PrefBlog

Canadian Life Companies Split Corp. has released its Annual Report to November 30, 2018.

It’s a pity that there is no standard index for Canadian insurers – the ‘bank’ component of the S&P/TSX Financial Index has greatly outperformed the insurers since the financial crisis.

Figures of interest are:

MER: The company reports “A separate base management expense ratio has been presented to reflect the normal operating expenses of the Company excluding any one time offering expenses. Management expense ratio is based on total expenses for the stated year and is expressed as an annualized percentage of average net asset value during the year” of 0.97%

Average Net Assets: There was no change in the number of units outstanding, so let’s just take the average of the year-beginning and year-ending NAVs, including preferred shares: (199-million + 230-million) / 2 = 214-million

Underlying Portfolio Yield: Dividends received of 7.149-million + interest of 0.128-million is 7.277-million divided by average net assets of 214-million is 3.40%

Income Coverage: Net Investment Income of 5.030-million divided by Preferred Share Distributions of 9.268-million is 54%.

Canoe EIT Income Fund has released its Annual Report to December 31, 2018.

Sadly, they did not publish a “whole fund” return.

Figures of interest are:

MER: “Management expense ratio excluding issue costs, interest, and distributions to preferred redeemable units” “as a percentage of net asset value” (which I take to mean, based only on the equity represented by the Capital Units) 1.57% “as a percentage of net asset value” (which I take to mean, based only on the equity represented by the Capital Units).

Average Net Assets: There was no particularly enormous change in either the number of capital units outstanding or of the net asset value per capital unit, so let’s just take the average of the year-beginning and year-ending NAVs, including preferred shares: (1,067-million + 215-million + 1,073-million + 136-million) / 2 = 1,246-million

Underlying Portfolio Yield: Dividends received of 28.606-million + interest of 4.347-million is 32.953-million divided by average net assets of 1,246-million is 2.64%

Income Coverage: Net Investment Income of 9.034-million divided by Preferred Share Distributions (annualized) of 10.626-million is 85%.

Asset Coverage: NET ASSETS ATTRIBUTABLE TO HOLDERS OF COMMON REDEEMABLE UNITS of 1,067-million + Preferred redeemable units of 215-million, all divided by Preferred redeemable units of 215-million is 6.0-:1 (downside protection of about 83%)

Note that DBRS recently confirmed the preferreds at Pfd-2(high):

The distribution coverage ratio was approximately 0.9. … As of April 9, 2019, the downside protection available to the Preferred Units was approximately 85.00%.

It will be recalled that PPL.PR.E will reset At 4.573% effective June 1, 2019.

PPL.PR.E is a FixedReset, 5.00%+300, that commenced trading 2014-1-16 after being announced 2014-1-7. It 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., PPL.PR.E 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 +1.02% and +1.62%, 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.E 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.E. Therefore I recommend that holders of PPL.PR.E 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 May 17, 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 ENB.PR.T will reset At 4.073% effective June 1, 2019.

ENB.PR.T is a FixedReset, 4.00%+250, that commenced trading 2012-12-5 after being announced 2012-11-26. It 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., ENB.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 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 +1.02% and +1.62%, 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 ENB.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:

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, ENB.PR.T. Therefore I recommend that holders of ENB.PR.T 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 May 17, 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.

Manulife Financial Corporation has announced:

that it does not intend to exercise its right to redeem all or any of its currently outstanding 8,000,000 Non-cumulative Rate Reset Class 1 Shares Series 15 (the “Series 15 Preferred Shares”) (TSX: MFC.PR.L) on June 19, 2019. As a result, subject to certain conditions described in the prospectus supplement dated February 18, 2014 relating to the issuance of the Series 15 Preferred Shares (the “Prospectus”), the holders of the Series 15 Preferred Shares have the right, at their option, to convert all or part of their Series 15 Preferred Shares on a one-for-one basis into Non-cumulative Floating Rate Class 1 Shares Series 16 of Manulife (the “Series 16 Preferred Shares”) on June 19, 2019. A formal notice of the right to convert Series 15 Preferred Shares into Series 16 Preferred Shares will be sent to the registered holders of the Series 15 Preferred Shares in accordance with the share conditions of the Series 15 Preferred Shares. Holders of Series 15 Preferred Shares are not required to elect to convert all or any part of their Series 15 Preferred Shares into Series 16 Preferred Shares. Holders who do not exercise their right to convert their Series 15 Preferred Shares into Series 16 Preferred Shares on such date will retain their Series 15 Preferred Shares, unless automatically converted in accordance with the conditions below.

The foregoing conversion right is subject to the conditions that: (i) if, after June 4, 2019, Manulife determines that there would be less than 1,000,000 Series 15 Preferred Shares outstanding on June 19, 2019, then all remaining Series 15 Preferred Shares will automatically be converted into an equal number of Series 16 Preferred Shares on June 19, 2019, and (ii) alternatively, if, after June 4, 2019, Manulife determines that there would be less than 1,000,000 Series 16 Preferred Shares outstanding on June 19, 2019, then no Series 15 Preferred Shares will be converted into Series 16 Preferred Shares. In either case, Manulife will give written notice to that effect to any registered holders of Series 15 Preferred Shares affected by the preceding minimums on or before June 11, 2019.

