PrefBlog

GMP Capital will soon experience great change:

GMP Capital Inc. has announced plans to exit the capital markets business, selling its investment banking arm to U.S. brokerage house Stifel Financial Corp. for approximately $70-million in a dramatic shift for what was once one of Canada’s most successful independent investment dealers.

In the latest sign of consolidation in financial services, GMP Capital’s bankers and traders will join St. Louis-based Stifel, which has built a national U.S. platform by making more than two dozen acquisitions during chief executive officer Ronald Kruszewski’s 22 years at the helm.

GMP Capital, founded in 1995 by veteran deal makers, made its name raising money for entrepreneurial businesses such as Research in Motion – now BlackBerry Ltd. – and cannabis, mining, and oil and gas companies in recent years. But, like BlackBerry, the Toronto-based investment bank that once boasted a market value of $2-billion is undergoing a transformation. Its core business will now revolve around its 33-per-cent stake in wealth manager Richardson GMP, which has approximately $30-billion in assets and 170 teams of financial advisers.

Once the Stifel transaction closes, GMP Capital plans to buy the remaining 67 per cent of Richardson GMP from its employees and Winnipeg’s Richardson family in a stock swap that will make the Richardson clan the company’s largest shareholder. GMP Capital will hold approximately $198-million in cash. That capital is earmarked for expanding the wealth management platform by recruiting financial advisers and potentially adding new services such as robo-advisers, specialized lending and asset management.

… and DBRS is watching with great interest:

DBRS, Inc. (DBRS) placed GMP Capital Inc.’s (GMP or the Company) Cumulative Preferred Shares rating of Pfd-4 (high) Under Review with Developing Implications. The rating action follows the announcement that GMP has agreed to sell substantially all of its capital markets business to Stifel Financial Corp. (Stifel).

KEY RATING CONSIDERATIONS
The Under Review with Developing Implications status reflects uncertainty surrounding the transaction, including shareholder and regulatory approval that are still required for the transaction to close as well as other strategic initiatives that are occurring in tandem. While certain assets and liabilities will transfer to Stifel with the capital markets business divestiture, the Cumulative Preferred Shares rated by DBRS will remain with GMP.
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DBRS will assess GMP’s pro-forma structure at the close of the transaction, including the remaining assets and liabilities as well as the Company’s future strategic direction and management’s ability to execute on this plan. DBRS notes that Harris Fricker, Chief Executive Officer of GMP, and other key personnel have agreed to join Stifel.

The rating could be upgraded if GMP’s pro-forma financials post-transaction are deemed to be stronger as a result of shedding the capital markets business, which has been highly volatile and loss-making. The rating could be downgraded if GMP’s credit fundamentals post-transaction are deemed to be weaker or if GMP is not able to acquire majority control of Richardson GMP, limiting its wealth management growth strategy.

Affected issues are GMP.PR.B and GMP.PR.C

DBRS has announced that it:

