PrefBlog

Standard & Poor’s has announced:

S&P Global Ratings today said it has lowered its global scale and Canada scale issue-level ratings on Aimia Inc.’s preferred shares to ‘D’ from ‘B-‘ and ‘P-4(Low)’, respectively, on the company’s continued deferral of preferred dividend payments. The company’s ability to meet the dividend payments in full and on schedule remains restricted by Aimia’s inability to pass the capital impairment test set forth under the CBCA (Canada Business Corporations Act). S&P Global Ratings views this as a breach of the “imputed promise” on the preferred shares’ timely payment of dividends, and characterize it as a payment default.

Aimia had suspended the dividend payments on its preferred and common shares almost a year ago, on June 14, 2017, due to its inability to satisfy the capital impairment test as set forth under the CBCA. As per our criteria (see “Use Of ‘C’ And ‘D’ Issue Credit Ratings For Hybrid Capital And Payment-In-Kind Instruments,” published Oct. 24, 2013, on RatingsDirect), we lower the issue-level ratings on a hybrid capital instrument to a ‘D’ if the company is unable to repay the dividends within one year of the deferral date and is unable to pay future dividend payments in full and on time.

The above rating action does not have any impact on our corporate credit rating on Aimia (BB-/Negative/–) or our ‘BB’ issue-level rating on the company’s senior secured debt, because the deferral of payments on the preferred shares is allowed in the instrument’s terms and conditions.

Affected issues are AIM.PR.A, AIM.PR.B and AIM.PR.C.

DBRS has muttered darkly about AIMIA after downgrading the preferreds to Pfd-5(high) in August 2017, following the suspension of preferred share dividends by the company and the subsequent downgrade to P-4(high) by S&P.

Brompton Oil Split Corp. has released its Annual Report to December 31, 2017.

Figures of interest are:

Average Net Assets: We need this to calculate portfolio yield and MER. NAV of 49.6-million in 2017, 52.2-million in 2016, average is 50.9-million.

MER: Expenses of 695,795 (not including amortization of the cost of issuance of preferred shares) on Average Net Assets of 50.9-million is 1.37% of the whole unit value.

Underlying Portfolio Yield: Dividends, interest and lending revenue(net of withholding) of 1.120-million divided by average net assets of 50.9-million is 2.20%

Income Coverage: Investment Income (as defined in “Underlying …”) of 1.120-million less expenses (as defined in “MER”) of 695,795 is 424,520 divided by Preferred Share Distributions of 1.606-million is 26%.

Strathbridge Asset Management Inc. has announced (on May 28):

World Financial Split Corp. (the “Company”) is pleased to announce that the board of directors has approved an extension of the maturity date of the Class A and Preferred shares of the Company for an additional seven year period beyond June 30, 2018 to June 30, 2025 as provided for in its articles of incorporation.

The term extension allows holders of Class A shares to continue to receive ongoing leveraged exposure to a high-quality portfolio consisting principally of common equity securities selected from the ten largest (by market capitalization) financial services companies in each of Canada, the United States and the rest of the world. Holders of the preferred shares are expected to continue to benefit from fixed cumulative preferential quarterly distributions in the amount of $0.13125 ($0.525 per annum) per preferred share representing a yield of 5.25% on the original issue price of $10.00. Since the inception to April 30, 2018, the Preferred shareholders have received cash distributions of $7.41 per share.

In connection with the extension of the term, holders of class A shares and preferred shares have a special retraction right (“Special Retraction Right”) on June 30, 2018. In order to exercise the Special Retraction Right, the shares must be surrendered for retraction on or prior to 5:00 p.m. (Toronto time) on June 15, 2018.

There was shareholder approval for the previous extension in 2011, but a change of terms means that the directors have discretion now. The 2011 extension was met with massive exercise of the Special Retraction Right.

Time has been good to the fund and the NAVPU is 14.36 as of June 7, compared to a mere 10.58 in June 2011, so the decision on whether or not to retract is more difficult than it was then.

