Pembina Pipeline Corporation has announced (on 2017-11-28):
that it has entered into an agreement with a syndicate of underwriters co-led by RBC Capital Markets, CIBC World Markets, and Scotiabank (together, the “Underwriters”) pursuant to which the Underwriters have agreed to purchase from Pembina 12,000,000 cumulative redeemable minimum rate reset class A preferred shares, Series 21 (the “Series 21 Preferred Shares”) at a price of $25.00 per share for distribution to the public.
The holders of Series 21 Preferred Shares will be entitled to receive fixed cumulative dividends at an annual rate of $1.225 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 4.90 percent per annum, for the initial fixed rate period to but excluding March 1, 2023. The first quarterly dividend payment date is scheduled for March 1, 2018. The dividend rate will reset on March 1, 2023 and every five years thereafter at a rate equal to the sum of the then five-year Government of Canada bond yield plus 3.26 percent, provided that, in any event, such rate shall not be less than 4.90 percent per annum. The Series 21 Preferred Shares are redeemable by Pembina, at its option, on March 1, 2023 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 21 Preferred Shares will have the right to convert their shares into cumulative redeemable floating rate class A preferred shares, Series 22 (the “Series 22 Preferred Shares”), subject to certain conditions, on March 1, 2023 and on March 1 of every fifth year thereafter. The holders of Series 22 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 3.26 percent.
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 4,000,000 Series 21 Preferred Shares at a price of $25.00 per share.
Closing of the offering is expected on December 7, 2017, subject to customary closing conditions.
The Company intends to use the net proceeds from the Offering to reduce indebtedness of the Company under its credit facilities. The indebtedness of the Company under the Credit Facilities was incurred in the normal course of business to fund the Company’s capital program, and to fund a portion of the cash consideration payable to former common shareholders of Veresen Inc. (“Veresen”) pursuant to the plan of arrangement with Veresen which closed on October 2, 2017.
The offering is being made by means of a prospectus supplement under the short form base shelf prospectus filed by the Company on July 27, 2017 in each of the provinces of Canada.
It looks expensive to me! According to Implied Volatility analysis:
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With the parameters shown, the theoretical value of the new issue is 24.27. Critics will be quick to point out that in this calculation there is zero value assigned to the minimum rate guarantee … but I’d say that’s about right!
These straw-men critics I have created will also have to explain why the two other Floor-Rate FixedResets (PPL.PR.K and PPL.PR.M) are cheap according to this analysis. It can be done – just assume that spreads on those two issues are so large that the floor doesn’t matter any more – but one way or another, it’s another example of the asymmetry of returns on issues priced near par working against the investor.