Bank of Montreal has announced:
a domestic public offering of $200 million of Non-Cumulative Perpetual Class B Preferred Shares Series 15 (the “Preferred Shares”). 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 exercisable at any time up to two days before closing.
The Preferred Shares will be issued to the public at a price of $25.00 per Preferred Share and holders will be entitled to receive non-cumulative preferential quarterly dividends as and when declared by the board of directors of the Bank, payable in the amount of $0.3625 per Preferred Share, to yield 5.80 per cent annually.
Subject to regulatory approval, on or after May 25, 2013, the Bank may redeem the Preferred Shares in whole or in part at a declining premium.
The anticipated closing date is April 2, 2008. The net proceeds from the offering will be used by the Bank for general corporate purposes.
Issue: Non-Cumulative Perpetual Class B Preferred Shares Series 15
Size: 8-million shares @ $25; underwriters’ greenshoe for an additional 2-million shares.
Dividends: 5.80% p.a., payable quarterly. Long first dividend of $0.57603 payable August 25, based on closing of April 2.
Redemption at Bank’s option: Redeemable at $26.00 commencing 2013-5-25; redemption price declines by $0.25 every May 25 until May 25, 2017; redeemable at $25.00 thereafter.
Ratings: S&P, P-1(low); DBRS, Pfd-1; Moody’s, Aa3
Priority: parri passu with all other prefs.
… More Later …
Later, More: Curve Price (the fair value, which does not include dynamic factors) as of the close 2008-3-24 is $25.43.
Later, Even More: BMO has been busy today! They’ve just announced a $600-million sub-debt issue at Canadas + 260bp, stepping up to BAs+200 March 28, 2018 (at which time it is callable at par), maturing March 28, 2023. Prospectus Supplement dated 2008-3-25; 10-year Canadas are now at 3.47%, so say this stuff comes with 6.07-ish coupon.
Later, So Much More You Just Can’t Believe It!: I am advised the BMO sub-debt issue got done at a size of $900-million, Coupon 6.17%, Price 99.97 to give a yield-to-hoped-for-and-very-well-advertised-call of 6.174%,
Later…: CurvePrice as of the close 2008-3-25 is 25.38.
Update, 2008-3-28: There have been some comments made about BMO.PR.K falling out of bed, with speculation about the implications for the opening price of the issue. First, let’s look at the BMO comparables:
| BMO Perps at Close 2008-3-27 | ||||
| Issue | Quote | Dividend | Pre-tax Bid YTW |
Curve Price |
| BMO.PR.H | 23.23-54 | 1.325 | 5.73% | 23.89 |
| BMO.PR.J | 19.81-87 | 1.125 | 5.75% | 20.76 |
| BMO.PR.K | 22.35-54 | 1.3125 | 5.95% | 23.74 |
| BMO.PR.? | 25.00 (Assumed) |
1.45 | 5.82% | 25.26 |
Assiduous Readers will be familiar with my article on convexity, in which I estimate that a 15bp yield pickup is required to make holding a near-par instrument worth-while. If we may assume a 5.75% base yield for deep-discount BMO prefs, this implies a 5.90% “fair-ish, sorta” yield for the new BMO issue, which implies a price of about 24.60. We shall see!
Note that the convexity stuff is considered a dynamic factor and is not incorporated into the evaluation of curvePrice, which is restricted to static factors.
Update, 2008-3-31: Quarter-end was a bad day thanks to the National Bank 6.00% Perps! Curve price at the close of business was 25.09.
Update, 2008-4-1: Closes tomorrow. Curve price at the close today was 25.08.
Hi guys . . . prophetic? . . . or morbid? . . . I know, jh thinks it’s good . . . something about getting more eggs or something like that . . . sit back, put your tray tables in an upright position, and get prepared . . . for a rough landing . . .
madequota
1 hour later
OK, this is pretty good . . . it’s been an hour since “prefoshima”, and the market’s absorbing this one better than most others. The big 5’s issues are all down, but only by nickels and dimes, and volume is non-existant.
The 5.6’s are still hanging around par, so could this 5.8 thing actually open at a premium? Should we actually buy the IPO? ~ waking up abruptly~ I almost forgot . . . this is just a bad dream!
Is it possible that pref investors have been kicked in the teeth so frequently, that they’re getting used to it? Unfortunately; I hope so.
madequota
I think it’s pretty damn good. 6000 worth of pretty damn good.
ry.pr.a last @ 20.80, down .49
fts.pr.f last @ 21.41, down .69
slf.pr.d last @ 19.70, down .98
ry.pr.f last @ 20.45, down .55
I think it’s pretty damn bad. more than 6000 worth of pretty damn bad.
BMO disclosed that the Apex / Sitka situation was going to decrease their Tier 1 Ratio by about 25bp.
At year end, Risk Weighted Assets were $178,687-million and the Tier 1 Ratio was 9.51% … total Tier 1 Capital was therefore $16,993-million. If we assume that the entire 25bp change was due to write-offs (not a very good assumption, since we know that they’ve increased lending to the trusts and increased their lines, as well as writing off some investment), we see that a new ratio of 9.25% implies new Tier 1 Capital of $16,529-million, a decline of $464-million.
So this issue, even if the greenshoe is fully exercised, will only restore about half the damage done by Apex/Sitka alone.
