Cenovus Energy Inc. has announced:
the company does not intend to exercise its right to redeem its Cumulative Redeemable First Preferred Shares, Series 1 (Series 1 Shares) and Cumulative Redeemable First Preferred Shares, Series 2 (Series 2 Shares) on March 31, 2021. As a result, subject to certain conditions:
the holders of Series 1 Shares have the right to choose one of the following options with regard to their shares:
retain any or all of their Series 1 Shares and continue to receive an annual fixed-rate dividend paid quarterly; or
convert, on a one-for-one basis, any or all of their Series 1 Shares into Series 2 Shares and receive an annual floating-rate dividend paid quarterly, and
the holders of Series 2 Shares have the right to choose one of the following options with regard to their shares:
retain any or all of their Series 2 Shares and continue to receive an annual floating-rate dividend paid quarterly; or
convert, on a one-for-one basis, any or all of their Series 2 Shares into Series 1 Shares and receive an annual fixed-rate dividend paid quarterly.
Conversion to either Series 1 Shares or Series 2 Shares is subject to the conditions that, after taking into account all Series 1 Shares and Series 2 Shares tendered for conversion: (i) if Cenovus determines there would be less than 1,000,000 Series 1 Shares outstanding after March 31, 2021, then all remaining Series 1 Shares will automatically be converted to Series 2 Shares on a one-for-one basis on March 31, 2021 and no Series 2 Shares tendered for conversion will be converted into Series 1 Shares; and (ii) if Cenovus determines there would be less than 1,000,000 Series 2 Shares outstanding after March 31, 2021, then all remaining Series 2 Shares will automatically be converted to Series 1 Shares on a one-for-one basis on March 31, 2021 and no Series 1 Shares tendered for conversion will be converted into Series 2 Shares. In either case, Cenovus will issue a news release to that effect no later than March 24, 2021.Holders of Series 1 Shares who choose to retain any or all of their shares or holders of Series 2 Shares who choose to convert to Series 1 Shares will receive the new annual fixed-rate dividend paid quarterly applicable to the Series 1 Shares for the five-year period commencing March 31, 2021 to, but excluding, March 31, 2026 of 2.577%, being equal to the sum of the Government of Canada five-year bond yield of 0.847% plus 1.73% in accordance with the terms of the Series 1 Shares, subject to the conditions described above.
Holders of Series 2 Shares who choose to retain any or all of their shares or holders of Series 1 Shares who choose to convert to Series 2 Shares will receive a new annual floating-rate dividend paid quarterly applicable to the Series 2 Shares for the five-year period commencing March 31, 2021 to, but excluding, March 31, 2026. The dividend rate applicable to the Series 2 Shares for the three-month period commencing March 31, 2021 to, but excluding, June 30, 2021 will be 1.80301%, being equal to the annual rate for the most recent auction of 90-day Government of Canada Treasury Bills of 0.073% plus 1.73%, in accordance with the terms of the Series 2 Shares (the Floating Quarterly Dividend Rate), subject to the conditions described above. The Floating Quarterly Dividend Rate will be reset every quarter.
Beneficial owners of Series 1 Shares or Series 2 Shares who wish to exercise the right of conversion should communicate as soon as possible with their brokers or other nominees in order to meet the deadline for registered holders to exercise such right, which is 5 p.m. ET on March 16, 2021. It is recommended this communication be had well in advance of the deadline in order to provide the brokers or other intermediaries with time to complete the necessary steps. Holders of Series 1 Shares who do not exercise the right of conversion by this deadline will continue to hold Series 1 Shares with the new annual fixed rate dividend, subject to the conditions described above. Holders of Series 2 Shares who do not exercise the right of conversion by this deadline will continue to hold Series 2 Shares with the new annual floating rate dividend, which will be reset every quarter, subject to the conditions described above.
Holders of the Series 1 Shares and the Series 2 Shares will have the opportunity to convert their shares again on March 31, 2026 and every five years thereafter as long as the shares remain outstanding.
CVE.PR.A was issued as HSE.PR.A, a FixedReset, 4.45%+173, on 2011-3-18 after being announced 2011-3-10. Notice of extension was published in February, 2016 and the issue reset to 2.404%. I recommended against conversion but there was a 13% conversion to the FloatingReset HSE.PR.B anyway. The ticker changed to CVE.PR.A following the Plan of Arrangement between HSE and CVE.
CVE.PR.B is a FloatingReset, Bills+173, that arose via a partial conversion from HSE.PR.A to HSE.PR.B in 2016. The ticker changed to CVE.PR.B following the Plan of Arrangement between HSE and CVE.
