Husky Energy has announced:
that the Company does not intend to exercise its right to redeem its Cumulative Redeemable Preferred Shares, Series 7 (Series 7 Shares) on June 30, 2020. As a result, subject to certain conditions, the holders of Series 7 Shares have the right to choose one of the following options with regard to their shares:
retain any or all of their Series 7 Shares and continue to receive an annual fixed-rate dividend paid quarterly; or
convert, on a one-for-one basis, any or all of their Series 7 Shares into Cumulative Redeemable Preferred Shares, Series 8 (Series 8 Shares) of Husky and receive a floating rate quarterly dividend.
Conversion to Series 8 Shares is subject to the conditions that: (i) if Husky determines that there would be less than one million Series 7 Shares outstanding after June 30, 2020, then all remaining Series 7 Shares will automatically be converted to Series 8 Shares on a one-for-one basis on June 30, 2020, and (ii) if Husky determines that there would be less than one million Series 8 Shares outstanding after June 30, 2020, no Series 7 Shares will be converted into Series 8 Shares. In either case, Husky will issue a news release to that effect no later than June 23, 2020.Holders of Series 7 Shares who choose to retain any or all of their shares will receive the new fixed-rate quarterly dividend applicable to the Series 7 Shares for the five-year period commencing June 30, 2020 to, but excluding, June 30, 2025 of 3.935%, being equal to the sum of the Government of Canada five-year bond yield of 0.415% plus 3.52% in accordance with the terms of the Series 7 Shares, subject to the conditions described above.
Holders of Series 7 Shares who choose to convert their shares to Series 8 Shares will receive a new floating-rate quarterly dividend applicable to the Series 8 Shares. The dividend rate applicable to the Series 8 Shares for the three-month period commencing June 30, 2020 to, but excluding, September 30, 2020 will be 3.775%, being equal to the annual rate for the most recent auction of 90-day Government of Canada Treasury Bills of 0.255% plus 3.52%, in accordance with the terms of the Series 8 Shares (the Floating Quarterly Dividend Rate), subject to the conditions described above. The Floating Quarterly Dividend Rate will be reset every quarter.
Beneficial owners of Series 7 Shares who wish to exercise the right of conversion should communicate as soon as possible with their brokers or other nominees in order to meet the deadline for registered holders to exercise such right, which is 5 p.m. ET on June 15, 2020. It is recommended this communication be had well in advance of the deadline in order to provide the brokers or other intermediaries with time to complete the necessary steps. Holders of Series 7 Shares who do not exercise the right of conversion by this deadline will continue to hold Series 7 Shares with the new annual fixed-rate dividend, subject to the conditions described above.
Holders of the Series 7 Shares and the Series 8 Shares will have the opportunity to convert their shares again on June 30, 2025 and every five years thereafter as long as the shares remain outstanding.
For more information on the terms of, and risks associated with, an investment in the Series 7 Shares and the Series 8 Shares, please see the Company’s prospectus supplement dated June 10, 2015 on www.sedar.com
HSE.PR.G is a FixedReset, 4.60%+352, that commenced trading 2015-6-17 after being announced 2015-6-9. It is tracked by HIMIPref™ and is assigned to the FixedReset subindex.
I still don’t understand why anyone would own these preferreds paying roughly 4% when you have the A series paying roughly 2% but priced over $3.50 lower? The difference of 2% on $3.50 is something like 7 cents per year. But you have the opportunity to make up the capital difference of $3.50 so why not just buy the A? Again I would rather own something at 25 cents on the dollar than 40 cents unless the yield difference is substantial. The commons are at 30 cents on the dollar and have a yield of 1% so they don’t even warrant a consideration. The cool thing about preferreds is that they get marked substantially lower when there is a loss but in reality the loss is fully attributed to the commons. Thus the opportunity to make good money with the security of asset coverage. Having oil come back obviously doesn’t hurt either. Husky has something like $8 billion in assets net of debt so the preferreds look like a pretty safe bet.
Dan Good, serious attempts were made to explain this to you previously. Go ahead and buy all the As you would like. All the Husky series are under-priced. If you want to buy the cheapest on a relative basis, you need to understand relative value. Try reading James’ work on implied volatility theory for starters.
I suspect that you already have and you are just muck-raking or you really don’t have a serious interest in understanding preferred shares.
Dan Good, I will throw this out there … the Gs have at least 20% more upside than the As once the market stops demanding such a ridiculous spread for Husky and yields normalize. See if you can do the math to figure that out.
