PrefBlog

Equitable Group Inc. has announced (on September 3):

the dividend rates applicable to the non-cumulative redeemable 5-year rate reset Preferred Shares, Series 3 (the “Series 3 Preferred Shares”) and the non-cumulative floating rate Preferred Shares, Series 4 (“Series 4 Preferred Shares”).

Holders of Series 3 Preferred Shares, should any remain outstanding after September 30, 2019 will be entitled to receive fixed rate non-cumulative preferential cash dividends on a quarterly basis, as and when declared by the Board of Directors of Equitable. The dividend rate for the five-year period commencing on September 30, 2019 to, but excluding September 30, 2024 will be 5.969% per annum, or $0.373063 per share per quarter, being equal to the sum of the five-year Government of Canada bond yield determined as of August 30, 2019 plus 4.78%, in accordance with the terms of the Series 3 Preferred Shares.

Holders of Series 4 Preferred Shares, should any be issued on September 30, 2019, will be entitled to receive floating rate non-cumulative preferential cash dividends on a quarterly basis, calculated on the basis of the actual number of days elapsed in each quarterly floating rate period divided by 365, as and when declared by the Board of Directors of Equitable. The dividend rate for the three-month period commencing on September 30, 2019 to, but excluding December 31, 2019 will be 6.418%, or $0.404422 per share, being equal to the sum of the annual rate for the most recent auction of the three-month Government of Canada Treasury Bills plus 4.78% (the “Floating Quarterly Dividend Rate”), in accordance with the terms of the Series 4 Preferred Shares. The Floating Quarterly Dividend Rate will be reset every quarter.

Holders of Series 3 Preferred Shares who wish to retain their Series 3 Preferred Shares do not need to take any further action. Holders of Series 3 Preferred Shares who wish to exercise their right of conversion 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 September 13, 2019.

They later announced:

that none of its outstanding 3,000,000 Non-cumulative Redeemable 5-Year Rate Reset Preferred Shares, Series 3 (the “Series 3 Preferred Shares”) will be converted on September 30, 2019 into Non-cumulative Floating Rate Preferred Shares, Series 4 (“Series 4 Preferred Shares”).

After taking into account all election notices received from holders of its outstanding Series 3 Preferred Shares by the September 13, 2019 deadline for conversion into Series 4 Preferred Shares, less than the minimum 800,000 shares required to give effect to the conversions, as per the terms of the Series 3 Preferred Shares described in the prospectus supplement dated July 25, 2014, were tendered for conversion. As a result, no Series 4 Preferred Shares will be issued on September 30, 2019 and holders of Series 3 Preferred Shares will retain their shares.

As previously announced on September 3, 2019, the dividend rate for the Series 3 Preferred Shares for the five-year period from and including September 30, 2019 to but excluding September 30, 2024 will be 5.969% per annum, or $0.373063 per share per quarter.

EQB.PR.C was issued as a FixedReset, 6.35%+478 in the summer of 2014.

As I wrote at the time:

This issue is unrated and will not be tracked by HIMIPref™. This is not because I worship the Credit Rating Agencies and am unable to do anything without them; it is because I feel that a public announcement by the CRAs of imminent downgrades do an admirable job of concentrating the minds of management and the directors on fixing the problem. Such announcements by Hymas Investment Management Inc. or Joe Blogger do not carry the same weight.

Since I don’t track it, it’s easy to overlook changes! Thanks to Assiduous Reader dodoi for bringing this to my attention.

There were five resets announced 2019-12-2, as follows:

The first three issues listed are consistent and the implied GOC-5 rate of 1.559% isn’t anything that raises any eyebrows around here … but the bottom two are a puzzle. I believe that all these calculations should be based on the rate at 10:00am December 2 … though it has been shown that prospectuses are imprecise regarding the details.

An inquiry directed to Atlantic Power’s Investor Relations Department elicited a claim that the GOC-5 yield was measured at the close, November 29, and that this was in accordance with the indenture. Well, it may or may not be, but my reading of the prospectus (available on SEDAR, not allowed to link directly of course, which is a disgrace, so the regulators say you have to search for “Atlantic Power Preferred Equity Ltd. Oct 21 2009 17:20:19 ET Final short form prospectus – English PDF 229 K”) suggests the correct time should have been 10am (Toronto time) on 2019-12-2.

An inquiry directed to Husky Energy’s Investor Relations Department has not yet been answered. My thanks to Assiduous Reader PG who brought this to my attention.

Inquiries continue.

