PrefBlog

DBRS has announced that it:

has today downgraded Aimia Inc.’s (Aimia or the Company) Issuer Rating and its Senior Secured Debt rating to BB (low) from BBB (low), and has assigned a recovery rating of RR4 to the Senior Secured Debt. DBRS has also downgraded the Company’s Preferred Shares rating to Pfd-5 (high) from Pfd-3 (low). The trends on all ratings have been changed to Negative from Stable. This rating action removes the Company’s ratings from Under Review with Negative Implications where they were placed on May 11, 2017, when Aimia announced that it had received a notice of contract non-renewal from Air Canada after the agreement’s expiration in June 2020. Since then, DBRS has had business and financial update meetings with management and reviewed the operational data released in the Company’s Q2 2017 results to update DBRS’s opinion of Aimia’s credit risk going forward.

The three-notch downgrade reflects Air Canada’s significance to Aimia as a coalition partner, combined with DBRS’s previous expectation that the non-renewal of the agreement with Air Canada was a low-probability scenario. DBRS believes that the loss of Air Canada as a coalition partner will result in lower engagement in the Aeroplan program, accelerated reward redemption as well as lower magnitude and significantly reduced predictability with respect to the Company’s gross billings, adjusted EBITDA and free cash flow profile going forward.

In its review, DBRS focused on Aimia’s: (1) evolving business risk profile without its largest redemption partner post-2020; (2) liquidity, including refinancing/repayment of upcoming 2019 and 2020 maturities; and (3) financial risk profile, including financial management intentions.
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The Negative trend reflects continued uncertainty and concern about further declines in the Company’s revenue, adjusted EBITDA and free cash flow going forward. DBRS will continue to monitor Aimia’s customer engagement, reward redemptions and the competitive environment on a quarter-by-quarter basis. While the Company could use capital-conserving measures and/or asset sales to improve credit metrics through debt reduction, the revision of the trend to Stable would be more influenced by greater visibility in operating income and free cash flow as well as increased confidence in Aimia’s ability to meet its funding requirements, including the first debt maturity in May 2019. DBRS believes that the Company’s International Coalitions segment will be relatively unaffected by the loss of Air Canada as a partner, but does not expect a material increase in earnings from this segment to compensate for the expected decrease from the Americas Coalitions segment. DBRS expects Aimia to seek out other coalition partners to offset some of the effects from the loss of Air Canada. DBRS notes that the Company has not made any material announcements in this regard to date, but will evaluate the impact of any agreement if/when it is reached. Should mileage accumulation decrease and/or redemptions accelerate more than revised expectations, in the absence of new partnerships, divestitures and/or capital raises, further downgrades could result.

DBRS notes that an Issuer rating of BB (low) typically maps to a Preferred Shares rating of Pfd-4 (low). In this case, however, since Aimia did not pay its last declared preferred share dividend, DBRS further discounted the Preferred Share rating to Pfd-5 (high). DBRS notes that the Company was prohibited from paying the preferred share dividend because of the failure of a capital impairment test in the Canada Business Corporations Act, not because of insolvency.

Aimia’s ratings are based on the quality of the Company’s brands and its relationships with remaining key commercial partners. The ratings also consider the consumer response following the announcement of the termination of the Air Canada agreement, a heightening competitive environment and the significant degree of revenue concentration.

Affected issues are AIM.PR.A, AIM.PR.B and AIM.PR.C.

This follows the suspension of preferred share dividends by the company and the subsequent downgrade to P-4(high) by S&P.

The company stated in their 17Q2 Earnings Release:

Update on Dividends to Shareholders

• • As communicated on June 14, 2017, the Company is prohibited from paying dividends declared on May 10, 2017, and originally scheduled to have been paid on June 30, 2017, as well as declaring any further dividends on any of the outstanding Common Shares or Preferred Shares, based on Aimia’s determination that the capital impairment test set forth in paragraph 42(b) of the Canada Business Corporations Act (the “CBCA”) would not be satisfied.
• • Recognizing the need to preserve the Company’s financial flexibility, liquidity and capital resources in the coming years, the Board has further determined that the Company will not declare dividends on its Common Shares for the foreseeable future, irrespective of the capital impairment test.
• • With respect to the Company’s Preferred Shares, dividends continue to accrue in accordance with their terms even if they are not declared.
• • There can be no assurance that the Company will, at some future point in time, be in a position to pay the dividends previously declared and declare and/or pay any future dividends.

BCE Inc. has announced (although not yet on their website):

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The new rate of 3.61% is a little higher than the current rate of 3.45%.

As previously noted in the report of the BCE.PR.A / BCE.PR.B Conversion Notice:

These issues constitute a Strong Pair.

The effective date of the interconversion is 2017-9-1. The deadline for instructing the company to convert shares is 2017-8-22 – but note that brokers serving the public will probably have internal deadlines a day or two in advance of this.

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., BCE.PR.A and BCE.PR.B). 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 FixedFloater / RatchetRate Strong Pair graphically by plotting the implied average Prime rate against the next Exchange Date (which is the date to which the average will be calculated).

