Northland Power Inc. has announced:
that pursuant to the share terms in respect of the Cumulative Rate Reset Preferred Shares, Series 1 (“Series 1 Shares”), it has determined the fixed dividend rate for the five years commencing September 30, 2015 and ending September 29, 2020. The fixed quarterly dividends on the Series 1 Shares during that period will be paid at an annual rate of 3.51% (Cdn. $0.22 per share per quarter).
Holders of Series 1 Shares have the right, at their option, exercisable not later than 5:00 pm (Toronto time) on September 15, 2015, to convert all or part of their Series 1 Shares, on a one-for-one basis, into Cumulative Floating Rate Preferred Shares, Series 2 (the “Series 2 Shares”), effective September 30, 2015. The quarterly floating rate dividends on the Series 2 Shares will be paid at an annual rate, calculated for each quarter, of 2.80% over the annual yield on 90-day Government of Canada treasury bills. The actual quarterly dividend rate in respect of the September 30, 2015 to December 30, 2015 dividend period for the Series 2 Shares will be 0.80% (3.18% on an annualized basis) and the dividend, if and when declared, for such dividend period will be Cdn. $0.20 per share, payable on December 31, 2015.
Holders of Series 1 Shares are not required to elect to convert all or any part of their Series 1 Shares into Series 2 Shares.
As provided in the share conditions of the Series 1 Shares, (i) if Northland determines that there would be fewer than 1,000,000 Series 1 Shares outstanding after September 30, 2015, all remaining Series 1 Shares will be automatically converted into Series 2 Shares on a one-for-one basis effective September 30, 2015; or (ii) if Northland determines that there would be fewer than 1,000,000 Series 2 Shares outstanding after September 30, 2015, no Series 1 Shares will be permitted to be converted into Series 2 Shares. There are currently 6,000,000 Series 1 Shares outstanding.
The Toronto Stock Exchange (“TSX”) has conditionally approved the listing of the Series 2 Shares effective upon conversion. Listing of the Series 2 Shares is subject to Northland fulfilling all the listing requirements of the TSX and, upon approval, the Series 2 Shares will be listed on the TSX under the trading symbol “NPI.PR.B”.
NPI.PR.A is a FixedReset with a spread of 280bp over five-year Canadas, which commenced trading July 28, 2015 under the ticker symbol NPP.PR.A after being announced July 6, 2010. The ticker was changed effective January 1, 2011 after conversion from an Income Trust. The original coupon was 5.25%, so the reset rate of 3.51% represents a decline of 33%. Hey, by recent 40%+ standards, that looks good!
As noted in the press release, holders have the option to convert into NPI.PR.B, a FloatingReset, and this option must be exercised prior to 5pm, September 15 before vanishing until the next reset date in 2020. Recent market conditions have been highly unfavourable for FloatingResets and it is likely that I will recommend against conversion. However, conditions can change dramatically and rapidly and I will wait until September 10 to make a more formal recommendation.
Note that the September 15 notification date is for notification of the company, and brokers will generally have an internal deadline a day or two prior to this … so if you’re planning to wait until the last minute, contact your broker and find out precisely when the last minute will be!
Hello James,
I must say I am very tempted by converting 50% of my holding of that pref I bought at, on average, $14.35 per share, as I don’t quite understand what can be those “highly unfavourable market conditions” making it better to go on with a five year reset at par of only 3.51% for a non-investment grade issue.
But for my concern of bad liquidity of the converted floating shares, I would convert all of them. Canada’s treasury bills are not a “refuge” such as U.S. bonds. Canada’s credit rating (AAA) cannot go up, it can only remain the same or, very likely if oil stays where it is in the near future, go lower. Canada is in recession. Canada will most probably register a deficit in 2015. The CAD is getting close to its historic lows. The Canadian economy is dependent to a large extent upon oil and other commodities. A NPD, Liberal or minority Conservative government will not be welcomed by international bond investors. A weak CAD should somehow translates into inflation sooner than later.
Thus, if the present situation is not precisely the kind of scenario why these conversion rights were granted with such issues then I don’t see when it will be the option to go for. Please explain me or direct me to something showing me what I am missing as I don’t see how Canadas’ interest rates can go any lower.
I have read your interesting comments on the possibility of negative rates but this, in my opinion, can only be possible with a “reserve” currency, what the CAD is clearly not for at least three of the next five (5) years.
Other than liquidity concerns, Mr. Market’s apparent aversion towards “floating” rates is the only “unfavorable market conditions” I see but I wish I could understand its logical foundation, if any.
Thanks
I don’t quite understand what can be those “highly unfavourable market conditions” making it better to go on with a five year reset at par of only 3.51% for a non-investment grade issue…. Mr. Market’s apparent aversion towards “floating” rates is the only “unfavorable market conditions” I see but I wish I could understand its logical foundation, if any.
Seems to me you understand it pretty well!
For my take on the situation, I suggest you review the post SLF.PR.G and TRP.PR.B: Convert or Hold?, particularly the third paragraph, which begins “The most logical way…”.
For the past eight months-odd I’ve been publishing the chart titled “Break-Even Three-Month Bill Rates” daily, but you can download the calculator and create it yourself if you like.
Basically, what is happening is that FloatingResets are trading extremely cheaply relative to their FixedReset counterparts – so cheaply that, on average, bill yields over the next three years would have to be negative in order for the FloatingResets to underperform.
My suggestion – tentative only for this particular issue, as I have not published a final recommendation – is that investors who want to convert will be better off if they do not exchange their shares with the issuer (which will be with a take-out of $0.00), but execute trades on the market following conversion (which, given current conditions, will likely be a more significant take-out).
I think this is happening in the marketplace because investors are forgetting they will have another chance to swap back and forth in five years. This ability serves to anchor the prices of the members of the pair within reasonable distances of each other … but current market conditions suggest these anchors are not as firmly lodged as one might expect!
Interesting suggestion but:
1. If everyone was to follow it we won’t have the required minimum of one Million floaters;
2. Low volumes / wide spreads between the bid and ask prices of each issues and commissions might eat up all your “take out”. More significantly to me, the time and delay to execute those may not be worth it for a small retail investor like me.
BTW, I cannot find the propectus on that issue on either their website or on SEDAR even if I try with the earlier Fund’s name. I wrote them to ask for it but haven’t received anything yet. Do you have an easy link to it by any chance as I would like to make sure that once converted into a floater, you can reconvert back into the fix reset in 2020.
Thanks
BTW, I cannot find the propectus on that issue on either their website or on SEDAR even if I try with the earlier Fund’s name
Search SEDAR for “Northland Power Preferred Equity Inc. Jul 21 2010 10:58:45 ET Final short form prospectus – English PDF 362 K ”
The regulators will not permit me to link directly to this public document.
Thanks James as I could not find it without your help. Pages 20-21 of the prospectus do indeed confirm what you already knew that we can convert back 1:1 the floater into the resettable in 2020 and every five years thereafter (for so long, obviously, there is at least 1 Million shares of each series after conversions). Maybe influenced by you (or out of fear being nicknamed Solomon Louis prefs), I gave instructions to my broker to convert about 40% of my holdings in the floater. I do anticipate some regrets for having done so in the upcoming year but, hopefully, I will praise myself for having done so in two years from now. Let’s see… Thks.
For my recommendation, see NPI.PR.A, FFH.PR.G, ALA.PR.A: Convert or Hold?.