Update, 2019-12-4: AZP will issue a press release on December 5, I am told. HSE has not yet responded to my two eMails asking them to specify the date and time as of which the GOC-5 yield was measured … but they’ve got a lot going on right now so I’ll wait another day before sending eMail #3.

DBRS has announced that it:

changed the trend on all ratings of Shaw Communications Inc. (Shaw or the Company) to Positive from Stable. DBRS Morningstar also confirmed Shaw’s Issuer Rating and Senior Notes rating at BBB (low) and Preferred Shares rating at Pfd-3 (low). The trend change reflects continued subscriber and financial growth in the Company’s Wireless division, improved market position, and management’s focus on optimizing operational processes. The ratings continue to reflect Shaw’s well-established brand and market position in Western Canada, high-quality network, and wireless growth opportunity in attractive urban markets covering ~50% of the Canadian market. The ratings also consider the intense competitive landscape, high capital intensity, high dividend payout, and risks associated with the changing regulatory environment.
…
DBRS Morningstar expects Shaw’s financial profile to improve through the capital investment cycle, supported by sound operating performance and sustainable cash flows and reflecting EBITDA growth rather than debt reduction. Free cash flow is expected to strengthen through DBRS Morningstar’s forecast period, tracking improvement in operating income and benefits from a moderating level of capital intensity (i.e., capital expenditures-to-revenue). DBRS Morningstar expects free cash flow (before dividend payments) to be above $700 million in F2020. Shaw’s free cash flow-to-debt should improve to the mid-single-digit range. Gross lease-adjusted debt-to-EBITDA is expected to remain between 2.75x and 3.0x through F2023. DBRS Morningstar believes that Shaw has the capacity to absorb additional debt that may be required to further enhance its competitive positioning of the Wireless business in addition to what is currently contemplated. If Shaw continues to witness healthy net subscriber and financial growth in its Wireless segment and continues to deliver stable profit in its Wireline segment while sustaining its current leverage (i.e., gross debt-to-EBITDA ratio between 2.5x and 3.0x), a rating upgrade is likely. Conversely, if the Wireless division is unable to continue delivering improving profit growth and/or there is a material deterioration in Wireline operating performance in addition to a sustainable rise in leverage, a trend change to Stable may occur.

Affected issues are SJR.PR.A and SJR.PR.B. Standard & Poor’s changed its outlook for the company’s credit to positive last week.

It will be recalled that MFC.PR.M will reset at 3.800% effective December 20, 2019.

MFC.PR.M is a FixedReset, 3.90%+236, that commenced trading 2014-8-15 after being announced 2014-8-11. Notice of extension was published 2019-11-8. It is tracked by HIMIPref™ and has been assigned to the FixedReset (Insurance non-NVCC) subindex, but will move shortly to the FixedReset (Discount) subindex as the imposition of NVCC rules for insurers can no longer be considered probable.

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. MFC.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).

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 +0.89% and +1.20%, 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 MFC.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, MFC.PR.M. Therefore, I recommend that holders of MFC.PR.M 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 4, 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.

Fairfax Financial Holdings Limited has announced:

that it has determined the fixed dividend rate on its Cumulative 5-Year Rate Reset Preferred Shares, Series C (the “Series C Shares”) (TSX: FFH.PR.C) for the five years commencing January 1, 2020 and ending December 31, 2024. The fixed quarterly dividends on the Series C Shares during that period, if and when declared, will be paid at an annual rate of 4.709% (C$0.294313 per share per quarter).

Holders of Series C Shares have the right, at their option, exercisable not later than 5:00 p.m. (Toronto time) on December 16, 2019, to convert all or part of their Series C Shares, on a one-for-one basis, into Cumulative Floating Rate Preferred Shares, Series D (the “Series D Shares”) (TSX: FFH.PR.D), effective December 31, 2019. The quarterly floating rate dividends on the Series D Shares will be paid at an annual rate, calculated for each quarter, of 3.15% over the annual yield on three-month Government of Canada treasury bills. The actual quarterly dividend rate in respect of the December 31, 2019 to March 30, 2020 dividend period for the Series D Shares will be 1.19721% (4.80199% on an annualized basis) and the dividend for such dividend period, if and when declared, will be C$0.29930 per share, payable on March 30, 2020.

Holders of Series D Shares also have the right, at their option, exercisable not later than 5:00 p.m. (Toronto time) on December 16, 2019, to convert all or part of their Series D Shares, on a one-for-one basis, into Series C Shares, effective December 31, 2019. Holders of the Series D Shares who elect to convert their shares by the conversion deadline will receive Series C Shares effective December 31, 2019 and will be entitled to receive, if and when declared, the fixed-rate dividend as described above.

