PrefBlog

Aimia Inc. has announced:

that its Board of Directors (the “Board”) has approved concurrent but separate substantial issuer bids to repurchase for cancellation (i) up to $62.5 million of its common shares at a fixed price of $4.25 per share, (ii) up to $31.25 million of its Cumulative Rate Reset Preferred Shares, Series 1 (the “Series 1 Preferred Shares”) and its Cumulative Floating Rate Preferred Shares, Series 2 (the “Series 2 Preferred Shares”), each at a fixed price of $17.20 per share, and (iii) up to $31.25 million of its Cumulative Rate Reset Preferred Shares, Series 3 (the “Series 3 Preferred Shares”, and collectively with the Series 1 Preferred Shares and the Series 2 Preferred Shares, the “Preferred Shares”) at a fixed price of $19.00 per share. On November 15, 2019, the last full trading day before the date of this press release, the closing price of the common shares on the Toronto Stock Exchange was $3.63.

Holders of Preferred Shares of record at the close of business on December 24, 2019, will be entitled to receive the dividends declared by the Board on October 28, 2019, regardless of whether such holder deposits Preferred Shares pursuant to the substantial issuer bids with respect to the Preferred Shares (collectively, the “Preferred Share Offers”). Such dividends are payable on December 31, 2019. The purchase prices offered for Preferred Shares pursuant to the Preferred Share Offers take into account and reflect the fact that such dividends will be paid on Preferred Shares. As such, holders of Preferred Shares should take into consideration the total consideration provided to holders of Preferred Shares under the Preferred Share Offers (as well as the dividends payable on December 31, 2019) when comparing to the current trading prices of the Preferred Shares.

	Issuer Bid Offer Price	Q4 Declared Dividends	Total Consideration	TSX Closing Price on Nov. 15, 2019
Series 1 Preferred Shares	$17.2000	$0.2813	$17.4813	$17.73
Series 2 Preferred Shares	$17.2000	$0.3395	$17.5395	$18.00
Series 3 Preferred Shares	$19.0000	$0.3757	$19.3757	$19.83

If fully taken up, the substantial issuer bids with respect to the common shares (the “Common Share Offer” and, together with the Preferred Share Offers, the “Offers”) would result in the company returning up to a further $125 million to common and preferred shareholders (the “Aggregate Offer Amount”). The Offers are intended to provide all of the company’s shareholders with optionality and a choice regarding liquidity through transactions designed to be accretive and value-enhancing. Further, the Preferred Share Offers, if fully or substantially subscribed, would reduce the company’s cash financing costs associated with preferred share dividend payments and related Part VI.1 tax.

Details of the Offers

Each of the Preferred Share Offers expires on December 27, 2019, at 10:00 p.m. ET and the Common Share Offer expires on December 30, 2019, at 5:00 p.m. ET, unless extended or withdrawn in accordance with applicable securities laws. Any of the Offers may be varied and/or extended independently of the other Offers (including potentially increasing the size of one or more Offers with the goal of affording shareholders the opportunity to receive up to the Aggregate Offer Amount), and none of the Offers is conditional either on any of the other Offers or on any minimum number of shares being tendered.

Based on publicly available information, as of November 15, 2019, Mittleman Investment Management, LLC beneficially owned, directly or indirectly, or exercised control or direction over, 25.1 million common shares, representing approximately 23.1% of the issued and outstanding number of such shares. Mittleman Investment Management, LLC has advised Aimia that it does not currently intend to participate in the Common Share Offer.

Further details of the Offers, including instructions for tendering shares, will be included in the formal offers to purchase and issuer bid circulars, letters of transmittal, notices of guaranteed delivery and other related documents for each of the Offers (with the Preferred Share Offers to be set forth in a single issuer bid circular) (collectively, the “Offer Documents”). The Offer Documents are expected to be mailed to shareholders, filed with the applicable Canadian securities regulatory authorities and made available without charge on SEDAR at www.sedar.com, as well as being posted on the Corporation’s website at www.aimia.com, on or about November 19, 2019.

Aimia has engaged BMO Capital Markets to act as financial advisor and dealer manager and AST Trust Company (Canada) to act as depositary for the Offers. Any questions or requests for information regarding the Offers may also be directed to the dealer manager or the depositary.

