PrefBlog

DBRS has announced:

that, effective February 21, 2019, Brookfield Soundvest Split Trust changed its name to Soundvest Split Trust.

There’s nothing on the the sponsor’s website about this, which is par for this particular course.

DBRS also announced that it:

confirmed the rating on the Preferred Securities issued by Soundvest Split Trust (the Trust) at Pfd-5 (high). The Trust invests in a diversified portfolio of Canadian companies (the Portfolio). Eligible investments of the Trust currently include common shares and preferred shares, income trusts, income securities (including bonds and debentures), real estate investment trusts, Canadian mortgage-backed securities and other equity securities. The Trust may engage in securities lending to generate additional income.

Holders of the Preferred Securities receive fixed quarterly interest payments of $0.15, yielding 6.0% annually on the issue price of $10.00 per security. Holders of capital units of the Trust (the Capital Units) may receive regular monthly cash distributions, provided that the Preferred Security asset coverage ratio is greater than 1.4 times (x). Capital Unit distributions were suspended in August 2011 because the asset coverage test was not met.

Based on the latest Portfolio yield as at February 28, 2019, the Preferred Securities distribution coverage ratio was approximately 0.5x. The insufficient amount of Portfolio dividends to cover Preferred Security distributions is projected to create an average annual grind of approximately 3.1% until maturity. As at February 28, 2019, the downside protection available to the Preferred Securities was approximately 6.3%. Downside protection has experienced a decline in the past year, but has shown slow recovery in the last two months.

Considering the amount of downside protection available to the Preferred Securities and projected grind until the expected end of the term on March 31, 2020, DBRS confirmed the rating on the Preferred Securities issued by the Trust at Pfd-5 (high).

BSD.PR.A was last mentioned on PrefBlog when there was the possibility of a selling opportunity.The term was extended in March, 2015 to March 31, 2020. The manager has been severely criticized on PrefBlog for suspending redemptions during the Credit Crunch and requiring notice of retraction exercise before the right to retract even existed.

Financial 15 Split Inc. has released its Annual Report to November 30, 2018.

Figures of interest are:

MER: 1.14% of the whole unit value, excluding one time initial offering expenses.

Average Net Assets: We need this to calculate portfolio yield. MER of 2.07% including one time initial offering expenses. Total Expenses of 8,362,558 implies $404-million net assets. Preferred Share distributions of 20,714,872 @ 0.55 / share implies 37.66-million shares out on average. Average Unit Value (beginning & end of year) = (18.32 + 15.90) / 2 = 17.11. Therefore 37.66-million @ 17.11 = 644-million average net assets. Rotten agreement between these two methods, but they did have a lot of treasury offerings this year. Give 75% weight to the second calculation and call it 584-million average.

Underlying Portfolio Yield: Dividends received of 18,408,988 divided by average net assets of 584-million is 3.15%

Income Coverage: Net Investment Income of 10,399,064 (net of withholding, expenses and capital gains) divided by Preferred Share Distributions of 20,714,872 is 50%.

It will be recalled that AIM.PR.C will reset at 6.011% effective March 31, 2019 (not 6.01%, as stated in the original press release).

AIM.PR.C is a FixedReset, 6.25%+420, that commenced trading 2014-1-15 after being announced 2014-1-6. The extension was announced 2019-2-26. The issue is tracked by HIMIPref™ but relegated to the Scraps-FixedReset (Discount) subindex on credit concerns.

Aimia suspended preferred share dividends in June, 2017. DBRS downgraded the preferreds to Pfd-5(high) in August, 2017, and currently has them under review with developing implications. S&P declared that it considered the preferred shares to be in default in June, 2018. On February 26, 2019, Aimia announced it would be paying the accrued dividends. On March 1, S&P upgraded the credit rating to P-4(low) and discontinued the rating.

AIM.PR.C will pay a dividend of $2.343750 to holders of record at the close of business on March 19, 2019, (implying an ex-dividend date of 2019-3-18, but for God’s sake, check!).

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., AIM.PR.C 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 have lost its fleeting interest 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 +0.99% and +1.24%, 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 AIM.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:

Note that the price of AIM.PR.C (and therefore the price of its notional FloatingReset counterpart) should be expected to drop substantially once the catch-up dividend of $2.343750 to holders of record at the close of business on March 19, 2019 goes ex-dividend.

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, AIM.PR.C. Therefore I recommend that holders of AIM.PR.C continue to hold the issue and not to convert. 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.

Those who wish to convert anyway are advised that the deadline for notifying the company of such a desire is 1:00 p.m. (Montreal time) on March 18, 2019 for beneficial holders wishing to exercise their conversion right through CDS Participants. Brokers and other intermediaries generally set their internal deadlines a day or two in advance of this date, so if you wish to convert there’s no time to waste! Note that brokers will, in general, try to execute the instruction on a ‘best efforts’ basis if received between the two deadlines, provided that the procrastinating shareholder grovels entertainingly enough.

It will be recalled that AQN.PR.D will reset at 5.091% effective March 31, 2019.

AQN.PR.D is a FixedReset, 5.00%+328, that commenced trading 2014-3-5 after being announced 2014-2-24. The extension was announced 2019-2-26. The issue is tracked by HIMIPref™ but 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., AQN.PR.D 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 have lost its fleeting interest 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 +0.99% and +1.24%, 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.D 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, AQN.PR.D. Therefore I recommend that holders of AQN.PR.D continue to hold the issue and not to convert. 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.

Those who wish to convert anyway are advised that the deadline for notifying the company of such a desire is 5:00 p.m. (EST) on March 15, 2019. Brokers and other intermediaries generally set their internal deadlines a day or two in advance of this date, so if you wish to convert there’s no time to waste! Note that brokers will, in general, try to execute the instruction on a ‘best efforts’ basis if received between the two deadlines, provided that the procrastinating shareholder grovels entertainingly enough.