Archive for April, 2014

POW.PR.F Sinking Fund

Tuesday, April 15th, 2014

I received a call today from Assiduous Reader HR, who brought to my attention the buy-back provisions of POW.PR.F:

The First Preferred Shares – 1986 Series are entitled to a quarterly cumulative dividend at a floating rate equal to one quarter of 70% of the average prime rate of two major Canadian chartered banks. Dividends are payable on the 15th day of each of the months of January, April, July, and October in each year.

The shares are redeemable by the Corporation for $50 per share plus declared and unpaid dividends. The Corporation will make all reasonable efforts to purchase for cancellation on the open market 20,000 shares per quarter, such number being cumulative only in the same calendar year.

It’s interesting because according to the 2013 Annual Report:

During the twelve months ended December 31, 2013, the Corporation purchased 12,000 of such shares.

In 2012:

During the twelve months ended December 31, 2012, the Corporation purchased 40,000 such shares.

In 2011:

A total of 77,300 such shares were purchased during the twelve months ended December 31, 2011.

In 2010:

A total of 80,000 such shares were purchased during the twelve months ended December 31, 2010.

In 2009:

A
total of 80,000 such shares were purchased during the twelve months ended December 31, 2009.

In 2008:

A total of 60,000 such shares were purchased during the twelve-month period of 2008.

So it’s clear they’ve made their quota occasionally, but have fallen far short in the past two years. Now, let it be said that these things are hopelessly illiquid. According to the Exchange, there are 530,578 outstanding, about $25-million worth. They are the second-least liquid issue in the HIMIPref™ universe, with an Average Daily Trading Value of only $1,290, beaten only by BSC.PR.B, a split-share with only 713,371 shares outstanding (at a par value of 18.85). They were intermittently included in the Floater subindex a few times in the 1990s – one month in 1994, two months in 1996, two in 1997 and one in 1999 – but otherwise, and since November 30, 1999, they have been relegated to the Scraps sub-index on volume concerns.

But look at this!

POWPRF
Click for Big

Since January 2, 2013, there has not been a single day on which the closing quote provided by the Exchange has been above $50.00. The maximum offer has been $49.90. So, one might think, “all reasonable efforts” would include lifting the offer every day, even if only for 100 shares a time, but this clearly isn’t happening. How come?

I suspect that one reason is the volume: in all of 2013, all of 47,734 shares traded on the Toronto Exchange (there may have been more on Alpha, etc., but my guess is ‘not many’). So to give them their due, buying 12,000 shares ranks as something of an accomplishment, even though it doesn’t meet quota.

It occurred to me that there might be exchange rules with respect to issuer bids. According to the Exchange rules on Normal Course Issuer Bids:

It is inappropriate for an issuer making a Normal Course Issuer Bid to abnormally influence the market price of its shares. Therefore, purchases made by Issuers pursuant to a Normal Course Issuer Bid must not be transacted at a price which is higher than the last independent trade of a Board Lot of the class of shares which is the subject of the Normal Course Issuer Bid.

So if a single Board Lot escapes their net and hits an independent bid, then they can’t bid any more than that price until a higher independent transaction occurs.

Not only that, but there are time and volume restrictions in a NCIB:

“normal course issuer bid” means an issuer bid by a listed issuer to acquire its listed securities where the purchases:

(a) if the issuer is not an investment fund, do not, when aggregated with all other purchases by the listed issuer during the same trading day, aggregate more than the greater of: (i) 25% of the average daily trading volume of the listed securities of that class; and (ii) 1,000 securities;

(b) if the issuer is an investment fund, do not, when aggregated with the total of all other purchases by the listed issuer during the preceding 30 days, aggregate more than 2% of the listed securities of that class outstanding on the date of acceptance of the notice of normal course issuer bid by the Exchange; and

(c) over a 12-month period, commencing on the date specified in the notice of the normal course issuer bid, do not exceed the greater of
(i) 10% of the public float on the date of acceptance of the notice of normal course issuer bid by the Exchange; or

(ii) 5% of such class of securities issued and outstanding on the date of acceptance of the notice of normal course issuer bid by the Exchange, excluding any securities held by or on behalf of the listed issuer on the date of acceptance of the notice of normal course issuer bid by the Exchange,

and for the purposes of (b) and (c), whether such purchases are made through the facilities of a stock exchange or otherwise, but excluding purchases made under a circular bid.

7. Block Purchase Exception—A listed issuer may make one block purchase per calendar week which exceeds the daily repurchase restriction contained in subsection 628(a)(ix)(a) of the Company Manual, subject to maximum annual aggregate limits. Once the block purchase exception has been relied on, the listed issuer may not make any further purchases under the normal course issuer bid for the remainder of that calendar day.

8. Purchases at the Opening and Closing—A listed issuer shall not make any purchases of its securities pursuant to a normal course issuer bid at the opening of a trading session, or during the 30 minutes before the scheduled close of a trading session. However, notwithstanding Policy 6-501(1)(1), purchases of securities pursuant to a normal course issue bid may be effected through the Exchange’s Market-On-Close facility

These restrictions were important during the NCIB for CWB.PR.A:

Apart from block purchase exceptions, the maximum number of preferred shares that may purchased per trading day is 1,538, an amount equal to 25% of the average daily trading volume of the preferred shares on the TSX for the six month period ended January 31, 2013.

