We had a look at POW.PR.A yesterday, as an example of an issue in the PerpetualPremium index with a negative YTW; now let’s look at RY.PR.K (previously commented upon on August 22). This is particularly interesting in light of the RY.PR.O redemption recently announced. RY.PR.O was also at an intermediate stage of its call schedule and also had a call price declining by $0.25 p.a. The important differences between these issues are:
- the “K” is retractable and is therefore included as debt on the balance sheet. RY.PR.O is perpetual and therefore may be included in Tier 1 Capital.
- the “K” has an annual dividend of $1.175; the “O” pays $1.375.
This issue was quoted at the close of business, 2006-10-19, at $25.66-62 and has the embedded option schedule:
- Redemption 2003-08-24 2004-08-23 26.000000
- Redemption 2004-08-24 2005-08-23 25.750000
- Redemption 2005-08-24 2006-08-23 25.500000
- Redemption 2006-08-24 2007-08-23 25.250000
- Redemption 2007-08-24 INFINITE DATE 25.000000
- Retraction 2008-08-24 INFINITE DATE 25.000000
So it is currently redeemable at $25.25 and, while one can never be absolutely certain of anything in this world, the idea that it will be redeemed prior to becoming retractible in 2008 is a safer bet than most.
These options, run through the HIMIPref™ software, give rise to the following optionCalculationList:
- Call 2006-11-18 YTM: -6.24 % [Restricted: -0.51 %] (Prob: 31.99 %)
- Call 2007-09-23 YTM: 2.61 % [Restricted: 2.42 %] (Prob: 1.14 %)
- Soft Maturity 2008-08-23 YTM: 3.64 % [Restricted: 3.64 %] (Prob: 66.87 %)
So HIMIPref™ is accounting for the possibility of an immediate call (one maturityNoticePeriod hence) at $25.25, which will result in a realized yield of -6.24%. This is a very odd issue, quite frankly! I noticed it when I was working on my article about Yield-to-Worst as a predictor of future returns (A Call, too, Harms) … at one of the year-ends studied it was among the issues with the lowest YTW but was not called, making my point a little less emphatic, but returning poorly over the ensuing year anyway. I drew attention at that point to the issue:
The other retractable in the low yield-to-worst lists for 2000-2002 that was not called was RY.PR.K. Although it managed to avoid the worst case scenario (a call nine months subsequent to its appearance in the list), it underperformed the index by a cumulative total of about 6% in the following three years. Clearly, dodging the redemption bullet was not, in and of itself, a great cause for celebration!
The continuing oddness can be illustrated over the past year by looking at a graph of the bid price over the past year. The high prices for this issue lead to YTWs that have been negative more often than not.
I don’t understand! Fortunately, however, I don’t need to understand. Knowing where to find the “Sell” button is good enough for me!