Power Financial Corporation has announced:
the applicable dividend rates on its Non-Cumulative 5-Year Rate Reset First Preferred Shares, Series T (the “Series T shares”) and on its Non-Cumulative Floating Rate First Preferred Shares, Series U (the “Series U shares”).
With respect to any Series T shares that will remain outstanding after January 31, 2019, holders thereof will be entitled to receive quarterly fixed non-cumulative preferential cash dividends, if, as and when declared by the Board of Directors of Power Financial. The dividend rate for the 5-year period from and including January 31, 2019 to but excluding January 31, 2024 will be 4.215%, being equal to the 5-year Government of Canada bond yield determined as of today plus 2.37%, in accordance with the terms of the Series T shares.
With respect to any Series U shares that may be issued on January 31, 2019, holders thereof will be entitled to receive quarterly floating rate non-cumulative preferential cash dividends, if, as and when declared by the Board of Directors of Power Financial. The dividend rate for the 3-month floating rate period from and including January 31, 2019 to but excluding April 30, 2019 will be 4.040%, being equal to the 3-month Government of Canada Treasury Bill yield determined as of today plus 2.37%, 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 U shares.
Beneficial owners of Series T 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 T shares can meet the deadline to exercise such conversion right, which is 5:00 p.m. (EST) on January 16, 2019.
They previously announced (on December 3; emphasis added):
that it does not intend to exercise its right to redeem all or part of the currently outstanding 8,000,000 Non-Cumulative 5-Year Rate Reset First Preferred Shares, Series T (the “Series T shares”) on January 31, 2019. As a result, subject to certain conditions, the holders of the Series T shares have the right to convert all or part of their Series T shares, on a one-for-one basis, into Non-Cumulative Floating Rate First Preferred Shares, Series U (the “Series U shares”) on January 31, 2019 (the “Conversion Date”) in accordance with the prospectus supplement dated December 4, 2013.
Holders of Series T shares who do not exercise their right to convert their Series T shares into Series U shares on the Conversion Date will retain their Series T shares.
The dividend rate applicable to the Series T shares for the 5-year period from January 31, 2019 to but excluding January 31, 2024, and the dividend rate applicable to the Series U shares for the 3-month period from January 31, 2019 to but excluding April 30, 2019, will be determined and announced by way of a news release on January 2, 2019.
Beneficial owners of Series T shares who wish to exercise their conversion right should communicate with their broker or other nominee to obtain instructions for exercising such right during the conversion period, which will run from January 2, 2019 until January 16, 2019 at 5:00 p.m. (EST).
The foregoing conversion rights are subject to the conditions that: (i) if Power Financial determines that there would remain outstanding on the Conversion Date less than 1,000,000 Series U shares, after having taken into account all Series T shares tendered for conversion into Series U shares, then holders of Series T shares will not be entitled to convert their shares into Series U shares, and (ii) alternatively, if Power Financial determines that there would remain outstanding on the Conversion Date less than 1,000,000 Series T shares, after having taken into account all Series T shares tendered for conversion into Series U shares, then all remaining Series T shares will automatically be converted into Series U shares without the consent of the holders, on a one-for-one basis, on the Conversion Date.
In either case, Power Financial will give written notice to that effect to the registered holder of Series T shares no later than January 24, 2019.
PWF.PR.T is a FixedReset, 4.20%+237, that commenced trading 2013-12-11 after being announced 2013-12-2. It is be tracked by HIMIPref™ and is assigned to the FixedReset (Discount) subindex.
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., PWF.PR.T 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 BigThe market has lost its recent enthusiasm for floating rate product; the implied rates until the next interconversion are below the current 3-month bill rate as the averages for investment-grade and junk issues are at +1.44% and +1.38%, 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 PWF.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:
| Estimate of FloatingReset (received in exchange for PWF.PR.T) Trading Price In Current Conditions |
| |
Assumed FloatingReset
Price if Implied Bill
is equal to |
| FixedReset |
Bid Price |
Spread |
2.00% |
1.50% |
1.00% |
| PWF.PR.T |
19.07 |
237bp |
19.22 |
18.73 |
18.23 |
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, PWF.PR.T. Therefore, it seems likely that I will recommend that holders of PWF.PR.T continue to hold the issue and not to convert, but I will wait until it’s closer to the January 16 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.
