PrefBlog

Royal Bank of Canada has announced:

that during the conversion notice period, which ran from July 25, 2019 to August 9, 2019, 210,844 Non-Viability Contingent Capital (NVCC) Non-Cumulative 5-Year Rate Reset First Preferred Shares, Series BB (the “Series BB shares”) were tendered for conversion, on a one-for-one basis, into NVCC Non-Cumulative Floating Rate First Preferred Shares, Series BC (the “Series BC shares”). As per the conditions set out in the prospectus supplement dated May 27, 2014, since less than 1,000,000 Series BC shares would be outstanding after August 24, 2019, holders of Series BB shares will not be entitled to convert their shares into Series BC shares. As a result, Series BC shares will not be issued at this time and holders of Series BB shares will retain their shares.

On August 24, 2019, Royal Bank of Canada will have 20,000,000 Series BB shares issued and outstanding. The Series BB shares are currently listed on the Toronto Stock Exchange under the symbol RY.PR.H.

RY.PR.H is a FixedReset, 3.90%+226, NVCC-Compliant issue that commenced trading 2014-6-3 after being announced 2014-5-23. The bank gave notice of extension on 2019-7-22. RY.PR.H will reset At 3.65% effective August 24, 2019. I recommended against conversion. The issue is tracked by HIMIPref™ and has been assigned to the FixedReset-Discount subindex.

It will be recalled that ENB.PR.Y will reset at 3.737% effective September 1, 2019

ENB.PR.Y is a FixedReset, 4.00%+238, that commenced trading 2013-6-6 after being announced 2013-5-28. It is tracked by HIMIPref™ but 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.PR.Y 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 well below the current 3-month bill rate as the averages for investment-grade and junk issues are at +1.14% and +1.26%, 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.PR.Y 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.PR.Y. Therefore, I recommend that holders of ENB.PR.Y 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. (EST) on August 19, 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.

Financial 15 Split Corp has released its Semi-Annual Report to May 31, 2019.

Figures of interest are:

MER: 1.01% of the whole unit value, adjusted “to reflect the normal operating expenses of the Company excluding any one time offering expenses. ”

Average Net Assets: We need this to calculate portfolio yield. The Total Assets of the fund at year end was $643.9-million, compared to $647.0-million on May 31, so call it an average of $645.5-million. Preferred share dividends of $11,380,883 were paid over the half year at 0.55 p.a. (a temporary boost from the required 0.525), implying average units outstanding 41.39-million, at an average NAVPU of (15.90 + 18.32 14.99)/2 = 17.11 15.44, implies net assets of $708.2-million $639.1-million. Say the Average Net Assets are the average of the two estimates, $676.8-million $642.3-million.

Underlying Portfolio Yield: Income received of $11,120,161 divided by average net assets of $676.8-million $642.3-million, multiplied by two because it’s semiannual is 3.29% 3.46%.

Income Coverage: Net investment income of $7,331,482 (before capital gains) divided by preferred share dividends of $11,380,883 is 64%.

The income coverage calculated is equal to the 0.64 times calculated by DBRS in April 2019.

Update, 2019-8-12: Figures struck out and replaced have been changed as the wrong end-value for 2018 was used initially. See comments.

Brompton Group has announced:

that it will hold a special meeting (the “Meeting”) of holders of Class A Shares and Preferred Shares (the “Shareholders”) of Brompton Lifeco Split Corp. (the “Fund”). The purpose of the Meeting is to consider and vote upon an extraordinary resolution to implement amendments to update and modernize the investment objectives, investment guidelines and investment restrictions of the Fund (the “Amendments”). The Fund was launched in April 2007.

The Fund invests, on an approximately equal weighted basis, in a portfolio consisting of common shares of Canada’s four largest publicly traded life insurance companies: Great-West Lifeco Inc., Industrial Alliance Insurance and Financial Services Inc., Manulife Financial Corporation and Sun Life Financial Inc. The Fund provides a low cost, efficient way to gain exposure to Canadian life insurance companies, with the added benefit of a proprietary covered call option strategy employed by Brompton which can lower portfolio volatility along with generating cash flows for distribution to Shareholders.

The Manager believes that the financial sector continues to be an attractive sector for investment and dividend growth, however, in order to respond to the changing business environment including the interest rate environment, regulation, fintech and evolving asset and wealth management businesses generally, the Manager believes that it would be advisable to make certain changes to the Fund’s investment objectives, investment guidelines, investment restrictions and distribution target. These changes will allow the Fund to diversify its holdings and expand its investment universe which the Manager believes will enhance long-term returns and would be for the benefit of Shareholders.