Now, despite spending a considerable amount of time with Mr. Google, SEDAR and the Power Corporation website, I have not been able to find anything that definitively states that the purchases of POW.PR.F constitute a Normal Course Issuer Bid. I think they do, but I’m not a specialist in such matters and if I was, I’d shoot myself. There are a lot of rules and compliance for such a hopelessly illiquid security must be a nightmare.

But I will send an inquiry to the company.

April 14, 2014

Monday, April 14th, 2014

It is possible that the US will lose its IMF veto:

At issue is the global community’s efforts to align the IMF’s power structure to match changes in the distribution of strength in the global economy. Each country is assigned shares, or quota, to match its contribution to the world’s gross domestic product. The 2010 changes — which, ironically, were prompted by President Barack Obama — would give more clout to countries such as China and India and reduce the influence of some European nations whose relative share of global GDP has shrunk over time.

The U.S. would remain the IMF’s dominant member. It would retain more than 17 per cent of total shares — which gives the U.S. veto power because approval of members representing 85 per cent of shares is required to approve major decisions. The next closest would be Japan and China, each of which would hold about 6.4 per cent of total quota.

Yet the governance overhaul also requires increased contributions to the fund’s permanent resources. The contributions are akin to insurance, as countries would only lose money if the IMF’s loans to troubled countries went unpaid.

Most legislatures approved the increased financial commitments to the IMF long ago. Mr. Obama, however, has failed repeatedly to muster enough votes in the U.S. Congress to pass the measure. Republican leaders in the House of Representatives and the Senate characterize the Obama administration’s request as akin to asking American taxpayers to bail out troubled countries such as Greece and Portugal.

Seems to me that the IMF should simply let the US drop below 17% if that’s what it wants – and perhaps assign caps to member contributions, instead of quota. If the Chinese want influence, let them buy it. I’ll sell them my share!

Canadian grain farmers aren’t the only ones complaining about railroads:

They can’t move because increasing oil production from North Dakota’s Bakken field, a record grain crop and unprecedented cold weather overwhelmed the U.S. railroad system. In part because of transport delays, coal inventories were down 26 percent in January from a year ago. A quarter of all U.S. freight rail traffic passes through Chicago, or 37,500 rail cars each day. The trip through the city can take more than 30 hours.

Coal producers including the Western Coal Traffic League, whose members are shippers of coal mined west of the Mississippi River, point at inconsistent rail service as the primary culprit and railroads put the blame on Chicago. The group asked on March 24 that the U.S. Surface Transportation Board institute a proceeding to address BNSF’s coal service in the region.

BNSF said in a response to the agency that it plans to spend $5 billion this year on service. “As these resources come on line, service will gradually improve,” it said in a March 25 letter.

Dwell times, a measure of how long loaded railroad cars sit in a railyard, averaged about 26 hours during the first quarter, up from 21 hours during the same period in 2013, AAR data show.

Trains are getting mired in Chicago’s tangle of bottlenecks, said Charles Clowdis, an IHS Global Insight analyst in Lexington, Massachusetts.

Sheryl King reminds us that long rates are different from short rates:

When it comes to any possible bearish sentiment, bond market investors are currently preoccupied with estimating the neutral policy rate for central banks, and how far long-term bond yields may or may not rise. At this point, however, there has very little focus on where the slope of the yield curve will be headed. History suggests it will get a lot flatter as we head toward the first Federal Reserve rate increase at some point in 2015; and Canada’s bond curve will follow suit.

So when will the yield curve start to discount policy tightening? It may already be happening in the U.S., with the curve almost 20 basis points flatter now than it was a few weeks ago. But the Canada curve remains at a cycle high.

The yield curve remains steep because doubt persists about the strength of the economy, which is keeping yields low at the front end of the curve.

Brace yourself for disaster – the regulators are getting interested in the bond market:

Bill Gross and Larry Fink manage a $3 trillion pile of bonds — an amount almost as big as Germany’s economy. Their firms, Pacific Investment Management Co. and BlackRock Inc. (BLK), doubled holdings since 2008, outpacing the market’s growth of 50 percent.

The lopsided bond market has caught the attention of the U.S. Securities and Exchange Commission. Not only is the SEC examining whether the biggest players get preferential prices and access because of their influence, it’s also worried about what happens when the five-year bond rally ends as U.S. policy makers prepare to raise interest rates.

The biggest funds’ dominance may make it harder for everyone to sell when the Fed boosts borrowing costs from record lows and sends bond prices tumbling. In essence, their selling may crowd narrowed exits, making it more painful as all investors race to get out of a falling market.

More than five years of near-zero interest rates from the Fed has propelled corporate bonds to record performance and the biggest debt managers have ballooned in size. Pimco, Vanguard Group Inc. and Fidelity Investments manage 39 percent of all mutual fund-owned taxable bonds today, up from 18 percent in 1997, according to Morningstar Inc. data. The smallest 205 fund providers manage 0.1 percent of the market.

At the same time, regulators are examining the way larger firms benefit in markets where transactions are often executed the same way they were a decade ago — through telephone conversations and e-mails.

In this two-tiered market, brokers choose which rivals and clients may see their bond prices on electronic trading systems by turning quotes on and off. Dealers often give bigger investors better prices in return for all of the business they do with Wall Street.

