PrefBlog

Canadian Imperial Bank of Commerce has announced:

the dividend rates applicable to its Non-cumulative Rate Reset Class A Preferred Shares Series 39 (Non-Viability Contingent Capital (NVCC)) (the “Series 39 Shares”) and Non-cumulative Floating Rate Class A Preferred Shares Series 40 (Non-Viability Contingent Capital (NVCC)) (the “Series 40 Shares”).

The fixed dividend rate applicable to the Series 39 Shares, should any remain outstanding after July 31, 2019, for the five-year period from and including July 31, 2019 to but excluding July 31, 2024 is 3.713%, payable quarterly as and when declared by the Board of Directors of CIBC.

The floating dividend rate applicable to the Series 40 Shares, should any be issued, for the three-month period from and including July 31, 2019 to but excluding October 31, 2019 is 3.981%, payable quarterly as and when declared by the Board of Directors of CIBC. CIBC has designated the Series 40 Shares as eligible to participate in the CIBC Shareholder Investment Plan.

Beneficial owners of Series 39 Shares who wish to exercise their conversion right should instruct their broker or other nominee to exercise such right during the conversion period, which runs from July 1, 2019 until 5:00 p.m. (Eastern Daylight Time) on July 16, 2019. Any notices received after this deadline will not be valid.

CM.PR.O is a FixedReset, 3.90%+232, NVCC-compliant, that commenced trading 2014-6-11 after being announced 2014-6-2. The extension was announced 2019-6-12. It 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., CM.PR.O 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

Frankly, I am not sure how seriously to take the results charted above. FixedResets had a very strong day on June 28 which was emphatically not shared by their FloatingReset counterparts, where extant, and thus the calculated break-even point for the FloatingReset dividend rates (determined by the average bill rate until the next Exchange Date) has declined dramatically from the last calculation as of June 10. It is not yet clear, of course, whether this represents an actual change in market sentiment or whether this is an artifact of a few players’ day’s trading which will be quickly reversed. The following discussion will assume that this is representative of an actual change in sentiment, but please note that this conclusion is highly provisional!

The market has lost 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 +0.34% and +0.68%, 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 CM.PR.O 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 well below the price of their FixedReset counterparts, CM.PR.O. Therefore, it seems likely that I will recommend that holders of CM.PR.O determine whether or not to convert based on their own portfolio considerations and forecast for policy rates continue to hold the issue and not to convert, but I will wait until it’s closer to the July 16 notification deadline before making a final pronouncement – particularly since, as noted above, the closing quotes for June 28 are highly suspect. 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.

Artis Real Estate Investment Trust has announced:

that it has delivered formal notice to the holder(s) of its Preferred Units, Series G (the “Series G Units”) that, on July 31, 2019, the REIT will redeem all of the 3,140,300 outstanding Series G Units at a price of $25.3125 (the “Redemption Price”) for each Series G Unit, being $25.00 plus $0.3125 in accrued and unpaid distributions thereon up to but excluding July 31, 2019.

The Redemption Price will be payable upon presentation and surrender of the Series G Units called for redemption at the corporate trust offices of AST Trust Company (Canada) at 1 Toronto Street, Suite 1200, Toronto, Ontario, M5C 2V6, Attention: Corporate Actions.

That was a nice surprise for holders of the issue, as AX.PR.G closed at 25.25, up $4.52 (+21.80%!) on volume of 234,839.

AX.PR.G is a FixedReset, 5.00%+313, that commenced trading 2013-7-29 after being announced 2013-7-18. Note that it is not strictly a “preferred share”, it is a trust unit, and that it pays interest and return of capital (see comments), not dividends. The issue has been tracked by HIMIPref™ but relegated to the Scraps – FixedReset (Discount) subindex on credit concerns.

A hint as to why they did this may be found in a June 3 press release:

Artis Real Estate Investment Trust (TSX: AX.UN) (“Artis” or the “REIT”) provided an update today on its normal course issuer bid (“NCIB”) activity in May 2019.

