PrefBlog

Manulife Financial Corporation has announced:

the applicable dividend rates for its Non-cumulative Rate Reset Class 1 Shares Series 7 (the “Series 7 Preferred Shares”) (TSX: MFC.PR.H) and Non-cumulative Floating Rate Class 1 Shares Series 8 (the “Series 8 Preferred Shares”).

With respect to any Series 7 Preferred Shares that remain outstanding after March 19, 2017, 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 March 20, 2017, and ending on March 19, 2022, will be 4.31200% per annum or $0.269500 per share per quarter, being equal to the sum of the five-year Government of Canada bond yield as at February 21, 2017, plus 3.13%, as determined in accordance with the terms of the Series 7 Preferred Shares.

With respect to any Series 8 Preferred Shares that may be issued on March 19, 2017 in connection with the conversion of the Series 7 Preferred Shares into the Series 8 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 March 20, 2017, and ending on June 19, 2017, will be 0.90639% (3.59600% on an annualized basis) or $0.226598 per share, being equal to the sum of the three-month Government of Canada Treasury bill yield as at February 21, 2017, plus 3.13%, as determined in accordance with the terms of the Series 8 Preferred Shares.

Beneficial owners of Series 7 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 March 6, 2017. The news release announcing such conversion right was issued on February 10, 2017 and can be viewed on SEDAR or Manulife’s website. Conversion inquiries should be directed to Manulife’s Registrar and Transfer Agent, CST Trust Company, at 1‑800-387-0825.

The Toronto Stock Exchange (“TSX”) has conditionally approved the listing of the Series 8 Preferred Shares effective upon conversion. Listing of the Series 8 Preferred Shares is subject to Manulife fulfilling all the listing requirements of the TSX and, upon approval, the Series 8 Preferred Shares will be listed on the TSX under the trading symbol “MFC.PR.S”.

MFC.PR.H is a FixedReset, 4.60%+313, that commenced trading 2012-2-22 after being announced 2012-2-14. The notice of extension was previously reported.

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.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).

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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 -0.51% and -0.64%, 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 MFC.PR.H 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 MFC.PR.H is concerned, Implied Volatility analysis indicates it’s fairly priced relative to other MFC issues:

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In fact, the entire series is well-behaved, with the exception of MFC.PR.F, which looks about $1.40 cheap (according to this analysis!).

DBRS has announced that it:

has today upgraded the rating on the Class B Preferred Shares, Series 2 (the Series 2 Preferred Shares) issued by Allbanc Split Corp. II (the Company) to Pfd-2 from Pfd-2 (low). In February 2016, the Company offered 687,567 Series 2 Preferred Shares at $25.67 each as part of a share reorganization. The Series 2 Preferred Shares were issued to maintain the leveraged split share structure of the Company so that the number of issued and outstanding Class A Capital Shares is twice the number of issued and outstanding Series 2 Preferred Shares. The maturity date for the Series 2 Preferred Shares is February 28, 2021.
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The current yield on the Portfolio shares fully covers the Series 2 Preferred Share dividends, providing dividend coverage of approximately 1.5 times (x). The Class A Capital Shares are expected to receive all excess dividend income after the Series 2 Preferred Share distributions and other expenses of the Company have been paid.

In the past year, the downside protection available to the Series 2 Preferred Shares, although being volatile, has been gradually increasing, reaching approximately 67.7% as of February 16, 2017.

ALB.PR.C is tracked by HIMIPref™ but relegated to the Scraps index on credit concerns.

Veresen Inc. has announced:

it has entered into a suite of separate agreements to sell its power generation business for $1.18 billion.

Veresen has maximized the value of its power business by selling the assets in three separate packages.
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Each of the agreements is subject to closing adjustments and conditions customary in transactions of this nature. Closing is expected to occur during the second quarter of 2017 subject to the receipt of all necessary approvals. Veresen anticipates the minimal amount of cash taxes arising from the sale of the power business will be recovered in the following year. The company expects to update its 2017 guidance for the divestiture of the power business upon the closing of the sale process. TD Securities Inc. acted as the company’s sole financial advisor on this divestiture.

