PrefBlog

Brookfield Office Properties Inc., a subsidiary of Brookfield Property Partners, has announced:

the reset dividend rate on its Class AAA Preference Shares, Series P (“Series P Shares”) (TSX: BPO.PR.P) ….

Series P Shares

If declared, the fixed quarterly dividends on the Series P Shares for the five years commencing April 1, 2017 and ending March 31, 2022 will be paid at an annual rate of 4.161% ($0.260063 per share per quarter).

Holders of Series P Shares have the right, at their option, exercisable not later than 5:00 p.m. (Toronto time) on March 16, 2017, to convert all or part of their Series P Shares, on a one-for-one basis, into Class AAA Preference Shares, Series Q (the “Series Q Shares”), effective March 31, 2017.

The quarterly floating rate dividends on the Series Q Shares have an annual rate, calculated for each quarter, of 3.00% over the annual yield on three-month Government of Canada treasury bills. The actual quarterly dividend rate for the April 1, 2017 to June 30, 2017 dividend period for the Series Q Shares will be 0.86762% (3.48% on an annualized basis) and the dividend, if declared, for such dividend period will be $0.216905 per share, payable on June 30, 2017.

Holders of Series P Shares are not required to elect to convert all or any part of their Series P Shares into Series Q Shares.

As provided in the share conditions of the Series P Shares, (i) if Brookfield determines that there would be fewer than 1,000,000 Series P Shares outstanding after March 31, 2017, all remaining Series P Shares will be automatically converted into Series Q Shares on a one-for-one basis effective March 31, 2017; and (ii) if Brookfield determines that there would be fewer than 1,000,000 Series Q Shares outstanding after March 31, 2017, no Series P Shares will be permitted to be converted into Series Q Shares. There are currently 12,000,000 Series P Shares outstanding.

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

BPO.PR.P is a FixedReset, 5.15%+300, that commenced trading 2010-10-21 after being announced 2010-10-13.

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., BPO.PR.P and the FloatingReset BPO.PR.Q 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 have a distaste at the moment for floating rate product; most of the implied rates until the next interconversion are lower than the current 3-month bill rate and the averages for investment-grade and junk issues are both well below current market rates, at -0.13% and -0.59%, 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 BPO.PR.P FixedReset, we may construct the following table showing consistent prices for its soon-to-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. Therefore, it seems likely that I will recommend that holders of BPO.PR.P continue to hold the issue and not to convert, but I will wait until it’s closer to the March 6 notification deadline before making a final pronouncement. I will note that, given the apparent cheapness of the FloatingResets, 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.

Insofar as the relative valuation of BPO.PR.P is concerned, Implied Volatility analysis indicates it’s fairly priced relative to other BPO issues:

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Fairfax Financial Holdings Limited has announced:

that it has determined the fixed dividend rate on its Cumulative 5-Year Rate Reset Preferred Shares, Series K (“Series K Shares”) (TSX:FFH.PR.K) for the five years commencing April 1, 2017 and ending March 31, 2022. The fixed quarterly dividends on the Series K Shares during that period, if and when declared, will be paid at an annual rate of 4.671% (Cdn. $0.291938 per share per quarter).

Holders of Series K Shares have the right, at their option, exercisable not later than 5:00pm (Toronto time) on March 16, 2017, to convert all or part of their Series K Shares, on a one-for-one basis, into Cumulative Floating Rate Preferred Shares, Series L (the “Series L Shares”), effective March 31, 2017. The quarterly floating rate dividends on the Series L Shares will be paid at an annual rate, calculated for each quarter, of 3.51% over the annual yield on three month Government of Canada treasury bills. The actual quarterly dividend rate in respect of the April 1, 2017 to June 29, 2017 dividend period for the Series L Shares will be 0.98384% (3.99% on an annualized basis) and the dividend for such dividend period, if and when declared, will be Cdn. $0.24596 per share, payable on June 29, 2017.

