Archive for the ‘Issue Comments’ Category

NA.PR.W : Convert or Hold?

Saturday, January 25th, 2020

It will be recalled that NA.PR.W will reset at 3.839% effective February 16, 2020.

NA.PR.W is a FixedReset, 3.90%+225, that commenced trading 2014-10-9 after being announced 2014-9-30. The company announced the extension on 2019-12-19. The issue is tracked by HIMIPref™ and is assigned to the FixedReset (Discount) subindex.

The most logical way to analyze the question of whether or not to convert is through the theory of Preferred Pairs, for which a calculator is available. Briefly, a Strong Pair is defined as a pair of securities that can be interconverted in the future (e.g. NA.PR.W and the FloatingReset that will arise if enough holders convert). Since they will be interconvertible on this future date, it may be assumed that they will be priced identically on this date (if they aren’t then holders will simply convert en masse to the higher-priced issue). And since they will be priced identically on a given date in the future, any current difference in price must be offset by expectations of an equal and opposite value of dividends to be received in the interim. And since the dividend rate on one element of the pair is both fixed and known, the implied average rate of the other, floating rate, instrument can be determined. Finally, we say, we may compare these average rates and take a view regarding the actual future course of that rate relative to the implied rate, which will provide us with guidance on which element of the pair is likely to outperform the other until the next interconversion date, at which time the process will be repeated.

We can show the break-even rates for each FixedReset / FloatingReset Strong Pair graphically by plotting the implied average 3-month bill rate against the next Exchange Date (which is the date to which the average will be calculated).

pairs_fr_200124
Click for Big

The market appears to have lost its fleeting interest in floating rate product; the implied rates until the next interconversion are below the current 3-month bill rate as the averages for investment-grade and junk issues are at +0.92% and +1.46%, respectively, after discarding the junk outlying pair AIM.PR.A / AIM.PR.B, which resets on 2020-3-31. Whatever might be the result of the next few Bank of Canada overnight rate decisions, I suggest that it is unlikely that the average rate over the next five years will be lower than current – but if you disagree, of course, you may interpret the data any way you like.

Since credit quality of each element of the pair is equal to the other element, it should not make any difference whether the pair examined is investment-grade or junk, although we might expect greater variation of implied rates between junk issues on grounds of lower liquidity, and this is just what we see.

If we plug in the current bid price of the NA.PR.W FixedReset, we may construct the following table showing consistent prices for its soon-may-be-issued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:

Estimate of FloatingReset (received in exchange for NA.PR.W) Trading Price In Current Conditions
  Assumed FloatingReset
Price if Implied Bill
is equal to
FixedReset Bid Price Spread 1.50% 1.00% 0.50%
NA.PR.W 16.76 225bp 16.67 16.18 15.69

Based on current market conditions, I suggest that the FloatingResets that will result from conversion are likely to trade below the price of their FixedReset counterparts, NA.PR.W. Therefore, I recommend that holders of NA.PR.W continue to hold the issue and not to convert. I will note that once the FloatingResets commence trading (if, in fact, they do) it may be a good trade to swap one issue for the other in the market once both elements of each pair are trading and you can – hopefully – do it with a reasonably good take-out in price, rather than doing it through the company on a 1:1 basis. But that, of course, will depend on the prices at that time and your forecast for the path of policy rates over the next five years. There are no guarantees – my recommendation is based on the assumption that current market conditions with respect to the pairs will continue until the FloatingResets commence trading and that the relative pricing of the two new pairs will reflect these conditions.

Those who wish to convert are advised that the deadline for notifying the company of such a desire is January 31, 2020 at 5:00 p.m. (EST). Brokers and other intermediaries generally set their internal deadlines a day or two in advance of this date, so if you wish to convert there’s no time to waste! Note that brokers will, in general, try to execute the instruction on a ‘best efforts’ basis if received between the two deadlines, provided that the procrastinating shareholder grovels entertainingly enough.

EMA.PR.F : Convert or Hold?

Saturday, January 25th, 2020

It will be recalled that EMA.PR.F will reset at 4.202% effective February 15, 2020.

EMA.PR.F is a FixedReset, 4.25%+263, that commenced trading 2014-6-9 after being being announced 2014-5-29. The company announced the extension on 2020-1-7. EMA.PR.F is tracked by HIMIPref™ and assigned to the FixedReset Discount subindex.

