Enbridge Inc. has announced:
that it does not intend to exercise its right to redeem its currently outstanding Cumulative Redeemable Preference Shares, Series P (Series P Shares) (TSX: ENB.PR.P) on March 1, 2019. As a result, subject to certain conditions, the holders of the Series P Shares have the right to convert all or part of their Series P Shares on a oneforone basis into Cumulative Redeemable Preference Shares, Series Q of Enbridge (Series Q Shares) on March 1, 2019. Holders who do not exercise their right to convert their Series P Shares into Series Q Shares will retain their Series P Shares.
The foregoing conversion right is subject to the conditions that: (i) if Enbridge determines that there would be less than 1,000,000 Series P Shares outstanding after March 1, 2019, then all remaining Series P Shares will automatically be converted into Series Q Shares on a oneforone basis on March 1, 2019; and (ii) alternatively, if Enbridge determines that there would be less than 1,000,000 Series Q Shares outstanding after March 1, 2019, no Series P Shares will be converted into Series Q Shares. There are currently 16,000,000 Series P Shares outstanding.
With respect to any Series P Shares that remain outstanding after March 1, 2019, holders thereof will be entitled to receive quarterly fixed cumulative preferential cash dividends, as and when declared by the Board of Directors of Enbridge. The new annual dividend rate applicable to the Series P Shares for the fiveyear period commencing on March 1, 2019 to, but excluding, March 1, 2024 will be 4.379 percent, being equal to the fiveyear Government of Canada bond yield of 1.879 percent determined as of today plus 2.50 percent in accordance with the terms of the Series P Shares.
With respect to any Series Q Shares that may be issued on March 1, 2019, holders thereof will be entitled to receive quarterly floating rate cumulative preferential cash dividends, as and when declared by the Board of Directors of Enbridge. The dividend rate applicable to the Series Q Shares for the threemonth floating rate period commencing on March 1, 2019 to, but excluding, June 1, 2019 will be 1.04099 percent, based on the annual rate on three month Government of Canada treasury bills for the most recent treasury bills auction of 1.63 percent plus 2.50 percent in accordance with the terms of the Series Q Shares (the Floating Quarterly Dividend Rate). The Floating Quarterly Dividend Rate will be reset every quarter.
Beneficial holders of Series P Shares who wish to exercise their right of conversion during the conversion period, which runs from January 30, 2019 until 5:00 p.m. (EST) on February 14, 2019, should communicate as soon as possible with their broker or other intermediary for more information. It is recommended that this be done well in advance of the deadline in order to provide the broker or other intermediary time to complete the necessary steps. Any notices received after this deadline will not be valid.
ENB.PR.P is a FixedReset, 4.00%+250, that commenced trading 2012914 after being announced 201294. It is tracked by HIMIPrefâ„˘ but is relegated to the Scraps FixedReset Discount index 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.P 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 higherpriced 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 breakeven rates for each FixedReset / FloatingReset Strong Pair graphically by plotting the implied average 3month bill rate against the next Exchange Date (which is the date to which the average will be calculated).
Click for Big
The market has lost its fleeting enthusiasm for floating rate product; the implied rates until the next interconversion are below the current 3month bill rate as the averages for investmentgrade and junk issues are at +1.41% and +1.22%, 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 investmentgrade 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.P FixedReset, we may construct the following table showing consistent prices for its soonmaybeissued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:
Estimate of FloatingReset (received in exchange for ENB.PR.P) Trading Price In Current Conditions 

Assumed FloatingReset Price if Implied Bill is equal to 
FixedReset 
Bid Price 
Spread 
2.00% 
1.50% 
1.00% 
ENB.PR.P 
16.70 
250bp 
16.82 
16.34 
15.86 
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, ENB.PR.P. Therefore, it seems likely that I will recommend that holders of ENB.PR.P continue to hold the issue and not to convert, but I will wait until it’s closer to the February 14 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 takeout 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 Wednesday, January 30th, 2019 at 10:15 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.
ENB.PR.P To Reset To 4.379%
Enbridge Inc. has announced:
ENB.PR.P is a FixedReset, 4.00%+250, that commenced trading 2012914 after being announced 201294. It is tracked by HIMIPrefâ„˘ but is relegated to the Scraps FixedReset Discount index 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.P 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 higherpriced 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 breakeven rates for each FixedReset / FloatingReset Strong Pair graphically by plotting the implied average 3month bill rate against the next Exchange Date (which is the date to which the average will be calculated).
Click for Big
The market has lost its fleeting enthusiasm for floating rate product; the implied rates until the next interconversion are below the current 3month bill rate as the averages for investmentgrade and junk issues are at +1.41% and +1.22%, 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 investmentgrade 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.P FixedReset, we may construct the following table showing consistent prices for its soonmaybeissued 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, ENB.PR.P. Therefore, it seems likely that I will recommend that holders of ENB.PR.P continue to hold the issue and not to convert, but I will wait until it’s closer to the February 14 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 takeout 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 Wednesday, January 30th, 2019 at 10:15 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.