… and Capital Power Corporation has announced:

that it has entered into an agreement to acquire the thermal power business of Veresen Inc., consisting of two gas-fired generation facilities and two waste heat assets.

Under the terms of the agreement, Capital Power will acquire 284 megawatts (MW, net) of generation from two natural gas-fired power assets in Ontario consisting of the 84 MW East Windsor Cogeneration Centre (East Windsor) and a 50% interest in the 400 MW York Energy Centre (York Energy), and will operate both facilities. Both East Windsor and York Energy are under long-term power purchase agreements (PPAs) with the Ontario Independent Electricity System Operator (IESO, A rated) with original terms expiring in 2029 and 2032, respectively. Both assets earn revenue through fixed capacity payments partly indexed to inflation and are compensated for operations and maintenance, and fuel (commodity and transportation) as well as start-up costs. Additionally, East Windsor is under a long-term steam supply agreement with Ford Motor Company (BBB rated).
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The purchase price for the acquisition is $225 million in total cash consideration, subject to working capital adjustments and other closing adjustments, and the assumption of $275 million of project level debt (proportionate basis). Capital Power expects to finance the transaction through existing cash and its credit facilities. The transaction is expected to close in the second quarter of 2017, subject to regulatory approvals and satisfaction of closing conditions.

The acquisition is expected to increase adjusted funds from operations (AFFO) by an estimated $24 million in the first full year of operations, which will be accretive by 25 cents per share reflecting a 7% increase. The acquisition is expected to be accretive to earnings by 11 cents per share during its first full year of operations. The projected annual EBITDA generated by the assets is estimated to be $55 million per year.

With respect to VSN, DBRS comments:

DBRS had placed Veresen’s ratings Under Review with Negative Implications on August 4, 2016, following the Company’s announcement that it would sell its power generation business, suspend its Premium Dividend and Dividend Reinvestment Plan (DRIP) and maintain its current dividend payout. Proceeds from the sale of the power business will be invested to develop Veresen’s midstream projects in the core natural gas and natural gas liquids infrastructure business. DBRS believes that this announcement negatively affects Veresen’s business risk profile. Please refer to the DBRS press releases “DBRS Places Veresen Inc.’s Ratings Under Review with Negative Implications,” dated August 4, 2016, and “DBRS Maintains Veresen Inc.’s Ratings Under Review with Negative Implications Status,” dated November 18, 2016. DBRS notes that today’s announcement by the Company is consistent with its announcement on August 4, 2016. Consequently, DBRS is maintaining the Under Review with Negative Implications status on Veresen’s ratings. DBRS will further review the details relating to the sale transactions as they become available and aims to resolve the Under Review with Negative Implications status after the sale transactions have closed in Q2 2017.

With respect to CPX, DBRS comments:

DBRS views the Acquisition as having a modestly positive impact on CPC’s Business Risk Assessment factors as (1) the Acquisition assets are supported by long-term PPAs with highly rated counterparties; (2) cash flow from the Acquisition assets is expected to be stable reflecting the nature of capacity contract payments, which account for approximately 80% of the revenues of the Acquisition assets; and (3) the assets being located outside of Alberta also provides CPC with additional geographic diversification, away from the heightened political risk in the province. However, DBRS views the impact of the Acquisition to be modestly negative on CPC’s credit ratios as a result of additional debt from the Acquisition. Overall, DBRS does not view the Acquisition as having either a material positive or negative impact on CPC’s rating.

DBRS notes that CPC’s rating remains BBB with a Negative trend due to Alberta’s challenging wholesale power market environment and heightened political risk for the power market in Alberta. DBRS expects the Negative trend to be resolved upon the completion of its annual review of the Company, which is anticipated to occur in March 2017.

