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Moody’s Investors Service has announced that it:

has today downgraded the Baseline Credit Assessments (BCAs), the long-term ratings and the Counterparty Risk Assessments (CRAs) of six Canadian banks and their affiliates, reflecting Moody’s expectation of a more challenging operating environment for banks in Canada for the remainder of 2017 and beyond, that could lead to a deterioration in the banks’ asset quality, and increase their sensitivity to external shocks.

The banks affected are: Toronto-Dominion Bank, Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Canada, National Bank of Canada, and Royal Bank of Canada.

The BCAs, long-term debt and deposit ratings and CRAs of the banks and their affiliates were downgraded by 1 notch, excepting only Toronto-Dominion Bank’s CRA, which was affirmed. The short term Prime-1 ratings of the Canadian banks were affirmed. All relevant ratings for these banks continue to have negative outlooks, reflecting the expected introduction of an operational resolution regime in Canada.

“Today’s downgrade of the Canadian banks reflects our ongoing concerns that expanding levels of private-sector debt could weaken asset quality in the future. Continued growth in Canadian consumer debt and elevated housing prices leaves consumers, and Canadian banks, more vulnerable to downside risks facing the Canadian economy than in the past.” said David Beattie, a Moody’s Senior Vice President.
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Moody’s considers that weakening credit conditions in Canada — including an increase in private-sector debt to GDP to 185.0% as of the end of 2016, up from 179.3% for 2015 — present increasing risk to Canadian banks’ asset quality and profitability. This increase has been led by household debt, which is now at a record high of 167.3% of disposable income (as at Q4 2016) and accompanying house price appreciation. Despite macro-prudential measures put into place by Canadian policymakers in recent years — which have had some success in moderating the rate of housing price growth — house prices and consumer debt levels remain historically high. Business credit, the other component of private-sector debt, has also grown rapidly, at a 6.2% CAGR over the past 3 years. We do note that the Canadian banks maintain strong buffers in terms of capital and liquidity. However, the resilience of household balance sheets, and consequently bank portfolios, to a serious economic downturn has not been tested at these levels of private sector indebtedness.

Specifically:

Toronto-Dominion Bank (TD, Aa2/Aa2 negative, a1); TD’s strong ratings are attributable to its very strong domestic retail franchise — which generates stable and recurring profitability and its business mix. This strength is due to leading market share positions in many personal & commercial financial services products, where TD typically has market shares in the high teens and holds first or second positions.

TD is the most retail oriented of its Canadian peers, with approximately 90% of earnings coming from retail (combined Canadian personal & commercial, wealth management and US personal & commercial, excluding corporate). While CM income has increased over recent quarters and capital allocated to the wholesale business is rising, we expect that reliance on this inherently volatile source of income will remain relatively modest.

Through acquisition and organic growth, TD has increased its exposure to unsecured Canadian consumer credit risk in recent years. In our view, however, the strength and stability of the earnings from TD’s Canadian personal and commercial banking franchise remain the primary credit strength supporting its ratings. The ratings of TD’s US affiliates benefit from support from the parent, and as such are also affected by this action.

TD’s preferred shares have been downgraded to Baa1(hyb). Issues affected are: TD.PF.A, TD.PF.C, TD.PF.D, TD.PF.E, TD.PF.F, TD.PF.G, TD.PF.H, TD.PR.S, TD.PR.T, TD.PR.Y, TD.PR.Z

BMO:

Bank of Montreal (BMO A1/A1 negative, a3); BMO is one of the six major banks in Canada which benefit from the protection of significant barriers to entry and the stability of a prudent regulatory environment. Although its Canadian retail market shares are towards the lower end of the Canadian peer group, BMO has double digit market shares across all significant retail financial services and products, providing scale and recurring earnings power in its home market. In our view, however, the strength and stability of the earnings from BMO’s Canadian personal and commercial (P&C) banking franchise remain the primary credit strength supporting its ratings. BMO has a strong and improving US regional banking presence through BMO Harris, which adds important diversification away from reliance on Canadian P&C earnings. However, BMO does not enjoy the same franchise strength and pricing power in the more competitive US market that it does in Canada. The ratings of BMO Harris and affiliates benefit from support from the parent, and as such are also affected by this action.