Why so condescending? As Peter Cundill used to say all you need to do the math is a hand held calculator. Obviously the upside on both is $25 as Husky can redeem them at this price. So lets say interest rates return to “normal”, you could potentially receive $18 more on a $6.57 investment on your A shares in capital appreciation and only $14 more on a $10.65 investment in the G shares. And what do you give up in yield? A few shekels per year. Literally 98.375 cents per year for the G and 97 cents for the A until reset date assuming a $25 investment in each. Try the Intelligent Investor by Benjamin Graham chapter 16.
Dan Good, husky has the right to redeem any of their preferred shares, but not the obligation; they can simply push them back every 5 years forever.
Why would they want to redeem series A which cost them a premium of 1.73% vs series G which costs them a premium of 3.52% over the 5 year gov rate. series G costs them more in div payments than series A. Therefore *IF* they wanted to redeem some, they would redeem the onces which are costing them the most.
What leads you to think they want to redeem any of their prefs?
“What leads you to think they want to redeem any of their prefs?”
Exactly the unanswered question put to Dan Good previously. He must be baiting, so I’m done replying to him. No one is that thick. I know I sound condescending, but he is a self-professed investment advisor and Jeremy Grantham acolyte, not someone who is just casually asking questions. Just wait for the 500 word post coming explaining how he is a value investor … something Grantham … something else Dundee … even more Bob Loblaw.
Not to date myself but I was introduced to the “Kondratiev” wave theory in 1981 that basically stated economic cycles were predictive and recurring in a series of small and larger waves. For example, interest rates rose for roughly 40 years from the 1940s to 1981 and have been falling for 40 years ever since. Who is to say rates might not increase in the future? And if they do then interest reset preferreds will become very costly to corporations and they will be better off to redeem them than continue to pay such a high premium over bond rates. Say rates hit 5% on bonds, Husky would be paying 8.5% on the G in after tax dollars. They would likely redeem them given the opportunity. But even the As would be expensive at just under 7% so they might redeem them as well. I think James has mentioned 65% or more of the Canadian market is resets now? But what becomes costly to corporations becomes an opportunity to investors. Another thing Cundill would do is look in areas where the market has declined the most for values. Where there is blood on the street so to speak. The interest reset market for preferreds I think would qualify today. If and when rates increase you may see a mass exit in this market for corporations in favor of perpetuals, Remember resets are still a relatively recent novalty in preferreds.
“As Peter Cundill used to say all you need to do the math is a hand held calculator”
To which I would add, ” garbage in, garbage out.”
DanGood’s investment “thesis” [ and ideas about relative value] seem to be based on comparatively steep discounts to par [ in this case “A” versus “G”] accompanied by some notion that the deeply discounted pref will be called, thereby juicing the return. We noticed that already in the May 2020 postings with respect to Dundee, and it was roundly questioned back then, and again here by Avocado and Stusclues with respect to HSE.PR.A. Their questions remain unanswered.
DanGood also ignores what primarily matters for these resets going forward: it is not the coupon rate per se that matters but what will be the spread to the 5-year GOC demanded by the market at the relevant time.
To use the “A” as an example: if the GOC at reset time is 5% [ the figure used by DanGood], the coupon on “A” will rise to 6.73%. But if the market at that time still requires, say, a 3% spread to the 5-year, then the price of “A” will reflect a current yield of 8%. That would mean that the “A” would still be trading well below par. Why therefore would Husky redeem the “A” pref trading below par, to replace it with … what?
Like Stusclues, I too wonder if DanGood is simply baiting, on the theory that some publicity is better than no publicity
In DanGood’s defense regarding “Their questions remain unanswered”; if I’m not mistaken Dan’s thesis requires interest rates to increase significantly to the point where companies will have to reduce their debt (and prefs in this case).
Now I question if we’ll ever see 5% rates again, or has QE forever changed our world? I was previously under the illusion that we would see 2-3% before covid came along; however I have since been humbly required to accept this new reality that we’ll be stuck for another decade of super low rates
My wishful thinking on this topic is that husky gets taken private and the prefs get called.
For the record, my own views regarding the effect of the general level of interest rates on the probability of preferred share redemption may be found under the heading “Term Extension” in the FixedReset Review: October, 2016.
