PrefBlog

Dundee Corporation has announced (although not yet on their website):

that it does not intend to exercise its right to redeem any currently outstanding cumulative 5-year rate reset first preference shares, series 2 (the “Series 2 Shares”) or cumulative floating rate first preference shares, series 3 (the “Series 3 Shares”) on September 30, 2019. As a result, subject to certain conditions, the holders of the Series 2 Shares have the right, at their option, to convert all or part of their Series 2 Shares on a one for one basis into Series 3 Shares and, the holders of Series 3 Shares have the right at their option, to convert all or a part of their Series 3 Shares on a one for one basis into Series 2 Shares, as at September 30, 2019. Holders who do not exercise their right to convert will retain their existing Series 2 Shares or Series 3 Shares, as applicable, unless automatically converted in accordance with the conditions below.

The foregoing conversions are subject to the conditions that: (i) if, after September 16, 2019, the Company determines that there would be less than 500,000 Series 2 Shares outstanding on September 30, 2019, then all remaining Series 2 Shares will automatically be converted into an equal number of Series 3 Shares on September 30, 2019, and (ii) alternatively, if the Company determines that there would be less than 500,000 Series 3 Shares outstanding on September 30, 2019, then all remaining Series 3 Shares will be automatically converted into an equal number of Series 2 Shares on September 30, 2019. In either case, Dundee will give written notice to that effect to holders of the Series 2 Shares or Series 3 Shares, as applicable, affected by the preceding minimums on or before September 23, 2019.

The dividend rate applicable to the Series 2 Shares for the 5-year period commencing on September 30, 2019 to, but excluding September 30, 2024, and the dividend rate applicable to the Series 3 Shares for the 3-month period commencing on September 30, 2019 to, but excluding December 31, 2019, will be determined and announced by way of a news release on September 3, 2019.

The deadline for the registered shareholder, CDS & Co., to provide notice of the exercise of its right to convert all or any part of the Series 2 Shares into Series 3 Shares or Series 3 Shares into Series 2 Shares is 5:00 p.m. (Toronto time) on September 16, 2019 and, once received, is irrevocable. Beneficial owners of Series 2 Shares or Series 3 Shares who wish to exercise their right of conversion should communicate as soon as possible with their broker or other intermediary for more information. It is recommended that this be done well in advance of the deadline in order to provide the broker or other intermediary with time to complete the necessary steps.

Holders will again have the opportunity to convert their Series 2 Shares into Series 3 or to convert their Series 3 Shares into Series 2 Shares on September 30, 2024, and every five years thereafter as long as the Series 2 Shares and Series 3 Shares remain outstanding.

I will have more to say when the reset rate is announced September 3.

In the post LCS.PR.A Seeks Mandate Change to Broaden Portfolio, I misinterpreted the paragraph in the press release that stated:

In keeping with industry trends over the past several years to lower investor costs and in connection with the proposed changes to the Fund, the Manager will discontinue the service fee paid to dealers based on the number of Class A Shares held by dealers’ clients of 0.40% per annum of the Class A Share net asset value beginning January 1, 2020. In addition, the management fee will not be increased for the Fund as a result of the additional work associated with the aforementioned enhancements.

I was under the mistaken impression that the manager was currently paying the fees, but this is not the case.

According to an eMail from an officer of Brompton:

Erm, no. We’re proposing to end the Class A trailer fee, but Brompton doesn’t pay the trailer fee, LCS does, so the Class A shareholders will end up with a lower MER after cancellation of this fee. No cash stuffed in pockets. I would appreciate a correction / retraction of this comment.

My apologies for my misdirected ire.

Bank of Montreal has announced:

that none of its 16 million Non-Cumulative 5-Year Rate Reset Class B Preferred Shares, Series 29 (the “Preferred Shares Series 29”) will be converted on August 26, 2019, being the first business day following the conversion date of August 25, 2019, into Non-Cumulative Floating Rate Class B Preferred Shares, Series 30 of the Bank (the “Preferred Shares Series 30”).

During the conversion period which ran from July 26, 2019 to August 12, 2019, 223,098 Preferred Shares Series 29 were tendered for conversion into Preferred Shares Series 30, which is less than the minimum 1,000,000 required to give effect to the conversion, as described in the Preferred Shares Series 29 prospectus supplement dated May 30, 2014. As a result, no Preferred Shares Series 30 will be issued on August 26, 2019 and holders of Preferred Shares Series 29 will retain their shares.

The Preferred Shares Series 29 are currently listed on the Toronto Stock Exchange under the symbol BMO.PR.T. As previously announced on July 26, 2019, the dividend rate for the five-year period commencing on August 25, 2019, and ending on August 24, 2024, will be 3.624%.

BMO.PR.T is a FixedReset, 3.90%+224, NVCC-compliant issue that commenced trading 2014-6-6 after being announced 2019-05-28. BMO.PR.T will reset at 3.624% effective August 25, 2019. I recommended against conversion. It is tracked by HIMIPref™ and is assigned to the FixedReset (Discount) subindex.

Royal Bank of Canada has announced:

that during the conversion notice period, which ran from July 25, 2019 to August 9, 2019, 210,844 Non-Viability Contingent Capital (NVCC) Non-Cumulative 5-Year Rate Reset First Preferred Shares, Series BB (the “Series BB shares”) were tendered for conversion, on a one-for-one basis, into NVCC Non-Cumulative Floating Rate First Preferred Shares, Series BC (the “Series BC shares”). As per the conditions set out in the prospectus supplement dated May 27, 2014, since less than 1,000,000 Series BC shares would be outstanding after August 24, 2019, holders of Series BB shares will not be entitled to convert their shares into Series BC shares. As a result, Series BC shares will not be issued at this time and holders of Series BB shares will retain their shares.

On August 24, 2019, Royal Bank of Canada will have 20,000,000 Series BB shares issued and outstanding. The Series BB shares are currently listed on the Toronto Stock Exchange under the symbol RY.PR.H.

RY.PR.H is a FixedReset, 3.90%+226, NVCC-Compliant issue that commenced trading 2014-6-3 after being announced 2014-5-23. The bank gave notice of extension on 2019-7-22. RY.PR.H will reset At 3.65% effective August 24, 2019. I recommended against conversion. The issue is tracked by HIMIPref™ and has been assigned to the FixedReset-Discount subindex.

It will be recalled that ENB.PR.Y will reset at 3.737% effective September 1, 2019

ENB.PR.Y is a FixedReset, 4.00%+238, that commenced trading 2013-6-6 after being announced 2013-5-28. 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.Y 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 well below the current 3-month bill rate as the averages for investment-grade and junk issues are at +1.14% and +1.26%, 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.Y 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, ENB.PR.Y. Therefore, I recommend that holders of ENB.PR.Y 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 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. (EST) on August 19, 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.