Historical performance of the fund, as reported by management in the 2017 Annual Report isn’t anything to write home about:

On the one hand, the NAVPU of 14.36 isn’t very good; it’s below the Asset Coverage of 1.5:1 that I like to see when making recommendations and the volatility of global financial common shares also dampens my enthusiasm. All in all, I’d say investors can do better elsewhere in the endless struggle between risk and return – given that the issue is trading very close to par, the decision regarding whether to sell on the market or retract will be dependent upon convenience, transaction charges at your brokerage, market depth and settlement details. Don’t forget the final dividend in your calculations!

It will be recalled that CPX.PR.E will reset at 5.238% effective June 30.

CPX.PR.E is a FixedReset, 4.50%+315, that commenced trading 2013-3-14 after being announced 2013-3-5. 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., CPX.PR.E and the FloatingReset, CPX.PR.F, 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 relatively uninterested in floating rate product; most of the implied rates until the next interconversion are scattered around the current 3-month bill rate and the averages for investment-grade and junk issues are similar, at +1.25% and +1.23%, respectively – although these break-even rates are much closer to the market rate than has often been the case! 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 CPX.PR.E FixedReset, we may construct the following table showing consistent prices for its soon-may-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 CPX.PR.E continue to hold the issue and not to convert.

If you do wish to convert, note that the deadline for notifying the company is 3:00 p.m. (MDT) / 5:00 p.m. (EDT) on June 15, 2018.. Brokerages and other intermediaries will normally set their internal deadlines a few days prior to this, so if you want to convert don’t waste any time! Such intermediaries may accept instructions after their internal deadline (but prior to the company deadline, of course) if you grovel in a sufficiently entertaining fashion, but this will only be done on a ‘best efforts’ basis.

I will note that once the FloatingResets commence trading (if, in fact, they do) 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.

The Toronto-Dominion Bank has announced (on June 5):

that it will exercise its right to redeem all of its 5,387,491 outstanding Non-cumulative Class A First Preferred Shares, Series S (the “Series S Shares”) on July 31, 2018 at the price of $25.00 per Series S Share, for an aggregate total of approximately $135 million.

TD also announced that it will exercise its right to redeem all of its 4,612,509 outstanding Non-cumulative Class A First Preferred Shares, Series T (the “Series T Shares”) on July 31, 2018 at the price of $25.00 per Series T Share, for an aggregate total of approximately $115 million.

On May 24, 2018, TD announced that dividends of $0.2106875 per Series S Share and $0.16787500 per Series T Share had been declared. These will be the final dividends on the Series S Shares and Series T Shares, respectively, and will be paid in the usual manner on July 31, 2018 to shareholders of record on July 10, 2018, as previously announced. After July 31, 2018, the Series S Shares and Series T Shares will cease to be entitled to dividends and the only remaining rights of holders of such shares will be to receive payment of the redemption amount.

With the announcement of the redemption of the Series S Shares and Series T Shares, the right of any holder of Series S Shares or Series T Shares to convert such shares will cease and terminate.

Beneficial holders who are not directly the registered holder of Series S Shares or Series T Shares should contact the financial institution, broker or other intermediary through which they hold these shares to confirm how they will receive their redemption proceeds. Inquiries should be directed to our Registrar and Transfer Agent, AST Trust Company (Canada), at 1-800-387-0825 (or in Toronto 416-682-3860).

TD.PR.S was announced on 2008-5-29 as a FixedReset, 5.00%+160, just the fourth FixedReset to be announced. It reset to 3.371% in 2013 and there was a 46% conversion to the FloatingReset TD.PR.T.

As these issues are NVCC non-compliant the redemption comes as no surprise, although there has always been a slim chance that the very low Issue Reset Spread would tempt the bank into leaving them outstanding past the time during which they could claim the issues as Tier 1 Capital.