The SEC is examining to what extent smaller buyers are disadvantaged, and whether the behavior constitutes market manipulation, according to two people with direct knowledge of the matter who asked not to be identified because the probe hasn’t been made public.

Finra is examining whether Wall Street firms overcharge investors and whether they unfairly allocate new corporate debt issues to reward certain clients, Nancy Condon, a spokeswoman, confirmed in an e-mail last week.

It’s getting tougher to trade bonds as the business gets less profitable for Wall Street. Corporate-debt trading volumes in the U.S. have failed to keep pace with issuance, increasing 14 percent since 2010 as outstanding notes grew by 33 percent, according to Finra and Bank of America Merrill Lynch index data.

Requirements that banks hold more cash in the event their investments tank have prompted dealers to reduce their inventories, giving the biggest managers even more sway in the market. The largest dealers had slashed their holdings of corporate bonds to $56 billion as of a year ago from $235 billion in 2007, according to Fed Bank of New York data. The inventories worked to cushion against price swings and made it easier to trade in larger sizes.

There’s a little pushback on the evil-HFT narrative:

Michael Lewis’s argument that the $23 trillion U.S. stock market is rigged in favor of speed traders is careless, according to Nasdaq OMX Group Inc. Chief Executive Officer Robert Greifeld.

The controversy over high-frequency trading intensified with the publication of Lewis’s book “Flash Boys” on March 31. Lewis argues that the fastest trading firms prey on slower investors by getting early access to nonpublic information.

“I think that was irresponsible on his part,” Greifeld said in an interview on PBS’s “Charlie Rose” show. “I feel poorly for the academics. Our markets are researched more than any other market that’s out there.”

Greifeld said about 100 academic papers have been written about how the U.S. markets operate and a similar number have been produced on overseas markets. Academics who have spent their careers studying markets are divided on high-speed trading, he said, with some in favor of it and some opposed.

“It’s not a story-telling type of issue,” he said. “It’s really dense academic papers to get through what happens in the marketplace.”

Mind you, the Europeans are seizing the opportunity to have more regulators writing more rules:

European Union lawmakers are poised to approve some of the toughest restrictions in the world on high-frequency trading, the first crackdown in the aftermath of Michael Lewis’s latest book, “Flash Boys.”

The curbs are part of revamped EU markets legislation ranging from commodity derivatives speculation to investor protection. The high-frequency trading limits include standards meant to keep the price increment for securities from being too small, mandatory tests of trading algorithms and requirements that market makers provide liquidity for a set number of hours each day.

Members of the European Parliament will vote tomorrow on EU rules that also include a requirement for traders to have their algorithms tested on venues and authorized by regulators. The assembly in Strasbourg, France, is set to endorse a tentative deal reached with governments on the measures earlier this year.

So … when do you figure the first scandal about a regulatory clerk selling code after approving it is going to happen? Another point of interest is … if an HFT firm discusses with the regulators what they have to do to get approval, does this mean that the regulators are in the business of writing code? That line of reasoning has been advanced in connection with Credit Rating Agencies and structured products!

Here’s a good joke!

DALBAR_20131231
Click for Big

Howard Gold comments on MarketWatch:

Its 20th annual Quantitative Analysis of Investor Behavior paints such a grim picture that if it were a painting, it would look like Edvard Munch’s “The Scream.”

After citing familiar figures on how individual investors substantially underperform the market averages because of terrible market timing, the firm, which has reported these statistics for 20 years, calls out investors’ obtuseness and the miserable failure of the financial-services industry to change their dysfunctional behavior.

“After decades of analyzing investor behavior in good times and in bad times, and after enormous efforts by thousands of industry experts to educate millions of investors, imprudent action continues to be widespread,” the report asserted.

“Attempts to correct irrational investor behavior through education have proved to be futile. The belief that investors will make prudent decisions after education and disclosure has been totally discredited.”

I know I’ve discussed DALBAR somewhere. In PrefLetter, I think. Dan Hallet has discussed DALBAR:

I suspect that DALBAR calculates what it calls investor returns by applying dollar-weighted fund redemption rates to benchmark returns – rather than applying a DWRR [Dollar Weighted Rate of Return] calculation directly to the funds. And if they’re doing that, they’re not calculating investor returns.

If I’m right, it’s not clear exactly what they’re calculating. But this explains why their figures show such staggering gaps of several percentage points. My research on this topic over the past 13 years is more in line with figures I’ve seen from Morningstar.com. In the U.S., Morningstar calculates what they call “investor returns” using the same method I have for more than a dozen years – i.e. calculating actual fund DWRR. … But even that is an estimate because it’s based on monthly data; and daily fund flows are required for a precise DWRR. But DALBAR’s reported figures aren’t even an estimate because they appear to blend fund flows with index returns.

Accordingly, DALBAR is probably correct in direction – i.e. whether TWRR [Time Weighted Rate of Return] is higher or lower than DWRR – but not even close in quantifying the gap between the two measures.

You can buy the DALBAR report for USD 775. That’s right, only USD 775! Damn well better be right.

