PrefBlog

Standard & Poor’s has announced:

• We are revising our outlook on Brookfield Renewable Partners L.P. (BREP) to stable from negative and are affirming our ‘BBB+’ issuer credit rating.
• At the same time, we are affirming our ‘BBB+’ issue-level rating on the company’s unsecured notes and our ‘A-2’ short-term rating. Our ‘BBB-/P-2(Low)’ preferred rating remains unchanged.
• The stable outlook reflects our view that the company’s business profile is less susceptible to resource risk because its hydrology is reverting back to historical levels. The decline in its financial measures, reflected in its year-end 2017 adjusted funds from operations (FFO) to debt of about 14%, has also reversed and its FFO-to-debt ratio improved to about 19% as of the quarter ended March 2019. We now expect BREP to maintain adjusted FFO to debt in the 20%-25% range over the next couple of years.

NEW YORK (S&P Global Ratings) July 8, 2019—S&P Global Ratings today took the rating actions above. Our affirmation reflects the continuing strength of BREP’s hydro-centric portfolio, which features assets with longer lives and relatively lower required capital spending than other generation asset types. We revised our outlook to stable because of the receding hydrology risk across the company’s portfolio, which had previously weighed on its financial measures, and its corporate-level debt prepayment. In the first quarter of 2019, BREP repaid almost all of its corporate credit facility using the proceeds from its issuance of preferred units and part of the proceeds from its sale of a 25% interest in one of its Canadian hydroelectric portfolios.

BREP’s year-end 2018 financial results demonstrate the successful execution of its long-term strategy to strengthen its liquidity and improve its credit metrics through both organic and inorganic growth. Even as the hydrology for its Brazilian assets continues to trend lower than we expected, we see the portfolio’s hydrology risk as moderating based on BREP’s generation levels for the most recent two years. The affirmation also incorporates the addition of the Terraform Power and Terraform Global wind and solar assets that contributed to the improvement in the company’s financial metrics in 2018.

The stable outlook on BREP reflects our expectation that the company will maintain a well-diversified portfolio of generation assets, operate under long-term contracts with investment-grade counterparties, and generate fairly predictable cash flows to support its holding-company debt obligations. We expect its adjusted FFO-to-debt ratio to improve to the 20%-25% range and anticipate that its adjusted debt to EBITDA will decline to 4.0x over the next 12 months. We also expect BREP to remain moderately strategic to its parent BAM per our group rating assessment.

We could lower our rating on BREP if its adjusted FFO-to-debt ratio consistently remains below 20% or if the company acquires assets that are higher risk that its existing portfolio, leading to a deterioration in the quality of the distributions from its portfolio. This could occur if it finances its acquisitions with substantially higher levels of holding-company debt or acquires higher-risk merchant assets or if there is a material change in the contractual profile of its operating assets.

While we view an upgrade as unlikely, we could raise our ratings on BREP if we revise our view of its stand-alone credit profile (SACP) to ‘a-‘. This is because our ratings on BREP already benefit from its perceived parental support but are capped one notch below our ‘A-‘ rating on BAM.

Affected issues are: (issued directly by Brookfield Renewable Partners L.P.) BEP.PR.E, BEP.PR.G, BEP.PR.I, BEP.PR.K, BEP.PR.M & BEP.PR.O

(issued by Brookfield Renewable Power Pref Eqty Inc, its subsidiary, and guaranteed by the parent) BRF.PR.A, BRF.PR.B, BRF.PR.C, BRF.PR.E, BRF.PR.F

Great news! One of the most execrable, poorly managed split share corporations in Canada is now defunct!

Soundvest Capital Management Ltd. announced (on 2019-5-2):

that it has reached an agreement with Bristol Gate Capital Partners Inc. (“Bristol Gate”) pursuant to which Bristol Gate has agreed to acquire the rights to the management agreement governing the Soundvest Split Trust (the “Fund”) (the “Proposed Transaction”).

In connection with the Proposed Transaction, Soundvest has agreed to hold a meeting of holders of the preferred securities of the Fund (the “Preferred Securities”) and capital units of the Fund (the “Capital Units”) at which (i) holders of the Preferred Securities will be asked to consider and, if deemed advisable, to approve amendments to the Trust Indenture dated March 16, 2005 (as amended) governing the Preferred Securities to change the Maturity Date (as defined in the Trust Indenture) of the Preferred Securities to a day prior to closing of the Proposed Transaction, and (ii) holders of the Capital Units will be asked to consider and, if deemed advisable, to approve amendments to the amended and restated Declaration of Trust of the Fund dated as of April 30, 2010, as amended March 16, 2015 and March 31, 2015, to change the attributes of the Capital Units to provide that the Fund may redeem all of the outstanding Capital Units, other than Bristol Gate’s Capital Units, on a date following the Maturity Date and prior to the closing of the Proposed Transaction (the “Redemption Date”) for an amount per Capital Unit equal to the net asset value per Capital Unit on the Redemption Date (the “Pre-Closing Changes”). It is a condition to the closing of the Proposed Transaction that the Fund complete the repayment and cancellation of the Preferred Securities on such new Maturity Date and redeem all of the outstanding Capital Units, other than Capital Units held by Bristol Gate or its related parties, on the Redemption Date in accordance with the Pre-Closing Changes.