Since CVE.PR.A has come up again I thought I would look back at how this share has performed versus the CVE.PR.G share which I queried about owning back on June 1st of 2020. I think a long enough period has expired to say the difference in performance is statistically relevant. Using Stockwatch and putting in the shares with a period of June 1st to current I see the A shares have doubled from roughly $6 to over $12. The G shares have risen from roughly $10.50 to $18.50. Or if I go from the high and low prices of this period I get a return of 119% for the A shares ($12.75/5.81) versus 85% for the G shares ($18.70/10.11). My reasoning then as it is today is that the $25 redemption price effectively puts a cap on the higher priced security. Or in layman’s terms I would rather own a security trading at a lower price/ asset value than a higher, assuming yield is roughly equivalent. Not to belabor a point but if you look at the world of investing primarily through glasses of yield and earnings you miss a world of opportunity in securities priced at steep discounts to their asset coverage. When earnings show up (oil prices rise) and rates start to pop upwards (not down) returns can be exceptional in rate reset preferreds as Husky has shown.
There is a much simpler explanation for the relative outperformance of CVE.pr.A
Holders of Series 1 Shares who choose to retain any or all of their shares ….. will receive the new annual fixed-rate dividend ……… of 2.577%, being equal to the sum of the Government of Canada five-year bond yield of 0.847% plus 1.73% .
What was the GOC 5 yr bond last June – 0.4 %?
Reset rate would have been 2.13%, only 87% of the new dividend of 2.577%.
Buyers last June were betting on a spike in the 5 yr bond yield prior to March 2021.
The hike in bond rates arrived just in the nick of time.
What DanGood doesn’t understand is a lot. On June 1st 2020, he should have owned the Gs. In the late summer and early fall, he should have sold them and bought the As, by now he should be back holding the Gs. He has no idea about IVT and other determinants in inter-issuer arbitrage, which is a good thing for those who do.
stusclues, any idea why the Cenovus G series is now trading at the same price as the Es. One month ago, the Es were trading roughly $1 above the Gs.
CVE.pr.E: resets Mar 2025, 5 Yr GoC + 3.57, current 4.591%
CVE.pr.G: resets Jun 2025, 5 Yr GoC + 3.52, current 3.935%
Only thing I can figure is that some entity wants out of the Es and another (or the same) entity is buying the Gs. Maybe attempts to even out the holdings for each reset period.
What it should matter is YTW (I have a spreadsheet based on James’ YTW calculator). Es still have an YTW advance of around 0.30% compared with Gs. Es just reset and you are guaranteed this rate for another 5 years and Gs will reset in about 2 months. Depending of GoC5 years yield in the next couple of months Gs will trade more or less than E depending on YTW.
sorry I was looking at another rows. Both will reset in 2025 and the YTW difference between E and G is like I said around 0.30%. Es with $1 more were in line with rest of CVEs. It could be that someone is selling Es. I do not think they buy Gs (we will have to look into daily volumes) and do not think it is such a big difference between them to sell Gs and buy Es specially if you have a some capital gain. Of course if you were to buy CVE you would choose Es or maybe As for bigger capital gain.
Week ending March 26th
CVE.pr.E: 12.1k, closed $19.36, down 34 cents on the week
CVE.pr.G: 21.9k, closed $19.71, flat (- 0.02) on the week
So, someone is deciding to buy the Gs over the Es despite the premium. And trading suggests Ms. Market knows someone wants to sell their Es and is lowballing her bids. I considered the previous $1 premium of Es over Gs to be a tad high but in the right neighbourhood.
As for capital gains, I expect the capital gain tax deduction to be reduced by 50% (from 50% to 25%) in the upcoming federal budget. That means 75% of gains will be taxed as income. Liberals probably implement the change effective Jan 1, 2022. But what if it is immediate or July 1st? Then again, maybe the budget doesn’t get passed before an election writ is dropped. If a significant increase in taxation of capital gains goes through this year, many investors will be booking gains.
Running an IVT model this morning (3/29), the Es are cheapest with market at 98% of IVT pricing. Smart money ought to be buying Es.
Is there any reason why CVE.PR.A jumped 6.9% today?
It’s being added to Solactive index and CVE is on a good run but neither of those are new today and nothing else moved like that. So… no. That I know of anyway.
Thank you IrateAR !
I found the announcement on March 5th about the Solactive Laddered Canadian Preferred Share Index – Effective Date 14th March 2024.
After the ex-dividend date of March 14th, I decided to sell all my CVE.PR.A shares and put the proceeds into BN, BIP, BEP, TRP, ENB and PPL preferred shares, which offer better value IMO.