PrefBlog

Brompton’s Life & Banc Split Corp has released its Semi-Annual Report, 2018 in August.

Figures of interest are:

MER: “The MER per unit, excluding Preferred share distributions and issue costs (which were covered by the portfolio’s dividend income), was 0.93% for the first six months of 2018, down from 0.95% for 2017.”

Average Net Assets: We need this to calculate portfolio yield. The Total Assets of the fund at year end was $453.8-million, compared to $413.2-million on June 30, so call it an average of $433.5-million. Preferred share dividends of $5,271,068 were paid over the half year at 0.475 p.a. (boosted to 0.545 after the recent term extension), implying average units outstanding 22.2-million, at an average NAVPU of (20.06 + 18.62)/2 = 19.34, implies net assets of $429.3-million. Say the Average Net Assets are the average of the two estimates, $431.4-million.

Underlying Portfolio Yield: Income received of $8,114,588 divided by average net assets of $431.4-million, multiplied by two because it’s semiannual is 3.76%.

Income Coverage: Net investment income of $6,131,229 (before capital gains) divided by preferred share dividends of $5,271,068 is a very good 116%.

The income coverage calculated is fairly close to “The dividend coverage ratio was about 1.0x.” calculated by DBRS in November 2018.

It will be recalled that FTU.PR.B recently extended term with a dividend boost to 10% – no gift, since the units are underwater. Shareholders had a retraction right:

In connection with the extension, the Company will offer a Special Retraction Right which will allow existing shareholders to tender one or both classes of Shares and receive a retraction price based on the November 30, 2018 net asset value per unit.

I recommended retraction, but it seems that the spirit of giving entered a lot of shareholders’ hearts during the retraction period.

Quadravest has announced:

US Financial 15 Split Corp. (“the Company”) announces a Class A share consolidation for all Class A shareholders of record on December 18, 2018. In connection with the extension of the termination date of the Company, a special retraction right was offered allowing existing shareholders to tender one or both classes of shares and receive a retraction price based on the November 30, 2018 net asset value per unit. In aggregate, more Preferred shares were tendered for retraction than Class A shares. The purpose of the share consolidation is to maintain the requirement that an equal number of Class A shares and Preferred shares remain outstanding.

Immediately after the special retraction payment on December 17, 2018, there will be 1,901,817 Preferred shares and 2,804,666 Class A shares outstanding. In order to restore an equal amount of shares outstanding for each class, Class A shareholders on record as at December 18, 2018 will receive approximately 0.678090368 Class A shares for each Class A share outstanding. The consolidation is a non-taxable event. The impact of the Class A share consolidation will be reflected in the next reported net asset value per unit as at December 31, 2018. Net assets of the Company after the retraction payments will be approximately $14.7 million.

The Class A shares provide for a leveraged return on the portfolio of investments and are entitled to all assets
greater than a $10 net asset value.

The Company’s Preferred shares will begin receiving an increased dividend rate of 10% annually based on the
Company’s net asset value to a maximum of $0.08333 per Preferred Share per month, effective December 1,
2018.

The company had 2,808,191 Whole Units outstanding on November 30.

It will be recalled that LFE.PR.B extended term with a dividend boost

to the greater of, (i) 6.5% based on the $10 original issue price and (ii) the prevailing Canadian Prime Rate plus 2% annually based on the $10 original issue price, to a maximum of 8%.

Shareholders had a special retraction right, but I noted that:

LFE.PR.B is currently trading above its retraction price, however, so in the absence of extortionate transaction costs, holders who want to get out are better off selling.

Quadravest has announced today:

Canadian Life Companies Split Corp. (“the Company”) announces a Class A share subdivision for all Class A shareholders of record on December 18, 2018.

In connection with the extension of the termination date of the Company, a special retraction right was offered allowing existing shareholders to tender one or both classes of shares and receive a retraction price based on the November 30, 2018 net asset value per unit. In aggregate, more Class A shares were tendered for retraction than Preferred shares. The purpose of the share consolidation is to maintain the requirement that an equal number of Class A shares and Preferred shares remain outstanding.

Immediately after the special retraction payment on December 17, 2018, there will be 14,320,344 Preferred shares and 13,641,379 Class A shares outstanding. In order to restore an equal amount of shares outstanding for each class, Class A shareholders on record as at December 18, 2018 will receive approximately 1.0497724607 Class A shares for each Class A share outstanding. The subdivision is a non-taxable event.

The impact of the Class A share consolidation will be reflected in the next reported net asset value per unit as at December 31, 2018. Net assets of the Company after the retraction payments will be approximately $174.9 million.

The issue closed today at 9.95-10, so if you missed the retraction there hasn’t been a lot of harm done! I’m surprised it’s holding up so well given that the November 30 NAVPU was 13.42 (which will now go up a bit due to the consolidation).

It will be recalled that AQN.PR.A will reset at 5.162% effective December 31, 2018.

AQN.PR.A is a FixedReset, 4.50%+294, that commenced trading 2012-11-9 after being announced 2012-10-25. The 2018-11-28 notice of extension was reported on PrefBlog. The issue is tracked by HIMIPref™, but relegated to the Scraps – FixedReset Discount index 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., AQN.PR.A 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 be more interested in floating rate product than usual; the implied rates until the next interconversion are above the current 3-month bill rate as the averages for investment-grade and junk issues are at +2.10% and +1.62%, 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 AQN.PR.A 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 be cheap and trading below the price of their FixedReset counterparts, AQN.PR.A. Therefore I recommend that holders of AQN.PR.A 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 the FixedReset for the FloatingReset in the market once both elements of each pair are trading and you can – presumably, according to this analysis – 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 anyway are advised that the deadline for notifying the company of such a desire is 5:00 p.m. (Toronto time) on December 17, 2018. 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 not much 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.