PrefBlog

Fitch Ratings has announced that it:

has affirmed The Toronto-Dominion Bank’s (TD) Long-Term Issuer Default Rating (IDR) at ‘AA-‘ and Short-Term IDR at ‘F1+’. The Rating Outlook has been revised to Negative from Stable. Fitch has also affirmed the ratings of TD’s subsidiaries, TD Bank US Holding Company and TD Bank, N.A.

KEY RATING DRIVERS
The affirmations reflect TD’s resilient financial profile, including consistent and prudent underwriting, benign asset quality, diversified business mix, strong capitalization and robust liquidity. Under Fitch’s macroeconomic base case, conditions for continued financial and credit performance at TD’s current rating level are adequate.

The Negative Outlook reflects the uncertainty regarding the ultimate impact on the bank’s franchise, earnings and risk profiles from the various investigations by regulators on the deficiencies of TD’s anti-money laundering (AML) practices in the U.S. The outcomes of these investigations could have both monetary and non-monetary penalties, including, in Fitch’s opinion, an inability to engage in further M&A in the U.S. Furthermore, Fitch believes management’s focus on remediating shortcomings in risk controls may divert from ongoing operations, and with the costs of remediation, manifest in a weaker financial profile and franchise.

Regulatory Probe into BSA/AML: Fitch has changed its Business Profile factor outlook for TD to Negative from Stable. On April 30, TD announced that it took an initial provision of USD$450 million in connection with discussions with one of its U.S. regulators related to investigations of TD’s U.S. Bank Secrecy Act (BSA) / anti-money laundering (AML) program. The bank’s regulatory and law enforcement discussions with three U.S. regulators (including the regulator referenced in the preceding sentence) and the Department of Justice are ongoing.

TD has stated that its AML program was insufficient to effectively monitor, detect, report, and respond to suspicious activity. In 2023, TD terminated its agreement to acquire First Horizon Corporation (FHN), little more than a year after the announced merger, due to uncertainty when and if regulatory approvals could be obtained. The bank has invested approximately $500 million in program remediation and platform enhancements, and the work is well underway to enhance the bank’s risk controls.

Risk Management Shortcomings: Fitch has lowered the Risk Profile score to ‘a+’ from ‘aa-‘ and changed the factor outlook to Negative from Stable. TD has exhibited a strong track record of well-monitored and conservative risk appetite despite its moderately higher structural interest rate sensitivity, which is commensurate with its retail focus and deposit-rich balance sheet. However, Fitch expects the regulatory findings regarding TD’s AML practices to continue to garner a great deal of regulatory, political and potential legal attention, both in Canada and the U.S. over the near term.

The timetable of the investigation and implementation of remediation recommendations is unclear. Meanwhile, TD is undergoing a comprehensive overhaul of its U.S. and global AML program. TD has hired recognized AML executives from across the private and public sectors, onboarded hundreds of new AML professionals with expertise in program design, oversight and execution. The bank has also deployed new enterprise-wide training and onboarding programs, and made investments in new technology, processes and controls to enhance oversight across the enterprise.

Asset Quality Normalization: As with peers, TD’s credit quality measures are normalizing from unusually benign levels. The extent and duration of benign credit quality from 2020 to 2023 were not incorporated into the ratings because they were temporary. Similarly, Fitch does not expect to take rating actions on credit quality normalization, except if the velocity and scale of deterioration were to suggest sustained credit losses outside historical norms. Credit normalization started to pick up pace at the end of FY 2023. TD guided in 2Q24 that provisions would likely finish the year between 40bps-50bps of net loans, in line with 2019 levels (45bps). As of 2Q24, the provision ratio was 47bps.

Remediation and Regulatory Costs 2024: Fitch has changed the Earnings Profile factor outlook to Negative from Stable. TD’s core earnings power has been relatively stable over time, supported by its diversified business model. However, since the start of its AML issues, TD has thus far earmarked approximately $1.8 billion in extra costs according to Fitch’s calculations, including penalties, provisions, remediation efforts and the cost of the termination of the FHN acquisition. These costs could increase as the regulators announce their findings.

At the end of FY 2023 TD announced a restructuring program to reduce its cost base and achieve greater efficiency. Thus far, it has spent $819 million (pre-tax) and is expected to achieve savings of $400 million (pre-tax) in 2024 going up to run rate savings of approximately $725 million (pre-tax) thereafter. Management believes this will help achieve TD’s positive operating leverage target over the medium term.

Potential Capital Pressure: TD had built up its common equity Tier 1 (CET1) ratio to 15.2% prior to the FHN acquisition. The ratio has declined to 13.4% as of 2Q24, as TD deployed the unused capital and returned some it to shareholders through share buy-backs. Still at the highest level among peers, Fitch believes that a larger capital buffer is appropriate at this juncture to allow TD to provision for potential regulatory penalties.

