PrefBlog

It will be recalled that DC.PR.B will reset at 5.284% effective September 30, 2019

DC.PR.B is a FixedReset, 5.688%+410, that commenced trading 2009-9-15 with a 6.75% coupon after being announced 2009-8-25. It reset to 5.688% effective 2014-09-30. I made no recommendation regarding conversion. It is tracked by HIMIPref™ but us relegated to the Scraps – FixedReset (Discount) subindex on credit concerns.

DC.PR.D is a FloatingReset, +410, that came into existence via a partial conversion from DC.PR.B. It is tracked by HIMIPref™ but relegated to the Scraps – FloatingReset 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. DC.PR.B and the FloatingReset DC.PR.D that will continue to exist if enough holders want it). 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 +0.53% and +1.00%, 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 DC.PR.B FixedReset, we may construct the following table showing consistent prices for its FloatingReset DC.PR.D counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:

Based on current market conditions, I suggest that the FloatingResets DC.PR.D that will result from conversion are likely to trade below the price of their FixedReset counterparts, DC.PR.B. Therefore,

• I recommend that holders of DC.PR.B continue to hold the issue and not to convert.
• I recommend that holders of DC.PR.D exchange their holdings to DC.PR.B.

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. (Toronto time) on September 16, 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.

CU Inc. has announced:

that it will issue $580,000,000 of 2.963% Debentures maturing on September 7, 2049, at a price of $100.00 to yield 2.963%. This issue was sold by RBC Dominion Securities Inc., BMO Nesbitt Burns Inc., TD Securities Inc., Scotia Capital Inc., CIBC World Markets Inc. and MUFG Securities (Canada), Ltd. Proceeds from the issue will be used to finance capital expenditures, to repay existing indebtedness, and for other general corporate purposes.

CIU.PR.A, a Straight Perpetual, 4.60% that was announced 2007-4-3. Its credit quality with respect to the CIU corporate structure was discussed long ago.

CIU.PR.A closed 2019-9-3 at 20.91-53 to yield 5.54%-34. Call it a midpoint of 5.44%, and the interest equivalent of that with a conversion factor of 1.3x is 7.07%. Therefore, the Seniority Spread between this issue and the new bond is about 411bp, slightly but not significantly tighter than the 420bp reported for the more general measures of bond and preferred yields on August 28.

This follows my highlighting of the IGM.PR.B refunding on 2019-5-1 and the TRP long bond on 2019-4-10.

This data point supports the accuracy of the Seniority Spread calculated every Wednesday on PrefBlog, with long-term charts being published periodically, eg (chart end-date 2019-8-9):

Click for Big

It also highlights just how cheap Straight Preferreds are compared to long-term corporate bonds!

There is something odd going on with the calculated reset rates announced today:

So, delving into the prospectuses:

All the prospectuses contain language to the effect that (taken from BAM.PF.F prospectus):

“Government of Canada Yield” on any date means the yield to maturity on such date (assuming semi-annual compounding) of a Canadian dollar denominated non-callable Government of Canada bond with a term to maturity of five years as quoted as of 10:00 a.m. (Toronto time) on such date and which appears on the Bloomberg Screen GCAN5YR Page on such date; provided that, if such rate does not appear on the Bloomberg Screen GCAN5YR Page on such date, the Government of Canada Yield will mean the average of the yields determined by two registered Canadian investment dealers selected by the Company, as being the yield to maturity on such date (assuming semi-annual compounding) which a Canadian dollar denominated non-callable Government of Canada bond would carry if issued in Canadian dollars at 100% of its principal amount on such date with a term to maturity of five years.

The ALA.PR.G prospectus specifies:

“Business Day” means a day on which banks are generally open for business in both Calgary, Alberta and Toronto, Ontario.
…
If any day on which any dividend on the Series G Shares is payable by AltaGas or on or by which any other action is required to be taken by AltaGas is not a Business Day, then such dividend shall be payable and such other action may be taken on or by the next succeeding day that is a Business Day.

This is echoed in the EFN.PR.E and DC.PR.B prospectuses.

The BAM.PF.F prospectus does not define Business Day, but specifies that both conversion and redemption will occur on the next business date following the dates for these actions, if the calculated date is not a business day. However, they do not specify what will happen if the Fixed Rate Calculation Date is not a business day.

So, I’m a bit puzzled. I have sent an inquiry to the Investor Relations department of each of the four companies, asking them to specify the date, time and method of calculation of the Government of Canada yield:

Sirs,

I find myself perplexed by discrepancies between the four Reset Rates that were announced on September 3, [relevant ticker symbol] among them. Each announcement implies a slightly different Government of Canada 5-year yield, although the prospectuses appear to specify identical dates, times and data sources for this calculation.

