PrefBlog

Quadravest has announced:

North American Financial 15 Split Corp. (the “Company”) announces a Class A share consolidation.

In connection with the extension of the termination date of the Company, a special retraction right was offered 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. In aggregate, more Preferred shares were tendered for retraction than Class A shares. The purpose of the share consolidation is to maintain the requirement that an equal number of Class A shares and Preferred shares remain outstanding.

Immediately after the special retraction payment on or before December 16, 2019, there will be 16,552,263 Preferred shares and 18,761,656 Class A shares outstanding. In order to restore an equal amount of shares outstanding for each Class, Class A shareholders will receive approximately 0.882238913 Class A shares for each Class A share. In addition the monthly Class A share dividend will be increased from a targeted 10 cents per share ($1.20 per annum) to 11.335 cents per share ($1.3602 per annum) in order to maintain the same pre consolidation dividend rate.

In the event that the share consolidation would otherwise result in the issuance of fractional shares, no fractional Class A shares will be issued and the number of Class A shares each holder shall receive will be rounded down to the nearest whole number. The consolidation is a non-taxable event.

It is expected that the Class A shares will trade on a post-consolidation basis at the opening of trading on, December 30, 2019.

The aggregate intrinsic value of the Class A shareholders’ holdings will remain the same and as a result the net asset value per Class A share will increase on a proportionate basis for each post-consolidation share on the consolidation date. As at the consolidation date, the resultant increase in the net asset value per Class A share will have the impact of increasing the asset coverage ratio for the Preferred shares.

The impact of the Class A share consolidation will be reflected in the next reported net asset value per unit as at December 31, 2019.

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.

As noted in the release, on the the consolidation date, the resultant increase in the net asset value per Class A share will have the impact of increasing the asset coverage ratio for the Preferred shares.

Standard & Poor’s has announced:

• On Dec. 13, 2019, S&P Global Ratings raised its issuer credit rating on Atlantic Power Corp. (APC) to ‘BB-‘ from ‘B+’ based on its improving leverage profile.
• At the same time, S&P Global Ratings raised APLP Holdings Limited Partnership’s issue-level ratings on the $400 million outstanding term loan B, $200 million revolving credit facility, and C$210 million medium-term notes to ‘BB’ from ‘BB-‘.
• We also raised our rating on the preferred shares at Atlantic Power Preferred Equity Ltd. to ‘B-‘ from ‘CCC+’ and P-4 (Low) from P-5 (High) on the Canadian national scale.
• The ‘2’ recovery rating on all debt tranches is unchanged, indicating our expectation for substantial recovery (70%-90%; rounded estimate: 80%) in the event of a default.
• We revised the outlook back to stable from positive, reflecting the predictability of highly contracted cash flows and APC’s plan to continue using excess cash to pay down debt.

…
S&P Global Ratings today took the rating actions listed above. We forecast Atlantic Power Corp.’s adjusted debt to EBITDA to be below 4.5x in 2020 and 2021. This is supported by APC’s highly contracted cash flow profile and management’s demonstrated track record and commitment to deleveraging. We view favorably the company paying down its existing term loan B, as well as the four acquisitions of biomass plants earlier this year. APC’s portfolio contains 21 operational power generation projects across the U.S. and two provinces in Canada–with approximately 1,900 megawatts (MW) of gross electric generation capacity and about 1,400 MW of owned capacity. Following the biomass acquisitions earlier this year, we believe the company’s portfolio shows diversity across power generation and fuel type, though scale remains limited.

The stable outlook reflects our view that cash flows are predictable due to the contractual arrangements between the power assets and the respective off-takers and that APC will use excess cash to pay down the term loan. We forecast our adjusted debt to EBITDA between 4.0x-4.5x over the next 12 months.

We could lower the rating if our forecast of adjusted debt to EBITDA indicates an upward trend of above 5.0x for a protracted period. This may due to the inability to recontract expiring PPAs or obtain new PPAs, or higher-than-expected operating costs to maintain the power assets in the portfolio. Such outcomes would consequently have a detrimental effect on cash flows and create uncertainty in cash available for debt service at APC’s level.

