PrefBlog

Timbercreek Asset Management Inc. has announced:

Big 8 Split Inc. (the “Company”) announced today that in connection with the previously announced upcoming maturity of the fund on December 14, 2018, 739,483 Class D Preferred Shares and 739,483 Class D Capital Shares have been tendered for redemption. The redemption price to be paid for the Class D Preferred Shares will be $10.00 per Class D Preferred Share, and the redemption price for the Class D Capital Shares will be $16.56 per Class D Capital Share.

Holders of Class D Capital Shares tendered 140,139 Class D Capital Shares (representing approximately 15.93% of the outstanding Class D Capital Shares), together with a cash amount of $10.00 per Class D Capital Share tendered (together, a “Big 8 Split Unit”), in exchange for the holder’s pro rata share of the Company’s shares of Bank of Montreal, The Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Royal Bank of Canada, The Toronto-Dominion Bank, Great-West Lifeco Inc., Manulife Financial Corporation, and Sun Life Financial Inc.

Payments of cash and delivery of the underlying portfolio shares owing to shareholders as a result of the final redemptions will be made by the Company on December 14, 2018.

The Company was established to generate dividend income for the Class D Preferred Shares while providing holders of the Class D Capital Shares with a leveraged opportunity to participate in capital appreciation from a portfolio of common shares of Bank of Montreal, The Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Royal Bank of Canada, The Toronto-Dominion Bank, Great-West Lifeco Inc., Manulife Financial Corporation, and Sun Life Financial Inc. Information concerning Big 8 Split Inc. is available on our website at www.timbercreek.com/investments/managed-companies/big8-split-inc/overview.

The Class D Capital Shares and Class D Preferred Shares of Big 8 Split are listed on the Toronto Stock Exchange under the symbols BIG.D and BIG.pr.D respectively.

BIG.PR.D has not been tracked by HIMIPref™, as it was too small to allow reasonable expectations of efficient trading.

Algonquin Power & Utilities Corp. has announced (emphasis added):

the applicable dividend rates for its Cumulative 5-Year Rate Reset Preferred Shares, Series A (the “Series A Preferred Shares”) and Cumulative Floating Rate Preferred Shares, Series B (the “Series B Preferred Shares”).

With respect to any Series A Preferred Shares that remain outstanding after December 31, 2018, holders thereof will be entitled to receive quarterly fixed cumulative preferential cash dividends, if, as and when declared by the board of directors of the Company (the “Board”). The dividend rate for the 5-year period from and including December 31, 2018 to but excluding December 31, 2023 will be 5.162%, being equal to the 5-year Government of Canada bond yield determined as of today plus 2.94%, in accordance with the terms of the Series A Preferred Shares.

With respect to any Series B Preferred Shares that may be issued on December 31, 2018, holders thereof will be entitled to receive quarterly floating rate cumulative preferential cash dividends, if, as and when declared by the Board. The dividend rate for the 3-month floating rate period from and including December 31, 2018 to but excluding March 31, 2019 will be 4.653%, being equal to the 3-month Government of Canada Treasury Bill yield determined as of today plus 2.94%, calculated on the basis of the actual number of days in such quarterly period divided by 365, in accordance with the terms of the Series B Preferred Shares.

Beneficial owners of Series A Preferred Shares who wish to exercise their conversion right should communicate with their broker or other nominee to ensure their instructions are followed so that the registered holder of the Series A Preferred Shares can meet the deadline to exercise such conversion right, which is 5:00 p.m. (EST) on December 17, 2018.

AQN.PR.A is a FixedReset, 4.50%+294, that commenced trading 2012-11-9 after being announced 2012-10-25. The 2018-11-28 notice of extension was reported on PrefBlog. The issue is tracked by HIMIPref™, but relegated to the Scraps – FixedReset Discount index 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., AQN.PR.A 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 becoming relatively more interested in floating rate product; the implied rates until the next interconversion are above the current 3-month bill rate as the averages for investment-grade and junk issues are at +2.03% and +2.18%, 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 AQN.PR.A 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 trade below the price of their FixedReset counterparts, AQN.PR.A. Therefore, it seems likely that I will recommend that holders of AQN.PR.A continue to hold the issue and not to convert, but I will wait until it’s closer to the December 17 notification deadline before making a final pronouncement. 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.

AltaGas Ltd. has announced:

reset dividend rates for the currently outstanding Cumulative Redeemable Five-Year Rate Reset Preferred Shares, Series E (the “Series E Shares”) (TSX: ALA.PR.E) and the Cumulative Redeemable Floating Rate Preferred Shares, Series F (the “Series F Shares”).

