PrefBlog

Brookfield Renewable Partners L.P. has announced:

that Brookfield Renewable Power Preferred Equity Inc. (“BRP Equity”) has determined the fixed dividend rate on its Class A Preference Shares, Series 3 (“Series 3 Shares”) (TSX: BRF.PR.C) for the five years commencing August 1, 2024 and ending July 31, 2029.

Series 3 Shares and Series 4 Shares

If declared, the fixed quarterly dividends on the Series 3 Shares during the five years commencing August 1, 2024 will be paid at an annual rate of 6.519% ($0.4074375 per share per quarter).

Holders of Series 3 Shares have the right, at their option, exercisable not later than 5:00 p.m. (Toronto time) on July 16, 2024, to convert all or part of their Series 3 Shares, on a one-for-one basis, into Class A Preference Shares, Series 4 (the “Series 4 Shares”), effective July 31, 2024.

The quarterly floating rate dividends on the Series 4 Shares will be paid at an annual rate, calculated for each quarter, of 2.940% over the annual yield on three-month Government of Canada treasury bills. The actual quarterly dividend in respect of the August 1, 2024 to October 31, 2024 dividend period for the Series 4 Shares, if declared, will be $0.478840 per share, payable on October 31, 2024.

Holders of Series 3 Shares are not required to elect to convert all or any part of their Series 3 Shares into Series 4 Shares.

As provided in the share conditions of the Series 3 Shares, (i) if BRP Equity determines that there would be fewer than 1,000,000 Series 3 Shares outstanding after July 31, 2024, all remaining Series 3 Shares will be automatically converted into Series 4 Shares on a one-for-one basis effective July 31, 2024; and (ii) if BRP Equity determines that there would be fewer than 1,000,000 Series 4 Shares outstanding after July 31, 2024, no Series 3 Shares will be permitted to be converted into Series 4 Shares. There are currently 10,000,000 Series 3 Shares outstanding.

The Toronto Stock Exchange (“TSX”) has conditionally approved the listing of the Series 4 Shares effective upon conversion. Listing of the Series 4 Shares is subject to BRP Equity fulfilling all the listing requirements of the TSX and, upon approval, the Series 4 Shares will be listed on the TSX under the trading symbol “BRF.PR.D”.

BRF.PR.C was issued as a FixedReset, 4.40%+294, that commenced trading 2010-10-11 after being announced 2010-10-1. The issue reset at 4.351% effective 2019-8-1. I recommended against conversion and there was no conversion. The issue has been tracked by HIMIPref™, but assigned to the Scraps – FixedReset (Discount) subindex on credit concerns.

Thanks to Assiduous Readers niagara and CanSiamCyp for bringing this to my attention!

Come one, come all! No bank too small!

DBRS has announced that it:

assigned provisional credit ratings of BB to EQB Inc.’s (EQB or the Group) Limited Recourse Capital Notes (Capital Notes) and Pfd-3 (low) to the non-cumulative Preferred Shares. Both trends are Stable.

Morningstar DBRS assigned the provisional credit ratings using EQB Inc.’s (EQB) Long-Term Issuer Rating of BBB with a Stable trend as the starting point, and then applied our standard three notches for both capital instruments. Morningstar DBRS notes that since the Capital Notes would convert to non-NVCC preferred shares, the issuance is being viewed similar to a preferred share issuance.

CREDIT RATING DRIVERS
The credit ratings of the securities will move in tandem with EQB’s Long-Term Issuer Rating. Over the longer term, Morningstar DBRS would upgrade EQB’s Long-Term Issuer Rating if EQB, together with Equitable Bank, were to progress in diversifying funding sources, particularly through more stable direct-to-consumer channels, and revenue, through higher noninterest income, while maintaining sound asset quality.

Conversely, a downgrade of EQB’s Long-Term Issuer Rating would result in a downgrade of the securities’ credit ratings. Morningstar DBRS would downgrade the Group’s Long-Term Issuer Rating if there were significant losses in the loan portfolio as a result of unforeseen weakness in underwriting and/or risk management, disproportionate growth in commercial originations that weaken the risk profile, or substantive funding pressure caused by deposit outflows.

