Capital Power Corporation has announced:
that it has priced a public offering (the “Offering”) in Canada of C$350 million 7.95% Fixed-to-Fixed Rate Subordinated Notes, Series 1, due September 9, 2082 (the “Notes”).
The Offering is expected to close on or about September 9, 2022. The Company intends to allocate an amount equal to the net proceeds from the sale of the Notes to finance or refinance new or existing “green” investments that meet the eligibility criteria as described in the Company’s Green Financing Framework. Pending such allocation, the Company expects to use the net proceeds from the sale of the Notes to redeem the Company’s outstanding Cumulative Minimum Rate Reset Preference Shares, Series 9 (TSX: CPX.PR.I) (the “Preferred Shares”), to repay certain amounts drawn on the Company’s credit facilities and for general corporate purposes. Although the Company intends to allocate an amount equal to the net proceeds of the Offering to eligible investments, it will not be an event of default under the Company’s indenture governing the Notes if the Company fails to do so.
The Offering represents the Company’s first green bond offering pursuant to its recently released Green Financing Framework, which Sustainalytics reviewed and provided a second-party opinion confirming its credibility. The Green Financing Framework and the second-party opinion from Sustainalytics can be found on the Company’s website.
The Notes have been assigned a provisional rating of BB by S&P Global Ratings and BB by DBRS Limited.
The Offering is being made in Canada through a syndicate of underwriters co-led by BMO Capital Markets, RBC Capital Markets, and Scotia Capital, under Capital Power’s short form base shelf prospectus dated June 10, 2022, as supplemented by a prospectus supplement dated August 18, 2022 to be filed with the securities regulatory authorities in each of the provinces and territories of Canada. The short form base shelf prospectus and prospectus supplement contain important detailed information about the Notes. Copies of these documents are, and in the case of the prospectus supplement, will be available electronically on the System for Electronic Document Analysis and Retrieval of the Canadian Securities Administrators (“SEDAR”), at www.sedar.com. Investors should read the short form base shelf prospectus and the prospectus supplement before making an investment decision.
DBRS comments:
DBRS Limited (DBRS Morningstar) assigned a provisional rating of BB with a Stable trend to the $350 million Fixed-to-Fixed Rate Subordinated Notes, Series 1 due September 9, 2082 (the Subordinated Notes), to be issued by Capital Power Corporation (the Company).
The Company intends to allocate an amount equal to the net proceeds from the sale of the Subordinated Notes to finance or refinance new or existing investments and expenditures that meet the eligibility criteria as described in its Green Financing Framework. Pending such allocation, the Company expects to use the net proceeds to redeem the Company’s outstanding Cumulative Minimum Rate Reset Preference Shares, Series 9, to repay certain amounts drawn on the Company’s credit facilities and for general corporate purposes.
CPX.PR.I is a FixedReset, 5.75%+412M575, that commenced trading 2017-8-9 after being announced 2017-7-27. The issue has been tracked by HIMIPref™ but relegated to the Scraps subindex on credit concerns.
And redemption confirmed today:
https://money.tmx.com/en/quote/CPX/news/6776724146130022/Capital_Power_provides_redemption_notice_of_Preferred_Shares_Series_9
“the Company expects to use the net proceeds from the sale of the Notes to redeem the Company’s outstanding Cumulative Minimum Rate Reset Preference Shares, Series 9 (TSX: CPX.PR.I) (the “Preferred Shares”), to repay certain amounts drawn on the Company’s credit facilities and for general corporate purposes.”
One good use would be an SIB for CPX.PR.A as it is dramatically cheap. Unlikely though I’m sure.
stu, why would Capital Power redeem the A issue? Coupon rate is 2.62% and resets at 5 year GoC plus 2.17%. They would be hard pressed to find a cheaper source of perpetual financing. Even if CPX redeemed 2 million A Prefs at $17.50, that would only result in a one time blip of $15 million to book value for a company having shareholder equity of approx $3 billion.
Seems like you are just talking your book. At current pricing CPX.pr.A will yield 4.5% for another 3 and 1/2 years. I don’t view the shares as a buy at $14.50.
“At current pricing CPX.pr.A will yield 4.5% for another 3 and 1/2 years. I don’t view the shares as a buy at $14.50.”
I may very well not understand your comment properly but I think it is a mistake to look at current yield to select rate reset.
Assuming the GOC 5yr bond yield hovers around 3% for the upcoming years, at $14.5, CPX.PR.A would reset at slightly below 9%(!)… so even though you may only get a yield of 4+% until december 2025, the capital gain will give you a very nice total return (because CPX.PR.A would be much higher than $14.5 at the reset date).
Maybe there is an issue with my reasoning but that’s the way I see things on this very topic. 🙂
Yomgui, I am aware of the potential capital gains but there is no guarantee that the 5 year bond will be 3% at the end of 2025. Could be lower, could be higher. Preferred shares are generally owned for income generation, not for capital appreciation.
I expect interest rates to experience several significant swings during the intervening period, providing opportunities to buy at lower levels assuming the investor is still confident of a much higher reset in 2025. No need to park money at a low yield in a 3 year trade. Upcoming resets over the next 9 months will allow income investors to lock in 7% yields for 5 years.
If a speculator wants to play the capital gains trade in the preferred market, the best entries occur when a company specific problem clobbers the share price or when the entire preferred market tanks like in 2020.
My strategy up to now has rather been to own perpetuals for yield because of the certainty of what you get “forever” (today you can buy strong investment grade perps yielding about 6.2% and well below par) and to take into account capital appreciation for rate reset.
For example, Capital Power Corp has 3 RR prefs (A, C and E).
A yields 4.5% at below $15 and the other two about 6% in the low twenties. Obviously different reset dates and spreads but today, I’d rather own CPX.PR.A because I believe the upside (GOC yield higher) / floor (GOC yield lower) are higher than the other 2 series.
Hopefully James doesn’t read all of this because I am rather new to the pref market and it is very possible that it shows in my comments ha ha
To make a decision now on which RR to buy, I believe we need to assume that today’s GOC 5yr yield is there to stay or else, you try to time the market and it is a dangerous game.
“why would Capital Power redeem the A issue?”
Yomgui is on the right track with the comments above.
If CPX is of the view that interest rates will not drop, then CPX.PR.A is the biggest bang for their buck in a buyback scenario. Given the state of the pref market today, an NCIB for all series (like BAM just got approved) is a reasonable use of cash, excluding the 2024 reset with minimum 575 (Cpx.pr.k).