Dif­fer­ent re­ac­tions to sim­i­lar of­fer­ings by In­tact, Emera

In­vestors bite for one pref, not for the other

National Post (National Edition) - - FINANCIAL POST - BARRY Critch­ley Off the Record Fi­nan­cial Post bcritch­ley@post­media.com

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.

Newspapers in English

Newspapers from Canada

© PressReader. All rights reserved.