PrefBlog

Middlefield Group has announced:

on behalf of E Split Corp. (the “Company”), is pleased to announce that it has filed a preliminary prospectus in relation to an initial public offering of preferred shares and class A shares.

The Company will invest in common shares of Enbridge Inc., a North American oil and gas pipeline, gas processing and natural gas distribution company.

The Company’s investment objectives for the:

Class A shares are to provide holders with:
(i) non-cumulative monthly cash distributions; and
(ii) the opportunity for capital appreciation through exposure to the portfolio

Preferred shares are to:
(i) provide holders with fixed cumulative preferential quarterly cash distributions; and
(ii) return the original issue price of $10.00 to holders upon maturity.

The initial target distribution yield for the class A shares is 8% per annum based on the original subscription price (or $0.10 per month or $1.20 per annum).

The initial target distribution yield for the preferred shares is 5.25% per annum based on the original subscription price (or $0.13125 per quarter or $0.525 per annum).

Middlefield Capital Corporation, the advisor, will provide investment management advice to the Company.

Prospective purchasers investing in E Split Corp. have the option of paying for: (i) preferred shares or class A shares in cash; or (ii) units comprised of one preferred share and one class A share or class A shares by exchanging securities of issuers listed in the preliminary prospectus. Prospective purchasers under the exchange option are required to deposit their exchange eligible securities prior to 5:00 p.m. (Toronto time) on June 8, 2018, in the manner described in the preliminary prospectus.

The syndicate of agents is being co-led by CIBC Capital Markets and RBC Capital Markets, and includes BMO Capital Markets, Scotiabank, TD Securities Inc., Canaccord Genuity Corp., GMP Securities L.P., National Bank Financial Inc., Raymond James Ltd., Industrial Alliance Securities, Manulife Securities Incorporated, Desjardins Securities Inc., Mackie Research Capital Corporation, and Middlefield Capital Corporation.

A preliminary prospectus containing important information relating to these securities has been filed with securities commissions or similar authorities in each of the provinces of Canada. The preliminary prospectus is still subject to completion or amendment. Copies of the preliminary prospectus may be obtained from any of the agents named above using the contact information for such agent. There will not be any sale or any acceptance of an offer to buy the securities until a receipt for the final prospectus has been issued.

DBRS provisionally rates the issue Pfd-3(high):

DBRS Limited (DBRS) assigned a provisional rating of Pfd-3 (high) to the Preferred Shares to be issued by E Split Corp. (the Company), which will be managed by Middlefield Limited (the Manager). Middlefield Capital Corporation will provide investment management advice to the Company. The Company will issue the Preferred Shares and Class A Shares at an issue price of $10.00 per Preferred Share and $15.00 per Class A Share. The Preferred Shares and Class A Shares will be issued on the basis that an equal number of Preferred Shares and Class A Shares will be outstanding at all times. Thus one Preferred Share and one Class A Share will comprise one unit (the Unit). The Maturity Date will be on June 30, 2023. The term of the Company may be extended beyond the redemption date for additional terms of five years each as determined by the Company’s board of directors.

The Preferred Shares will be entitled to fixed quarterly cumulative preferential cash distributions of $0.13125 (or $0.525 annually) per share, representing a 5.25% per-annum return on the issue price of $10.00. Holders of the Class A Shares will receive regular monthly non-cumulative distributions targeted to be $0.10 (or $1.20 annually) per Class A Share to yield 8.00% per annum on the issue price of $15.00. No distributions will be paid on the Class A Shares if (1) the distributions payable on the Preferred Shares are in arrears or (2) in respect of a cash distribution by the Company, the net asset value (NAV) per Unit is less than $15.00.

Net proceeds from the offering will be used to invest in a portfolio comprising common shares of Enbridge Inc. (rated BBB (high) with a Stable trend by DBRS; the Portfolio) in accordance with the Company’s investment objectives, strategy and restrictions. Up to 10% of the Portfolio may be invested in securities of any other issuer as determined by the Manager. The Company will not for a period of more than 30 consecutive days have less than 90% of the value of the total assets of the Company (excluding cash and cash equivalents) comprising common shares of Enbridge Inc.

