Element Fleet Management Corp. has announced (emphasis added):
the applicable dividend rates for its Cumulative 5-Year Rate Reset Preferred Shares, Series A (the “Series A shares”) and Cumulative Floating Rate Preferred Shares, Series B (the “Series B shares”).
With respect to any Series A shares that remain outstanding after December 31, 2018, holders thereof shall be entitled to receive, and the Corporation shall pay thereon, if, as and when declared by the directors of the Corporation, fixed, cumulative, preferential cash dividends payable quarterly. The dividend rate applicable to the Series A shares for the period from and including December 31, 2018 up to, but excluding, December 31, 2023, will be 6.933%, being equal to the sum of the 5-year Government of Canada bond yield determined as of today plus 4.71%, in accordance with the terms of the Series A shares.
With respect to any Series B shares that may be issued on December 31, 2018, holders thereof shall be entitled to receive, and the Corporation shall pay thereon, if, as and when declared by the directors of the Corporation, floating rate, cumulative, preferential cash dividends payable quarterly. The dividend rate applicable to the Series B shares for the period from and including December 31, 2018 up to, but excluding, March 31, 2019, will be 6.444%, being equal to the sum of the 3-month Government of Canada Treasury Bill yield determined as of today plus 4.71%, calculated on the basis of the actual number of days in such quarterly period divided by 365, in accordance with the terms of the Series B shares.
Beneficial owners of Series A shares who wish to exercise their Conversion Privilege should communicate with their broker or other nominee to ensure their instructions are followed so that the registered holder of the Series A shares can meet the deadline to exercise the Conversion Privilege. Such deadline is 5:00 p.m. (EST) on December 17, 2018, as further described in the Corporation’s news release dated November 20, 2018 and in the rights, privileges, restrictions and conditions attaching to the Series A shares, as provided in Article 4 of the Corporation’s restated articles of incorporation dated October 4, 2016.
EFN.PR.A is a FixedReset, 6.60%+471, that was announced 2013-12-9; HIMIPref™ commenced tracking the issue in September 2015 after it received a DBRS rating. The notice of extension dated 2018-11-20 was reported on PrefBlog. The issue is relegated to the Scraps – FixedReset Discount 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., EFN.PR.A 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 BigThe market appears to be becoming relatively more interested in floating rate product; the implied rates until the next interconversion are above the current 3-month bill rate as the averages for investment-grade and junk issues are at +2.03% and +2.18%, respectively. 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 EFN.PR.A 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 EFN.PR.A) Trading Price In Current Conditions |
| |
Assumed FloatingReset
Price if Implied Bill
is equal to |
| FixedReset |
Bid Price |
Spread |
2.50% |
2.00% |
1.50% |
| EFN.PR.A |
21.02 |
471bp |
21.27 |
20.82 |
20.37 |
Based on current market conditions, I suggest that the FloatingResets that will result from conversion are likely to trade below the price of their FixedReset counterparts, EFN.PR.A. Therefore, it seems likely that I will recommend that holders of EFN.PR.A continue to hold the issue and not to convert, but I will wait until it’s closer to the December 17 notification deadline before making a final pronouncement. 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.
This entry was posted on Monday, December 3rd, 2018 at 11:23 pm and is filed under Issue Comments. You can follow any responses to this entry through the RSS 2.0 feed.
You can leave a response, or trackback from your own site.
EFN.PR.A To Reset At 6.933%
Element Fleet Management Corp. has announced (emphasis added):
EFN.PR.A is a FixedReset, 6.60%+471, that was announced 2013-12-9; HIMIPref™ commenced tracking the issue in September 2015 after it received a DBRS rating. The notice of extension dated 2018-11-20 was reported on PrefBlog. The issue is relegated to the Scraps – FixedReset Discount 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., EFN.PR.A 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 becoming relatively more interested in floating rate product; the implied rates until the next interconversion are above the current 3-month bill rate as the averages for investment-grade and junk issues are at +2.03% and +2.18%, respectively. 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 EFN.PR.A 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:
Price if Implied Bill
is equal to
Based on current market conditions, I suggest that the FloatingResets that will result from conversion are likely to trade below the price of their FixedReset counterparts, EFN.PR.A. Therefore, it seems likely that I will recommend that holders of EFN.PR.A continue to hold the issue and not to convert, but I will wait until it’s closer to the December 17 notification deadline before making a final pronouncement. 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.
This entry was posted on Monday, December 3rd, 2018 at 11:23 pm and is filed under Issue Comments. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.