There’s always a lot of political argument about contracting-out … for instance, only Rob Ford was brave enough to defy the unions and contract out garbage collection in Toronto. Many people will claim that government services are cheaper because there is no built-in profit … many people should price a visit to the International Space Station:

Later this month, a company called SpaceX is scheduled to launch its Falcon 9 rocket on a routine supply mission to the International Space Station (ISS). But if all goes as planned, this mission could herald the beginning of something decidedly not routine: the use of private, reusable rockets to service America’s space program.

SpaceX and another private launch company, Orbital Sciences, are the beneficiaries of a recent shift in the American space program toward privatizing more routine missions – such as the transport of supplies and eventually people to and from the ISS. While this upcoming mission is only a preliminary test, SpaceX eventually hopes to dramatically reduce the cost of launching cargo and people into space by eventually making both the first and second stages of its rockets reusable. Last year, the company estimated that once its rockets are able to land back on earth and, after re-fueling, quickly be re-launched, the cost for a trip to the ISS could drop to as low as from $5 million to $7 million.

Factoring in NASA’s financial assistance in developing the Falcon 9 rocket and the cost of the 12-launch contract, the space agency is paying SpaceX about $166 million per launch to the ISS. By contrast, estimates for the cost of sending the recently retired space shuttle to the ISS range as high as $1.5 billion, including the money spent developing and building the shuttles.

It was a modestly positive day for the Canadian preferred share market, with PerpetualDiscounts gaining 1bp and both FixedResets and DeemedRetractibles up 5bp. Volatility was higher than usual, with a number of FixedReset winners. Volume was below average.

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices

Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)
Median
YTW
Median
Average
Trading
Value
Median
Mod Dur
(YTW)
Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 -1.1447 % 2,424.3
FixedFloater 4.69 % 4.24 % 33,989 17.97 1 0.3469 % 3,660.0
Floater 3.00 % 3.10 % 49,343 19.48 4 -1.1447 % 2,617.6
OpRet 4.37 % -4.40 % 34,011 0.13 2 -0.0388 % 2,690.0
SplitShare 4.81 % 4.38 % 65,065 4.24 5 0.0159 % 3,085.4
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0388 % 2,459.8
Perpetual-Premium 5.55 % -4.35 % 107,247 0.09 13 -0.1299 % 2,383.5
Perpetual-Discount 5.43 % 5.36 % 120,916 14.58 23 0.0056 % 2,483.8
FixedReset 4.68 % 3.53 % 202,402 4.20 79 0.0459 % 2,532.6
Deemed-Retractible 5.03 % -0.21 % 150,981 0.12 42 0.0508 % 2,491.2
FloatingReset 2.64 % 2.44 % 199,414 4.11 5 -0.0080 % 2,480.0
Performance Highlights
Issue Index Change Notes
PWF.PR.A Floater -2.68 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-04-14
Maturity Price : 19.22
Evaluated at bid price : 19.22
Bid-YTW : 2.75 %
FTS.PR.G FixedReset 1.10 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-04-14
Maturity Price : 23.17
Evaluated at bid price : 24.89
Bid-YTW : 3.74 %
FTS.PR.H FixedReset 1.16 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-04-14
Maturity Price : 21.49
Evaluated at bid price : 21.84
Bid-YTW : 3.63 %
IFC.PR.C FixedReset 1.17 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-09-30
Maturity Price : 25.00
Evaluated at bid price : 26.00
Bid-YTW : 2.59 %
BAM.PR.T FixedReset 1.23 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-04-14
Maturity Price : 23.28
Evaluated at bid price : 24.70
Bid-YTW : 4.02 %
TRP.PR.C FixedReset 2.48 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-04-14
Maturity Price : 22.38
Evaluated at bid price : 22.72
Bid-YTW : 3.60 %
Volume Highlights
Issue Index Shares
Traded
Notes
RY.PR.Z FixedReset 273,946 RBC bought blocks of 12,400 and 10,000 from Scotia at 25.50 and crossed blocks of 50,000 and 20,000 at 25.54. Scotia crossed 25,000 at 25.50. TD crossed 100,000 at 25.52.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-05-24
Maturity Price : 25.00
Evaluated at bid price : 25.53
Bid-YTW : 3.46 %
CM.PR.L FixedReset 178,088 Called for redemption.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-05-30
Maturity Price : 25.00
Evaluated at bid price : 24.98
Bid-YTW : 4.92 %
TRP.PR.E FixedReset 108,000 Scotia crossed 24,400 at 25.45 and bought 12,900 from RBC and 10,000 from TD at the same price. Desjardins crossed 50,000 at the same price again.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-04-14
Maturity Price : 23.26
Evaluated at bid price : 25.41
Bid-YTW : 3.86 %
RY.PR.I FixedReset 84,950 Scotia crossed 39,600 at 25.60; TD crossed 41,000 at the same price.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-02-24
Maturity Price : 25.00
Evaluated at bid price : 25.59
Bid-YTW : 3.11 %
TD.PR.E FixedReset 82,100 Called for Redemption.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-05-30
Maturity Price : 25.00
Evaluated at bid price : 24.98
Bid-YTW : 4.76 %
ENB.PR.J FixedReset 77,926 TD crossed blocks of 10,000 and 50,000, both at 25.35.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-04-14
Maturity Price : 23.25
Evaluated at bid price : 25.26
Bid-YTW : 4.14 %
There were 26 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
PWF.PR.A Floater Quote: 19.22 – 20.00
Spot Rate : 0.7800
Average : 0.5839

