Month: October 2017

As previously discussed, ticker changes are required to reflect the assumption of Veresen’s preferreds by Pembina Pipeline. These changes came into effect today.

So the changes are:

Implied Volatility analysis of the PPL preferreds yields a very interesting result:

Click for Big

The curve is extraordinarily steep, giving rise to an Implied Volatility of 40%, which is a ludicrously high number beyond which I refuse even to calculate possible fitting errors. This can arise in two major situations:

• Market participants feel that all issues will be redeemed at par; this invalidates the Black-Scholes option theory used in the analysis as market prices will no longer be directionless over time, or
• Market participants feel that GOC-5 yields will increase dramatically and are willing to pay a premium for low-spread, low-cost issues, as these are more highly leveraged to the benchmark yield

With respect to the first possibility, I can think of no reason to believe that PPL will redeem its preferreds except in reaction to the normal ebb and flow of credit spreads. With respect to the second, this is not what we observe in two major investment-grade series:

Click for Big

The BAM series has a very reasonable Implied Volatility of 9%; note that the pattern of variance is quite odd, with the slope appearing to be negative for the lower-spread, non-floor issues.

Click for Big

The MFC series has an Implied Volatility of 17%, which is too high (although most of these series have Implied Volatilities that I consider unreasonably high) if the future is supposed to be directionless, but far too low if you believe, as I do, that Deemed Retractions for insurers will be seen in the future.

So it’s all something of a mystery! I suggest, however, that the lower-spread PPL issues look vulnerable to underperformance relative to their higher-spread siblings in the absence of dramatic overall market move, as Implied Volatility moves to a more reasonable level.

Quadravest has announced:

North American Financial 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, Canaccord Genuity Corp., GMP Securities L.P., 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 $9.90 per Preferred Share to yield 5.30% and the Class A Shares will be offered at a price of $9.00 per Class A Share to yield 13.33%.

The closing price on the TSX of each of the Preferred Shares and the Class A Shares on October 3, 2017 was $10.09 and $9.19, respectively.

Since inception of the Company, the aggregate dividends declared on the Preferred Shares have been $6.80 per share and the aggregate dividends declared on the Class A Shares have been $11.15 per share, for a combined total of $17.95. 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 financial services companies made up of Canadian and U.S. issuers as follows:

Bank of Montreal	National Bank of Canada	Bank of America Corp.
The Bank of Nova Scotia	Manulife Financial Corporation	Citigroup Inc.
Canadian Imperial Bank of Commerce	Sun Life Financial Services of Canada Inc.	Goldman Sachs Group Inc.
Royal Bank of Canada	Great-West Lifeco Inc.	JP Morgan Chase & Co.
The Toronto-Dominion Bank	CI Financial Corp.	Wells Fargo & Co.

The Company’s investment objectives are:
Preferred Shares:
i. to provide holders of the Preferred Shares with fixed, cumulative preferential monthly cash dividends currently in the amount of 5.25% annually, to be set by the Board of Directors annually subject to a minimum of 5.25% until 2019 (set at 5.50% annually effective Dec. 1, 2017); 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 in an amount to be determined by the Board of the Directors; and
ii. to permit holders to participate in all growth in the net asset value of the Company above $10 per Unit, by paying holders on or about the termination date of December 1, 2019 (subject to further 5 year extensions thereafter) such amounts as remain in the Company after paying $10 per Preferred Share.

The sales period of this overnight offering will end at 9:00 a.m. EST on October 5, 2017. The offering is expected to close on or about October 19, 2017 and is subject to certain closing conditions including approval by the TSX.

So

The Preferred Shares will be offered at a price of $9.90 per Preferred Share to yield 5.30% and the Class A Shares will be offered at a price of $9.00 per Class A Share

… for a total of $18.90 per whole unit, compared to a NAV per whole unit of 17.23 as of 2017-09-29. It’s a great business when it works!

