Month: May 2019

It will be recalled that RY.PR.Z will reset At 3.700% effective May 24, 2019.

RY.PR.Z is a NVCC-compliant FixedReset, 4.00%+221, that commenced trading 2014-1-30 after being announced 2014-1-21. The extension was announced 2019-4-12. This issue is tracked by HIMIPref™ and is 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., RY.PR.Z 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 +0.94% and +1.37%, 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 RY.PR.Z 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, RY.PR.Z. Therefore I recommend that holders of RY.PR.Z 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 9, 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.

Pembina Pipeline Corporation has announced:

that it does not intend to exercise its right to redeem the currently outstanding Cumulative Redeemable Rate Reset Class A Preferred Shares, Series 5 (“Series 5 Shares”) (TSX: PPL.PR.E) on June 3, 2019 (the “Conversion Date”).

As a result, and subject to certain terms of the Series 5 Shares, the holders of the Series 5 Shares will have the right to elect to convert all or any of their Series 5 Shares into Cumulative Redeemable Floating Rate Class A Preferred Shares, Series 6 of Pembina (“Series 6 Shares”) on the basis of one Series 6 Share for each Series 5 Share on the Conversion Date.

Pursuant to the terms of the Series 5 Shares, as June 1, 2019, the required conversion date for the Series 5 Shares, is not a business day, the actual conversion date will be the next succeeding business day, being June 3, 2019.

With respect to any Series 5 Shares that remain outstanding after the Conversion Date, holders thereof will be entitled to receive quarterly fixed cumulative preferential cash dividends, if, as and when declared by the Board of Directors of Pembina. The annual dividend rate for the Series 5 Shares for the five-year period from and including June 1, 2019 to, but excluding, June 1, 2024 will be 4.573%, being equal to the five-year Government of Canada bond yield of 1.573% determined as of today plus 3.00%, in accordance with the terms of the Series 5 Shares.

With respect to any Series 6 Shares that may be issued on the Conversion Date, holders thereof will be entitled to receive quarterly floating rate cumulative preferential cash dividends, if, as and when declared by the Board of Directors of Pembina. The annual dividend rate for the 3-month floating rate period from and including June 1, 2019 to, but excluding, September 1, 2019 will be 4.666 %, being equal to the annual rate of interest for the most recent auction of 90-day Government of Canada treasury bills of 1.666% plus 3.00%, in accordance with the terms of the Series 6 Shares (the “Floating Quarterly Dividend Rate”). The Floating Quarterly Dividend Rate will be reset every quarter.

As provided in the terms of the Series 5 Shares: (i) if Pembina determines that there would remain outstanding immediately following the conversion less than 1,000,000 Series 5 Shares, all remaining Series 5 Shares will be converted automatically into Series 6 Shares on a one-for-one basis effective as of the Conversion Date; or (ii) if Pembina determines that there would remain outstanding immediately following the conversion less than 1,000,000 Series 6 Shares, holders of Series 5 Shares will not be entitled to convert their Series 5 Shares into Series 6 Shares on the Conversion Date. There are currently 10,000,000 Series 5 Shares outstanding.

The Series 5 Shares are issued in “book entry only” form and, as such, the sole registered holder of the Series 5 Shares is the Canadian Depositary for Securities Limited (“CDS”). All rights of holders of Series 5 Shares must be exercised through CDS or the CDS participant through which the Series 5 Shares are held. The deadline for the registered shareholder (CDS) to provide notice of exercise of the right to convert Series 5 Shares into Series 6 Shares is 3:00 p.m. (MST) / 5:00 p.m. (EST) on May 17, 2019. Any notices received after this deadline will not be valid. As such, holders of Series 5 Shares who wish to exercise their right to convert their Series 5 Shares into Series 6 Shares should contact their broker or other intermediary for more information and it is recommended that this be done well in advance of the deadline in order to provide the broker or other intermediary with the time to complete the necessary steps.

If Pembina does not receive an election notice from CDS during the time fixed therefor, then the Series 5 Shares shall be deemed not to have been converted (except in the case of an automatic conversion). Holders of Series 5 Shares and Series 6 Shares will have an opportunity to convert their shares again on June 1, 2024, and every five years thereafter as long as the shares remain outstanding.

As previously announced, the dividend payable on June 3, 2019 to holders of the Series 5 Shares of record on May 1, 2019 will be $0.312500 per Series 5 Share, consistent with the dividend rate in effect since the issuance of the Series 5 Shares. For more information on the terms of, and risks associated with an investment in, the Series 5 Shares and the Series 6 Shares, please see Pembina’s prospectus supplement dated January 9, 2014 which can be found on SEDAR at www.sedar.com.

