SLF.PR.G To Reset At 2.275%

Sun Life Financial Inc. has announced:

the applicable dividend rates for its Class A Non-Cumulative Rate Reset Preferred Shares Series 8R (the “Series 8R Shares”) and Class A Non-Cumulative Floating Rate Preferred Shares Series 9QR (the “Series 9QR Shares”).

With respect to any Series 8R Shares that remain outstanding after June 30, 2015, commencing as of such date, holders thereof will be entitled to receive non-cumulative preferential cash dividends on a quarterly basis, as and when declared by the Board of Directors of Sun Life Financial and subject to the Insurance Companies Act (Canada). The dividend rate for the five-year period commencing on June 30, 2015 to but excluding June 30, 2020 will be 2.275 % per annum or $0.142188 per share per quarter, being equal to the sum of the Government of Canada Yield, as defined in the terms of the Series 8R Shares, on Monday, June 1, 2015 plus 1.41%, as determined in accordance with the terms of the Series 8R Shares.

With respect to any Series 9QR Shares that may be issued on June 30, 2015, holders thereof will be entitled to receive floating rate non-cumulative preferential cash dividends on a quarterly basis, as and when declared by the Board of Directors of Sun Life Financial and subject to the Insurance Companies Act (Canada), based on a dividend rate equal to the sum of the T-Bill Rate, as defined in the terms of the Series 9QR Shares, plus 1.41% (calculated on the basis of the actual number of days elapsed in such Quarterly Floating Rate Period divided by 365 days), subject to certain adjustments in accordance with the terms of the Series 9QR Shares. The dividend rate for the period commencing on June 30, 2015 to but excluding September 30, 2015 will be equal to 2.075 % per annum or $0.130753 per share, as determined in accordance with the terms of the Series 9QR Shares.

Beneficial owners of Series 8R Shares who wish to exercise their right of conversion should communicate as soon as possible with their broker or other nominee and ensure that they follow their instructions in order to meet the deadline to exercise such right, which is 5:00 p.m. (ET) on Monday, June 15, 2015.

An application will be made to list the Series 9QR Shares on the Toronto Stock Exchange.

SLF.PR.G has paid 4.35% over the past five years, so the change in dividend represents a cut of 48%. Ouch!

SLF.PR.G was announced 2010-5-13 and commenced trading 2010-5-25. It is tracked by HIMIPref™ and is assigned to the FixedReset subindex. As it is an insurance issue, it is my opinion that OSFI will – eventually – apply the NVCC rules to it and as it is not NVCC-compliant, it is my further opinion that it will be redeemed on or before a certain date. For analytical purposes, I have currently set that date to be 2025-1-31; it will probably be pushed back a year or two as OSFI’s foot-dragging with respect to the Life Insurance Regulatory Framework continues. You may agree or disagree with me as you wish; at present, the performance of insurance issues suggests the market as a whole disagrees.

Note that holders of SLF.PR.G have the right, until 5:00 p.m. (ET) on Monday, June 15, 2015, to notify the company that they wish to convert to the new FloatingReset series – the two series will be interconvertible every five years for as long as they exist. Note that brokers will have earlier internal deadlines.

I will post regarding my opinion on whether to retain or convert SLF.PR.G closer to the deadline; until then, contemplate today’s graph of FixedReset/FloatingReset Strong Pairs:

Click for Big

The Investment Grade pairs are very well-behaved today, with implied break-even 3-Month T-Bill rates in a nice cluster between 0.31% and 0.63%, with an average of 0.48%.

Estimate of SLF.PR.? FloatingReset Trading Price In Current Conditions
  Assumed FloatingReset
Price if Implied Bill
is equal to
FixedReset Bid Price Spread 0.30% +0.45% +0.60%
SLF.PR.G 16.63 141bp 16.02 16.18 16.34

So at this point, it appears that holders of SLF.PR.G who wish to own the FloatingReset issue would be better advised not to convert, but to swap on the market; this will result in a small cash take-out provided that the new pair trades in line with extant pairs, which is by no means guaranteed.

4 Responses to “SLF.PR.G To Reset At 2.275%”

  1. liuyun88 says:

    Its interesting the reset 5yr GoC rate is the lowest 5yr it has ever gotten to intraday for the last 30 days. Conspiracy?

  2. jiHymas says:

    I was wondering when somebody was going to bring that up! You win the prize – I have sent you links to download the June edition of PrefLetter.

    I don’t think it will happen. Consider the amounts of money involved. Say you have a $200-million issue of FixedResets and you’re seeking to manipulate GOC-5 at the “fix”. 1bp of yield on the GOC-5 rate over five years comes to $100,000, and that assumes nobody has converted to FloatingResets.

    I will be the last to deny that $100,000 is nice to have, but who gets it? In all the fixing cases found or alleged so far, individuals or small groups of traders have done it in order to boost their profits … which they get a piece of via their bonus. Say somewhere between 20% and 50%. The fact that the company gets the rest is only incidental to the scheme.

    In a rigging such as you suggest, it’s the company that gets the money (via lower dividend rates, so it’s actually a saving relative to an unknown figure. What’s worse, it’s over a five year period) and it’s unclear who would be putting significant money in their pocket. It would have to be a cabal of non-trading officers, giving instructions to their traders, who would execute trades with (or give instructions to) their dealers, and that’s starting to look like a pretty unwieldy conspiracy for not a lot of money that doesn’t really disproportionately wind up in anybody’s pocket.

    Remember too that while SLF (probably) has a dedicated Canada desk, they are certainly not completely plugged-in market-making behemoths. In order to influence the calculated GOC-5 at a given time, they’re probably going to have eat the bid-ask spread (or at least a good chunk of it) … and then they’ll have to eat it again when they unwind the position.

    In addition, the penalties if you’re caught are grossly disproportionate, as discussed on June 10.

    Which is not to say I think it’s impossible. Just unlikely and hard to prove.

  3. liuyun88 says:

    Thanks for the prize, but I already subscribe to PrefLetter…
    Maybe SLF has hedged it by selling GoC-5 going into the issue (locking in their funding rate) and bought GoC-5 back at the setting. Whatever the actual mechanism, it’s interesting GoC-5 peaked almost exactly at 10am on the day of the setting.

  4. jiHymas says:

    Odd … you’re using a different eMail address to comment than you are for your subscription.

    If you send me an eMail from your commenting account telling me your subscription address, I’ll add an issue to your subscription.

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