Golly, BMO … I’d love to make up the difference … but money’s pretty tight right now and I’d have to cash in other investments … how about 6%?
wanna bet that on April 2 there isn’t a nice pop, particularly in view of the the rumours I hear that BOC is looking at an aggressive 150 BP cut between now and June?
you know what? it could be BMO @ 6%, but I’m waiting for RBC and CIBC to weigh in. They haven’t done a pref issue for eons, and both have the potential to keep the party going. You will almost certainly get your 6%, and prime will be below 5 when it happens!
Can someone please tell me why losing my shirt on pref holdings is a good thing? I just can’t get used to staring at a red screen (especially when the rest of the market is green today)?
madequota
madequota:
I’m truly sorry you’re losing your shirt on your prefs (no sarcasm). Maybe you should give Mr. Hymas your entire account to manage, and relax.
I’ve been mulling a bit on Madequota’s post. It bothers me that he is so upset. Unless he is buying on margin, I truly don’t understand why he doesn’t have an attitude towards his prefs similar to that which he would have to his bonds, namely, that as long as the credit is good until the Call date (or worst case beyond), the favourable tax status of canadian prefers should reassure him that he is getting, all other things being equal in a low rate enviroment, an extremely nice return on his investments. Waterfall your purchases…waterfall your duration, keep an eye on the credit quality, and don’t trade the damn things so much, and benign karma shall be yours
I want karma; yes, I do. And, like you, I don’t believe in margin.
The reason I’m so upset is not with the short-term paper loss situation. I’m upset because, as I mentioned yesterday, the banks are printing pref stock like monopoly money. If you’re right and the bank rate continues to go down big [even if it goes down small], then 5.8%, tax friendly prefs are a great thing. But to BMO anyway, it makes more sense to sell 5.8% money, than to buy it. JH would make the point about Tier 1 ratios, etc. At the end of the day, they’re still “borrowing” from you at 5.8%, and “lending” to you at 5.25%. Tier 1 or otherwise, this makes no sense to me, and things that make no sense . . . are upsetting.
madequota
p.s. I’m waiting for the 6% prefs from RBC anyway!
I’m waiting for RBC and CIBC to weigh in.
As of year-end, RY had only $10-million capacity for pref issuance … they basically filled up on a very opportunistic basis at 4.5% and 4.45% last year, with the last slice being the unpopular RY.PR.G issue. I’ll bet their CFO made rather a point of this last October when discussing bonus!
CM had $218-million capacity, but capacity calculations are complicated by the equity issue and write-downs.
Both these figures will have been substantially increased in the interim by OSFI’s increase of allowable prefs to 30% from 25% of Tier 1 capital; if we look at the year-end figures and make this adjustment and no other, we find that RY’s capacity has increased by $1,671-million and CM’s by $900-million. So, yup, they can still issue in size.
I suggest that TD and BNS are more likely sources, however, based on their relative lack of exposure to the funding source.
Look at the bright side, madequota … a lot of issuers are going ex-dividend this week (CM, BNS, ELF …) … you’ll be able to buy a lot more shares when you reinvest!
As Queen Victoria said, when advising a daughter about the latter’s impending wedding night, “Just lie back, close your eyes, and think of England.” So too, with prefs, just lie back, close your eyes and think of the spread (ahem).
kaspu; I’ve never thought of pref investing as being similar to being screwed, but I guess I should have by now!
JH, the ex factor definitely makes March 28 a day of potential buying opps, doesn’t it?
I am seeing some volume support for most of the fiprefs at $20+, and most have yet to plunge through $21, so it might not be as bad as 5.8 could have made it.
SLF’s have been battered disproportionately all week; any theories on that set?
madequota
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Can someone explain how come the BMO 5.80% is trading below issue price while the TD 5.60% (TD.PR.Q) is trading at a premium ? Also, the BNS 5% resetable, is it because it will likely be called in 5 years time that gives it the premium? I will like to be enlightened, thanks!~
Kaitas21 – Thanks for dropping in!
Nobody will be able to give you a really good answer to that question, although there will be no shortage of plausible ones. The best bet for the BMO / TD conundrum is simply the market’s perception of
(a) credit risk, and
(b) issuance risk.
Concerns about the credit risk will be fuelled by the headlines and by BMO’s attempts in the last year to overtake CM for the “Most Likely to Walk into a Sharp Object” crown, what with their energy trading loss and the Apex / Sitka problems. They are also more involved in securitization than most Canadian banks, and securitization doesn’t give as much security as it used to!
Their issues look cheap if they keep their Pfd-1 rating, a little expensive if they were to be marked down to Pfd-1(low). While I hasten to point out that I have seen no indication that such a mark-down is contemplated, and it is my view that such a mark-down would not be warranted, there will be some who disagree.
From the issuance perspective … there may be players who look at the balance sheets and make a decision: TD has done their issuance, BMO will be back for more. Therefore, mark down BMO because of the risk that next month they’ll be issuing at 6.0%. This is not a conclusion I would endorse, nor is it one that I would trade on if I had made that conclusion, but again, there will be some who disagree.
It’s a very good question, though … if I have time after the close, I’ll post some comparables for the two banks and add a few comments.
The BNS issue … well, it’s probably benefitting from the financial strength of BNS, the relative scarcity of BNS prefs, and the reset provision. There are some significant players who absolutely will not buy straight perps, and they’ve had pretty slim pickings for the past few years.
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