Holders of Series K Shares are not required to elect to convert all or any part of their Series K Shares into Series L Shares.

As provided in the share conditions of the Series K Shares, (i) if Fairfax determines that there would be fewer than 1,000,000 Series K Shares outstanding after March 31, 2017, all remaining Series K Shares will be automatically converted into Series L Shares on a one-for-one basis effective March 31, 2017; and (ii) if Fairfax determines that there would be fewer than 1,000,000 Series L Shares outstanding after March 31, 2017, no Series K Shares will be permitted to be converted into Series L Shares. There are currently 9,500,000 Series K Shares outstanding.

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

FFH.PR.K is a FixedReset, 5.00%+351, that commenced trading 2012-3-21 after being announced 2012-3-12.

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.K and the FloatingReset FFH.PR.L 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 have a distaste at the moment for floating rate product; most of the implied rates until the next interconversion are lower than the current 3-month bill rate and the averages for investment-grade and junk issues are both well below current market rates, at -0.13% and -0.59%, 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.K FixedReset, we may construct the following table showing consistent prices for its soon-to-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. Therefore, it seems likely that I will recommend that holders of FFH.PR.K continue to hold the issue and not to convert, but I will wait until it’s closer to the March 6 notification deadline before making a final pronouncement. I will note that, given the apparent cheapness of the FloatingResets, 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.

Insofar as the relative valuation of FFH.PR.K is concerned, Implied Volatility analysis indicates it’s fairly priced relative to other FFH issues:

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BCE Inc. has released its Notice of Conversion Privilege for BCE.PR.O:

1. Holders of BCE Inc. fixed-rate Series AO Preferred Shares have the right to convert all or part of their shares, effective on March 31, 2017, on a one-for-one basis, into floating-rate Cumulative Redeemable First Preferred Shares, Series AP of BCE Inc. (the “Series AP Preferred Shares”). In order to convert their shares, holders must exercise their right of conversion during the conversion period, which runs from March 1, 2017 until 5:00 p.m. (Montréal/Toronto time) on March 16, 2017.
…
4. As of March 31, 2017, the Series AO Preferred Shares will, should they remain outstanding, pay, on a quarterly basis, as and when declared by the Board of Directors of BCE Inc., a fixed cash dividend for the following five years that will be based on a fixed rate equal to the sum of: (a) the yield to maturity compounded semi-annually (the “Government of Canada Yield”), computed on March 1, 2017 in accordance with the articles of BCE Inc., of a Canadian dollar denominated non-callable Government of Canada bond with a term to maturity of five years, and (b) 3.09%. The “Government of Canada Yield” computed on March 1, 2017 is 1.170%. Accordingly, the annual fixed dividend rate applicable to the Series AO Preferred Shares for the period of five years beginning on March 31, 2017 will be 4.260%.

5. As of March 31, 2017, the Series AP Preferred Shares, if issued, will pay, for each quarterly period beginning with the quarterly period from and including March 31, 2017 up to but excluding June 30, 2017, as and when declared by the Board of Directors of BCE Inc., a quarterly floating dividend rate equal to the “Floating Quarterly Dividend Rate” for such quarterly period. The “Floating Quarterly Dividend Rate” for any such quarterly period shall be equal to the rate, expressed as a percentage, equal to the sum of: (a) the “T-Bill
Rate”, calculated in accordance with the articles of BCE Inc. on the 30th day prior to the first day of the new quarterly period, and (b) 3.09%, calculated on the basis of the actual number of days in such quarterly period divided by 365. The “T-Bill Rate” means, for any quarterly period, the average yield expressed as a percentage per annum on three-month Government of Canada Treasury Bills, as reported by the Bank of Canada, for the most recent treasury bills auction preceding the applicable calculation date. The “Floating Quarterly Dividend Rate” computed on March 1, 2017 and applicable to the Series AP Preferred Shares for the quarterly period beginning on March 31, 2017 will be 0.89005% (annual rate of 3.570%, based on an initial T-Bill Rate of 0.480%).

