J, FTS.PR.K and FTS.PR.M.

BCE Inc. has announced:

that 455,302 of its 4,393,775 fixed-rate Cumulative Redeemable First Preferred Shares, Series T (“Series T Preferred Shares”) have been tendered for conversion on November 1, 2016, on a one-for-one basis, into floating-rate Cumulative Redeemable First Preferred Shares, Series S (“Series S Preferred Shares”). In addition, 548,079 of its 3,606,225 Series S Preferred Shares have been tendered for conversion on November 1, 2016, on a one-for-one basis, into Series T Preferred Shares. Consequently, on November 1, 2016, BCE will have 4,486,552 Series T Preferred Shares and 3,513,448 Series S Preferred Shares issued and outstanding. The Series T Preferred Shares and the Series S Preferred Shares will continue to be listed on the Toronto Stock Exchange under the symbols BCE.PR.T and BCE.PR.S, respectively.

The Series T Preferred Shares will pay on a quarterly basis, for the five-year period beginning on November 1, 2016, as and when declared by the Board of Directors of BCE, a fixed cash dividend based on an annual fixed dividend rate of 3.019%.

The Series S Preferred Shares will continue to pay a monthly floating adjustable cash dividend for the five-year period beginning on November 1, 2016, as and when declared by the Board of Directors of BCE. The monthly floating adjustable dividend for any particular month will continue to be calculated based on the prime rate for such month and using the Designated Percentage for such month representing the sum of an adjustment factor (based on the market price of the Series S Preferred Shares in the preceding month) and the Designated Percentage for the preceding month.

I previously reported that BCE.PR.T, the FixedFloater, would reset to 3.019% and recommended conversion to BCE.PR.S.

Brookfield Asset Management Inc. has announced:

the results of the exercise of the conversion privilege for its Class A Preference Shares, Series 8 (the “Series 8 Preferred Shares”) (TSX: BAM.PR.E) and its Class A Preference Shares, Series 9 (the “Series 9 Preferred Shares”) (TSX: BAM.PR.G).

Holders of the company’s Series 8 Preferred Shares and Series 9 Preferred Shares had the right to exchange their shares for the other series effective November 1, 2016, if they submitted an election to convert their shares on or prior to October 18, 2016. Holders of 435,513 Series 8 Preferred Shares have elected to convert these shares into an equivalent number of Series 9 Preferred Shares, and holders of 1,262,704 Series 9 Preferred Shares have elected to convert these shares into an equivalent number of Series 8 Preferred Shares.

These conversions will be effective on November 1, 2016. Following these conversions, there will be 2,479,585 Series 8 Preferred Shares and 5,519,415 Series 9 Preferred Shares issued and outstanding.

The Series 8 Preferred Shares pay a monthly floating rate dividend based on the Prime Rate, adjusted to reflect the trading price of these shares. The most recent monthly dividend paid on these shares on October 12, 2016 reflected an annualized dividend rate of 2.70%. The Series 9 Preferred Shares pay a quarterly dividend which is reset every five years based on a percentage of the five-year rate offered on Government of Canada bonds at the time. As previously announced, the annual rate on the Series 9 Preferred Shares has been reset at 2.75% commencing with the dividend payable on February 1, 2017.

Holders of the company’s Series 8 and Series 9 Preferred Shares will again have the opportunity to convert their shares into the other series effective November 1, 2021 and every five years thereafter.

Assiduous Readers will remember that I recommended conversion to BAM.PR.E when the reset rate of 2.75% on BAM.PR.G was announced.

BlackRock Asset Management Canada Limited has announced (although not yet on their website):

details concerning the delisting and mandatory redemption of the Class A Capital Shares (the “Capital Shares”) and Class A Preferred Shares (“Preferred Shares”) of the Corporation on December 30, 2016 (the “Redemption Date”). The Capital Shares and Preferred Shares are currently listed on the Toronto Stock Exchange (the “TSX”) under the symbols” “BBO” and “BBO.PR.A”, respectively.

As disclosed in the Corporation’s disclosure documents, pursuant to the Corporation’s Articles of Incorporation, as amended, the Capital Shares and Preferred Shares will be automatically redeemed on the Redemption Date. The redemption price payable by the Corporation for a Capital Share on the Redemption Date will be equal to the greater of: (i) the net asset value per Unit (a “Unit” consists of one Preferred Share and one Capital Share) on that date minus $10.00 and any accrued and unpaid distributions on a Preferred Share; and (ii) nil. Any monthly distribution declared on the Capital Shares for December 2016 will be paid with the redemption proceeds for the Capital Shares. The redemption price payable by the Corporation for a Preferred Share on the Redemption Date will be equal to the lesser of: (i) $10.00 plus any accrued and unpaid distributions thereon; and (ii) the net asset value of the Corporation on that date divided by the total number of Preferred Shares then outstanding. The quarterly distribution expected to be declared on the Preferred Shares for December 2016 will be paid with the redemption proceeds for the Preferred Shares.

