PrefBlog

Brookfield Asset Management Inc. has announced:

that it has determined the fixed dividend rate on its Cumulative Class A Preference Shares, Series 28 (“Series 28 Shares”) (TSX: BAM.PR.X) for the five years commencing July 1, 2017 and ending June 30, 2022 …

Series 28 Shares and Series 29 Shares

If declared, the fixed quarterly dividends on the Series 28 Shares during the five years commencing July 1, 2017 will be $0.1704375 per share per quarter, which represents a yield of 4.177% on the most recent trading price, similar to the current yield. The new fixed dividend rate that will apply for the five years commencing July 1, 2017 represents a yield of 2.727% based on the redemption price of $25 per share.

Holders of Series 28 Shares have the right, at their option, exercisable not later than 5:00 p.m. (Toronto time) on June 15, 2017, to convert all or part of their Series 28 Shares, on a one-for-one basis, into Cumulative Class A Preference Shares, Series 29 (the “Series 29 Shares”), effective June 30, 2017.

The quarterly floating rate dividends on the Series 29 Shares will be paid at an annual rate, calculated for each quarter, of 1.80% over the annual yield on three-month Government of Canada treasury bills. The actual quarterly dividend rate in respect of the July 1, 2017 to September 30, 2017 dividend period for the Series 29 Shares will be 0.58704% (2.329% on an annualized basis) and the dividend, if declared, for such dividend period will be $0.14676 per share, payable on September 29, 2017.

Holders of Series 28 Shares are not required to elect to convert all or any part of their Series 28 Shares into Series 29 Shares.

As provided in the share conditions of the Series 28 Shares, (i) if Brookfield determines that there would be fewer than 1,000,000 Series 28 Shares outstanding after June 30, 2017, all remaining Series 28 Shares will be automatically converted into Series 29 Shares on a one-for-one basis effective June 30, 2017; and (ii) if Brookfield determines that there would be fewer than 1,000,000 Series 29 Shares outstanding after June 30, 2017, no Series 28 Shares will be permitted to be converted into Series 29 Shares. There are currently 9,394,373 Series 28 Shares outstanding.

The Toronto Stock Exchange (“TSX”) has conditionally approved the listing of the Series 29 Shares effective upon conversion. Listing of the Series 29 Shares is subject to Brookfield fulfilling all the listing requirements of the TSX and, upon approval, the Series 29 Shares will be listed on the TSX under the trading symbol “BAM.PR.Y”.

BAM.PR.X is a FixedReset 4.60%+180 that commenced trading 2011-2-8 after being announced 2011-1-19. It has been a member of the FixedReset subindex since inception.

Thus, the new rate represents a dividend reduction of 41%. Ouch!

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., BAM.PR.X and the FloatingReset BAM.PR.Y 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 +0.07% and -0.33%, 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 BAM.PR.X 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. Therefore, it seems likely that I will recommend that holders of BAM.PR.X continue to hold the issue and not to convert, but I will wait until it’s closer to the June 15 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.

The Canadian Imperial Bank of Commerce has announced:

that it had entered into an agreement with a group of underwriters led by CIBC World Markets Inc. for an issue of 16 million Basel III-compliant Non-cumulative Rate Reset Class A Preferred Shares, Series 45 (the “Series 45 Shares”) priced at $25.00 per Series 45 Share to raise gross proceeds of $400 million.

CIBC has granted the underwriters an option to purchase up to an additional four million Series 45 Shares at the same offering price, exercisable at any time up to two days prior to closing. Should the underwriters’ option be fully exercised, the total gross proceeds of the financing will be $500 million.

The Series 45 Shares will yield 4.40% per annum, payable quarterly, as and when declared by the Board of Directors of CIBC, for an initial period ending July 31, 2022. On July 31, 2022, and on July 31 every five years thereafter, the dividend rate will reset to be equal to the then current five-year Government of Canada bond yield plus 3.38%.

Subject to regulatory approval and certain provisions of the Series 45 Shares, on July 31, 2022 and on July 31 every five years thereafter, CIBC may, at its option, redeem all or any part of the then outstanding Series 45 Shares at par.

