ALA.PR.E Redemption Considered

AltaGas Ltd. has announced:

that it is considering an offering of hybrid subordinated debt securities under its short form base shelf prospectus dated March 31, 2023.

If a successful offering is priced and completed, the Company intends to use the net proceeds of the offering to redeem or repurchase its outstanding cumulative redeemable five-year rate reset preferred shares, series E (TSX: ALA.PR.E). There is no certainty that AltaGas will ultimately complete the offering being considered or as to the timing or terms on which such an offering might be completed.

ALA.PR.E was issued as a FixedReset, 5.00%+317, that commenced trading 2013-12-13 after being announced 2013-12-4. The 2018-11-28 notice of extension was reported on PrefBlog. The issue reset at 5.393% effective December 31, 2018. I recommended against conversion and there was no conversion. The issue is tracked by HIMIPref™ but is relegated to the Scraps – FixedReset Discount subindex due to credit concerns.

The market seems to be ascribing a pretty fair chance of success with their refunding (which is reasonable, since the company will be very hesitant to announce a longshot): the issue was quoted at 22.20-22 at the ‘close’ (actually, 4:30pm) yesterday, opened at 22.20 today (some poor sucker with a GTC order? Or somebody bailing without seeing the news?), traded just below 24.50 at about 10:30am, and is now (11:20am) at 24.94. So some people are making a few bucks!

This is another example of just how cheap the preferred share market is nowadays against its comparables.

Thanks to the Assiduous Reader who brought this to my attention!

52 Responses to “ALA.PR.E Redemption Considered”

  1. avocado says:

    CALGARY, AB, Nov. 7, 2023 /CNW/ – AltaGas Ltd. (“AltaGas” or the “Company”) (TSX: ALA) today announced that it has priced an offering of $200 million of 8.90% Fixed-to-Fixed Rate Subordinated Notes, Series 3 due November 10, 2083 (the “Offering”). The Notes are callable after five years.

    Interesting to see the 8.9% pre-tax coupon they’ll pay vs 382+317=6.99% eligible dividend. Seems so very similar at a 1.3 equivalency factor.

  2. DR says:

    if anyone has any contacts out there that might be able to shed light on the nature of the ala book, please feel free to share it here.

    specifically was the book oversubscribed and did it contain a wide range of institutional buyers or was it a one off private placement type deal


  3. Abacin8 says:

    Before they announced the deal closed, it was stated that it was 2.1X covered, 43 buyers.

  4. DR says:

    very good to know, thanks. could be a very material development should more non banks follow and an institutional market develops for such hybrids.

    but must say, speaking to the laziness of these issuers, to call a 7% when you have other series >10% (ala.a in this case) is yet another argument for more active ncibs on their cheapest series.

    or even possibly SIBs. every issuer out there could learn something from the ELF/UNC/EVT complex as to the use of SIBs in that none are too small (EVT) when something is cheap enough. third straight year of across the board SIBs.

  5. DR says:

    should cpx.c go, we might be on to something

  6. skeptical says:

    My rough calculation shows that for Alberta @8% tax rate for the province, the difference will be about $365k for one year period for the 250 million issue size. For a company with half a billion in profits, this seems like a rounding error. Was it even worth the time?
    And when factoring in about 1% for pricing in the new issue, it would take about 7 years just to break even on the expenses.

    Perhaps the banker friends were itching for some business and the CFO obliged.
    Or perhaps they really bought into higher for longer thing and want to lock in the rates at 8.9% now rather than 11% in five years.

  7. stusclues says:

    “yet another argument for more active ncibs on their cheapest series.”

    I agree and I’d call out Fairfax for not doing more to retire their preferred shares (note: they do have an NCIB). Prem Watsa consistently states that he runs the company with a focus on increasing book value over the long term. He should behave that way by more aggressively retiring prefs (and buying cheap prefs of other issuers too). FFH should have bought back more commons also when they were trading sub $500. Prem did personally but the company did not.

  8. DR says:


    skinny indeed but don’t forget the listing fees! as to rate forecast, both are callable and resetable every 5 years so not sure any different?


    why single out one issuer when they are all guilty with exception of BCE?