This has become a very strange company. According to their 19Q3 Financials, they have about $572-million in equity financing cash, near-cash and other investments of about $625-million. The shareholders’ equity of $572-million includes about $316-million in total preferred share capital (see the 2018 financial statements, oddly not available on their website, but which are on SEDAR (which, of course, does not want me to link to them either), via a search for “Aimia Inc. Mar 28 2019 07:17:41 ET Audited annual financial statements – English PDF 951 K”)

So that’s pretty good leverage for the common shareholders, provided through the good graces of the preferred shareholders. And completion in full of the common share tranche of this issuer bid will ratchet up the leverage still further, regardless of the degree of preferred shareholder participation.

Quadravest has announced:

a pro-rata redemption of XMF.PR.B Class I Preferred Shares (“Class I Preferred Shares”) and a XMF.A Capital Share (“Capital Share”) consolidation in order to maintain an equal number of Capital Shares, Class I Preferred Shares and XMF.PR.C Class II Preferred Shares (“Class II Preferred Shares”) outstanding.

In connection with the termination date extension of the Company for a further five years to December 1, 2024, an additional retraction right was offered allowing existing shareholders to tender any or all classes of Shares and receive a retraction price based on the November 29, 2019 net asset value per unit, payable on or before December 16, 2019. There were more Class II Preferred Shares retracted than Capital Shares and Class I Preferred Shares. As a result, pursuant to the Company’s guidelines, the Company is required to redeem 867,100 Class I Preferred Shares.

The Class I Preferred Shares will be redeemed on a pro-rata basis, so that shareholders of record on the close of business on November 29, 2019 will have approximately 27.54% of their Class I Preferred Shares redeemed. The redemption price of $5.00 per Class I Preferred Share will be paid on or before December 16, 2019. Holders of Class I Preferred Shares that have been called for redemption will be entitled to receive the November dividend payable on December 10, 2019 for holders of record on November 29, 2019.

As a result of the reduction in Class I and Class II Preferred shares, Capital shareholders will have their Capital Shares consolidated at a ratio of 0.722920066 for each Capital Share outstanding. The consolidation will be a non-taxable event. The expected post-consolidation trade date for the Capital Shares will be announced at a later date.

The Company invests in common shares of Manulife Financial Corporation, the largest life insurer in Canada offering financial products and wealth management services.

XMF.PR.B was distributed in accordance with the reorganization of XMF.PR.A (on the second attempt, as the first attempt failed). The issue is not tracked by HIMIPref™, as there is only a market value of about $16-million outstanding; over a quarter of which is now being redeemed.

Quadravest has announced:

a pro-rata redemption of YCM.PR.A Class I Preferred Shares (“Class I Preferred Shares”) and a YCM Capital Share (“Capital Share”) consolidation in order to maintain an equal number of Capital Shares, Class I Preferred Shares and YCM.PR.B Class II Preferred Shares (“Class II Preferred Shares”) outstanding.

In connection with the termination date extension of the Company for a further five years to December 1, 2024, an additional retraction right was offered allowing existing shareholders to tender any or all classes of Shares and receive a retraction price based on the November 29, 2019 net asset value per unit, payable on or before December 16, 2019. There were more Class II Preferred Shares retracted than Capital Shares and Class I Preferred Shares. As a result, pursuant to the Company’s guidelines, the Company is required to redeem 719,390 Class I Preferred Shares.

The Class I Preferred Shares will be redeemed on a pro-rata basis, so that shareholders of record on the close of business on November 29, 2019 will have approximately 44.35% of their Class I Preferred Shares redeemed. The redemption price of $5.00 per Class I Preferred Share will be paid on or before December 16, 2019. Holders of Class I Preferred Shares that have been called for redemption will be entitled to receive the November dividend payable on December 10, 2019 for holders of record on November 29, 2019.

As a result of the reduction in Class I and Class II Preferred shares, Capital shareholders will have their Capital Shares consolidated at a ratio of 0.578956069 for each Capital Share outstanding. The consolidation will be a non-taxable event. The expected post-consolidation trade date for the Capital Shares will be announced at a later date.

