PrefBlog

Manulife Financial Corporation has announced (although not yet on their website):

that after having taken into account all election notices received by the March 4, 2020 deadline for conversion of its currently outstanding 10,000,000 Non-cumulative Rate Reset Class 1 Shares Series 19 (the “Series 19 Preferred Shares”) (TSX: MFC.PR.N) into Non-cumulative Floating Rate Class 1 Shares Series 20 of Manulife (the “Series 20 Preferred Shares”), the holders of Series 19 Preferred Shares are not entitled to convert their Series 19 Preferred Shares into Series 20 Preferred Shares. There were 110,669 Series 19 Preferred Shares elected for conversion, which is less than the minimum one million shares required to give effect to conversions into Series 20 Preferred Shares.

As announced by Manulife on February 19, 2020, after March 19, 2020, holders of Series 19 Preferred Shares 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 Manulife and subject to the provisions of the Insurance Companies Act (Canada). The dividend rate for the five-year period commencing on March 20, 2020, and ending on March 19, 2025, will be 3.675% per annum or $0.229688 per share per quarter, being equal to the sum of the five-year Government of Canada bond yield as at February 19, 2020, plus 2.30%, as determined in accordance with the terms of the Series 19 Preferred Shares.

Subject to certain conditions described in the prospectus supplement dated November 26, 2014 relating to the issuance of the Series 19 Preferred Shares, Manulife may redeem the Series 19 Preferred Shares, in whole or in part, on March 19, 2025 and on December 19 every five years thereafter.

MFC.PR.N is a FixedReset, 3.80%+230, that commenced trading 2014-12-3 after being announced 2014-11-26. The company provided notice of extension 2020-2-3. The issue will reset at 3.675% effective 2020-3-20. It is tracked by HIMIPref™ and is assigned to the FixedReset – Insurance non-NVCC subindex.

It is interesting to note that the recent declines in GOC-5 yields has actually resulted in an increase in the yield-spread between the notional non-callable MFC FixedReset and GOC-5 according to Implied Volatility Analysis:

Click for Big

Click for Big

Partners Value Split Corp. has announced (on March 2, although not yet on their website):

the completion of its previously announced issue of 6,000,000 Class AA Preferred Shares, Series 10 (the “Series 10 Preferred Shares”) at an offering price of $25.00 per Series 10 Preferred Share, raising gross proceeds of $150,000,000. The Series 10 Preferred Shares carry quarterly fixed cumulative preferential dividends representing a 4.70% annualized yield on the offering price and have a final maturity of February 28, 2027. The Series 10 Preferred Shares have been listed and posted for trading on the Toronto Stock Exchange under the symbol PVS.PR.H. The net proceeds of the offering will be used to pay a special dividend on the Company’s capital shares.

Prior to the closing of the offering, the Company subdivided the existing capital shares held by Partners Value Investments Inc. so that there are an equal number of preferred shares and capital shares outstanding.

The Company owns a portfolio consisting of 79,740,966 Class A Limited Voting Shares of Brookfield Asset Management Inc. (the “Brookfield Shares”) which is expected to yield quarterly dividends that are sufficient to fund quarterly fixed cumulative preferential dividends for the holders of the Company’s preferred shares and to enable the holders of the Company’s capital shares to participate in any capital appreciation of the Brookfield Shares. Brookfield Asset Management Inc. (“BAM”) is a leading global alternative asset manager with over US$540 billion of assets under management across real estate, infrastructure, renewable power, private equity and credit. BAM owns and operates long-life assets and businesses, many of which form the backbone of the global economy. Utilizing its global reach, access to large-scale capital and operational expertise, BAM offers a range of alternative investment products to investors around the world—including public and private pension plans, endowments and foundations, sovereign wealth funds, financial institutions, insurance companies and private wealth investors. BAM is listed on the New York Stock Exchange and Toronto Stock Exchange under the symbol BAM and BAM.A respectively.

PVS.PR.H is a SplitShare, 4.70%, 7-Year, that was announced February 20. It will be tracked by HIMIPref™ and has been assigned to the SplitShares subindex.