During the month of May, Artis has acquired the following number of units through its NCIB:
• 1,590,993 trust units at a weighted-average price of $11.24;
• 6,800 Series A preferred units at a weighted-average price of $21.96;
• 9,800 Series E preferred units at a weighted-average price of $20.56; and
• 13,100 Series G units at a weighted-average price of $21.99.

From November 1, 2018, when the REIT announced its intention to purchase units through its NCIB, to May 31, 2019, Artis has bought back 12,650,364 trust units at a weighted-average price of $10.46, 51,900 Series A preferred units at a weighted-average price of $21.53, 59,600 Series E preferred units at a weighted-average price of $20.09, and 55,000 Series G preferred units at a weightedaverage price of $21.37.

As of the date hereof, there are 141,283,025 trust units, 3,400,200 Series A preferred units, 3,944,100 Series E preferred units, 3,150,300 Series G preferred units and 5,000,000 Series I preferred units outstanding.

The REIT has an automatic purchase plan in place which allows for the continuous purchase of units and preferred units under its NCIB, including during normal blackout periods.

Their 2018 Financial Report discloses:

The REIT’s weighted-average effective rate at December 31, 2018, on mortgages and other loans secured by properties, inclusive of properties held in joint ty5frgtenture arrangements, was 4.30%, compared to 3.96% at December 31, 2017. The weighted-average nominal interest rate on mortgages and other loans secured by properties, inclusive of properties held in joint venture arrangements, at December 31, 2018, was 4.09%, compared to 3.79% at December 31, 2017.

So in terms of cash, they’re not really saving too much by redeeming AX.PR.G at par, given that it would have reset to about 4.50%. But they’re saving a little bit, and 50bp was enough for RioCan to redeem REI.PR.A and later, REI.PR.C.

Still, holders of AX.PR.G have just been handed a windfall profit of over $14-million, which is about $0.10 per trust unit outstanding, which compares to a reported profit of $158-million in 2018. If I owned the trust units, I’d be ticked off. Why is there such an emphasis on big dramatic moves? What’s wrong with continuing to purchase on the open market at a $4 discount to par, given that the excess financing cost is only about $0.10 – $0.15 per annum? What’s the risk? If you get it wrong, you have another chance to redeem in five years – that’s the beauty of the FixedReset structure – at least, from the issuers’ perspective.

Sure, it’s slow. So what? Slow and steady wins the race!

The Toronto-Dominion Bank has announced (on July 25 June 25, so they say, but it wasn’t on their website yesterday evening!):

that it does not intend to exercise its right to redeem all or any part of the currently outstanding 20 million Non-Cumulative 5-Year Rate Reset Preferred Shares, Series 3 (Non-Viability Contingent Capital (NVCC)) (the “Series 3 Shares”) of TD on July 31, 2019. As a result and subject to certain conditions set out in the prospectus supplement dated July 24, 2014 relating to the issuance of the Series 3 Shares, the holders of the Series 3 Shares have the right to convert all or part of their Series 3 Shares, on a one-for-one basis, into Non-Cumulative Floating Rate Preferred Shares, Series 4 (NVCC) (the “Series 4 Shares”) of TD on July 31, 2019. Holders who do not exercise their right to convert their Series 3 Shares into Series 4 Shares on such date will continue to hold their Series 3 Shares.

The foregoing conversion right is subject to the conditions that: (i) if TD determines that there would be less than 1,000,000 Series 4 Shares outstanding after taking into account all shares tendered for conversion on July 31, 2019, then holders of Series 3 Shares will not be entitled to convert their shares into Series 4 Shares, and (ii) alternatively, if TD determines that there would remain outstanding less than 1,000,000 Series 3 Shares after taking into account all shares tendered for conversion on July 31, 2019, then all remaining Series 3 Shares will automatically be converted into Series 4 Shares on a one-for-one basis on July 31, 2019. In either case, TD will give written notice to that effect to holders of Series 3 Shares no later than July 24, 2019.