The dividend rate applicable to the Series 15 Preferred Shares for the 5-year period commencing on June 20, 2019, and ending on June 19, 2024, and the dividend rate applicable to the Series 16 Preferred Shares for the 3-month period commencing on June 20, 2019, and ending on September 19, 2019, will be determined and announced by way of a news release on May 21, 2019. Manulife will also give written notice of these dividend rates to the registered holders of Series 15 Preferred Shares.

Beneficial owners of Series 15 Preferred Shares who wish to exercise their right of conversion should instruct their broker or other nominee to exercise such right before 5:00 p.m. (Toronto time) on June 4, 2019. Conversion inquiries should be directed to Manulife’s Registrar and Transfer Agent, AST Trust Company (Canada), at 1-800-783-9495.

Subject to certain conditions described in the Prospectus, Manulife may redeem the Series 15 Preferred Shares, in whole or in part, on June 19, 2024 and on June 19 every five years thereafter and may redeem the Series 16 Preferred Shares, in whole or in part, after June 19, 2019.

The Toronto Stock Exchange (“TSX”) has conditionally approved the listing of the Series 16 Preferred Shares effective upon conversion. Listing of the Series 16 Preferred Shares is subject to Manulife fulfilling all the listing requirements of the TSX and, upon approval, the Series 16 Preferred Shares will be listed on the TSX under the trading symbol “MFC.PR.S”.

MFC.PR.L is a FixedReset, 3.90%+216, that commenced trading 2014-2-25 after being announced 2014-2-18. This issue is tracked by HIMIPref™ an assigned to the FixedReset-Insurance-nonNVCC subindex. As it is issued by an Insurance Holding Company and is not compliant with the banks’ NVCC rules which I expect to be extended to the insurance sector, I have added a “Deemed Maturity” entry to the call schedule for analytical purposes, dated 2030-1-31, at 25.00.

I will have more commentary when the reset rate is announced on May 21.

Laurentian Bank of Canada has announced:

that it does not intend to exercise its right to redeem all or any of its currently outstanding Non-Cumulative Class A Preferred Shares, Series 13 (the “Preferred Shares Series 13”) (TSX: LB.PR.H) on June 15, 2019. As a result, subject to certain conditions described in the prospectus supplement dated March 27, 2014 relating to the issuance of the Preferred Shares Series 13 (the “Prospectus”), the holders of the Preferred Shares Series 13 have the right, at their option, to convert any or all of their Preferred Shares Series 13 into an equal number of the Bank’s Non-Cumulative Class A Preferred Shares, Series 14 (the “Preferred Shares Series 14”) on June 17, 2019. This date is the first business day following the conversion date of June 15, 2019, identified in the Prospectus, which falls on a Saturday. In accordance with the share conditions, a written notice of the right to convert Preferred Shares Series 13 into Preferred Shares Series 14 will be sent to the registered holders of the Preferred Shares Series 13. Holders of Preferred Shares Series 13 are not required to elect to convert all or any part of their Preferred Shares Series 13 into Preferred Shares Series 14. Holders who do not exercise their right to convert their Preferred Shares Series 13 into Preferred Shares Series 14 on such date will retain their Preferred Shares Series 13, unless automatically converted in accordance with the conditions below.

The foregoing conversion right is subject to the conditions that: (i) if, after May 31, 2019, the Bank determines that there would be less than 1,000,000 Preferred Shares Series 14 outstanding on June 17, 2019, then no Preferred Shares Series 13 will be converted into Preferred Shares Series 14, and (ii) alternatively, if after, May 31, 2019, the Bank determines that there would be less than 1,000,000 Preferred Shares Series 13 outstanding on June 17, 2019, then all remaining Preferred Shares Series 13 will automatically be converted into an equal number of Preferred Shares Series 14 on June 17, 2019. In either case, the Bank will give written notice to that effect to any registered holders of Preferred Shares Series 13 affected by the preceding minimums on or before June 7, 2019.

The dividend rate applicable to the Preferred Shares Series 13 for the five-year period from and including June 15, 2019 to, but excluding, June 15, 2024, and the dividend rate applicable to the Preferred Shares Series 14 for the three-month period from and including June 15, 2019 to, but excluding, September 15, 2019, will be determined and announced by way of a news release on May 16, 2019. The Bank will also give written notice of these dividend rates to the registered holders of Preferred Shares Series 13.

Beneficial owners of Preferred Shares Series 13 who wish to exercise their right of conversion should instruct their broker or other nominee to exercise such right before 5:00 p.m. (Montreal time) on May 31, 2019. Conversion inquiries should be directed to the Bank’s Registrar and Transfer Agent, Computershare Investor Services Inc., at 1-800-564-6253.

The Toronto Stock Exchange (“TSX”) has conditionally approved the listing of the Preferred Shares Series 14 effective upon conversion. Listing of the Preferred Shares Series 14 is subject to the Bank fulfilling all the listing requirements of the TSX.

LB.PR.H is a NVCC-compliant FixedReset, 4.30%+255, that commenced trading 2014-4-3 after being announced 2014-3-25. This issue is tracked by HIMIPref™ but relegated to the Scraps FixedReset-Discount subindex on credit concerns.

I will have more commentary when the reset rate is announced on May 16.