It may well be that yields get to be so high that HSE finds it advisable to reduce their debt generally … but generally speaking it will be cheaper and easier for them to reduce their commercial paper ($450-million as of 20Q1) and to reduce the level of refinancing of their market debt, most of which matures within the next ten years.
I will also point out that Dan Good‘s investment thesis, insofar as it has been laid out here, assigns a 100% probability to a sharp increase in the general level of interest rates, which seems rather aggressive.
As far as the general idea of preferentially investing in lower priced preferreds is concerned, there is some support for that; yes, there is more room for capital gains in the future and yes, there is, potentially, higher credit quality for the lower-priced issues (assuming that negotiations in times of extreme stress focus on par value rather than yield, which is possible although not guaranteed).
Both rationales, however, should only be taken as adjustments to valuation rather than the sole determinants, particularly since the current market is such that the value of the issuer’s embedded option to call at par is worth as close to zero for both HSE.PR.A and HSE.PR.G as one might wish.
HSE.PR.A yields far less than HSE.PR.G under current market conditions; 8.45% for the former vs. the latter’s 9.54% as of yesterday’s close, according to my calculations. The question of how much yield one should be willing to give up in exchange for a lower spread (and therefore a lower call probability) is a complex one (which I attempt to address with Implied Volatility theory) – but at the moment, I like the Gs.
“if I’m not mistaken Dan’s thesis requires interest rates to increase significantly to the point where companies will have to reduce their debt (and prefs in this case)”
Well its hard to argue that some deleveraging wouldn’t be a consequence of rising rates. Its another matter entirely to leap to the wiping out of preferred shares in the capital structure of a company. Even “if”, Dan Good’s last post identifies (rightly) that the Gs would probably be redeemed ahead of the As, which puts to drivel his initial assertion that the As are best issue to buy because the are the most discounted from par. He doesn’t even know what he is arguing.
Thank you James.
For the lazy ones amongst us, here is what you wrote back in 2016. It also relates to the last point Stusclues just made:
“However, it must always be remembered that the decision by the issuer regarding whether to call the issue or to allow it to reset will have little, if anything, to do with the GOC-5 yield: the relationship between the Issue Reset Spread and the level achievable in the marketplace at that time will be much more important. For example, one might think that if GOC-5 reaches 1980’s levels of 10%, then TRP will not wish to pay a 12.38% dividend on TRP.PR.D. But calling the issue will require them to fund their operations from other sources – which, given a GOC-5 yield of 10%, might make 12.38% look cheap!
This is a very difficult concept for many retail investors to grasp.”
You do not have to wait for a preferred share to be called, you could sell it. If we look at the recent past, last year when GOC5 was about 1.5% HSE.PR.A reached about $18. I have bought some As with an average in lower $6s. I do not know how soon GOC5 will reach 1.5% again and if the HSE.PR.A will be priced at that level but it is possible and I would be happy if could triple my money and in the meantime get close to 9% or more dividend.
Exactly my point. In Canada we have been living in a world primarily void of deep discount plays as the makets have primarily risen over the past 10 years. Now there are many. This is when the fun starts. The theory is to only purchase securities trading with a adequate margin of safety. You can get this with price (40 cents on the dollar is safer than 100 cents) asset quality (cash is good unless they burn it) little or no debt and business quality among other factors. So you don’t wait around for $25 on the preferreds since they have no margin of safety in price left. Things have a way of going surprising bad. Hopefully you can get out at $18+ and get into a similar preferred share at $12.50 or less? As you said tripling your money and getting well paid on the dividend is not to be frowned upon. I do know with absolute certainty you cannot triple you money on the G shares from here. Dundee preferreds are fully backed by cash and have the potential for a substantial issuer bid. So maybe they are a better bet? I don’t know. As James has pointed out yield spreads on preferreds are at or near historical high levels. This is the area I want to be. To have some corporation pay me a 3+% premium to a risk free rate seems like a misprint to me. And then being able to buy the security at a discount? I need a piece of that action. As for calling preferreds, corporations also must look at what rate of return they can invest their capital at as well. I have argued for many years with EL Financial management that they should buy out their preferreds as they cannot invest and earn a return anywhere near 5% after tax in a risk free asset. The CEO bought out my chunks of the G shares over the last year so at least he sees their value. I have given up on believing management is run by reasonable business men.
“… last year when GOC5 was about 1.5% HSE.PR.A reached about $18. … I would be happy if could triple my money”
Dodoi, not sure where you’re getting your $ 18 last year. I see the “A” in a range of some $13.50 earlier in 2019 when the 5-year was consistently above 1.75%, and then the price dropping off over the rest of the year.
