Our report on the Enbridge Rate reset preferred share, the Series 9 trading as ENB.PF.A is updated and rated Buy at $20.47.
The shares happen to be very similar to the Canadian Western Bank rate reset preferred share that is on our list which is rated (lower) Sell at $24.57 and which closed today at $24.90. Both shares have a dividend of $1.10. The CWB share will reset in April 2019 at the Canada bond 5 year yield plus 276 basis points while the Enbridge shares will reset December 1, 2019 at the 5 year plus 266 basis points. The CWB shares have the small added risk of being non-cumulative and that they would be converted to CWB common shares in the unlikely event CWB gets into certain triggering financial difficulties.
The shares started out in early 2014 with the same distribution amount of $1.10 and the same price at $25 and almost the same reset yield spread. After both were issued, interest rates unexpectedly continued to decline and the price of both shares fell as they were no longer competitive with the newer rate reset preferred shares being issued (some with guaranteed minimum reset yields). As interest rates rose, the CWB shares have recovered to almost $25. But I recall that the Enbridge share suffered a separate blow when Enbridge took certain actions that weakened its balance sheet and credit rating not long after the issue date. Therefore, the Enbridge shares may not recover towards $25 until and unless Enbridge’s credit rating improves, which it may do. But they may recover somewhat in any case as the reset date approaches.
The CWB and the Enbridge shares are both now rated Pfd-3. In fact the Enbridge shares seem to be rated slightly higher at PFd-3 (high). But at $20.47 and with the same distribution now and with a distribution that will be just 0.1% lower after the reset, it appears that the Enbridge shares are trading as if they are quite a bit more risky. Perhaps that provides an opportunity to buy the Enbridge shares at a discounted price.
It is possible that the CWB shares are trading at $24.90 in anticipation that CWB will redeem them at $25. I don’t know why they would, given CWB probably cannot issue new rate reset shares at much if any lower than a spread of 276 basis points. But it is possible that the bank analysts are expecting these shares to be redeemed.
These shares could be purchased for yield by those willing to hold for the current yield and the expected yield in the next five year reset period. Or, they could be purchased on a more speculative basis for both the yield and the hope that the price will move at lest somewhat towards $25 perhaps by the time of the reset in 14 months.
One reason that all rate reset preferred shares are not rising with the higher Canada 5 year yield is that the market yield on competing new rate reset preferred shares has risen. Bank of Nova Scotia had an issue today (it sold out rapidly) at a yield of 4.85%. The credit rating was higher than the two noted above at PFd-2. For comparison, that was about 246 basis points above the Canada bond and it will reset at 243 basis points above the Canada in five years.