ENB.PR.F : Convert or Hold?

It will be recalled that ENB.PR.F will reset at 4.689% effective June 1.

ENB.PR.F is a FixedReset, 4.00%+251, that commenced trading 2012-1-18 after being announced 2012-1-9. It is tracked by HIMIPref™ but relegated to the Scraps subindex on credit concerns.

The most logical way to analyze the question of whether or not to convert is through the theory of Preferred Pairs, for which a calculator is available. Briefly, a Strong Pair is defined as a pair of securities that can be interconverted in the future (e.g., ENB.PR.F and the FloatingReset that will exist if enough holders convert). Since they will be interconvertible on this future date, it may be assumed that they will be priced identically on this date (if they aren’t then holders will simply convert en masse to the higher-priced issue). And since they will be priced identically on a given date in the future, any current difference in price must be offset by expectations of an equal and opposite value of dividends to be received in the interim. And since the dividend rate on one element of the pair is both fixed and known, the implied average rate of the other, floating rate, instrument can be determined. Finally, we say, we may compare these average rates and take a view regarding the actual future course of that rate relative to the implied rate, which will provide us with guidance on which element of the pair is likely to outperform the other until the next interconversion date, at which time the process will be repeated.

We can show the break-even rates for each FixedReset / FloatingReset Strong Pair graphically by plotting the implied average 3-month bill rate against the next Exchange Date (which is the date to which the average will be calculated).

Click for Big

The market appears to be relatively uninterested in floating rate product; most of the implied rates until the next interconversion are scattered around the current 3-month bill rate and the averages for investment-grade and junk issues are quite different, at +1.13% and +0.72%, respectively – although these break-even rates are much closer to the market rate than has often been the case! Whatever might be the result of the next few Bank of Canada overnight rate decisions, I suggest that it is unlikely that the average rate over the next five years will be lower than current – but if you disagree, of course, you may interpret the data any way you like.

Since credit quality of each element of the pair is equal to the other element, it should not make any difference whether the pair examined is investment-grade or junk, although we might expect greater variation of implied rates between junk issues on grounds of lower liquidity, and this is just what we see.

If we plug in the current bid price of the ENB.PR.F FixedReset, we may construct the following table showing consistent prices for its soon-may-be-issued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:

Estimate of FloatingReset (received in exchange for ENB.PR.F) Trading Price In Current Conditions
  Assumed FloatingReset
Price if Implied Bill
is equal to
FixedReset Bid Price Spread 1.75% 1.25% 0.75%
ENB.PR.F 20.29 251bp 19.87 19.38 18.89

Based on current market conditions, I suggest that the FloatingResets that will result from conversion are likely to be cheap and trading below the price of their FixedReset counterparts. Therefore, I recommend that holders of ENB.PR.F continue to hold the issue and not to convert.

If you do wish to convert, note that the deadline for notifying the company is 5:00 p.m. (EST) on May 17, 2018.. Brokerages and other intermediaries will normally set their internal deadlines a few days prior to this, so if you want to convert don’t waste any time! Such intermediaries may accept instructions after their internal deadline (but prior to the company deadline, of course) if you grovel in a sufficiently entertaining fashion, but this will only be done on a ‘best efforts’ basis.

I will note that once the FloatingResets commence trading (if, in fact, they do) it may be a good trade to swap the FixedReset for the FloatingReset in the market once both elements of each pair are trading and you can – presumably, according to this analysis – do it with a reasonably good take-out in price, rather than doing it through the company on a 1:1 basis. But that, of course, will depend on the prices at that time and your forecast for the path of policy rates over the next five years. There are no guarantees – my recommendation is based on the assumption that current market conditions with respect to the pairs will continue until the FloatingResets commence trading and that the relative pricing of the two new pairs will reflect these conditions.

3 Responses to “ENB.PR.F : Convert or Hold?”

  1. prefQC says:

    Hi James,
    A general question relating to strong-pair conversions. Now that interest rates seem to be monotically rising, aren’t all Floating Resets threatened with “extinction” at their next conversion date?
    Barring an actual sustained inversion (or near inversion) of the 90-day / 5-yr yield curve, who is going to stay with (or convert to) floating resets on the conversion date? Of course they are wonderful to buy once they have subsequently fallen in value w.r.t. their fixed-reset counterparts a few months later, but enough people have to actually convert, at a near-guaranteed loss, for their existence to be assured.
    Unless I am mistaken, all of your conversion recommendations to date have been to stay with the fixed-reset and not convert.
    Are floating-resets on the “endangered species” list?

  2. jiHymas says:

    Barring an actual sustained inversion (or near inversion) of the 90-day / 5-yr yield curve, who is going to stay with (or convert to) floating resets on the conversion date?

    Well, that’s the heart of the problem! Normally – but not always! – a higher yield is realized by investors in 5-year product than is realized by those investing in short-term paper and rolling it for five years. That’s one reason why some people prefer Floating Rate HELOCs to conventional mortgages!

    As with so much else in the preferred share world, this feature bears more resemblance to a bit of flim-flam, offering investors attractive sounding choices that aren’t really all that exciting.

    Back in the early days of conversion, I recommended that AZP.PR.B, TRP.PR.A & FFH.PR.C all be converted to their FloatingReset counterparts.

  3. gsp says:

    Despite being very large issues, neither .pr.f nor .pr.v achieved the million share conversion threshold which only represented 5% and 7% of their shares outstanding.


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