Middlefield is best known for its stealth redemption of STW.PR.A at the peak of the Credit Crunch.

Intact Financial Corporation has announced (although not yet on their website):

that it has entered into an agreement with a syndicate of underwriters led by TD Securities Inc. together with BMO Capital Markets, CIBC Capital Markets and National Bank Financial pursuant to which the underwriters have agreed to purchase, on a bought deal basis, 8,000,000 Non-Cumulative Rate Reset Class A Shares, Series 7 (the “Series 7 Preferred Shares”) from Intact for sale to the public at a price of $25.00 per Series 7 Preferred Share, representing aggregate gross proceeds of $200 million.

Intact has granted the underwriters an underwriters’ option to purchase up to an additional 2,000,000 Series 7 Preferred Shares at the same offering price exercisable in whole or in part, at any time before 8:30am on the date that is two (2) business days prior to closing. Should the underwriters’ option be fully exercised, the total gross proceeds of the Series 7 Preferred Shares offering will be $250 million. The net proceeds will be used for general corporate purposes.

The holders of Series 7 Preferred Shares will be entitled to receive fixed non-cumulative preferential cash dividends, as and when declared by the Board of Directors of Intact, on a quarterly basis (with the first quarterly dividend, covering the period from issuance to September 30, 2018, to be paid on September 28, 2018), for the initial fixed rate period ending on June 30, 2023, based on an annual rate of 4.90%. The dividend rate will be reset on June 30, 2023 and every five years thereafter at a rate equal to the 5-year Government of Canada bond yield plus 2.55%.

Holders of the Series 7 Preferred Shares will have the right, at their option, to convert their Series 7 Preferred Shares into Non-cumulative Floating Rate Class A Shares, Series 8 (the “Series 8 Preferred Shares”), subject to certain conditions, on June 30, 2023 and on June 30 every five years thereafter. The holders of Series 8 Preferred Shares will be entitled to receive floating rate non-cumulative preferential cash dividends, as and when declared by the Board of Directors of Intact, at a rate equal to the 90-day Canadian Treasury Bill rate plus 2.55%.

DBRS Limited has assigned a provisional rating of Pfd-2 for the Series 7 Preferred Shares.

The Series 7 Preferred Shares will be offered for sale to the public in each of the provinces and territories of Canada pursuant to a prospectus supplement to be filed with the Canadian securities regulatory authorities. The offering is scheduled to close on or about May 29, 2018.

As this issue is not NVCC compliant, it will be analyzed as having a Deemed Retraction. Note, however, that this carries more uncertainty than it does with most other insurers because Intact is a P&C insurer, not a life company.

This issue was announced almost simultaneously with a new issue from Emera Incorporated, a FixedReset 4.90%+254M490. Barry Critchley remarks:

While the two deals shared similar terms, investors treated them differently. By early afternoon only Intact’s order was completely filled. But sources indicated investors could still post expressions of interest for the Emera offering. On TD Investing’s website, the offering is indicated as open.

Emera Incorporated has announced:

that it will issue 12,000,000 Cumulative Minimum Rate Reset First Preferred Shares, Series H (the “Series H Preferred Shares”) at a price of $25.00 per share and at an initial annual dividend rate of 4.90 per cent, for aggregate gross proceeds of $300 million on a bought deal basis to a syndicate of underwriters in Canada led by Scotiabank, CIBC Capital Markets, RBC Capital Markets and TD Securities Inc. Emera 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 H Preferred Shares at a price of $25.00 per share (the “Underwriters Option”). If the Underwriters Option is exercised in full, the aggregate gross proceeds to Emera will be $350 million.

The holders of the Series H Preferred Shares will be entitled to receive fixed cumulative preferential cash dividends at an annual rate of $1.225 per share, payable quarterly, as and when declared by the board of directors of Emera, yielding 4.90 per cent per annum, for the initial period ending on August 15, 2023. The first of such dividends, if declared, shall be payable on August 15, 2018, and shall be $0.25507 per Series H Preferred Share, based on the anticipated closing of the offering on May 31, 2018. The dividend rate will be reset on August 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 2.54 per cent, provided that, in any event, such rate shall not be less than 4.90 per cent per annum. The Series H Preferred Shares are redeemable by Emera, at its option, on August 15, 2023 and on August 15 of every fifth year thereafter.

