PrefBlog

Element Fleet Management Corp. has announced (although not yet on their website):

the applicable dividend rates for its Cumulative 5-Year Rate Reset Preferred Shares, Series C (the “Series C shares”) and Cumulative Floating Rate Preferred Shares, Series D (the “Series D shares”).

With respect to any Series C shares that remain outstanding after June 30, 2019, holders thereof shall be entitled to receive, and the Corporation shall pay thereon, if, as and when declared by the directors of the Corporation, fixed, cumulative, preferential cash dividends payable quarterly. The dividend rate applicable to the Series C shares for the period from and including June 30, 2019 up to, but excluding, June 30, 2024, will be 6.210% per annum, being equal to the sum of the 5-year Government of Canada bond yield determined as of today plus 4.81%, in accordance with the terms of the Series C shares.

With respect to any Series D shares that may be issued on June 30, 2019, holders thereof shall be entitled to receive, and the Corporation shall pay thereon, if, as and when declared by the directors of the Corporation, floating rate, cumulative, preferential cash dividends payable quarterly. The dividend rate applicable to the Series D shares for the period from and including June 30, 2019 up to, but excluding, September 30, 2019, will be 6.476% per annum, being equal to the sum of the 3-month Government of Canada Treasury Bill yield determined as of today plus 4.81%, 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 D shares.

Beneficial owners of Series C shares who wish to exercise their Conversion Privilege should communicate with their broker or other nominee to ensure their instructions are followed so that the registered holder of the Series C shares can meet the deadline to exercise the Conversion Privilege. Such deadline is 5:00 p.m. (Toronto time) on June 17, 2019, as further described in the Corporation’s news release dated May 22, 2019 and in the rights, privileges, restrictions and conditions attaching to the Series C shares, as provided in Article 6 of the Corporation’s restated articles of incorporation dated October 4, 2016.

EFN.PR.C was announced 2014-2-26 as a FixedReset, 6.50%+481, but was not added to HIMIPref™ at that time as the company did not have a credit rating. The company received an initial rating from DBRS on 2015-9-24 and HIMIPref™ commenced tracking its four issues then outstanding shortly thereafter. The extension of the issue was announced 2019-5-22. The issue continues to be 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., EFN.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 has regained a little 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 +1.32% and +1.72%, 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 EFN.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:

Based on current market conditions, I suggest that the FloatingResets that will result from conversion are likely to trade close to the price of their FixedReset counterparts, EFN.PR.C. Therefore, it seems likely that I will recommend that holders of EFN.PR.C determine whether or not to convert based on their own portfolio considerations and forecast for policy rates, but I will wait until it’s closer to the June 17 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 one issue for the other in the market once both elements of each pair are trading and you can – hopefully – 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.

DBRS has announced that it:

upgraded the long-term ratings of The Toronto-Dominion Bank (TD or the Bank) and its related entities, including TD’s Long-Term Issuer Rating to AA (high) from AA. The Bank’s Short-Term Issuer Rating is confirmed at R-1 (high). The trend on all ratings is now Stable. TD’s Long-Term Issuer Rating is composed of an Intrinsic Assessment (IA) of AA and a Support Assessment (SA) of SA2, which reflects the expectation of timely systemic support from the Government of Canada (rated AAA with a Stable trend by DBRS). The SA2 designation results in a one-notch uplift to the Long-Term Issuer Rating. Under the new Canadian Bank Recapitalization Regime, DBRS expects to eventually remove the uplift from systemic support once the Bank has issued a sufficient level of bail-inable senior debt, which would thereby provide an adequate buffer for non-bail-inable obligations and is then expected to offset the removal of systemic support.

