RY.PR.I To Reset at 3.52%; RY.PR.L at 4.26%

Royal Bank of Canada has announced:

the applicable dividend rates for its Non-Cumulative 5-Year Rate Reset First Preferred Shares Series AJ (the “Series AJ shares”) and Series AL (the “Series AL shares”) and Non-Cumulative Floating Rate First Preferred Shares Series AK (the “Series AK shares”) and Series AM (the “Series AM shares”).

With respect to any Series AJ and Series AL shares that remain outstanding after February 24, 2014, holders of the Series AJ and Series AL shares will be entitled to receive quarterly fixed non-cumulative preferential cash dividends, as and when declared by the Board of Directors of the Royal Bank of Canada, subject to the provisions of the Bank Act (Canada).

The dividend rate for the 5-year period from and including February 24, 2014 to but excluding February 24, 2019 will be 3.52% for Series AJ shares, being equal to the 5-Year Government of Canada bond yield determined as of January 24, 2014 plus 1.93%, as determined in accordance with the terms of the Series AJ shares.

The dividend rate for the 5-year period from and including February 24, 2014 to but excluding February 24, 2019 will be 4.26% for Series AL shares, being equal to the 5-Year Government of Canada bond yield determined as of January 24, 2014 plus 2.67%, as determined in accordance with the terms of the Series AL shares.

With respect to any Series AK shares that may be issued on February 24, 2014, holders of the Series AK shares will be entitled to receive quarterly floating rate non-cumulative preferential cash dividends, calculated on the basis of the actual number of days elapsed in such quarterly period divided by 365, as and when declared by the Board of Directors of Royal Bank of Canada, subject to the provisions of the Bank Act (Canada). The dividend rate for the floating rate period from and including February 24, 2014 to but excluding May 24, 2014 will be 2.82%, being equal to the 3-month Government of Canada Treasury Bill yield determined as of January 24, 2014 plus 1.93%, as determined in accordance with the terms of the Series AK shares.

With respect to any Series AM shares that may be issued on February 24, 2014, holders of the Series AM shares will be entitled to receive quarterly floating rate non-cumulative preferential cash dividends, calculated on the basis of the actual number of days elapsed in such quarterly period divided by 365, as and when declared by the Board of Directors of Royal Bank of Canada, subject to the provisions of the Bank Act (Canada). The dividend rate for the floating rate period from and including February 24, 2014 to but excluding May 24, 2014 will be 3.56%, being equal to the 3-month Government of Canada Treasury Bill yield determined as of January 24, 2014 plus 2.67%, as determined in accordance with the terms of the Series AM shares.

Beneficial owners of Series AJ shares and Series AL shares who wish to exercise their conversion rights should communicate as soon as possible with their broker or other nominee to obtain instructions for exercising such right on or prior to the deadline for notice of intention to convert, which is 5:00 p.m. (EST) on February 10, 2014.

These issues were last mentioned on PrefBlog when the extension became official.

I make no recommendation regarding whether or not to convert. Strong Pair theory and its calculator imply that the expected average 3-Month T-Bill rate over the next five years will be about 1.90% (compared with the current 0.90%) and I have no strong feelings that this is too high or too low. Investors should make a decision based on the purpose of the issue in their portfolio.

2 Responses to “RY.PR.I To Reset at 3.52%; RY.PR.L at 4.26%”

  1. reikreik70 says:

    Hello.

    I have a question about both of these.

    Above you mention “The dividend rate for the 5-year period from and including February 24, 2014 to but excluding February 24, 2019 will be 3.52% for Series AJ shares, being equal to the 5-Year Government of Canada bond yield determined as of January 24, 2014 plus 1.93%, as determined in accordance with the terms of the Series AJ shares.

    The dividend rate for the 5-year period from and including February 24, 2014 to but excluding February 24, 2019 will be 4.26% for Series AL shares, being equal to the 5-Year Government of Canada bond yield determined as of January 24, 2014 plus 2.67%, as determined in accordance with the terms of the Series AL shares.”

    so its mentioned that they must redeem prior to jan 31, 2022, so is it possible for royal bank to reset both of these on feb 24, 2019 if the rates are attractive to rates on feb 24, 2019 and then redeem them before the 5 year reset of feb 24, 2024 (assuming they reset again here) in order to satisfy in order to be complaint.

    Or may they only reset if the new 5 year period completes before jan 31, 2022. Im just trying to figure out the maturity on these 2 resets – would it be feb 24,2019 because they cant reset again or could it still be jan 31, 2022 because they could reset again on feb 24,2019 and then redeem on jan 31, 2022 to be compliant?????

    it makes a difference In duration and stock action if maturity is early 2019 versus early 2022.

    thanks Reik

  2. jiHymas says:

    so its mentioned that they must redeem prior to jan 31, 2022, so is it possible for royal bank to reset both of these on feb 24, 2019 if the rates are attractive to rates on feb 24, 2019 and then redeem them before the 5 year reset of feb 24, 2024 (assuming they reset again here) in order to satisfy in order to be complaint.

    Or may they only reset if the new 5 year period completes before jan 31, 2022. Im just trying to figure out the maturity on these 2 resets – would it be feb 24,2019 because they cant reset again or could it still be jan 31, 2022 because they could reset again on feb 24,2019 and then redeem on jan 31, 2022 to be compliant?????

    There is no absolute requirement that these non-compliant issues get redeemed ever. The only change we can count on is that as of January 31, 2022 (at the latest), the banks may not count these non-compliant issues as part of Tier 1 Capital.

    It is assumed that this change will change the character of the issues, from the perspective of the bank, from “cheap equity” to “expensive debt”; and, since the debt will be expensive, it will be redeemed. However, it is by no means assured that market conditions will continue to be such that the debt is indeed expensive until the end of eternity. Maybe in the next few years, conditions will change so that it’s cheap debt! Who knows?

    So while I am comfortable with the analysis based on a 2022-1-31 call, I recognize that I may not always be comfortable with this idea; if the market changes, I may have to change my model.

    You should also recognize that this particular issue cannot actually be called on 2022-1-31. According to the prospectus, it may only be called on its exchange dates; the next one is 2019-2-24 and the one after that is 2024-2-24. So if they don’t call the issue in 2019, it will remain outstanding past what I am using now as the effective maturity date.

    One reason to allow it to reset in 2019 is given above – market conditions might have changed so that it’s actually cheap debt. Alternatively, equity and equity equivalents might be so expensive for the bank in 2019 that they’re willing to endure two years of “expensive debt” in the period 2022-24 in order to obtain the benefit of three years of “cheap equity” in the period 2019-22.

    Another possibility is that they could have a shareholder vote to change the terms of the issue to make them compliant; this is actually a procedure that has been commended by OSFI. They would have to pay a sweetener to get a favourable vote (say, maybe, a special dividend of fifty cents, declared immediately following a change of terms), but it might be worth it.

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