BCE.PR.O came into existence by way of conversion from BAF.PR.C. This was a mandatory exchange following the BCE takeover of Bell Aliant.

BAF.PR.C was a FixedReset, 4.55%+309, that commenced trading 2011-12-7 after being announced 2011-11-21.

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., BCE.PR.O and the FloatingReset BCE.PR.P 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 have a distaste at the moment for floating rate product; most of the implied rates until the next interconversion are lower than the current 3-month bill rate and the averages for investment-grade and junk issues are both well below current market rates, at -0.18% and -0.67%, 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 MFC.PR.H FixedReset, we may construct the following table showing consistent prices for its soon-to-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. Therefore, it seems likely that I will recommend that holders of BCE.PR.O continue to hold the issue and not to convert, but I will wait until it’s closer to the March 6 notification deadline before making a final pronouncement. I will note that, given the apparent cheapness of the FloatingResets, 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.

Insofar as the relative valuation of BCE.PR.O is concerned, Implied Volatility analysis indicates it’s a little cheap relative to other BCE issues, but this conclusion may be distorted because BCE.PR.Q is so expensive:

Click for Big

DBRS has announced that it:

has today upgraded the rating on the Class A Preferred Shares, Series 1 (the Class A Preferred Shares) issued by Global Champions Split Corp. (the Company) to Pfd-2 (high) from Pfd-2. The Company issued 2,000,000 Class A Preferred Shares at an issue price of $25.00 per preferred share and an equal number of capital shares (the Capital Shares) on March 7, 2013. The redemption date for the Class A Preferred Shares will be on or about July 31, 2019.

Net proceeds from the initial offering were used to invest in a portfolio of common shares of 15 international large capitalization companies (the Portfolio), which currently consists of 16 companies.
…
Based on the latest dividend yield on the Portfolio and foreign exchange rates, the dividend coverage ratio is approximately 1.6 times. Holders of the Capital Shares are expected to receive all excess income after the Company’s expenses and the Class A Preferred Share distributions have been paid.

As at February 23, 2017, the downside protection available to the Class A Preferred Shares was approximately 65.5% based on the NAV of $72.42 after accounting for exchange rate adjustment.

Some particular strengths of the Company are the adequate diversification of the Portfolio with companies of strong credit quality and the consistency of dividend distributions of the companies in the Portfolio.

Considering the stability and growth of the downside protection as well as strong Portfolio metrics, DBRS has upgraded the rating on the Class A Preferred Shares issued by the Company to Pfd-2 (high) from Pfd-2.

GCS.PR.A is a SplitShare paying 4.00% eligible dividends, maturing July 31, 2019. It commmenced trading 2013-3-7 after a relatively long gestation period. With respect to the nature of the dividends, the company states:

For purposes of the enhanced dividend tax credit rules contained in the Income Tax Act (Canada) and any corresponding provincial and territorial tax legislation, all dividends (and deemed dividends) paid by Global Champions branded split corporations to Canadian residents on our common and preferred shares after December 31, 2005 are designated as “eligible dividends.” Unless stated otherwise, all dividends (and deemed dividends) are designated as “eligible dividends” for the purposes of these rules.

GCS.PR.A is tracked by HIMIPref™ but relegated to the Scraps index on volume concerns.

The Bank of Montreal has announced:

a domestic public offering of $500 million of Non-Cumulative 5-Year Rate Reset Class B Preferred Shares Series 40 (Non-Viability Contingent Capital (NVCC)) (the “Preferred Shares Series 40”). The offering will be underwritten on a bought-deal basis by a syndicate of underwriters led by BMO Capital Markets.

The Preferred Shares Series 40 will be issued to the public at a price of $25.00 per share. Holders will be entitled to receive non-cumulative preferential fixed quarterly dividends for the initial period ending May 25, 2022, as and when declared by the Board of Directors of the Bank, payable in the amount of $0.28125 per share, to yield 4.50 per cent annually.

