PrefBlog

DBRS has announced that it:

placed its credit ratings on Laurentian Bank of Canada (LBC or the Bank), including the Bank’s Long-Term Issuer Rating of A (low), Under Review with Negative Implications following a series of recent adverse developments, including the departures of LBC’s chief executive officer (CEO) and chair of the board as well as a mainframe outage that lasted several days before being resolved. The Bank’s Intrinsic Assessment of A (low) and Support Assessment (SA) of SA3 remain unchanged. The SA3 designation reflects no expectation of timely external support.

KEY CREDIT RATING CONSIDERATIONS
The Under Review with Negative Implications designation reflects DBRS Morningstar’s view that these adverse series of events in aggregate have weakened LBC’s franchise strength and future growth prospects, pressuring the credit ratings. LBC’s Personal Banking business, which has already had weaker earnings than its peers, has been under pressure with customer attrition, shrinking loans, and stagnant deposits in recent years. In DBRS Morningstar’s view, the mainframe outage that disrupted online access to retail and business accounts for four days could make it even more difficult for current management to turn around the important Personal Banking segment.

DBRS Morningstar’s review will assess the extent the rapid succession of executive departures and operational missteps have had on the Bank’s franchise and risk profile, along with the Bank’s ability to improve earnings and future prospects in light of the uncertainty of its strategic direction moving forward.

CREDIT RATING DRIVERS
Given the credit ratings are Under Review with Negative Implications, credit rating upgrades are unlikely. DBRS Morningstar would confirm the credit ratings with Stable trends if DBRS Morningstar views recent events as having no impact on LBC’s financial performance or franchise.

The credit ratings would be downgraded if DBRS Morningstar views the executive departures and operational risks exposed by the extended mainframe outage as negatively affecting the franchise and the Bank’s ability to produce sustained improvement in its financial performance. Increased pressures on funding and liquidity or additional operational missteps would also result in a credit rating downgrade.

CREDIT RATING RATIONALE
Franchise Combined Building Block (BB) Assessment: Good/Moderate

LBC is Canada’s eighth-largest Schedule I bank with assets of $50.6 billion as at July 31, 2023. The Bank offers retail services in Québec through its branch network as well as commercial lending across Canada and in the U.S. LBC also distributes financial products to brokers and financial advisors across Canada through its wholesale arm, B2B Bank. Over the past few years through 2022, LBC’s Personal Banking business faced customer attrition, shrinking loans, and stagnant deposits. Almost two years into the current strategic plan that was unveiled on December 10, 2021, the Bank has undertaken a digital-first approach and introduced new and enhanced digital capabilities to close gaps in its Personal Banking business, particularly across mortgage, Visa, and deposit products. On October 2, 2023, following the mainframe outage, the Bank announced the sudden and unexpected departure of its president and CEO, Rania Llewellyn, and the resignation of its board chair, Michael Mueller. With Éric Provost only recently being appointed as president and CEO, there remains limited visibility on LBC’s long-term strategic direction, although the Bank’s current focus is on improving operating efficiency and simplifying the organizational structure.

Earnings Combined Building Block (BB) Assessment: Good/Moderate
Relative to its peers, LBC has demonstrated lower profitability although it has a higher share of noninterest income at about 28% of total revenue for the first nine months of F2023. The Bank’s net income decreased by about 12.0% year over year (YOY) to $150.5 million for the first nine months of F2023 as a result of lower noninterest income and higher provision for credit losses and operating expenses. While a decrease in noninterest income was driven by reduced capital market revenue, noninterest expenses increased on higher salaries, employee benefits, and ongoing investments in technology. As a result, the operating efficiency ratio deteriorated to 70.4% for the first nine months of F2023 from 67.6% for the same period of 2022. Partly offsetting the downward pressure on net earnings, net interest income grew 2.5% YOY to $563.4 million for the first nine months of F2023; however, the net interest margin as calculated by DBRS Morningstar compressed by 7 basis points (bps) to 1.52%, primarily from higher funding costs.