The most logical way to analyze the question of whether or not to convert is through the theory of Preferred Pairs, for which a calculator is available. Briefly, a Strong Pair is defined as a pair of securities that can be interconverted in the future (e.g. EMA.PR.F and the FloatingReset that will arise if enough holders convert). Since they will be interconvertible on this future date, it may be assumed that they will be priced identically on this date (if they aren’t then holders will simply convert en masse to the higher-priced issue). And since they will be priced identically on a given date in the future, any current difference in price must be offset by expectations of an equal and opposite value of dividends to be received in the interim. And since the dividend rate on one element of the pair is both fixed and known, the implied average rate of the other, floating rate, instrument can be determined. Finally, we say, we may compare these average rates and take a view regarding the actual future course of that rate relative to the implied rate, which will provide us with guidance on which element of the pair is likely to outperform the other until the next interconversion date, at which time the process will be repeated.

We can show the break-even rates for each FixedReset / FloatingReset Strong Pair graphically by plotting the implied average 3-month bill rate against the next Exchange Date (which is the date to which the average will be calculated).

pairs_fr_200124
Click for Big

The market appears to have lost its fleeting interest in floating rate product; the implied rates until the next interconversion are below the current 3-month bill rate as the averages for investment-grade and junk issues are at +0.92% and +1.46%, respectively, after discarding the junk outlying pair AIM.PR.A / AIM.PR.B, which resets on 2020-3-31. Whatever might be the result of the next few Bank of Canada overnight rate decisions, I suggest that it is unlikely that the average rate over the next five years will be lower than current – but if you disagree, of course, you may interpret the data any way you like.

Since credit quality of each element of the pair is equal to the other element, it should not make any difference whether the pair examined is investment-grade or junk, although we might expect greater variation of implied rates between junk issues on grounds of lower liquidity, and this is just what we see.

If we plug in the current bid price of the EMA.PR.F FixedReset, we may construct the following table showing consistent prices for its soon-may-be-issued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:

Estimate of FloatingReset (received in exchange for EMA.PR.F) Trading Price In Current Conditions
  Assumed FloatingReset
Price if Implied Bill
is equal to
FixedReset Bid Price Spread 1.50% 1.00% 0.50%
EMA.PR.F 17.80 263bp 17.73 17.24 16.75

Based on current market conditions, I suggest that the FloatingResets that will result from conversion are likely to trade below the price of their FixedReset counterparts, EMA.PR.F. Therefore, I recommend that holders of EMA.PR.F continue to hold the issue and not to convert. I will note that once the FloatingResets commence trading (if, in fact, they do) it may be a good trade to swap one issue for the other in the market once both elements of each pair are trading and you can – hopefully – do it with a reasonably good take-out in price, rather than doing it through the company on a 1:1 basis. But that, of course, will depend on the prices at that time and your forecast for the path of policy rates over the next five years. There are no guarantees – my recommendation is based on the assumption that current market conditions with respect to the pairs will continue until the FloatingResets commence trading and that the relative pricing of the two new pairs will reflect these conditions.

Those who wish to convert are advised that the deadline for notifying the company of such a desire is 5:00 p.m. (EST) on January 31, 2020. Brokers and other intermediaries generally set their internal deadlines a day or two in advance of this date, so if you wish to convert there’s no time to waste! Note that brokers will, in general, try to execute the instruction on a ‘best efforts’ basis if received between the two deadlines, provided that the procrastinating shareholder grovels entertainingly enough.

BCE.PR.F / BCE.PR.E : Net 17% Conversion To FixedFloaters

Wednesday, January 22nd, 2020

BCE Inc. has announced (on January 21):

that 506,975 of its 6,707,867 fixed-rate Cumulative Redeemable First Preferred Shares, Series AF (“Series AF Preferred Shares”) have been tendered for conversion on February 1, 2020, on a one-for-one basis, into floating-rate Cumulative Redeemable First Preferred Shares, Series AE (“Series AE Preferred Shares”). In addition, 3,283,795 of its 9,292,133 Series AE Preferred Shares have been tendered for conversion on February 1, 2020, on a one-for-one basis, into Series AF Preferred Shares. Consequently, on February 1, 2020, BCE will have 9,484,687 Series AF Preferred Shares and 6,515,313 Series AE Preferred Shares issued and outstanding. The Series AF Preferred Shares and the Series AE Preferred Shares will continue to be listed on the Toronto Stock Exchange under the symbols BCE.PR.F and BCE.PR.E, respectively.

The Series AF Preferred Shares will pay on a quarterly basis, for the five-year period beginning on February 1, 2020, as and when declared by the Board of Directors of BCE, a fixed cash dividend based on an annual fixed dividend rate of 3.865%.