Subject to the right of redemption, holders of the Series 45 Shares will have the right to convert their shares into Non-cumulative Floating Rate Class A Preferred Shares, Series 46 (the “Series 46 Shares”), subject to certain conditions, on July 31, 2022 and on July 31 every five years thereafter. Holders of the Series 46 Shares will be entitled to receive a quarterly floating rate dividend, as and when declared by the Board of Directors of CIBC, equal to the three-month Government of Canada Treasury Bill yield plus 3.38%.

Holders of the Series 46 Shares may convert their Series 46 Shares into Series 45 Shares, subject to certain conditions, on July 31, 2027 and on July 31 every five years thereafter.

The expected closing date is June 2, 2017. CIBC will make an application to list the Series 45 Shares as of the closing date on the Toronto Stock Exchange. The net proceeds of this offering will be used for general purposes of CIBC.

Later, they announced:

that as a result of strong investor demand for its previously announced domestic public offering of non-cumulative Rate Reset Class A Preferred Shares, Series 45, the size of the offering has been increased to 32 million shares. The gross proceeds of the offering will now be $800 million. The offering will be underwritten by a syndicate led by CIBC World Markets Inc. The expected closing date is June 2, 2017.

The net proceeds from this transaction will be used for general purposes of CIBC.

A good sized issue!

Implied Volatility analysis for FixedResets suggests the issue may be a little expensive:

Click for Big

The theoretical price implied by the above calculation is 24.76.

In keeping with its policy of contempt for the preferred shareholders who provide a chunk of its financing, Enbridge has again decided not to publicize events related to its ENB.PR.B issue, its extension, reset and conversion privilege.

Assiduous Readers will recall that ENB.PR.B will reset to 3.415% effective 2017-6-1. It was issued as a 4.00%+240 FixedReset which commenced trading 2011-9-30 after being announced 2011-9-21.

An inquiry to Enbridge Investor Relations elicited the response:

Approximately 1.7 million Series B will be converted into Cs and those Cs will start to trade on the TSX on June 1.

It will be remembered that I recommended against conversion.

Market conditions with respect to FixedReset / FloatingReset equivalency have not changed significantly since my recommendation:

Click for Big

ECN Capital Corp. has announced:

that it has closed the previously announced offering of 4,000,000 6.25% Cumulative 5-Year Minimum Rate Reset Preferred Shares, Series C (the “Series C Preferred Shares”) at a price of $25.00 per share for aggregate gross proceeds of $100,000,000. The offering was conducted by a syndicate of underwriters co-led by BMO Capital Markets, CIBC Capital Markets, National Bank Financial, RBC Capital Markets, TD Securities, and including Cormark Securities, Desjardins Securities, GMP Securities, HSBC Securities (Canada) and Raymond James.

The Corporation intends to use the net proceeds to originate and finance, directly and indirectly, finance assets, to fund future acquisitions and for general corporate purposes.

“We are grateful for the support shown by the market in the successful completion of this financing”, said Steve Hudson, Chief Executive Officer, “and we look forward to executing on our business plan and delivering value for our shareholders.”

The Series C Preferred Shares will commence trading today on the Toronto Stock Exchange under the symbol “ECN.PR.C”.

ECN.PR.C is a FixedReset, 6.25%+519M625, announced 2017-5-15. It will be tracked by HIMIPref™ but relegated to the Scraps subindex on credit concerns.

The issue traded 99,442 shares today in a range of 24.43-75 before closing at 24.44-52. Vital statistics are:

Canadian Utilities Limited has announced:

that after having taken into account all election notices following the conversion deadline for the Cumulative Redeemable Second Preferred Shares Series Y (“Series Y Preferred Shares”) tendered for conversion into Cumulative Redeemable Second Preferred Shares Series Z (“Series Z Preferred Shares”), the holders of Series Y Preferred Shares are not entitled to convert their Series Y Preferred Shares into Series Z Preferred Shares. There were approximately 508,379 Series Y Preferred Shares tendered for conversion, which is less than the two million shares required to give effect to conversions into Series Z Preferred Shares.

The Series Y Preferred Shares will continue to pay on a quarterly basis, for the five-year period from and including June 1, 2017 to but excluding June 1, 2022, as and when declared by the Board of Directors of Canadian Utilities Limited, a fixed dividend based on an annual dividend rate of 3.40%.

Assiduous Readers will remember that I recommended against conversion after the reset to 3.40% for CU.PR.C.

So CU.PR.C is now a FixedReset, 3.4O%+240. It is tracked by HIMIPref™ and is assigned to the FixedReset subindex.