Pembina Pipeline Corporation has announced:
that it has entered into an agreement with a syndicate of underwriters co-led by Scotiabank, BMO Capital Markets and RBC Capital Markets (together, the “Underwriters”) pursuant to which the Underwriters have agreed to purchase from Pembina 6,000,000 cumulative redeemable minimum rate reset class A preferred shares, Series 11 (the “Series 11 Preferred Shares”) at a price of $25.00 per share for distribution to the public.
The holders of Series 11 Preferred Shares will be entitled to receive fixed cumulative dividends at an annual rate of $1.4375 per share, payable quarterly on the 1st day of March, June, September and December, as and when declared by the Board of Directors of Pembina, yielding 5.75 per cent per annum, for the initial fixed rate period to but excluding March 1, 2021. The first quarterly dividend payment date is scheduled for March 1, 2016. The dividend rate will reset on March 1, 2021 and every five years thereafter at a rate equal to the sum of the then five-year Government of Canada bond yield plus 5.00 per cent, provided that, in any event, such rate shall not be less than 5.75 percent per annum. The Series 11 Preferred Shares are redeemable by Pembina, at its option, on March 1, 2021 and on March 1 of every fifth year thereafter at a price of $25.00 per share plus accrued and unpaid dividends.
The holders of Series 11 Preferred Shares will have the right to convert their shares into cumulative redeemable floating rate class A preferred shares, Series 12 (the “Series 12 Preferred Shares”), subject to certain conditions, on March 1, 2021 and on March 1 of every fifth year thereafter. The holders of Series 12 Preferred Shares will be entitled to receive quarterly floating rate cumulative dividends, as and when declared by the Board of Directors of Pembina, at a rate equal to the sum of the then 90-day Government of Canada treasury bill rate plus 5.00 per cent.
Pembina has granted to the Underwriters an option, exercisable at any time up to 48 hours prior to the closing of the offering, to purchase up to an additional 2,000,000 Series 11 Preferred Shares at a price of $25.00 per share.
Closing of the offering is expected on January 15, 2016, subject to customary closing conditions.
The Company intends to use the net proceeds from the offering of Series 11 Preferred Shares to reduce indebtedness of the Company under its credit facilities as well as for capital expenditures and working capital requirements in connection with the Company’s 2016 capital program. The indebtedness of the Company was incurred in the normal course of business to fund the Company’s capital program.
The offering is being made by means of a prospectus supplement under the short form base shelf prospectus filed by the Company on March 18, 2015 in each of the provinces of Canada.
Implied Volatility analysis shows that the issue is reasonably priced. While the curve-fitting implies that the issue is a little rich [theoretical price is $24.57], the high level of Implied Volatility leads to the conclusion that there is a very high degree of directional bias in the pricing of PPL’s FixedResets – which is also something affecting other series of other issuers. As this bias recedes (assuming that it ever does!), Implied Volatility will decline, the curve will flatten and the higher-spread issues (most notably the new issue) will significantly outperform the lower-spread issues.
On the other hand, the directional bias could be quite right! There will be many among us who think that +500 is a ridiculous spread, even for a resource-centric junk issue and that spreads will narrow once memories of 2015 fade. Given this particular scenario, the lower-spread issues will shine: a calculation based on projected calculated values of 350bp Spread and 10% Implied Volatility implies that the extant PPL preferreds will enjoy total capital gains in the area of 20%which, if achieved in a reasonable timeframe, will dwarf the yield advantage of the new issue for which capital gains will be a big fat zero; even then, all but one of the extant issues will be trading at a discount!
So pays yer money and takes yer chances, gents, roll up, roll up! If you think current market conditions are the new normal, you’ll like the new issue. If you think this is a transitory crash, you won’t.
Click for Big
amazing to see that this 10 billion company with a 5.75 pref coupon and floor and 5.00 reset hasn’t flown out the door. reminds me of the BAM 5.00 pref that no one wanted as a new issue (you could have bought all you wanted) because markets were weak at the time, but it gradually made it’s way up to 26.00.
amazing to see that this 10 billion company with a 5.75 pref coupon and floor and 5.00 reset hasn’t flown out the door.
Well … it is junk, after all! It may be that the market is having a little bit of reaction to the previous paradigm, in which everybody loved the concept of FixedResets so much, they would buy new issues from junk-rated companies, that have been locked out of the new issue market for many, many, many years.
And it’s in an unpopular sector. Maybe junk from a non-energy company would do a little better.
The new TRP issue looks interesting… But what might the rating be after the developing (DBRS) and Negative (S&P) warning that was published here less than a month ago: http://prefblog.com/?p=32780
The announcement:
http://www.transcanada.com/announcements-article.html?id=2042975&t=
12M Fixed Reset shares, plus a possible 2M extra, at 5.5% which will reset at +469 with a 5.5% floor.