KEY RATING CONSIDERATIONS
The upgrade of TD’s long-term ratings recognizes the Bank’s improving fundamentals and franchise, including a growing level of earnings in the United States and ongoing strong performance in Canada, as the Bank continues to execute on its lower-risk strategy. DBRS views TD as consistently outperforming most global banks, and the Bank’s upgraded IA is now in line with a few highly regarded U.S. peers. The U.S. retail bank now represents over one-third of the Group’s earnings, which contributes to TD’s geographic diversity. Indeed, the Canadian and U.S. retail operations generate more than 80% of TD’s adjusted net income, providing considerable earnings stability, which is a key factor underpinning the ratings. DBRS notes that the performance of the U.S. franchise has vastly improved as the Bank has built its asset generation capabilities, and it has realized the benefit from margin expansion and lower corporate taxes following U.S. tax reform. However, while historically a source of lower credit risk, TD’s focus on retail lending in Canada, where the consumer is highly levered, makes it somewhat more exposed to a potential downturn in Canada. At present, TD is less exposed (as a percentage of earnings) to capital markets businesses compared with the other large Canadian banks. However, TD is investing to build out its capital markets capabilities, particularly in the United States, which could potentially expose the Bank to greater earnings volatility.

The affected issues are all NVCC-compliant: TD.PF.A, TD.PF.B, TD.PF.C, TD.PF.D, TD.PR.E, TD.PF.F, TD.PF.G, TD.PF.H, TD.PF.I, TD.PF.J, TD.PF.K, TD.PF.L and the new issue.

Update, 2019-5-31: DBRS corrected an error regarding TD’s subordinated debt.

Global Resource Champions Split Corp. has announced:

its intention to redeem all of its outstanding Class A Preferred Shares, Series 1 (the “Series 1 Preferred Shares”) (TSX: GRP.PR.A) for cash on June 14, 2019 (the “Redemption Date”) in accordance with the terms of the Series 1 Preferred Shares.

The redemption price per Series 1 Preferred Share will be equal to C$25.00 plus accrued and unpaid dividends as of the Redemption Date of C$0.321181 per share, representing a total redemption price of C$25.321181 per Series 1 Preferred Share (the “Redemption Price”).

Notice will be delivered to holders of Series 1 Preferred Shares in accordance with the terms of the Series 1 Preferred Shares.

From and after the Redemption Date the Series 1 Preferred Shares will cease to be entitled to dividends or any other participation in any distribution of the assets of the Company and the holders thereof shall not be entitled to exercise any of their other rights as shareholders in respect thereof except to receive the Redemption Price (less any tax required to be deducted and withheld by the Company).

GRP.PR.A is a SplitShare, 6.25%, 7-year issue scheduled to mature 2023-5-25, that commenced trading 2016-5-6 after marketting commenced 2016-4-5. It is tracked by HIMIPref™ but is currently relegated to the Scraps – SplitShare subindex on volume concerns.

It will be recalled that MFC.PR.L will reset At 3.78600% effective June 20, 2019.

MFC.PR.L is a FixedReset, 3.90%+216, that commenced trading 2014-2-25 after being announced 2014-2-18. The extension was announced 2019-5-7. As it is issued by an Insurance Holding Company and is not compliant with the banks’ NVCC rules, I have added a “Deemed Maturity” entry to the call schedule, which was adjusted in December 2018 to 2030-1-31, at 25.00. MFC.PR.L is tracked by HIMIPref™ and assigned to the FixedReset – Insurance Non-NVCC 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., MFC.PR.L 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, although it may be picking up again; 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 +1.27% and +1.29%, 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 MFC.PR.L 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 trade close to the price of their FixedReset counterparts, MFC.PR.L. Therefore, I recommend that holders of MFC.PR.L determine whether or not to convert based on their own portfolio considerations and forecast for policy rates. I will note that once the FloatingResets commence trading (if, in fact, they do) it may be a good trade to swap one issue for the other in the market once both elements of each pair are trading and you can – hopefully – 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 are advised that the deadline for notifying the company of such a desire is 5:00 p.m. (Toronto time) on June 4, 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.