BMO.PR.L, the 5.80% perp announced March 25 commenced trading today to less than rapturous applause, but enough volume to indicate that the underwriting was a modest success. Modest? Their press release indicated:
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.
… and I don’t see a press release on their site indicating that the option was picked up, nor is there anything on SEDAR.
On the ‘new issue’ post there was a question about the relative levels of the TD and BMO prefs … so here’s a table, as of the close 4/2:
| BMO / TD Perpetual Comparison | ||||
| Issue | Dividend | Quote, 4/2 | Pre-Tax Bid-YTW |
Curve Price |
| BMO.PR.J | 1.125 | 19.95-05 | 5.72% | 20.65 |
| BMO.PR.K | 1.3125 | 22.35-40 | 5.95% | 23.57 |
| BMO.PR.H | 1.325 | 23.23-39 | 5.74% | 23.72 |
| BMO.PR.L | 1.45 | 24.75-79 | 5.89% | 25.12 |
| TD.PR.O | 1.2125 | 22.80-00 | 5.41% | 22.29 |
| TD.PR.P | 1.3125 | 23.95-00 | 5.57% | 23.56 |
| TD.PR.Q | 1.40 | 25.11-15 | 5.67% | 24.58 |
| TD.PR.R | 1.40 | 24.86-88 | 5.68% | 24.50 |
Internally, the TD issues look well behaved … the yield spread between the discount issues and the near-par ones is not quite the 15bp I have previously suggested as a rule of thumb, but it’s close enough for horse-shoes. Note that TD.PR.Q, despite its 25.11-15 quote, may legitimately be considered a discounted issue because it’s full of dividend … a dividend of $0.35 goes ex on April 4. The BMO issues, internally, are less in accord with the rule, with BMO.PR.K looking about 20bp cheap to its peers.
If we mentally adjust the BMO.PR.K issue, we can see that BMO is trading to yield about 30bp more, pre-tax, than TD across the curve. This may be contrasted with the best available bond comparison, sub-debt, the recent BMO issue, trading with a presumed call in 2018, is quoted at 261bp over Canadas, while a TD issue trading to a presumed call in 2017 (5 years prior to maturity), is at 245bp over Canadas. So that’s 16bp over, pre-tax, for 10-year sub-debt, which makes a 30bp pre-tax spread on preferreds seem plausible.
Looking at a Pfd-1(low) issuer: NA.PR.K yields 5.98%, NA.PR.L yield 5.96 (no allowance for convexity here!) with a new issue currently being flogged at a 6.00% yield. The BMO issues are at least trading through the NAs.
All in all, given the preferred share quotes, and supported by evidence from the sub-debt market, I’d say the differences between BMO and TD preferred yields are well explained by a presumption of credit quality.
that’s a pretty good analysis, I’d say . . . a couple of adders that concern me: there’s still a pretty serious imbalance between bid volumes and offer volumes (skewed heavily to the sell side). Secondly, the lack of greenshoe point could imply a second closing is coming. (Remember when SLF did that at $24 . . . very ugly).
On the +ve side, BMO themselves are absent (almost totally) from the sell side; this could imply that the underwriters in general have indeed done an acceptable job liquidating this puppy. Secondly, the market (especially of the comparables you’ve mentioned) has held up nicely throughout this deal. Even NA is not doing badly.
PH may be right (did I just say that?) about this market possibly troughing out here.
madequota
jiHymas, was is the superlative for “enlightened” ? 🙂 thanks!
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