Risk Combined Building Block (BB) Assessment: Good
Amounting to $37.0 billion as at Q3 2023, gross loans saw sluggish growth of about 1.2% YOY compared with 10.9% in the prior-year period. Lower non-mortgage personal loans partly offset an increase in residential mortgages and commercial loans. The bulk of credit risk lies in the commercial book, which accounted for about 48% of total loans as at Q3 2023 and has concentrations in commercial real estate and inventory financing. Overall, the Bank’s asset quality is good with low impairments and loan losses. The gross impaired loans ratio marginally increased by 11 bps YOY to 55 bps at the end of Q3 2023, largely because of increased impairments in commercial mortgages. As with the rest of the banking sector, DBRS Morningstar expects asset quality metrics to further deteriorate from their current levels in the short to intermediate term amid the challenging macroeconomic environment. Furthermore, if not managed prudently, the Bank’s continued realignment of the loan portfolio and geographic expansion, as well as deficiencies in IT capabilities and uncertainties around its new strategic direction, could expose LBC to heightened levels of operational and credit risk.

Funding and Liquidity Combined Building Block (BB) Assessment: Good/Moderate
Despite recent events, LBC’s overall funding and liquidity position has remained stable. Accounting for about 66% of the funding base, total deposits, including capital market deposits, declined by 3.0% year to date to $26.3 billion for the first nine months of F2023 and were in line with a reduction in the loan book. Personal deposits, which represented 85% of total deposits, marginally increased to $22.4 billion for the first nine of months of F2023 on the back of an uptick in direct retail deposits, which were partly offset by a decline in broker-sourced deposits. The Bank expects to attract more direct client deposits on a national level in the coming years, which DBRS Morningstar would view favourably over broker deposits. Liquidity levels, which include cash and Government of Canada securities, are sufficient to meet the Bank’s needs, with liquid assets forming 24% of total assets as at Q3 2023.

Capitalisation Combined Building Block (BB) Assessment: Good/Moderate
LBC’s capital ratios under the standardized approach are above regulatory minimums and provide adequate buffers to absorb stressed levels of loan losses. DBRS Morningstar would view favourably a larger capital buffer, sufficient to absorb significant losses, especially as the Bank undertakes an “accelerated evolution of its strategic plan” and continues to grow its commercial loan book, which may be more susceptible to weakness in the event of a sustained economic downturn. The CET1 capital ratio increased to 9.8% as at Q3 2023, compared with 9.1% as at Q3 2022, primarily reflecting lower risk-weighted assets as well as internal capital generation.

The affected issue is LB.PR.H.

BCE Inc. has announced:

that the Toronto Stock Exchange (the “TSX”) has accepted a notice filed by BCE of its intention to renew its normal course issuer bid (“NCIB”) to purchase up to 10% of the public float of each series of BCE’s outstanding First Preferred Shares that are listed on the TSX (the “Preferred Shares”). The period of the NCIB will extend from November 9, 2023 to November 8, 2024, or an earlier date should BCE complete its purchases under the NCIB. BCE will pay the prevailing market price at the time of acquisition for any Preferred Shares purchased plus brokerage fees payable by BCE (except with respect to purchases made under an issuer bid exemption order, which will be at a discount to the prevailing market price), and all Preferred Shares acquired by BCE under the NCIB will be cancelled.

The actual number of Preferred Shares repurchased under the NCIB and the timing of such repurchases will be at BCE’s discretion and shall be subject to the limitations set out in the TSX Company Manual.

The NCIB will be conducted through a combination of discretionary transactions and purchases under an automatic securities purchase plan through the facilities of the TSX as well as alternative trading systems in Canada, if eligible, or by such other means as may be permitted by securities regulatory authorities, including pre-arranged crosses, exempt offers, private agreements under an issuer bid exemption order issued by securities regulatory authorities and block purchases of Preferred Shares. Purchases made under an issuer bid exemption order will be at a discount to the prevailing market price.

