PrefBlog

In late May, Mulvihill published a Notice of Special Meeting and Management Information Circular for World Financial Split Corp., known to us as WFS.PR.A (Capital Units were WFS) [bolding added for the critical bits]:

The purpose of the Meeting is to consider and vote upon a special resolution to reposition and recapitalize the Fund to enhance its ability to meet its investment objectives going forward. In this regard, the Fund proposes to change the following (collectively, the “Proposed Amendments”):
1. the investment objectives, strategy and restrictions of the Fund to expand and diversify the portfolio of equity securities to global equity securities selected by the Manager and increase the dividend on the Preferred Shares to $0.0625 per month (7.5% on the original $10.00 issue price) and reinstate the Class A Share distribution (targeted at 12.0% per annum payable monthly on the consolidated Class A Share net asset value per share of approximately $8.00 per share);

2. the articles of the Fund to:
(a) change the name of the Fund from “World Financial Split Corp.” to “Premium Global Income Split Corp.”;
(b) consolidate the Class A Shares of the Fund in order to reset the net asset value per Class A Share to approximately $8.00 per share;
(c) change the existing Preferred Shares of the Fund into a number of Class A Shares and a lesser number of the same class of Preferred Shares to be determined based on the number of shares surrendered pursuant to the Special Retraction Right referred to below (for example, assuming a 4:1 Class A Share consolidation, the Manager would expect 100 Preferred Shares to be exchanged into approximately 41 Class A Shares and 66 Preferred Shares with a value initially equal to the value of the Preferred Shares so exchanged. The exact numbers into which such shares are proposed to be changed shall be announced on June 17, 2024);
(d) extend the Termination Date of the Fund from June 30, 2025 to June 30, 2029 and provide the directors of the Fund with the ability to extend the Termination Date for successive five year terms;
(e) eliminate the $15.00 net asset value per Unit dividend threshold on Class A Shares;
(f) provide holders of Class A Shares and Preferred Shares who do not wish to continue their investment in the Fund with a special retraction right (the “Special Retraction Right”) to enable such Shareholders to retract their shares on June 28, 2024 on the same terms that would have applied had the Fund redeemed all Shares as originally contemplated for June 30, 2025 and provide that the Shareholders who wish to exercise the Special Retraction Right must give notice that they wish to exercise such right on or prior to June 14, 2024; and
(g) create an unlimited number of new classes of shares, issuable in an unlimited number of series and authorize the directors of the Fund to determine the rights, privileges and restrictions attaching to each such series;

On June 17, they announced:

as a result of the special retraction right to be provided to holders of Class A Shares and Preferred Shares who do not wish to continue their investment in the Fund should the Proposal be approved by shareholders, the Class A Shares will be consolidated on a 1:4 basis, such that each holder of a Class A Share will receive approximately 0.25 Class A Shares for each Class A Share held (the “Consolidation”) and the existing Preferred Shares will be exchanged into approximately 0.68 Preferred Shares and 0.40 Class A Shares, such that a holder of 100 Preferred Shares of the Fund will receive approximately 68 Preferred Shares and 40 Class A Shares for each Preferred Share held

On June 21 they announced:

that shareholders of the Fund have approved a proposal to change the investment objectives, strategy and restrictions of the Fund and to amend the articles of the Fund (the “Amendments”), all as more particularly described in the Fund’s management information circular dated May 10, 2024 (the “Circular”), at a special meeting of the shareholders held earlier today.

… and on July 5 they announced:

– (TSX: PGIC/ PGIC.PR.A) Mulvihill Capital Management Inc., the manager of Premium Global Income Split Corp., formerly World Financial Split Corp. (the “Fund”), is pleased to announce that the reorganization of the Fund has been completed, which included a change to the Fund’s name, ticker symbols, investment objectives and strategies of the Fund and amendments to the articles of the Fund (the “Reorganization”).

As a result of the Reorganization, there are 446,654 Class A Shares and 446,654 Preferred Shares of the Fund issued and outstanding following the consolidation of the Class A Shares and the exchange of Preferred Shares into Class A Shares and a lesser number of Preferred Shares.

Poor old WFS! The issue got hammered during the Credit Crunch (see page 8 of the 2023 Annual Report) and never really recovered.

With 862,417 preferred shares outstanding as of 2023-12-31 (see page 23 of the 2023 Annual Report) and “approximately 0.68 [new] Preferred Shares” issued per old preferred share, there should be 586,444 new preferred shares outstanding before accounting for the special retraction, but the company reports 446,654 currently outstanding, which implies a 24% retraction rate.

But anyway, with such a small float, no credit rating (discontinued in 2010) and no NAV test for Capital Unit distributions … I’m finally dropping this issue from HIMIPref™ coverage.

WFS.PR.A was last extended in 2018. The 2011 extension resulted in a massive retraction.

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!