As previously announced by AltaGas on November 28, 2018, AltaGas does not intend to exercise its right to redeem its Series E Shares on December 31, 2018 (the “Conversion Date”). As a result, subject to certain conditions, the holders of the Series E Shares have the right to convert all or part of their Series E Shares on a one-for-one basis into Series F Shares on the Conversion Date. Holders who do not exercise their right to convert their Series E Shares into Series F Shares will, subject to automatic conversion in certain circumstances, retain their Series E Shares. Holders of Series E Shares should review the prior press release for further details.

With respect to any Series E Shares that remain outstanding after the Conversion Date, holders shall be entitled to receive, as and when declared by the Board of Directors of AltaGas, fixed cumulative preferential cash dividends, payable quarterly. The new annual dividend rate applicable to the Series E Shares for the five-year period commencing on and including December 31, 2018 to, but excluding, December 31, 2023 will be 5.393 percent, being equal to the sum of the five-year Government of Canada bond yield determined as of today plus 3.17 percent.

With respect to any Series F Shares that may be issued on the Conversion Date, holders shall be entitled to receive, as and when declared by the Board of Directors of AltaGas, quarterly floating rate cumulative preferential cash dividends. The dividend rate applicable to the Series F Shares for the three-month floating rate period commencing on and including December 31, 2018 to, but excluding, March 31, 2019 will be 4.88 percent, being equal to the sum of the annual rate of interest for the most recent auction of 90 day Government of Canada treasury bills plus 3.17 percent (the “Floating Quarterly Dividend Rate”). The Floating Quarterly Dividend Rate will be reset every quarter.

ALA.PR.E is a FixedReset, 5.00%+317, that commenced trading 2013-12-13 after being announced 2013-12-4. The 2018-11-28 notice of extension was reported on PrefBlog. The issue is tracked by HIMIPref™ but is relegated to the Scraps – FixedReset Discount subindex due to credit concerns.

It is worth noting the company’s recent announcement of:

the timing of its financial and operational outlook conference call. To align the previously discussed “update call” to review AltaGas’ 2019 outlook, capital plan and update on other strategic and operational items with the start date of the recently announced incoming Chief Executive Officer, Randy Crawford, AltaGas intends to host the conference call on Thursday, December 13, 2018.

This call, which will be led by Randy Crawford and Tim Watson, Executive Vice President and Chief Financial Officer, will discuss AltaGas’ 2019 financial outlook and capital funding plan, with an update on key initiatives including dividend policy.

The question of what changes in dividend policy might be in store has received a certain amount of notice:

AltaGas (TSX:ALA) stock has lost nearly half of its value in the last year. The news of a new CEO coming on board did not trigger any meaningful rally in the stock. The big change in asset mix with a weight toward utility assets in the near term and the fact that the stock’s yield has been pushed up to 13.8% will likely lead to a dividend cut.
…
In summary, management will be reviewing the payout ratio, and it also seemed to hint that a dividend cut could be coming. For a yield that more closely aligns with that of other utilities, we could be seeing a dividend cut of at least 50% for AltaGas from its current yield of about 13.8% as of writing.

Assiduous Reader PL points out to me:

They have about 60 million preferred shares [52-million as of 2018-2-23 … JH] and over 200 million common [270.5 million (as at October 19, 2018, included in Q3 Report). … JH] The common stock is down so much the dividend is around 15 per cent.

On Dec 13 9 A.M Alta Gas will have a conference call on Financial and Operational Outlook. Pretty sure they will cut the common dividend by at least 50 per cent.

I do not think we will have a Husky situation where they cut the common dividend entirely and that tanked the Husky preferred . Question is have the Alta Gas preferred already been spooked.

The ALA issues have certainly been hammered during the recent downdraft, with the five FixedReset issues tracked down between 21% and 31%:

Click for Big

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., ALA.PR.E 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 becoming relatively more interested in floating rate product; the implied rates until the next interconversion are above the current 3-month bill rate as the averages for investment-grade and junk issues are at +2.03% and +2.18%, 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 ALA.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 trade below the price of their FixedReset counterparts, ALA.PR.E. Therefore, it seems likely that I will recommend that holders of ALA.PR.E continue to hold the issue and not to convert, but I will wait until it’s closer to the December 17 notification deadline before making a final pronouncement. 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.

Element Fleet Management Corp. has announced (emphasis added):

the applicable dividend rates for its Cumulative 5-Year Rate Reset Preferred Shares, Series A (the “Series A shares”) and Cumulative Floating Rate Preferred Shares, Series B (the “Series B shares”).