upgraded the long-term ratings of the Royal Bank of Canada (RBC or the Bank) and its related entities, including RBC’s Long-Term Issuer Rating, to AA (high) from AA. DBRS also changed the trend on all long-term ratings to Stable from Positive. The Bank’s Short-Term Issuer Rating was confirmed at R-1 (high) with a Stable trend. RBC’s Long-Term Issuer Rating is composed of an Intrinsic Assessment (IA) of AA and Support Assessment of SA2, which reflect the expectation of timely systemic support from the Government of Canada (rated AAA with a Stable trend by DBRS). The SA2 designation results in a one-notch uplift to the Long-Term Issuer Rating. Under the new Canadian Bank Recapitalization Regime (the Bail-In Regime), DBRS expects to eventually remove the uplift from systemic support, once the Bank has issued a sufficient level of bail-inable senior debt, which would thereby provide an adequate buffer for non-bail-inable obligations and is then expected to offset the removal of systemic support.
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DBRS remains concerned over the combination of Canadian household indebtedness and elevated housing prices, particularly in and around Vancouver and Toronto, and the potential impact of a housing downturn on the Canadian economy as well as to other consumer-related loan portfolios. Nonetheless, RBC’s residential-secured portfolio, like all the large Canadian banks, appears conservatively underwritten, with 37% of RBC’s Canadian residential mortgage loans insured. The average loan-to-value ratio of the uninsured portfolio is a conservative 57%, providing a substantial buffer for a decline in housing prices.
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RBC’s Q2 2019 Common Equity Tier 1 ratio increased 90 basis points YoY to 11.8%, primarily due to strong earnings generation. While overall capital levels remain well above regulatory minimums, they are at the low end of some global peers. However, DBRS views capital levels as strong given the Bank’s asset mix and ability to generate capital. The Bank has begun issuing Bail-inable Senior Debt as part of the Bail-In Regime. It is expected that the Bank will exceed the total loss absorbing capacity requirements issued by the Office of the Superintendent of Financial Institutions as it replaces maturing legacy senior debt.
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18-Jun-19 NVCC Preferred Shares Upgraded Pfd-2 (high) Stb
18-Jun-19 Non-Cumulative Preferred Shares (Excluding Series W) Upgraded Pfd-1 (low) Stb
18-Jun-19 Preferred Shares, Series C-1 Upgraded A Stb
18-Jun-19 Preferred Shares, Series C-2 Upgraded A Stb

Affected issues are:
NVCC-compliant : (Straights) RY.PR.N, RY.PR.O, RY.PR.P
(FixedReset) RY.PR.H, RY.PR.J, RY.PR.M, RY.PR.Q, RY.PR.R, RY.PR.S, RY.PR.Z

NVCC-non-compliant: (Straight) RY.PR.A, RY.PR.C, RY.PR.E, RY.PR.F, RY.PR.G

Specifically Excluded from being rated: RY.PR.W

It’s a bit odd that the Series C-1 shares were upgraded – they have been redeemed as I reported in August 2017; this was confirmed in the 2017 Annual Report:

On November 13, 2017, we redeemed all 82,050 issued and outstanding Non-cumulative Perpetual First Preferred Shares, Series C-1, for cash at a redemption price of US$1,000 per share.

The C-series preferreds were issued in connection with the takeover of City National in 2015.

Brompton Lifeco Split Corp. has released its Annual Report to December 31, 2018.

Note that the benchmarking isn’t ideal, since the Financial index will include banks, while the fund has a mandate only for insurers.

Figures of interest are:

MER: The MER per unit of the Fund, excluding Preferred share distributions (which were largely covered by the Fund’s dividend income), was 0.98% in 2018, down from 1.05% in 2017 as a result of better fixed-cost absorption.

Average Net Assets: We need this to calculate portfolio yield; and it’s tricky because “The Fund completed a treasury offering of Class A shares and Preferred shares for aggregate gross proceeds of approximately $38.6 million on February 6, 2018.”. Preferred Share distributions of 4,055,809 @ 0.575 / share implies 7.054-million shares out on average. Average Unit Value (beginning & end of year) = (16.82 + 12.71) / 2 = 14.76. Therefore 7.054-million @ 14.76 = 104.1-million average net assets.

Underlying Portfolio Yield: Dividends, interest and lending income received of 4.249-million divided by average net assets of 104.1-million is 4.08%

Income Coverage: Gross Investment Income (before capital gains & losses) of $4.250-million less expenses of 1.818-million is net investment income of $2.432-million divided by Preferred Share Distributions of 4.056-million is 60%.

Canadian Imperial Bank of Commerce has announced:

that it has completed the offering of 10 million Non-cumulative Rate Reset Class A Preferred Shares Series 51 (Non-Viability Contingent Capital (NVCC)) (the “Series 51 Shares”) priced at $25.00 per share to raise gross proceeds of $250 million.

The offering was made through a syndicate of underwriters led by CIBC Capital Markets. The Series 51 Shares commence trading on the Toronto Stock Exchange today under the ticker symbol CM.PR.Y.

The Series 51 Shares were issued under a prospectus supplement dated May 27, 2019, to CIBC’s short form base shelf prospectus dated July 11, 2018.

