PrefBlog

Manulife Financial Corporation has announced (on February 3, but not yet on their website):

that it does not intend to exercise its right to redeem all or any 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) on March 19, 2020. As a result, subject to certain conditions described in the prospectus supplement dated November 26, 2014 relating to the issuance of the Series 19 Preferred Shares (the “Prospectus”), the holders of the Series 19 Preferred Shares have the right, at their option, to convert all or part of their Series 19 Preferred Shares on a one-for-one basis into Non-cumulative Floating Rate Class 1 Shares Series 20 of Manulife (the “Series 20 Preferred Shares”) on March 19, 2020. A formal notice of the right to convert Series 19 Preferred Shares into Series 20 Preferred Shares will be sent to the registered holders of the Series 19 Preferred Shares in accordance with the share conditions of the Series 19 Preferred Shares. Holders of Series 19 Preferred Shares are not required to elect to convert all or any part of their Series 19 Preferred Shares into Series 20 Preferred Shares. Holders who do not exercise their right to convert their Series 19 Preferred Shares into Series 20 Preferred Shares on such date will retain their Series 19 Preferred Shares, unless automatically converted in accordance with the conditions below.

The foregoing conversion right is subject to the conditions that: (i) if, after March 4, 2020, Manulife determines that there would be less than 1,000,000 Series 19 Preferred Shares outstanding on March 19, 2020, then all remaining Series 19 Preferred Shares will automatically be converted into an equal number of Series 20 Preferred Shares on March 19, 2020, and (ii) alternatively, if, after March 4, 2020, Manulife determines that there would be less than 1,000,000 Series 20 Preferred Shares outstanding on March 19, 2020, then no Series 19 Preferred Shares will be converted into Series 20 Preferred Shares. In either case, Manulife will give written notice to that effect to any registered holders of Series 19 Preferred Shares affected by the preceding minimums on or before March 11, 2020.

The dividend rate applicable to the Series 19 Preferred Shares for the 5-year period commencing on March 20, 2020, and ending on March 19, 2025, and the dividend rate applicable to the Series 20 Preferred Shares for the 3-month period commencing on March 20, 2020, and ending on June 19, 2020, will be determined and announced by way of a news release on February 19, 2020. Manulife will also give written notice of these dividend rates to the registered holders of Series 19 Preferred Shares.

Beneficial owners of Series 19 Preferred Shares who wish to exercise their right of conversion should instruct their broker or other nominee to exercise such right before 5:00 p.m. (Toronto time) on March 4, 2020. Conversion inquiries should be directed to Manulife’s Registrar and Transfer Agent, AST Trust Company (Canada), at 1-800-783-9495.

Subject to certain conditions described in the Prospectus, Manulife may redeem the Series 19 Preferred Shares, in whole or in part, on March 19, 2025 and on March 19 every five years thereafter and may redeem the Series 20 Preferred Shares, in whole or in part, after March 19, 2020.

The Toronto Stock Exchange (“TSX”) has conditionally approved the listing of the Series 20 Preferred Shares effective upon conversion. Listing of the Series 20 Preferred Shares is subject to Manulife fulfilling all the listing requirements of the TSX and, upon approval, the Series 20 Preferred Shares will be listed on the TSX under the trading symbol “MFC.PR.S”.

MFC.PR.N is a FixedReset, 3.80%+230, that commenced trading 2014-12-3 after being announced 2014-11-26. It is tracked by HIMIPref™ and is assigned to the FixedReset – Insurance non-NVCC subindex.

I will have more to say when the reset rate is announced on February 19.

National Bank of Canada has announced:

that none of its outstanding 12,000,000 Non-Cumulative 5-Year Rate Reset First Preferred Shares, Series 32 (the “Series 32 Preferred Shares”) will be converted on February 15, 2020 into Non-Cumulative Floating Rate First Preferred Shares, Series 33 (the “Series 33 Preferred Shares”).

During the conversion period, 58,495 Series 32 Preferred Shares were tendered for conversion into Series 33 Preferred Shares, which is less than the minimum 1,000,000 required to give effect to the conversion, as per the terms of the Series 32 Preferred Shares described in the prospectus supplement dated October 2, 2014.

As a result, no Series 33 Preferred Shares will be issued on February 15, 2020 and holders of Series 32 Preferred Shared will retain their shares.

The Series 32 Preferred Shares are currently listed on the Toronto Stock Exchange under the symbol NA.PR.W. The annual dividend rate for such shares for the five-year period commencing on February 16, 2020, and ending on February 15, 2025, will be 3.839% .

It will be recalled that NA.PR.W will reset at 3.839% effective February 16, 2020.

NA.PR.W is a FixedReset, 3.90%+225, that commenced trading 2014-10-9 after being announced 2014-9-30. The company announced the extension on 2019-12-19. NA.PR.W will reset at 3.839% effective February 16, 2020. I recommended against conversion. The issue is tracked by HIMIPref™ and is assigned to the FixedReset (Discount) subindex.

Brompton Group has announced:

) Brompton Split Banc Corp. (the “Company”) is pleased to announce it is undertaking an overnight treasury offering of class A and preferred shares (the “Class A Shares” and “Preferred Shares”, respectively).

The sales period for this overnight offering will end at 9:00 a.m. (ET) on Tuesday, February 4, 2020. The offering is expected to close on or about February 13, 2020 and is subject to certain closing conditions including approval by the Toronto Stock Exchange (“TSX”).