The Series AE Preferred Shares will continue to pay a monthly floating adjustable cash dividend for the five-year period beginning on February 1, 2020, as and when declared by the Board of Directors of BCE. The monthly floating adjustable dividend for any particular month will continue to be calculated based on the prime rate for such month and using the Designated Percentage for such month representing the sum of an adjustment factor (based on the market price of the Series AE Preferred Shares in the preceding month) and the Designated Percentage for the preceding month.

BCE.PR.F is a FixedFloater which was added to the HIMIPref™ database in December 2008, when it was paying 4.40%. It reset in 2010 to 4.541% and after a net conversion to BCE.PR.F the issue pair was about 90% FixedFloater. It reset in 2015 to 3.110% and after a massive conversion the issue pair was about 60% RatchetRate. Notice of Extension/Conversion was published 2019-12-18. It reset to 3.865% in 2020; I recommended BCE.PR.E as the better part of the pair. The issue pair is now about 59% FixedFloater.

BCE.PR.E is a RatchetRate preferred, interconvertible every five years with BCE.PR.F. It was added to the HIMIPref™ database in May, 2012.

TD.PF.C : No Conversion To FloatingReset

Monday, January 20th, 2020

The Toronto-Dominion Bank has announced (on January 16):

that none of its 20 million Non-Cumulative 5-Year Rate Reset Preferred Shares, Series 5 (Non-Viability Contingent Capital (NVCC)) (the “Series 5 Shares”) will be converted on January 31, 2020 into Non-Cumulative Floating Rate Preferred Shares, Series 6 (NVCC) (the “Series 6 Shares”) of TD.

During the conversion period, which ran from January 2, 2020 to January 16, 2020, 168,856 Series 5 Shares were tendered for conversion into Series 6 Shares, which is less than the minimum 1,000,000 shares required to give effect to the conversion, as described in the prospectus supplement for the Series 5 Shares dated December 9, 2014. As a result, no Series 6 Shares will be issued on January 31, 2020 and holders of Series 5 Shares will retain their Series 5 Shares.

The Series 5 Shares are currently listed on the Toronto Stock Exchange under the symbol TD.PF.C. As previously announced on January 2, 2020, the dividend rate for the Series 5 Shares for the 5 year period from and including January 31, 2020 to but excluding January 31, 2025 will be 3.876%.

TD.PF.C is a FixedReset, 3.75%+225, that commenced trading 2014-12-16 after being announced 2014-12-5. Notice of extension was reported in December, 2019. TD.PF.C will reset at 3.876% effective January 31, 2020. I recommended against conversion. TD.PF.C is tracked by HIMIPref™ and is assigned to the FixedReset-Discount subindex.

CM.PR.P : No Conversion To FloatingReset

Monday, January 20th, 2020

Canadian Imperial Bank of Commerce has announced:

that, during the conversion notice period which ran from January 1, 2020 to January 16, 2020, 70,730 Non-cumulative Rate Reset Class A Preferred Shares Series 41 (Non-Viability Contingent Capital (NVCC)) of CIBC (the “Series 41 Shares”) were tendered for conversion, on a one-for-one basis, into Non-cumulative Floating Rate Class A Preferred Shares Series 42 (Non-Viability Contingent Capital (NVCC)) of CIBC (the “Series 42 Shares”). As per the conditions set out in the prospectus supplement dated December 8, 2014 relating to the issuance of the Series 41 Shares, since less than 1,000,000 Series 42 Shares would be outstanding on January 31, 2020, holders of Series 41 Shares who tendered their Series 41 Shares for conversion will not be entitled to convert their shares into Series 42 Shares. As a result, Series 42 Shares will not be issued at this time.

On January 31, 2020, CIBC will have 12,000,000 Series 41 Shares issued and outstanding. The Series 41 Shares are currently listed on the Toronto Stock Exchange under the symbol CM.PR.P.

The fixed dividend rate applicable to the Series 41 Shares for the five-year period from and including January 31, 2020 to but excluding January 31, 2025 is 3.909%, payable quarterly as and when declared by the Board of Directors of CIBC.

CM.PR.P is a FixedReset, 3.75%+224, that commenced trading 2014-12-16 after being announced 2014-12-8. In December, notice of extension was published. CM.PR.P will reset at 3.909% effective January 31, 2020. I recommended against conversion. The issue is tracked by HIMIPref™ and is assigned to the FixedReset-Discount subindex.

BCE.PR.F To Reset At 3.865%; Convert or Hold BCE.PR.F / BCE.PR.E ?