DBRS rates it Pfd-2(low):

DBRS Limited (DBRS Morningstar) finalized its provisional rating of Pfd-2 (low) on the Class AA Preferred Shares, Series 10 (the Series 10 Preferred Shares) issued by Partners Value Split Corp. (the Company) that will rank pari passu with the existing Class AA Preferred Shares, Series 6; the Class AA Preferred Shares, Series 7; the Class AA Preferred Shares, Series 8; and the Class AA Preferred Shares, Series 9 (collectively, the Class AA Preferred Shares).

he Series 10 Preferred Shareholders will be entitled to receive a quarterly, fixed, cumulative dividend of $0.29375 per share to yield 4.70% per annum on the issue price of $25.00. The maturity date for the new series is February 28, 2027. Proceeds from the Series 10 Preferred Share offering will be used to pay a special dividend on Capital Shares (the Capital Shares).

The Company owns a portfolio (the Portfolio) of Brookfield Asset Management Inc. (BAM; rated A (low) with a Stable trend by DBRS Morningstar) Class A Limited Voting Shares (the BAM Shares). Dividends from the Portfolio are used to fund the payment of interest on the debentures to the extent that any have been issued and to fund the payment of dividends on the Class AA Preferred Shares. There are 700 Series 6 Debentures outstanding (as a result of the retraction of 700 Class AA Preferred Shares, Series 8) and 3,200 Series 7 Debentures (as a result of the retraction of 3,200 Class AA Preferred Shares, Series 9).

All series of Class AA Preferred Shares rank senior to the Capital Shares, the Class AAA Preferred Shares, and the Junior Preferred Shares, Series 1 and the Junior Preferred Shares, Series 2 (collectively, the Junior Preferred Shares) and rank pari passu with all other Class AA Preferred Shares with respect to the payment of dividends and repayment of principal.

he Junior Preferred Shareholders are entitled to receive quarterly noncumulative cash distributions at an annual rate of 5% when declared by the board of directors. There is $245 million worth of Junior Preferred Shares currently outstanding. The Company’s Capital Shareholders will only receive excess dividend income after interest on the debentures, Class AA Preferred Share distributions, Junior Preferred Share Distributions, and other Company expenses have been paid. Any capital appreciation of the BAM Shares will benefit the Capital Shareholders.

The Company has issued a limited number of Class A Voting Shares that rank senior to the Class AA Preferred Shares in respect of capital upon the Company’s dissolution, winding up, or insolvency. As of June 30, 2019, there was $100 worth of such shares outstanding.

Following the issuance of the Series 10 Preferred Shares, the downside protection available to the Class AA Preferred Shares is expected to be approximately 88.9% and the dividend coverage ratio is expected to be approximately 2.1 times (x; based on the Canadian dollar and U.S. dollar exchange rate as of February 26, 2020). BAM declares its dividends in U.S. dollars; consequently, there is risk that an appreciating Canadian dollar will cause the dividend coverage ratio to fall below 1.0x times. In the event of a shortfall, the Company may sell some BAM Shares, engage in security lending, or write covered call options to generate sufficient income to satisfy its obligations to pay the Class AA Preferred Shares dividends. If the Company chooses to lend its holdings, the Portfolio would be exposed to the potential losses if the borrower defaults on its obligations to return the borrowed securities.

The main constraints to the ratings are the following:

(1) The downside protection available to Class AA Preferred Shareholders depends solely on the market value of BAM Shares held in the Portfolio, which will fluctuate over time.

(2) There is a lack of diversification as the Portfolio is entirely made up of BAM Shares.

(3) Changes in BAM’s dividend policy may result in reductions in Class AA Preferred Shares dividend coverage.

(4) As BAM declares dividends in U.S. dollars, the Company is exposed to foreign currency risk relating to the Canadian-U.S. exchange rate, specifically the appreciation of the Canadian dollar versus the U.S. dollar. This may have a negative impact on the dividend coverage ratio of the Class AA Preferred Shares as these dividends are paid in Canadian dollars.

(5) Downside protection available to the Class AA Preferred Shares may be negatively affected by the retraction of the Junior Preferred Shares.