Holders of Series C Shares are not required to elect to convert all or any part of their Series C Shares into Series D Shares and holders of Series D Shares are not required to elect to convert all or any part of their Series D Shares into Series C Shares. Holders of the Series C Shares who do not elect to convert their shares by the conversion deadline will retain their Series C Shares and will receive the fixed-rate dividend as described above (subject to the automatic conversion features described below). Holders of the Series D Shares who do not elect to convert their shares by the conversion deadline will retain their Series D Shares and will receive the floating-rate dividend as described above (subject to the automatic conversion features described below).

As provided in the share conditions of the Series C Shares and the Series D Shares: (i) if Fairfax determines that there would be fewer than 1,000,000 Series C Shares outstanding after December 31, 2019, all remaining Series C Shares will be automatically converted into Series D Shares on a one-for-one basis effective December 31, 2019 and Fairfax will cause the return of all Series C Shares tendered for conversion into Series D Shares; and (ii) if Fairfax determines that there would be fewer than 1,000,000 Series D Shares outstanding after December 31, 2019, all remaining Series D Shares will be automatically converted into Series C Shares on a one-for-one basis effective December 31, 2019 and Fairfax will cause the return of all Series D Shares tendered for conversion into Series C Shares.

There are currently 6,016,384 Series C Shares and 3,983,616 Series D Shares outstanding. The Series C Shares and the Series D Shares are listed on the Toronto Stock Exchange under the trading symbols “FFH.PR.C” and “FFH.PR.D”, respectively.

Fairfax also announces that it has declared the following quarterly dividends per share on its preferred shares:

Series of Preferred Shares	Dividend (C$)	Payment Date	Record Date
Series C	0.286125	December 31, 2019	December 13, 2019
Series D	0.30171	December 30, 2019

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 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.

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Click for Big

The market has little 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 +0.89% and +1.20%, 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 are 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, it seems likely that I will recommend that holders of FFH.PR.C continue to hold the issue and not to convert, while holders of FFH.PR.D should convert to FFH.PR.C, but I will wait until it’s closer to the December 16 notification deadline before making a final pronouncement. I will note that once the conversion period has passed 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.

This notice has been cancelled and corrected. See AZP.PR.B Resets Reset To 5.739%, and for background see Anomalies In Resets for 2019-12-31.

Atlantic Power Corporation and Atlantic Power Preferred Equity Ltd. have announced:

The reset rate for the Series 2 Shares, using a fixed dividend rate (the “Fixed Dividend Rate”), was calculated on November 29, 2019 to be 5.67%, representing the sum of the Canadian Government five-year bond yield of 1.49% plus 4.18%. Such Fixed Dividend Rate will commence with the March 31, 2020 dividend payment to the holders of the Series 2 Shares and continue through the December 31, 2024 dividend payment to the holders of the Series 2 Shares, at which time such Fixed Dividend Rate will again be reset.

The dividend rate for the Cumulative Floating Rate Preferred Shares, Series 3 (the “Series 3 Shares”), using a floating dividend rate (the “Floating Dividend Rate”), was calculated on November 29, 2019 to be 5.83%, representing the sum of the Canadian Government 90-day Treasury Bill yield (using the three-month average result of 1.65%) plus 4.18%. Such Floating Dividend Rate will be effective with the March 31, 2020 dividend payment to the holders of the Series 3 Shares. The Floating Dividend Rate for Series 3 Shares will be reset each quarter.

On December 31, 2019 and again on December 31 of every fifth year thereafter, the holders of Series 2 Shares have the right to convert their Series 2 Shares, on a one-for-one basis, into Series 3 Shares and the holders of Series 3 Shares have the right to convert their Series 3 Shares, on a one-for-one basis, into Series 2 Shares.

Holders of Series 2 Shares or Series 3 Shares who wish to convert such securities into Series 3 Shares or Series 2 Shares, respectively, should contact the financial institution, broker or other intermediary through which they hold the Series 2 Shares or Series 3 Shares to exercise this conversion privilege. Notice of the exercise of the conversion privilege (an “Election Notice”) must be received by Preferred Equity not earlier than December 1, 2019 and not later than 5:00 p.m. (Toronto time) on December 16, 2019.

Automatic Conversion and Restrictions on Conversion

Series 2 Shares

If, after giving effect to all Election Notices, there would remain outstanding less than 1 million Series 2 Shares, then all remaining outstanding Series 2 Shares will automatically convert into Series 3 Shares, on a one-for-one basis on December 31, 2019. Holders of the Series 2 Shares will not be permitted to convert their Series 2 Shares into Series 3 Shares if, after giving effect to all Election Notices, there would be outstanding less than 1 million Series 3 Shares.