Saturday, January 18th, 2020

BCE Inc has announced (on 2020-1-16):

2020-notice-of-dividend-rate-series-af
Click for Big

BCE.PR.F is a FixedFloater which was added to the HIMIPref™ database in December 2008, when it was paying 4.40%. It reset in 2010 to 4.541% and after a net conversion to BCE.PR.F the issue pair was about 90% FixedFloater. It reset in 2015 to 3.110% and after a massive conversion the issue pair was about 60% RatchetRate. Notice of Extension/Conversion was published 2019-12-18

BCE.PR.E is a RatchetRate preferred, interconvertible every five years with BCE.PR.F. It was added to the HIMIPref™ database in May, 2012.

The most logical way to analyze the question of whether or not to convert is through the theory of Preferred Pairs, for which a calculator is available. Briefly, a Strong Pair is defined as a pair of securities that can be interconverted in the future (e.g., BCE.PR.F and the RatchetRate BCE.PR.E that will continue to exist if enough holders want it). Since they will be interconvertible on this future date, it may be assumed that they will be priced identically on this date (if they aren’t then holders will simply convert en masse to the higher-priced issue). And since they will be priced identically on a given date in the future, any current difference in price must be offset by expectations of an equal and opposite value of dividends to be received in the interim. And since the dividend rate on one element of the pair is both fixed and known, the implied average rate of the other, floating rate, instrument can be determined. Finally, we say, we may compare these average rates and take a view regarding the actual future course of that rate relative to the implied rate, which will provide us with guidance on which element of the pair is likely to outperform the other until the next interconversion date, at which time the process will be repeated.

We can show the break-even rates for each FixedFloater / RatchetRate Strong Pair graphically by plotting the implied average prime rate against the next Exchange Date (which is the date to which the average will be calculated). Inspection of the graph and the overall average break-even rates for extant pairs will provide a guide for estimating the break-even rate for the pair now under consideration assuming, of course, that enough conversions occur so that the pair is in fact created.

pairs_ff_200117
Click for Big

The market seems to be doing a pretty good job of arbitraging this series of issues; the seven BCE issues have an average break-even prime rate of 4.49%, close to the current prime of 3.95% although significantly higher than last week’s figure of 4.15%. There is more variation than might be expected. Whatever might be the result of the next few Bank of Canada overnight rate decisions, I suggest that it is unlikely that the average rate over the next five years will be lower than current – but if you disagree, of course, you may interpret the data any way you like.

If we plug in the current bid price of the BCE.PR.F FixedFloater, we may construct the following table showing consistent prices for its RatchetRate counterpart BCE.PR.E given a variety of Implied Breakeven yields consistent with issues currently trading:

Estimate of RatchetRate BCE.PR.E (received in exchange for BCE.PR.F) Trading Price In Current Conditions
  Assumed RatchetRate
Price if Implied Prime
is equal to
FixedReset Bid Price 5.00% 4.50% 4.00%
BCE.PR.F 16.05 17.15 16.66 16.18

Note that the above table assumes that it will be the price of BCE.PR.E that varies, but the issue will probably continue trading at around 16.00, like the other BCE RatchetRates; it will more likely be the case that the price of BCE.PR.F declines. Everything’s relative!

Based on current market conditions, I suggest that BCE.PR.E will likely trade above the price of their counterparts, BCE.PR.F. Therefore, I recommend that holders of BCE.PR.F convert to BCE.PR.E and I recommend that holders of BCE.PR.E continue to hold the issue. I will note that once the conversion period has passed it may be a good trade to swap one issue for the other in the market once both elements of each pair are trading and you can – hopefully – do it with a reasonably good take-out in price, rather than doing it through the company on a 1:1 basis. But that, of course, will depend on the prices at that time and your forecast for the path of policy rates over the next five years. There are no guarantees – my recommendation is based on the assumption that current market conditions with respect to the pairs will continue until after the conversion and that the relative pricing of the two new pairs will reflect these conditions.

Note that the company deadline to receive notice of conversion is 5:00 p.m. (Eastern time) on January 20, 2020., so there is no time to waste – in fact, internal deadlines at brokerages and other intermediaries has likely passed and people calling in so shortly before the deadline will have to ask for ‘best efforts’ by the brokerage.

NA.PR.W To Reset At 3.839%

Saturday, January 18th, 2020

National Bank of Canada has announced:

the dividend rates applicable to the Non-Cumulative 5-Year Rate Reset First Preferred Shares, Series 32 (the “Series 32 Preferred Shares”) and the Non-Cumulative Floating Rate First Preferred Shares, Series 33 (the “Series 33 Preferred Shares”).