Subject to regulatory approval, on or after May 25, 2022, the Bank may redeem the Preferred Shares Series 40 in whole or in part at par. On May 25, 2022, the dividend rate will reset and will reset thereafter every five years to be equal to the 5-Year Government of Canada Bond Yield plus 3.33 per cent. Subject to certain conditions, holders may elect to convert any or all of their Preferred Shares Series 40 into an equal number of Non-Cumulative Floating Rate Class B Preferred Shares Series 41 (Non-Viability Contingent Capital (NVCC)) (“Preferred Shares Series 41”) on May 25, 2022, and on May 25 of every fifth year thereafter. Holders of the Preferred Shares Series 41 will be entitled to receive non-cumulative preferential floating rate quarterly dividends, as and when declared by the Board of Directors of the Bank, equal to the then 3-month Government of Canada Treasury Bill Yield plus 3.33 per cent. Subject to certain conditions, holders may elect to convert any or all of their Preferred Shares Series 41 into an equal number of Preferred Shares Series 40 on May 25, 2027, and on May 25 of every fifth year thereafter.

The anticipated closing date is March 9, 2017. The net proceeds from the offering will be used by the Bank for general banking purposes.

Implied Volatility analysis indicates that (subject to the usual caveats) this issue is well priced relative to the other BMO NVCC FixedResets:

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Mind you, though, the Implied Volatility of this set of issues is enormous – 33%! Such a high figure (I suggest that a more rational number is in the 5%-10% range) is suggestive of the idea that an expectation of market directionality is influencing the relative pricing of the different issues; specifically, I suggest that there is an influential view in the market that since these shares are issued by a bank, everything will be OK and they’ll all trade around par forever. We have seen that this assumption can sometimes lead to bad result – boy, have we ever!

I suggest that the level of Implied Volatility implies that a flattening of the indicated curve is more likely than a future steepening – regardless of whether this involves yields of the high-spread issues declining or of low-spread yields increasing, or any other combination of movements – and that therefore the higher-spread issues may be expected to outperform … provided Black-Scholes holds in this particular case! It is entirely possible that Assiduous Readers will have their own views on market direction – a change in spreads, a change in the GOC-5 yield, whatever – and that these views might influence their choice.

It will be recalled that MFC.PR.H will reset to 4.312% effective March 19.

Holders of MFC.PR.H have the option to convert to FloatingResets, which will pay 3-month bills plus 313bp on the par value of $25.00, reset quarterly. The deadline for notifying the company of the intent to convert is 5:00 p.m. (Toronto time) on March 6, 2017; but note that this is a company deadline and that brokers will generally set their deadlines a day or two in advance, so there’s not much time to lose if you’re planning to convert! However, if you miss the brokerage deadline they’ll probably do it on a ‘best efforts’ basis if you grovel in a sufficiently entertaining fashion. The ticker for the new FloatingReset, if it is issued, will be MFC.PR.S.

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., the FixedReset MFC.PR.H 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).

Click for Big

The market appears to have a distaste at the moment for floating rate product; most of the implied rates until the next interconversion are lower than the current 3-month bill rate and the averages for investment-grade and junk issues are both well below current market rates, at +0.02% and -0.51%, 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 MFC.PR.H FixedReset, we may construct the following table showing consistent prices for its soon-to-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. Therefore, I recommend that holders of MFC.PR.H continue to hold the issue and not to convert. I will note that, given the apparent cheapness of the FloatingResets, 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.

Note as well that conversion rights are dependent upon at least one million shares of each series being outstanding after giving effect to holders’ instructions; e.g., if only 100,000 shares of MFC.PR.H are tendered for conversion, then no conversions will be allowed; but if only 100,000 shares of MFC.PR.H will remain after the rest are all tendered, then conversion will be mandatory. However, this is relatively rare: all Strong Pairs have some version of this condition; there are 49 Strong Pairs outstanding; and only ten issues which did not create the potential Strong Pair.