Stable Funding and Liquidity Profile: TD’s funding and liquidity profile is stable and in line with peers. However, contraction in wealth management and U.S. retail deposits over the last couple of years, a trend seen industry wide, TD’s loans-to-deposits ratio deteriorated to 117% in 2Q24 (as per Fitch’s calculations), at the top end of Canadian peers. Meanwhile at 126%, TDS’s LCR ratio sits in the middle of the Canadian peer range.

RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
–Fitch could downgrade TD’s ratings if the current regulatory issues translate into a material loss of franchise strength, or if it becomes likely that the bank will incur fines that would result in structurally lower profitability that pressures existing capital levels.
–If TD’s Long-Term IDR is downgraded the Short-Term IDR would be downgraded as well.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
–Conversely, the Outlook may be revised to Stable if the monetary and non-monetary penalties form the regulatory findings are manageable for TD and do not significantly impact its growth prospects and earnings.

Affected issues are TD.PF.A, TD.PF.B, TD.PF.C, TD.PF.D, TD.PF.E, TD.PF.I, TD.PF.J and TD.PF.M.

An exchange of comments on PrefBlog about the captioned subject led to an exchange of eMails with Canoe Investor Relations, which I think is sufficiently interesting to warrant a post. I may be wrong!

I commenced by sending them an eMail:

I have a question regarding the captioned issue.

According to the prospectus at LINK , “Subject to the provisions of any equity securities of the Fund ranking prior to or pari passu with the Series 1 Preferred Units, and to the provisions described under “− Restrictions on Distributions and Retirement and Issue of Series 1 Preferred Units”, a Series 1 Preferred Unitholder may require the Fund to retract such Series 1 Preferred Units (by delivering notice to the Manager of the intention to have Series 1 Preferred Units retracted not less than 30 days prior to the applicable retraction date) on or after March 15, 2024 for a cash price of $25.00, together with any accrued and unpaid distributions up to but excluding the date of retraction and less any tax required by law to be deducted therefrom.”

My question relates to dividends that are paid by the company on retracted shares.

There are four important dates: the notification date, the retraction date, the record date of the current dividend and its payment date. It is not clear to me how the calculations work if the sequence of these dates for a particular retraction is notification – record – retraction – payment.

Say, for instance, that an investor gave notice on May 10 of his desire to retract and delivers EIT.PR.A shares to the Manager on that date in accordance with the prospectus. The retraction date is therefore June 9. In the interim, however, the shares earn a dividend with a record date of May 23, payment date June 15.

Therefore, it seems to me that the investor earns the full dividend of $0.30 payable June 15 and is also paid the accrued dividend of slightly less than $0.30 that has accrued from March 15 until the retraction date of June 9.

It does not appear likely to me that the issuer will actually pay such an excessive rate on shares submitted for retraction. How is this situation resolved in practice?

Sincerely,

Canoe responded:

Thank you for your email.

In the example that you noted, where the unit holder provides notice before the record date, and the retraction is after the record date (but before the June 15 payment date), the unit holder would receive $25/unit plus interest only. The interest would be calculated from March 16 to the retraction date. They would not get the $0.30/unit distribution, but instead only interest based on the number of days. Unitholders that retract are not eligible for a ‘double payment’.

Well, that seems clear enough! But how exactly does that work? So I asked:

Thank you for this.

What is the legal foundation for unitholders being ineligible for a ‘double payment’? Is there something involved such as a letter of transmittal that is specifies that the shares are ineligible for the regular dividend payment in such a situation?

Sincerely,

… and they answered:

When a unitholder submits their notice of retraction, the units are withdrawn from the exchange/CDS and the record date will not be applicable to the affected units. Going further, what they are paid will depend on the calculations described in the certificate of amendment.

I confess I find it surprising that the “units are withdrawn” prior to the company paying for them. What happens if the issuer goes bankrupt in between withdrawal and payment? This is very unlikely, particularly given that the issuer is a fund, but still … I’m surprised.

Do these withdrawn units continue to exist outside the Book Based System? Maybe: the prospectus doesn’t state that the issue is only Book Based, merely that:

Book-entry only certificates representing the Series 1 Preferred Units will be issued in registered form to CDS Clearing and Depository Services Inc. (“CDS”) or its nominee and will be deposited with CDS on the Closing Date.

I also suspect that there’s some kind of Letter of Transmittal that goes from the brokerage to the issuer that specifies exactly what’s gping on, but to my disappointment Canoe did not address that issue.

Perhaps I should note that I do not suspect that there’s any skullduggery or even any sloppiness in the procedures used … I just like to understand things and I will admit my understanding of the entire process is incomplete. But we can’t understand everything thoroughly in this big world, so I will leave the rest of the investigation to others!

Manulife Financial Corporation has announced (although not yet on their website):

the applicable dividend rates for its Non-cumulative Rate Reset Class 1 Shares Series 15 (the “Series 15 Preferred Shares”) (TSX: MFC.PR.L) and Non-cumulative Floating Rate Class 1 Shares Series 16 (the “Series 16 Preferred Shares”).