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-04-14
Maturity Price : 19.22
Evaluated at bid price : 19.22
Bid-YTW : 2.75 %

ELF.PR.G Perpetual-Discount Quote: 21.34 – 21.73
Spot Rate : 0.3900
Average : 0.3061

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-04-14
Maturity Price : 21.34
Evaluated at bid price : 21.34
Bid-YTW : 5.60 %

BNS.PR.R FixedReset Quote: 25.58 – 25.84
Spot Rate : 0.2600
Average : 0.1828

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-01-26
Maturity Price : 25.00
Evaluated at bid price : 25.58
Bid-YTW : 3.28 %

TD.PR.S FixedReset Quote: 25.27 – 25.42
Spot Rate : 0.1500
Average : 0.0891

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2018-07-31
Maturity Price : 25.00
Evaluated at bid price : 25.27
Bid-YTW : 3.08 %

TD.PR.O Deemed-Retractible Quote: 25.28 – 25.43
Spot Rate : 0.1500
Average : 0.0913

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-05-14
Maturity Price : 25.25
Evaluated at bid price : 25.28
Bid-YTW : 0.79 %

BMO.PR.J Deemed-Retractible Quote: 25.84 – 25.99
Spot Rate : 0.1500
Average : 0.0939

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-05-14
Maturity Price : 25.50
Evaluated at bid price : 25.84
Bid-YTW : -4.65 %

New Issue: BMO FixedReset, 4.00%+233, NVCC-Compliant

Monday, April 14th, 2014

Bank of Montreal has announced:

an inaugural Basel III-compliant domestic public offering of $300 million of Non-Cumulative 5-year Rate Reset Class B Preferred Shares Series 27 (the “Preferred Shares Series 27”). The offering will be underwritten on a bought deal basis by a syndicate led by BMO Capital Markets. The Bank has granted to the underwriters an option to purchase up to an additional $50 million of the Preferred Shares Series 27 exercisable at any time up to two days before closing.

The Preferred Shares Series 27 will be issued to the public at a price of $25.00 per Preferred Share Series 27 and holders will be entitled to receive non-cumulative preferential fixed quarterly dividends for the initial period ending May 25, 2019 as and when declared by the board of directors of the Bank, payable in the amount of $0.25 per Preferred Share Series 27, to yield 4.00 per cent annually.

Subject to regulatory approval, on or after May 25, 2019, the Bank may redeem the Preferred Shares Series 27, in whole or in part at par. Thereafter, the dividend rate will reset every five years to be equal to the 5-Year Government of Canada Bond Yield plus 2.33 per cent. Subject to certain conditions, holders may elect to convert any or all of their Preferred Shares Series 27 into an equal number of Non-Cumulative Floating Rate Class B Preferred Shares Series 28 (“Preferred Shares Series 28”) on May 25, 2019 and on May 25 of every fifth year thereafter. Holders of the Preferred Shares Series 28 will be entitled to receive non-cumulative preferential floating rate quarterly dividends, as and when declared by the board of directors of the Bank, equal to the then 3-month Government of Canada Treasury Bill yield plus 2.33 per cent. Subject to certain conditions, holders may elect to convert any or all of their Preferred Shares Series 28 into an equal number of Preferred Shares Series 27 on May 25, 2024 and on May 25 of every fifth year thereafter.

The anticipated closing date is April 23, 2014. The net proceeds from the offering will be used by the Bank for general corporate purposes.

This was quickly followed up by:

Bank of Montreal (TSX:BMO)(NYSE:BMO) today announced that as a result of strong investor demand for its previously announced Basel III-compliant domestic public offering of $300 million of Non-Cumulative 5-year Rate Reset Class B Preferred Shares Series 27 (the “Preferred Shares Series 27”), the size of the offering has been increased to $500 million. As announced earlier today, the revised offering will be underwritten on a bought deal basis by a syndicate led by BMO Capital Markets.

To my chagrin, they did not announce the redemption of BMO.PR.O, a FixedReset, 6.50%+458 which is callable on May 25. Given the fat Issue Reset Spread, a call is as close to certain as one ever gets in this business … but I guess I’ll just have to keep checking their news releases every day.

The new issue is provisionally rated Pfd-2 by DBRS:

DBRS has today provisionally rated Bank of Montreal’s (the Bank) Non-Cumulative 5-Year Rate Reset Class B Preferred Shares, Series 27 (NVCC Preferred Shares Series 27 or Series 27) at Pfd-2 with a Stable trend.

DBRS assigned the NVCC Preferred Shares Series 27 a rating equal to the Bank’s intrinsic assessment less four rating notches because the Series 27 has only an Office of the Superintendent of Financial Institutions (OSFI)-compliant non-viable contingent capital (NVCC) trigger, which is consistent with the OSFI requirements for NVCC instruments, and no additional triggers.

The rating is consistent with DBRS’s criteria titled, “Rating Bank Capital Securities — Subordinated, Hybrid, Preferred & Contingent Capital Securities.”

… and P-2(low) by S&P:

Standard & Poor’s Ratings Services today said it assigned its ‘BBB-‘ global scale and ‘P-2(Low)’ Canada scale ratings to Bank of Montreal’s (BMO) C$300 million non-cumulative five-year rate reset class B preferred shares series 27. The issuer credit rating on BMO is A+/Stable/A-1.