BMO’s preferred shares have been downgraded to Baa3(hyb). Issues affected are: BMO.PR.A, BMO.PR.B, BMO.PR.C, BMO.PR.K, BMO.PR.L, BMO.PR.M, BMO.PR.Q, BMO.PR.R, BMO.PR.S, BMO.PR.T, BMO.PR.W, BMO.PR.Y, BMO.PR.Z.

BNS:

Bank of Nova Scotia (BNS A1/A1 negative, a3); BNS is the most internationally active of the Canadian banks with approximately half of its earnings generated outside of Canada. BNS has taken significant measures to increase its profitability that signal a fundamental shift away from the bank’s traditionally low risk appetite. While the bank’s strategic actions are intended to enhance current profitability — in 2016, BNS reported domestic net interest margin lower than the six largest Canadian banks’ average- in our view, they increase the prospect of future incremental credit losses.

While BNS had strategically grown its credit card and auto finance portfolios – both of which are particularly prone to deterioration during an economic downturn and exhibit higher defaults and loss severities than mortgage portfolios — in recent years, growth in 2016 was flat. In addition, the bank has made a series of acquisitions away from its strong domestic franchise towards higher-growth but less stable international markets. BNS has aspirations to continue to grow its international earnings, which in Moody’s view adds to bondholder risk.

BNS’ preferreds have been downgraded to Baa3(hyb). Issues affected are: BNS.PR.A, BNS.PR.B, BNS.PR.C, BNS.PR.D, BNS.PR.E, BNS.PR.F, BNS.PR.G, BNS.PR.H, BNS.PR.O, BNS.PR.P, BNS.PR.Q, BNS.PR.R, BNS.PR.Y and BNS.PR.Z.

CM:

Canadian Imperial Bank of Commerce (CIBC A1/A1 negative, a3); CIBC is the most reliant of the Canadian banks on domestic P&C earnings, which generate approximately 65% of total earnings, excluding Corporate. In our view, however, the strength and stability of the earnings from CIBC’s Canadian personal and commercial banking franchise remain the primary credit strength supporting its ratings. CIBC has the second lowest proportionate exposure to unsecured and non-real estate secured consumer debt as a percentage of domestic consumer assets (roughly 11.5%), reflective of its very large book of insured mortgages.

CIBC is one of the six major banks in Canada that benefit from the protection of significant barriers to entry and the stability of a prudent regulatory environment. Although its Canadian retail market shares are mid-range relative to its Canadian peers, CIBC has solid double digit market shares across all significant retail financial services and products, providing scale and recurring earnings.

CM’s preferreds have been downgraded to Baa3(hyb). Affected issues are CM.PR.O, CM.PR.P and CM.PR.Q.

NA:

National Bank of Canada (NBC A1/A1 negative, baa1); NBC’s dominant position in commercial banking and strong second place share of market in retail banking in Québec are the primary credit strengths supporting its high ratings. The stability of the recurring earnings power of NBC’s regional retail franchise is, in Moody’s view, highly unlikely to be challenged. That being said, NBC’s asset base (CAD234 billion as of Q1 2017) and national deposit share (roughly 4%) are small relative to the other large Canadian banks whose branch systems are more national in scale. In our view, however, the strength and stability of the earnings from NBC’s Canadian personal and commercial banking franchise remain the primary credit strength supporting its ratings.

While each of the major Canadian banks enjoys the benefits of superior pricing power due to sustainable large market shares in many significant retail and commercial products and services, this is true for NBC only in the context of its regional market, the province of Québec. As such, the challenges in geographic diversification and earnings stability and the Québec credit concentrations offset partially the strength in local market share and sustainability. NBC is the Canadian bank most reliant upon inherently less stable capital markets earnings, which generated 38% of total earnings, excluding Corporate for 2016 (38% for 2015.)

NA’s preferreds have been downgraded to Ba1(hyb). Affected issues are NA.PR.A, NA.PR.Q, NA.PR.S, NA.PR.W and NA.PR.X

RY:

Royal Bank of Canada (RBC A1/A1 negative, a3 ); RBC’s ratings reflect its profile as a strong and diversified universal bank with sustainable leading market shares across many retail products and services in its home market. The stable earnings from RBC’s domestic Personal and Commercial franchise are a key credit strength. RBC has had very low earnings volatility, supported by the stabilizing effect of the recurring profitability of RBC’s solid domestic retail banking franchise.