With respect to any Series 15 Preferred Shares that remain outstanding after June 19, 2024, holders thereof will be entitled to receive fixed rate non-cumulative preferential cash dividends on a quarterly basis, as and when declared by the Board of Directors of Manulife and subject to the provisions of the Insurance Companies Act (Canada). The dividend rate for the five-year period commencing on June 20, 2024, and ending on June 19, 2029, will be 5.77500% per annum or $0.360938 per share per quarter, being equal to the sum of the five-year Government of Canada bond yield as at May 21, 2024, plus 2.16%, as determined in accordance with the terms of the Series 15 Preferred Shares.

With respect to any Series 16 Preferred Shares that may be issued in connection with the conversion of the Series 15 Preferred Shares into the Series 16 Preferred Shares, holders thereof will be entitled to receive floating rate non-cumulative preferential cash dividends on a quarterly basis, calculated on the basis of the actual number of days elapsed in each quarterly floating rate period divided by 365, as and when declared by the Board of Directors of Manulife and subject to the provisions of the Insurance Companies Act (Canada). The dividend rate for the three-month period commencing on June 20, 2024, and ending on September 19, 2024, will be 1.77245% (7.03200% on an annualized basis) or $0.443113 per share, being equal to the sum of the three-month Government of Canada Treasury bill yield as at May 21, 2024, plus 2.16%, as determined in accordance with the terms of the Series 16 Preferred Shares.

Beneficial owners of Series 15 Preferred Shares who wish to exercise their right of conversion should instruct their broker or other nominee to exercise such right before 5:00 p.m. (Toronto time) on June 4, 2024. Conversion inquiries should be directed to Manulife’s Registrar and Transfer Agent, TSX Trust Company, at 1‑800‑783‑9495.

The Toronto Stock Exchange (“TSX”) has conditionally approved the listing of the Series 16 Preferred Shares effective upon conversion. Listing of the Series 16 Preferred Shares is subject to Manulife fulfilling all the listing requirements of the TSX and, upon approval, the Series 16 Preferred Shares will be listed on the TSX under the trading symbol “MFC.PR.S”.

MFC.PR.L is a FixedReset, 3.90%+216, that commenced trading 2014-2-25 after being announced 2014-2-18. The extension was announced 2019-5-7. MFC.PR.L reset At 3.78600% effective June 20, 2019. I made no recommendation regarding conversion and there was no conversion.

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

Partners Value Split Corp. has announced:

y its intention to redeem 1,975,000 of its outstanding Class AA Preferred Shares, Series 8 (“Preferred Shares, Series 8”) (TSX: PVS.PR.F) for cash on May 31, 2024 (the “Redemption Date”) in accordance with the terms of the Preferred Shares, Series 8. The Preferred Shares, Series 8 being called for redemption represent approximately 32.92% of all outstanding Preferred Shares, Series 8 of the Company.

The Preferred Shares, Series 8 will be partially redeemed on a pro rata basis, so that each holder of Preferred Shares, Series 8 of record at the close on May 22, 2024 (the “Record Date”) will have approximately 32.92% of their Preferred Shares, Series 8 redeemed.

The redemption price per Preferred Share, Series 8 being redeemed will be equal to C$25.00 per share (the “Redemption Price”). Separately from the Redemption Price, the quarterly cash dividend of C$0.30 per share to May 31, 2024, will be paid in the usual manner on June 7, 2024, to holders of Preferred Shares, Series 8 of record on May 22, 2024, including those whose Preferred Shares, Series 8 were redeemed on May 31, 2024. Holders of Preferred Shares, Series 8 are entitled on a partial redemption to a redemption price equal to C$25.00 plus accrued and unpaid dividends. For greater certainty, such accrued and unpaid dividends will only be paid once per Preferred Share, Series 8, on June 7, 2024.

On the completion of the partial redemption herein, the remaining 4,024,300 unredeemed Preferred Shares, Series 8 will remain issued and outstanding in accordance with their terms.

Notice will be delivered to holders of the Preferred Shares, Series 8 in accordance with the terms of the Preferred Shares, Series 8.

From and after the Redemption Date, the Preferred Shares, Series 8 called for redemption will cease to be entitled to dividends or any other participation in any distribution of the assets of the Company and the holders thereof shall not be entitled to exercise any of their other rights as shareholders in respect thereof except to receive the Redemption Price (less any tax required to be deducted and withheld by the Company). After the partial redemption of the Preferred Shares, Series 8, the Company will consolidate the existing capital shares held by Partners Value Investments Inc. so that there are an equal number of preferred shares and capital shares outstanding.

PVS.PR.F was issued as a SplitShare, 4.80%, maturing 2024-9-30, which commenced trading 2017-9-18 after being announced 2017-09-07. It is tracked by HIMIPref™ and has been assigned to the SplitShare subindex.

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