CREDIT RATING RATIONALE

Franchise Combined Building Block (BB) Assessment: Good/Moderate

Earnings Combined Building Block (BB) Assessment: Good/Moderate

Risk Combined Building Block (BB) Assessment: Strong/Good

Funding and Liquidity Combined Building Block (BB) Assessment: Moderate

Capitalization Combined Building Block (BB) Assessment: Good

I can’t find anything about this (potential?) issue on the company website or the sadly mis-named SEDAR+.

But it’s worth mentioning because EQB has a preferred issue outstanding: EQB.PR.C, which remains unrated.

EQB.PR.C was issued as a FixedReset, 6.35%+478 in the summer of 2014. It will next reset effective 2024-09-30.

As I wrote at the time:

This issue is unrated and will not be tracked by HIMIPref™. This is not because I worship the Credit Rating Agencies and am unable to do anything without them; it is because I feel that a public announcement by the CRAs of imminent downgrades do an admirable job of concentrating the minds of management and the directors on fixing the problem. Such announcements by Hymas Investment Management Inc. or Joe Blogger do not carry the same weight.

Update, 2024-7-9: DBRS that it (puzzling bit bolded):

assigned a final credit rating of BB to EQB Inc.’s (EQB or the Group) Limited Recourse Capital Notes (Capital Notes) and a credit rating of Pfd-3 (low) to the non-cumulative Preferred Shares. Both trends are Stable.

Morningstar DBRS assigned the credit ratings using EQB Inc.’s (EQB) Long-Term Issuer Rating of BBB with a Stable trend as the starting point, and then applied our standard three notches for both capital instruments. Morningstar DBRS notes that since the Capital Notes would convert to non-NVCC preferred shares, the issuance is being viewed similar to a preferred share issuance.

On July 9, 2024, EQB issued $150 million of Capital Notes that mature on October 31, 2084, and will have an initial five-year fixed rate of 8%.

CREDIT RATING DRIVERS
The credit ratings of the securities will move in tandem with EQB’s Long-Term Issuer Rating. Over the longer term, Morningstar DBRS would upgrade EQB’s Long-Term Issuer Rating if EQB, together with Equitable Bank, continues to progress in diversifying funding sources, particularly through more stable direct-to-consumer channels, and revenue, through higher noninterest income, while maintaining sound asset quality.

Conversely, a downgrade of EQB’s Long-Term Issuer Rating would result in a downgrade of the securities. Morningstar DBRS would downgrade the Group’s Long-Term Issuer Rating if there are significant losses in the loan portfolio as a result of unforeseen weakness in underwriting and/or risk management, disproportionate growth in commercial originations that weaken the risk profile, or substantive funding pressure caused by deposit outflows.

Franchise Combined Building Block (BB) Assessment: Good/Moderate

Earnings Combined Building Block (BB) Assessment: Good/Moderate

Risk Combined Building Block (BB) Assessment: Strong/Good

Funding and Liquidity Combined Building Block (BB) Assessment: Moderate

Capitalization Combined Building Block (BB) Assessment: Good

I was puzzled over the idea that the underlying preferred shares were non-NVCC, since that did not align with my understanding of the rules – which are that the LRCNs must be backed by Tier 1 capital.

My understanding is, fortunately, confirmed by OSFI:

Issue #2: Given the fixed maturity date of the LRCNs in year 60, do the LRCNs satisfy the CAR Guideline requirement that Additional Tier 1 instruments be perpetualFootnote5?

LRCN noteholders’ recourse is limited to perpetual Tier 1-qualifying instruments – Bank preferred shares or common shares – in all circumstances, including at maturity of the notes in year 60. OSFI concluded that the LRCN structure is perpetual based on its economic substance and consideration of the structure holistically rather than its component instruments.

It’s further confirmed by DBRS:

— In a situation where default is imminent, insurance LRCN investors will rank pari passu to preferred shareholders. Bank LRCNs will see a conversion to common shares in a manner that maintains the credit hierarchy and where LRCN investors are expected to rank in priority to common shareholders.