DBRS’ Review Negative of VSN was reported on PrefBlog here and here. The Negative Trend noted by DBRS with respect to CPX does not affect the preferred shares.

Affected VSN issues are VSN.PR.A, VSN.PR.C and VSN.PR.E.

Affected CPX issues are CPX.PR.A, CPX.PR.C, CPX.PR.E and CPX.PR.E.

BPO.PR.E settled today, but I was unable to find a press release. Which is not to say that there is no press release, of course – Brookfield’s website is an incredibly poorly designed labyrinth, although it looks really cool and groovy and awesome, man. Have another spliff, bro!

BPO.PR.E is a FixedReset, 5.10%+396M510, announced 2017-2-9. It will be tracked by HIMIPref™ but relegated to the Scraps index on credit concerns.

The issue traded 697,623 shares today in a range of 24.92-02 before closing at 24.99-00, 10×188. Vital statistics are:

DBRS formally assigned a Pfd-3 rating to the issue:

DBRS Limited (DBRS) has today assigned a rating of Pfd-3 with a Stable trend to the $275 million Class AAA Preference Shares, Series EE (Series EE Preferred Shares), issued by Brookfield Office Properties Inc. (Brookfield).

The Series EE Preferred Shares will rank equally and rateably with Brookfield’s existing Class AAA preference shares and in priority of the Company’s Class B preferred shares and common shares.

DBRS understands that the net proceeds from the sale of the Series EE Preferred Shares will be used for general corporate purposes, which may include the redemption of existing preferred shares.

Implied Volatility analysis suggests that the issue is a little expensive, but it will be noted that in addition to all the usual assumptions made in this analysis, this conclusion also depends on the assumption that the issues with a reset-floor are equivalent to issues without a reset floor … which is somewhat controversial!

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Brookfield Renewable Partners L.P. has announced that it has:

completed its previously announced issue of Cumulative Minimum Rate Reset Class A Preferred Limited Partnership Units, Series 11 (the “Series 11 Preferred Units”). The offering was underwritten by a syndicate led by TD Securities Inc., CIBC Capital Markets, RBC Capital Markets and Scotiabank.

Brookfield Renewable issued 10,000,000 Series 11 Preferred Units at a price of $25.00 per unit, for total gross proceeds of CDN$250,000,000.

The Series 11 Preferred Units will commence trading on the Toronto Stock Exchange this morning under the ticker symbol BEP.PR.K.

BEP.PR.K is a FixedReset, 5.00%+382M500, announced 2017-2-7. Note that distributions on this security will be a mix of ordinary income and return of capital. It will be tracked by HIMIPref™ but relegated to the Scraps subindex on credit concerns.

The issue traded 784,722 shares today in a range of 24.88-00 before closing at 24.97-99, 54×45. Vital statistics are:

Update, 2017-10-11: Note that if we look at the prospectus (available on SEDAR under ““Brookfield Renewable Partners L.P. Feb 7 2017 18:36:01 ET Prospectus (non pricing) supplement – English PDF 284 K”:

The reclassification of a Series 11 Preferred Unit into a Series 12 Preferred Unit or a Series 12 Preferred Unit into a Series 11 Preferred Unit, whether pursuant to an election made by the Resident Holder or pursuant to an automatic reclassification, may be considered to be a disposition of the Series 11 Preferred Unit or Series 12 Preferred Unit by the Resident Holder. The CRA’s position is that the conversion of an interest in a partnership into another interest in the partnership may result in a disposition of the partnership interest by the holder if the conversion results in a significant change in the rights and obligations of the holder in respect of the converted interest, including a significant change in the percentage interest in the profits of the partnership. Whether or not the reclassification of Series 11 Preferred Units into Series 12 Preferred Units or Series 12 Preferred Units into Series 11 Preferred Units would result in a significant change in the percentage interest of a Resident Holder in the profits of the Partnership is a question of fact that depends upon the facts and circumstances that exist at the time of the reclassification.