New Rate Reset Preferred Shares With Floor Feature Are They Worth A Look?

For the past year, new preferred share issuances were somewhat rare, until November when three major underwritings took place. Brookfield Asset Management, TransCanada and Enbridge all raised money in the same week and while similar to the old rate reset preferred shares, (with an initial rate for five years and a new rate reset in five years equal to Canada five-year bonds + (indicated rate specific to each issue) this time they added an additional important feature, a new FLOOR rate, equal to the original rate.

These offerings were very well received by the public, and the three deals were upsized and are now trading at a significant premium to the issue price.

For example, the prospectus for the new Brookfield Asset Management Preferred Share issued on November 10th 2016 reads:

• The Annual Fixed Dividend Rate will be equal to the greater of: (i) the Five-Year Government of Canada Bond Yield (“GCAN5YR”) plus 3.85% as quoted on Bloomberg (see quote for “GCAN5YR <INDEX>”) or comparable sources at 10:00 a.m. (Toronto time) on the 30th day prior to the first day of a Subsequent Fixed Rate Period, and (ii) 4.80%.

In plain language, the new feature insures that, at the discretion of the issuer, investors will at least receive the same rate five years later, get paid back, or renew at a higher rate if Canada five year rates go higher.

The retail investor has been hit with severe losses as this was one of the worst performing sectors over the past year because rates went down and issuances were so frequent that the supply crushed the demand.

At first glance this new type of preferred share looks good but from experience I suspect many more companies will be issuing more shares to the market soon enough and this could cause some pressure on the overall sector once again. Investors looking for income and capital preservation must remember that preferred shares are NOT considered fixed income and bonds would still be the most reliable option.

Please do not hesitate to contact me if you would like to discuss this further. You can also email us to sign on to our newsletter.

Stephane Ruah is an Investment Advisor at iA Securities. With over 12 years’ experience, he provides innovative investment services to families and entrepreneurs and can be reached at 514.875-0309 or sruah@iagto.ca

The preceding has been prepared by Stephane Ruah, Investment Advisor for Industrial Alliance Securities Inc. (IAS) and does not necessarily reflect the opinions of IAS. The information contained in this document comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the time of publication and are subject to change. The information contained in this document does not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors.

Industrial Alliance Securities Inc. (IAS) is a member of the Canadian Investor Protection Fund (CIPF) and the Investment Industry Regulatory Organization of Canada (IIROC). iA Securities is a trademark and business name under which Industrial Alliance Securities Inc. operates.