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 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 +0.94% and +1.37%, 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 trade below the price of their FixedReset counterparts, PPL.PR.E. Therefore, it seems likely that I will recommend that holders of PPL.PR.E continue to hold the issue and not to convert, but I will wait until it’s closer to the May 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 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.

National Bank of Canada has announced:

that none of its outstanding 14,000,000 Non-Cumulative 5-Year Rate Reset First Preferred Shares, Series 30 (the “Series 30 Preferred Shares”) will be converted on May 15, 2019 into Non-Cumulative Floating Rate First Preferred Shares, Series 31 (the “Series 31 Preferred Shares”).

During the conversion period, 344,653 Series 30 Preferred Shares were tendered for conversion into Series 31 Preferred Shares, which is less than the minimum 1,000,000 required to give effect to the conversion, as per the terms of the Series 30 Preferred Shares described in the prospectus supplement dated January 31, 2014.

As a result, no Series 31 Preferred Shares will be issued on May 15, 2019 and holders of Series 30 Preferred Shared will retain their shares.

The Series 30 Preferred Shares are currently listed on the Toronto Stock Exchange under the symbol NA.PR.S. The annual dividend rate for such shares for the five-year period commencing on May 16, 2019, and ending on May 15, 2024, will be 4.025%.

NA.PR.S is a NVCC-compliant FixedReset, 4.10%+240, that commenced trading 2014-2-7 after being announced 2014-1-29. It will reset At 4.025% effective May 16, 2019. I recommended against conversion. It is tracked by HIMIPref™ and assigned to the FixedResets-Discount subindex.

Fortis Inc. has announced:

Fortis has declared and hereby gives notice of a corrected second quarter dividend of $0.2455625 per share on its Cumulative Redeemable Fixed Rate Reset First Preference Shares, Series K (the “Series K Shares”), payable on June 1, 2019 to the shareholders of record of the Series K Shares at the close of business on May 17, 2019. This notice replaces and supersedes the dividend of $0.2453125 declared on the Series K Shares and disclosed in a news release dated February 14, 2019, which was the first dividend declared following the January 30, 2019 reset of the fixed dividend rate pursuant to the terms of the Series K Shares.

The dividend on the Series K Shares has been designated by the Corporation as an eligible dividend for federal and provincial dividend tax credit purposes.

This has been quite the saga! Fortis made selective disclosure of the reset rate which was eventually revealed to be 3.925%, which was inconsistent with others determined with identical timing. I recommended that holders not convert and there was no conversion. Fortis was recalcitrant in responding to inquiries but eventually admitted their error, while stating that public disclosure would occur in early April. This was later delayed until May 1 and now, finally, the issue can be put to bed.

Errors happen. Big deal. The real issue in this abominable display of incompetent arrogance is Fortis’ disgraceful communication practices. They really need to think about how well they communicate with their financiers.

IGM Financial Inc. announced (on March 20):

– IGM Financial Inc. (TSX:IGM) (“IGM Financial”) announced today that it has completed its previously announced offering of $250 million principal amount of 4.206% debentures due March 21, 2050.

The debentures were offered through a group of agents led by BMO Capital Markets and RBC Capital Markets.

The net proceeds of the offering will be used by IGM Financial to fund the intended redemption of all six million of its issued and outstanding 5.90% Non-Cumulative First Preferred Shares, Series B (the “Series B Preferred Shares”) and for general corporate purposes. IGM Financial intends to issue a notice later today to redeem the Series B Preferred Shares on or about April 30, 2019. In accordance with the terms of the Series B Preferred Shares, the redemption price will be $25.00 for each Series B Preferred Share plus an amount equal to all declared and unpaid dividends, net of any tax required to be withheld by IGM Financial.

IGM.PR.B commenced trading 2009-12-8 after being announced 2009-11-30. The offering was not very successful and I reported an inventory blow-out sale 2009-12-17.

As noted in some comments on this redemption, it is particularly noteworthy that the redemption is explicitly being financed with a 31-year bond issue yielding 4.206%, compared to the 5.90% dividend on the issue, which is equivalent to 7.67%, implying a Seniority Spread of almost 350bp; within a few basis points of the 350bp Seniority Spread reported March 20, the announcement date. The redemption is another data point in my collection illustrating the current cheapness of the preferred share market relative to bonds, last discussed April 10.