PrefBlog

Note: Apparently the figure given in the press release has been rounded; the actual reset rate will be 6.011%.

Aimia has announced:

the applicable dividend rates for its Cumulative Rate Reset Preferred Shares, Series 3 (the “Series 3 Shares”) and its Cumulative Floating Rate Preferred Shares, Series 4 (the “Series 4 Shares”), further to the February 25, 2019 notice and announcement that it will not exercise its right to redeem all or any part of the outstanding Series 3 Shares and, as a result of which, subject to certain conditions, the holders of the Series 3 Shares will have the right to convert all or any number of their Series 3 Shares into Series 4 Shares on a one-for-one basis.

With respect to any Series 3 Shares that remain outstanding on or after April 1, 2019, holders of the Series 3 Shares will be entitled to receive quarterly fixed, cumulative, preferential cash dividends, as and when declared by the company’s Board of Directors, subject to compliance with the provisions of the Canada Business Corporations Act. The annual dividend rate for the five-year period from and including March 31, 2019 up to but excluding March 31, 2024 will be 6.01%, being 4.20% over the five-year Government of Canada bond yield, as determined in accordance with the rights, privileges, restrictions and conditions attaching to the Series 3 Shares.

With respect to any Series 4 Shares that may be issued on April 1, 2019, holders of the Series 4 Shares will be entitled to receive quarterly floating rate, cumulative, preferential cash dividends, calculated on the basis of the actual number of days elapsed in such quarterly period divided by 365, as and when declared by the Board of Directors of Aimia, subject to the provisions of the Canada Business Corporations Act. The annualized dividend rate for the floating rate period from and including March 31, 2019 up to but excluding June 30, 2019 will be 5.88%, being 4.20% over the three-month Government of Canada Treasury Bill yield, as determined in accordance with the terms of the Series 4 Shares.

The Series 3 Shares are issued in “book entry only” form and must be purchased or transferred through a participant (a “CDS Participant”) in the depository service of CDS Clearing and Depository Services Inc. (“CDS”). All rights of holders of Series 3 Shares must be exercised through CDS or the CDS Participant through which the Series 3 Shares are held. As such, beneficial owners of Series 3 Shares who wish to exercise their conversion right should communicate as soon as possible with their broker or other nominee to obtain instructions for exercising such right through CDS on or prior to the deadline for exercise, which is 5:00 p.m. (Montreal time) on March 18, 2019 for CDS as sole registered holder of the Series 3 Shares but 1:00 p.m. (Montreal time) on March 18, 2019 for beneficial holders wishing to exercise their conversion right through CDS Participants.

Inquiries should be directed to Aimia’s Registrar and Transfer Agent, AST Trust Company (Canada), at 1-800-387-0825 (toll free in Canada and the United States).

AIM.PR.C is a FixedReset, 6.25%+420, that commenced trading 2014-1-15 after being announced 2014-1-6. The extension was announced 2019-2-26. The issue is tracked by HIMIPref™ but relegated to the Scraps-FixedReset (Discount) subindex on credit concerns.

Aimia suspended preferred share dividends in June, 2017. DBRS downgraded the preferreds to Pfd-5(high) in August, 2017, and currently has them under review with developing implications. S&P declared that it considered the preferred shares to be in default in June, 2018. On February 26, 2019, Aimia announced it would be paying the accrued dividends. On March 1, S&P upgraded the credit rating to P-4(low) and discontinued the rating.

AIM.PR.C will pay a dividend of $2.343750 to holders of record at the close of business on March 19, 2019, (implying an ex-dividend date of 2019-3-18, but for God’s sake, check!). The yield on this issue without accounting for this catch-up dividend, given the current bid price of 25.25 is 6.03% to perpetuity, assuming an end-value of 24.41. Just where the issue might trade after the dividend is a matter of conjecture; speculators are invited to pick a post-dividend bid price and determine the implied yield; they’ll still be guessing, but they’ll be guessing with more numbers, which is good, right?

It is of interest to note that AIM.PR.C’s reset dividend of 6.01% implied a Government of Canada 5-Year bond yield of 1.810%, whereas the two other issues resetting today, AQN.PR.D and PPL.PR.Q both implied a Canada yield of 1.811%. According to the AIM.PR.C prospectus (available on SEDAR as “Aimia Inc. Jan 8 2014 14:29:45 ET Prospectus supplement – English PDF 280 K” but I’m not allowed to link directly to this public document because the regulators think you don’t deserve it):

“Annual Fixed Dividend Rate” means, for any Subsequent Fixed Rate Period, the annual rate (expressed as a percentage rounded down to the nearest one hundred–thousandth of one percent (with 0.000005% being rounded up)) equal to the Government of Canada Bond Yield on the applicable Fixed Rate Calculation Date plus 4.20%.

“Government of Canada Bond Yield” on any date means the yield to maturity on such date (assuming semi-annual compounding) of a Canadian dollar denominated non-callable Government of Canada bond with a term to maturity of five years as quoted as of 10:00 a.m. (Montreal time) on such date and which appears on the Bloomberg Screen GCAN5YR Page on such date; provided that, if such rate does not appear on the Bloomberg Screen GCAN5YR Page on such date, the Government of Canada Bond Yield will mean the arithmetic average of the yields quoted to Aimia by two registered Canadian investment dealers selected by Aimia as being the annual yield to maturity on such date, compounded semi-annually, which a non-callable Government of Canada bond would carry if issued, in Canadian dollars in Canada, at 100% of its principal amount on such date with a term to maturity of five years.

OK, it’s only a discrepancy of 0.001%, or $0.00025 dividend per annum per share, but I’m still going to query their Investor Relations department.

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., AIM.PR.C 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 AIM.PR.C 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, AIM.PR.C. Therefore, it seems likely that I will recommend that holders of AIM.PR.C continue to hold the issue and not to convert, but I will wait until it’s closer to the March 18 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 1:10 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.