New Issue: TRP FixedReset, 5.50%+469M550

TransCanada Corporation has announced:

that it will issue 12 million cumulative redeemable minimum rate reset first preferred shares, series 13 (the “Series 13 Preferred Shares”) at a price of $25.00 per share for aggregate gross proceeds of $300 million on a bought deal basis to a syndicate of underwriters in Canada co-led by TD Securities Inc., BMO Capital Markets and Scotiabank.

The holders of Series 13 Preferred Shares will be entitled to receive fixed cumulative dividends at an annual rate of $1.375 per share, payable quarterly on the last business day of February, May, August and November, as and when declared by the board of directors of TransCanada. The Series 13 Preferred Shares will yield 5.50 per cent per annum for the initial fixed rate period ending May 31, 2021 with the first dividend payment date scheduled for May 31, 2016. The dividend rate will reset on May 31, 2021 and on the last business day of May in every fifth year thereafter to a rate equal to the sum of the then five-year Government of Canada bond yield plus 4.69 per cent, provided that, in any event, such rate shall not be less than 5.50 per cent per annum. The Series 13 Preferred Shares are redeemable by TransCanada, at its option, on May 31, 2021 and on the last business day of May in every fifth year thereafter at a price of $25.00 per share plus accrued and unpaid dividends.

The holders of Series 13 Preferred Shares will have the right to convert their shares into cumulative redeemable first preferred shares, series 14 (the “Series 14 Preferred Shares”), subject to certain conditions, on May 31, 2021 and on the last business day of May in every fifth year thereafter. The holders of Series 14 Preferred Shares will be entitled to receive quarterly floating rate cumulative dividends, as and when declared by the board of directors of TransCanada, at an annualized rate equal to the sum of the then 90-day Government of Canada treasury bill rate plus 4.69 per cent.

TransCanada 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 two million Series 13 Preferred Shares at a price of $25.00 per share.

The anticipated closing date is April 20, 2016. The net proceeds of the offering will be used for general corporate purposes and to reduce short term indebtedness of TransCanada and its affiliates, which short term indebtedness was used to fund TransCanada’s capital program and for general corporate purposes.

The Series 13 Preferred Shares will be offered to the public in Canada pursuant to a prospectus supplement that will be filed with securities regulatory authorities in Canada under TransCanada’s short form base shelf prospectus dated December 23, 2015. The securities referred to herein have not been and will not be registered under the United States Securities Act of 1933, as amended, and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.

They later announced:

that as a result of strong investor demand for its previously announced offering of cumulative redeemable minimum rate reset first preferred shares, series 13 (the “Series 13 Preferred Shares”), the size of the offering has been increased to 20 million shares. The offering no longer includes the previously granted underwriters’ option. The aggregate gross proceeds of the offering will now be $500 million. The syndicate of underwriters is co-led by TD Securities Inc., BMO Capital Markets and Scotiabank.

Note that (as pointed out by Assiduous Reader FletcherLynd) the company is on Review-Developing by DBRS and Outlook-Negative by S&P.

Implied Volatility analysis must be taken with a grain of salt since the Issue Reset Spread for the new issue (469bp) is so much higher than that of the previous high for this issuer (TRP.PR.G, +296). In addition, this is the first TRP issue with a floor on the reset rate.

However, the fit is reasonable and the Implied Volatility, while very high, is in line with other series:

Click for Big

So on the one hand, it’s a decent (although not especially good) fit. On the other hand, the Implied Volatility is unreasonably high (I would expect that the long term value for implied volatility would be in the high single-digits). So it boils down to what we’ve been seeing a lot of lately: if you believe that current conditions are the new normal, you’ll like the new issue. If you believe that Market Reset Spreads are currently elevated, you like the lower-spread issues.