Quadravest has announced:

Dividend 15 Split Corp. (the “Company”) is pleased to announce it will undertake an exchange offer for holders of BCE Inc. or TransCanada Corporation whereby the Company will offer 5.55 Class A Shares in exchange for each freely-tradable common share of BCE Inc. and 5.55 Class A Shares for each freely tradable common share of TransCanada Corporation (the “Exchange Offer”). The current market value of the Class A Shares to be received via the Exchange Offer is $57.33 per share. The Company will take up to a maximum combined value of $25mm of BCE Inc. and TransCanada Corporation shares in this Exchange Offer.

The Company currently holds 936,800 shares of BCE Inc. and 1,013,400 shares of TransCanada Corporation in its investment portfolio and any shares taken up in this exchange will be added to the portfolio for investment purposes only. The closing price on the TSX of DFN Class A Shares on June 6, 2018 was $10.33 and the current yield is 11.6%. As of the same date the closing prices on the TSX of BCE Inc. and TransCanada Corporation were $54.40 and $53.57, respectively.

Dividend 15 is an investment corporation that invests in a portfolio consisting of high dividend paying Canadian companies. The Company’s investment manager actively manages the Company’s investment portfolio in order to meet the Company’s investment objectives. The manager supplements the dividends received on portfolio investments by writing options in respect to some or all of the portfolio.

Since inception of the Company, distribution objectives have been met and exceeded:
• 170 consecutive regular monthly dividend payments declared
• aggregate dividends declared on the Class A Shares have been $20.50 per share (includes five special distributions of $0.25 per share, one special distribution of $0.50 per share and one special stock dividend of $1.75 per share)
• all distributions to date made in tax advantaged eligible Canadian dividends or capital gains dividends

The Company’s investment portfolio is an actively managed, high quality portfolio consisting of 15 dividend yielding Canadian companies as follows:
Bank of Montreal
Bank of Nova Scotia
BCE Inc.
CI Financial Corp.
CIBC
Enbridge Inc.
Manulife Financial
National Bank of Canada
Royal Bank
Sun Life Financial
TELUS Corporation
Thomson Reuters Corporation
Toronto-Dominion Bank
TransAlta Corporation
TransCanada Corporation

The sales period of the Exchange Offer will end at 5:00 p.m. EST on June 15, 2018. The Exchange Offer is expected to close on or about June 28, 2018 and is subject to certain closing conditions including approval by the TSX. In conjunction with the Exchange Offer, the Company anticipates issuing an equal number of Preferred Shares to the number of Class A Shares issued under this Exchange Offer.

Given that the NAVPU as of May 31 was 18.06, assigning a $10.00 value to the preferreds and calculating a value of 9.87 to the DFN Capital Units based on today’s close of BCE and TRP, we can estimate that the premium to NAV on this offer is somewhere close to 10%. Wow!

Update, 2018-6-18: They raised $30-million:

Dividend 15 Split Corp. (the “Company”) is pleased to announce that 139,327 and 133,180 freely-tradeable common shares of BCE Inc. and TransCanada Corporation, respectively, were tendered pursuant to the exchange offer announced on June 7, 2018 whereby the Company offered 5.55 Class A Shares in exchange for each freelytradable common share of BCE Inc. and 5.55 Class A Shares for each freely-tradable common share of (the “Exchange Offer”).

The Exchange Offer period has now ended. As a result, the Company expects to issue 1,512,413 DFN Class A shares in exchange for the securities tendered. In conjunction with the Exchange Offer, the Company also expects to issue 1,512,413 Preferred Shares. The Exchange Offer and Preferred Share offering are expected to close on or about June 28, 2018 and are subject to certain closing conditions including approval by the TSX.

The Company currently holds 936,800 shares of BCE Inc. and 1,013,400 shares of TransCanada Corporation in its investment portfolio and the shares taken up in this exchange will be added to the portfolio for investment purposes only.

The total value of the Exchange Offer and Preferred Share offering is expected to be approximately $30.0 million.