For greater certainty, could you please tell me the date, time and data source for your calculation?

Sincerely,

Update, 2019-9-5: I have obtained the following screenshot for the Bloomberg GCAN5YR screen on September 3:

Click for Big

Another update, 2019-9-5: I have obtained another screenshot!

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Another update, 2019-9-12: It was like pulling teeth, but I got a third screenshot:

Click for Big

Another update, 2019-9-12: And, finally:

Click for Big

Brookfield Asset Management Inc. has announced:

that it has determined the fixed dividend rate on its Cumulative Class A Preference Shares, Series 40 (“Series 40 Shares”) (TSX: BAM.PF.F) for the five years commencing October 1, 2019 and ending September 30, 2024, and also determined the quarterly dividend on its floating rate Cumulative Class A Preference Shares, Series 25 (“Series 25 Shares”) (TSX: BAM.PR.S).

Series 40 Shares and Series 41 Shares

If declared, the fixed quarterly dividends on the Series 40 Shares during the five years commencing October 1, 2019 will be $0.2518125 per share per quarter, which represents a yield of 6.105% on the most recent trading price, similar to the current yield. The new fixed dividend rate that will apply for the five years commencing October 1, 2019 represents a yield of 4.029% based on the redemption price of $25 per share.

Holders of Series 40 Shares have the right, at their option, exercisable not later than 5:00 p.m. (Toronto time) on September 16, 2019, to convert all or part of their Series 40 Shares, on a one-for-one basis, into Cumulative Class A Preference Shares, Series 41 (the “Series 41 Shares”), effective September 30, 2019.

The quarterly floating rate dividends on the Series 41 Shares will be paid at an annual rate, calculated for each quarter, of 2.86% over the annual yield on three-month Government of Canada treasury bills. The actual quarterly dividend rate in respect of the October 1, 2019 to December 31, 2019 dividend period for the Series 41 Shares will be 1.13374% (4.498% on an annualized basis) and the dividend, if declared, for such dividend period will be $0.283435 per share, payable on December 31, 2019.

Holders of Series 40 Shares are not required to elect to convert all or any part of their Series 40 Shares into Series 41 Shares.

As provided in the share conditions of the Series 40 Shares: (i) if Brookfield determines that there would be fewer than 1,000,000 Series 40 Shares outstanding after September 30, 2019, all remaining Series 40 Shares will be automatically converted into Series 41 Shares on a one-for-one basis effective September 30, 2019; and (ii) if Brookfield determines that there would be fewer than 1,000,000 Series 41 Shares outstanding after September 30, 2019, no Series 40 Shares will be permitted to be converted into Series 41 Shares. There are currently 11,841,025 Series 40 Shares outstanding.

The Toronto Stock Exchange (“TSX”) has conditionally approved the listing of the Series 41 Shares effective upon conversion. Listing of the Series 41 Shares is subject to Brookfield fulfilling all the listing requirements of the TSX and, upon approval, the Series 41 Shares will be listed on the TSX under the trading symbol “BAM.PF.K”.

BAM.PF.F is a FixedReset, 4.50%+286, that commenced trading 2014-6-5 after being announced 2014-5-27. 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., BAM.PF.F 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). Inspection of the graph and the overall average break-even rates for extant pairs will provide a guide for estimating the break-even rate for the pair now under consideration assuming, of course, that enough conversions occur so that the pair is in fact created.

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 +1.22%, 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 BAM.PF.F 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, BAM.PF.F. Therefore, it seems likely that I will recommend that holders of BAM.PF.F continue to hold the issue and not to convert, but I will wait until it’s closer to the September 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.

Element Fleet Management Corp. has announced (although not yet on their website):

the dividend rates applicable to its Cumulative 5-Year Rate Reset Preferred Shares, Series E (the “Series E shares”) and Cumulative Floating Rate Preferred Shares, Series F (the “Series F shares”).

With respect to any Series E shares that remain outstanding after September 30, 2019, holders thereof shall be entitled to receive, and the Corporation shall pay thereon, if, as and when declared by the Board of Directors of the Corporation (the “Board”), fixed, cumulative, preferential cash dividends payable quarterly. The dividend rate applicable to the Series E shares for the period from and including September 30, 2019 up to, but excluding, September 30, 2024, will be 5.903% per annum, being equal to the sum of the 5-year Government of Canada bond yield determined as of today plus 4.72%, in accordance with the terms of the Series E shares.