Holders of Series 32 Preferred Shares, should any remain outstanding after February 15, 2020, will be entitled to receive fixed rate non-cumulative preferential cash dividends on a quarterly basis, as and when declared by the Board of Directors of the Bank and subject to the provisions of the Bank Act (Canada). The dividend rate for the five-year period commencing on February 16, 2020 and ending on February 15, 2025 will be 3.839%, being equal to the sum of the five-year Government of Canada Bond yield (1.589%) plus 2.25%, as determined in accordance with the terms of the Series 32 Preferred Shares.

Holders of Series 33 Preferred Shares, should any be issued on February 15, 2020, will be entitled to receive floating rate non-cumulative preferential cash dividends on a quarterly basis, as and when declared by the Board of Directors of the Bank and subject to the provisions of the Bank Act (Canada). The dividend rate for the three-month period commencing on February 16, 2020 and ending on May 15, 2020, will be 3.898%, being equal to the sum of the 90-day Government of Canada Treasury Bill yield (1.648%) plus 2.25%, calculated on the basis of actual number of days elapsed in such quarterly floating rate period divided by 365, as determined in accordance with the terms of the Series 33 Preferred Shares.

Holders of the Series 32 Preferred Shares have, subject to certain conditions, the right to convert all or part of their Series 32 Preferred Shares on a one-for-one basis into Series 33 Preferred Shares on February 15, 2020.

Beneficial owners of Series 32 shares who wish to exercise their conversion right should communicate as soon as possible with their broker or other nominee and ensure that they follow their instructions in order to meet the deadline to exercise such right, which is January 31, 2020 at 5:00 p.m. (EST).

NA.PR.W is a FixedReset, 3.90%+225, that commenced trading 2014-10-9 after being announced 2014-9-30. The company announced the extension on 2019-12-19. The issue is tracked by HIMIPref™ and is assigned to the FixedReset (Discount) subindex.

The most logical way to analyze the question of whether or not to convert is through the theory of Preferred Pairs, for which a calculator is available. Briefly, a Strong Pair is defined as a pair of securities that can be interconverted in the future (e.g., NA.PR.W and the FloatingReset that will exist if enough holders convert). Since they will be interconvertible on this future date, it may be assumed that they will be priced identically on this date (if they aren’t then holders will simply convert en masse to the higher-priced issue). And since they will be priced identically on a given date in the future, any current difference in price must be offset by expectations of an equal and opposite value of dividends to be received in the interim. And since the dividend rate on one element of the pair is both fixed and known, the implied average rate of the other, floating rate, instrument can be determined. Finally, we say, we may compare these average rates and take a view regarding the actual future course of that rate relative to the implied rate, which will provide us with guidance on which element of the pair is likely to outperform the other until the next interconversion date, at which time the process will be repeated.

We can show the break-even rates for each FixedReset / FloatingReset Strong Pair graphically by plotting the implied average 3-month bill rate against the next Exchange Date (which is the date to which the average will be calculated). Inspection of the graph and the overall average break-even rates for extant pairs will provide a guide for estimating the break-even rate for the pair now under consideration assuming, of course, that enough conversions occur so that the pair is in fact created.

pairs_fr_200117
Click for Big

The market has little enthusiasm for floating rate product; the implied rates until the next interconversion are generally well below the current 3-month bill rate as the averages for investment-grade and junk issues are at +0.61% (ignoring the outlier FTS.PR.H / FTS.PR.I, which resets 2020-6-1) and +1.48% (including all data points, including 3 very high, very suspicious ones), respectively. Whatever might be the result of the next few Bank of Canada overnight rate decisions, I suggest that it is unlikely that the average rate over the next five years will be lower than current – but if you disagree, of course, you may interpret the data any way you like.

Since credit quality of each element of the pair is equal to the other element, it should not make any difference whether the pair examined is investment-grade or junk, although we might expect greater variation of implied rates between junk issues on grounds of lower liquidity, and this is just what we see.

If we plug in the current bid price of the NA.PR.W FixedReset, we may construct the following table showing consistent prices for its soon-may-be-issued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:

Estimate of FloatingReset (received in exchange for NA.PR.W) Trading Price In Current Conditions
  Assumed FloatingReset
Price if Implied Bill
is equal to
FixedReset Bid Price Spread 1.50% 1.00% 0.50%
NA.PR.W 17.15 225bp 17.06 16.57 16.07

Based on current market conditions, I suggest that the FloatingResets that will result from conversion are likely to trade below the price of their FixedReset counterparts, NA.PR.W. Therefore, it seems likely that I will recommend that holders of NA.PR.W continue to hold the issue and not to convert, but I will wait until it’s closer to the January 31 notification deadline before making a final pronouncement. I will note that once the conversion period has passed it may be a good trade to swap one issue for the other in the market once both elements of each pair are trading and you can – hopefully – do it with a reasonably good take-out in price, rather than doing it through the company on a 1:1 basis. But that, of course, will depend on the prices at that time and your forecast for the path of policy rates over the next five years. There are no guarantees – my recommendation is based on the assumption that current market conditions with respect to the pairs will continue until the FloatingResets commence trading and that the relative pricing of the two new pairs will reflect these conditions.

