PrefBlog

Bank of Montreal has announced (although not yet on their website):

it has closed its domestic public offering of Non-Cumulative 5-Year Rate Reset Class B Preferred Shares Series 38 (the “Preferred Shares Series 38”). The offering was underwritten on a bought deal basis by a syndicate of underwriters led by BMO Capital Markets. Bank of Montreal issued 24 million Preferred Shares Series 38 at a price of $25 per share to raise gross proceeds of $600 million.

The Preferred Shares Series 38 were issued under a prospectus supplement dated October 14, 2016, to the Bank’s short form base shelf prospectus dated April 13, 2016. Such shares will commence trading on the Toronto Stock Exchange today under the ticker symbol BMO.PR.B.

BMO.PR.B is a FixedReset, 4.85%+406, NVCC-compliant issue announced October 14. It will be tracked by HIMIPref™ and assigned to the FixedResets subindex.

The issue traded a staggering 4,330,078 shares in a range of 25.69-82 before closing at 25.69-70, 27×87. The volume ranks it sixth in my database (over 1-million records dating back to 1993-12-31), just behind NVA.PR.A (Nova Energy), which traded 4.4-million shares on 1997-3-24 (shortly after issue) and the highest single-issue daily volume since GWO.PR.E, which traded 5.3-million shares on 1999-3-18 (also shortly after issue). So, this is the highest single-issue daily volume so far this century.

Vital statistics are:

As has often been the case lately, Implied Volatility analysis results in a chart that can be interpreted in two ways:

Click for Big

The curve fits very well, with a very high Implied Volatility. If one takes the view that GOC-5 rates will increase dramatically over the next few years, the low-spread, low-price issues will be preferred (as this will lead to capital gains on these issues, but not the new one since the call provision caps the expected price); if one takes the view that the current GOC yield curve represents the new normal, then the new issue will be preferred (as one will then expect Implied Volatility to decrease, flattening the fitted curve, resulting in capital losses for the low-spread issues).

Manulife Financial Corporation has announced:

that it does not intend to exercise its right to redeem all or any of its currently outstanding 8,000,000 Non-cumulative Rate Reset Class 1 Shares Series 5 (the “Series 5 Preferred Shares”) (TSX: MFC.PR.G) on December 19, 2016. As a result, subject to certain conditions described in the prospectus supplement dated November 29, 2011 relating to the issuance of the Series 5 Preferred Shares (the “Prospectus”), the holders of the Series 5 Preferred Shares have the right, at their option, to convert all or part of their Series 5 Preferred Shares on a one-for-one basis into Non-cumulative Floating Rate Class 1 Shares Series 6 of Manulife (the “Series 6 Preferred Shares”) on December 19, 2016. A formal notice of the right to convert Series 5 Preferred Shares into Series 6 Preferred Shares will be sent to the registered holders of the Series 5 Preferred Shares in accordance with the share conditions of the Series 5 Preferred Shares. Holders of Series 5 Preferred Shares are not required to elect to convert all or any part of their Series 5 Preferred Shares into Series 6 Preferred Shares. Holders who do not exercise their right to convert their Series 5 Preferred Shares into Series 6 Preferred Shares on such date will retain their Series 5 Preferred Shares, unless automatically converted in accordance with the conditions below.

The foregoing conversion right is subject to the conditions that: (i) if, after December 5, 2016, Manulife determines that there would be less than 1,000,000 Series 5 Preferred Shares outstanding on December 19, 2016, then all remaining Series 5 Preferred Shares will automatically be converted into an equal number of Series 6 Preferred Shares on December 19, 2016, and (ii) alternatively, if, after December 5, 2016, Manulife determines that there would be less than 1,000,000 Series 6 Preferred Shares outstanding on December 19, 2016, then no Series 5 Preferred Shares will be converted into Series 6 Preferred Shares. In either case, Manulife will give written notice to that effect to any registered holders of Series 5 Preferred Shares affected by the preceding minimums on or before December 12, 2016.

The dividend rate applicable to the Series 5 Preferred Shares for the 5-year period commencing on December 20, 2016, and ending on December 19, 2021, and the dividend rate applicable to the Series 6 Preferred Shares for the 3-month period commencing on December 20, 2016, and ending on March 19, 2017, will be determined and announced by way of a news release on November 21, 2016. Manulife will also give written notice of these dividend rates to the registered holders of Series 5 Preferred Shares.

Beneficial owners of Series 5 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 December 5, 2016. Conversion inquiries should be directed to Manulife’s Registrar and Transfer Agent, CST Trust Company, at 1-800-387-0825.

Subject to certain conditions described in the Prospectus, Manulife may redeem the Series 5 Preferred Shares, in whole or in part, on December 19, 2021 and on December 19 every five years thereafter and may redeem the Series 6 Preferred Shares, in whole or in part, after December 19, 2016.

The Toronto Stock Exchange (“TSX”) has conditionally approved the listing of the Series 6 Preferred Shares effective upon conversion. Listing of the Series 6 Preferred Shares is subject to Manulife fulfilling all the listing requirements of the TSX and, upon approval, the Series 6 Preferred Shares will be listed on the TSX under the trading symbol “MFC.PR.Q”.

