PrefBlog

DBRS has announced that it has:

confirmed the ratings of Loblaw Companies Limited (Loblaw) and Shoppers Drug Mart Corporation (guaranteed by Loblaw) at BBB after the announcement that Choice Properties Real Estate Investment Trust (CP REIT; rated BBB by DBRS) has entered into an agreement to acquire the assets and assume the liabilities of Canadian Real Estate Investment Trust (CREIT; the Acquisition). The trend on the ratings has been changed to Stable from Positive.

CP REIT is expected to acquire the assets of CREIT for a total value of approximately $6 billion, forming the largest real estate investment trust (REIT) in Canada with a combined gross leasable area of approximately 69 million square feet and pro forma net operating income of approximately $889 million. The Acquisition is expected to be financed using a combination of CP REIT units, the assumption of existing CREIT indebtedness (nearly $1.5 billion of mortgage debt and $450 million unsecured debentures) and incremental debt in the form of a $1.25 billion term loan facility, as well as an $850 million bridge facility.
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The trend change to Stable from Positive reflects the increase in leverage attributable to Loblaw and CP REIT (estimated by DBRS at approximately 3.66 times (x) lease-adjusted debt-to-adjusted EBITDAR pro forma the Acquisition versus 3.04x for the last 12 months ended Q3 2017) as a result of the Acquisition and the Company’s ongoing litigation related to tax avoidance claims by the Canada Revenue Agency, combined with ongoing uncertainty surrounding the possible impacts of lawsuits, settlements and other costs related to the bread price-fixing investigation by the Competition Bureau. These factors have been considered in conjunction with headwinds faced by the retail business in 2018 from minimum wage increases and recently announced and possible additional generic-drug pricing and health-care reforms.
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If DBRS becomes confident that the ultimate impact of the bread-price fixing investigation and its related costs, as well as the ongoing tax litigation, will not have a material impact on Loblaw, including any effects on future profitability; that the Company’s operating performance will remain sound (in particular the Company’s ability to offset the effects of the minimum wage increase and generic drug pricing reforms in the near term and its capacity to continue to deliver same-store sales and EBITDA growth over the medium term); and credit metrics improve toward the new range considered appropriate for the BBB (high) rating category (i.e., lease-adjusted debt-to-adjusted EBITDAR below 3.50x), a positive rating action could result.

The only affected issue is L.PR.B. Note that DBRS confirmed Weston, Loblaws’ parent, at Pfd-3 [stable] in November, 2017, and there was no further announcement on the Weston issues today.

As previously reported, BCE.PR.C will reset to 4.38% effective 2018-03-01. Prior to the reset announcement, conversion notices were sent to holders of BCE.PR.C and BCE.PR.D. Holders have until 5:00 p.m. (Eastern time) on February 19, 2018 to communicate a desire to exchange to the company (brokerages will want to know a day or two in advance so they can communicate on your behalf), so there’s not much time to waste if you are holding one and wish to convert to the other.

The new rate of 4.38% is a nice improvement over the past five years’ rate of 3.55% and significantly better than the November, 2017, reset of BCE.PR.Z to 3.904%.

In my terminology, BCE.PR.D is a Ratchet Rate preferred, currently paying 100% of Prime, reset quarterly. BCE.PR.C is a FixedFloater with the rate being reset to a somewhat arbitrary number every five years. Both issues have been relegated to the Scraps subindex on credit concerns.

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.C and BCE.PR.D). 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).

Click for Big

The average break-even rate for the BCE pairs is 4.84%, while the average for all FixedFloater – RatchetRate pairs is 5.47% (BAM.PR.G / BAM.PR.E is way out of line!).

Predictions are difficult, particularly when they are about the future! It will be remembered that Prime is currently at 3.45%; therefore, if we assume that future hikes are evenly sized and spaced, an average of 4.85% implies an end-value in five years of about 6.25%. I’m inclined to believe that it will turn out to be a little 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 (when it comes to FixedReset / FloatingReset pairs, anyway, with their greater number of issues).

If we plug in the current bid price of the BCE.PR.C FixedFloater, we may construct the following table showing consistent prices for its BCE.PR.D FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:

Based on current market conditions and the 4.38% reset rate for the BCE.PR.C FixedFloater, I consider it likely that the FixedFloater BCE.PR.C will trade at somewhat less than the price of BCE.PR.D, its RatchetRate counterpart. Therefore, I recommend holders retain, or switch to, BCE.PR.D. Those with strong convictions regarding future movements in Prime may, of course, wish to emerge from the Exchange holding BCE.PR.D with the intent of swapping for BCE.PR.C in the market place on better terms than offered by the company; 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 BCE.PR.D). Holders have until 5:00 p.m. (Eastern time) on February 19, 2018 to communicate a desire to exchange to the company (brokerages will want to know a day or two in advance so they can communicate on your behalf), so there’s not much time to waste if you are holding one and wish to convert to the other.