Series 3 Shares

If, after giving effect to all Election Notices, there would remain outstanding less than 1 million Series 3 Shares, then all remaining outstanding Series 3 Shares will automatically convert into Series 2 Shares, on a one-for-one basis on December 31, 2019. Holders of the Series 3 Shares will not be permitted to convert their Series 3 Shares into Series 2 Shares if, after giving effect to all Election Notices, there would be outstanding less than 1 million Series 2 Shares.

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.

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 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.

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Click for Big

The market has little 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 +0.89% and +1.20%, 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 18.51. 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, it seems likely that I will recommend that holders of AZP.PR.B continue to hold the issue and not to convert, while holders of AZP.PR.C should convert to AZP.PR.B, but I will wait until it’s closer to the December 16 notification deadline before making a final pronouncement. I will note that once the conversion period has passed 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.

TC Energy Corporation has announced:

that it has notified the registered shareholders of the applicable dividend rates for its Cumulative Redeemable First Preferred Shares, Series 1 (Series 1 Shares) and its Cumulative Redeemable First Preferred Shares, Series 2 (Series 2 Shares).

As previously announced in the Company’s news release dated November 21, 2019, holders of the Series 1 Shares have the right on December 31, 2019 to convert, on a one-for-one basis, any or all of their Series 1 Shares into Series 2 Shares and receive a floating rate quarterly dividend, or retain any or all of their Series 1 Shares and receive a new fixed rate quarterly dividend.

Holders of the Series 2 Shares have the right on December 31, 2019 to convert, on a one-for-one basis, any or all of their Series 2 Shares into Series 1 Shares and receive a fixed rate quarterly dividend, or retain any or all of their Series 2 Shares and receive a floating rate quarterly dividend.

Should a holder of Series 1 Shares choose to retain their shares, such shareholders will receive the new annual fixed dividend rate applicable to Series 1 Shares of 3.479% for the five-year period commencing December 31, 2019 to, but excluding, December 31, 2024. Should a holder of Series 1 Shares choose to convert their shares to Series 2 Shares, holders of Series 2 Shares will receive the floating quarterly dividend rate applicable to the Series 2 Shares of 3.572% for the three-month period commencing December 31, 2019 to, but excluding, March 30, 2020. The floating dividend rate will be reset every quarter.

Should a holder of Series 2 Shares choose to retain their shares, such shareholders will receive the floating quarterly dividend rate applicable to Series 2 Shares of 3.572% for the three-month period commencing December 31, 2019 to, but excluding, March 30, 2020. The floating dividend rate will be reset every quarter. Should a holder of Series 2 Shares choose to convert their shares to Series 1 Shares, holders of Series 1 Shares will receive the new fixed quarterly dividend rate applicable to the Series 1 Shares of 3.479% for the five-year period commencing December 31, 2019 to, but excluding, December 31, 2024.

Beneficial owners of Series 1 or Series 2 Shares who do not provide notice or communicate with their broker or other nominee by 5 p.m. (EST) on December 16, 2019 will retain their respective Series 1 Shares or Series 2 Shares, as applicable, and receive the new dividend rate applicable to such shares, subject to the conditions stated above.

The foregoing conversions are subject to the conditions that: (i) if TC Energy determines that there would be less than one million Series 1 Shares outstanding after December 31, 2019, then all remaining Series 1 Shares will automatically be converted into Series 2 Shares on a one-for-one basis on December 31, 2019, and (ii) if TC Energy determines that there would be less than one million Series 2 Shares outstanding after December 31, 2019, then all of the remaining outstanding Series 2 Shares will automatically be converted into Series 1 Shares on a one-for-one basis on December 31, 2019. In either case, TC Energy will issue a news release to that effect no later than December 23, 2019.

Holders of Series 1 Shares and Series 2 Shares will have the opportunity to convert their shares again on December 31, 2024 and every five years thereafter as long as the shares remain outstanding. For more information on the terms of, and risks associated with an investment in the Series 1 Shares and the Series 2 Shares, please see the prospectus supplement dated September 22, 2009 which is available on sedar.com or on our website.

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.

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 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 little 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 +0.89% and +1.20%, 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 13.84. Who cares? At the moment, both issues are ex-dividend and are interconvertible effective December 31 and are therefore exactly the 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, it seems likely that I will recommend that holders of TRP.PR.A continue to hold the issue and not to convert, while holders of TRP.PR.F should convert to TRP.PR.A, but I will wait until it’s closer to the December 16 notification deadline before making a final pronouncement. I will note that once the conversion period has passed 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.