The supporting document adds a tiny amount of flesh to the bare bones quoted above:

Additionally, on March 20, 2023, OSFI reinforced that for banks deemed non-viable and where OSFI triggers conversion, its “capital guidelines require AT1 and Tier 2 capital instruments to be converted into common shares in a manner that respects the hierarchy of claims in liquidation.” [Footnote reference to OSFI. OSFI reinforces guidance on Additional Tier 1 and Tier 2 Capital Instruments. March 20, 2023. https://www.osfi-bsif.gc.ca/Eng/osfibsif/med/Pages/at1t2.aspx] The conversion is done at a pre-established equity conversion multiplier that results in a more favourable outcome for investors of AT1 securities compared with common shareholders, who would experience material dilution as they are first to bear losses. If Canadian authorities choose not to trigger NVCC in the event that a bank has, or is about to, become non-viable, that bank’s LRCN investors are expected to rank in priority to common shareholders in a liquidation scenario where there may be losses.

In the event that a Canadian financial institution finds itself in a situation where default is imminent in the absence of support and the trigger point(s) has been reached, LRCN holders are expected to fare better than common shareholders but worse than holders of subordinated and senior debt (NVCC subordinated and bail-inable senior debt for banks), with the credit hierarchy being maintained. Unlike LRCNs, Credit Suisse’s AT1s were designed to experience a total loss in the event of a non-viability trigger, as determined by the Swiss regulator, even if the common shares retained value. This approach is different from the one used in the rest of Europe, the UK, and Canada, as recently confirmed by their local banking regulators.

So how do we square this circle? If you fight your way through the idiotic search system on the sadly mis-named Sedar+ you can find a document with the following characteristics: EQB Inc. (formerly Equitable Group Inc.) / EQB Inc. (formerly Equitable Group Inc.) (000020356) Marketing materials (other than specified derivative) – English.pdf 02 Jul 2024 21:19 EDTJuly 02 2024 at 21:19:17 Eastern Daylight Time Ontario 202 KB Generate URL. This is an “indicative term sheet” with most of the good stuff (like payment rates, issue size…) redacted; but it’s titled “EQB Inc. ●% Limited Recourse Capital Notes, Series 1 (Subordinated Indebtedness) Indicative Term Sheet”.

So that’s the answer: the reason that the underlying prefs can be non-NVCC is that the LRCN wrapper is because the LRCN is not the Tier 1 Capital we all know and love. It’s sub-debt, Tier 2. Added 2024-7-10: Wait a minute! It’s not Tier 2 either, because Tier 2 also has to be NVCC (albeit it converts on better terms that Tier 1). So it’s just sub-debt

Update, 2024-7-10: The plot thickens! EQB has announced (about time, EQB!):

the offering of $150 million 8.000% Limited Recourse Capital Notes, Series 1 (Subordinated Indebtedness) (the “LRCNs”) in Canada. EQB Inc. is the 100% owner of Equitable Bank (the “Bank”), a Schedule 1 bank regulated by the Office of the Superintendent of Financial Institutions Canada.

The LRCNs will bear interest at 8.000% annually, payable semi-annually, for the initial period ending on, but excluding, October 31, 2029. Thereafter, the interest rate on the LRCNs will reset every five years at a rate equal to the prevailing 5-year Government of Canada Yield plus 4.548%. The LRCNs will mature on October 31, 2084. The expected closing date of the offering of the LRCNs is July 16, 2024. LRCNs issued by EQB Inc. are not characterized as Non-Viability Contingent Capital (NVCC).

The total order book was oversubscribed by more than 4x times and approximately one-quarter of the 25+ investors were new to the group’s debt platform. “The overwhelming response to our inaugural LRCN issuance is a testament to investors’ belief in EQB’s challenger ethos as we drive change in Canadian banking to enrich people’s lives,” said Chadwick Westlake, chief financial officer, EQB Inc. “This issuance increases the depth and sophistication of our capital stack, and the high level of capital markets interest underscores the unique role we play in the Canadian banking landscape. This issuance further strengthens our balance sheet as we continue to create long-term value for our shareholders.”

In connection with the issuance of the LRCNs, EQB Inc. will issue Non-Cumulative 5-Year Fixed Rate Reset Preferred Shares, Series 5 (the “Series 5 Shares”), to be held by Computershare Trust Company of Canada, as trustee of EQB LRCN Limited Recourse Trust (the “Limited Recourse Trust”). In the case of non-payment of interest on or principal of the LRCNs when due, the recourse of each LRCN holder will be limited to that holder’s proportionate share of the Limited Recourse Trust’s assets held in respect of the LRCNs, which will consist of the Series 5 Shares, except in limited circumstances.

