PrefBlog

Dividend Growth Split Corp has released its Semi-Annual Report to June 30, 2019.

Figures of interest are:

MER: ” The MER excluding Preferred share distributions and issuance costs was 0.88% in the first six months of 2019, unchanged from the same period in 2018.”

Average Net Assets: We need this to calculate portfolio yield. The Total Assets of the fund at year end was $499.6-million, compared to $549.9-million on June 30, so call it an average of $524.8-million. Preferred share dividends of $9,584,220 were paid over the half year at 0.525 p.a., implying average units outstanding 36.51-million, at an average NAVPU of (14.97 + 13.60)/2 = 14.28, implies net assets of $521.4-million. Say the Average Net Assets are the average of the two estimates, $523.1-million.

Underlying Portfolio Yield: Income received of $10,898,580 divided by average net assets of $523.1-million, multiplied by two because it’s semiannual is 4.17%.

Income Coverage: Net investment income of $8,543,279 (after expenses, before capital gains) divided by preferred share dividends of $9,584,220 is 89%.

The income coverage calculated is a bit less than the DBRS calculation in September 2019:

The dividend coverage ratio is approximately 1.0 times.

Quadravest has announced (on September 19):

North American Financial 15 Split Corp. (the “Company”) announced previously on February 21, 2019 it will extend the termination date of the Company a further five year period from December 1, 2019 to December 1, 2024.

In connection with the extension, the Company is entitled to amend the prescribed minimum annual rate of cumulative preferential monthly dividends to be paid to the FFN.PR.A Preferred Shares (“Preferred Shares”) for the five year renewal period, commencing December 1, 2019. The Company may also amend the dividend entitlement of the Preferred Shares on an annual basis. Based on current market rates for preferred shares with similar terms, the minimum annual rate for the five year term will be set at 5.5% and the annual payment rate will remain unchanged at 5.5% per annum, based on the $10 repayment value. The Preferred shareholders have received a total of $7.85 per share in distributions since inception. The dividend policy for the FFN Class A Shares (“Class A Shares”) will remain unchanged.

In relation to the term extension and the Preferred Share minimum rate increase, the Company has an additional retraction right for those shareholders not wishing to continue holding their investment, allowing existing shareholders to tender one or both classes of Shares and receive a retraction price based on the November 29, 2019 net asset value per unit. Alternatively, shareholders may sell their shares for the market price at any time, potentially at a higher price than would be achieved through retraction, or shareholders may take no action and continue to hold their shares.

The Company invests in a high quality portfolio consisting of 15 financial services companies made up of Canadian and U.S. issuers as follows: Bank of Montreal, The Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Royal Bank of Canada, Toronto-Dominion Bank, National Bank of Canada, Manulife Financial Corporation, Sun Life Financial, Great-West Lifeco, CI Financial Corp, Bank of America, Citigroup Inc., Goldman Sachs Group, JP Morgan Chase & Co. and Wells Fargo & Co.

The extension to 2024-12-1 was previously reported. The dividend rate was increased to 5.50% in 2017 and has remained there since. The name of the fund was changed from Financial 15 Split Corp. II in 2015. The term was extended in 2014 after the first extension in 2007. The issue had an exciting time during the Credit Crunch.

It will be recalled that TD.PF.A will reset at 3.662% effective October 31, 2019

TD.PF.A is a FixedReset, 3.90%+224, NVCC-compliant issue that commenced trading 2014-6-4 after being announced 2014-5-26. 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. TD.PF.A 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 +0.70% and +0.84%, 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.A 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, TD.PF.A. Therefore, I recommend that holders of TD.PF.A 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. (Toronto time) on October 16, 2019. This is the Wednesday following Thanksgiving, i.e., the second trading day following this post. 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.

It will be recalled that TRP.PR.E will reset at 3.762% effective October 30, 2019

TRP.PR.E is a FixedReset, 4.25%+235, that commenced trading 2014-1-20 after being announced 2014-1-13. Notice of extension was provided on 2019-9-18. It is tracked by HIMIPref™ and 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. TRP.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 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 +0.70% and +0.84%, 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 TRP.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, TRP.PR.E. Therefore, I recommend that holders of TRP.PR.E 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 p.m. (EDT) on October 15, 2019. This is the Tuesday following Thanksgiving, i.e., the first trading day following this post. 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.

Bank of Montreal has announced (on September 27):

that it does not intend to exercise its right to redeem the currently outstanding Non-Cumulative 5-Year Rate Reset Class B Preferred Shares, Series 31 of the Bank (the “Preferred Shares Series 31”) on November 25, 2019. As a result, subject to certain conditions, the holders of Preferred Shares Series 31 have the right, at their option, to convert all or part of their Preferred Shares Series 31 on a one-for-one basis into Non-Cumulative Floating Rate Class B Preferred Shares, Series 32 of the Bank (the “Preferred Shares Series 32”) on November 25, 2019. Holders who do not exercise their right to convert their Preferred Shares Series 31 into Preferred Shares Series 32 on such date will retain their Preferred Shares Series 31, unless automatically converted in accordance with the conditions below.

