The Royal Bank announced today that RY.PR.O will be redeemed at a price of $25.50 on November 24, 2006.
This is an interesting decision on their part. As noted in my previous post on this topic, the issue pays $1.375 and the premium was declining by $0.25 annually – implying a net cost to Royal of $1.125 annually for the $25 capital, which is quite competitive.
I can only assume that they have a desired capital structure that includes some preferreds … and that the issue of RY.PR.B was an opportunistic move with the proceeds earmarked for this redemption.
RY.PR.O was quoted at the close yesterday, 2006-10-18, at $25.96-23, and had a pre-Tax YTW of -6.48% based on a call 2006-11-17 at $25.50 (OK, so the calculation was one week off! It’s still quite bad enough!). Had the issue survived until called 2008-09-23, the pre-tax YTM realized would have been 3.89 % – still pretty skimpy.
So there’s an objective lesson for all readers! It’s all very well to make elegant arguments that something won’t be called based on net cost to issuer, and there may often be a great deal of validity to these arguments. But plain old YTW remains a very powerful tool for avoiding mistakes and decisions made on any single element of valuation will often be in error.