Rate-reset deluge comes after drought

Go figure. After almost three months without a rate-reset preferred share transaction, the market has given up $1.4 billion to eager issuers over the past week.

From early September to late November, not one issuer came to the market with a product that offers a fixedrate yield for the first five years of its life and the prospect of either another fixedrate or a floating-rate security for the following five years.

But things have changed dramatically over the past seven days with all the issuance coming from non-financial corporations.

Pembina Pipelines — which closed its $9.4 billion takeover of Veresen Inc. in early October — started the resurgence with a $400 million raise at 4.90 per cent. (The $400 million assumes the four million share underwriters’ option will be exercised. We’ll know Thursday.) In five years that rate will serve as the minimum reset yield for the following five years.

Brookfield Office Properties was the next cab to join the line: it priced a $250 million offering on which investors will receive a fixed yield of 4.85 per cent. The underwriters were given an option to sell another two million shares and raise an extra $50 million.

Then came Enbridge Inc. with a $500 million issue that will also pay investors a fixed rate of 4.90 per cent over the next five years. (The $400 million raise includes $100 million that’s subject to an underwriters’ option.)

That financing was part of a package that included a $1.5 billion private placement of equity (at $44.84 a share) with three large institutional investors plus a 10 per cent dividend hike. The financing news has had a positive effect on the share price, which has been on a steady downtrend for about a year. The shares hit a 52-week low of $44.01 in mid-November. They closed Wednesday at $48.76.

The fourth transaction occurred Wednesday when Kinder Morgan Canada, which went public last May, announced a $200 million deal. (The deal could end up at $250 million for which Kinder Morgan will pay 5.20 per cent.) At 5.20 per cent, the rate is five basis points more than what it paid in August for $300 million of similar capital.

A key difference between the two deals is the spread above the base, the yield on five-year Canada bonds: in August the spread was 365 basis points (reflecting a base rate of 160 basis points) whereas in December the spread was 351 basis points (which equates to a base rate of 169 basis points.) Over the period the preferred shares continue to be rated Pfd-3 (high.)

So what’s an explanation? Clearly there was a lack of supply over the period until late November. For whatever reason, issuers felt they didn’t need the extra capital because reset offerings get snapped up quickly and generally receive substantial institutional support.

But that scenario changed a week or so back. In one case (Enbridge) it coincided, with “the finalization of its strategic plan and outlook following the merger with Spectra Energy” a transaction that closed last February. As for the timing, Enbridge had to get matters addressed before two investor conferences are held next week. In another case (Kinder Morgan) the financing presumably had to wait until the U.S. parent released its “preliminary 2018 financial projections to ensure that investors had the most recent information.” That occurred Monday.

The word is that if companies want the capital before year end, speed is required. Given the upcoming holidays and the time taken to close a transaction, next week is about the cut-off.