Perhaps you’re thinking of 2018 when “A” was actually around $ 18 … but in 2018 the 5-year GOC averaged 2.34%.
Relative to each other the “A” and the “G” have pretty much performed identically price-wise since November 2018.
@peet
You are right!
Given HSE.to stock price over the past few years, there may be a concern of it going broke.. This may more likely that than preferreds of this company being called back at par (or anything similar)..
Note I’m not buying any of HSE preferred shares given its financial situation.
“Note I’m not buying any of HSE preferred shares given its financial situation.”
That has definitely been the prevailing view! I was buying HSE.PR.G throughout April at spreads north of 11%! They have subsequently narrowed to north of 8% and they have some ways to go as worries of solvency risk at Husky begins to melt.
I thought I would revisit these preferreds to see the results after 2 years. The CVE.PR.A shares have risen from $7.41 as of June 1st, 2020 to $16.91 and the CVE.PR.G from $11.45 to $22.32. So a gain of 228% on the A’s and 195% on the G’s. Not accounting for the dividends which are pretty even for both. So buying focusing more on price than yield has worked out. And I remain a deep discount value guy.
Your terminology is not right. While 16.91/7.41 = 2.28, the gain is 9.50 which expressed as a percentage of 7.41 is 128%. I am curious if you actually bought at 7.41, or acted on your idea at any price, or if this comment is more of discussion about an idea you had way back when.
So buying focusing more on price than yield has worked out. And I remain a deep discount value guy.
Dan Good, it looks like you’re falling into the ‘confirmation bias’ trap, in which all supporting evidence is believed whole-heartedly, while all negative evidence is ignored.
As I stated above:
Luckily for you, that’s exactly what has happened: when I wrote that on 2020-6-4, the GOC-5 rate was about 0.45%, while last Friday, the last trading day before you updated, this yield had increased to about 3.36%. That’s quite a substantial move in objective terms, not to mention subjective changes like the difference between June 2020, when everyone was about to die of the plague, to now, when we all have to take out a mortgage to buy a steak for the barbecue.
There is no doubt that having a lot of room between the market price and call price is a good thing, as I have often discussed here. The more room there is, the more symetric the probability distribution of projected absolute future returns will be.
But it’s not the end of the story. Your comment indicates a pay-up of $4.04 to swap the A into the G on 2020-6-1, which my comment points out translates to a yield pick-up of 89bp with the usual assumption of a constant GOC-5 rate. So you chose the As, with a cheaper price (and more leverage to the GOC-5 yield) in preference to the Gs, giving up the yield to gain increased discounting.
OK, fine. As I indicated, it wasn’t my preferred route, but if everybody always agreed, nobody would ever trade. However … what if the the yield advantage of the Gs had been 189bp instead of 89? Howabout 289bp, 389bp, 1089bp? If the Gs had been priced a mere penny above the As, would you still have gone for the deepest discount?
I suspect not: at some point I’m sure the yield would have seemed more important than the price difference between market and par. The discount of issues to par is an important consideration, but it is not the only consideration; and when considering the success of any investment thesis in the past, it is extremely important to consider exactly what the thesis was and what else was going on that affected its success.
Your thesis was, in fact, that interest rates were going to rise. And it has worked out very well for the one-decision buy-and-hold strategy that you have illustrated. But in the absence of a lot more data – and information regarding loss-aversion, to name just one more investment factior – it is a mere anecdote, more redolent of market-timing rather than a careful investment strategy.
“As I indicated, it wasn’t my preferred route, but if everybody always agreed, nobody would ever trade.”
True, it takes all kinds. However, in this case we are hearing, again on the same topic, a self-declared professional money manager declare a willfully ignorant position – that being that low priced issues are “deep value”. Sometimes they are but not for that reason alone nor is a buy and hold always the best temporal course of action (usually is not). This sentiment completely disregards the mathematically sound Implied Probability Theory and the oft discussed Prefblog topics of irrationality and mispricing in the Canadian pref market. Alas, this is too often the state of managed money today in this country. I sure hope Dan isn’t trolling for clients on this blog.
Implied Probability Theory
I suspect you meant Implied Volatility Theory.
