Different reactions to similar offerings by Intact, Emera
Investors bite for one pref, not for the other
Two issuers, with slightly different ratings, came to the market Thursday with preferred share offerings carrying the same coupon rate — but only one appeared to have filled its order on the day.
Toronto-based Intact Financial Corp. was first out of the gate with a $200-million offering that could grow to $250 million if there was enough interest, with an annual yield of 4.90 per cent. DBRS rated the offering at Pfd-2, or of “satisfactory credit quality,” a notch below its highest rating of Pfd-1.
The spread on the fiveyear paper, meaning the premium above the base rate (or the yield on five-year Canada bonds) was 255 basis points. The rate reset offering (more of this later) is the first by Intact since the summer of 2011 when it was able to raise $250 million at a coupon of 4.20 per cent at a spread of 172 basis points.
Half an hour after Intact’s offering, Halifax-based Emera Inc. joined the fray — but with larger ambitions. It was seeking $300 million, at 4.90 per cent, but also gave itself the ability to raise another $50 million. The spread was 254 basis points. The preferred shares were rated P-2 (low) of “adequate quality” by Standard & Poor’s Rating Service.
The rate-reset offering is the first by Emera since June 2014 when it raised $200 million at a spread of 263 basis points and a coupon of 4.25 per cent. Back then, its preferred shares were rated “somewhat speculative,” or Pfd-3, by DBRS, and P-2 by S&P.
While the two deals shared similar terms, investors treated them differently. By early afternoon only Intact’s order was completely filled. But sources indicated investors could still post expressions of interest for the Emera offering. On TD Investing’s website, the offering is indicated as open.
Rate-reset preferred shares are permanent capital with limited rights for the owners, meaning holders can do nothing to demand the return of their original investment. Instead, all the rights belong to the issuers who decide whether to redeem or not when the initial fixed-rate period (normally in five years) rolls around.
If the preferred shares are redeemed, holders get their money back. If the issuer decides not to redeem but keep them in play, holders have a choice. They can either switch to another five-year fixed-rate preferred share security (with the rate being set at the then-five-year Canada bond yield plus the initial spread) or a five-year floating rate preferred share with the yield set at the thenthree-month Treasury bill rate plus the initial spread.
While past experience from these two issuers doesn’t necessarily indicate what will happen this time, the information is still worthwhile. The redemption decision is based on many factors including the need for capital, the presence of other equity options and the market. In short, is it more or less expensive to scrap the existing contract and float a new offering?
Both those companies have gone down that road before. In June 2010, Emera raised $150 million from the sale of rate-reset preferred shares that paid 4.40 per cent, with a 184 basis points spread. When the summer of 2015 rolled around, Emera opted not to redeem the issue but to offer “new” converted preferred shares to the holders at a much lower yield. For the next five years holders could receive either a fixed 2.555 per cent or a floating 2.393 per cent. Because the fixed rate was below the now-market rate the preferred shares traded at a healthy discount to their $25 issue price.
In late 2017, Intact also chose to leave the issue outstanding, and with good reason. The fixed rate on the new preferred shares was set at 3.396 per cent. And that rate means the preferred shares traded below $25.
Intact Financial’s preferred-share offering was filled on its first day, but investors seem to be holding back on Emera’s similar offering.