The dividend rate applicable to the Series 3 Shares for the 5-year period from and including July 31, 2019 to but excluding July 31, 2024, and the dividend rate applicable to the Series 4 Shares for the 3-month period from and including July 31, 2019 to but excluding October 31, 2019, will be determined and announced by way of a press release on July 2, 2019.

Beneficial owners of Series 3 Shares who wish to exercise their conversion right should communicate as soon as possible with their broker or other nominee to obtain instructions for exercising such right during the conversion period, which runs from July 2, 2019 until 5:00 p.m. (Toronto time) on July 16, 2019.

Inquiries should be directed to TD’s Registrar and Transfer Agent, AST Trust Company (Canada), at 1-800-387-0825 (or in Toronto 416-682-3860).

TD.PF.B is a FixedReset 3.80%+227, NVCC-compliant, issue that commenced trading 2014-7-31 after being announced 2014-7-22. It is tracked by HIMIPref™ and is assigned to the FixedReset (Discount) subindex.

I will have more to say when the reset rate is announced on July 2.

Canadian Imperial Bank of Commerce has announced (on June 12):

that it does not intend to exercise its right to redeem all or any part of its currently outstanding 16,000,000 Non-cumulative Rate Reset Class A Preferred Shares Series 39 (Non-Viability Contingent Capital (NVCC)) (the “Series 39 Shares”) on July 31, 2019.

Subject to certain conditions set out in the prospectus supplement dated June 2, 2014 relating to the issuance of the Series 39 Shares, the holders of Series 39 Shares have the right to convert all or any of their Series 39 Shares, on a one-for-one basis, into Non-cumulative Floating Rate Class A Preferred Shares Series 40 (Non-Viability Contingent Capital (NVCC)) of CIBC (the “Series 40 Shares”) on July 31, 2019.

On such date, holders who do not exercise their right to convert their Series 39 Shares into Series 40 Shares, will continue to hold their Series 39 Shares. The foregoing conversion rights are subject to the following:

• if CIBC determines that there would remain outstanding less than 1,000,000 Series 40 Shares, after having taken into account all Series 39 Shares tendered for conversion on July 31, 2019, then holders of Series 39 Shares will not be entitled to convert their shares into Series 40 Shares, and
• alternatively, if CIBC determines that there would remain outstanding less than 1,000,000 Series 39 Shares, after having taken into account all Series 39 Shares tendered for conversion on July 31, 2019, then all, but not part, of the remaining outstanding Series 39 Shares will automatically be converted into Series 40 Shares on a one-for-one basis on July 31, 2019.

In either case, CIBC will give written notice to that effect to the registered holder of Series 39 Shares no later than July 24, 2019.

The dividend rate applicable to the Series 39 Shares, should any remain outstanding after July 31, 2019, for the five-year period from and including July 31, 2019 to but excluding July 31, 2024 , and the dividend rate applicable to the Series 40 Shares, should any be issued, for the three-month period from and including July 31, 2019 to but excluding October 31, 2019, as and when declared by the Board of Directors of CIBC, will be calculated and announced on June 28, 2019. CIBC has designated the Series 40 Shares as eligible to participate in the CIBC Shareholder Investment Plan.

Beneficial owners of Series 39 Shares who wish to excise their conversion right should instruct their broker or other nominee to exercise such right during the conversion period, which runs from July 1, 2019 until 5:00 p.m. (Eastern Daylight Time) on July 16, 2019. It is recommended that this be done well in advance of the deadline in order to provide the broker or other nominee time to complete the necessary steps. Any notices received after this deadline will not be valid.

CM.PR.O is a FixedReset, 3.90%+232, NVCC-compliant, that commenced trading 2014-6-11 after being announced 2014-6-2. It is tracked by HIMIPref™ and is assigned to the FixedReset (Discount) subindex.

I will have more to say when the reset rate is announced on June 28.