Oops, yes James I did 🙂
Don’t worry, I started buying the Husky A preferreds in May and added in June and early July 2020 at just over $6 per share. You are right about my terminology but you get the point. As for being “lucky” I live in the world of deep discount plays where something usually has gone horribly wrong (interest rates collapsing) to put the securities at such a deep discount in the first place. I wasn’t betting on a rise in rates to make money but just a “reversion to normal”. Things just generally have a way of working out when you buy on pessimism. Of course I am careful in what I buy – I didn’t buy Bombardier preferreds which would have worked out fine – but while most investors focus on yields, earnings and earnings growth I play in a different playground focusing on book value which I believe gives me an advantage. There are too many smart people knocking each other out where the majority play. I put the original blog out there to get people thinking in a different way. I’m not looking for converts nor wanting to show you how many Buggattis I have. And no I am not looking for clients.
It’s always difficult being a contrarian. Dan Good, you need to post more often.
Get my a cup of coffee and I can go on forever. My son made me a birthday card years ago with a drawn graph of the fall of CI shares with the underlying caption ; “may all your shorts work out”. I remember questioning a Mackenzie manager during an advisor conference that was holding a ton of CI shares when they traded north of $36. I told him I was shorting the shares because they were over 6 times book and trading at a Goldilock’s price. He said he couldn’t wait for the future to buy my shares back from me at a much higher price. I haven’t seen him since. I also questioned a manager in 2007 that was holding a lot of Canadian bank shares that traded at roughly 3 times book and told him something was wrong because bank shares generally trade at a discount (as in 1982) to as high as 2 times. He told me you can’t look at banks that wat anymore because they now have more goodwill. Again, the rest is history. I got my “start” as a DIY investor buying Sceptre Resources at junk prices prior to their buyout in 1996 so I will always have an affinity to preferred shares. Those were fun days!
Dan, you should post more but it’s better to tone it down or the academia crowd will retort on all the deficiencies in your positions. Surely, you can only win on ritualistic formulas.
JH said “OK, fine. As I indicated, it wasn’t my preferred route, but if everybody always agreed, nobody would ever trade.”
DG said “Don’t worry, I started buying the Husky A preferreds in May and added in June and early July 2020 at just over $6 per share.”
DG, maybe we have a connection. I sold 2,300 shares of HSE.PR.A on May 7, 2020 at prices around $6.35. Maybe you bought these. My reason for selling these shares and others at that time was to make enough losses to allow me to recover capital gains taxes paid in previous years. To me this was a guaranteed thing compared to all the uncertainty at that time.
Comparing the prices of shares I owned May 31, 2020 and still own May 31, 2022 my biggest price gain is TA.PR.F with a gain of 108% (21.95 vs. 10.55) and my smallest price gain is EFN.PR.C with a gain of 24% (25.00 vs. 20.18). The rest of the price gains vary from +50% to +70%.
Dan Good, I must compliment you on your excellent stock pick. But what is the way forward for you now. Is CVE.PR.A still a holding for you? Or is it no longer at a deep discount and must be sold? Do you find enough deep discount buys to always be fully invested in deep discount plays? Or do you have GICs and other regular common and preferred share investments like myself?
I can always buy BIR preferred at $25 or less with a yield of 2% in 3 months. This is equivalent to 8% annually or an interest equivalent of roughly 10.4%. EL preferreds yield just under 6% and are basically “risk free” as they are fully backed by cash and equivalents. At 80 cents on the dollar they might be a buy. But I can buy some common shares on the TSX at 50 cents on the dollar so that is where I am or commons of companies yielding 4.4% where they pay special dividends, trade below book and increase their dividends on a pretty regular basis. I’m interested to see what credit spreads are like so straight prefs might be interesting today too? As for a GIC please shoot me before I ever buy any.
As for a GIC please shoot me before I ever buy any.
Those who do have an interest in GICs and who have a full-service brokerage account should be aware of one little wrinkle …
Full-service brokerages will often provide liquidity to those of their clients wishing to sell GICs out of a sudden need for cash. Typically, they will buy the GIC at a price equating to a yield 200bp over the market rate and sell them to the first taker at 100bp over makret rate.
These things can be attractive investments now that we are back into an environment in which secondary GICs will be trading at a fat discount, since a large component of the income will be taxable as a capital gain only on maturity.
Of course, due to the nature of the market, you don’t get to specify the maturity date or the principal amount: the dealers have their inventory, take it or leave it. But some might wish to call their brokers and ask to be notified whenever something becomes available.