In connection with the redemption, BlackRock Canada expects that the Capital Shares and Preferred Shares will cease trading on the TSX and be delisted from the TSX on or about December 23, 2016. It is expected that, as soon as practicable following the Redemption Date, the affairs of the Corporation will be wound up and the Corporation will be dissolved. To facilitate a timely and orderly redemption, the Corporation may liquidate certain assets in order to move to a larger cash position as the Redemption Date approaches.

For more information, investors should consult with their investment advisor or visit our website at www.blackrock.com/ca.

BBO.PR.A has received some coverage on PrefBlog, but has not been tracked by HIMIPref™.

Update, 2017-1-6: Done.

BCE Inc. has announced that it:

will, on November 1, 2016, continue to have Cumulative Redeemable First Preferred Shares, Series T (“Series T Preferred Shares”) outstanding if, following the end of the conversion period on October 18, 2016, BCE Inc. determines that at least one million Series T Preferred Shares would remain outstanding. In such a case, as of November 1, 2016, the Series T Preferred Shares will pay, on a quarterly basis, as and when declared by the Board of Directors of BCE Inc., a fixed cash dividend for the following five years that will be based on a fixed rate equal to the product of: (a) the average of the yields to maturity compounded semi-annually, determined on October 11, 2016 by two investment dealers selected by BCE Inc., that would be carried by non-callable Government of Canada bonds with a 5-year maturity (the “Government of Canada Yield”), multiplied by (b) a percentage rate determined by BCE Inc. (the “Selected Percentage Rate”) for such period. The “Selected Percentage Rate” determined by BCE Inc. for such period is 390%. The Government of Canada Yield” is 0.774%. Accordingly, the annual dividend rate applicable to the Series T Preferred Shares for the period of five years beginning on November 1, 2016 will be 3.019%.

Holders of BCE.PR.T may convert to BCE.PR.S:

Should you wish to continue receiving a fixed quarterly dividend for the five-year period beginning November 1, 2016, you do not need to take any action with respect to this notice. However, should you wish to receive a floating monthly dividend, you must elect to convert your Series T Preferred Shares into Series S Preferred Shares as explained in more detail in the attached Notice of Conversion Privilege.

In order to convert your shares, you must exercise your right of conversion during the conversion period, which runs from September 16, 2016 to October 18, 2016, inclusively.

Holders of both the Series T Preferred Shares and the Series S Preferred Shares will have the opportunity to convert their shares again on November 1, 2021, and every five years thereafter as long as the shares remain outstanding.

There is always a certain amount of confusion regarding how RatchetRate issues such as BCE.PR.S work, so I’ll quote that part too:

As of November 1, 2016, the Series S Preferred Shares, should they remain outstanding, will continue to pay a monthly floating dividend based on a dividend rate that will fluctuate over time between 50% and 100% of the Prime rate (“Prime”) for each month computed in accordance with the articles of BCE Inc. Accordingly, from November 1, 2016, the holders of Series S Preferred Shares will continue to be entitled to receive floating adjustable cash dividends, as and when declared by the Board of Directors of BCE Inc., to be paid on the twelfth day of the subsequent month. The dividend rate will be adjusted upwards or downwards on a monthly basis by an Adjustment Factor (as described below) whenever the Calculated Trading Price, being the market price of the Series S Preferred Shares computed in accordance with the articles of BCE Inc., is $24.875 or less or $25.125 or more, respectively. The Adjustment Factor for a month will be based on the Calculated Trading Price of the Series S Preferred Shares for the preceding month determined in accordance with the following table:

If the Calculated Trading Price for the preceding month is:	The Adjustment Factor as a percentage of Prime shall be:
$25.50 or more	– 4.00%
$25.375 and less than $25.50	– 3.00%
$25.25 and less than $25.375	– 2.00%
$25.125 and less than $25.25	– 1.00%
Greater than $24.875 and less than $25.125	nil
Greater than $24.75 to $24.875	+ 1.00%
Greater than $24.625 to $24.75	+ 2.00%
Greater than $24.50 to $24.625	+ 3.00%
$24.50 or less	+ 4.00%

Given that all BCE RatchetRate issues are currently bid in the 14.19-30 range, there is not much chance that the percentage of prime paid will be reduced below 100% any time soon!

BCE.PR.T and BCE.PR.S form a Strong Pair and can therefore be compared with other Strong Pairs of this form using the Pairs Equivalency Calculator:

Click for Big

The BCE.PR.T / BCE.PR.S pair, at the bids of 14.36 and 14.35, respectively, will have an equivalent total return to the next Exchange Date if the average Prime Rate is 2.81%; this should mean the prices will be about equivalent (although note that this ignores the effect of the last dividend on BCE.PR.S of about $0.055).

Over the medium term I suggest that it is prudent to take the view that Canada Prime is much more likely to increase over the next five years than it is to decrease. Therefore, I recommend that holders of BCE.PR.T convert to BCE.PR.S, and that holders of the latter issue maintain their position.