PrefBlog

Enbridge Inc. has announced:

the completion today of the previously announced stock-for-stock merger transaction (the Transaction) to acquire all of the outstanding common stock of Spectra Energy Corp (NYSE:SE) (Spectra Energy).

This led Standard & Poor’s to announce:

• •On Feb. 27, 2017, Enbridge Inc. announced the completion of its merger with Spectra Energy Corp. in a share-exchange transaction.
• •With the merger’s completion, Spectra subsidiary Westcoast Energy Inc. will become a wholly owned subsidiary of Enbridge Inc.
• •We view Westcoast as a core subsidiary of Enbridge, so we are raising our ratings on Westcoast, including our long-term corporate credit rating to ‘BBB+’ from ‘BBB’.
• •We removed the ratings from CreditWatch, where they were placed with positive implications Sept. 6, 2016.
• •The stable outlook on Westcoast reflects the outlook on ultimate parent Enbridge.

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S&P Global Ratings today said it raised its ratings on Westcoast Energy Inc., including its long-term corporate credit and senior unsecured debt ratings on the company to ‘BBB+’ from ‘BBB’. S&P Global Ratings removed the ratings from CreditWatch, where they were placed with positive implications Sept. 6, 2016. The outlook is stable.

Enbridge Inc. has announced its merger with Spectra Energy Corp., under which Spectra and all its subsidiaries, including Westcoast, will merge with Enbridge at the closing of this share-exchange transaction.
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The stable outlook on Westcoast reflects the outlook on parent Enbridge,
because we view Westcoast to be a core subsidiary under our criteria, so have
linked the ratings and outlooks on the two.

The stable outlook on Enbridge reflects our view that the transaction with Spectra will not result in material asset dispositions that do not repay debt, or changes in proposed financing for the combined capital program that increase the proportion of debt. In addition, we expect that the planned capital program will occur on time and budget, and that the financing plans will maintain adjusted funds from operations (AFFO)-to-debt at the low end of the significant financial risk profile category at about 14%.

The new S&P rating for the Westcoast preferreds, W.PR.H, W.PR.J, W.PR.K and W.PR.M, is now P-2(low), up a notch (but an important notch!) from P-3(high).

DBRS commented on the merger:

DBRS continues to believe that the merger does not have any impact on the credit quality of Spectra and its DBRS-rated subsidiaries as no changes are currently contemplated to Spectra, its subsidiaries and counterparties, as a result of the Transaction. As a result, the stand-alone credit profiles of Spectra and its DBRS-rated subsidiaries remain unchanged.

With respect to Enbridge, DBRS confirmed all ratings:

DBRS Limited (DBRS) has today confirmed the following ratings of Enbridge Inc. (ENB) and removed them from Under Review with Developing Implications where they were placed on September 6, 2016. The trends are Stable:

— ENB, Issuer Rating of BBB (high)
— ENB, Medium-Term Notes & Unsecured Debentures rated BBB (high)
— ENB, Cumulative Redeemable Preferred Shares rated Pfd-3 (high)
— ENB, Commercial Paper rated R-2 (high)
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With respect to financial risk profile, DBRS expects ENB to meet its key target metrics of 15% funds from operations (FFO) to debt and five times debt-to-EBITDA, likely in late 2018 or early 2019. DBRS notes the combined entity’s substantial medium-term capex program and consequently expects near-term pressure on ENB’s credit metrics to continue. DBRS expects the recovery in key credit metrics (on both consolidated and non-consolidated bases) at the combined entity to be faster than previously expected from ENB on a stand-alone basis. This expectation is consistent with a number of key DBRS assumptions, including the migration of the combined entity’s common dividend payout ratio toward the low end of the 50% to 60% range over the medium term, the achievement of expected run-rate synergies and estimated tax savings, and that there is no increase in structural subordination at the ENB level from currently contemplated levels.

The Stable trends incorporate DBRS’s expectation that any incremental investments in new projects will be consistent with maintaining a strong overall business risk profile and medium-term improvement in key credit metrics. Changes to any of these and other key assumptions would cause DBRS to revisit the current ratings and/or trends.

DBRS has announced that it:

has today upgraded the rating on the Class B Preferred Shares, Series 2 (the Series 2 Preferred Shares) issued by Allbanc Split Corp. II (the Company) to Pfd-2 from Pfd-2 (low). In February 2016, the Company offered 687,567 Series 2 Preferred Shares at $25.67 each as part of a share reorganization. The Series 2 Preferred Shares were issued to maintain the leveraged split share structure of the Company so that the number of issued and outstanding Class A Capital Shares is twice the number of issued and outstanding Series 2 Preferred Shares. The maturity date for the Series 2 Preferred Shares is February 28, 2021.
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The current yield on the Portfolio shares fully covers the Series 2 Preferred Share dividends, providing dividend coverage of approximately 1.5 times (x). The Class A Capital Shares are expected to receive all excess dividend income after the Series 2 Preferred Share distributions and other expenses of the Company have been paid.