The LRCNs may be redeemed during the period from September 30 to and including October 31, 2029, and every five years thereafter, in whole or in part on not less than 10 nor more than 60 days’ prior notice, provided that the Bank elects to complete and has obtained receipt of all necessary regulatory approvals relating to a redemption of the same number of Bank Notes (as defined below).

The gross proceeds from the sale of the LRCNs will be used by EQB Inc. to acquire $150 million 8.001% Limited Recourse Capital Notes, Series 1 (Non-Viability Contingent Capital (NVCC)) (Subordinated Indebtedness) of the Bank (the “Bank Notes”). The Bank Notes are intended to qualify as additional Tier 1 capital of the Bank within the meaning of the regulatory capital adequacy requirements to which the Bank is subject. The proceeds to the Bank from the sale of the Bank Notes will be added to the Bank’s general funds and will be utilized for general banking purposes, which may include the redemption of outstanding capital securities of the Bank, and/or the repayment of other outstanding liabilities of the Bank.

The LRCNs will be offered by way of a prospectus supplement to EQB Inc.’s short form base shelf prospectus dated July 25, 2022, to be filed on or about July 9, 2024, with the securities commissions and other similar regulatory authorities in each of the provinces and territories of Canada.

Access to the prospectus supplement, the corresponding base shelf prospectus and any amendment thereto in connection with the offering of the LRCNs is provided in accordance with securities legislation relating to procedures for providing access to a shelf prospectus supplement, a base shelf prospectus and any amendment thereto.

An electronic or paper copy of the shelf prospectus supplement, the corresponding base shelf prospectus and any amendment to the documents may be obtained, without charge, from National Bank Financial Inc. by email at syndicate-corp@nbc.ca, BMO Nesbitt Burns Inc. by email at DCMCADSyndicateDesk@bmo.com, CIBC World Markets Inc. by phone at 416-594-8515 or email at Mailbox.CIBCDebtSyndication@cibc.com or Scotia Capital Inc. by email at syndicate.toronto@scotiabank.com.

So I don’t know. This states that the proceeds from these newly issued sort-of-LRCNs will be funnelled down to the bank via the bank’s own 8.001% LRCNs, which are “intended to qualify as additional Tier 1 capital of the Bank” although they rather oddly insist on calling them “(Subordinated Indebtedness)”. There will therefore be no net cash retained at the holdco level, which means that the question regarding what is going to happen with EQB.PR.C (issued by the holdco) is still up in the air.

I’m not sure what’s going on. One of the subsidiaries, Concentra Bank, has two series of preferred shares outstanding, on the books for $110-million (2023 Annual Report, page 144 of PDF, and (page 91 of PDF):

EQB has a 100% ownership interest in Equitable Bank. Equitable Bank is the parent company of its wholly owned subsidiaries, Equitable Trust, Concentra Bank, Concentra Trust, Bennington Financial Services, EQB Covered Bond (Legislative) GP Inc., and EQB Covered Bond (Legislative) Guarantor Limited Partnership. All these subsidiaries have been consolidated in the consolidated financial statements of EQB as at October 31, 2023.

Equitable Bank has $72-million of preferred shares issued (page 46 of PDF) but I can’t, after an admittedly very brief look through the Annual Report, find any mention of what they are. I suspect that these might be all issued to the holdco, which has funded this purchase with the EQB.PR.C issue, but who knows? This suspected issue of the Bank, held entirely by the holdco, would disappear on consolidation, but then I don’t know why the Concentra issues wouldn’t show up on page 46 of the Annual Report.

It’s all very confusing and since I have no intention of holding, or even following the issue, I’m going to leave explanations of how the bookkeeping works as an exercise for the student.

Thanks to Assiduous Reader cwrea for bringing the CWB press release to my attention!

