PrefBlog

Brompton Life & Banc Split Corp. has released its Annual Report to December 31, 2018.

Note that according to the implementation by iShares, the capped financial index is about 69% banks, 19.7% insurance and 10.4% diversified financials, so the fund is by design overweight insurers relative to this benchmark – and insurers have underperformed.

Figures of interest are:

MER: “The MER per unit, excluding Preferred share distributions (which were covered by the portfolio’s dividend income), was 0.91% for 2018”

Average Net Assets: We need this to calculate portfolio yield. The Total Assets of the fund at year end was $412.0-million, compared to $445.2-million a year prior (there was an increase in shares outstanding due to a warrant offering), so call it an average of $428.6-million. This can be checked by examining distributions on preferred shares of $11.728-million, which at $0.545 / share implies an average of 21.5-million units outstanding, which at an average value of $17.98 implies average net assets of 386.6-million. Since shares were issued in July and December, 2018, the latter figure seems more appropriate.

Underlying Portfolio Yield: Investment income of $17.354-million received divided by average net assets of $386.6-million is 4.5%.

Income Coverage: Net investment income after expenses of $10.845-million received plus $2.468-million issuance costs added back is $13.313-million, to cover preferred dividends of 11.728-million is about 114%.

DBRS Limited has announced that it:

downgraded the rating on the Preferred Shares issued by North American Financial 15 Split Corp. (the Company) to Pfd-4 (high) from Pfd-3 (low).
…
On February 21, 2019, the Company extended the term of the Preferred Shares for additional five years. The new termination date is December 1, 2024. After December 1, 2019, the Company will have the right to amend the dividend rate on the Preferred Shares for the new five-year term. Any such changes are expected to be announced no later than September 30, 2019.

The Portfolio provides approximately 37% of downside protection to holders of the Preferred Shares as at March 15, 2019. The downside protection experienced a decline in 2018, showing only a slow recovery over the past few months. The Preferred Shares currently pay a fixed cumulative monthly dividend of $0.04583 per Preferred Share, yielding 5.5% annually on their issue price of $10 per share. Holders of the Class A Shares receive regular monthly targeted cash distributions of $0.10 per Class A Share, yielding 8.0% annually on the issue price of $15 per share. No distributions will be paid to Class A Shares if the NAV per unit falls below $15 and no special year-end dividends will be paid if, after such payment, the Portfolio’s NAV is less than $25. The Preferred Share dividend coverage ratio was approximately 0.64 times. The average grind on the Portfolio is expected to be 3.1% annually for the next five years.

The affected issue is FFN.PR.A .

It will be recalled that TRP.PR.D will reset at 3.903% effective April 30, 2019.

TRP.PR.D is a FixedReset, 4.00%+238, that commenced trading 2013-3-4 after being announced 2013-2-25. The extension was announced 2019-3-15. The issue is tracked by HIMIPref™ and 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., TRP.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 +0.78% 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 TRP.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, TRP.PR.D. Therefore I recommend that holders of TRP.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 p.m. (EDT) on April 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.

It will be recalled that CWB.PR.B will reset at 4.301% effective May 1, 2019.

CWB.PR.B is a FixedReset, 4.40%+276, that commenced trading 2014-2-10 after being announced 2014-1-31. The extension was announced 2019-3-11. 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., CWB.PR.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 +0.78% 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 CWB.PR.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, CWB.PR.B. Therefore I recommend that holders of CWB.PR.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. (EDT) on April 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.