New Issue: CU Inc Fixed-Reset 6.70%+481

CU Inc. has announced:

it has entered into an agreement with a syndicate of underwriters led by BMO Capital Markets, and including RBC Capital Markets and TD Securities Inc. The underwriters have agreed to buy 6,400,000 6.70% Cumulative Redeemable Preferred Shares Series 2 at a price of $25.00 per share for aggregate gross proceeds of $160,000,000.

The Series 2 Preferred Shares will be issued to the public at a price of $25.00 per share and holders will be entitled to receive fixed cumulative preferential cash dividends, payable quarterly for an initial period of five years, as and when declared by the board of directors of the Corporation, at a rate of $1.675 per share, to yield 6.70% annually. Thereafter, the dividend rate will reset every five years to the then current 5-Year Government of Canada bond yield plus 4.81%. On June 1, 2014, and on June 1 of every fifth year thereafter, the Corporation may redeem the Series 2 Preferred Shares in whole or in part at par.

Holders may elect to convert any or all of their Series 2 Preferred Shares into an equal number of Cumulative Redeemable Preferred Shares Series 3 on June 1, 2014, and on June 1 of every fifth year thereafter. Holders of the Series 3 Preferred Shares will be entitled to receive quarterly floating rate cumulative preferential cash dividends, as and when declared by the board of directors, equal to the then current 3-month Government of Canada Treasury Bill yield plus 4.81%. The Corporation may redeem the Series 3 Preferred Shares in whole or in part at par.

The offering is being made only in the provinces of Canada by means of a prospectus and the closing date of the issue is expected to be on or about March 27, 2009. The Corporation intends to use the proceeds to purchase preferred shares to be issued by its wholly owned operating subsidiaries, ATCO Electric Ltd. and ATCO Gas and Pipelines Ltd. It is expected that these subsidiaries will use the proceeds to fund a portion of their 2009 capital expenditure programs, to repay existing indebtedness, and for other general corporate purposes.

The initial dividend will be payable June 1 for $0.30288 assuming a March 27 closing.

I am not a big fan of this interlocking preferred share structure – it makes credit analysis more difficult and makes me wonder why they aren’t injecting capital into their operating subs via common equity. I can only assume it’s some kind of regulatory gymnastics:

Rate base for each utility is the aggregate of the AUC approved investment in property, plant and equipment, less accumulated depreciation, and unamortized contributions by utility customers for extensions to plant, plus an allowance for working capital. The utilities earn a return on rate base intended to meet the cost of the debt and preferred share components of rate base and to provide share owners with a fair return on the common equity component of rate base.

The AUC approves rates of return for the debt and preferred share components of rate base based on the actual or forecast weighted average cost of each utility’s debt and preferred shares and establishes the capital structure for each utility.

It is possible – though not spelt out in the press release – that the Series X or Series W preferreds issued by CU Inc.’s subs to CU Inc.’s parent will be redeemed:

The Series W preferred shares are redeemable commencing on March 1, 2008 at the stated value plus a 4% premium for the next 12 months plus accrued and unpaid dividends. The redemption premium declines by 1% in each succeeding 12 month period until March 1, 2012.

The Series X preferred shares are redeemable commencing June 1, 2008 at the stated value plus a 4% premium for the next 12 months plus accrued and unpaid dividends. The redemption premium declines by 1% in each succeeding 12 month period until June 1, 2012.

… in which case this would be a method whereby Canadian Utilities is replacing parent-level debt with subsidiary debt. Assiduous Readers will remember that the proceeds from the CIU.PR.A issue were used to redeem three CU issues.

Still, this should be an interesting issue … a fixed-reset from a utility with a cumulative coupon will be considered attractive by many.

2 Responses to “New Issue: CU Inc Fixed-Reset 6.70%+481”

  1. prefhound says:

    In addition to a cumulative dividend, the new fixed resets also came out at only 10-20 bp less than the perpetural CIU.PR.A yield (in the morning anyway). This is much less than the 50-75 bp discount to perpetual yields we have seen for new bank fixed resets.

    Unfortunately, this just made the CIU.PR.A fall enough to nearly make up the difference!

  2. […] CIU Inc. Fixed-Resets, 6.70%+481 announced last week had a superb opening day, trading 182,555 shares in a range of 25.25-85 before closing with a quote […]

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