In the past year, the downside protection available to the Series 2 Preferred Shares, although being volatile, has been gradually increasing, reaching approximately 67.7% as of February 16, 2017.

ALB.PR.C is tracked by HIMIPref™ but relegated to the Scraps index on credit concerns.

Manulife Financial Corporation has announced:

the applicable dividend rates for its Non-cumulative Rate Reset Class 1 Shares Series 7 (the “Series 7 Preferred Shares”) (TSX: MFC.PR.H) and Non-cumulative Floating Rate Class 1 Shares Series 8 (the “Series 8 Preferred Shares”).

With respect to any Series 7 Preferred Shares that remain outstanding after March 19, 2017, holders thereof will be entitled to receive fixed rate non-cumulative preferential cash dividends on a quarterly basis, as and when declared by the Board of Directors of Manulife and subject to the provisions of the Insurance Companies Act (Canada). The dividend rate for the five-year period commencing on March 20, 2017, and ending on March 19, 2022, will be 4.31200% per annum or $0.269500 per share per quarter, being equal to the sum of the five-year Government of Canada bond yield as at February 21, 2017, plus 3.13%, as determined in accordance with the terms of the Series 7 Preferred Shares.

With respect to any Series 8 Preferred Shares that may be issued on March 19, 2017 in connection with the conversion of the Series 7 Preferred Shares into the Series 8 Preferred Shares, holders thereof will be entitled to receive floating rate non-cumulative preferential cash dividends on a quarterly basis, calculated on the basis of actual number of days elapsed in each quarterly floating rate period divided by 365, as and when declared by the Board of Directors of Manulife and subject to the provisions of the Insurance Companies Act (Canada). The dividend rate for the three-month period commencing on March 20, 2017, and ending on June 19, 2017, will be 0.90639% (3.59600% on an annualized basis) or $0.226598 per share, being equal to the sum of the three-month Government of Canada Treasury bill yield as at February 21, 2017, plus 3.13%, as determined in accordance with the terms of the Series 8 Preferred Shares.

Beneficial owners of Series 7 Preferred Shares who wish to exercise their right of conversion should instruct their broker or other nominee to exercise such right before 5:00 p.m. (Toronto time) on March 6, 2017. The news release announcing such conversion right was issued on February 10, 2017 and can be viewed on SEDAR or Manulife’s website. Conversion inquiries should be directed to Manulife’s Registrar and Transfer Agent, CST Trust Company, at 1‑800-387-0825.

The Toronto Stock Exchange (“TSX”) has conditionally approved the listing of the Series 8 Preferred Shares effective upon conversion. Listing of the Series 8 Preferred Shares is subject to Manulife fulfilling all the listing requirements of the TSX and, upon approval, the Series 8 Preferred Shares will be listed on the TSX under the trading symbol “MFC.PR.S”.

MFC.PR.H is a FixedReset, 4.60%+313, that commenced trading 2012-2-22 after being announced 2012-2-14. The notice of extension was previously reported.

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., MFC.PR.H and the FloatingReset MFC.PR.S 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).

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The market appears to have a distaste at the moment for floating rate product; most 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 current market rates, at -0.51% and -0.64%, 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 MFC.PR.H 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, it seems likely that I will recommend that holders of MFC.PR.H continue to hold the issue and not to convert, but I will wait until it’s closer to the March 6 notification deadline before making a final pronouncement. 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 path of policy rates over the next five years. 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.

Insofar as the relative valuation of MFC.PR.H is concerned, Implied Volatility analysis indicates it’s fairly priced relative to other MFC issues:

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In fact, the entire series is well-behaved, with the exception of MFC.PR.F, which looks about $1.40 cheap (according to this analysis!).

AltaGas Ltd. has announced:

that it has closed its previously announced public offering of 12,000,000 Cumulative 5-Year Minimum Rate Reset Redeemable Preferred Shares, Series K (the “Series K Preferred Shares”), at a price of $25.00 per Series K Preferred Share (the “Offering”) for aggregate gross proceeds of $300 million.

The Offering was first announced on February 13, 2017 when AltaGas entered into an agreement with a syndicate of underwriters co-led by CIBC Capital Markets, BMO Capital Markets, National Bank Financial Inc. and Scotiabank.

Net proceeds will be used to reduce existing indebtedness and for general corporate purposes.

The Series K Preferred Shares will commence trading today on the Toronto Stock Exchange (“TSX”) under the symbol ALA.PR.K.

ALA.PR.K is a FixedReset, 5.00%+380M500, announced 2017-2-13. It will be tracked by HIMIPref™ but relegated to the Scraps subindex on credit concerns.

The issue traded 1,402,187 shares today in a range of 25.01-10 before closing at 25.09-11, 6×10. Vital statistics are:

Implied Volatility analysis indicates that while the new issue is reasonably a little cheap, a cheaper alternative for this name is available with ALA.PR.A:

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