8 Responses to “New Issue: TRP FixedReset, 5.50%+469M550”

  1. Louisprefs says:

    Sigh… Again, as the secondary market was picking up, a new issue overly expensive for the issuer (in my opinion) is issued thus affecting adverserly the prior trading ones. The good news is that this other sizeable one was fully underwritten in a record time so far as I can tell. I could not get any via discount brokers TD and BMO within the hour from the press release notifications I received (it came in around lunch time). My full service broker could get at Scotia Nesbitt Burn could get me what I asked around 3:00 pm. I have already instructed her to place a 30 days limit sale offer for 25.75 from the moment it will have closed and start trading.

    P.S. The old dog I am is starving to death chewing bones while awaiting the return of his Master.

  2. nebulousanalyst says:

    I wouldn’t look at the TRP issue too negatively. Prefs have come a long way off the bottom, so we should expect some new issues. It does show that the pref market is getting a little healthier overall. They issued at a rate lower than some recent bank issues while they are under review (given their pending merger) and after placing the largest secondary for a TSX issuer.

  3. Louisprefs says:

    The problem is not that new prefs are issued. The “price” the new ones are issued at is the problem.

    Look at the price decline almost all existing issues sustained yesterday afternoon after TRP’s announcement of its new issue (see, for instance, BEP.PR.G). This has been the case with almost every new issue for the last four months and was also raised by Scotia’s pref analyst as the main reason for the slower recovery of prefs he has been predicting since Q4 2015.

    Indeed Why would I pay 25.75 to buy on the secondary pref market an existing pref (CU.PR.I) with a similar rating but with a much smaller coupon and reset formula? The fact that these new big issues are sold out within hours is an indication that they are not priced at the price the market would be prepared to pay for them. Still, all new issuers of the last four months seem obliged to better the prior issuer. This is why people like me are keeping money on the sideline buying new prefs without commission at $25 to sell them back within weeks after their issuance for small, but fairly constant, capital gains. Meanwhile, I am not buying the low reset formula I would otherwise be considering buying. I suspect I am not the only one with this mindset…

  4. David says:

    I look at this TRP issue (and other recent ones) as solid 5 year money, and to the extent many people want some of that in their mix, the rates are very very attractive and the issues are very large. I am newish to this market, but I did place a 1500 share order on line within an hour and got allocated zero. Not even 100 shares! I phoned and was politely told the allotment fill for on-line was 3.1%. 3.1%!!! Needless to say I started complaining. The fill on ENF the other day was 4% (again I got zero, I am using RBC Direct who was probably well down the lead table on these issues)! I would be interested to see how much institutional money is now grabbing these TRP type issues (pension funds, insurance, flexible shorter term bond funds, etc) to fill their shorter term needs. Maybe that is where the problem is right now for me at least getting any new paper, but that should be good for the market over-all. And they will certainly hold it to “maturity” which I expect they are banking on 5 years out.

  5. Louisprefs says:


    James may have a better answer but, personnaly, I was one day candidly told by BMO Investors Line that priority was given to those doing business with BMO Nesbitt Burns (i.e with a personal broker). As a matter of fact, I was able to get all I wanted from my broker at Scotia McLeod eventhough by then TD Waterhouse and BMO Investors Lines had told me they were sold out.

  6. Louisprefs says:

    Woops! by “TD Waterhouse” I rather meant “TD Webroker”.

  7. nebulousanalyst says:

    @Louispref – I respectfully disagree on the mispricing – the fact that the issues are selling quickly shows that they are priced correctly wrt the market rates and recent issues (a correct price should be slightly more aggressive than the market rates to cover commission and ensure the deal gets fully placed). I do understand the frustration you are expressing and in no way am I diminishing that.

    As far as getting allocations – Louispref’s is on point – discount broker’s are at the bottom of the list. You also need to pay attention to whom the lead book runners are on a deal. For the TRP pref this was TD, BMO, BNS. For ENF it was BNS, BMO, CIBC. The only shot you have at getting an allocation via discount brokerage, often the only shot for retail brokerage in general, is to use an account at one of the leads – very little of hot deals will be allocated below high net worth (and most of it is allocated institutionally).

  8. David says:

    Thank you both for the responses and learnings. I will have to make a change to what I do.

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