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Predictions are difficult, particularly when they are about the future! It will be remembered that Prime is currently at 2.95%; therefore, if we assume that future hikes are evenly sized and spaced, an average of 4.00% implies an end-value in five years of about 5.00%. I’m inclined to believe that it will turn out to be less than that, but if you disagree I won’t put up much of an argument!

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.A FixedFloater, 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 RatchetRate issue, BCE.PR.B, should be trading somewhat above the price of BCE.PR.A, its FixedFloater counterpart. Therefore, it is likely that when the time comes I will recommend that holders of BCE.PR.A convert into BCE.PR.B, while current holders of the latter issue stand pat. However, a formal recommendation will not be made until closer to the notification date of August 22. Those with strong convictions regarding future movements in Prime will, of course, have an equally strong preference for one of the two issues; other investors may wish to select which of the pair they wish to hold for the next five years based on their personal circumstances (e.g., if you’re hedging a prime-linked mortgage with this issue [not a wise move], you will want to hold BBD.PR.B).

Capital Power Corporation has announced:

that it has closed its previously announced offering of Cumulative Minimum Rate Reset Preference Shares, Series 9 (the “Series 9 Shares”) at a price of $25.00 per Series 9 Share for aggregate gross proceeds of $150 million on a bought deal basis with a syndicate of underwriters, co-led by TD Securities Inc. and National Bank Financial Inc. The underwriters exercised their option to increase the size of the offering and purchased an additional 1,000,000 Series 9 Shares on the same terms, for additional gross proceeds of $25 million.

The Series 9 Shares will begin trading today on the TSX under the symbol CPX.PR.I.

CPX.PR.I is a FixedReset, 5.75%+412M575, announced July 27. The issue will be tracked by HIMIPref™ but relegated to the Scraps subindex on credit concerns. It is rated Pfd-3(low) by DBRS.

The issue traded 641,727 shares today in a tight range of 24.99-04. Vital statistics are:

The new issue remains extraordinarily expensive (as it was on announcement day), according to Implied Volatility analysis:

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According to this analysis the fair value of the issue is now 23.77, compared to 23.65 on announcement day. Quibblers will remember that this analysis does not assign any value to the minimum rate guarantee.

Quadravest has announced:

Dividend 15 Split Corp. (the “Company”) is pleased to announce it has filed a preliminary short form prospectus in each of the provinces of Canada with respect to an offering of Preferred Shares and Class A Shares of the Company. The offering will be co-led by National Bank Financial Inc., CIBC, Scotia Capital Inc., RBC Capital Markets and will also include BMO Capital Markets, TD Securities Inc., GMP Securities L.P., Canaccord Genuity Corp., Raymond James, Desjardins Securities Inc., Echelon Wealth Partners, Industrial Alliance Securities Inc., Mackie Research Capital Corporation and Manulife Securities Incorporated.

The Preferred Shares will be offered at a price of $10.00 per Preferred Share to yield 5.25% and the Class A Shares will be offered at a price of $10.90 per Class A Share to yield 11.01%. The closing price on the TSX of each of the Preferred Shares and the Class A Shares on August 8, 2017 was $10.31 and $11.15, respectively.

Since inception of the Company, the aggregate dividends declared on the Preferred Shares have been $7.02 per share and the aggregate dividends declared on the Class A Shares have been $19.50 per share (including five special distributions of $0.25 per share, one special distribution of $0.50 per share and one special stock dividend of $1.75 per share), for a combined total of $26.52 per unit.

All distributions to date have been made in tax advantage eligible Canadian dividends or capital gains dividends.

The net proceeds of the offering will be used by the Company to invest in an actively managed, high quality portfolio consisting of 15 dividend yielding Canadian companies as follows:

Bank of Montreal	Enbridge Inc.	TELUS Corporation
The Bank of Nova Scotia	Manulife Financial Corp.	Thomson-Reuters Corporation
BCE Inc.	National Bank of Canada	The Toronto-Dominion Bank
Canadian Imperial Bank of Commerce	Royal Bank of Canada	TransAlta Corporation
CI Financial Corp.	Sun Life Financial Inc.	TransCanada Corporation

The Company’s investment objectives are:

Preferred Shares:
i.to provide holders of the Preferred Shares with fixed, cumulative preferential monthly cash dividends in the amount of 5.25% annually; and
ii.on or about the termination date, currently December 1, 2019 (subject to further 5 year extensions thereafter), to pay the holders of the Preferred Shares $10.00 per Preferred Share.

Class A Shares:
i.to provide holders of the Class A Shares with regular monthly cash dividends currently targeted to be $0.10 per share; and
ii.on or about the termination date, currently December 1, 2019 (subject to further 5 year extensions thereafter) to pay holders of Class A Shares at least the original issue price of those shares.

The sales period of this overnight offering will end at 9:00 a.m. EST on August 10, 2017.

So whole units are being offered for a total of $20.90, whereas the NAV net of distributions on July 31 was 18.95. It can be a great business in a rising market!

Update, 2017-08-11: The offering was highly successful!

Dividend 15 Split Corp. (the “Company”) is pleased to announce it has completed the overnight marketing of up to 4,182,000 Preferred Shares and up to 4,182,000 Class A Shares of the Company. The total proceeds of the offering are expected to be approximately $87.4 million.