  9. jiHymas says:

    Interesting “incentive to redeem” on these notes:

    From, and including, the date of issue (the “Closing Date”) to, but excluding November 10, 2028, the Notes will bear interest at a rate of 8.90% per annum, with the first payment being $44.50 per $1,000 principal amount of Notes. From, and including, November 10, 2028, and on every fifth anniversary of such date thereafter (each such date, an “Interest Reset Date”), the interest rate on the Notes will reset for the Subsequent Fixed Rate Period (as defined herein) at a rate per annum equal to the Five Year Government of Canada Yield (as defined herein) as of the most recent Interest Reset Determination Date (as defined herein), plus: (a) for the period from, and including, November 10, 2028 to, but excluding, November 10, 2033, 5.089%; (b) for the period from, and including, November 10, 2033 to, but excluding, November 10, 2048, 5.339%; and (c) for the period from, and including, November 10, 2048 to, but excluding, the Maturity Date, 6.089%, in each case, to be reset on each Interest Reset Date

  10. DR says:

    if wanted to point out individual behaviour, lets talk about our fine feathered friends at brookfield…

    BN has bought back in excess of $500mm worth of common so far this year. the common has a 1% dividend yield and trades around IFRS book value – granted they encourage people to look at the “blended” value which uses market prices for listed subs, notably BAM and is much higher.

    they also reiterate their belief in the carrying values of BPY/BPO and point to asset sales this year that were all in excess of IFRS book.

    that being said, they still opted for the common in deference to either BN or BPO prefs yielding 12-25% on a reset basis and trading at 50%-25% of par respectively.

    at those perpetually compounded rates and immediate impact to IFRS book, i would take the prefs all day long over the common but they have bought….

    zero prefs

  11. DR says:


    u mean the step up? yeah, will be quite the motivator and as such does look a little more like sub debt than a pref after all…

  12. DR says:

    and circling back to skeptical’s point, begs the question


  13. skeptical says:

    Wow, so they moved from 3.17 spread to 5.089-6.089 spread to save money? If the new issue had been perpetual note, someone could have justified the move.
    Who cares.

  14. stusclues says:

    “why single out one issuer when they are all guilty with exception of BCE?”

    Agreed. They are all guilty. I singled out FFH because Prem is so outspoken about concentrating on book value as the key metric for management behaviour. Retiring prefs well below par is highly accretive to book value.

    The other reason is free cash. Many issuers have too many competing uses for cash in operations or debt reduction to consider big pref buybacks. FFH has massive liquidity with the laser focus on building book value, so their behaviour (not buying prefs) stands out as a lost opportunity.

  15. DR says:

    fair enough. ffh is on my boycott list. just can’t forget that it was the target of many very smart hedge funds shorting it couple decades ago. but that was a long time ago….

    how ’bout that tom czitron article in the globe. that piece of rubbish from a former lead bond fund manager at rbc!

  16. stusclues says:

    “how ’bout that tom czitron article in the globe. that piece of rubbish from a former lead bond fund manager at rbc!”

    Agreed. Terrible article. He doesn’t mention “fixed reset” even once, despite this class being the dominant type in Canada. No wonder retail investors are so confused about preferred shares.

  17. jiHymas says:

    For those interested, the article may be found at

    I’m tempted to chime in on the comments, but I’m afraid it would look bad. I am amused, however, that the most ‘highly respected’ comment (by far) commences with:

    most uninformed article ever written. fails to mention once that the vast majority of prefs o/s these days are of the rate reset variety which mean that their coupons will rise dramatically when they reset.

  18. DR says:


    what incensed me so much is not just all the factual errors and omissions but that as a former top gun at RBC i view him to a certain degree as an ambassador for the bank.

    imo, the rate reset market was fundamentally mis-priced when it was conceived in the early years. my first stab at them was 2015 and i’ve had two pretty good kicks at the can with them. this is my third go and admittedly am underwater but that is normally the case when accumulating broken securities.

    that being said, RBC and others stuffed a mispriced security into client accounts and created one of the most saturated asset classes i can think of. it has still not recovered from that despite a few periods of returning to fair value post 2016.

    the gfc was not dissimilar in what occurred with all the mortgage paper.

    so for an ex RBC expert to be so negligent in his writing, i consider it particularly offensive to all those long at par

    but perhaps “former” may explain a lot

  19. DR says:

    even if we forgive him for not clarifying that he meant only to be discussing perpetuals…

    simply can’t have a conversation about perpetuals without discussing the impact that the rate resets have had on them, and that is the profound weakness has spilled over and is in part why seniority spreads remain so elevated.

    i do think the higher rate environment does partly explain elevated seniority spreads on weaker credit for those highly levered companies but i think it is only half the story

  20. jiHymas says:

    as a former top gun at RBC i view him to a certain degree as an ambassador for the bank. … so for an ex RBC expert to be so negligent in his writing …

    Banks are not in the business of creating high quality, premium products.

    Banks are in the business of creating plain-vanilla products cheaply and selling the hell out of them with the help of their massive distribution network and the Canadian perception that since banks are big, they must also be smart.

    I have never been as impressed by the expertise shown by bank employees as you appear to be!

  21. DR says:

    experts at lining their pockets

  22. DR says:

    ALA press released they expect to save $10mm over first 5yrs on the pref-hybrid switch so effective tax rate not as simple as just the allin alberta corp tax rate.

    good thing as might incentivize more such deals???