EMA.PR.F To Reset At 4.202%

Saturday, January 18th, 2020

Emera Incorporated has announced (on 2020-1-16):

the applicable dividend rates for its Cumulative Rate Reset First Preferred Shares, Series F (the “Series F Shares”) and Cumulative Floating Rate First Preferred Shares, Series G (the “Series G Shares”), in each case, payable if, as and when declared by the Board of Directors of the Company:
  • 4.202% per annum on the Series F Shares ($0.262625 per Series F Share per quarter), being equal to the sum of the Government of Canada bond yield as at January 16, 2020, plus 2.63%, payable quarterly on the 15th of February, May, August and November of each year during the five-year period commencing on February 15, 2020 and ending on (and inclusive of) February 14, 2025; and
  • 4.278% on the Series G Shares for the three-month period commencing on February 15, 2020 and ending on (and inclusive of) May 14, 2020 ($0.263712 per Series G Share for the quarter), being equal to the sum of the three-month Government of Canada treasury bill yield rate as at January 16, 2020, plus 2.63% (calculated on the basis of the actual number of days elapsed during the quarter divided by 365), payable on the 15th of May, 2020. The quarterly floating dividend rate will be reset every quarter.

Holders of the Series F Shares have the right, at their option, to convert all or any of their Series F Shares, on a one-for-one basis, into Series G Shares on February 15, 2020 (the “Conversion Date”). On such date, holders who do not exercise their right to convert their Series F Shares into Series G Shares will continue to hold their Series F Shares. The foregoing conversion right is subject to the following:

  • if the Company determines that there would be less than 1,000,000 Series G Shares outstanding on the Conversion Date, then holders of Series F Shares will not be entitled to convert their shares into Series G Shares, and
  • alternatively, if the Company determines that there would remain outstanding less than 1,000,000 Series F Shares on the Conversion Date, then all remaining Series F Shares will automatically be converted into Series G Shares on a one-for-one basis on the Conversion Date.

Beneficial owners of Series F Shares who wish to exercise their conversion right should communicate with their broker or other nominee to obtain instructions for exercising such right during the conversion period, which runs from January 16, 2020 until 5:00 p.m. (EST) on January 31, 2020.

EMA.PR.F is a FixedReset, 4.25%+263, that commenced trading 2014-6-9 after being being announced 2014-5-29. The company announced the extension on 2020-1-7. EMA.PR.F is tracked by HIMIPref™ and assigned to the FixedReset Discount subindex.

The most logical way to analyze the question of whether or not to convert is through the theory of Preferred Pairs, for which a calculator is available. Briefly, a Strong Pair is defined as a pair of securities that can be interconverted in the future (e.g., EMA.PR.F and the FloatingReset that will exist if enough holders convert). Since they will be interconvertible on this future date, it may be assumed that they will be priced identically on this date (if they aren’t then holders will simply convert en masse to the higher-priced issue). And since they will be priced identically on a given date in the future, any current difference in price must be offset by expectations of an equal and opposite value of dividends to be received in the interim. And since the dividend rate on one element of the pair is both fixed and known, the implied average rate of the other, floating rate, instrument can be determined. Finally, we say, we may compare these average rates and take a view regarding the actual future course of that rate relative to the implied rate, which will provide us with guidance on which element of the pair is likely to outperform the other until the next interconversion date, at which time the process will be repeated.

We can show the break-even rates for each FixedReset / FloatingReset Strong Pair graphically by plotting the implied average 3-month bill rate against the next Exchange Date (which is the date to which the average will be calculated). Inspection of the graph and the overall average break-even rates for extant pairs will provide a guide for estimating the break-even rate for the pair now under consideration assuming, of course, that enough conversions occur so that the pair is in fact created.

pairs_fr_200117
Click for Big

The market has little enthusiasm for floating rate product; the implied rates until the next interconversion are generally well below the current 3-month bill rate as the averages for investment-grade and junk issues are at +0.61% (ignoring the outlier FTS.PR.H / FTS.PR.I, which resets 2020-6-1) and +1.48% (including all data points, including 3 very high, very suspicious ones), respectively. Whatever might be the result of the next few Bank of Canada overnight rate decisions, I suggest that it is unlikely that the average rate over the next five years will be lower than current – but if you disagree, of course, you may interpret the data any way you like.