The ‘BBB-/P-2(Low)’ ratings stand three notches below BMO’s stand-alone credit profile (SACP), incorporating:
  • •A deduction of two notches the minimum downward notching from the SACP under our criteria for hybrid capital instruments; and
  • •A deduction of an additional notch to reflect that the preferred shares feature a non-viability contingent conversion trigger provision. Should a trigger event occur (as defined by the Office of the Superintendent of Financial Institutions’ [OSFI] guideline for Capital Adequacy Requirements, Chapter 2), each preferred share outstanding will automatically and immediately be converted, without the holder’s consent, into a number of fully paid and freely tradable common shares of the bank determined in accordance with a conversion formula.

LFE.PR.B Monthly Retraction Price

Monday, April 14th, 2014

The calculation of the monthly retraction price stated in the Annual Information Form:

Except as noted below, holders of Preferred Shares whose Shares are surrendered for retraction will be entitled to receive a price per Share (the “Preferred Share Retraction Price”) equal to the sum of (i) the sum of (A) the lesser of (x) $10.00 and (y) 98% of the net asset value per Unit determined as of the Retraction Date, less in either case the cost to the Company of the purchase of a Class A Share in the market for cancellation and less any other applicable costs, plus (B) an amount equal to any accrued and unpaid dividends on each Preferred Share to but excluding the applicable Retraction Date, plus (ii) all declared and unpaid dividends (“Dividends Owing”) on a Preferred Share to be retracted to but excluding the applicable Retraction Date.

… differs from that specified in the prospectus:

Holders retracting a Preferred Share will be entitled to receive an amount per Preferred Share equal to the lesser of (i) $10.00; and (ii) 96% of the Net Asset Value determined as of the Retraction Date less the cost to the Company of the purchase of a Class A Share in the market for cancellation.

Complicating matters – there’s always a complication! – was the 2012 Capital Reorganization, in which:

amend the Articles of the Company to decrease the discount to net asset value applicable to monthly redemptions of shares from 4% to 2% and provide for the amount of this reduced discount to be paid to Quadravest, and not retained by the Company;

I sent an inquiry to the company:

I am concerned regarding the phrase ” less in either case ” found in the AIF version. If, for instance, there was a situation in which NAVPU was $12 and the market price of a Class A Share was $1, it would appear that this $1 for the Class A share would be deducted from ” (x) $10.00 ” and thus [assuming that amount (ii) = 0] the Preferred Share Retraction Price would be $9.00, whereas under the prospectus language, the Preferred Share Retraction Price would be $10.00.

To but it another way, the AIF phrase “less in either case” appears to apply to both case (x) and case (y), which differs from the prospectus language, unamended by the reorganization, and which doesn’t make a lot of sense anyway.

Can you clarify the calculation of the Preferred Share Retraction Price?

The company responded very quickly and efficiently:

Payment for LFE.PR.B shares retracted would be the lessor of (a) $10 or (b) 98% of the net asset value per unit, less the cost to buy a LFE share in the market for cancellation.

In your example below, based on a net asset value per unit of $12, the calculation (b) above would be: (98% x $12) less $1 = $10.76. Please note there could also be a maximum of 1% charged should the fund have to unwind securities in the event of a large volume of retractions in a particular month.

Therefore the lessor of (a) and (b) would still be $10.

I don’t expect the monthly retraction option to be viable unless there is another market crash, but it’s always nice to have these things nailed down in advance.

April PrefLetter Released!

Monday, April 14th, 2014

The April, 2014, edition of PrefLetter has been released and is now available for purchase as the “Previous edition”. Those who subscribe for a full year receive the “Previous edition” as a bonus.

The regular appendices reporting on DeemedRetractibles and FixedResets are included.

PrefLetter may now be purchased by all Canadian residents.

Until further notice, the “Previous Edition” will refer to the April, 2014, issue, while the “Next Edition” will be the May, 2014, issue, scheduled to be prepared as of the close May 9 and eMailed to subscribers prior to market-opening on May 12.

PrefLetter is intended for long term investors seeking issues to buy-and-hold. At least one recommendation from each of the major preferred share sectors is included and discussed.

It appears that the server problems that have bedevilled the site recently have been solved … well, perhaps, not so much ‘solved’ as ‘worked around’. If you deserve a link but did not get a link, please let me know.

Note: My verbosity has grown by such leaps and bounds that it is no longer possible to deliver PrefLetter as an eMail attachment – it’s just too big for my software! Instead, I have sent passwords – click on the link in your eMail and your copy will download.

Note: The PrefLetter website has a Subscriber Download Feature. If you have not received your copy, try it!

Note: PrefLetter eMails sometimes runs afoul of spam filters. If you have not received your copy within fifteen minutes of a release notice such as this one, please double check your (company’s) spam filtering policy and your spam repository – there are some hints in the post Sympatico Spam Filters out of Control. If it’s not there, contact me and I’ll get you your copy … somehow!

Note: There have been scattered complaints regarding inability to open PrefLetter in Acrobat Reader, despite my practice of including myself on the subscription list and immediately checking the copy received. I have had the occasional difficulty reading US Government documents, which I was able to resolve by downloading and installing the latest version of Adobe Reader. Also, note that so far, all complaints have been from users of Yahoo Mail. Try saving it to disk first, before attempting to open it.

