PrefBlog

North American Financial 15 Split Corp. has released its Semi-Annual Report to May 31, 2019.

Figures of interest are:

MER: 1.05% of the whole unit value “based on total expenses for the stated period and is expressed as an annualized percentage of average net asset value during the period.”

Average Net Assets: We need this to calculate portfolio yield. No change in Number of Units Outstanding, so just calculate as [298.4-million (NAV at beginning of period) + 279.6-million (NAV at end of period)] / 2 = 289.0-million.

Underlying Portfolio Yield: (4.784-million dividends + 0.096-million interest) times two because it’s only half a year divided by average net assets of 289.0-million is 3.38%

Income Coverage: Net Investment Income (excluding capital gains) of 3.068-million divided by Preferred Share Distributions of 5.163-million is 59%.

It will be recalled that BMO.PR.W will reset at 3.851% effective November 25, 2019

BMO.PR.W is a FixedReset, 3.80%+222, that commenced trading 2014-7-30 after being announced 2014-7-22. Notice of extension was given 2019-9-27. It is tracked by HIMIPref™ and has been 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. BMO.PR.W 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 +0.30% and +0.83%, 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 BMO.PR.W 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, BMO.PR.W. Therefore, I recommend that holders of BMO.PR.W 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.ET on November 12, 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.

Fortis Inc. has announced that it (on November 1, although only on its share information page, not as a press release):

provides notice to the holders of its Cumulative Redeemable Fixed Rate Reset First Preference Shares, Series M of the Corporation (the “Series M Shares”) of the following dividend rates, in each case payable if, as and when declared by the Board of Directors of the Corporation:

i. $0.2445625 per Series M Share, being the fixed dividend rate payable quarterly on the first day of March, June, September and December of each year during the five-year period from and including December 1, 2019 to but excluding December 1, 2024; and

ii. $0.25816575 per share on the Cumulative Redeemable Floating Rate First Preference Shares, Series N of the Corporation (the “Series N Shares”), being the floating dividend rate applicable to the Series N Shares for the 3-month period from and including December 1, 2019 and ending on and including February 29, 2020, in each case determined in accordance with the corresponding rights, privileges, conditions and restrictions attached to the Series M Shares and Series N Shares, respectively, as a class, as set out in the short form prospectus of the Corporation dated September 11, 2014 relating to the issuance of the Series M Shares.

Beneficial owners of Series M Shares wishing to convert to Series N Shares should communicate with their broker or other nominee to obtain instructions for exercising such right during the conversion period, which runs from November 1, 2019, until 5:00 p.m. (EST) on November 18, 2019.

Inquiries should be directed to Ms. Karen Gosse, Vice President, Treasury and Planning, Fortis at 709.737.2865.

FTS.PR.M is a FixedReset, 4.10%+248, that commenced trading 2014-9-19 after being announced and supersized 2014-9-3. The issue is tracked by HIMIPref™ but is relegated to the Scraps – FixedResets (Discount) subindex.

Note that the reset rate is inconsistent with the rate for ENB.PF.A and the rate for PPL.PR.G; it has been shown on PrefBlog that FixedReset Prospectuses Are Imprecise!

I am pleased to note that Fortis has reconsidered its previous policy of selective disclosure.

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., FTS.PR.M 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 +0.47% and +1.44%, respectively, after removal of the outlying pair FFH.PR.C / FFH.PR.D from the junk group. 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 FTS.PR.M 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, FTS.PR.M. Therefore, it seems likely that I will recommend that holders of FTS.PR.M continue to hold the issue and not to convert, but I will wait until it’s closer to the November 18 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.

Quadravest has announced:

Dividend 15 Split Corp. (the “Company”) today announced it has received approval for an at-the-market equity program (“ATM Program”) that allows the Company to issue shares of the Company to the public from time to time, at the Company’s discretion effective until July 4, 2020, unless terminated prior to such date by the Company. Any Class A Shares or Preferred Shares sold in the ATM Program will be sold through the Toronto Stock Exchange (the “TSX”) or any other marketplace in Canada on which the Class A Shares and Preferred Shares are listed, quoted or otherwise traded at the prevailing market price at the time of sale.

Sales of Class A Shares and Preferred Shares through the ATM Program will be made pursuant to the terms of an equity distribution agreement dated October 29, 2019 (the “Equity Distribution Agreement”) with National Bank Financial Inc. (the “Agent”). Sales of Class A Shares and Preferred Shares will be made by way of “at-the-market distributions” as defined in National Instrument 44-102 Shelf Distributions on the TSX or on any marketplace for the Class A Shares and Preferred Shares in Canada. Since the Class A Shares and Preferred Shares will be distributed at the prevailing market prices at the time of the sale, prices may vary among purchasers during the period of distribution. The ATM Program is being offered pursuant to a prospectus supplement dated October 29, 2019 to the Company’s short form base shelf prospectus dated June 1, 2018. The maximum gross proceeds from the issuance of the shares will be $93,000,000. Copies of the prospectus supplement and the short form base shelf prospectus may be obtained from your registered financial advisor using the contact information for such advisor, or from representatives of the Agent and are available on SEDAR at www.sedar.com.

The volume and timing of distributions under the ATM Program, if any, will be determined at the Company’s sole discretion. The Company intends to use the proceeds from the ATM Program in accordance with the investment objectives and investment strategies of the Company, subject to the investment restrictions of the Company.