The holders of Series H Preferred Shares will have the right to convert their shares into Cumulative Floating Rate First Preferred Shares, Series I (the “Series I Preferred Shares”), subject to certain conditions, on August 15, 2023 and on August 15 of every fifth year thereafter. The holders of the Series I Preferred Shares will be entitled to receive quarterly floating rate cumulative preferential cash dividends, as and when declared by the board of directors of Emera, at a rate equal to the sum of the then 90-day Government of Canada treasury bill rate plus 2.54 per cent.

The offering is subject to the receipt of all necessary regulatory and stock exchange approvals. The net proceeds of the offering will be used for general corporate purposes.

This issue was announced almost simultaneously with a new issue from Intact Financial Corporation, a FixedReset 4.90%+255. Barry Critchley remarks:

While the two deals shared similar terms, investors treated them differently. By early afternoon only Intact’s order was completely filled. But sources indicated investors could still post expressions of interest for the Emera offering. On TD Investing’s website, the offering is indicated as open.

This seems quite rational, since the new issue is ridiculously expensive.

according to Implied Volatility Analysis:

Click for Big

According to the analysis above, the fair value is a bit under $24.00 … note, however, that complainers will triumphantly point out that this assigns a value of zero to the Floor Rate Guarantee. But as I stated in the February, 2018, edition of PrefLetter:

It is often asserted that a horrific fall of FixedReset prices is a completely logical expectation; that the 2014-16 bear market was completely justified; that similar experiences will happen again; and that floor rates are an excellent way to protect investors from the decline in income.

This assertion does not make a lot of sense to me. Suppose an investor holds a FixedReset with a coupon rate of 5% and that a decline in government yields makes a reduction to 4% seem both likely and imminent. If the bear market scenario is to play out, this investor and many like him will be selling to avoid experiencing the reset.

But where is this money to be deployed? Yields are already down in the government market and all other fixed income markets will be affected to some degree; corporate-government spreads increased during the recent episode (see Chart FR-63 ), but corporate yields did decline – they just didn’t decline as much. I see no reason for an expectation that FixedReset yields should magically remain constant if the face of global interest rate declines.
…
However, any increase in the price of the floor-rate issue is capped by the call price. In the simplest scenario, the non-floor issue will remain priced at par and reset to a 4% distribution, while the floored issue will be called; the investor will then have to reinvest his funds … and find that he is reinvesting at contemporary rates and experiencing transaction costs that are not borne by the investor in the non-floored issue. It’s not much of a win!

In order for the floor rate to have value, both issues must be trading at a discount to par; this will give the floored issue room to rise in price on the secondary market. Such a price rise will be determined by the excess yield to be gained over the next five years until the next reset plus, perhaps, an allowance for the possibility that current conditions will persist and give the holder another chance to reset. The benefit will be capped by the distribution rate difference multiplied by the Modified Duration of the issues (which will normally be in the range of 20 to 25), so a price difference of between 20% and 25% for a one percent decline in government yields. However, this potential gain is capped by the potential for a call, so the issues must already be trading at a 20%-25% discount to par for this maximum to be reached … and to work out the value of this scenario, we must then calculate the probability of such a decline in government yields.

Once we see floor-rate issues trading at large discounts in an environment in which a significant decline in government rates has a reasonable probability, I will revisit my opinion of the value of such guarantees. I’m not holding my breath.

However, even those unimpressed by all that “Implied Volatility” blather and tiresome pettifogging regarding Floor Guarantees should be, at the very least, tempted by EMA.PR.A in preference to the new issue. Sure, it only pays 2.555% at present … but it will reset on 2020-8-15 at GOC-5 + 184, or – given today’s GOC-5 yield of 2.33% – 4.17%. It was quoted today at 19.09-25, an Expected Future Current Yield of 5.46%, which ain’t bad for investment grade!