The Class A Shares will be offered at a price of $13.00 per Class A Share for a distribution rate of 9.2% on the issue price, and the Preferred Shares will be offered at a price of $10.25 per Preferred Share for a yield to maturity of 4.3%. (1) The closing price on the TSX for each of the Class A and Preferred Shares on January 31, 2020 was $13.11 and $10.60, respectively. The Class A and Preferred Share offering prices were determined so as to be non-dilutive to the most recently calculated net asset value per unit of the Company (calculated as at January 31, 2020), as adjusted for dividends and certain expenses to be accrued prior to or upon settlement of the offering.

The Company invests in a portfolio (the “Portfolio”) consisting of common shares of the six largest Canadian banks: Royal Bank of Canada, The Bank of Nova Scotia, National Bank of Canada, The Toronto-Dominion Bank, Canadian Imperial Bank of Commerce and Bank of Montreal. In addition, the Company may hold up to 10% of the total assets of the Portfolio in investments in global financial companies for the purpose of enhanced diversification and return potential.

The investment objectives for the Class A Shares are to provide holders with regular monthly cash distributions targeted to be at least $0.10 per Class A Share and to provide the opportunity for growth in the net asset value per Class A Share.

The investment objectives for the Preferred Shares are to provide holders with fixed cumulative preferential quarterly cash distributions, currently in the amount of $0.125 per Preferred Share, and to return the original issue price to holders of Preferred Shares on November 29, 2022.

The syndicate of agents for the offering is being led by RBC Capital Markets, CIBC Capital Markets, National Bank Financial Inc. and Scotiabank.

The NAVPU of the Whole Units (determined by adding the NAVPU of the Capital Units to the NAVPU of the preferred shares) is 22.76 and the Whole Units are being offered at 23.25, so that’s a premium of a little under 2.2%. What a great business this is, when it works! It’s very interesting to see that the preferreds are being offered at a significant discount to their market value … I’ve had a look at the Underwriting agreement for the 2019 Treasury offering (available on SEDAR; search for “Brompton Split Banc Corp. Feb 21 2019 19:20:04 ET Underwriting or agency agreements (or amendment thereto) PDF 260 K”) but can’t quite make out what happens to all that loose cash when retail clients purchase only Capital Units. Are the preferreds scooped up by the dealers’ inventories? That would be a nice incentive to sell only Capital Units!

Update, 2020-2-17: The offering raised just under $53-million.

Enbridge Inc. has announced:

that it does not intend to exercise its right to redeem its currently outstanding Cumulative Redeemable Preference Shares, Series 11 (Series 11 Shares) (TSX: ENB.PF.C) on March 1, 2020. As a result, subject to certain conditions, the holders of the Series 11 Shares have the right to convert all or part of their Series 11 Shares on a one-for-one basis into Cumulative Redeemable Preference Shares, Series 12 of Enbridge (Series 12 Shares) on March 1, 2020. Holders who do not exercise their right to convert their Series 11 Shares into Series 12 Shares will retain their Series 11 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 11 Shares outstanding after March 1, 2020, then all remaining Series 11 Shares will automatically be converted into Series 12 Shares on a one-for-one basis on March 1, 2020; and (ii) alternatively, if Enbridge determines that there would be less than 1,000,000 Series 12 Shares outstanding after March 1, 2020, no Series 11 Shares will be converted into Series 12 Shares. There are currently 20,000,000 Series 11 Shares outstanding.

With respect to any Series 11 Shares that remain outstanding after March 1, 2020, 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 11 Shares for the five-year period commencing on March 1, 2020 to, but excluding, March 1, 2025 will be 3.938 percent, being equal to the five-year Government of Canada bond yield of 1.298 percent determined as of today plus 2.64 percent in accordance with the terms of the Series 11 Shares.

With respect to any Series 12 Shares that may be issued on March 1, 2020, 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 12 Shares for the three-month floating rate period commencing on March 1, 2020 to, but excluding, June 1, 2020 will be 1.07879 percent, based on the annual rate on three month Government of Canada treasury bills for the most recent treasury bills auction of 1.64 percent plus 2.64 percent in accordance with the terms of the Series 12 Shares (the Floating Quarterly Dividend Rate). The Floating Quarterly Dividend Rate will be reset every quarter.

Beneficial holders of Series 11 Shares who wish to exercise their right of conversion during the conversion period, which runs from January 31, 2020 until 5:00 p.m. (EST) on February 18, 2020, 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.PF.C is a FixedReset, 4.40%+264, that commenced trading 2014-5-22 after being announced 2014-5-12. The issue is tracked by HIMIPref™ but is 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., ENB.PF.C 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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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 +0.84% and +1.09% (ignoring the outlier AIM.PR.A / AIM.PR.B – the latter issue was quoted at 7.63-17.50, due to either inadequate Toronto Stock Exchange reporting or inadequate Toronto Stock Exchange supervision of market-makers), 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 ENB.PF.C FixedReset, we may construct the following table showing consistent prices for its soon-may-be-issued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:

Based on current market conditions, I suggest that the FloatingResets that will result from conversion are likely to trade below the price of their FixedReset counterparts, ENB.PF.C. Therefore, it seems likely that I will recommend that holders of ENB.PF.C continue to hold the issue and not to convert, but I will wait until it’s closer to the February 18 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.