PrefBlog

Pembina Pipeline Corporation has announced:

that it does not intend to exercise its right to redeem the currently outstanding Cumulative Redeemable Rate Reset Class A Preferred Shares, Series 17 (“Series 17 Shares”) (TSX: PPL.PR.Q) on March 31, 2019 (the “Conversion Date”).

As a result, and subject to certain terms of the Series 17 Shares, the holders of the Series 17 Shares will have the right to elect to convert all or any of their Series 17 Shares into Cumulative Redeemable Floating Rate Class A Preferred Shares, Series 18 of Pembina (“Series 18 Shares”) on the basis of one Series 18 Share for each Series 17 Share on the Conversion Date.

With respect to any Series 17 Shares that remain outstanding after March 31, 2019, holders thereof will be entitled to receive quarterly fixed cumulative preferential cash dividends, if, as and when declared by the Board of Directors of Pembina. The annual dividend rate for the Series 17 Shares for the five-year period from and including March 31, 2019 to, but excluding, March 31, 2024 will be 4.821%, being equal to the five-year Government of Canada bond yield of 1.811% determined as of today plus 3.01%, in accordance with the terms of the Series 17 Shares.

With respect to any Series 18 Shares that may be issued on March 31, 2019, holders thereof will be entitled to receive quarterly floating rate cumulative preferential cash dividends, if, as and when declared by the Board of Directors of Pembina. The annual dividend rate for the 3-month floating rate period from and including March 31, 2019 to, but excluding, June 30, 2019 will be 4.692%, being equal to the annual rate of interest for the most recent auction of 90-day Government of Canada treasury bills of 1.682% plus 3.01%, in accordance with the terms of the Series 18 Shares (the “Floating Quarterly Dividend Rate”). The Floating Quarterly Dividend Rate will be reset every quarter.

As provided in the terms of the Series 17 Shares: (i) if Pembina determines that there would remain outstanding immediately following the conversion less than 1,000,000 Series 17 Shares, all remaining Series 17 Shares will be converted automatically into Series 18 Shares on a one-for-one basis effective March 31, 2019; or (ii) if Pembina determines that there would remain outstanding immediately following the conversion less than 1,000,000 Series 18 Shares, holders of Series 17 Shares will not be entitled to convert their Series 17 Shares into Series 18 Shares on the Conversion Date. There are currently 6,000,000 Series 17 Shares outstanding.

The Series 17 Shares are issued in “book entry only” form and, as such, the sole registered holder of the Series 17 Shares is the Canadian Depositary for Securities Limited (“CDS”). All rights of holders of Series 17 Shares must be exercised through CDS or the CDS participant through which the Series 17 Shares are held. Pursuant to the terms of the Series 17 Shares, CDS may provide notice of exercise of the right to convert Series 17 Shares into Series 18 Shares not earlier than the 30th day prior to, but not later than 3:00 (MST) / 5:00 pm (EST) on the 15th day preceding, the Series 17 conversion date, which is March 31, 2019. As the 15th day prior to the conversion date for Series 17 Shares is March 16, 2019, which is not a business day, the deadline for CDS to provide notice of exercise of the right to convert Series 17 Shares into Series 18 Shares is 3:00 p.m. (MST) / 5:00 p.m. (EST) on March 15, 2019. Any notices received after this deadline will not be valid. As such, holders of Series 17 Shares who wish to exercise their right to convert their Series 17 Shares into Series 18 Shares should contact their broker or other intermediary for more information and it is recommended that this be done well in advance of the deadline in order to provide the broker or other intermediary with the time to complete the necessary steps.

If Pembina does not receive an election notice from CDS during the time fixed therefor, then the Series 17 Shares shall be deemed not to have been converted (except in the case of an automatic conversion). Holders of Series 17 Shares and Series 18 Shares will have an opportunity to convert their shares again on March 31, 2024, and every five years thereafter as long as the shares remain outstanding.

As previously announced, the dividend payable on April 1, 2019 to holders of the Series 17 Shares of record on March 15, 2019 will be $0.312500 per Series 17 Share, consistent with the dividend rate in effect since issuance of the Series 17 Shares on October 21, 2017. For more information on the terms of the Series 17 Shares and the Series 18 Shares, please see Pembina’s articles of amalgamation, including the share terms and shares in series schedule attached thereto as Schedule “A”, which were filed under Pembina’s profile on SEDAR at www.sedar.com on October 2, 2017.

PPL.PR.Q was originally issued as VSN.PR.C, following a plan of arrangement between the two companies. VSN.PR.C was a FixedReset, 5.00%+301 that commenced trading 2013-10-21 after being announced October 9. PPL.PR.Q is tracked by HIMIPref™ but 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., PPL.PR.Q 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).

The market has lost its fleeting enthusiasm for floating rate product; the implied rates until the next interconversion are below the current 3-month bill rate as the averages for investment-grade and junk issues are at +1.12% and +1.45%, 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 PPL.PR.Q 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:

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, PPL.PR.Q. Therefore, it seems likely that I will recommend that holders of PPL.PR.Q continue to hold the issue and not to convert, but I will wait until it’s closer to the March 15 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 Saturday, March 2nd, 2019 at 12:32 am 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.