The dividend rate on FFN.PR.A was boosted by 25bp to 5.50% just last week … I suppose that, somehow, this will make the offering easier to sell.

Update, 2017-10-05: The offering was successful:

North American Financial 15 Split Corp. (the “Company”) is pleased to announce it has completed the overnight marketing of up to 3,664,000 Preferred Shares and up to 3,664,000 Class A Shares of the Company. The total proceeds of the offering are expected to be approximately $69.2 million.

Valener Inc. has announced:

that, after having taken into account all conversion notices received from holders of its outstanding Cumulative Rate Reset Preferred Shares, Series A (“Series A Shares”) by the September 29, 2017 deadline for the conversion of the Series A Shares into Cumulative Floating Rate Preferred Shares, Series B (“Series B Shares”), less than the 1,000,000 Series A Shares required to give effect to conversions into Series B Shares were tendered for conversion. As a result, none of Valener’s Series A Shares will be converted into Series B Shares on October 15, 2017.

It will be recalled that VNR.PR.A will reset to 4.62% effective 2017-10-15 and will henceforth be referred to as a FixedReset, 4.62%+281. It commenced trading 2012-6-6 as a FixedReset, 4.35%+281, after being announced 2012-5-15. The issue is tracked by HIMIPref™ and has been assigned to the FixedReset subindex.

I recommended against conversion.

Pembina Pipeline Corporation has announced:

that it has completed its previously announced business combination (the “Transaction”) with Veresen Inc. (TSX: VSN) (“Veresen”) pursuant to a plan of arrangement (the “Arrangement”) under Section 193 of the Business Corporations Act (Alberta) to create one of the largest energy infrastructure companies in Canada.
…
Pursuant to the Arrangement, Pembina acquired all of the issued and outstanding common shares of Veresen in a transaction valued at approximately $9.4 billion, including the assumption of Veresen’s debt (including subsidiary debt) and preferred shares.

In accordance with the Arrangement, Veresen has been amalgamated with Pembina and the outstanding Veresen preferred shares have been exchanged for Pembina preferred shares with the same terms and conditions, and will be listed on the Toronto Stock Exchange (“TSX”) under the symbols PPL.PR.O (series 15, previously Series A preferred shares of Veresen), PPL.PR.Q (series 17, previously Series C preferred shares of Veresen) and PPL.PR.S (series 19, previously Series E preferred shares of Veresen) within a few days following closing. Dividends on the series 15, 17 and 19 preferred shares will continue to be paid on the last business day of March, June, September and December in each year if, as and when declared by the Board of Directors.

So the changes will be (once the principals get around to it):

I will provide further details as they are slowly and painstakingly unveiled by the company and the Toronto exchange, to whom this entire affair comes as a complete surprise.

DBRS has discontinued Veresen ratings:

DBRS Limited (DBRS) discontinued the Issuer Rating, Senior Unsecured Notes Rating and Preferred Shares Rating of Veresen Inc. (Veresen or the Company). The rating is being discontinued at the request of the Company following today’s announcement that the previously announced business combination between Veresen and Pembina Pipeline Corporation (Pembina; rated BBB, Stable trend) has been closed pursuant to a plan of arrangement (the Arrangement). Pursuant to the Arrangement, Pembina has acquired all of the issued and outstanding common shares of Veresen in a transaction valued at approximately $9.4 billion, including the assumption of Veresen’s debt (including subsidiary debt) and preferred shares.

They further commented:

In terms of Pembina’s financing of the Acquisition, DBRS notes that the financing is consistent with Pembina’s financing plan at the time of the announcement of the Acquisition in May 2017. The cash portion of the Acquisition is estimated to be approximately $1.5 billion. This will temporarily be financed with Pembina’s credit facilities and then refinanced with a mix of long-term debt, common equity and preferred shares. DBRS continues to hold the view that the Acquisition will modestly weaken Pembina’s financial metrics in the near term. Please see DBRS’s above-referenced press release dated May 1, 2017, for more details.