Opening day volume was 492,801. Vital statistics on 2020-3-2 are:

Fairfax Financial Holdings Limited has announced:

that it has determined the fixed dividend rate on its Cumulative 5-Year Rate Reset Preferred Shares, Series M (“Series M Shares”) (TSX: FFH.PR.M) for the five years commencing April 1, 2020 and ending March 31, 2025. The fixed quarterly dividends on the Series M Shares during that period, if and when declared, will be paid at an annual rate of 5.003% (C$0.312688 per share per quarter).

Holders of Series M Shares have the right, at their option, exercisable not later than 5:00 p.m. (Toronto time) on March 16, 2020, to convert all or part of their Series M Shares, on a one-for-one basis, into Cumulative Floating Rate Preferred Shares, Series N (the “Series N Shares”), effective March 31, 2020. The quarterly floating rate dividends on the Series N Shares will be paid at an annual rate, calculated for each quarter, of 3.98% over the annual yield on three-month Government of Canada treasury bills. The actual quarterly dividend rate in respect of the April 1, 2020 to June 29, 2020 dividend period for the Series N Shares will be 1.38526% (5.61801% on an annualized basis) and the dividend for such dividend period, if and when declared, will be C$0.34632 per share, payable on June 29, 2020.

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

As provided in the share conditions of the Series M Shares: (i) if Fairfax determines that there would be fewer than 1,000,000 Series M Shares outstanding after March 31, 2020, all remaining Series M Shares will be automatically converted into Series N Shares on a one-for-one basis effective March 31, 2020; and (ii) if Fairfax determines that there would be fewer than 1,000,000 Series N Shares outstanding after March 31, 2020, no Series M Shares will be permitted to be converted into Series N Shares and Fairfax will cause the return of all Series M Shares tendered for conversion into Series N Shares. There are currently 9,200,000 Series M Shares outstanding.

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

FFH.PR.M is a FixedReset, 4.75%+398, that commenced trading 2015-3-3 after being announced 2015-2-20. It is tracked by HIMIPref™ but has been relegated to the Scraps-FixedReset (Discount) subindex on credit concerns.

The most logical way to analyze the question of whether or not to convert is through the theory of Preferred Pairs, for which a calculator is available. Briefly, a Strong Pair is defined as a pair of securities that can be interconverted in the future (e.g., FFH.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 shows odd differences in its 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 +0.70% and +1.78% (ignoring the outliers AIM.PR.A / AIM.PR.B, and FFH.PR.E / FFH.PR.F, both of which Exchange 2020-3-31; as well as FFH.PR.G / FFH.PR.H), 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.

The breakeven rate for the junk pairs has been relatively high recently; I confess I’m not quite sure what to make of it.

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.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 at about the same price as their FixedReset counterparts, FFH.PR.M. Therefore, it seems likely that I will recommend that holders of FFH.PR.M make their own decision based on their own portfolios and financial circumstances, but I will wait until it’s closer to the March 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.

Fairfax Financial Holdings Limited has announced:

that it has determined the fixed dividend rate on its Cumulative 5-Year Rate Reset Preferred Shares, Series E (the “Series E Shares”) (TSX: FFH.PR.E) for the five years commencing April 1, 2020 and ending March 31, 2025. The fixed quarterly dividends on the Series E Shares during that period, if and when declared, will be paid at an annual rate of 3.183% (C$0.198938 per share per quarter).

Holders of Series E Shares have the right, at their option, exercisable not later than 5:00 p.m. (Toronto time) on March 16, 2020, to convert all or part of their Series E Shares, on a one-for-one basis, into Cumulative Floating Rate Preferred Shares, Series F (the “Series F Shares”) (TSX: FFH.PR.F), effective March 31, 2020. The quarterly floating rate dividends on the Series F Shares will be paid at an annual rate, calculated for each quarter, of 2.16% over the annual yield on three-month Government of Canada treasury bills. The actual quarterly dividend rate in respect of the March 31, 2020 to June 29, 2020 dividend period for the Series F Shares will be 0.94690% (3.79801% on an annualized basis) and the dividend for such dividend period, if and when declared, will be C$0.23673 per share, payable on June 29, 2020.

