11 Responses to “April 7, 2010”

1. mega56 says:

   April 7, 2010 at 10:12 pm

   hello,

   I’m new to preferred shares and I was wondering if you can point me to the general direction for more information. More than a general definition but less than an in depth analysis (here).

   For example, fixedResets are perpetual by nature so does that mean unless the company calls, the funds are locked in indefinitely?

   Thanks

2. jiHymas says:

   April 8, 2010 at 12:40 am

   I was wondering if you can point me to the general direction for more information.

   I will immodestly point you toward my own articles, linked on the right hand panel of this blog. The green boxes are are links to various articles I have written on various aspects of the preferred share market and were intended for beginners.

   Also, have a look at the Finiki page on Preferred Shares, the product of Financial WebRing and (if you’re brave!) the Financial Webring Forum.

   fixedResets are perpetual by nature so does that mean unless the company calls, the funds are locked in indefinitely?

   That is exactly what is meant by the term perpetual. One of the green boxes referred to above points to an essay, Perpetual and Retractible Preferred Shares, focussing on just that issue.

3. mpisni says:

   April 8, 2010 at 5:55 am

   I know James won’t mention it but the PreLetter is an excellant source of information , analysis and recommendations

4. mega56 says:

   April 8, 2010 at 7:00 am

   Hi James,

   I’ve read some of the articles you’ve written (Perpetual and Retractible Preferred Shares, Why Preferred Shares and preferred and GICs). Very informative and answered most of questions I had. Thank you.

   Couple of things that came up that may be in other articles (I’ll continue searching);

   1. Under what circumstances will a company issue a new preferred?

   2. Under what circumstances will a company redeem a preferred share?

   3. Regarding perpetuals and rising interest rates. I’ve read in many places that perpetuals are risky during a phase where rates are rising, stay away. When I’m looking at the numbers, I don’t see it.

   Example: CM.PR.E currently sits at 22.43 @$1.40
   a. if it gets called (worst), you’ve got a nice gain @25.00
   b. if price drops with rising rates, you still get the dividend

   I’m missing the downside here

   thank you!

5. jiHymas says:

   April 8, 2010 at 12:15 pm

   Under what circumstances will a company issue a new preferred?

   Banks and insurers will issue prefs to boost their Tier 1 Capital (see http://www.prefblog.com/?cat=24&s=tier. Utilities and other players seek to improve their debt ratios.

   Under what circumstances will a company redeem a preferred share?

   Usually when the market changes to the point where they can refinance at a cheaper rate.

   I’m missing the downside here

   If you have to sell when it’s down, you feel very sad. That’s why prefs should be part of a fixed income portfolio, not the whole thing. I recommend that prefs be no more than 50% of a diversified fixed income portfolio.

   Also, a declining price can be (but usually isn’t) a sign of deteriorating credit quality. Nortel and Quebecor World defaulted and pref holders got nothing.

   Also, remember that inflation is the great enemy of long term debt. If inflation should suddenly and permanently increase to – say – 6%, PD holders will be very sad.

   But you’ve got the right idea. See Shut Up and Clip Your Coupons!

6. mega56 says:

   April 8, 2010 at 3:40 pm

   The Shut Up and Clip Your Coupons! article was excellent. One should be ‘ok’ if they went with a bank perpetual? At least from credit risk.

   Regarding the following statement:
   Usually when the market changes to the point where they can refinance at a cheaper rate.

   I’m noticing that most the fixedResets are trading above par value, wouldn’t this be an ideal situation for calling?

   I’m looking at the YTW on the the fixedResets and comparing those with bond yields (example below), the latter would be the better choice if one had to purchase today. Even more so if it was in a TFSA or RRSP. This wouldn’t be the case if one bought the fixedResets last year however.

   Short Description: ReOpening of Provincial Bonds
   Maturity: December 18, 2019
   Coupon: 4.10 % per annum
   Accrued interest of approximately $13.03 (per $1,000 face value) will be added.
   Price: $98.619 CDN per $100 par value.
   Yield to Maturity: 4.27% semi-annual ; 4.32% annual
   Settlement: April 13, 2010.

   thanks again

7. jiHymas says:

   April 8, 2010 at 3:54 pm

   I’m noticing that most the fixedResets are trading above par value, wouldn’t this be an ideal situation for calling?

   I can’t remember whether I’ve said so on PrefBlog, but certainly in PrefLetter I’ve pointed out that the issuer’s decision to call will be based on the reset spread, rather than the yield as calculated today.

   Say, for instance, we had a FixedReset issued with a 10% initial fixed rate, with a reset spread of +50bp This will have a very high yield to call, but a low probability of being called, and the YTW will be based (almost certainly) on the yield assuming a reset to about 3.1% and existence to perpetuity.

   The curious case of BAM.PR.R was discussed in the last PrefLetter.

8. like_to_retire says:

   April 8, 2010 at 6:25 pm

   It’s not often I need to google two words in one sentence, but you scored a winner in todays blog James.

   Paroxysm and insouciance are doozies for sure.

   ltr

9. mega56 says:

   April 8, 2010 at 7:06 pm

   thanks James,

   It’ll take me a while to digest that last paragraph!

   I’ll take advantage of the PrefLetter after learning the basics (may take a while)

10. April 14, 2010 « PrefBlog says:

    April 14, 2010 at 7:25 pm

    […] interest-equivalent spread is now about 295bp, down substantially from the peak of 310bp reported April 7 though still wider than the 285bp reported at […]

11. June 22, 2011 « PrefBlog says:

    June 23, 2011 at 1:13 am

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