DBRS Limited has announced that it:

upgraded Enbridge Inc.’s (ENB or the Company) Issuer Rating and Senior Unsecured Notes rating both to A (low), Preferred Shares rating to Pfd-2 (low), and Commercial Paper rating to R-1 (low). Morningstar DBRS also confirmed the credit rating of the existing Subordinated Notes (Existing Subordinated Notes) at BBB (low) and assigned a final credit rating of BBB to its Fixed-to-Fixed Rate Subordinated Notes due March 15, 2055, and Fixed-to-Fixed Rate Subordinated Notes due June 27, 2054 (together, the New Subordinated Notes). All trends are Stable. Morningstar DBRS also upgraded Enbridge Energy Partners, L.P.’s (EEP) Senior Unsecured Notes rating to A (low) with a Stable trend based on ENB’s guarantee; EEP in turn guarantees ENB’s Senior Unsecured Notes. ENB also guarantees the Senior Unsecured Notes of Spectra Energy Partners, L.P., which in turn guarantees ENB’s Senior Unsecured Notes. At the same time, Morningstar DBRS has removed the Under Review With Developing Implications (UR-Dev.) status of the credit ratings of ENB and EEP.

KEY CREDIT RATING CONSIDERATIONS
The credit ratings were placed UR-Dev. in September 2023 following the announcement that ENB had entered into definitive agreements (the Acquisition) with Dominion Energy, Inc. to acquire (1) East Ohio Gas Company (EOG); (2) Questar Gas Company (Questar Gas) and its related Wexpro companies (Wexpro, and collectively with Questar Gas, Questar); and (3) Public Service Company of North Carolina, Incorporated (PSNC; collectively, the Local Distribution Companies (LDCs)) for a total purchase price of USD 14.0 billion ($19 billion¿translated at USD/CAD 1.35), including the assumption of approximately USD 4.6 billion in debt. At the time, Morningstar DBRS had noted that the Acquisition should have a positive impact on ENB’s business risk profile, and should the financing plan result in minimal to no impact on the Company’s key credit metrics as of March 31, 2023 (please see Morningstar DBRS’ rating report on the Company dated June 28, 2023, for further details), Morningstar DBRS may consider a positive credit rating action.

ENB has made material progress on closing the Acquisition and the associated financing plan. The acquisition of EOG and Questar, which together account for the largest contribution to earnings from the Acquisition, closed in March 2024 and June 2024, respectively, with no material changes in terms and conditions from when the Acquisition was announced. ENB expects the acquisition of PSNC to close in Q3 2024. ENB’s financing plan is also now largely complete with the purchase price of $12.8 billion funded with equity and asset sales totaling approximately $6.2 billion and the issuance of Subordinated Notes for approximately $3.7 billion. Morningstar DBRS expects the balance to be raised from a mix of the recent issuance of the New Subordinated Notes, at-the-market equity issuance program, and/or asset sales.

Morningstar DBRS believes that the collective business risk profile of the utility assets is stronger than the weighted average of ENB’s current investment portfolio. Each LDC is state-regulated and operates under a cost-of-service framework with no exposure to natural gas price risk or volume risk. All three LDCs are allowed timely operating costs and capital expenditure recovery, subject to only modest regulatory lags. Combined, the LDCs provide natural gas distribution services to nearly 3.0 million customers with the strongest base of customers at EOG and Questar, which serve approximately 1.2 million customers each. EOG (rate base $6.0 billion in 2022) is a single-state LDC operating an extensive gas distribution system with more than 40 interconnections across nine interstate gas pipelines. EOG is anticipated to have the potential for a substantial rate base increase driven by modernization efforts. Questar (rate base $3.9 billion in 2022) largely operates in Utah and has a one-of-a-kind agreement with Wexpro that provides up to 65% of Questar’s annual gas supply on a cost-of-service arrangement. PSNC (rate base $2.6 billion in 2022) is a single-state LDC in North Carolina. Both Questar and PSNC are experiencing growth primarily driven by population expansion within their respective service territories.

Morningstar DBRS views the planned acquisition of the regulated gas utility businesses as providing a more stable source of cash flow generation with lower risk compared with ENB’s existing business risk profile. The Acquisition is expected to double the contribution of ENB’s regulated gas distribution businesses to approximately 23% of total adjusted EBITDA (Morningstar DBRS estimate for 2025) from 13% currently. ENB will benefit from greater geographic and regulatory diversification with higher regulatory returns on equity and thicker deemed equity. Finally, ENB will stand to potentially gain from synergies, as the Acquisition would form the largest natural gas distribution utility in North America, by volume, with a rate base exceeding $27 billion serving approximately 7 million customers in Canada and the U.S.

Given the material proceeds from equity and asset sales used in financing the Acquisition, Morningstar DBRS expects the Company’s financial risk profile to remain supportive of the credit ratings. Morningstar DBRS expects the Company will maintain its cash flow-to-debt ratio between 14% and 15% from 2025 onwards, which is likely to be the first full year after close of the Acquisition.