Holders of Series F Shares also have the right, at their option, exercisable not later than 5:00 p.m. (Toronto time) on March 16, 2020, to convert all or part of their Series F Shares, on a one-for-one basis, into Series E Shares, effective March 31, 2020. Holders of the Series F Shares who elect to convert their shares by the conversion deadline will receive Series E Shares effective March 31, 2020 and will be entitled to receive, if and when declared, the fixed-rate dividend as described above.

Holders of Series E Shares are not required to elect to convert all or any part of their Series E Shares into Series F Shares and holders of Series F Shares are not required to elect to convert all or any part of their Series F Shares into Series E Shares. Holders of the Series E Shares who do not elect to convert their shares by the conversion deadline will retain their Series E Shares and will receive the fixed-rate dividend as described above (subject to the automatic conversion features described below). Holders of the Series F Shares who do not elect to convert their shares by the conversion deadline will retain their Series F 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 E Shares and the Series F Shares: (i) if Fairfax determines that there would be fewer than 1,000,000 Series E Shares outstanding after March 31, 2020, all remaining Series E Shares will be automatically converted into Series F Shares on a one-for-one basis effective March 31, 2020 and Fairfax will cause the return of all Series F Shares tendered for conversion into Series E Shares; and (ii) if Fairfax determines that there would be fewer than 1,000,000 Series F Shares outstanding after March 31, 2020, all remaining Series F Shares will be automatically converted into Series E Shares on a one-for-one basis effective March 31, 2020 and Fairfax will cause the return of all Series E Shares tendered for conversion into Series F Shares.

There are currently 3,967,134 Series E Shares and 3,572,044 Series F Shares outstanding. The Series E Shares and the Series F Shares are listed on the Toronto Stock Exchange under the trading symbols “FFH.PR.E” and “FFH.PR.F”, respectively.

FFH.PR.E commenced trading 2010-2-1 as a FixedReset, 4.75%+216, after being announced 2010-1-21. It reset in 2015 to 2.91% and I recommended against conversion; there was a 31% conversion to the FloatingReset, FFH.PR.F, anyway.

FFH.PR.F commenced trading in 2015 as a result of the 31% conversion from FFH.PR.E noted above.

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.E and the FloatingReset FFH.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). 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 shows odd differences in its 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 +0.70% and +1.78% (ignoring the outliers AIM.PR.A / AIM.PR.B, and FFH.PR.E / FFH.PR.F, both of which Exchange 2020-3-31; as well as FFH.PR.G / FFH.PR.H), 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.

The breakeven rate for the junk pairs has been relatively high recently; I confess I’m not quite sure what to make of it.

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.E FixedReset, we may construct the following table showing consistent prices for its soon-may-be-issued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:

Before I get eviscerated in the comments, please note that I am well aware that FFH.PR.F is trading and is quoted with a bid of 12.70. Who cares? At the moment, the issues are interconvertible effective March 31 and are therefore exactly same thing (except for a minor difference in final dividend) 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 FFH.PR.F that will result from conversion are likely to trade at about the same price as their FixedReset counterparts, FFH.PR.E. Therefore, it seems likely that I will recommend that holders of FFH.PR.E and FFH.PR.F make their own decision based on their own portfolios and financial circumstances, but I will wait until it’s closer to the March 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.

Aimia has announced (on February 28):

the applicable dividend rates for its Cumulative Rate Reset Preferred Shares, Series 1 (the “Series 1 Preferred Shares”) and its Cumulative Floating Rate Preferred Shares, Series 2 (the “Series 2 Preferred Shares”), further to the February 25, 2020 notice and announcement that it will not exercise its right to redeem all or any part of the outstanding Series 1 Preferred Shares or Series 2 Preferred Shares and, as a result of which, subject to certain conditions, the holders of the Series 1 Preferred Shares will have the right to convert all or any number of their Series 1 Preferred Shares into Series 2 Preferred Shares and the holders of the Series 2 Preferred Shares will have the right to convert all or any number of their Series 2 Preferred Shares into Series 1 Preferred Shares, in each case on a one-for-one basis.

