PrefBlog

The Toronto-Dominion Bank has announced (on January 2):

the applicable dividend rates for its Non-Cumulative 5-Year Rate Reset Preferred Shares, Series 5 (Non-Viability Contingent Capital (NVCC)) (the “Series 5 Shares”) and Non-Cumulative Floating Rate Preferred Shares, Series 6 (NVCC) (the “Series 6 Shares”).

With respect to any Series 5 Shares that remain outstanding after January 31, 2020, holders of the Series 5 Shares will be entitled to receive quarterly fixed non-cumulative preferential cash dividends, as and when declared by the Board of Directors of TD, subject to the provisions of the Bank Act (Canada). The dividend rate for the 5-year period from and including January 31, 2020 to but excluding January 31, 2025 will be 3.876%, being equal to the 5-Year Government of Canada bond yield determined as at January 2, 2020 plus 2.25%, as determined in accordance with the terms of the Series 5 Shares.

With respect to any Series 6 Shares that may be issued on January 31, 2020, holders of the Series 6 Shares will be entitled to receive quarterly floating rate non-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 TD, subject to the provisions of the Bank Act (Canada). The dividend rate for the floating rate period from and including January 31, 2020 to but excluding April 30, 2020, will be 3.921%, being equal to the 90-day Government of Canada Treasury Bill yield determined as of January 2, 2020 plus 2.25%, as determined in accordance with the terms of the Series 6 Shares.

Beneficial owners of Series 5 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 on or prior to the deadline for exercise, which is 5:00 p.m. (Toronto time) on January 16, 2020.

Inquiries should be directed to TD’s Registrar and Transfer Agent, AST Trust Company (Canada), at 1-800-387-0825 (or in Toronto 416-682-3860).

TD.PF.C is a FixedReset, 3.75%+225, that commenced trading 2014-12-16 after being announced 2014-12-5. Notice of extension was reported in December, 2019. TD.PF.C is tracked by HIMIPref™ and is assigned to the FixedReset-Discount subindex.

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., TD.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 +0.75% and +1.41%, respectively, ignoring the outliers FTS.PR.H/FTS.PR.I and SLF.PR.G/SLF.PR.J for investment grade (due to a very short term until the next reset) and AIM.PR.A/AIM.PR.B for junk (due to a ludicrous quotation spread on AIM.PR.B). 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 TD.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, TD.PF.C. Therefore, it seems likely that I will recommend that holders of TD.PF.C continue to hold the issue and not to convert, but I will wait until it’s closer to the January 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.

DBRS has announced that it:

downgraded the rating of the Preferred Shares issued by Brompton Oil Split Corp. (the Company) to Pfd-5 from Pfd-4 (low). The Company invests in common shares of at least 15 large capitalization North American oil and gas issuers (the Portfolio) selected from the S&P 500 Index and the S&P/TSX Composite Index. The Company may also invest up to 25% of the Portfolio value in the common shares of issuers listed on the S&P 500 Index or the S&P/TSX Composite Index that satisfy its investment criteria, operating in energy subsectors including equipment, services, pipelines, transportation, and infrastructure. The Portfolio is approximately equally weighted, actively managed, and rebalanced at least semi-annually. A portion of the Portfolio’s investments are denominated in U.S. dollars; however, substantially all of this exposure is hedged back to Canadian dollars. The Company has the ability to write covered call options or engage in securities lending in order to generate additional income.
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The dividend coverage ratio was approximately 0.3 times as of December 11, 2019.
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As of December 11, 2019, the downside protection available to holders of the Preferred Shares was 0.6%. It has averaged around this level in the last three months as a result of depressed prices of energy stocks and the oil market struggling to recover from lower demand and oversupply. Subsequently, because of the downside protection reduction below acceptable levels for a prolonged period of time and weak dividend coverage, which creates further grind on the Portfolio, DBRS Morningstar downgraded the rating on the Preferred Shares to Pfd-5.

The maturity date of the Preferred Shares is March 31, 2020. On March 9, 2019, the Company announced an extension of the term for another three to five years. The details of the term extension will be announced at least 60 days before the maturity date.

The Whole Unit NAVPU was 10.92 as of December 23, according to Brompton’s figures for the Capital Unit NAVPU and Preferred Share NAVPU, for an Asset Coverage Ratio of 1.1-:1, equivalent to Downside Protection of about 8%. It’s not clear to me how the DBRS figure of 0.6% was derived.