The Company invests in a high quality portfolio of leading Canadian dividend-yielding stocks as follows: Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Royal Bank of Canada, Toronto-Dominion Bank, National Bank of Canada, CI Financial Corp., BCE Inc., Manulife Financial, Enbridge, Sun Life Financial, TELUS Corporation, Thomson Reuters Corporation, TransAlta Corporation, TC Energy Corporation.

ATM offerings have been possible (theoretically, anyway!) for a number of years, but I don’t recall having ever seen one announced in the Canadian preferred share space.

Given that DFN.PR.A recently had a traditional overnight offering at a 5.6% premium to NAVPU, the attractiveness of this route to financing is obvious.

Pembina Pipeline Corporation has announced:

that it does not intend to exercise its right to redeem the currently outstanding Cumulative Redeemable Rate Reset Class A Preferred Shares, Series 7 (“Series 7 Shares”) (TSX: PPL.PR.G) on December 2, 2019 (the “Conversion Date”).

As a result, and subject to certain terms of the Series 7 Shares, the holders of the Series 7 Shares will have the right to elect to convert all or any of their Series 7 Shares into Cumulative Redeemable Floating Rate Class A Preferred Shares, Series 8 of Pembina (“Series 8 Shares”) on the basis of one Series 8 Share for each Series 7 Share on the Conversion Date.

Pursuant to the terms of the Series 7 Shares, as December 1, 2019, the conversion date for the Series 7 Shares, is not a business day, the actual conversion date will be the next succeeding business day, December 2, 2019.

With respect to any Series 7 Shares that remain outstanding after December 2, 2019, holders thereof will be entitled to receive quarterly fixed cumulative preferential cash dividends, if, as and when declared by the Board of Directors of Pembina. The annual dividend rate for the Series 7 Shares for the five-year period from and including December 1, 2019 to, but excluding, December 1, 2024 will be 4.38%, being equal to the five-year Government of Canada bond yield of 1.44% determined as of today plus 2.94%, in accordance with the terms of the Series 7 Shares.

With respect to any Series 8 Shares that may be issued on December 2, 2019, holders thereof will be entitled to receive quarterly floating rate cumulative preferential cash dividends, if, as and when declared by the Board of Directors of Pembina. The annual dividend rate for the 3-month floating rate period from and including December 1, 2019 to, but excluding, March 1, 2020 will be 4.602%, being equal to the annual rate of interest for the most recent auction of 90-day Government of Canada treasury bills of 1.662% plus 2.94%, in accordance with the terms of the Series 8 Shares (the “Floating Quarterly Dividend Rate”). The Floating Quarterly Dividend Rate will be reset every quarter.

As provided in the terms of the Series 7 Shares: (i) if Pembina determines that there would remain outstanding immediately following the conversion less than 1,000,000 Series 7 Shares, all remaining Series 7 Shares will be converted automatically into Series 8 Shares on a one-for-one basis effective December 2, 2019; or (ii) if Pembina determines that there would remain outstanding immediately following the conversion less than 1,000,000 Series 8 Shares, holders of Series 7 Shares will not be entitled to convert their Series 7 Shares into Series 8 Shares on the Conversion Date. There are currently 10,000,000 Series 7 Shares outstanding.

The Series 7 Shares are issued in “book entry only” form and, as such, the sole registered holder of the Series 7 Shares is the Canadian Depositary for Securities Limited (“CDS”). All rights of holders of Series 7 Shares must be exercised through CDS or the CDS participant through which the Series 7 Shares are held. The deadline for the registered shareholder (CDS) to provide notice of exercise of the right to convert Series 7 Shares into Series 8 Shares is 3:00 p.m. (MT) / 5:00 p.m. (ET) on November 15, 2019. Any notices received after this deadline will not be valid. As such, holders of Series 7 Shares who wish to exercise their right to convert their Series 7 Shares into Series 8 Shares should contact their broker or other intermediary for more information and it is recommended that this be done well in advance of the deadline in order to provide the broker or other intermediary with the time to complete the necessary steps.

If Pembina does not receive an election notice from CDS during the time fixed therefor, then the Series 7 Shares shall be deemed not to have been converted (except in the case of an automatic conversion). Holders of Series 7 Shares will have an opportunity to convert their shares again on December 1, 2024, and every five years thereafter as long as the shares remain outstanding.

As previously announced, the dividend payable on December 2, 2019 to holders of the Series 7 Shares of record on November 1, 2019 will be $0.281250 per Series 7 Share, consistent with the dividend rate in effect since issuance of the Series 7 Shares. For more information on the terms of the Series 7 Shares and the Series 8 Shares, please see Pembina’s prospectus supplement dated September 4, 2014 which can be found on SEDAR at www.sedar.com.

PPL.PR.G is a FixedReset, 4.50%+294, that commenced trading 2014-9-11 after being announced 2014-9-2. It is tracked by HIMIPref™ but relegated to the Scraps index on credit concerns.

Note that the reset rate is inconsistent with the rate for ENB.PF.A; it has been shown on PrefBlog that FixedReset Prospectuses Are Imprecise!

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., PPL.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 +0.73% and +1.03%, respectively, after removal of the outlying pair FFH.PR.C / FFH.PR.D from the junk group. 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 PPL.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, PPL.PR.G. Therefore, it seems likely that I will recommend that holders of PPL.PR.G continue to hold the issue and not to convert, but I will wait until it’s closer to the November 15 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.