With respect to any Series 1 Preferred Shares that remain outstanding on or after March 31, 2020, holders of the Series 1 Preferred Shares will be entitled to receive quarterly fixed, cumulative, preferential cash dividends, as and when declared by the company’s Board of Directors, subject to compliance with the provisions of the Canada Business Corporations Act. The dividend rate for the five-year period from and including March 31, 2020 up to but excluding March 31, 2025 will be 4.802%, being 3.75% over the five-year Government of Canada bond yield, as determined in accordance with the rights, privileges, restrictions and conditions attaching to the Series 1 Preferred Shares.

With respect to any Series 2 Preferred Shares that remain outstanding on or after March 31, 2020, holders of the Series 2 Preferred Shares will be entitled to receive quarterly floating rate, cumulative, preferential cash dividends, calculated on the basis of the actual number of days elapsed in such quarterly period divided by 365, as and when declared by the Board of Directors of Aimia, subject to the provisions of the Canada Business Corporations Act. The dividend rate for the floating rate period from and including March 31, 2020 up to but excluding June 30, 2020 will be 5.392%, being 3.75% over the three-month Government of Canada Treasury Bill yield, as determined in accordance with the rights, privileges, restrictions and conditions attaching to the Series 2 Preferred Shares.

The Series 1 Preferred Shares and the Series 2 Preferred Shares are issued in “book entry only” form and must be purchased or transferred through a participant (a “CDS Participant”) in the depository service of CDS Clearing and Depository Services Inc. (“CDS”). All rights of holders of Series 1 Preferred Shares and Series 2 Preferred Shares must be exercised through CDS or the CDS Participant through which the Series 1 Preferred Shares or Series 2 Preferred Shares are held, as the case may be. As such, beneficial owners of Series 1 Preferred Shares or of Series 2 Preferred Shares who wish to exercise their conversion right should communicate as soon as possible with their broker or other nominee to obtain instructions for exercising such right through CDS on or prior to the deadline for exercise, which is 5:00 p.m. (Montreal time) on March 16, 2020 for CDS as sole registered holder of the Series 1 Preferred Shares and the Series 2 Preferred Shares but 1:00 p.m. (Montreal time) on March 16, 2020 for beneficial holders wishing to exercise their conversion right through CDS Participants.

Inquiries should be directed to Aimia’s Registrar and Transfer Agent, AST Trust Company (Canada), at 1-800-387-0825 (toll free in Canada and the United States).

AIM.PR.A is a FixedReset, 4.50%+375, assigned to the Scraps-FixedReset (Discount) subindex. It commenced trading as AER.PR.A with an initial dividend rate of 6.50% on 2010-1-20 after being announced 2010-1-12. AIM.PR.A changed its ticker from AER.PR.A in October, 2011. The first extension was reported on PrefBlog and the reset to 4.50% was announced 2015-3-2. I recommended against conversion. There was a 43% conversion to the FloatingReset, AIM.PR.B in 2015. The 2020 extension was announced 2020-2-25.

AIM.PR.B commenced trading 2015-3-31 as the result of the 43% conversion from AIM.PR.A noted above.

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., AIM.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 shows odd differences in its 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 +0.70% and +1.78% (ignoring the outliers AIM.PR.A / AIM.PR.B, and FFH.PR.E / FFH.PR.F, both of which Exchange 2020-3-31; as well as FFH.PR.G / FFH.PR.H), 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.

The breakeven rate for the junk pairs has been relatively high recently; I confess I’m not quite sure what to make of it.

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 AIM.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 AIM.PR.B is trading and is quoted with a bid of 13.70. Who cares? At the moment, the issues are interconvertible effective March 31 and are therefore exactly same thing (except for a minor difference in final dividend) 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 AIM.PR.B that will result from conversion are likely to trade at about the same price as their FixedReset counterparts, AIM.PR.A. Therefore, it seems likely that I will recommend that holders of AIM.PR.A and AIM.PR.B make their own decision based on their own portfolios and financial circumstances, but I will wait until it’s closer to the March 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.