In addition to the approval of the Pre-Closing Changes, holders of Preferred Securities and Capital Units (collectively, the “Unitholders”) will be asked to consider and, if deemed advisable, to approve the change of manager at the special meetings. Details about the changes will be contained in the meeting materials to be mailed to the Unitholders.

Soundvest will refer the Proposed Transaction to the Independent Review Committee (the “IRC”) of the Fund, which acts in an advisory capacity representing the interests of the Fund and Unitholders with respect to conflict of interest matters. The IRC will be asked to review the Proposed Transaction and determine that, if implemented, the Proposed Transaction would achieve a fair and reasonable result for the Fund.

The Proposed Transaction is subject to customary regulatory approvals. Closing will occur two business days after all securityholder and regulatory approvals have been obtained, which is currently targeted for late June 2019.

… and the OSC has produced its paperwork (on 2019-6-20):

IN THE MATTER OF
THE SECURITIES LEGISLATION OF
ONTARIO
(the Jurisdiction)

AND

IN THE MATTER OF
THE PROCESS FOR
EXEMPTIVE RELIEF APPLICATIONS
IN MULTIPLE JURISDICTIONS

AND

IN THE MATTER OF
SOUNDVEST SPLIT TRUST
(the Fund)

AND

IN THE MATTER OF
SOUNDVEST CAPITAL MANAGEMENT LTD.
(the Filer)

AND

IN THE MATTER OF
BRISTOL GATE CAPITAL PARTNERS INC.
(Bristol Gate)

DECISION
…
The Principal Regulator is satisfied that the decision meets the test set out in the Legislation for the Principal Regulator to make the decision.

The decision of the Principal Regulator under the Legislation is that the Approval Sought is granted, provided that the Filer obtains the prior approval of securityholders of the Fund for the Change of Manager.

They later announced (on 2019-6-25):

Soundvest Capital Management Ltd. (the “Manager” or “Soundvest”) today held the special meeting (the “Meeting”) of the holders (“Securityholders”) of preferred securities (“Preferred Securities”) and the holders (“Unitholders”) of capital units (“Capital Units”) of Soundvest Split Trust (the “Fund”).

On May 2, 2019, Soundvest announced that it and Bristol Gate Capital Partners Inc. (“Bristol Gate”) had reached an agreement for Bristol Gate to acquire from Soundvest the management agreement and investment advisory agreement governing the Fund that will result in Bristol Gate becoming the investment fund manager and portfolio manager of the Fund (the “Proposed Transaction”).

At the Meeting, Unitholders and Securityholders approved the Proposed Transaction and the applicable amendments to the Trust Indenture and the Declaration of Trust which provide that the Preferred Securities will mature on July 3, 2019 and all of the outstanding Capital Units, other than the Capital Units beneficially owned by Bristol Gate and its related parties, will be redeemed on July 3, 2019.

Upon closing of the Proposed Transaction (the “Closing”), the only issued and outstanding Capital Units will be those held by Bristol Gate and its related parties. As a result, the board of directors of Soundvest, as manager of the Fund, has determined to voluntarily delist the Capital Units from the TSX on July 3, 2019. Soundvest will not be seeking the approval of holders of Capital Units for the delisting of the Capital Units, as the Proposed Transaction constitutes a near term liquidity event for Unitholders, for which all material conditions will have been satisfied and the likelihood of non-completion is remote.

Closing is expected to occur on July 5, 2019, subject to satisfaction of all closing conditions, including receipt of all required securities regulatory and stock exchange approvals.

… and the trust indenture (see SEDAR and search for “Soundvest Split Trust Jun 26 2019 16:13:52 ET Other securityholders documents – English PDF 11 K”; I regret that the Canadian Securities Administrators do not permit the public to link directly to these public documents) has been modified:

NOW THEREFORE it is hereby covenanted, agreed and declared as follows:
1. The definition of “Maturity Date” in Section 1.1 of the Trust Indenture is hereby deleted
and substituted with the following:
“ “Maturity Date” shall mean July 3, 2019.”

BSD.PR.A was last mentioned on PrefBlog when the name was changed in March, 2019. The term was extended in March, 2015 to March 31, 2020. The manager has been severely criticized on PrefBlog for suspending redemptions during the Credit Crunch and requiring notice of retraction exercise before the right to retract even existed.

Good riddance to bad rubbish.

Update, 2019-9-12: DBRS discontinues rating:

DBRS Limited (DBRS) discontinued the rating on the Preferred Securities issued by Soundvest Split Trust as they were fully repaid on July 3, 2019.