Manulife Financial Corporation has announced:

that it does not intend to exercise its right to redeem all or any of its currently outstanding 8,000,000 Non-cumulative Rate Reset Class 1 Shares Series 11 (the “Series 11 Preferred Shares”) (TSX: MFC.PR.J) on March 19, 2018. As a result, subject to certain conditions described in the prospectus supplement dated November 27, 2012 relating to the issuance of the Series 11 Preferred Shares (the “Prospectus”), the holders of the Series 11 Preferred Shares have the right, at their option, to convert all or part of their Series 11 Preferred Shares on a one-for-one basis into Non-cumulative Floating Rate Class 1 Shares Series 12 of Manulife (the “Series 12 Preferred Shares”) on March 19, 2018. A formal notice of the right to convert Series 11 Preferred Shares into Series 12 Preferred Shares will be sent to the registered holders of the Series 11 Preferred Shares in accordance with the share conditions of the Series 11 Preferred Shares. Holders of Series 11 Preferred Shares are not required to elect to convert all or any part of their Series 11 Preferred Shares into Series 12 Preferred Shares. Holders who do not exercise their right to convert their Series 11 Preferred Shares into Series 12 Preferred Shares on such date will retain their Series 11 Preferred Shares, unless automatically converted in accordance with the conditions below.

The foregoing conversion right is subject to the conditions that: (i) if, after March 5, 2018, Manulife determines that there would be less than 1,000,000 Series 11 Preferred Shares outstanding on March 19, 2018, then all remaining Series 11 Preferred Shares will automatically be converted into an equal number of Series 12 Preferred Shares on March 19, 2018, and (ii) alternatively, if, after March 5, 2018, Manulife determines that there would be less than 1,000,000 Series 12 Preferred Shares outstanding on March 19, 2018, then no Series 11 Preferred Shares will be converted into Series 12 Preferred Shares. In either case, Manulife will give written notice to that effect to any registered holders of Series 11 Preferred Shares affected by the preceding minimums on or before March 12, 2018.

The dividend rate applicable to the Series 11 Preferred Shares for the 5-year period commencing on March 20, 2018, and ending on March 19, 2023, and the dividend rate applicable to the Series 12 Preferred Shares for the 3-month period commencing on March 20, 2018, and ending on June 19, 2018, will be determined and announced by way of a news release on February 20, 2018. Manulife will also give written notice of these dividend rates to the registered holders of Series 11 Preferred Shares.

Beneficial owners of Series 11 Preferred Shares who wish to exercise their right of conversion should instruct their broker or other nominee to exercise such right before 5:00 p.m. (Toronto time) on March 5, 2018. Conversion inquiries should be directed to Manulife’s Registrar and Transfer Agent, AST Trust Company (Canada), at 1-800-387-0825.

Subject to certain conditions described in the Prospectus, Manulife may redeem the Series 11 Preferred Shares, in whole or in part, on March 19, 2023 and on March 19 every five years thereafter and may redeem the Series 12 Preferred Shares, in whole or in part, after March 19, 2018.

The Toronto Stock Exchange (“TSX”) has conditionally approved the listing of the Series 12 Preferred Shares effective upon conversion. Listing of the Series 12 Preferred Shares is subject to Manulife fulfilling all the listing requirements of the TSX and, upon approval, the Series 12 Preferred Shares will be listed on the TSX under the trading symbol “MFC.PR.S”.

MFC.PR.J is a FixedReset, 4.00%+261, that commenced trading 2012-12-4 after being announced 2012-11-27. It is tracked by HIMIPref™ and is assigned to the FixedReset sub-index.

As this issue is not NVCC compliant and it is an insurance issue, it is analyzed as having a Deemed Retraction, effective 2025-1-31 (this date may change in the future).

There’s not much point in doing any analysis until the reset rate is announced February 20, 2018.

It will be recalled that ENB.PR.D will reset to 4.46% (paid on par) effective March 1.

Holders of ENB.PR.D have the option to convert to FloatingResets, which will pay 3-month bills plus 237bp on the par value of $25.00, reset quarterly. The deadline for notifying the company of the intent to convert is 5:00 p.m. (EST) on February 14, 2018; but note that this is a company deadline and that brokers will generally set their deadlines a day or two in advance, so there’s not much time to lose if you’re planning to convert! However, if you miss the brokerage deadline they’ll probably do it on a ‘best efforts’ basis if you grovel in a sufficiently entertaining fashion. The ticker for the new FloatingReset, if it is issued, has not yet been announced.

ENB.PR.D is a FixedReset, 4.00%+237, that commenced trading 2011-11-23 after being announced 2011-11-14. It is tracked by HIMIPref™ but relegated to the Scraps subindex on credit concerns.

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., ENB.PR.D and the FloatingReset 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 be skeptical at the moment towards 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 at +1.22% and +0.88%, respectively (there are a number of junk issues with implied bill rates of less than zero, which affect the average but do not appear on the chart). 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 ENB.PR.D FixedReset, we may construct the following table showing consistent prices for its maybe-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 FloatingResets that will result from conversion are likely to be cheap and trading below the price of their FixedReset counterparts. Therefore, I recommend that holders of ENB.PR.D continue to hold the issue and not to convert. 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 new pair will reflect these conditions.