ALA.PR.E To Reset At 5.393%

AltaGas Ltd. has announced:

reset dividend rates for the currently outstanding Cumulative Redeemable Five-Year Rate Reset Preferred Shares, Series E (the “Series E Shares”) (TSX: ALA.PR.E) and the Cumulative Redeemable Floating Rate Preferred Shares, Series F (the “Series F Shares”).

As previously announced by AltaGas on November 28, 2018, AltaGas does not intend to exercise its right to redeem its Series E Shares on December 31, 2018 (the “Conversion Date”). As a result, subject to certain conditions, the holders of the Series E Shares have the right to convert all or part of their Series E Shares on a one-for-one basis into Series F Shares on the Conversion Date. Holders who do not exercise their right to convert their Series E Shares into Series F Shares will, subject to automatic conversion in certain circumstances, retain their Series E Shares. Holders of Series E Shares should review the prior press release for further details.

With respect to any Series E Shares that remain outstanding after the Conversion Date, holders shall be entitled to receive, as and when declared by the Board of Directors of AltaGas, fixed cumulative preferential cash dividends, payable quarterly. The new annual dividend rate applicable to the Series E Shares for the five-year period commencing on and including December 31, 2018 to, but excluding, December 31, 2023 will be 5.393 percent, being equal to the sum of the five-year Government of Canada bond yield determined as of today plus 3.17 percent.

With respect to any Series F Shares that may be issued on the Conversion Date, holders shall be entitled to receive, as and when declared by the Board of Directors of AltaGas, quarterly floating rate cumulative preferential cash dividends. The dividend rate applicable to the Series F Shares for the three-month floating rate period commencing on and including December 31, 2018 to, but excluding, March 31, 2019 will be 4.88 percent, being equal to the sum of the annual rate of interest for the most recent auction of 90 day Government of Canada treasury bills plus 3.17 percent (the “Floating Quarterly Dividend Rate”). The Floating Quarterly Dividend Rate will be reset every quarter.

ALA.PR.E is a FixedReset, 5.00%+317, that commenced trading 2013-12-13 after being announced 2013-12-4. The 2018-11-28 notice of extension was reported on PrefBlog. The issue is tracked by HIMIPref™ but is relegated to the Scraps – FixedReset Discount subindex due to credit concerns.

It is worth noting the company’s recent announcement of:

the timing of its financial and operational outlook conference call. To align the previously discussed “update call” to review AltaGas’ 2019 outlook, capital plan and update on other strategic and operational items with the start date of the recently announced incoming Chief Executive Officer, Randy Crawford, AltaGas intends to host the conference call on Thursday, December 13, 2018.

This call, which will be led by Randy Crawford and Tim Watson, Executive Vice President and Chief Financial Officer, will discuss AltaGas’ 2019 financial outlook and capital funding plan, with an update on key initiatives including dividend policy.

The question of what changes in dividend policy might be in store has received a certain amount of notice:

AltaGas (TSX:ALA) stock has lost nearly half of its value in the last year. The news of a new CEO coming on board did not trigger any meaningful rally in the stock. The big change in asset mix with a weight toward utility assets in the near term and the fact that the stock’s yield has been pushed up to 13.8% will likely lead to a dividend cut.

In summary, management will be reviewing the payout ratio, and it also seemed to hint that a dividend cut could be coming. For a yield that more closely aligns with that of other utilities, we could be seeing a dividend cut of at least 50% for AltaGas from its current yield of about 13.8% as of writing.

Assiduous Reader PL points out to me:

They have about 60 million preferred shares [52-million as of 2018-2-23 … JH] and over 200 million common [270.5 million (as at October 19, 2018, included in Q3 Report). … JH] The common stock is down so much the dividend is around 15 per cent.

On Dec 13 9 A.M Alta Gas will have a conference call on Financial and Operational Outlook. Pretty sure they will cut the common dividend by at least 50 per cent.

I do not think we will have a Husky situation where they cut the common dividend entirely and that tanked the Husky preferred . Question is have the Alta Gas preferred already been spooked.

The ALA issues have certainly been hammered during the recent downdraft, with the five FixedReset issues tracked down between 21% and 31%:

Click for Big

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., ALA.PR.E 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 ALA.PR.E 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 ALA.PR.E) Trading Price In Current Conditions
  Assumed FloatingReset
Price if Implied Bill
is equal to
FixedReset Bid Price Spread 2.50% 2.00% 1.50%
ALA.PR.E 17.18 317bp 17.43 16.98 16.52

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, ALA.PR.E. Therefore, it seems likely that I will recommend that holders of ALA.PR.E 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.

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