The Existing Subordinated Notes and the New Subordinated Notes rank equally in right of payment until the occurrence of certain bankruptcy and related events at which time the Existing Subordinated Notes would automatically convert into preferred shares. The Existing Subordinated Notes would then rank below the New Subordinated Notes. According to Morningstar DBRS’ Hierarchy Principle, as outlined in the Morningstar DBRS “Credit Ratings Global Policy,” the Existing Subordinated Notes, being subordinate to the New Subordinated Notes in the event of insolvency of the Company, should be rated one notch lower than the New Subordinated Notes (i.e., BBB (low)), hence the confirmation at BBB (low) of the Existing Subordinated Notes, despite the upgrade to the Issuer Rating

CREDIT RATING DRIVERS
A positive credit rating action is unlikely in medium term unless there is a successful resolution of the Line 5 dispute and the Company maintains its consolidated cash flow-to-debt ratio of higher than 17.5%. While unlikely in the medium term, a negative credit rating action could occur if the Company’s consolidated cash flow-to-debt ratio stays consistently less than 12.5%

EARNINGS OUTLOOK
Morningstar expects EBITDA in 2024 and 2025 to grow at around 8% primarily because of the Acquisition and commercially secured projects that are expected to come into service over the next two years.

FINANCIAL OUTLOOK
Morningstar DBRS expects cash flow from operations to also trend higher as a result of higher earnings. While overall debt levels are expected to increase as the Company funds a part of its secured capital program from debt, Morningstar DBRS expects the Company to stay within its target Debt/EBITDA range of 4.5 times (x) to 5.0x.

CREDIT RATING RATIONALE
ENB’s credit ratings are supported by (1) a high level of geographic and product-mix diversification and large scale; (2) low-risk operations that provide stable income and cash flow; and (3) strong natural gas transmission, distribution, and storage businesses, which have been enhanced materially by the Acquisition. The credit ratings are constrained by (1) pipeline competition, volume, and operational risks; (2) structural subordination at ENB; and (3) rising environmental, regulatory, and political risks

Affected issues are (deep breath): ENB.PF.A, ENB.PF.C, ENB.PF.E, ENB.PF.G, ENB.PF.K, ENB.PR.A, ENB.PR.B, ENB.PR.D, ENB.PR.F, ENB.PR.H, ENB.PR.J, ENB.PR.N, ENB.PR.P, ENB.PR.T and ENB.PR.Y.

This is a pretty big deal, for those who care about such things. ENB comprises about 11.5% of ZPR (as of mid-November, 2023) and about 8.4% of CPD (as of mid-March, 2021, according to my notes made during my PrefLetter monitoring. So measured credit quality for the preferred share market has just improved considerably! Enbridge issues have been rated P-2(low) by S&P since June, 2015.

Industrial Alliance Insurance and Financial Services Inc. has announced:

that it has sent today to all shareholders of its Non-Cumulative Class A Preferred Shares Series B (TSX: IAF.PR.B) (the “Series B Preferred Shares”) a formal notice and instructions for the redemption of the Series B Preferred Shares outstanding as of today (the “Series B Redemption”). Upon the Series B Redemption scheduled for July 29, 2024, iA Insurance will pay to the holders of the Series B Preferred Shares the redemption price consisting of $25 plus an amount equal to the cash dividend in respect of the third quarter, pro rated to the redemption date. There are 5,000,000 Series B Preferred Shares outstanding as of today.

Separately from the redemption price, the regular second quarter dividend of $0.2875 per Series B Preferred Share will be paid in the usual manner on July 2, 2024 to preferred shareholders of record on May 24, 2024. After the Series B Preferred Shares are redeemed, holders of Series B Preferred Shares will cease to be entitled to distributions of dividends and will not be entitled to exercise any rights as holders other than to receive the redemption price.

This issue was originally issued as IAG.PR.A as a 4.60% Straight Perpetual and commenced trading 2006-2-4, before PrefBlog was invented. The ticker changed to IAF.PR.B on 2019-1-4. This redemption was foreshadowed by the announcement of an LRCN issue by the holding company.

Thanks to Assiduous Reader newbiepref for bringing this to my attention!