The foregoing conversions are subject to the conditions that: (i) if, after November 12, 2019, the Bank determines that there would be less than 1,000,000 Preferred Shares Series 31 outstanding on November 25, 2019, then all remaining Preferred Shares Series 31 will automatically be converted into an equal number of Preferred Shares Series 32 on November 25, 2019; and (ii) alternatively, if the Bank determines that there would be less than 1,000,000 Preferred Shares Series 32 outstanding on November 25, 2019, no Preferred Shares Series 31 will be converted into Preferred Shares Series 32. In either case, the Bank will give written notice to that effect to any registered holders of Preferred Shares Series 31 affected by the preceding minimums on or before November 15, 2019.

The dividend rate applicable to the Preferred Shares Series 31 for the 5-year period commencing on November 25, 2019, and ending on November 24, 2024, and the dividend rate applicable to the Preferred Shares Series 32 for the 3-month period commencing on November 25, 2019, and ending on February 24, 2020, will be determined and announced by way of a news release on October 28, 2019. This date is the first business day following the dividend rate calculation date of October 26, 2019, established in the Preferred Shares Series 31 prospectus, which falls on a Saturday. The Bank will also give written notice of these dividend rates to the registered holders of Preferred Shares Series 31.

Beneficial owners of Preferred Shares Series 31 who, on or after October 28, 2019, wish to exercise their right of conversion should instruct their broker or other nominee to exercise such right before 5:00 p.m. (EDT) on November 12, 2019.

Conversion inquiries should be directed to BMO’s Registrar and Transfer Agent, Computershare Trust Company of Canada, at 1-800-340-5021.

BMO.PR.W is a FixedReset, 3.80%+222, that commenced trading 2014-7-30 after being announced 2014-7-22. It is tracked by HIMIPref™ and has been assigned to the FixedReset – Discount subindex.

I will have more to say once the reset rate is announced October 28.

The Toronto-Dominion Bank has announced (on October 1):

the applicable dividend rates for its Non-Cumulative 5-Year Rate Reset Preferred Shares, Series 1 (Non-Viability Contingent Capital (NVCC)) (the “Series 1 Shares”) and Non-Cumulative Floating Rate Preferred Shares, Series 2 (NVCC) (the “Series 2 Shares”).

With respect to any Series 1 Shares that remain outstanding after October 31, 2019, holders of the Series 1 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 October 31, 2019 to but excluding October 31, 2024 will be 3.662%, being equal to the 5-Year Government of Canada bond yield determined as at October 1, 2019 plus 2.24%, as determined in accordance with the terms of the Series 1 Shares.

With respect to any Series 2 Shares that may be issued on October 31, 2019, holders of the Series 2 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 October 31, 2019 to but excluding January 31, 2020, will be 3.864%, being equal to the 90-day Government of Canada Treasury Bill yield determined as of October 1, 2019 plus 2.24%, as determined in accordance with the terms of the Series 2 Shares.

Beneficial owners of Series 1 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 October 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).

They previously announced (on September 24):

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 1 (Non-Viability Contingent Capital (NVCC)) (the “Series 1 Shares”) of TD on October 31, 2019. As a result and subject to certain conditions set out in the prospectus supplement dated May 28, 2014 relating to the issuance of the Series 1 Shares, the holders of the Series 1 Shares have the right to convert all or part of their Series 1 Shares, on a one-for-one basis, into Non-Cumulative Floating Rate Preferred Shares, Series 2 (NVCC) (the “Series 2 Shares”) of TD on October 31, 2019. Holders who do not exercise their right to convert their Series 1 Shares into Series 2 Shares on such date will continue to hold their Series 1 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 2 Shares outstanding after taking into account all shares tendered for conversion on October 31, 2019, then holders of Series 1 Shares will not be entitled to convert their shares into Series 2 Shares, and (ii) alternatively, if TD determines that there would remain outstanding less than 1,000,000 Series 1 Shares after taking into account all shares tendered for conversion on October 31, 2019, then all remaining Series 1 Shares will automatically be converted into Series 2 Shares on a one-for-one basis on October 31, 2019. In either case, TD will give written notice to that effect to holders of Series 1 Shares no later than October 24, 2019.

The dividend rate applicable to the Series 1 Shares for the 5-year period from and including October 31, 2019 to but excluding October 31, 2024, and the dividend rate applicable to the Series 2 Shares for the 3-month period from and including October 31, 2019 to but excluding January 31, 2020, will be determined and announced by way of a press release on October 1, 2019.

Beneficial owners of Series 1 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 October 1, 2019 until 5:00 p.m. (Toronto time) on October 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.A is a FixedReset, 3.90%+224, NVCC-compliant issue that commenced trading 2014-6-4 after being announced 2014-5-26. 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., TD.PF.A 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 +0.84% 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 TD.PF.A 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, TD.PF.A. Therefore, it seems likely that I will recommend that holders of TD.PF.A continue to hold the issue and not to convert, but I will wait until it’s closer to the October 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.