With respect to any Series A shares that remain outstanding after December 31, 2018, holders thereof shall be entitled to receive, and the Corporation shall pay thereon, if, as and when declared by the directors of the Corporation, fixed, cumulative, preferential cash dividends payable quarterly. The dividend rate applicable to the Series A shares for the period from and including December 31, 2018 up to, but excluding, December 31, 2023, will be 6.933%, being equal to the sum of the 5-year Government of Canada bond yield determined as of today plus 4.71%, in accordance with the terms of the Series A shares.

With respect to any Series B shares that may be issued on December 31, 2018, holders thereof shall be entitled to receive, and the Corporation shall pay thereon, if, as and when declared by the directors of the Corporation, floating rate, cumulative, preferential cash dividends payable quarterly. The dividend rate applicable to the Series B shares for the period from and including December 31, 2018 up to, but excluding, March 31, 2019, will be 6.444%, being equal to the sum of the 3-month Government of Canada Treasury Bill yield determined as of today plus 4.71%, calculated on the basis of the actual number of days in such quarterly period divided by 365, in accordance with the terms of the Series B shares.

Beneficial owners of Series A shares who wish to exercise their Conversion Privilege should communicate with their broker or other nominee to ensure their instructions are followed so that the registered holder of the Series A shares can meet the deadline to exercise the Conversion Privilege. Such deadline is 5:00 p.m. (EST) on December 17, 2018, as further described in the Corporation’s news release dated November 20, 2018 and in the rights, privileges, restrictions and conditions attaching to the Series A shares, as provided in Article 4 of the Corporation’s restated articles of incorporation dated October 4, 2016.

EFN.PR.A is a FixedReset, 6.60%+471, that was announced 2013-12-9; HIMIPref™ commenced tracking the issue in September 2015 after it received a DBRS rating. The notice of extension dated 2018-11-20 was reported on PrefBlog. The issue is relegated to the Scraps – FixedReset Discount 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., EFN.PR.A 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 becoming relatively more interested in floating rate product; the implied rates until the next interconversion are above the current 3-month bill rate as the averages for investment-grade and junk issues are at +2.03% and +2.18%, 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 EFN.PR.A 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 trade below the price of their FixedReset counterparts, EFN.PR.A. Therefore, it seems likely that I will recommend that holders of EFN.PR.A continue to hold the issue and not to convert, but I will wait until it’s closer to the December 17 notification deadline before making a final pronouncement. 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.

Capital Power Corporation has announced (emphasis added):

that it has notified registered shareholders of its Cumulative Rate Reset Preference Shares, Series 3 (Series 3 Shares) (TSX: CPX.PR.C) of the Conversion Privilege and Dividend Rate Notice.

Subject to certain conditions, beginning on December 1, 2018 and ending at 5:00 p.m. (Toronto time) on December 17, 2018, each registered holder of Series 3 Shares will have the right to elect to convert any or all of their Series 3 Shares into an equal number of Cumulative Floating Rate Preference Shares, Series 4 (Series 4 Shares) by delivering an Election Notice to the Corporation.

If Capital Power does not receive an Election Notice from a holder of Series 3 Shares during the time fixed therefor, then the Series 3 Shares shall be deemed not to have been converted (except in the case of an Automatic Conversion, see below). Holders of the Series 3 Shares and the Series 4 Shares will have the opportunity to convert their shares again on December 31, 2023, and every five years thereafter as long as the shares remain outstanding.

Effective December 31, 2018, on December 3, 2018, the Annual Fixed Dividend Rate for the Series 3 Shares was set for the next five-year period at 5.45300%. Effective December 31, 2018, on December 3, 2018, the Floating Quarterly Dividend for the Series 4 Shares was set for the first Quarterly Floating Rate Period (being the period from and including December 31, 2018, to but excluding March 31, 2019) at 1.21882%. The Floating Quarterly Dividend Rate will be reset every quarter.

The Series 3 Shares are issued in “book entry only” form and, as such, the sole registered holder of the Series 3 Shares is CDS Clearing and Depository Services Inc. (CDS). All rights of beneficial holders of Series 3 Shares must be exercised through CDS or the CDS participant through which the Series 3 Shares are held. The deadline for the registered shareholder to provide notice of exercise of the right to convert Series 3 Shares into Series 4 Shares is 3:00 p.m. (MST) / 5:00 p.m. (EST) on December 17, 2018. Any Election Notices received after this deadline will not be valid. As such, beneficial holders of Series 3 Shares who wish to exercise their rights to convert their shares should contact their broker or other intermediary for more information and it is recommended that this be done well in advance of the deadline in order to provide the broker or other intermediary with time to complete the necessary steps.