  23. jiHymas says:

    Assiduous Reader PL writes in and says:

    I notice that there has been discussion regarding AltaGas redemption of their series E Preferred Shares and the issuance of a new hybrid (bond?) on the blog. Within the discussion, it has been pointed out that AltaGas issued a press release outlining their savings as a result of the swap (see below).

    As part of the press release, they stated the dividends are not tax deductible per part 6.1 tax. I suspect this has to do with the new tax rules on corporate dividend income and not on personal income. I was wondering whether you would be so kind as to explain this situation to me or to everyone on the blog. Here are a few questions that I have:

    – Am I correct that the non deductible tax per Part 6.1 is corporate income related and not personal?
    – I understand that AltaGas might be able to save money by using business expense, tax deductible bonds/interest as opposed paying dividends from after tax retained earnings but I am not sure how the new tax rules would have had any effect on this
    – Is there a way we could model which issuers and or issues (high price, low price, …) would most benefit from this business savings math
    – Since CIBC / RB C were the bookrunners on the deal, are they not pitching this same math to every other pref share issuer?

    Thanks in advance.

    Does anybody with more tax expertise than me want to address these questions?

  24. DR says:

    certainly no expert myself but at no point would we have ever expected that the dividends paid on pref shares would have been deductible to Altagas.

    the question would have been what is the overall tax rate on deductible interest expense that Altagas would incur.

    presumed that when skeptical did his calculation and arrived as a lower savings, that he would have used the published corporate tax rates for an Alberta issuer and that is 15% federal and 8% provincial.

    would seem based on the Altagas release that their effective tax rate must be higher. 10mm over 5yrs = 2mm/yr on a 200mm issue arrives at 1%/yr or 6% after tax (compared to the 7% dividend they would have paid).

    so 6% from a 8.9% coupon would suggest a tax rate of 33% rather than 23%

    skeptical, would you agree?

  25. DR says:

    and starting with the assumption that the demand for the hybrid is a contstant spread over canadas for that credit,

    cpx.c has a slightly higher reset spread than the ala did, same rating and also up for reset end of this month.

    judging from the bid and lack of offers, it should be a goner assuming they can move fast enough as time is running out.

    don’t suspect the many ENB’s due for reset will qualify as the reset spreads are possibly too low but ta.j later next year ought to disappear at +380

  26. DR says:

    suppose its worth noting that the ALA savings wont quite be as much as they thought given canada’s just popped on the inflation numbers and the reset is looking lower than it would have been when they did the deal….

  27. DR says:

    as for modelling those which could be called, look for reset spreads in/around 300 for that credit BUT

    these rascally issuers would still be far better off buying their lower reset series that have dramatically higher yields in the open market. few will likely go that route as they cite too much work or not enough liquidity

  28. DR says:

    and it just dawned on me that regarding whether or not we might expect more such deals…

    the new rules regarding dividends would have had no bearing on ALA, the issuer

    these rules are meant to combat the massive dividend arbitrage business engaged in by banks/insurance co’s. that is to say that dividends RECEIVED by such institutions would henceforth be taxable as opposed to non taxable

    so given we know that certain institutions were dumping prefs as they no longer had the old tax advantages…

    stands to reason that they would want to replace them with something similar that gives them the same after tax yield and that could well mean we will see a non bank hybrid market develop

  29. jiHymas says:

    so 6% from a 8.9% coupon would suggest a tax rate of 33% rather than 23%

    According to ALA’s 2022 Annual Report, their “Effective income tax rate” was 20.0% in 2022.

  30. DR says:

    odd. math doesn’t add up then.

    perhaps a portion of the dividends paid were deductible previously which doesn’t make much sense or their tax rates have risen???

  31. skeptical says:

    In my experience, it is rare for a publicly listed company to pay a tax rate higher than the ‘posted tax rate.’
    Perhaps a quick query to investor relations would get a better answer than the guess work we are doing here. Just ask them to show the math!

  32. niagara says:

    Not sure if this helps, but in Altagas’ press release dated Nov 10, they state:
    ” Series E Preferred Share dividends are not deductible for tax purposes and are subject to part 6.1 tax at 40 percent. As a result of the Offering, based on current rates, AltaGas expects to save approximately $10 million or $0.01 of annual earnings per share during the initial five-year term of the subordinated notes due to lower taxes and financing charges relative to what the reset rate would have been on the Series E Preferred Share dividends.”

    40 percent tax rate, or so they say.

  33. DR says:

    the part VI tax is levied on issuers of pref shares. it is generally recoverable.

    however in certain instances where a corporation is either not taxable or paying tax at a level below certain thresholds, the tax may not be fully recovered.

    in and of itself, this is not a major development but it COULD lead to the cost of prefs being higher than simply the coupon and would be on a case by case basis

  34. DR says:

    or so i have just learned….