The aggregate intrinsic value of the Capital shareholders’ holdings will remain the same as a result of the net asset value per Capital Share increasing on a proportionate basis for each post-consolidation share on the consolidation date.

As at the consolidation date, the resultant increase in the net asset value per Capital Share will have the impact of increasing the asset coverage ratios for the Class I Preferred Shares and Class II Preferred Shares.

The Company invests in common shares of Canadian Imperial Bank of Commerce, a Canadian financial institution.

YCM.PR.A had a large partial redemption in 2014; the issue arose from a complex reorganization of XCM.PR.A. The issue is not tracked by HIMIPref™, as the market capitalization of just over $8-million is about to be cut by nearly half.

TC Energy Corporation has announced (on November 21):

that it does not intend to exercise its right to redeem its Cumulative Redeemable First Preferred Shares, Series 1 (Series 1 Shares) and Cumulative Redeemable First Preferred Shares, Series 2 (Series 2 Shares) on December 31, 2019. As a result, subject to certain conditions:

(a) the holders of Series 1 Shares have the right to choose one of the following options with regard to their shares:

to retain any or all of their Series 1 Shares and continue to receive a fixed rate quarterly dividend; or

to convert, on a one-for-one basis, any or all of their Series 1 Shares into Series 2 Shares and receive a floating rate quarterly dividend, and
(b) the holders of Series 2 Shares have the right to choose one of the following options with regard to their shares:

to retain any or all of their Series 2 Shares and continue to receive a floating rate quarterly dividend; or

to convert, on a one-for-one basis, any or all of their Series 2 Shares into Series 1 Shares and receive fixed rate quarterly dividend.
The dividend rate applicable to the Series 1 Shares for the five-year period commencing on December 31, 2019 to, but excluding, December 31, 2024 will equal the Government of Canada five-year bond yield on December 2, 2019 plus 1.92 per cent. The dividend rate applicable to the Series 2 Shares for the three-month period commencing on December 31, 2019 to, but excluding, March 30, 2020 will equal the Government of Canada 90-day treasury bill rate on December 2, 2019 plus 1.92 per cent. Both rates will be calculated according to the terms of the prospectus supplement dated September 22, 2009 and announced by way of a news release on December 2, 2019.

Beneficial owners of Series 1 Shares and Series 2 Shares who want to exercise their right of conversion should communicate as soon as possible with their broker or other nominee and ensure that they follow their instructions in order to meet the deadline to exercise such right, which is 5 p.m. (EDT) on December 16, 2019. Any notices received after this deadline will not be valid. As such, it is recommended that this be done well in advance of the deadline in order to provide the broker or other nominee with time to complete the necessary steps.

The conversion of Series 1 Shares are subject to the conditions that: (i) if TC Energy determines that there would be less than one million Series 1 Shares outstanding after December 31, 2019, then all remaining Series 1 Shares will automatically be converted into Series 2 Shares on a one-for-one basis on December 31, 2019, and (ii) alternatively, if TC Energy determines that there would be less than one million Series 2 Shares outstanding after December 31, 2019, no Series 1 Shares will be converted into Series 2 Shares.

The conversion of Series 2 Shares are subject to the conditions that: (i) if TC Energy determines that there would be less than one million Series 1 Shares outstanding after December 31, 2019, then no Series 2 Shares will be converted into Series 1 Shares, and (ii) alternatively, if TC Energy determines that there would be less than one million Series 2 Shares outstanding after December 31, 2019, then all of the remaining outstanding Series 2 Shares will automatically be converted into Series 1 Shares on a one-for-one basis on December 31, 2019. In either case, TC Energy will issue a news release to that effect no later than December 23, 2019.

Beneficial owners of Series 1 Shares who do not provide notice or communicate with their broker or other nominee by the deadline will retain their Series 1 Shares and receive the new annual fixed dividend rate applicable to the Series 1 Shares. Beneficial owners of Series 2 Shares who do not provide notice or communicate with their broker or other nominee by the deadline will retain their Series 2 Shares and receive the floating rate quarterly dividend applicable to the Series 2 Shares, subject to the conditions stated above.

