This issue became the only “Operating Retractible” to have a negative bid-Yield-to-Worst (YTW) on August 17, with a bid price of 25.36.
It was issued in the spring of 1998 and has an annual coupon of $1.20. The option schedule is:
- Redemption 2005-08-25 2006-08-24 25.500000
- Redemption 2006-08-25 2007-08-24 25.250000
- Redemption 2007-08-25 INFINITE DATE 25.000000
- Retraction 2008-05-25 INFINITE DATE 26.040000
And the calculation of YTW is:
- Call 2006-09-16 YTM: 10.41 % [Restricted: 0.86 %] (Prob: 12.31 %)
- Call 2006-09-24 YTM: -0.43 % [Restricted: -0.05 %] (Prob: 9.32 %)
- Soft Maturity 2008-05-24 YTM: 3.90 % [Restricted: 3.90 %] (Prob: 78.38 %)
And the cash flow for YTW is:
- 2006-09-24 FINAL DIVIDEND 0.10 1.000451 0.10
- 2006-09-24 MATURITY 25.25 1.000451 25.26
Which at least has the advantage of being simple!
HIMIPref™ does not consider the investment merits (or lack thereof!) of this issue when evaluating trades – the eligibleForPurchase function returns code “14” :
pseudoModifiedDuration (Worst) of buy side less than minimum setting
In other words, the issue is simple too short-term to be worth bothering with.
With an annual coupon of only $1.20 and with the bank having the chance to save $0.25 by waiting until the end of August, 2007 to redeem these shares, they will probably be around for another year, no matter what the term until the YTW scenario. From an investor’s perspective, however … Who’s putting a bid on these things???? The most likely scenario has the pre-tax cash flow analysis:
- 2006-11-25 DIVIDEND 0.30 0.989474 0.30
- 2007-02-25 DIVIDEND 0.30 0.979888 0.29
- 2007-05-25 DIVIDEND 0.30 0.970703 0.29
- 2007-08-25 DIVIDEND 0.30 0.961299 0.29
- 2007-11-25 DIVIDEND 0.30 0.951985 0.29
- 2008-02-25 DIVIDEND 0.30 0.942762 0.28
- 2008-05-24 FINAL DIVIDEND 0.29 0.933925 0.27
- 2008-05-24 MATURITY 25.00 0.933925 23.35
- Total Cash Flows 27.0924
- Total Present Value 25.3601
- Discounting Rate 3.9026 % (Annual rate compounded semi-annually)
which doesn’t look all that great to me!
Update, 2008-9-9: And, as a matter of fact, the issue was called for redemption at par, effective 2007-8-27.
RY.PR.K
Tuesday, August 22nd, 2006The Yield-to-Worst on this issue went negative on 2006-08-21, joining BMO.PR.G to be the second member of the “Operating Retractibles” index with negative YTW.
The option schedule on the RY.PR.Ks is:
And the (pre-tax) YTW Scenario analysis is:
This is another one of those situations which may ultimately force me to define yet another yield measure: “Yield-to-Best-For-Issuer”. The YTW is based on an immediate call at $25.25, which would lead to an absolute loss of money from yesterday’s closing bid of $25.40 (never mind the closing offer of $25.59!). If Royal waits a year prior to calling, however, they will save themselves $0.25 on the call price and only pay $1.1750 in extra dividends for that period. They can calculate their net cost of funds for the next twelve months, then as less than $1.00 on a $25.00 loan, which is considerably below what they would have to pay on a new perpetual issue (although another retractible might possibly be competitive: CGI.PR.C pays $0.975 and is quoted at $25.45-74).
No matter how it’s sliced, it’s very unlikely that you’ll see HIMIPref™ recommending this issue in the near future … too short-term, for one thing.
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