New Issue: ENB FixedReset 4.90%+317M490

Enbridge Inc. has announced:

that it has entered into an agreement with a group of underwriters to sell $400 million Cumulative Redeemable Minimum Rate Reset Preference Shares, Series 19 (the “Series 19 Preferred Shares”) at a price of $25.00 per share for distribution to the public. Closing of the offering is expected on or about December 11, 2017.

The holders of Series 19 Preferred Shares will be entitled to receive fixed cumulative dividends at an annual rate of $1.225 per share, payable quarterly on the first day of March, June, September and December, as and when declared by the Board of Directors of Enbridge. The Series 19 Preferred Shares are expected to yield 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 Canadian Government bond yield plus 3.17 percent, provided that, in any event, such rate shall not be less than 4.90 percent per annum. The Series 19 Preferred Shares are redeemable by Enbridge, at its option, on March 1, 2023 and on March 1 of every fifth year thereafter.

The holders of Series 19 Preferred Shares will have the right to convert their shares into Cumulative Redeemable Preference Shares, Series 20 (the “Series 20 Preferred Shares”) on March 1, 2023 and on March 1 of every fifth year thereafter, subject to certain conditions. The holders of Series 20 Preferred Shares will be entitled to receive quarterly floating rate cumulative dividends, as and when declared by the Board of Directors of Enbridge, at a rate equal to the sum of the 90-day Government of Canada Treasury bill rate plus 3.17 percent.

Enbridge has granted to the underwriters an option to purchase up to an additional four million Series 19 Preferred Shares at a price of $25.00 per share, exercisable at any time up to 48 hours prior to the closing of the offering.

The offering is being made only in Canada by means of a prospectus supplement to the base shelf prospectus of the Company dated September 14, 2017. Proceeds are expected to be used to partially fund capital projects, to reduce existing indebtedness and for other general corporate purposes of the Company and its affiliates.

The syndicate of underwriters is led by Scotiabank, BMO Capital Markets, CIBC Capital Markets, and National Bank Financial.

This issue looks extraordinarily expensive to me! According to Implied Volatility analysis:

Click for Big

With the parameters shown, the theoretical value of the new issue is 23.17, roughly equivalent to the BPO new issue. 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!

One Response to “New Issue: ENB FixedReset 4.90%+317M490”

  1. jiHymas says:

    Assiduous Reader JW attempted to post the following, but experienced difficulties … so here it is! – JH

    James I just don’t understand how you can ascribe “zero value” to the minimum rate guarantee. This would presume that the bond market has even the slightest idea where bond yields will be in five years. Sure, if 5y yields are 3 percent then sure the guarantee will be of no value – but what if yields are 0.50? I can assure you that the bond market has no clue what the future holds. The min rate guar is there precisely to protect investors from the disaster of all those prefs that have been smoked for the past three years. Prefs will min rate guar have all held up very well. Has the 5y spread been generous lately? no, but that’s not the point. If 5y yields are substantially higher in four years, then next to one will care about narrowness of the ENB 3.17 spread, especially if the 3m/5y spread is even more narrow by then! also, I don’t think that you can rightly compare the BPO and ENB issues on credit quality and equate them. If it was BAM vs ENB then yes, but not BPO. Anyway, my main point is simply that the min rate guar is there to protect investors from a repeat of 2014-2016 and no one saw that coming (including the “know-nothing” bond market) so this is insurance and no insurance isn’t free but it’s a trade off between a higher base coupon and spread vs a lower coupon and spread with the guarantee. I will take the latter. You just can’t ascribe zero value to it. If – for whatever reason – someone had started to issue those types of prefs in 2013 and you had then that the min rate guar was worth nothing, then within one year you would have had to eat those words.

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