PrefBlog

DBRS has announced that it:

maintains its Under Review with Developing Implications status on the Pfd-4 rating of GMP Capital Inc.’s (GMP or the Company) Cumulative Preferred Shares. The rating was initially put Under Review with Developing Implications on June 18, 2019, following the announcement that GMP had agreed to sell substantially all of its capital markets business to Stifel Financial Corp. (Stifel). The review was maintained on September 18, 2019, as the transaction had yet to close.
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KEY RATING CONSIDERATIONS
The continuation of the review period takes into consideration that the future ultimate ownership and structure of GMP’s business has still not been finalized. DBRS Morningstar will assess GMP’s pro forma structure once it is known whether or not GMP is able to consolidate full ownership of Richardson GMP. This assessment will review the assets and liabilities composition, the Company’s ownership, the Company’s future strategic direction, and management’s ability to execute on this plan.

RATING DRIVERS
DBRS Morningstar could upgrade the rating if GMP’s franchise prospects and its post-transaction pro forma financials are deemed to be stronger with the consolidation of Richardson GMP. Conversely, the rating could be downgraded if GMP’s credit fundamentals weaken.

GMP was downgraded to Pfd-4(high) by DBRS in 2016. It was put on Review-Developing in June, 2019 and the review was extended in September, 2019.

Standard & Poor’s has announced:

• Power Corp. of Canada (PCC) announced its intent to reorganize simplifying its organizational hierarchy by acquiring the remaining public shares of Power Financial Corp. (PFC) that it does not currently own.
• We are raising our ratings on PCC by one notch, including our long-term issuer credit rating to ‘A+’ from ‘A’, and affirming our ratings on PFC.
• The stable outlook reflects our expectation that PCC will maintain its robust earnings and very strong financial risk profile.

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S&P Global Ratings said today it raised its long-term issuer credit rating on Power Corp. of Canada (PCC) to ‘A+’ from ‘A’, its preferred stock rating to ‘A-‘ from BBB+’, and its preferred stock Canada national scale rating to ‘P-1 (Low)’ from P-2 (High). At the same time, we affirmed our ‘A+’ ratings on Power Financial Corp. (PFC). The outlook is stable.

The upgrade of PCC and alignment with the ratings on PFC reflects our favorable view that the proposal to acquire the remaining 35.9% of common shares of PFC that it does not currently own will remove structural subordination and enable greater capital fungibility between the two companies. Our issuer credit ratings on PCC and PFC are aligned with that on Great-West Lifeco (the ultimate holding company of the insurance operation). We believe PCC has less regulatory restriction and a more reliable earnings stream from the additional unregulated cash flows through dividends from IGM and Pargesa that are available to support its obligations.

The stable outlook reflects our expectation that PCC will continue to generate robust earnings, as well as maintain solid capitalization without meaningfully increasing financial leverage. Great-West Lifeco Inc.’s dominant market position (PFC owns a total of 70.8% of Great-West Lifeco, including cross-ownership through IGM Financial Inc.) in multiple life insurance product lines, along with its vast geographic presence, should continue to translate into a stable source of earnings and dividends for PCC. IGM, which provides an additional source of earnings for the group, will continue to augment the group’s funds.

However, higher financial leverage (compared with ‘AA’ rated life insurance groups, which we consider peers of Great-West Lifeco) somewhat offsets these strengths. In our base-case scenario, we expect total financial leverage will remain between 35%-40%.

We could lower the ratings over the next 18-24 months if we believe the company’s financial risk profile will deteriorate, either as a result of the funding structure posing a risk because of significantly elevated leverage or weak fixed-charge coverage on a sustained basis, or materially declining capital adequacy.

At this time, we believe an upgrade is unlikely given PCC’s acquisitive nature, which precludes us from having certainty in forecasting capital at the extremely strong level.

Power Corporation and Power Financial have announced:

• Power Financial Minority Shareholders to receive 1.05 Power Corporation Subordinate Voting Shares and nominal cash consideration in exchange for each Power Financial Common Share.
• Power Financial Minority Shareholders to receive Power Corporation shares with Net Asset Value that is $4.50 higher than the Net Asset Value of each Power Financial Common Share, an increase of 11% (calculated without accounting for any exercise of Pre-Emptive Rights (as defined herein)).
• Power Corporation to undertake further initiatives to benefit shareholders in conjunction with the Reorganization, including implementation of a significant near-term operating cost reduction plan, reduced financing costs and a dividend increase.
• Paul Desmarais, Jr. and André Desmarais to retire as Co-Chief Executive Officers of Power Corporation after 23 years in the roles and to continue to serve as Chairman and Deputy Chairman, respectively, of Power Corporation’s Board of Directors. R. Jeffrey Orr, President and Chief Executive Officer of Power Financial, to become President and Chief Executive Officer of Power Corporation.

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Upon completion of the Reorganization, PCC will own all of the PFC Common Shares, while PFC preferred shares and debt securities will remain outstanding.
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Financing Expense Reduction – PCC and PFC intend to redeem an aggregate of $350 million of First Preferred Shares with available cash, resulting in reduced annual financing costs of approximately $15 million per year.
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As a result of such securities remaining outstanding, PFC currently anticipates that it will remain a reporting issuer in each of the provinces and territories of Canada.