Under the NCIB, BCE is authorized to repurchase shares of each respective series of the Preferred Shares as follows:

					Maximum Number of Shares Subject to Purchase
Series	Ticker	Issued and Outstanding Shares(1)	Public Float(1)	Average Daily Trading Volume(2)	Total(3)	Daily(4)
R	BCE.PR.R	7,894,800	7,894,800	5,406	789,480	1,351
S	BCE.PR.S	2,064,967	2,064,967	1,499	206,496	1,000
T	BCE.PR.T	5,354,833	5,354,833	4,556	535,483	1,139
Y	BCE.PR.Y	6,667,052	6,667,052	4,878	666,705	1,219
Z	BCE.PR.Z	2,785,698	2,785,698	1,827	278,569	1,000
AA	BCE.PR.A	11,604,661	11,604,661	9,332	1,160,466	2,333
AB	BCE.PR.B	7,055,639	7,055,639	5,602	705,563	1,400
AC	BCE.PR.C	6,505,774	6,505,774	5,029	650,577	1,257
AD	BCE.PR.D	12,671,126	12,671,126	11,791	1,267,112	2,947
AE	BCE.PR.E	6,097,913	6,097,913	5,653	609,791	1,413
AF	BCE.PR.F	9,145,387	9,145,387	5,502	914,538	1,375
AG	BCE.PR.G	8,636,930	8,636,930	4,969	863,693	1,242
AH	BCE.PR.H	4,878,370	4,878,370	2,998	487,837	1,000
AI	BCE.PR.I	9,362,540	9,362,540	4,724	936,254	1,181
AJ	BCE.PR.J	4,279,960	4,279,960	1,509	427,996	1,000
AK	BCE.PR.K	22,455,312	22,455,312	15,074	2,245,531	3,768
AL	BCE.PR.L	1,761,188	1,761,188	795	176,118	1,000
AM	BCE.PR.M	10,253,978	10,253,978	6,779	1,025,397	1,694
AN	BCE.PR.N	1,042,322	1,042,322	741	104,232	1,000
AQ	BCE.PR.Q	8,410,414	8,410,414	8,561	841,041	2,140
(1) As of October 31, 2023.
(2) For the 6 months ended October 31, 2023.
(3) Represents approximately 10% of the public float in respect of each series of Preferred Shares.
(4)Represents the maximum number of shares of each series of Preferred Shares that may be purchased over the TSX (or alternative trading systems in Canada, if eligible) during the course of one trading day. This amount is equal to the greater of (i) 25% of the average daily trading volume on the TSX calculated in accordance with the rules of the TSX, and (ii) 1,000 shares. This limitation does not apply to purchases made pursuant to block purchase exemptions.

BCE is making this NCIB because it believes that, from time to time, the Preferred Shares may trade in price ranges that do not fully reflect their value. BCE believes that, in such circumstances, the repurchase of its Preferred Shares represents an appropriate use of its available funds.

As of October 31, 2023, under its current normal course issuer bid that commenced on November 9, 2022 and will expire on November 8, 2023, and for which the company received approval from the TSX, BCE purchased, through the facilities of the TSX and alternative eligible trading systems, Preferred Shares as follows:

Series	Ticker	Maximum Number of Shares Subject to Purchase	Number of Shares Purchased	Weighted Average Price Paid per Security
R	BCE.PR.R	799,890	104,100	$14.76
S	BCE.PR.S	212,826	63,300	$18.05
T	BCE.PR.T	587,013	515,300	$17.85
Y	BCE.PR.Y	807,929	353,200	$17.76
Z	BCE.PR.Z	191,850	191,850	$19.11
AA	BCE.PR.A	1,230,766	703,000	$16.83
AB	BCE.PR.B	768,873	633,100	$17.95
AC	BCE.PR.C	1,002,799	238,500	$16.61
AD	BCE.PR.D	996,320	575,800	$17.90
AE	BCE.PR.E	651,291	415,800	$18.22
AF	BCE.PR.F	948,148	336,100	$16.04
AG	BCE.PR.G	897,953	342,600	$15.15
AH	BCE.PR.H	501,757	139,200	$18.08
AI	BCE.PR.I	953,504	172,500	$15.12
AJ	BCE.PR.J	446,496	185,000	$18.22
AK	BCE.PR.K	2,319,031	735,000	$14.22
AL	BCE.PR.L	179,938	38,200	$16.25
AM	BCE.PR.M	1,043,997	186,000	$14.71
AN	BCE.PR.N	105,472	12,400	$17.16
AQ	BCE.PR.Q	920,000	789,586	$20.50