An upgrade is unlikely at this time, even with much improved credit metrics, in the absence of a concerted effort and demonstrated track record by the company to substantially increase size and scale that is more in line with its peers.

Affected issues are AZP.PR.A, AZP.PR.B and AZP.PR.C.

In February, 2015, S&P removed its ‘Watch Negative’ on these issues. DBRS discontinued coverage in 2014 after downgrading the preferreds to Pfd-5(high) in August 2013.

Standard & Poor’s has announced:

• Power Corp. of Canada (PCC) announced its intent to reorganize simplifying its organizational hierarchy by acquiring the remaining public shares of Power Financial Corp. (PFC) that it does not currently own.
• We are raising our ratings on PCC by one notch, including our long-term issuer credit rating to ‘A+’ from ‘A’, and affirming our ratings on PFC.
• The stable outlook reflects our expectation that PCC will maintain its robust earnings and very strong financial risk profile.

…
S&P Global Ratings said today it raised its long-term issuer credit rating on Power Corp. of Canada (PCC) to ‘A+’ from ‘A’, its preferred stock rating to ‘A-‘ from BBB+’, and its preferred stock Canada national scale rating to ‘P-1 (Low)’ from P-2 (High). At the same time, we affirmed our ‘A+’ ratings on Power Financial Corp. (PFC). The outlook is stable.

The upgrade of PCC and alignment with the ratings on PFC reflects our favorable view that the proposal to acquire the remaining 35.9% of common shares of PFC that it does not currently own will remove structural subordination and enable greater capital fungibility between the two companies. Our issuer credit ratings on PCC and PFC are aligned with that on Great-West Lifeco (the ultimate holding company of the insurance operation). We believe PCC has less regulatory restriction and a more reliable earnings stream from the additional unregulated cash flows through dividends from IGM and Pargesa that are available to support its obligations.

The stable outlook reflects our expectation that PCC will continue to generate robust earnings, as well as maintain solid capitalization without meaningfully increasing financial leverage. Great-West Lifeco Inc.’s dominant market position (PFC owns a total of 70.8% of Great-West Lifeco, including cross-ownership through IGM Financial Inc.) in multiple life insurance product lines, along with its vast geographic presence, should continue to translate into a stable source of earnings and dividends for PCC. IGM, which provides an additional source of earnings for the group, will continue to augment the group’s funds.

However, higher financial leverage (compared with ‘AA’ rated life insurance groups, which we consider peers of Great-West Lifeco) somewhat offsets these strengths. In our base-case scenario, we expect total financial leverage will remain between 35%-40%.

We could lower the ratings over the next 18-24 months if we believe the company’s financial risk profile will deteriorate, either as a result of the funding structure posing a risk because of significantly elevated leverage or weak fixed-charge coverage on a sustained basis, or materially declining capital adequacy.

At this time, we believe an upgrade is unlikely given PCC’s acquisitive nature, which precludes us from having certainty in forecasting capital at the extremely strong level.

Power Corporation and Power Financial have announced:

• Power Financial Minority Shareholders to receive 1.05 Power Corporation Subordinate Voting Shares and nominal cash consideration in exchange for each Power Financial Common Share.
• Power Financial Minority Shareholders to receive Power Corporation shares with Net Asset Value that is $4.50 higher than the Net Asset Value of each Power Financial Common Share, an increase of 11% (calculated without accounting for any exercise of Pre-Emptive Rights (as defined herein)).
• Power Corporation to undertake further initiatives to benefit shareholders in conjunction with the Reorganization, including implementation of a significant near-term operating cost reduction plan, reduced financing costs and a dividend increase.
• Paul Desmarais, Jr. and André Desmarais to retire as Co-Chief Executive Officers of Power Corporation after 23 years in the roles and to continue to serve as Chairman and Deputy Chairman, respectively, of Power Corporation’s Board of Directors. R. Jeffrey Orr, President and Chief Executive Officer of Power Financial, to become President and Chief Executive Officer of Power Corporation.

