PrefBlog

Moody’s Investor Service has announced:

today downgraded the senior unsecured ratings of Enbridge Inc. (ENB) to Baa3 from Baa2. In addition, Moody’s changed the short term commercial paper rating for Enbridge (US) Inc. to P-3 from P-2 and the subordinate ratings to Ba2 from Ba1. At the same time, Moody’s changed the rating outlook for Enbridge to stable from negative.
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The downgrade reflects ongoing high leverage at Enbridge Inc. For example, Moody’s calculates a ratio of debt to EBITDA at 6.4x for the twelve months ended September 2017. Attaining a ratio below 5.5x, for a sustained period of time, is an important threshold to maintain the Baa2 rating. On a prospective basis, taking into consideration the actions announced, the ratio could fall to the 5.3x — 5.5x range, but Moody’s views the execution risks associated with Enbridge’s stated actions to be sufficiently high that achieving those levels in 2018 would be challenging.
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Outlook

The change in rating outlook to stable from negative reflects Enbridge’s predictable cash flow generation and large, low business risk asset base. The stable outlook reflects an expectation that Enbridge will follow through on its announced strategic plans, which include some non-core asset divestitures and financing plans that encompasses a balanced mix of both debt and equity. The stable outlook also incorporates a view that Enbridge’s key financial credit metrics, including a ratio of debt to EBITDA, will decline towards 5.5x during 2018, setting a path for further improvements to financial metrics in 2019 and 2020.

Factors that Could Lead to an Upgrade

• • Moody’s adjusted debt to EBITDA is sustained comfortably below 5.5x.
• • A large reduction in its organizational complexity and structural subordination

Factors that Could Lead to a Downgrade

• • Moody’s adjusted debt to EBITDA is sustained well above 6x.
• • Increases in structural subordination, more aggressive financial policies or a material change in the company’s business risk could also lead to a downgrade.

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Pref. Stock Preferred Stock, Downgraded to Ba2 from Ba1

The story attracted notice from the Globe & Mail.

Affected issues are (deep breath) ENB.PF.A, ENB.PF.C, ENB.PF.E, ENB.PF.G, ENB.PF.I, ENB.PF.K, ENB.PR.A, ENB.PR.B, ENB.PR.C, ENB.PR.D, ENB.PR.F, ENB.PR.H, ENB.PR.J, ENB.PR.N, ENB.PR.P, ENB.PR.T and ENB.PR.Y

DBRS has announced that it:

upgraded Fairfax Financial Holdings Limited’s (Fairfax or the Company) Issuer Rating to BBB (high) from BBB, its Senior Unsecured Debt rating to BBB (high) from BBB and its Preferred Shares rating to Pfd-3 (high) from Pfd-3.
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The upgrade of Fairfax’s ratings primarily reflects the application of the “Global Insurance Methodology” and the assignment of an FSR of “A” to its operating insurance companies. As the parent holding company, Fairfax’s Issuer Rating of BBB (high) is positioned two notches below this FSR.
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In upgrading the Issuer Rating to BBB (high), DBRS takes into account Fairfax’s good franchise strength and risk profile, including its good net earnings, liquidity and capitalization. DBRS also considered the successful completion of the acquisition of Allied World (AWAC), which enhances the Company’s global market share, product offering and geographic reach while strengthening Fairfax’s position in the U.S. Excess & Surplus insurance market, increasing the Company’s rank to within the top five.

Fairfax has eliminated all of its equity index hedges, sold the majority of its long-dated bonds and reduced the duration of its fixed-income portfolios. This is expected to result in more stable investment income and net earnings going forward. Indicative of its franchise strength, the Company is the third-largest commercial property and casualty (P&C) insurer in Canada in terms of market share based on 2016 direct written premiums, and it is one of the top 15 global non-life reinsurers after the acquisition of AWAC.
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The Company’s value-based investment strategy, though effective and historically successful, tends to yield volatile results. Consequently, despite historically stable and profitable underwriting results, the earnings volatility from investment income and past hedging activities are affecting fixed-charge coverage ratios that are averaging 3.0 times (x) lower than desired levels for an “A”-rated company. Fairfax’s high cash balances and the subsidiaries’ dividend capacity alleviate concerns about Fairfax’s meeting its capital servicing requirements.

The Stable trend considers the Company’s improving fundamentals, including its expanding global operations and strengthening franchise as well as its ability to adapt to the current challenging operating environment.

RATING DRIVERS

Positive ratings pressure could arise if the Company demonstrates a sustained improvement in profitability through consistently high returns on equity accompanied by well-managed risk exposures with continuous protection of capital, evidenced by strong regulatory capital ratios, along with material reduction in leverage, significantly improved fixed-charge coverage ratios and a material reduction in investment income volatility. Negative ratings pressure could arise through the inadequate monitoring and oversight of assumed risks, resulting in a material deterioration in underwriting results, a sustained material decline in the regulatory capital ratios of the operating subsidiaries, a material reduction in holdco liquidity levels or a sustained significant deterioration in investment income.