  35. paullo says:

    Thanks DR. That information is much appreciated.

  36. DR says:

    just spoke to a cfo of one of my names

    the question becomes what of an issuer that was profitable upon issuance but finds itself less so now…

    the part 6 gets paid regardless and they do have the ability to “move them around” such that even though consolidated may be losing money, often certain entities within that can allow for recovery.

    that which isn’t recoverable is a loss carry forward

    but if that issuer has an already large pile of loss carryfowards, not worth a whole lot and

    the pref stock is indeed even more expensive than the already lofty levels we see them trading at

  37. Avoid the Herd says:

    Tax on Preferred Shares – this problem also applies to Dundee. The Dundee prefs have held up very well this year. Investors are likely expecting them to be redeemed next September. Management has spoken frequently about the how the CRA preferred issue tax renders this form of funding extremely expensive for the company.

  38. DR says:


    yeah, as if +410 over 4% wasn’t bad enough.

    that part 6 tax really serves to kick an issuer when they are down!

  39. skeptical says:

    So essentially, this tax is levied upon certain issuers that are not profitable but still have to pay out eligible dividends. 6.1 rule makes sure that if dividend is paid out of ‘untaxed earnings’ for whatever reason, this tax gets applied to ensure integration.
    So in our context, marginally profitable firms could be more impacted than the firms that are on much stronger footing.

  40. DR says:

    yes. everyone without exception pays it

    but if you are a profitable corp paying 28.5% then it is all recoverable

    so ALA at 20% likely only got partial recovery, hence the math

    but for those that find themselves unprofitable or in very low bracket, it is a real kick in groin when can least afford it

    the “move it around” feature may allow for some recovery but those carry forward losses on unrecoverable amount just aint worth a whole lot when discount rate has moved up and no real visibility to profitability

  41. DR says:

    dont own any, but now aware of this part 6 + hybrid possibility, aqn.a goes on the radar alongside the cpx.c

    should either go, would expect few others to pop

  42. DR says:

    lastly, more of a mental exercise but….

    in extreme cases, might this serve to motivate the suspension of pref divs to avoid paying the part 6!

    while the div is cumulative, the part 6 would be avoided altogether until divs restored upon profitability….

  43. skeptical says:

    DR: Thanks for this wonderful explanation.
    Are there any implications of holding the preferred shares within a CCPC? is there any additional tax paid by the ccpc holding company for example?

  44. DR says:

    short answer is no idea but not sure i understand the question

    are you asking about the part 6 if the issuer is a CCPC or
    the treatment of divs received into a CCPC?

    from what i have read, the part 6 rule was largely implemented (in 1987!) to address private issuers from shortchanging the CRA by issuing eligible pref divs where no corp income tax was being collected thus depriving the CRA

    but rules apply to both public and private issuers. this was one of the pieces we read prior to speaking to cfo of public co issuer in a less than fully taxable situation…

  45. skeptical says:

    I am talking about a CCPC that holds preferred shares.
    Eligible dividends received by CCPC get taxed at a refundable 38.xx% tax. the refund is triggered when the dividend is passed on to shareholders.
    Almost all the Canadian preferreds mark the dividends as ‘eligible’, so the tax treatment should be similar to what I mentioned above.

    From the link above, it says that the recipients are not subject to the 10% tax if they are excepted dividends. So as per the above link, there should be no tax applicable to preferred shares held within ccpc. Just the regular refundable Part VI tax.

  46. DR says:

    ha! i am the last guy to ask about that

    i find the use of private holdco’s for passive income, revokable family trusts and the like entirely reprehensible

    however as one of the myriad boomers providing ongoing financial support to adult children who sees no end in sight and deems those children’s claim on my passive income as absolute, i am not against income splitting so

    we just gifted the kids the assets and pray they don’t go off the reservation

  47. skeptical says:

    I dug deeper and looked at the form (Schedule 43) for calculating this tax as a recipient:
    Part 4 – Part IV.1 tax payable.

    The title description states:
    This tax does not apply to dividends received by financial intermediary corporations or corporations that were private corporations at the time the dividends were received.

    So it would seem that all the machinations happen mostly on the payer side of these dividends, except the exceptions, as always.

    I share your opinion on passive income splitting. But that would start another little thread of its own.

    Thanks for your insights on this. Was very helpful.

  48. DR says:

    all CPX issues Halted after hours. fingers crossed…

  49. DR says:

    not today, not today

  50. […] to Assiduous Reader Dan Good for bringing this to my attention, to Avoid the Herd for foreshadowing the announcement and to DR and niagara for helping me understand how this can make financial […]

  51. […] subordinated/hybrid notes look a lot like LRCNs but have a step-up in interest rate, which would disqualify them from being Tier 1 Capital for banks and […]

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