PrefBlog

Capital Power Corporation has announced:

that it has notified the registered shareholder of its Cumulative 5-Year Rate Reset Preference Shares, Series 1 (Series 1 Shares) (TSX: CPX.PR.A) of the Conversion Privilege and Dividend Rate Notice.

Beginning on December 1, 2015 and ending on December 16, 2015 holders of the Series 1 Shares will have the right to elect to convert any or all of their Series 1 Shares into an equal number of Cumulative Floating Rate Preference Shares, Series 2 (Series 2 Shares).

If Capital Power does not receive an Election Notice from a holder of Series 1 Shares during the time fixed therefor, then the Series 1 Shares shall be deemed not to have been converted (except in the case of an Automatic Conversion). Holders of the Series 1 Shares and the Series 2 Shares will have the opportunity to convert their shares again on December 31, 2020, and every five years thereafter as long as the shares remain outstanding.

Effective December 31, 2015, the Annual Fixed Dividend Rate for the Series 1 Shares was set for the next five year period at 3.06%. Effective December 31, 2015, the Floating Quarterly Dividend for the Series 2 Shares was set for the first Quarterly Floating Rate Period (being the period from and including December 31, 2015, to but excluding March 31, 2016) at 2.67%. The Floating Quarterly Dividend Rate will be reset every quarter.

The Series 1 Shares are issued in “book entry only” form and, as such, the sole registered holder of the Series 1 Shares is the Canadian Depository for Securities Limited (CDS). All rights of beneficial holders of Series 1 Shares must be exercised through CDS or the CDS participant through which the Series 1 Shares are held. The deadline for the registered shareholder to provide notice of exercise of the right to convert Series 1 Shares into Series 2 Shares is 3:00 p.m. (MST) / 5:00 p.m. (EST) on December 16, 2015. Any notices received after this deadline will not be valid. As such, holders of Series 1 Shares who wish to exercise their right to convert their shares should contact their broker or other intermediary for more information and it is recommended that this be done well in advance of the deadline in order to provide the broker or other intermediary with time to complete the necessary steps.

After December 16, 2015, (i) if Capital Power determines that there would remain outstanding on December 31, 2015, less than 1,000,000 Series 1 Shares, all remaining Series 1 Shares will be automatically converted into Series 2 Shares on a one-for one basis effective December 31, 2015; or (ii) if Capital Power determines that there would remain outstanding after December 31, 2015, less than 1,000,000 Series 2 Shares, no Series 1 Shares will be permitted to be converted into Series 2 Shares effective December 31, 2015. There are currently 5,000,000 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 the Capital Power 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 CPX.PR.B.

CPX.PR.A is a FixedReset, originally 4.60%+217, that commenced trading 2010-12-16 after being announced 2010-12-1. Thus, we observe a 33% reduction of the dividend.

As noted in the release, the deadline for notifying the company of a desire to convert to the FloatingReset CPX.PR.B is 5:00 p.m. (EST) on December 16, 2015, (a Wednesday) but brokerages will normally have an internal deadline a day or two prior to that. If you miss the brokerage deadline, they’ll probably submit the request for you if you grovel, but if you miss the company deadline, that’s it.

At this point, market conditions are such that I expect CPX.PR.B to trade significantly below CPX.PR.A. CPX.PR.A closed today at 10.15 (!) and the average implied 3-month bill rate of other junk issues is -0.70%. Assuming this relationship holds, the estimated trading price for CPX.PR.B is 8.69, about 15% lower. Rather than convert and thereby get 1.00 shares of CPX.PR.B, it seems likely (but by no means guaranteed!) that it will be better to execute trades in the marketplace after CPX.PR.B commences trading and thereby get (maybe!) 1.16 shares of CPX.PR.B.

So, I expect to recommend that holders of CPX.PR.A hang on to them, but I will make a formal recommendation on December 11, just in time for PrefLetter.

This entry was posted on Wednesday, December 2nd, 2015 at 2:30 am and is filed under Issue Comments. 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.