Note: There have been other scattered complaints that double-clicking on the links in the “PrefLetter Download” email results in a message that the password has already been used. I have been able to reproduce this problem in my own eMail software … the problem is double-clicking. What happens is the first click opens the link and the second click finds that the password has already been used and refuses to work properly. So the moral of the story is: Don’t be a dick! Single Click!

Note: Assiduous Reader DG informs me:

In case you have any other Apple users: you need to install a free App from the apple store called “FileApp”. It comes with it’s own tutorial and allows you to download and save a PDF file.

BK.PR.A 2013 Annual Report

Sunday, April 13th, 2014

Canadian Banc Corp. has released its Annual Report to November 30, 2013.

BK / BK.PR.A Performance
Instrument One
Year
Three
Years
Five
Years
Whole Unit +18.69% +9.18% +14.91%
BK +32.42% +13.51% +26.83%
BK.PR.A +5.12% +5.12% +5.12%
S&P/TSX Financial Index +25.17% +12.64% +15.34%

Figures of interest are:

MER: 1.43% of the whole unit value, excluding one time initial offering expenses.

Average Net Assets: We need this to calculate portfolio yield; unfortunately the number of units changesd, which makes it more approximate. The Total Assets of the fund at year end was $134.0-million, compared to $129.5-million a year prior, so call it an average of $132.25-million. Total Preferred Share Distribution in 2013 was $3.152-million, at $0.50/share implies an average of 6.304-million units, at an average NAV of ((22.33 + 19.93) / 2 = 20.83, so call it $131.3-million. Close enough! Call the Average Net Assets $132-million.

Underlying Portfolio Yield: Investment income of $4.905-million received divided by average net assets of $132-million is 3.7%.

Income Coverage: Net investment income of $4.905-million less expenses before issuance fees of $1.868-million is $3.038-million, to cover preferred dividends of 3.152-million is about 96%.

FFN.PR.A to Vote on Term Extension

Sunday, April 13th, 2014

Financial 15 Split Corp. II has announced:

that a special meeting of shareholders will be held at 12:00 p.m. (Eastern standard time) on May 14, 2014.

The primary purpose of the meeting is to consider a special resolution to allow shareholders to continue their investment beyond the currently scheduled termination date of December 1, 2014. Under the primary proposal, the initial termination date would be extended by 5 years to December 1, 2019 (subject to further extensions of 5 years each thereafter).

Full details of the meeting will be contained in the Notice of Meeting and Management Information Circular which will be mailed on April 17, 2014 to all shareholders of record on April 9, 2014.

The Company invests in a high quality portfolio consisting of 15 financial services companies made up of Canadian and U.S. issuers as follows: Bank of Montreal, The Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Royal Bank of Canada, Toronto-Dominion Bank, National Bank of Canada, Manulife Financial Corporation, Sun Life Financial, Great-West Lifeco, CI Financial Income Fund, Bank of America, Citigroup Inc., Goldman Sachs Group, JP Morgan Chase & Co. and Wells Fargo & Co.

I will discuss the matter further when more details are available.

FTN.PR.A to Vote on Term Extension

Sunday, April 13th, 2014

Financial 15 Split Corp has announced:

that a special meeting of shareholders will be held at 11:30 a.m. (Eastern standard time) on May 14, 2014.

The primary purpose of the meeting is to consider a special resolution to allow shareholders to continue their investment beyond the currently scheduled termination date of December 1, 2015. Under the primary proposal, the initial termination date would be extended by 5 years to December 1, 2020 (subject to further extensions of 5 years each thereafter).

Full details of the meeting will be contained in the Notice of Meeting and Management Information Circular which will be mailed on April 17, 2014 to all shareholders of record on April 9, 2014.

The Company invests in a high quality portfolio consisting of 15 financial services companies made up of Canadian and U.S. issuers as follows: Bank of Montreal, The Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Royal Bank of Canada, Toronto-Dominion Bank, National Bank of Canada, Manulife Financial Corporation, Sun Life Financial, Great-West Lifeco, CI Financial Income Fund, Bank of America, Citigroup Inc., Goldman Sachs Group, JP Morgan Chase & Co. and Wells Fargo & Co.

I will discuss this vote further when more details become available.

DF.PR.A 2013 Annual Report

Sunday, April 13th, 2014

Dividend 15 Split Corp. II has released its Annual Report to November 30, 2013.

DF / DF.PR.A Performance
Instrument One
Year
Three
Years
Five
Years
Whole Unit +22.09% +11.10% +13.73%
DF.PR.A +5.38% +5.38% +5.38%
DF +56.13% +21.48% 29.46%
S&P/TSX 60 Index +13.40% +4.36% +9.65%

Using the S&P TSX 60 index rather than “Dividend Aristocrats” seems a little odd to me – but we’ll let them choose their benchmark!

Figures of interest are:

MER: 1.28% of the whole unit value (estimated from 2012 values; the 2013 figure is not comparable due to a secondary share offering that spanned 2013 year end).

Average Net Assets: We need this to calculate portfolio yield. No change in Number of Units Outstanding, so the average of the beginning and end of year figures can be used: $81.2-million

Underlying Portfolio Yield: Dividends received of 3,075,803 divided by average net assets of 81.2-million is 3.8%

Income Coverage: Net Investment Income of 1,757,682 divided by Preferred Share Distributions of 2,670,393 is 66%.

