New Issue: HSE FixedReset, 4.50%+357

Husky Energy has announced that it:

has agreed to issue to a syndicate of underwriters led by TD Securities Inc. and RBC Capital Markets for distribution to the public 6,000,000 Cumulative Redeemable Preferred Shares, Series 5 (the “Series 5 Shares”).

The Series 5 Shares will be issued at a price of $25.00 per Series 5 Share, for aggregate gross proceeds of $150 million. Holders of the Series 5 Shares will be entitled to receive a cumulative quarterly fixed dividend yielding 4.50 percent annually for the initial period ending March 31, 2020. Thereafter, the dividend rate will be reset every five years at a rate equal to the five-year Government of Canada bond yield plus 3.57 percent.

Holders of Series 5 Shares will have the right, at their option, to convert their shares into Cumulative Redeemable Preferred Shares, Series 6 (the “Series 6 Shares”), subject to certain conditions, on March 31, 2020 and on March 31 every five years thereafter. Holders of the Series 6 Shares will be entitled to receive cumulative quarterly floating dividends at a rate equal to the 90-day Government of Canada Treasury Bill rate plus 3.57 percent.

Husky has granted the underwriters an option, exercisable in whole or in part prior to closing, to purchase up to an additional 2,000,000 Series 5 Shares at the same offering price. The Series 5 Shares will be offered by way of prospectus supplement to the short form base shelf prospectus of Husky Energy dated February 23, 2015.

The prospectus supplement will be filed with securities regulatory authorities in all provinces of Canada.

The net proceeds of the offering will be used for the partial repayment of short term debt incurred in connection with the Company’s U.S. refining operations.

The offering is expected to close on or about March 12, 2015, subject to customary closing conditions and receipt of required regulatory approvals.

They later announced:

that the underwriters of its Cumulative Redeemable Preferred Shares, Series 5 (the “Series 5 Shares”) offering have exercised their option to increase the size to 8,000,000 shares, due to positive investor response.

The aggregate gross proceeds from the upsized offering will be $200 million. Closing of the offering is expected on or about March 12, subject to customary closing conditions and receipt of required regulatory approvals.

It astonishes me to report that the recently issued HSE.PR.C, a FixedReset 4.50%+313 resetting 2019-12-31 (a mere three months prior to the resetting of the new issue) was not more badly hurt by the news: yesterday it closed at 25.25-30 (3.94%-93) and today it closed at 24.84-93 ( ) on good volume of 77,500, which is far in excess of the turnover it saw in February. Come on, people! Surely rational expectations decree that a 44bp difference in reset rates should be worth more than that!

It might be, of course, that the market is asserting that the new issue is grossly underpriced and will pop as soon as it starts trading. This interpretation is consistent with the exercise of the underwriters’ option. And it is also possible that the market is asserting that Five-Year Canada yields in late 2019/early 2020 will be so high that a mere 44bp in dividend rates will be a mere bagatelle. And it is also possible that the market is asserting that the credit quality of HSE is so incredibly wonderful and adamantine that both issues are certain to be called on their first exchange dates and refinanced at a much cheaper rate.

Well, the market can assert whatever it likes. And it will.

After all, look at TRP.PR.E and TRP.PR.G, which show a bid price difference of $0.08 today, despite an Issue Reset Spread difference of 61bp, albeit with thirteen month difference in next Exchange Date. I suspect that eventually this recent spate of high-spread issues will force down the prices of the older, somewhat lower-spread issues (the very low spread issues have, I think, taken their hits already). But I’ve been wrong before and will be wrong again, so don’t mortgage the house.

2 Responses to “New Issue: HSE FixedReset, 4.50%+357”

  1. Prefhound says:

    Well, one reason the HSE.PR.C might be as high as $24.93 is that it goes Ex Dividend on March 11 (1 week). Some investors might be waiting for that dividend. I suppose 44 bps might be worth, say 10% of the current dividend and the price could fall to $22.50 to equalize to a $25 IPO for the new issue. As usual, it doesn’t make much sense to hang on to the PR.C until it goes ex div….

  2. jiHymas says:

    Right, the dividend. I missed that one!

    That’s still less than thirty cents, though and the price spread should be more than that, as you say. It could well be a dividend capture story run amok; as you pointed out in the comments to December 15, 2011 and was discussed further in the post YLO.PR.A and YLO, retail has a tendency to decide to sell immediately after receiving one last dividend, a strategy that often doesn’t work out too well.

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