However, over the past four years RBC has demonstrated rapid growth in its Capital Markets business, led by growth in its US corporate loan book and the repo and securities finance business. We believe that RBC’s US-focused Capital Markets growth strategy increases its exposure to risks that could more rapidly erode its creditworthiness in volatile or adverse market conditions, and is therefore negative for the credit. To date, this risk has been well managed and its performance has been very stable. Maintaining this performance through more volatile markets will be key to RBC’s longer term risk management track record. We do not expect that this business will continue on this growth trajectory, and, in fact, that capital committed to the Capital Markets business will be more constrained.

Management plans to substantially grow the earnings of its recently acquired, California-based private and commercial bank, City National Bank, (deposits Aa3 stable, a2) both organically and through targeted acquisitions. Growth in the City National business presents less credit risk than continued growth in the Capital Markets area, in our view.

RY’s preferreds have been downgraded to Baa3(hyb). Affected issues are RY.PR.A, RY.PR.B, RY.PR.C, RY.PR.D, RY.PR.E, RY.PR.F, RY.PR.G, RY.PR.H, RY.PR.I, RY.PR.J, RY.PR.K, RY.PR.L, RY.PR.M, RY.PR.N, RY.PR.O, RY.PR.P, RY.PR.Q, RY.PR.R, RY.PR.W and RY.PR.Z.

Element Fleet Management Corp. has announced:

that it has closed the previously announced offering of 6,000,000 5.75% Cumulative 5-Year Minimum Rate Reset Preferred Shares, Series I, including 2,000,000 shares issued pursuant to the underwriters’ option, which was exercised in full on April 28, 2017 (the “Series I Preferred Shares” or the “Offering”) at a price of $25.00 per share for aggregate gross proceeds of $150,000,000. The Offering was conducted by a syndicate of underwriters led by BMO Capital Markets, CIBC Capital Markets, National Bank Financial, RBC Capital Markets, TD Securities, Cormark Securities, Desjardins Securities, GMP Securities, HSBC Securities (Canada) and Raymond James.

The net proceeds will be used to fund the growth of Element’s business and for general corporate purposes.

The Series I Preferred Shares will commence trading today on the Toronto Stock Exchange under the symbol “EFN.PR.I”.

EFN.PR.I is a FixedReset, 5.75%+464M575, announced April 26. It will be tracked by HIMIPref™ but is relegated to the Scraps index on credit concerns.

The issue traded 534,126 shares today in a range of 24.80-02 before closing at 24.98-00. Vital statistics are:

The issue is attractively priced relative to its peer:

Click for Big

An interesting feature of the above FixedReset Volatility Analysis is that the minimum rate guarantee on EFN.PR.I is assumed to be effective. This, together with the small difference in reset spreads with some of the extant issues, results in EFN.PR.I having a lower spread but a higher expected dividend on reset, resulting in a higher Current Yield than would otherwise be the case, resulting in a jog in the usual straight line. I will have to do some thinking about the implications of this for the analysis!

Brookfield Office Properties Inc. has announced:

that it intends to:

• …
• •Redeem all 2,804,795 of its outstanding Class AAA Preference Shares, Series J (TSX: BPO.PR.J) (the “Series J Shares”), all of which are beneficially held by CDS & Co., as nominee of CDS Clearing and Depositary Services Inc., for cash on June 5, 2017. The redemption price for each such share will be C$25.00 plus accrued and unpaid dividends thereon (which as of June 5, 2017 will be C$0.22260), representing a total redemption price of C$25.22260.

Notices of Redemption for both series have been sent to CDS & Co. Payment of the redemption price will be made on or after June 5, 2017 through the facilities of CDS & Co. to all beneficial holders of the Series G Shares and Series J Shares.

BPO.PR.J had a recent partial call for redemption and in 2014 was partially exchanged for BPS.PR.B pursuant to a reorganization.

BPO.PR.J is a 5.00% Operating Retractible issued 2004-4-30 which became redeemable at par 2014-6-30 and retractible for shares 2014-12-31. It has been relegated to the Scraps index since issue.