DBRS has announced that it:

has today downgraded the following ratings of Fortis Inc. (Fortis or the HoldCo) and removed them from Under Review with Negative Implications where they were placed on February 9, 2016:

— Issuer Rating, downgraded to BBB (high), Stable trend, from A (low)
— Unsecured Debentures, downgraded to BBB (high), Stable trend, from A (low)
— Preferred Shares, downgraded to Pfd-3 (high), Stable trend, from Pfd-2 (low)

DBRS’s rating action largely reflects a significant increase in debt at the HoldCo’s level and incorporates the modest improvement of Fortis’s business risk profile following the completion of the acquisition of ITC Holdings Corp. (ITC) on October 14, 2016.
…
Based on DBRS’s rating approach to holding companies, DBRS recognizes that Fortis is a holding company of large, diverse and stable cash flow-generating regulated assets. This acts as a partial mitigation on the structural subordination issue. However, the incremental debt resulting from the Acquisition far outweighs the incremental cash flow to Fortis. Based on Fortis’s forecast, its non-consolidated metrics are expected to improve slightly in 2017 and 2018, but it will not be until 2019 that these metrics are expected to improve to the pre-Acquisition level. As a result, a one-notch downgrade is appropriate. The Stable trend reflects DBRS’s expectations as follows: (1) The post-close common equity of approximately $500 million will be issued in 2017, and the proceeds will be used to repay the EBF borrowings. (2) Non-consolidated metrics are expected to improve slightly over the next 24 months and further improve thereafter as ITC and other Fortis capital projects are completed and start generating cash flow. (3) During this period, all capital projects at regulated subsidiaries are expected to be self-financed with no further equity injection to be required from Fortis. The regulated rate base, which excludes the Waneta Expansion, is expected to increase to approximately $25.2 billion in 2017 (pro forma). As such, cash flow in the form of dividends to Fortis is expected to increase without additional debt expected to be issued at the HoldCo level. Combined with Fortis’s plan to slightly reduce its HoldCo debt, DBRS expects Fortis’s non-consolidated financial profile to strengthen over the medium term.

S&P is much more cheerful, maintaining an investment-grade rating of P-2:

• •On Oct. 14 2016, St. John’s, Nfld.-based utility holding company Fortis Inc. announced the closing of its US$11.3 billion acquisition of ITC Holdings Corp., a U.S.-based electricity transmission operator.
• •We are revising our outlook on Fortis and its subsidiaries, FortisAlberta Inc. and Caribbean Utilities Co. Ltd., to stable from negative.
• •We are also affirming our ratings on Fortis and its subsidiaries.
• •The stable outlook reflects the closing of the transaction consistent with our expectations including the sale of 19.9% of ITC to an infrastructure-focused minority investor.

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The stable outlook reflects S&P Global Ratings’ view of Fortis’ stable and predictable cash flow, underpinned by the company’s regulated operations with
generally supportive regulatory frameworks. During our two-year outlook period, we expect Fortis to focus on its regulated businesses, including the ITC integration. Although credit metrics will be weak in 2016 due to the timing of the acquisition’s closing, we expect credit metrics to stabilize and improve during our outlook period, with AFFO-to-debt at about 10.5%.

We could take a negative rating action on Fortis if the company’s AFFO-to-debt were to fall below 10% during our outlook period. This could happen because of cost overruns from post-merger integration efforts with ITC, material adverse regulatory decisions, Fortis encountering operational difficulties that lead to unexpected increased costs or material debt-funded acquisitions.

We could take a positive rating action if Fortis improves its financial position, with AFFO-to-debt approaching 15% with no increase in business risk. However, based on our financial forecast, the ITC acquisition, and the company’s capital programs, we believe the prospect of a positive rating action is highly unlikely during our outlook horizon.

So mark up another example for the “Credit analysis is complicated and subjective” thesis!

Affected issues are: FTS.PR.F, FTS.PR.G, FTS.PR.H, FTS.PR.I, FTS.PR.J, FTS.PR.K and FTS.PR.M.

BCE Inc. has announced:

that 455,302 of its 4,393,775 fixed-rate Cumulative Redeemable First Preferred Shares, Series T (“Series T Preferred Shares”) have been tendered for conversion on November 1, 2016, on a one-for-one basis, into floating-rate Cumulative Redeemable First Preferred Shares, Series S (“Series S Preferred Shares”). In addition, 548,079 of its 3,606,225 Series S Preferred Shares have been tendered for conversion on November 1, 2016, on a one-for-one basis, into Series T Preferred Shares. Consequently, on November 1, 2016, BCE will have 4,486,552 Series T Preferred Shares and 3,513,448 Series S Preferred Shares issued and outstanding. The Series T Preferred Shares and the Series S Preferred Shares will continue to be listed on the Toronto Stock Exchange under the symbols BCE.PR.T and BCE.PR.S, respectively.

The Series T Preferred Shares will pay on a quarterly basis, for the five-year period beginning on November 1, 2016, as and when declared by the Board of Directors of BCE, a fixed cash dividend based on an annual fixed dividend rate of 3.019%.

The Series S Preferred Shares will continue to pay a monthly floating adjustable cash dividend for the five-year period beginning on November 1, 2016, as and when declared by the Board of Directors of BCE. The monthly floating adjustable dividend for any particular month will continue to be calculated based on the prime rate for such month and using the Designated Percentage for such month representing the sum of an adjustment factor (based on the market price of the Series S Preferred Shares in the preceding month) and the Designated Percentage for the preceding month.

I previously reported that BCE.PR.T, the FixedFloater, would reset to 3.019% and recommended conversion to BCE.PR.S.