With respect to any Series F shares that may be issued on September 30, 2019, holders thereof shall be entitled to receive, and the Corporation shall pay thereon, if, as and when declared by the Board, floating rate, cumulative, preferential cash dividends payable quarterly. The dividend rate applicable to the Series F shares for the period from and including September 30, 2019 up to, but excluding, December 31, 2019, will be 6.365% per annum, being equal to the sum of the 3-month Government of Canada Treasury Bill yield determined as of today plus 4.72%, calculated on the basis of the actual number of days in such quarterly period divided by 365, in accordance with the terms of the Series F shares.

Beneficial owners of Series E shares who wish to exercise their Conversion Privilege should communicate with their broker or other nominee to ensure their instructions are followed so that the registered holder of the Series E shares can meet the deadline to exercise the Conversion Privilege. Such deadline is 5:00 p.m. (Toronto time) on September 16, 2019, as further described in the Corporation’s news release dated August 27, 2019 and in the rights, privileges, restrictions and conditions attaching to the Series E shares, as provided in Article 8 of the Corporation’s restated articles of incorporation dated October 4, 2016.

EFN.PR.E is a FixedReset, 6.40%+472, that was announced 2014-6-2 but not immediately tracked by HIMIPref™ as it was unrated. Coverage commenced in September, 2015 after the company’s preferreds were rated Pfd-3 by DBRS. The extension was announced 2019-8-27.

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., BAM.PF.F 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). Inspection of the graph and the overall average break-even rates for extant pairs will provide a guide for estimating the break-even rate for the pair now under consideration assuming, of course, that enough conversions occur so that the pair is in fact created.

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 +1.22%, 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 EFN.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, EFN.PR.E. Therefore, it seems likely that I will recommend that holders of EFN.PR.E continue to hold the issue and not to convert, but I will wait until it’s closer to the September 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.

AltaGas Ltd. has announced:

reset dividend rates for the currently outstanding Cumulative Redeemable Five-Year Rate Reset Preferred Shares, Series G (the “Series G Shares”) (TSX: ALA.PR.G) and the Cumulative Redeemable Floating Rate Preferred Shares, Series H (the “Series H Shares”).

As previously announced by AltaGas on August 29, 2019, AltaGas does not intend to exercise its right to redeem its Series G Shares on September 30, 2019 (the “Conversion Date”). As a result, subject to certain conditions, the holders of the Series G Shares have the right to convert all or part of their Series G Shares on a one-for-one basis into Series H Shares on the Conversion Date. Holders who do not exercise their right to convert their Series G Shares into Series H Shares will, subject to automatic conversion in certain circumstances, retain their Series G Shares. Holders of Series G Shares should review the prior press release for further details.

With respect to any Series G Shares that remain outstanding after the Conversion Date, holders shall be entitled to receive, as and when declared by the Board of Directors of AltaGas, fixed cumulative preferential cash dividends, payable quarterly. The new annual dividend rate applicable to the Series G Shares for the five-year period commencing on and including September 30, 2019 to, but excluding, September 30, 2024 will be 4.242 percent, being equal to the sum of the five-year Government of Canada bond yield determined as of today plus 3.06 percent.

With respect to any Series H Shares that may be issued on the Conversion Date, holders shall be entitled to receive, as and when declared by the Board of Directors of AltaGas, quarterly floating rate cumulative preferential cash dividends. The dividend rate applicable to the Series H Shares for the three-month floating rate period commencing on and including September 30, 2019 to, but excluding, December 31, 2019 will be 4.698 percent, being equal to the sum of the annual rate of interest for the most recent auction of 90 day Government of Canada treasury bills plus 3.06 percent (the “Floating Quarterly Dividend Rate”). The Floating Quarterly Dividend Rate will be reset every quarter.

AltaGas is a leading North American energy infrastructure company with a focus on regulated Utilities, Midstream and Power. AltaGas creates value by growing and optimizing its energy infrastructure, including a focus on clean energy sources. For more information visit: www.altagas.ca.

ALA.PR.G is a FixedReset, 4.75%+306, that commenced trading 2014-7-3 after being announced 2014-6-23. Notice of extension was announced 2019-8-29. The issue is tracked by HIMIPref™ but relegated to the Scraps subindex on credit concerns. In December, 2018, the issue was downgraded to Pfd-3(low) by DBRS and to P-3 by S&P.

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., ALA.PR.G 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). Inspection of the graph and the overall average break-even rates for extant pairs will provide a guide for estimating the break-even rate for the pair now under consideration assuming, of course, that enough conversions occur so that the pair is in fact created.

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 +1.22%, 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 ALA.PR.G 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, ALA.PR.G. Therefore, it seems likely that I will recommend that holders of ALA.PR.G continue to hold the issue and not to convert, but I will wait until it’s closer to the notification deadline (which, unusually, was not specified in the press release) 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.