Fortis Inc. has announced:
that it has entered into an agreement with a syndicate of underwriters led by TD Securities Inc., Scotia Capital Inc., RBC Capital Markets and CIBC, pursuant to which they have agreed to purchase from Fortis and sell to the public 10,000,000 Cumulative Redeemable Five-Year Fixed Rate Reset Series First Preference Shares, Series H (the “Series H First Preference Shares”) of the Corporation (the “Offering”).
Holders of Series H First Preference Shares will be entitled to receive a cumulative quarterly fixed dividend for the initial period ending on but excluding June 1, 2015 (the “Initial Period”) of 4.25% per annum, if, as and when declared by the Board of Directors of the Corporation. The first of such dividends, if declared, shall be payable on June 1, 2010 and shall be $0.3668 per Series H First Preference Share. Thereafter, the dividend rate will reset every five years at a level of 1.45% over the five-year Canada bond yield. Holders of Series H First Preference Shares will, subject to certain conditions, have the option to convert all or any part of their shares into Cumulative Redeemable Floating Rate First Preference Shares, Series I (the “Series I First Preference Shares”) of the Corporation at the end of the Initial Period and at the end of each subsequent five-year period.
Holders of Series I First Preference Shares will be entitled to receive a cumulative quarterly floating dividend at the rate of the three-month Government of Canada Treasury Bill yield plus 1.45%, if, as and when declared by the Board of Directors of the Corporation.
The purchase price of $25.00 per Series H First Preference Share will result in gross proceeds of $250 million. The net proceeds of the Offering will be used to repay borrowings under the Corporation’s committed credit facility and to inject additional equity into a regulated subsidiary.
The first coupon will be for $0.3668 payable 2010-6-1 based on closing 2010-1-26.
FTS has an outstanding FixedReset, FTS.PR.G, 5.25%+213, which closed Friday at 26.46-70 to yield 3.70-43% to its presumed call 2013-9-1. There is also an outstanding PerpetualDiscount, FTS.PR.F, which pays $1.225 and last closed at 21.71-40 to yield 5.71-49%.
The Break-Even Rate Shock for the issue against FTS.PR.F, according to the BERS Calculator is a rather high 222bp.
WITH THE BERS BEING SO HIGH ON THIS AND THE BROOKFIELD ISSUE SHOULD WE BE BUYING THE PERPETUALS
Well … all I can say is that the BERS calculation quantifies the data you can use when making a decision.
If you assign a high probability to a rate shock (as defined) in excess of, say, 250bp – then you will find the FixedResets attractive relative to the Straights.
You may also find them attractive if you assign a lower probability to this occurance, but are highly risk averse.
For myself, though, I wouldn’t assign a very high probability to a shock of such magnitude; and from looking at the Break-Even-Inflation-Expectation on TIPS and RRBs, it’s safe to say that the market as a whole shares my views on this.
Thus, IF I liked the Brookfield/Fortis name sufficiently to trust them with perpetual money (note that FixedResets are just as perpetual as Straights; the credit risk is forever) and IF there were no constraints imposed by the rest of my portfolio, then I would be ranking the Straights as more attractive than the FixedResets.
Specific recommendations for each class of Preferred Shares are made monthly in PrefLetter.
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