DBRS comments:

While the announced preferred share redemption will decrease the cash held at POW and PWF, the companies will continue to benefit from significant cash balances and other liquid assets. The decline in cash is offset by lower annual preferred dividend payments and operating costs resulting in a pro forma fixed charge coverage for POW of 16.0 times (x) and PWF of 16.3x, an improvement from 14.2x and 15.0x as at Q3 2019, respectively. The redemption of preferred shares and issuance of new Subordinated Voting Shares will also result in improved financial leverage for both companies, with a decrease to 7.1% from 11.1% for POW and 14.2% from 15.1% for PWF. This improves capitalization assessments for both companies. Other than the redemption of preferred shares, large cash outlays are not expected in the foreseeable future as the earliest debt maturity is in 2033 for PWF and 2039 for POW. These actions are viewed as management’s effective cash utilization during a calmer period for the organization and reflects the strong credit profile of the companies.

Affected issues are (deep breath): POW.PR.A, POW.PR.B, POW.PR.C, POW.PR.D, POW.PR.F, POW.PR.G

PWF.PR.A, PWF.PR.E, PWF.PR.F, PWF.PR.G, PWF.PR.H, PWF.PR.I, PWF.PR.K, PWF.PR.L, PWF.PR.O, PWF.PR.P, PWF.PR.Q, PWF.PR.R, PWF.PR.S, PWF.PR.T, PWF.PR.Z

As noted by Assiduous Reader skeptical in the comments to an unrelated post, it seems likely that PWF.PR.I (Straight Perpetual, 6%, issued 2003-3-11, 8-million shares) and PWF.PR.G (Straight Perpetual, 5.9%, issued 2002-7-16, 6-million shares) will be redeemed. Both were down significantly on the day on much higher than normal volume.

It will be recalled that FFH.PR.C will reset at 4.709% effective January 1, 2020.

FFH.PR.C was issued as a cumulative FixedReset issue, 5.75%+315 that commenced trading 2009-10-5 after being announced 2009-9-29. It reset to 4.578% in 2014. I recommended in favour of conversion to FloatingResets. The conversion rate was about 40%.

FFH.PR.D resulted from 40% conversion from FFH.PR.C in 2014 and commenced trading 2014-12-31.

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.C and the FloatingReset FFH.PR.D). 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 below the current 3-month bill rate as the averages for investment-grade and junk issues are at +0.86% and +1.22%, 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 FFH.PR.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:

Before I get eviscerated in the comments, please note that I am well aware that FFH.PR.D is trading and is quoted with a bid of 17.60. Who cares? At the moment, both issues are cum-dividend and are interconvertible effective December 31 and therefore differ from being the exactly same thing from an investment perspective only by the difference in one dividend payment, less than two cents. 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.D, that will result from conversion are likely to trade below the price of their FixedReset counterparts, FFH.PR.C. Therefore, I recommend that holders of FFH.PR.C continue to hold the issue and not to convert. Similarly, I recommend that holders of FFH.PR.D convert to FFH.PR.C 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. (Toronto time) on December 16, 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.

Husky Energy has announced:

the fixed-rate quarterly dividend applicable to its Cumulative Redeemable Preferred Shares, Series 3 (Series 3 Shares) for the five-year period commencing December 31, 2019.

The fixed-rate dividend for the Series 3 Shares announced on December 2, 2019 was calculated on November 29, 2019 as 4.636%, representing the sum of the Canadian Government five-year bond yield of 1.506% plus 3.13%.

The new fixed-rate dividend for Series 3 Shares, based on a calculation as of December 2, 2019, is 4.689%, representing the sum of the Canadian Government five-year bond yield of 1.559% plus 3.13%.

The dividend rate applicable to the Cumulative Redeemable Preferred Shares, Series 4 for the three-month period commencing December 31, 2019 to, but excluding, March 31, 2020 remains unchanged at 4.782%, being equal to the annual rate for the most recent auction of 90-day Government of Canada Treasury Bills as of December 2, 2019 of 1.652% plus 3.13%.

This announcement cancels and corrects the previous announcement of a reset rate of 4.636%.

HSE.PR.C is a FixedReset, 4.50%+313, that commenced trading 2014-12-9 after being announced 2014-12-1. The issue is tracked by HIMIPref™ and is been assigned to the FixedResets-Discount subindex.

The initial announcement was quickly determined to be anomalous, but in contrast with the swift correction to AZP.PR.B, getting Husky to fix its error was something of a struggle. On December 9 I noted:

I sent another eMail via Husky Energy’s on-line form about their anomalous reset calculation for HSE.PR.C. Still no answer, but I’m not the only one querying them.

Yesterday I used their on-line form to submit the question again, and used the form to ask “General Inquiries” if their Investor Relations department was functional, and used Facebook to ask their social media people whether their on-line form and Investor Relations were functional. Social Media got back to me very quickly, by both eMail and FB Messenger, telling me that they’d forwarded my message. Whether or not it was this action that sparked a flurry of activity today, I’ll never know!

Many thanks are due to all those who sent other queries to Husky when it became apparent that they couldn’t be bothered to answer mine; particularly those who kept me abreast of their own progress: Assiduous Readers Avocado and peet and correspondents LC, JD and WP.