Holders of Series 1 Shares and Series 2 Shares will have the opportunity to convert their shares again on December 31, 2024 and every five years thereafter as long as the shares remain outstanding. For more information on the terms of, and risks associated with an investment in Series 1 Shares and Series 2 Shares, please see the Corporation’s prospectus supplement dated September 22, 2009 which is available on sedar.com or on the Corporation’s website.

TRP.PR.A commenced trading 2009-9-30 after being announced 2009-9-22. It commenced life as a FixedReset, 4.60%+192, that reset to 3.266% effective 2014-12-31. Assiduous Readers may recall that I have blamed the 2014 reset of TRP.PR.A for what we might now call ‘the first half’ of the current bear market. I recommended conversion to TRP.PR.F in 2014 and there was a conversion rate of about 62%.

I will have more to say once the reset rate is announced December 2.

Manulife Financial Corporation has announced:

the applicable dividend rates for its Non-cumulative Rate Reset Class 1 Shares Series 17 (the “Series 17 Preferred Shares”) (TSX: MFC.PR.M) and Non-cumulative Floating Rate Class 1 Shares Series 18 (the “Series 18 Preferred Shares”).

With respect to any Series 17 Preferred Shares that remain outstanding after December 19, 2019, holders thereof will be entitled to receive fixed rate non-cumulative preferential cash dividends on a quarterly basis, as and when declared by the Board of Directors of Manulife and subject to the provisions of the Insurance Companies Act (Canada). The dividend rate for the five-year period commencing on December 20, 2019, and ending on December 19, 2024, will be 3.8000% per annum or $0.23750 per share per quarter, being equal to the sum of the five-year Government of Canada bond yield as at November 20, 2019, plus 2.36%, as determined in accordance with the terms of the Series 17 Preferred Shares.

With respect to any Series 18 Preferred Shares that may be issued on December 19, 2019 in connection with the conversion of the Series 17 Preferred Shares into the Series 18 Preferred Shares, holders thereof will be entitled to receive floating rate non-cumulative preferential cash dividends on a quarterly basis, calculated on the basis of actual number of days elapsed in each quarterly floating rate period divided by 365, as and when declared by the Board of Directors of Manulife and subject to the provisions of the Insurance Companies Act (Canada). The dividend rate for the three-month period commencing on December 20, 2019, and ending on March 19, 2020, will be 1.00250% (4.0210% on an annualized basis) or $0.250625 per share, being equal to the sum of the three-month Government of Canada Treasury bill yield as at November 20, 2019, plus 2.36%, as determined in accordance with the terms of the Series 18 Preferred Shares.

Beneficial owners of Series 17 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 December 4, 2019. The news release announcing such conversion right was issued on November 8, 2019 and can be viewed on SEDAR or Manulife’s website. Conversion inquiries should be directed to Manulife’s Registrar and Transfer Agent, AST Trust Company (Canada), at 1‑800‑783‑9495.

The Toronto Stock Exchange (“TSX”) has conditionally approved the listing of the Series 18 Preferred Shares effective upon conversion. Listing of the Series 18 Preferred Shares is subject to Manulife fulfilling all the listing requirements of the TSX and, upon approval, the Series 18 Preferred Shares will be listed on the TSX under the trading symbol “MFC.PR.S”.

MFC.PR.M is a FixedReset, 3.90%+236, that commenced trading 2014-8-15 after being announced 2014-8-11. Notice of extension was published 2019-11-8. It is tracked by HIMIPref™ and has been assigned to the FixedReset (Insurance non-NVCC) subindex, but will move shortly to the FixedReset (Discount) subindex as the imposition of NVCC rules for insurers can no longer be considered probable.

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., MFC.PR.M and the FloatingReset MFC.PR.S 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.

Click for Big

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 +0.89% and +1.64%, respectively, after removal of the outlying pair TRP.PR.A / TRP.PR.F from the investment-grade group (which has its next exchange date 2019-12-31). 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 MFC.PR.M 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 MFC.PR.S that will result from conversion are likely to trade below the price of their FixedReset counterparts, MFC.PR.M. Therefore, it seems likely that I will recommend that holders of MFC.PR.M continue to hold the issue and not to convert, but I will wait until it’s closer to the December 4 notification deadline before making a final pronouncement. 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.