April 11, 2014

Friday, April 11th, 2014

5Banc Split Inc., proud issuer of FBS.PR.C, was confirmed at Pfd-2 by DBRS:

The Preferred Shares pay a quarterly fixed, cumulative, preferential distribution of $0.11875 per Preferred Share yielding 4.75% per annum on their initial issue price. Based on the current dividend yields on the underlying banks, the Preferred Share dividend coverage ratio is approximately 2.2 times. Holders of the Capital Shares are expected to receive all excess dividend income after the Preferred Share distributions and other expenses of the Company have been paid.

Since the rating was upgraded in April 2013, the Company’s performance has been positive, with net asset values increasing steadily. Downside protection available to holders of the Preferred Shares was 68.6% as of April 3, 2014.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts gaining 3bp, while FixedResets and DeemedRetractibles were both off 5bp. Volatility was minimal. Volume was low, but the highlights are comprised entirely of FixedResets.

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices

Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)
Median
YTW
Median
Average
Trading
Value
Median
Mod Dur
(YTW)
Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 0.3830 % 2,452.4
FixedFloater 4.71 % 4.25 % 34,316 17.96 1 0.3810 % 3,647.3
Floater 2.97 % 3.09 % 49,764 19.53 4 0.3830 % 2,647.9
OpRet 4.36 % -4.15 % 32,066 0.14 2 -0.0388 % 2,691.1
SplitShare 4.81 % 4.42 % 60,253 4.25 5 0.0239 % 3,084.9
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0388 % 2,460.7
Perpetual-Premium 5.54 % -5.86 % 106,003 0.09 13 0.0181 % 2,386.6
Perpetual-Discount 5.43 % 5.36 % 122,435 14.60 23 0.0262 % 2,483.7
FixedReset 4.68 % 3.63 % 203,923 4.20 79 -0.0484 % 2,531.4
Deemed-Retractible 5.03 % -0.19 % 146,820 0.13 42 -0.0469 % 2,489.9
FloatingReset 2.64 % 2.46 % 206,782 4.11 5 0.0159 % 2,480.2
Performance Highlights
Issue Index Change Notes
BAM.PR.X FixedReset 1.12 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-04-11
Maturity Price : 21.36
Evaluated at bid price : 21.67
Bid-YTW : 4.20 %
PWF.PR.A Floater 1.70 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-04-11
Maturity Price : 19.75
Evaluated at bid price : 19.75
Bid-YTW : 2.68 %
Volume Highlights
Issue Index Shares
Traded
Notes
BAM.PR.R FixedReset 189,665 RBC crossed blocks of 140,800 and 25,000, both at 25.30.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-04-11
Maturity Price : 23.65
Evaluated at bid price : 25.33
Bid-YTW : 3.96 %
TRP.PR.E FixedReset 101,900 Scotia crossed 80,000 at 25.45.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-04-11
Maturity Price : 23.26
Evaluated at bid price : 25.42
Bid-YTW : 3.86 %
RY.PR.Z FixedReset 57,135 TD crossed 50,000 at 25.65.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-05-24
Maturity Price : 25.00
Evaluated at bid price : 25.64
Bid-YTW : 3.63 %
MFC.PR.L FixedReset 53,680 Nesbitt crossed 50,000 at 24.80.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.81
Bid-YTW : 4.02 %
BNS.PR.Z FixedReset 37,683 TD crossed 25,000 at 24.37.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.36
Bid-YTW : 3.53 %
BAM.PR.X FixedReset 34,899 RBC crossed 30,200 at 21.60.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-04-11
Maturity Price : 21.36
Evaluated at bid price : 21.67
Bid-YTW : 4.20 %
There were 18 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
BAM.PR.R FixedReset Quote: 25.33 – 25.55
Spot Rate : 0.2200
Average : 0.1356

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-04-11
Maturity Price : 23.65
Evaluated at bid price : 25.33
Bid-YTW : 3.96 %

CU.PR.G Perpetual-Discount Quote: 21.80 – 22.10
Spot Rate : 0.3000
Average : 0.2218

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-04-11
Maturity Price : 21.51
Evaluated at bid price : 21.80
Bid-YTW : 5.21 %

IAG.PR.E Deemed-Retractible Quote: 26.07 – 26.25
Spot Rate : 0.1800
Average : 0.1198

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-12-31
Maturity Price : 25.25
Evaluated at bid price : 26.07
Bid-YTW : 5.06 %

GWO.PR.H Deemed-Retractible Quote: 23.01 – 23.25
Spot Rate : 0.2400
Average : 0.1811

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.01
Bid-YTW : 5.91 %

FTS.PR.F Perpetual-Discount Quote: 24.30 – 24.47
Spot Rate : 0.1700
Average : 0.1127

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-04-11
Maturity Price : 24.00
Evaluated at bid price : 24.30
Bid-YTW : 5.09 %

IFC.PR.C FixedReset Quote: 25.70 – 25.99
Spot Rate : 0.2900
Average : 0.2336

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-09-30
Maturity Price : 25.00
Evaluated at bid price : 25.70
Bid-YTW : 3.08 %