Since credit quality of each element of the pair is equal to the other element, it should not make any difference whether the pair examined is investment-grade or junk, although we might expect greater variation of implied rates between junk issues on grounds of lower liquidity, and this is just what we see.

If we plug in the current bid price of the EMA.PR.F FixedReset, we may construct the following table showing consistent prices for its soon-may-be-issued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:

Estimate of FloatingReset (received in exchange for EMA.PR.F) Trading Price In Current Conditions
  Assumed FloatingReset
Price if Implied Bill
is equal to
FixedReset Bid Price Spread 1.50% 1.00% 0.50%
EMA.PR.F 18.20 263bp 18.13 17.64 17.15

Based on current market conditions, I suggest that the FloatingResets that will result from conversion are likely to trade below the price of their FixedReset counterparts, EMA.PR.F. Therefore, it seems likely that I will recommend that holders of EMA.PR.F continue to hold the issue and not to convert, but I will wait until it’s closer to the January 31 notification deadline before making a final pronouncement. I will note that once the conversion period has passed it may be a good trade to swap one issue for the other in the market once both elements of each pair are trading and you can – hopefully – do it with a reasonably good take-out in price, rather than doing it through the company on a 1:1 basis. But that, of course, will depend on the prices at that time and your forecast for the path of policy rates over the next five years. There are no guarantees – my recommendation is based on the assumption that current market conditions with respect to the pairs will continue until the FloatingResets commence trading and that the relative pricing of the two new pairs will reflect these conditions.

CM.PR.P : Convert or Hold?

Saturday, January 11th, 2020

It will be recalled that CM.PR.P will reset at 3.909% effective January 31, 2020.

CM.PR.P is a FixedReset, 3.75%+224, that commenced trading 2014-12-16 after being announced 2014-12-8. In December, notice of extension was published. CM.PR.P is tracked by HIMIPref™ and is assigned to the FixedReset-Discount subindex.

The most logical way to analyze the question of whether or not to convert is through the theory of Preferred Pairs, for which a calculator is available. Briefly, a Strong Pair is defined as a pair of securities that can be interconverted in the future (e.g. CM.PR.P and the FloatingReset that will arise if enough holders convert). Since they will be interconvertible on this future date, it may be assumed that they will be priced identically on this date (if they aren’t then holders will simply convert en masse to the higher-priced issue). And since they will be priced identically on a given date in the future, any current difference in price must be offset by expectations of an equal and opposite value of dividends to be received in the interim. And since the dividend rate on one element of the pair is both fixed and known, the implied average rate of the other, floating rate, instrument can be determined. Finally, we say, we may compare these average rates and take a view regarding the actual future course of that rate relative to the implied rate, which will provide us with guidance on which element of the pair is likely to outperform the other until the next interconversion date, at which time the process will be repeated.

We can show the break-even rates for each FixedReset / FloatingReset Strong Pair graphically by plotting the implied average 3-month bill rate against the next Exchange Date (which is the date to which the average will be calculated).

pairs_fr_200110
Click for Big

The market appears to have lost its fleeting interest in floating rate product; the implied rates until the next interconversion are below the current 3-month bill rate as the averages for investment-grade and junk issues are at +0.64% and +1.10%, respectively. Whatever might be the result of the next few Bank of Canada overnight rate decisions, I suggest that it is unlikely that the average rate over the next five years will be lower than current – but if you disagree, of course, you may interpret the data any way you like.

Since credit quality of each element of the pair is equal to the other element, it should not make any difference whether the pair examined is investment-grade or junk, although we might expect greater variation of implied rates between junk issues on grounds of lower liquidity, and this is just what we see.

If we plug in the current bid price of the CM.PR.P FixedReset, we may construct the following table showing consistent prices for its soon-may-be-issued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:

Estimate of FloatingReset (received in exchange for CM.PR.P) Trading Price In Current Conditions
  Assumed FloatingReset
Price if Implied Bill
is equal to
FixedReset Bid Price Spread 1.50% 1.00% 0.50%
CM.PR.P 17.30 224bp 17.13 16.64 16.15

Based on current market conditions, I suggest that the FloatingResets that will result from conversion are likely to trade below the price of their FixedReset counterparts, CM.PR.P. Therefore, I recommend that holders of CM.PR.P continue to hold the issue and not to convert. I will note that once the FloatingResets commence trading (if, in fact, they do) it may be a good trade to swap one issue for the other in the market once both elements of each pair are trading and you can – hopefully – do it with a reasonably good take-out in price, rather than doing it through the company on a 1:1 basis. But that, of course, will depend on the prices at that time and your forecast for the path of policy rates over the next five years. There are no guarantees – my recommendation is based on the assumption that current market conditions with respect to the pairs will continue until the FloatingResets commence trading and that the relative pricing of the two new pairs will reflect these conditions.