The Toronto-Dominion Bank has announced (although not yet on their website):

the applicable dividend rates for its Non-Cumulative 5-Year Rate Reset Preferred Shares, Series 3 (Non-Viability Contingent Capital (NVCC)) (the “Series 3 Shares”) and Non-Cumulative Floating Rate Preferred Shares, Series 4 (NVCC) (the “Series 4 Shares”).

With respect to any Series 3 Shares that remain outstanding after July 31, 2019, holders of the Series 3 Shares will be entitled to receive quarterly fixed non-cumulative preferential cash dividends, as and when declared by the Board of Directors of TD, subject to the provisions of the Bank Act (Canada). The dividend rate for the 5-year period from and including July 31, 2019 to but excluding July 31, 2024 will be 3.681%, being equal to the 5-Year Government of Canada bond yield determined as at July 2, 2019 plus 2.27%, as determined in accordance with the terms of the Series 3 Shares.

With respect to any Series 4 Shares that may be issued on July 31, 2019, holders of the Series 4 Shares will be entitled to receive quarterly floating rate non-cumulative preferential cash dividends, calculated on the basis of the actual number of days elapsed in such quarterly period divided by 365, as and when declared by the Board of Directors of TD, subject to the provisions of the Bank Act (Canada). The dividend rate for the floating rate period from and including July 31, 2019 to but excluding October 31, 2019, will be 3.931%, being equal to the 90-day Government of Canada Treasury Bill yield determined as of July 2, 2019 plus 2.27%, as determined in accordance with the terms of the Series 4 Shares.

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 on or prior to the deadline for exercise, which is 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. TD provided notice of extension on 2019-6-25. The 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., TD.PF.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 has lost enthusiasm for floating rate product; the implied rates until the next interconversion are generally well below the current 3-month bill rate as the averages for investment-grade and junk issues are at +0.63% and +0.67%, 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 TD.PF.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 trade well below the price of their FixedReset counterparts, TD.PF.B. Therefore, it seems likely that I will recommend that holders of TD.PF.B 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. 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.

Brookfield Renewable Partners L.P. has announced:

that Brookfield Renewable Power Preferred Equity Inc. (“BRP Equity”) has determined the fixed dividend rate on its Class A Preference Shares, Series 3 (“Series 3 Shares”) (TSX: BRF.PR.C) for the five years commencing August 1, 2019 and ending July 31, 2024. If declared, the fixed quarterly dividends on the Series 3 Shares during that period will be paid at an annual rate of 4.351% ($0.2719375 per share per quarter).

Holders of Series 3 Shares have the right, at their option, exercisable not later than 5:00 p.m. (Toronto time) on July 16, 2019, to convert all or part of their Series 3 Shares, on a one-for-one basis, into Class A Preference Shares, Series 4 (the “Series 4 Shares”), effective July 31, 2019.

The quarterly floating rate dividends on the Series 4 Shares will be paid at an annual rate, calculated for each quarter, of 2.94% over the annual yield on three-month Government of Canada treasury bills. The actual quarterly dividend rate in respect of the August 1, 2019 to October 31, 2019 dividend period for the Series 4 Shares will be 1.15970% (4.601% on an annualized basis) and the dividend, if declared, for such dividend period will be $0.289925 per share, payable on October 31, 2019.

Holders of Series 3 Shares are not required to elect to convert all or any part of their Series 3 Shares into Series 4 Shares.

As provided in the share conditions of the Series 3 Shares, (i) if BRP Equity determines that there would be fewer than 1,000,000 Series 3 Shares outstanding after July 31, 2019, all remaining Series 3 Shares will be automatically converted into Series 4 Shares on a one-for-one basis effective July 31, 2019; and (ii) if BRP Equity determines that there would be fewer than 1,000,000 Series 4 Shares outstanding after July 31, 2019, no Series 3 Shares will be permitted to be converted into Series 4 Shares. There are currently 10,000,000 Series 3 Shares outstanding.

The Toronto Stock Exchange (“TSX”) has conditionally approved the listing of the Series 4 Shares effective upon conversion. Listing of the Series 4 Shares is subject to BRP Equity fulfilling all the listing requirements of the TSX and, upon approval, the Series 4 Shares will be listed on the TSX under the trading symbol “BRF.PR.D”.

BRF.PR.C is a FixedReset, 4.40%+294, that commenced trading 2010-10-11 after being announced 2010-10-1. The issue has been tracked by HIMIPref™, but assigned 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., BRF.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 lost enthusiasm for floating rate product; the implied rates until the next interconversion are generally well below the current 3-month bill rate as the averages for investment-grade and junk issues are at +0.63% and +0.67%, 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 BRF.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 well below the price of their FixedReset counterparts, BRF.PR.C. Therefore, it seems likely that I will recommend that holders of BRF.PR.C 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. 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.