Affected issues are FFH.PR.C, FFH.PR.D, FFH.PR.E, FFH.PR.F, FFH.PR.G, FFH.PR.H, FFH.PR.I, FFH.PR.J, FFH.PR.K and FFH.PR.M.

Note that Fairfax Financial Holdings Limited is not regulated by OSFI although Northbridge, its P&C subsidiary, is:

In Canada, property and casualty companies are regulated by the Office of the Superintendent of Financial Institutions on the basis of a minimum supervisory target of 150% of a minimum capital test (‘‘MCT’’) formula. At December 31, 2016 and 2015 Northbridge’s subsidiaries had a weighted average MCT ratio in excess of the 150% minimum supervisory target.

Therefore, I do not consider FFH issues to be subject to the potential DeemedRetraction of insurers.

S&P Global Ratings has announced:

• •Montreal-based Laurentian Bank of Canada recently disclosed mortgage documentation and client representation issues, with a sample of mortgage loans sold to third-party purchasers, that have generated some concern, on our part, with respect to the rigor of the company’s underwriting procedures and risk control functions.
• •While there is currently no evidence of weakened asset quality in the sample or overall mortgage portfolio, we believe aggressive residential loan growth as well as the bank’s exposure to the nonprime residential mortgage segment of the Canadian mortgage market has increased the near-term downside to the risk profile for Laurentian Bank.
• •We are therefore placing our ratings on Laurentian Bank of Canada on CreditWatch with negative implications.

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The CreditWatch placement reflects our view that the bank’s aggressive loan growth could have negative repercussions for LBC’s creditworthiness. Although the bank’s asset-quality metrics remain strong, we believe the recent disclosures around lapses in mortgage documentation based on a sample of mortgages sold to a third-party purchaser (TPP) and inadvertent inclusion of ineligible loans in another third-party transaction suggest the company’s underwriting procedures and risk control functions may be weaker than the assumptions our current ratings incorporate.

As noted in our June 16 report on the bank, we believe that LBC’s ambitious transformation plan, largely focused on growth in commercial lending and increased use of the B2B (via brokers and third-party financial advisers) channel, may negatively affect the bank’s asset-quality profile. In 2017, LBC’s residential mortgage loans were up 10% from last year, reflecting organic growth through independent brokers and advisors.
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Specifically, we could lower our ratings on LBC if we see:

• •Further findings regarding mortgage document falsification that show the problem to be deeper than initially described;
• •Weakening funding and liquidity profile, such that our stable funding ratio and broad liquid assets as a proportion of short-term wholesale funding for Laurentian Bank meaningfully weaken;
• •Deterioration in loan performance and asset quality metrics owing to the aforementioned documentation issues or otherwise; or
• •Legal or regulatory actions affecting the company’s financials or reputation.

We could affirm the ratings, and revise the outlook to negative, if we observe receding near-term risks, including:

• •The mortgage document falsification proves to be small in impact and largely contained to a minor segment of the portfolio.

Affected issues are LB.PR.H and LB.PR.J.

This move follows coverage by Canadian media:

Laurentian Bank of Canada is trying to calm jittery investors, suggesting shareholders overreacted when they sent its share price tumbling after the bank disclosed problems with some mortgages it issued.

The Montreal-based bank played down documentation gaps and misrepresentation affecting up to $300-million in mortgages as largely a paperwork issue, even as it admitted staff had failed to get necessary documents to verify some loans, while a lesser number of clients had embellished their means to qualify.

Executives at the lender have stressed that it has ample excess cash to repurchase $180-million in problematic loans in the near term, and more if necessary. Audits turned up no evidence that staff did anything intentionally wrong, and found no notable concentration of improper loans coming from any particular mortgage brokers, the bank said. And so far, the loans at issue have performed well.

Northland Power Inc. has announced:

that as fewer than one million of its Cumulative Rate Reset Preferred Shares, Series 3 (“Series 3 Shares”) were tendered for conversion into Cumulative Floating Rate Preferred Shares, Series 4 (the “Series 4 Shares”), no Series 3 Shares will be converted into Series 4 Shares. Consequently, effective December 31, 2017, Northland will continue to have 4,800,000 Series 3 Shares and no Series 4 Shares issued and outstanding.

The fixed quarterly dividends on the Series 3 Shares for the period from January 2, 2018 until December 31, 2022 will be paid at an annual rate of 5.08% (Cdn. $0.3175 per share per quarter).

The Series 3 Shares are listed on the Toronto Stock Exchange under the symbol “NPI.PR.C”.

It will be recalled that NPI.PR.C will reset to 5.08% effective January 1 and I recommended against conversion.

NPI.PR.C is a FixedReset, 5.00%+346, that commenced trading 2012-5-24 after being announced 2012-5-14. It is tracked by HIMIPref™ but relegated to the Scraps index on credit concerns.