PrefBlog

Equitable Group Inc. has announced:

that it has agreed to issue 2,800,000 Non-cumulative 5-Year Rate Reset Preferred Shares Series 3 (the “Series 3 Preferred Shares”) on a bought deal basis to a syndicate of underwriters led by TD Securities Inc. and Scotiabank for distribution to the public. The Series 3 Preferred Shares will be issued at a price of $25.00 per share, for aggregate gross proceeds of $70,000,000. Holders of the Series 3 Preferred Shares will be entitled to receive non-cumulative preferential quarterly fixed dividends yielding 6.35% annually for the initial period ending September 30, 2019. Thereafter, the dividend rate will be reset every five years at a rate equal to the then current 5-year Government of Canada bond yield plus 4.78%.

The Company has granted to the underwriters an over-allotment option, exercisable for a period of 30 days following closing of the offering, to purchase up to an additional 200,000 Series 3 Preferred Shares which, if exercised in full, would increase the gross offering size to $75,000,000. The Series 3 Preferred Shares will be offered in all provinces and territories of Canada by way of a supplement to the Company’s existing short form base shelf prospectus dated June 24, 2014.

“Preferred shares have long formed a fundamental part of our Bank’s efficient capital structure and of our strategy of supporting growth with non-dilutive forms of capital,” said Andrew Moor, President and CEO of Equitable Group and its wholly owned subsidiary, Equitable Bank. “This attractive offering will keep our capital position well above most industry benchmarks as we deliver profitable growth across our lines of business.”

Holders of Series 3 Preferred Shares will have the right, at their option, to convert their Series 3 Preferred Shares into Non-cumulative Floating Rate Preferred Shares Series 4 of the Company (the “Series 4 Preferred Shares”), subject to certain conditions, on September 30, 2019 and on September 30 every five years thereafter. Holders of the Series 4 Preferred Shares will be entitled to receive non-cumulative preferential quarterly floating dividends at a rate equal to the three-month Government of Canada Treasury Bill yield plus 4.78%.

The proceeds of this offering will be used by the Company to acquire Basel III compliant Non-cumulative 5-Year Rate Reset Preferred Shares Series 3 of Equitable Bank (the “Bank”), which will form part of the Bank’s Tier I capital base. The Bank will in turn use the proceeds for corporate purposes and to redeem its existing Series 1 Preferred Shares, subject to the receipt of all necessary regulatory approvals. The Company likewise intends to redeem its currently outstanding Non-cumulative 5-year Rate Reset Preferred Shares Series 1 on September 30, 2014 in accordance with the terms of such shares.

“Equitable’s capital ratios have consistently exceeded minimum regulatory standards as a result of years of disciplined capital allocation,” said Tim Wilson, Chief Financial Officer of Equitable Group and Equitable Bank. “Giving effect to the issuance of Series 3 and the redemption of Series 1, on a pro forma basis our Total and Tier I Capital Ratios would improve by 80 basis points to 17.4% and 14.6% respectively on an all-in basis, based on our reported position at the end of our first quarter.”

The offering is expected to close on or about August 8, 2014. The Company will make an application to list the Series 3 Preferred Shares and Series 4 Preferred Shares on the Toronto Stock Exchange.

It’s kind of an interesting issue, because it’s being issued by the holding company with proceeds being invested in virtually identical private shares of the operating company. The OpCo’s shares will be NVCC-compliant, but the HoldCo’s shares are unregulated and do not have a forced-conversion-to-equity clause; thus, it is possible that the OpCo’s shares could be converted into OpCo common while the HoldCo’s shares still represent a $25 claim on HoldCo. While I’m sure that in such a case that this claim would not be trading at par, it sounds like a good thing, even if all it ever does is make the lawyers rich.

It is also interesting that the coupon of this issue, at 6.35%, is lower than the initial coupon on the issue it is refunding, EQB.PR.A, issued as ETC.PR.A. However, the Issue Reset Spread on the issue is higher, 478bp as opposed to 453bp. How times change!

This issue is unrated and will not be tracked by HIMIPref™. This is not because I worship the Credit Rating Agencies and am unable to do anything without them; it is because I feel that a public announcement by the CRAs of imminent downgrades do an admirable job of concentrating the minds of management and the directors on fixing the problem. Such announcements by Hymas Investment Management Inc. or Joe Blogger do not carry the same weight.

Update, 2016-3-9: This trades as EQB.PR.C

This entry was posted on Thursday, July 24th, 2014 at 6:58 pm and is filed under New Issues. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.