Kinder Morgan Canada Limited has announced (although not yet on their website):
that it has entered into an agreement with a syndicate of underwriters led by CIBC Capital Markets, Scotiabank, RBC Capital Markets and TD Securities (together, the “Underwriters”) pursuant to which the Underwriters have agreed to purchase from the Company, 8,000,000 cumulative redeemable minimum rate reset preferred shares, Series 3 (the “Series 3 Preferred Shares”) at a price of $25.00 per share for distribution to the public.
The Company has granted to the Underwriters an option, exercisable at any time up to 48 hours prior to the closing of the offering, to purchase up to an additional 2,000,000 Series 3 Preferred Shares at a price of $25.00 per share.
The Company intends to use the proceeds from the offering to indirectly subscribe for preferred units in Kinder Morgan Canada Limited Partnership, which intends to subsequently use such proceeds to, directly or indirectly, finance the development, construction and completion of the Trans Mountain Expansion Project and Base Line Terminal project as well as potential future growth opportunities, to repay indebtedness and for general corporate purposes.
The holders of Series 3 Preferred Shares will be entitled to receive fixed cumulative dividends at an annual rate of $1.3000 per share, payable quarterly on the 15th day of February, May, August and November as and when declared by the Board of Directors of the Company, yielding 5.20 percent per annum at the issue price, for the initial fixed rate period to but excluding February 15, 2023 (the “Initial Fixed Rate Period”). The first quarterly dividend payment date is scheduled for February 15, 2018 and is anticipated to be in the amount of $0.22082 per share (assuming closing of the offering on December 15, 2017). The dividend rate will reset on February 15, 2023 and every five years thereafter at a rate equal to the sum of the then five-year Government of Canada bond yield plus 3.51 percent, provided that, in any event, such rate shall not be less than 5.20 percent per annum. The Series 3 Preferred Shares are redeemable by the Company, at its option, on February 15, 2023 and on February 15 of every fifth year thereafter at a price of $25.00 per share plus accrued and unpaid dividends.
The holders of Series 3 Preferred Shares will have the right to convert their shares into cumulative redeemable floating rate preferred shares, Series 4 (the “Series 4 Preferred Shares”), subject to certain conditions, on February 15, 2023 and on February 15 of every fifth year thereafter. The holders of Series 4 Preferred Shares will be entitled to receive quarterly floating rate cumulative dividends, as and when declared by the Board of Directors of the Company, at a rate equal to the sum of the then 90-day Government of Canada treasury bill rate plus 3.51 percent.
Closing of the offering is expected to occur on December 15, 2017, subject to customary closing conditions.
The offering is being made under a prospectus supplement to the base shelf prospectus of the Company dated July 28, 2017 (together, the “Prospectus”). Copies of the Prospectus may be obtained from Canadian Imperial Bank of Commerce, Commerce Court, Toronto, Ontario M5L 1A2, Telephone (416) 980-3096, The Bank of Nova Scotia, Scotia Plaza, 44 King Street West, Toronto, Ontario M5H 1H1, Telephone: (416) 866-3672, Royal Bank of Canada, 200 Bay Street, 4th Floor, North Tower, Toronto, Ontario, M5J 2W7, Telephone (416) 955-7803 and The Toronto-Dominion Bank, Toronto-Dominion Centre, Toronto, Ontario M5K 1A2, Telephone: (416) 308-6963. Investors should read the Prospectus, and the documents incorporated therein by reference, in their entirety, before making an investment decision.
The issue even made the Globe & Mail, presumably because of controversy about the Trans Mountain Pipeline:
Kinder Morgan Canada Ltd. is selling $200-million in shares even as the company dials back spending and warns of additional delays to its marquee Trans Mountain pipeline expansion.
The unit of Houston-based Kinder Morgan Inc. said Wednesday that it is selling eight million preferred units at $25 each in a bought deal to major banks, with proceeds earmarked to help finance the $7.4-billion pipeline expansion to Canada’s West Coast.
The offering comes despite warnings the 590,000-barrel-a-day expansion project could see oil shipments commence nine months later than originally planned. This week, the company said delays could extend beyond September, 2020, further driving up costs.
BAM.PR.Z To Reset At 4.685%
Monday, December 4th, 2017Brookfield Asset Management Inc. has announced:
BAM.PR.Z is a FixedReset, 4.80%+296, that commenced trading 2011-11-2 after being announced 2011-10-24. It is tracked by HIMIPref™ and assigned to the FixedReset subindex.
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., BAM.PR.Z and the FloatingReset BAM.PF.K 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).
Click for Big
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 +0.42% and +0.53%, 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 BAM.PR.Z FixedReset, we may construct the following table showing consistent prices for its soon-may-be-issued FloatingReset BAM.PF.K counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:
Price if Implied Bill
is equal to
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 BAM.PR.Z continue to hold the issue and not to convert, but I will wait until it’s closer to the December 18 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.
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