After December 17, 2018, (i) if Capital Power determines that there would remain outstanding on December 31, 2018, less than 1,000,000 Series 3 Shares, all remaining Series 3 Shares will be automatically converted into Series 4 Shares on a one-for one basis effective December 31, 2018 (an Automatic Conversion); or (ii) if Capital Power determines that there would remain outstanding after December 31, 2018, less than 1,000,000 Series 4 Shares, no Series 3 Shares will be permitted to be converted into Series 4 Shares effective December 31, 2018. There are currently 6,000,000 Series 3 Shares outstanding.

The Toronto Stock Exchange (TSX) has conditionally approved the listing of the Series 4 Shares effective upon conversion. Listing of the Series 4 Shares is subject to the Capital Power fulfilling all the listing requirements of the TSX and upon approval, the Series 4 Shares will be listed on the TSX under the trading symbol CPX.PR.D.

For more information on the terms of, and risks associated with an investment in, the Series 3 Shares and the Series 4 Shares, please see Capital Power’s prospectus supplement dated December 10, 2012 which is available on sedar.com or on Capital Power’s website at capitalpower.com.

CPX.PR.C is a FixedReset, 4.60%+323, that commenced trading 2012-12-18 after being announced 2012-12-6. It is tracked by HIMIPref™ but relegated to the Scraps – FixedReset Discount index 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.C and the FloatingReset, CPX.PR.D, 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 becoming relatively more interested in floating rate product; the implied rates until the next interconversion are above the current 3-month bill rate as the averages for investment-grade and junk issues are at +2.03% and +2.18%, 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 CPX.PR.C 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, CPX.PR.D, that will result from conversion are likely to trade below the price of their FixedReset counterparts, CPX.PR.C. Therefore, it seems likely that I will recommend that holders of CPX.PR.C continue to hold the issue and not to convert, but I will wait until it’s closer to the December 17 notification deadline before making a final pronouncement. 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.

Brookfield Office Properties has announced (emphasis added):

the reset dividend rate on its Class AAA Preference Shares, Series T (“Series T Shares”) (TSX: BPO.PR.T) …

Series T Shares

If declared, the fixed quarterly dividends on the Series T Shares for the five years commencing January 1, 2019 and ending December 31, 2023 will be paid at an annual rate of 5.383% ($0.336438 per share per quarter).

Holders of Series T Shares have the right, at their option, exercisable not later than 5:00 p.m. (Toronto time) on December 17, 2018, to convert all or part of their Series T Shares, on a one-for-one basis, into Class AAA Preference Shares, Series U (the “Series U Shares”), effective December 31, 2018.

The quarterly floating rate dividends on the Series U Shares have an annual rate, calculated for each quarter, of 3.16% over the annual yield on three-month Government of Canada treasury bills. The actual quarterly dividend rate for the January 1, 2019 to March 31, 2019 dividend period for the Series U Shares will be 1.200820% (4.87% on an annualized basis) and the dividend, if declared, for such dividend period will be $0.300205 per share, payable on March 29, 2019.

Holders of Series T Shares are not required to elect to convert all or any part of their Series T Shares into Series U Shares.

As provided in the share conditions of the Series T Shares, (i) if Brookfield determines that there would be fewer than 1,000,000 Series T Shares outstanding after December 31, 2018, all remaining Series T Shares will be automatically converted into Series U Shares on a one-for-one basis effective December 31, 2018; and (ii) if Brookfield determines that there would be fewer than 1,000,000 Series U Shares outstanding after December 31, 2018, no Series T Shares will be permitted to be converted into Series U Shares. There are currently 10,000,000 Series T Shares outstanding.

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

BPO.PR.T is a FixedReset, 4.60%+316, that commenced trading 2012-9-13 after being announced 2012-9-5. It is tracked by HIMIPref™, but relegated to the Scraps – FixedReset Discount index 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., BPO.PR.T and the FloatingReset, BPO.PR.L, 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 becoming relatively more interested in floating rate product; the implied rates until the next interconversion are above the current 3-month bill rate as the averages for investment-grade and junk issues are at +2.03% and +2.18%, 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 BPO.PR.T 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, BPO.PR.L, that will result from conversion are likely to trade below the price of their FixedReset counterparts, BPO.PR.T. Therefore, it seems likely that I will recommend that holders of BPO.PR.T continue to hold the issue and not to convert, but I will wait until it’s closer to the December 17 notification deadline before making a final pronouncement. 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.