PrefBlog

DBRS has announced that it:

upgraded the Issuer Rating and Preferred Shares rating of Algonquin Power & Utilities Corp. (APUC or the Company) to BBB and Pdf-3 from BBB (low) and Pfd-3 (low), respectively. Both trends are Stable. The ratings reflect a significant improvement of APUC’s business risk profile following the acquisition of the Empire District Electric Company (Empire) and a successful integration of Empire into the Company’s regulated utility operations. The ratings also reflect stable and strong cash flow from its two principal subsidiaries (1) Liberty Utilities Co. (LUCo) – the guarantor of the debt issued by Liberty Utilities Finance GP1 (rated BBB (high) with Stable trends, recently confirmed by DBRS; and (2) Algonquin Power Co. (APCo; operating as Liberty Power Co., recently upgraded to BBB with Stable trends, from BBB (low) by DBRS).

APUC is a holding company with a sizable and well-diversified portfolio of low risk, regulated assets (owned by LUCo) and long-term contracted, non-regulated assets (largely owned by APCo). Regulated assets account for approximately 70% of APUC’s 2018 cash flow (pro forma) while the remaining contribution of APUC’s cash flow is from non-regulated generation assets with an average remaining contract life of approximately 14 years. APUC also has an approximate 41.5% equity investment interest in Atlantica Yield plc, which owns and operates a globally diverse, long-term contracted portfolio clean generating assets. Based on the Company’s current business strategy, DBRS expects the Company’s cash flow from regulated utilities to be in the 65% to 70% range going forward. Should the portion of the regulated cash flow decrease significantly from the current mix, it could negatively affect the current ratings.

The ratings incorporate structural subordination in that any debt issued by APUC is structurally subordinated by the debt issued by LUCo and APCo. The ratings also incorporate the regulatory risk at its regulated subsidiaries and volume and re-contracting risk at its non-regulated assets. Any adverse changes at either the regulated subsidiaries or non-regulated generation assets that may weaken the credit profile of these two main subsidiaries could have a negative impact on the ratings of APUC.

Currently, APUC does not issue long-term debt and has minimal debt at the corporate level. DBRS expects the Company to maintain its non-consolidated credit metrics at a reasonable level on a sustainable basis. Any material increases in non-consolidated leverage or a significant weakening of APUC’s cash flow-to-non-consolidated debt ratio could result in a negative rating action.

Affected issues are AQN.PR.A and AQN.PR.D

DBRS has announced that it:

downgraded the rating of the Preferred Shares issued by Brompton Oil Split Corp. (the Company) to Pfd-4 (low) from Pfd-3.
…
Although the majority of the issuers included in the Portfolio are currently rated investment grade with Stable trends, the equity market sell-off during the end of the last year led to a significant downward movement in the level of downside protection available to the Preferred Shares. As at January 15, 2019, the downside protection available to holders of the Preferred Shares was 10%, down from 32% at the end of the third quarter of 2018. The dividend coverage ratio was approximately 0.2 times.
…
Distributions to the Class A Shares are currently suspended due to a decline in the Portfolio’s NAV and the asset coverage test not being met.

As a result of the downside protection dropping below acceptable levels for a prolonged period of time and giving consideration to the time remaining until maturity and weak dividend coverage, DBRS downgraded the rating on the Preferred Shares to Pfd-4 (low).

Both classes of shares are scheduled to mature on March 31, 2020. The board of directors may extend the term of the Company and the shares by successive terms of up to five years, provided that shareholders are given an optional retraction right at the end of each successive term.

When they downgraded the company to Pfd-3 in February 2016, they noted:

As of February 5, 2016, the dividend coverage ratio is 1.36. The downside protection available to holders of the Preferred Shares is approximately 37%.

As of January 22, the NAVPU of OSP / OSP.PR.A was 10.98 (the sum of the Capital Units NAV and the preferred share NAV in Brompton’s new-fangled presentation). The issue commenced trading 2015-2-24 after being announced 2015-1-7.

This four-notch downgrade constitutes a black mark for DBRS. Sure, the NAV didn’t change much from the first downgrade to September 2018 – but the dividend coverage, which they touted as 136% in February 2016, (I haven’t a clue how they calculated that number) was 38% for 2016 and 26% in 2017.

Note that DBRS said dividend coverage was 0.9 times in the initial rating 2015-2-24; approximately 0.3 times in their January, 2017, confirmation and approximately 0.2 times in their January, 2018, confirmation, so it’s possible that the 1.36 times touted in February 2016 was a simple uncorrected typographical error.

The Canadian Imperial Bank of Commerce has announced:

that it has completed the offering of 13 million Non-cumulative Rate Reset Class A Preferred Shares Series 49 (Non-Viability Contingent Capital (NVCC)) (the “Series 49 Shares”) priced at $25.00 per share to raise gross proceeds of $325 million.

The offering was made through a syndicate of underwriters led by CIBC Capital Markets. The Series 49 Shares commence trading on the Toronto Stock Exchange today under the ticker symbol CM.PR.T.

The Series 49 Shares were issued under a prospectus supplement dated January 15, 2019, to CIBC’s short form base shelf prospectus dated July 11, 2018.

CIBC has designated the Series 49 Shares as eligible to participate in the CIBC Shareholder Investment Plan along with Series 41, 43, 45 and 47. Holders of eligible shares may elect to have dividends on those preferred shares reinvested in common shares if they reside in Canada, or may elect stock dividends if they reside in the U.S. See “CIBC Shareholder Investment Plan” at www.cibc.com for more information.

CM.PR.T is a FixedReset, 5.20%+331, NVCC-compliant, that was announced 2019-1-14. It will be tracked by HIMIPref™ and is assigned to the FixedReset (discount) subindex.

The issue traded 581,064 shares in a range of 24.65-91 before closing at 24.65-72. Vital statistics are:

The new issue is quite expensive according to Implied Volatility Analysis:

Click for Big

According to this analysis, the fair value of the new issue on January 22 is 23.55, down 0.30 from the announcement day level. This is in-line with the actual loss in price, so we can say it ‘held its own’! Note that CM.PR.R, a FixedReset, 4.40%+338, NVCC Compliant issue that commenced trading 2017-6-2 after being announced 2017-5-25, was quoted today at 22.98-15, after trading 27,600 shares in a range of 22.95-305. CM.PR.R resets 2022-7-31, so it has 14 dividend payments left to reset at 80bp less than the new issue, so 25 * 0.008 * 14 / 4 = 0.70, so it will receive $0.70 less total dividends than the new issue until it resets. I’m ignoring a ‘first-coupon effect’ for the new issue, but the currently payable dividend for CM.PR.R pays it up until 2019-1-30, so the effect is minimal.