CIBC has designated the Series 51 Shares as eligible to participate in the CIBC Shareholder Investment Plan along with Series 41, 43, 45, 47 and 49. Holders of eligible shares may elect to have dividends on those preferred shares reinvested in common shares if they reside in Canada, or may elect stock dividends if they reside in the U.S. See “CIBC Shareholder Investment Plan” at www.cibc.com for more information.

CM.PR.Y is a FixedReset, 5.15%+362, NVCC, announced May 24. It will be tracked by HIMIPref™ and has been assigned to the FixedReset (Discount) subindex.

The issue traded 1,022,019 shares today in a range of 24.35-65 before closing at 24.37-40. Vital statistics are:

Given that the PerpetualDiscount index is down 5.64% from its pre-announcement close on May 23, this was actually a pretty good day for the issue!

The new issue is somewhat expensive according to Implied Volatility Analysis:

Click for Big

According to this analysis, the fair price of the new issue is 23.71, down from the announcement day fair-value of 24.85, but alert Assiduous Readers will have noticed that the Implied Volatility plot is very peculiar, having three expensive issues and four cheap ones, with nothing in between.

The other two rich issues are:

• CM.PR.S, a FixedReset, 4.50%+245, NVCC-compliant issue that commenced trading 2018-1-18 after being announced 2018-1-10. It is 0.89 rich, being bid at 19.01 compared to a fair value of 18.12.
• CM.PR.T, a FixedReset, 5.20%+331, NVCC-compliant issue that commenced trading 2019-1-22 after being announced 2019-1-14. It is 2.17 rich, being bid at 24.40 compared to a fair value of 22.23. Alert readers will note that is is bid higher than CM.PR.Y despite having an Issue Reset Spread 31bp lower. Sometimes I despair of this market.

The extremely perplexing issue is CM.PR.R, a FixedReset, 4.40%+338, NVCC Compliant issue that commenced trading 2017-6-2 after being announced 2017-5-25. It is bid at 21.30 compared to a fair value of 22.56. Alert readers will note that it is bid much lower than CM.PR.T despite having an Issue Reset Spread 7bp higher.

I confess I don’t know quite what to make of this. It is common – normal, even – for a new issue to remain rich for quite some time, but I am at a loss to explain why CM.PR.S should remain rich after being on the market for sixteen months. CM.PR.R is just silly … but note that its current coupon is low relative to the new issue and it won’t reset until 2022-7-31 … three years, roughly, thirteen coupon payments, but that’s only a total of about $0.60 and doesn’t explain the differential with CM.PR.S anyway.

Fortunately, I don’t have to explain it! All I have to do is avoid buying the new issue and favour other, cheaper, choices for any allocation to CM that I care to make.

The Toronto Dominion Bank’s new issue closed today without an announcement on their website.

TD.PF.M is a FixedReset 5.10%+356, NVCC, announced 2019-5-24. It will be tracked by HIMIPref™ and has been assigned to the FixedReset (Discount) subindex.

The issue traded 680,093 shares today in a range of 24.60-78 before closing at 24.70-71. Vital statistics are:

Given that the PerpetualDiscount index is down 5.64% from its pre-announcement close on May 23, this was actually a pretty good day for the issue!

The new issue remains expensive according to Implied Volatility Analysis:

Click for Big

According to this analysis, the fair price of the new issue is 23.58, down 0.69 from the announcement day fair value of 24.27.

It is most interesting to compare this issue with TD.PF.L, a FixedReset, 5.20%+327, that commenced trading 2019-1-28 after being announced 2019-01-17. Alert Assiduous Readers will have noticed that although the initial dividends of the two issues are similar, the spreads are 29bp different, which is significant. The fair price of TD.PF.L according to the analysis above is only 22.39 (down 0.84 from the TD.PF.M announcement day value of 23.23), yet the issue closed today at 24.63-68, not much below TD.PF.M’s 24.70-71. I am reminded of the BCE.PR.K Ridiculous Rip-off Wrinkle, in which BCE was able to reopen the issue since – presumably – the initial coupon rate was in-line with the market even though the spread to the Canada 5-year for the re-opened portion was 87bp lower than it should have been.