…
Upon completion of the Reorganization, PCC will own all of the PFC Common Shares, while PFC preferred shares and debt securities will remain outstanding.
…
Financing Expense Reduction – PCC and PFC intend to redeem an aggregate of $350 million of First Preferred Shares with available cash, resulting in reduced annual financing costs of approximately $15 million per year.
…
As a result of such securities remaining outstanding, PFC currently anticipates that it will remain a reporting issuer in each of the provinces and territories of Canada.

DBRS comments:

While the announced preferred share redemption will decrease the cash held at POW and PWF, the companies will continue to benefit from significant cash balances and other liquid assets. The decline in cash is offset by lower annual preferred dividend payments and operating costs resulting in a pro forma fixed charge coverage for POW of 16.0 times (x) and PWF of 16.3x, an improvement from 14.2x and 15.0x as at Q3 2019, respectively. The redemption of preferred shares and issuance of new Subordinated Voting Shares will also result in improved financial leverage for both companies, with a decrease to 7.1% from 11.1% for POW and 14.2% from 15.1% for PWF. This improves capitalization assessments for both companies. Other than the redemption of preferred shares, large cash outlays are not expected in the foreseeable future as the earliest debt maturity is in 2033 for PWF and 2039 for POW. These actions are viewed as management’s effective cash utilization during a calmer period for the organization and reflects the strong credit profile of the companies.

Affected issues are (deep breath): POW.PR.A, POW.PR.B, POW.PR.C, POW.PR.D, POW.PR.F, POW.PR.G

PWF.PR.A, PWF.PR.E, PWF.PR.F, PWF.PR.G, PWF.PR.H, PWF.PR.I, PWF.PR.K, PWF.PR.L, PWF.PR.O, PWF.PR.P, PWF.PR.Q, PWF.PR.R, PWF.PR.S, PWF.PR.T, PWF.PR.Z

As noted by Assiduous Reader skeptical in the comments to an unrelated post, it seems likely that PWF.PR.I (Straight Perpetual, 6%, issued 2003-3-11, 8-million shares) and PWF.PR.G (Straight Perpetual, 5.9%, issued 2002-7-16, 6-million shares) will be redeemed. Both were down significantly on the day on much higher than normal volume.

It will be recalled that HSE.PR.C will reset at 4.689% effective December 31, 2019.

HSE.PR.C is a FixedReset, 4.50%+313, that commenced trading 2014-12-9 after being announced 2014-12-1. The initial reset rate announcement was quickly determined to be anomalous and eventually corrected. The issue is tracked by HIMIPref™ and is been assigned to the FixedResets-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. HSE.PR.C and the FloatingReset that will arise 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 below the current 3-month bill rate as the averages for investment-grade and junk issues are at +0.86% 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 HSE.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 below the price of their FixedReset counterparts, HSE.PR.C. Therefore, I recommend that holders of HSE.PR.C 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. ET on December 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.

It will be recalled that TRP.PR.A will reset at 3.479% effective December 31, 2019.

TRP.PR.A commenced trading 2009-9-30 after being announced 2009-9-22. It commenced life as a FixedReset, 4.60%+192, that reset to 3.266% effective 2014-12-31. Assiduous Readers may recall that I have blamed the 2014 reset of TRP.PR.A for what we might now call ‘the first half’ of the current bear market. I recommended conversion to TRP.PR.F in 2014 and there was a conversion rate of about 62%. The company announced the extension to 2024 on 2019-11-21.

TRP.PR.F commenced trading 2014-12-31 after a partial conversion from TRP.PR.A.

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.A and the FloatingReset TRP.PR.F). 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 below the current 3-month bill rate as the averages for investment-grade and junk issues are at +0.86% 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 TRP.PR.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:

Before I get eviscerated in the comments, please note that I am well aware that TRP.PR.F is trading and is quoted with a bid of 14.00. Who cares? At the moment, both issues are ex-dividend and are interconvertible effective December 31 and are therefore exactly same thing from an investment perspective. We are interested in predicting what might happen after the potential for conversion has passed.