BCE will enter into an automatic securities purchase plan (“ASPP”) with a designated broker in relation to the NCIB on or about the commencement date of the NCIB. The ASPP will allow for the purchase of Preferred Shares, subject to certain trading parameters, at times when BCE ordinarily would not be active in the market due to applicable regulatory restrictions or self-imposed trading black-out periods. Outside of these periods, the Preferred Shares will be repurchased by BCE at its discretion under the NCIB.

Geez, I hate these press releases with big tables in them – they take forever to format into HTML! But worth it, in this case – this is a really meaningful NCIB!

Thanks to Assiduous Reader Peculiar_Investor for bringing this to my attention!

Enbridge Inc. has announced:

that it does not intend to exercise its right to redeem its currently outstanding Cumulative Redeemable Preference Shares, Series N (Series N Shares) (TSX: ENB.PR.N) on December 1, 2023. As a result, subject to certain conditions, the holders of the Series N Shares have the right to convert all or part of their Series N Shares on a one-for-one basis into Cumulative Redeemable Preference Shares, Series O of Enbridge (Series O Shares) on December 1, 2023. Holders who do not exercise their right to convert their Series N Shares into Series O Shares will retain their Series N Shares.

The foregoing conversion right is subject to the conditions that: (i) if Enbridge determines that there would be less than 1,000,000 Series N Shares outstanding after December 1, 2023, then all remaining Series N Shares will automatically be converted into Series O Shares on a one-for-one basis on December 1, 2023; and (ii) alternatively, if Enbridge determines that there would be less than 1,000,000 Series O Shares outstanding after December 1, 2023, no Series N Shares will be converted into Series O Shares. There are currently 18,000,000 Series N Shares outstanding.

With respect to any Series N Shares that remain outstanding after December 1, 2023, holders thereof will be entitled to receive quarterly fixed cumulative preferential cash dividends, as and when declared by the Board of Directors of Enbridge. The new annual dividend rate applicable to the Series N Shares for the five-year period commencing on December 1, 2023 to, but excluding, December 1, 2028 will be 6.696 percent, being equal to the five-year Government of Canada bond yield of 4.046 percent determined as of today plus 2.65 percent in accordance with the terms of the Series N Shares.

With respect to any Series O Shares that may be issued on December 1, 2023, holders thereof will be entitled to receive quarterly floating rate cumulative preferential cash dividends, as and when declared by the Board of Directors of Enbridge. The dividend rate applicable to the Series O Shares for the three-month floating rate period commencing on December 1, 2023 to, but excluding, March 1, 2024 will be 1.94183 percent, based on the annual rate on three month Government of Canada treasury bills for the most recent treasury bills auction of 5.16 percent plus 2.65 percent in accordance with the terms of the Series O Shares (the Floating Quarterly Dividend Rate). The Floating Quarterly Dividend Rate will be reset every quarter.

Beneficial holders of Series N Shares who wish to exercise their right of conversion during the conversion period, which runs from November 1, 2023 until 5:00 p.m. (EST) on November 16, 2023, should communicate as soon as possible with their broker or other intermediary for more information. It is recommended that this be done well in advance of the deadline in order to provide the broker or other intermediary time to complete the necessary steps. Any notices received after this deadline will not be valid.

ENB.PR.N was issued as a FixedReset, 4.00%+265, that commenced trading 2012-7-17 after being announced 2012-7-9. The issue reset at 5.086% in 2018. I recommended against conversion and there was no conversion. ENB.PR.N is tracked by HIMIPref™ and assigned to the “Scraps – FixedResets (Discount)” subindex, relegated there due to credit concerns.

