Enbridge Inc. has announced:
that it does not intend to exercise its right to redeem its currently outstanding Cumulative Redeemable Preference Shares, Series L (Series L Shares) (TSX: ENB.PF.U) on September 1, 2017. As a result, subject to certain conditions, the holders of the Series L Shares have the right to convert all or part of their Series L Shares on a one-for-one basis into Cumulative Redeemable Preference Shares, Series M of Enbridge (Series M Shares) on September 1, 2017. Holders who do not to exercise their right to convert their Series L Shares into Series M Shares will retain their Series L Shares.
The foregoing conversion right is subject to the conditions that: (i) if Enbridge determines that there would be less than 1,000,000 Series L Shares outstanding after September 1, 2017, then all remaining Series L Shares will automatically be converted into Series M Shares on a one-for-one basis on September 1, 2017; and (ii) alternatively, if Enbridge determines that there would be less than 1,000,000 Series M Shares outstanding after September 1, 2017, no Series L Shares will be converted into Series M Shares. There are currently 16,000,000 Series L Shares outstanding.
With respect to any Series L Shares that remain outstanding after September 1, 2017, holders thereof will be entitled to receive quarterly fixed cumulative preferential cash dividends, as and when declared by the Board of Directors of Enbridge. The new annual dividend rate applicable to the Series L Shares for the five-year period commencing on September 1, 2017 to, but excluding, September 1, 2022 will be 4.959 percent, being equal to the five-year United States Government treasury bond yield of 1.809 percent determined as of today plus 3.15 percent in accordance with the terms of the Series L Shares.
With respect to any Series M Shares that may be issued on September 1, 2017, holders thereof will be entitled to receive quarterly floating rate cumulative preferential cash dividends, as and when declared by the Board of Directors of Enbridge. The dividend rate applicable to the Series M Shares for the three-month floating rate period commencing on September 1, 2017 to, but excluding, December 1, 2017 will be 1.055 percent, based on the annual rate on three-month United States Government treasury bills for the most recent treasury bills auction of 1.08 percent plus 3.15 percent in accordance with the terms of the Series M Shares (the Floating Quarterly Dividend Rate). The Floating Quarterly Dividend Rate will be reset every quarter.
Beneficial holders of Series L Shares who wish to exercise their right of conversion during the conversion period, which runs from August 2, 2017 until 5:00 p.m. (EST) on August 17, 2017, should communicate as soon as possible with their broker or other intermediary for more information. 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. Any notices received after this deadline will not be valid.
The four ENB USD-denominated issues have a very narrow range of spreads, limiting the utility of Implied Volatility Analysis for FixedResets, but for what it’s worth:
Click for Big
As I do not track USD issues, there will be no recommendation regarding whether holders should convert or hold their ENB.PR.U shares.
It is interesting to note that this issue will reset at a higher yield than when issued. There are not many that did. I also wonder why it is trading at a significant yield premium to enb.pr.b. That issue will also reset in about five years but is yielding a significantly lower yield of about 4.5% at current price….
At the August 9 bid price of 18.72, ENB.PR.B yields 5.09% to perpetuity, using the ytc_resets calculator with an end-price of 18.72 in thirty years and all resets done with a GOC-5 yield of 1.51%. Remember that ENB.PR.B reset June 1 with the GOC-5 yield on May 1 of just over 1%, which has now increased by about half a point; the current rate will only last 5 years, which is only a little while in the great scheme of things.
At today’s close of 23.77, ENB.PF.U yields 5.22% to perpetuity, using the ytc_resets calculator with an end-price of 23.77 in thirty years and all resets done with a 5-year treasury yield of 1.84%.
So, a 13bp yield premium for the USD issue as of today. Thirty-year treasuries now yield 2.86% compared to 2.34% for thirty-year Canadas. so in the absence of liquidity effects I suggest the yield premium of ENB.PF.U should be higher; but doubtless there is a certain amount of scarcity value in a US-pay issue paying eligible dividends.
I agree that at this point ENB.PR.B is better positioned than ENB.PF.U. (That wasn’t the case two years ago when I bought into ENB.PF.U.) Would you hold or convert ENB.PF.U? I am on the fence — floaters seem to have caught up market price-wise with rate resets.
This issue resets in a few months. If the US5 year stays at 3.0% or goes higher by then, there’s a likelihood that this issue could be recalled.
Unlike the Enb.pr.b issue, this issue has much higher cost to the company at even 3% US5. Of course, if they don’t, we get to earn a solid 6.5% USD eligible dividend.