Based on current market conditions, I suggest that the FloatingResets, TRP.PR.F, that will result from conversion are likely to trade below the price of their FixedReset counterparts, TRP.PR.A. Therefore, I recommend that holders of TRP.PR.A continue to hold the issue and not to convert. Similarly, I recommend that holders of TRP.PR.F convert to TRP.PR.A. 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. (EST) on December 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.

It will be recalled that AZP.PR.B will reset at 5.739% effective January 1, 2020.

AZP.PR.B used to be CZP.PR.B, which used to be EPP.PR.B, and throughout these changes was a FixedReset, 7.00%+418, which commenced trading 2009-11-2 after being announced 2009-10-13. You can’t tell your players without a programme! Notice of extension was provided in November, 2014, and it reset to 5.57% effective 2014-12-31. I recommended in favour of conversion and the conversion rate was 42%. The company announced the extension to 2024 on 2019-11-14. An erroneous announcement of a reset to 5.67% was announced 2019-12-2.

AZP.PR.C resulted from the partial conversion of AZP.PR.B and commenced trading 2014-12-31.

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. AZP.PR.B and the FloatingReset AZP.PR.C). 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 below the current 3-month bill rate as the averages for investment-grade and junk issues are at +0.86% 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 AZP.PR.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:

Before I get eviscerated in the comments, please note that I am well aware that AZP.PR.C is trading and is quoted with a bid of 18.50. Who cares? At the moment, both issues are cum-dividend and are interconvertible effective December 31 and are therefore differ from being the exactly same thing from an investment perspective only by the difference in one dividend payment, about two cents. We are interested in predicting what might happen after the potential for conversion has passed.

Based on current market conditions, I suggest that the FloatingResets, AZP.PR.C, that will result from conversion are likely to trade below the price of their FixedReset counterparts, AZP.PR.B. Therefore, I recommend that holders of AZP.PR.B continue to hold the issue and not to convert. Similarly, I recommend that holders of AZP.PR.C convert to AZP.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 December 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.

It will be recalled that BPO.PR.A will reset at 4.709% effective January 1, 2020.

BPO.PR.A is a FixedReset, 4.75%+315, that commenced trading 2014-10-23 after being announced 2014-10-7. The issue is tracked by HIMIPref™ but relegated to the Scraps index 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. BPO.PR.A and the FloatingReset that may exist if enough holders elect to 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 below the current 3-month bill rate as the averages for investment-grade and junk issues are at +0.86% 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 BPO.PR.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, BPO.PR.A. Therefore, I recommend that holders of BPO.PR.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 December 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.

It will be recalled that FFH.PR.C will reset at 4.709% effective January 1, 2020.

FFH.PR.C was issued as a cumulative FixedReset issue, 5.75%+315 that commenced trading 2009-10-5 after being announced 2009-9-29. It reset to 4.578% in 2014. I recommended in favour of conversion to FloatingResets. The conversion rate was about 40%.

FFH.PR.D resulted from 40% conversion from FFH.PR.C in 2014 and commenced trading 2014-12-31.

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. FFH.PR.C and the FloatingReset FFH.PR.D). 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 below the current 3-month bill rate as the averages for investment-grade and junk issues are at +0.86% 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 FFH.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:

Before I get eviscerated in the comments, please note that I am well aware that FFH.PR.D is trading and is quoted with a bid of 17.60. Who cares? At the moment, both issues are cum-dividend and are interconvertible effective December 31 and therefore differ from being the exactly same thing from an investment perspective only by the difference in one dividend payment, less than two cents. We are interested in predicting what might happen after the potential for conversion has passed.

Based on current market conditions, I suggest that the FloatingResets, FFH.PR.D, that will result from conversion are likely to trade below the price of their FixedReset counterparts, FFH.PR.C. Therefore, I recommend that holders of FFH.PR.C continue to hold the issue and not to convert. Similarly, I recommend that holders of FFH.PR.D convert to FFH.PR.C 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 December 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.