Those who wish to convert are advised that the deadline for notifying the company of such a desire is 5:00 p.m. (Eastern Standard Time) on January 16, 2020.. Brokers and other intermediaries generally set their internal deadlines a day or two in advance of this date, so if you wish to convert there’s no time to waste! Note that brokers will, in general, try to execute the instruction on a ‘best efforts’ basis if received between the two deadlines, provided that the procrastinating shareholder grovels entertainingly enough.

TD.PF.C : Convert or Hold?

Saturday, January 11th, 2020

It will be recalled that TD.PF.C will reset at 3.876% effective January 31, 2020.

TD.PF.C is a FixedReset, 3.75%+225, that commenced trading 2014-12-16 after being announced 2014-12-5. Notice of extension was reported in December, 2019. TD.PF.C is tracked by HIMIPref™ and is assigned to the FixedReset-Discount subindex.

The most logical way to analyze the question of whether or not to convert is through the theory of Preferred Pairs, for which a calculator is available. Briefly, a Strong Pair is defined as a pair of securities that can be interconverted in the future (e.g. TD.PF.C and the FloatingReset that will arise if enough holders convert). Since they will be interconvertible on this future date, it may be assumed that they will be priced identically on this date (if they aren’t then holders will simply convert en masse to the higher-priced issue). And since they will be priced identically on a given date in the future, any current difference in price must be offset by expectations of an equal and opposite value of dividends to be received in the interim. And since the dividend rate on one element of the pair is both fixed and known, the implied average rate of the other, floating rate, instrument can be determined. Finally, we say, we may compare these average rates and take a view regarding the actual future course of that rate relative to the implied rate, which will provide us with guidance on which element of the pair is likely to outperform the other until the next interconversion date, at which time the process will be repeated.

We can show the break-even rates for each FixedReset / FloatingReset Strong Pair graphically by plotting the implied average 3-month bill rate against the next Exchange Date (which is the date to which the average will be calculated).

pairs_fr_200110
Click for Big

The market appears to have lost its fleeting interest in floating rate product; the implied rates until the next interconversion are below the current 3-month bill rate as the averages for investment-grade and junk issues are at +0.64% and +1.10%, respectively. Whatever might be the result of the next few Bank of Canada overnight rate decisions, I suggest that it is unlikely that the average rate over the next five years will be lower than current – but if you disagree, of course, you may interpret the data any way you like.

Since credit quality of each element of the pair is equal to the other element, it should not make any difference whether the pair examined is investment-grade or junk, although we might expect greater variation of implied rates between junk issues on grounds of lower liquidity, and this is just what we see.

If we plug in the current bid price of the TD.PF.C FixedReset, we may construct the following table showing consistent prices for its soon-may-be-issued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:

Estimate of FloatingReset (received in exchange for TD.PF.C) Trading Price In Current Conditions
  Assumed FloatingReset
Price if Implied Bill
is equal to
FixedReset Bid Price Spread 1.50% 1.00% 0.50%
TD.PF.C 17.75 225bp 17.63 17.13 16.63

Based on current market conditions, I suggest that the FloatingResets that will result from conversion are likely to trade below the price of their FixedReset counterparts, TD.PF.C. Therefore, I recommend that holders of TD.PF.C continue to hold the issue and not to convert. I will note that once the FloatingResets commence trading (if, in fact, they do) it may be a good trade to swap one issue for the other in the market once both elements of each pair are trading and you can – hopefully – do it with a reasonably good take-out in price, rather than doing it through the company on a 1:1 basis. But that, of course, will depend on the prices at that time and your forecast for the path of policy rates over the next five years. There are no guarantees – my recommendation is based on the assumption that current market conditions with respect to the pairs will continue until the FloatingResets commence trading and that the relative pricing of the two new pairs will reflect these conditions.

Those who wish to convert are advised that the deadline for notifying the company of such a desire is 5:00 p.m. (Toronto time) on January 16, 2020.. Brokers and other intermediaries generally set their internal deadlines a day or two in advance of this date, so if you wish to convert there’s no time to waste! Note that brokers will, in general, try to execute the instruction on a ‘best efforts’ basis if received between the two deadlines, provided that the procrastinating shareholder grovels entertainingly enough.