PrefBlog

It will be recalled that BAM.PF.B will reset at 4.437% effective April 1, 2019.

BAM.PF.B is a FixedReset, 4.20%+263, that commenced trading 2012-9-12 after being announced 2012-8-23. The issue is tracked by HIMIPref™ and assigned to the FixedReset (Discount) sub-index.

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., BAM.PF.B 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 BAM.PF.B 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, BAM.PF.B. Therefore I recommend that holders of BAM.PF.B 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. (Toronto time) on March 18, 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.

It will be recalled that PPL.PR.Q will reset at 4.821% effective March 31, 2019.

PPL.PR.Q was originally issued as VSN.PR.C, following a plan of arrangement between the two companies. VSN.PR.C was a FixedReset, 5.00%+301 that commenced trading 2013-10-21 after being announced October 9. PPL.PR.Q is tracked by HIMIPref™ but 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., PPL.PR.Q 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 PPL.PR.Q 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, PPL.PR.Q. Therefore I recommend that holders of PPL.PR.Q 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 3:00 p.m. (MST) / 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.

I previously announced that AIM.PR.C would reset at 6.01%, basing the report on Aimia’s press release. At that time, I observed:

It is of interest to note that AIM.PR.C’s reset dividend of 6.01% implied a Government of Canada 5-Year bond yield of 1.810%, whereas the two other issues resetting today, AQN.PR.D and PPL.PR.Q both implied a Canada yield of 1.811%.
…
OK, it’s only a discrepancy of 0.001%, or $0.00025 dividend per annum per share, but I’m still going to query their Investor Relations department.

Aimia Investor Relations now informs me:

4.20 + 1.81100 (GCAN5YR) is how we calculate it which is equal to 6.01100 which is rounded in the release to 6.01%.

As and when an exact dividend amount is declared/announced, you will be able to use the exact dividend amount (which we normally give to five digits as you can see from our Feb 25th release regarding past dividends) on the basis of the pref share at $25 to verify the rate used.

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.

I have expressed a preliminary view that holders of AIM.PR.C should retain their holdings and not convert to FloatingResets; a final recommendation will be provided in the next few days.

Brompton Group has announced:

Brompton Oil Split Corp. (the “Fund”) 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. The current maturity date of March 31, 2020 will be extended for an additional period of three to five years. The new term and the proposed rate for the preferred share dividend for the new term will be announced at least 60 days prior to the current March 31, 2020 maturity date. The preferred share dividend rate for the extended term will be based on market yields for preferred shares with similar terms at that time. The extension of the term of the Fund is not expected to be a taxable event.

The Fund invests in a portfolio of equity securities of large capitalization North American oil and gas issuers, primarily focused on those with significant exposure to oil.

OSP.PR.A commenced trading 2015-2-24 in accordance with pre-issue marketting. It is a Split Share, 5-Year, with a 5% coupon.

It was originally rated Pfd-3(high) by DBRS with downside protection of 57.3%; downgraded a year later to Pfd-3 with downside protection of 37%; and downgraded in January, 2019 to Pfd-4(low) with downside protection 10%. It has been a rough few years for the oil industry!

The NAVPU of the Whole Units is currently 11.46, derived by summing the values for the capital units and the preferred shares in Brompton’s new-fangled presentation.

Brookfield Asset Management Inc. has announced:

that it has determined the fixed dividend rate on its Cumulative Class A Preference Shares, Series 34 (“Series 34 Shares”) (TSX: BAM.PF.B) for the five years commencing April 1, 2019 and ending March 31, 2024, and also determined the quarterly dividend on its floating rate Cumulative Class A Preference Shares, Series 25 (“Series 25 Shares”) (TSX: BAM.PR.S).

Series 34 Shares and Series 35 Shares

If declared, the fixed quarterly dividends on the Series 34 Shares during the five years commencing April 1, 2019 will be $0.2773125 per share per quarter, which represents a yield of 5.854% on the most recent trading price, similar to the current yield. The new fixed dividend rate that will apply for the five years commencing April 1, 2019 represents a yield of 4.437% based on the redemption price of $25 per share.

Holders of Series 34 Shares have the right, at their option, exercisable not later than 5:00 p.m. (Toronto time) on March 18, 2019, to convert all or part of their Series 34 Shares, on a one-for-one basis, into Cumulative Class A Preference Shares, Series 35 (the “Series 35 Shares”), effective March 31, 2019.

The quarterly floating rate dividends on the Series 35 Shares will be paid at an annual rate, calculated for each quarter, of 2.63% over the annual yield on three-month Government of Canada treasury bills. The actual quarterly dividend rate in respect of the April 1, 2019 to June 30, 2019 dividend period for the Series 35 Shares will be 1.07505% (4.312% on an annualized basis) and the dividend, if declared, for such dividend period will be $0.2687625 per share, payable on June 30, 2019.

Holders of Series 34 Shares are not required to elect to convert all or any part of their Series 34 Shares into Series 35 Shares.

As provided in the share conditions of the Series 34 Shares, (i) if Brookfield determines that there would be fewer than 1,000,000 Series 34 Shares outstanding after March 31, 2019, all remaining Series 34 Shares will be automatically converted into Series 35 Shares on a one-for-one basis effective March 31, 2019; and (ii) if Brookfield determines that there would be fewer than 1,000,000 Series 35 Shares outstanding after March 31, 2019, no Series 34 Shares will be permitted to be converted into Series 35 Shares. There are currently 9,888,332 Series 34 Shares outstanding.

The Toronto Stock Exchange (“TSX”) has conditionally approved the listing of the Series 35 Shares effective upon conversion. Listing of the Series 35 Shares is subject to Brookfield fulfilling all the listing requirements of the TSX and, upon approval, the Series 35 Shares will be listed on the TSX under the trading symbol “BAM.PF.K”.

BAM.PF.B is a FixedReset, 4.20%+263, that commenced trading 2012-9-12 after being announced 2012-8-23. The issue is tracked by HIMIPref™ and assigned to the FixedReset (Discount) sub-index.

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., BAM.PF.B and the FloatingReset BAM.PF.K 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 has lost its fleeting 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 +1.01% 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 BAM.PF.B 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, BAM.PF.K, that will result from conversion are likely to trade below the price of their FixedReset counterparts, BAM.PF.B. Therefore, it seems likely that I will recommend that holders of BAM.PF.B continue to hold the issue and not to convert, but I will wait until it’s closer to the March 18 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.