Thanks to Assiduous Reader CanSiamCyp for bringing this to my attention!

Pembina Pipeline Corporation has announced:

that it does not intend to exercise its right to redeem the currently outstanding Cumulative Redeemable Rate Reset Class A Preferred Shares, Series 1 (“Series 1 Shares”) (TSX: PPL.PR.A) on December 1, 2023.

As a result of the decision not to redeem the Series 1 Shares, and subject to certain terms of the Series 1 Shares, the holders of the Series 1 Shares will have the right to elect to convert all or part of their Series 1 Shares on a one-for-one basis into Cumulative Redeemable Floating Rate Class A Preferred Shares, Series 2 of Pembina (“Series 2 Shares”) on December 1, 2023 (the “Conversion Date”). Holders who do not exercise their right to convert their Series 1 Shares into Series 2 Shares will retain their Series 1 Shares.

As provided in the terms of the Series 1 Shares: (i) if Pembina determines that there would remain outstanding immediately following the conversion less than 1,000,000 Series 1 Shares, then all remaining Series 1 Shares will be automatically converted into Series 2 Shares on a one-for-one basis effective as of the Conversion Date; or (ii) if Pembina determines that there would be less than 1,000,000 Series 2 Shares outstanding immediately following the conversion, no Series 1 Shares will be converted into Series 2 Shares on the Conversion Date. There are currently 10,000,000 Series 1 Shares outstanding.

With respect to any Series 1 Shares that remain outstanding after the Conversion Date, holders thereof will be entitled to receive quarterly fixed cumulative preferential cash dividends, if, as and when declared by the Board of Directors of Pembina. The annual dividend rate for the Series 1 Shares for the five-year period from and including December 1, 2023, to, but excluding, December 1, 2028, will be 6.525 percent, being equal to the five-year Government of Canada bond yield of 4.055 percent determined as of today plus 2.47 percent, in accordance with the terms of the Series 1 Shares.

With respect to any Series 2 Shares that may be issued on the Conversion Date, holders thereof will be entitled to receive quarterly floating rate cumulative preferential cash dividends, if, as and when declared by the Board of Directors of Pembina. The annual dividend rate applicable to the Series 2 Shares for the three-month floating rate period from and including December 1, 2023, to, but excluding, March 1, 2024, will be 7.631 percent, being equal to the annual rate of interest for the most recent auction of 90-day Government of Canada treasury bills of 5.161 percent plus 2.47 percent, in accordance with the terms of the Series 2 Shares (the “Floating Quarterly Dividend Rate”). The Floating Quarterly Dividend Rate will be reset on the first day of March, June, September and December in each year.

Beneficial holders of Series 1 Shares who wish to exercise their right of conversion during the conversion period, which runs from November 1, 2023, until 3:00 pm (MT) / 5:00 pm (ET) on November 16, 2023, should communicate as soon as possible with their broker or other intermediary for more information. It is recommended that this be done well in advance of the deadline in order to provide the broker or other intermediary with the time to complete the necessary steps. Any notices received after this deadline will not be valid.

As previously announced, the dividend payable on December 1, 2023, to holders of the Series 1 Shares of record on November 1, 2023, will be $0.306625 per Series 1 Share. For more information on the terms of the Series 1 Shares and the Series 2 Shares, please see the prospectus supplement dated July 19, 2013, which can be found on SEDAR at www.sedarplus.ca.

PPL.PR.A was issued as a FixedReset, 4.25%+247, that commenced trading 2013-7-26 after being announced 2013-7-17. The issue reset at 4.906% in 2018. I recommended against conversion and there was no converesion. PPL.PR.A is tracked by HIMIPref™ and assigned to the “Scraps – FixedResets (Discount)” subindex, relegated there due to credit concerns.

Thanks to Assiduous Reader niagara for bringing this to my attention!