The proposed changes are primarily designed to accomplish the following:

• expand investment holdings and diversify the portfolio by changing the investment universe of the Fund from only four Canadian life insurance companies to a portfolio of between 10 to 20 equity securities of primarily North American financial services companies including insurance companies, banks, asset management companies and diversified financials, selected by the Manager, in its discretion. In addition, the Fund may hold up to 20% of its total assets in financial services-related companies or global financial services companies;
• the diversification of the Fund’s portfolio should provide opportunities to increase the value of the Fund’s portfolio which in turn would result in a higher net asset value of the Class A Shares and as the net asset value of the Class A Shares appreciates, the asset coverage for the Preferred Shares will also improve;
• by increasing the number of securities held by the Fund, the Manager will be provided with more opportunities to write covered call options and potentially generate additional returns for the Fund;
• the Manager will be permitted to rebalance and/or reconstitute the Fund’s portfolio at its discretion so that the Fund may respond to security or market developments on a more timely basis and provide more active portfolio management;
• the Manager believes that amending the target rate for distributions from $0.90 per Class A Share per annum to an amount initially targeted to be approximately 10% per annum of the net asset value per Class A Share is still a high distribution rate for holders of Class A Shares; however, it is expected to be a more sustainable distribution rate for the Fund. A lower Class A Share distribution rate would also improve the Preferred Share coverage.

In keeping with industry trends over the past several years to lower investor costs and in connection with the proposed changes to the Fund, the Manager will discontinue the service fee paid to dealers based on the number of Class A Shares held by dealers’ clients of 0.40% per annum of the Class A Share net asset value beginning January 1, 2020. In addition, the management fee will not be increased for the Fund as a result of the additional work associated with the aforementioned enhancements.

As a result of the changes described above, the Manager is also proposing to change the name of the Fund to “Brompton Financial Split Corp.” and the ticker symbols in respect of the Fund’s Class A Shares and Preferred Shares to BFS and BFS.PR.A, respectively.

A special meeting of Shareholders will be held on September 26, 2019 to consider and vote on the proposed Amendments. Shareholders of record at the close of business on August 27, 2019 will be entitled to vote at the Meeting. The Manager expects the effective date of the Amendments to take place shortly after the Meeting. Details of the proposed Amendments will be further outlined in the Fund’s notice of meeting and management information circular that will be prepared and delivered to Shareholders in connection with the Meeting and will be available on www.sedar.com

The current NAVPU of the fund is $14.18, obtained by summing the separately reported $4.17 for the Capital Units and $10.01 for the preferreds.

I consider the verbiage regarding their covered call writing strategy to be so much eyewash – neither Brompton nor anybody else, to the best of my knowledge, has ever published any data to demonstrate that this is an actual skill they have that benefits unitholders.

As for the diversification – I guess they’re tired of insurance companies underperforming and want to get some more assets in the door. It’s a good thing … for those among us who care about the safety of preferred shares and don’t give two hoots about what happens to the Capital Units.

The interesting thing about all this is that they’re grabbing the trailer fees (paid to stockbrokers who stick their clients’ money into the Capital Units) and stuffing the cash into their own pockets. Now THAT’S interesting!

My interpretation was incorrect. See LCS.PR.A : Correction & Apology for Comment

LCS.PR.A was added to the HIMIPref™ database in October, 2014, backdated to 2014-5-1, following its term extension and treasury offering earlier in the year. Capital Units dividends were suspended in January 2015, but reinstated in November, 2016. Only one of the scheduled monthly Capital Unit distributions has been made since the September, 2018, payment became due. The company announced the five year extension in March, 2018. The issue reset to 6.25% with an end-date of 2024-4-29 in April, 2019. The issue is tracked by HIMIPref™ but relegated to the Scraps – Splitshares subindex on credit concerns.

Valener Inc. has announced:

On March 27, 2019, a definitive arrangement agreement (the “arrangement agreement”) was signed wherein Noverco Inc., a private company and indirect controlling partner of Énergir, L.P. (“Noverco”), has committed to acquire all of Valener’s issued and outstanding common shares and issued and outstanding Series A preferred shares (the “arrangement”). Since that date, the key events involving the arrangement were as follows:

Suspension of the dividend reinvestment plan, as required by the arrangement agreement, on March 29, 2019;
Approval by the Federal Energy Regulatory Commission on May 31, 2019;
Special Meeting held on June 11, 2019 and during which Valener’s common shareholders and Series A preferred shareholders approved the arrangement at over 90% of submitted votes;
Final order approving the arrangement issued on June 14, 2019 by the Quebec Superior Court; and
Public hearing before the Vermont Public Utility Commission (“VPUC”) held on July 23, 2019. The decision might be issued in the coming weeks.
Detailed information about the arrangement is presented in the arrangement agreement and in the management information circular of Énergir Inc., in its capacity as a General Partner of Énergir, L.P., acting as manager of Valener Inc., dated April 24, 2019. These documents are available on SEDAR at www.sedar.com and on Valener’s website at www.valener.com.

The proposed acquisition at par was announced in March and approved by holders in June.

The issue commenced trading 2012-6-6 as a FixedReset, 4.35%+281, after being announced 2012-5-15. It reset to 4.62% effective 2017-10-15. I recommended against conversion and there was no conversion to FloatingResets. The issue is tracked by HIMIPref™ and has been assigned to the FixedReset subindex.