New Issue: BMO FixedReset, 4.00%+233, NVCC-Compliant

Bank of Montreal has announced:

an inaugural Basel III-compliant domestic public offering of $300 million of Non-Cumulative 5-year Rate Reset Class B Preferred Shares Series 27 (the “Preferred Shares Series 27”). 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 Series 27 exercisable at any time up to two days before closing.

The Preferred Shares Series 27 will be issued to the public at a price of $25.00 per Preferred Share Series 27 and holders will be entitled to receive non-cumulative preferential fixed quarterly dividends for the initial period ending May 25, 2019 as and when declared by the board of directors of the Bank, payable in the amount of $0.25 per Preferred Share Series 27, to yield 4.00 per cent annually.

Subject to regulatory approval, on or after May 25, 2019, the Bank may redeem the Preferred Shares Series 27, in whole or in part at par. Thereafter, the dividend rate will reset every five years to be equal to the 5-Year Government of Canada Bond Yield plus 2.33 per cent. Subject to certain conditions, holders may elect to convert any or all of their Preferred Shares Series 27 into an equal number of Non-Cumulative Floating Rate Class B Preferred Shares Series 28 (“Preferred Shares Series 28”) on May 25, 2019 and on May 25 of every fifth year thereafter. Holders of the Preferred Shares Series 28 will be entitled to receive non-cumulative preferential floating rate quarterly dividends, as and when declared by the board of directors of the Bank, equal to the then 3-month Government of Canada Treasury Bill yield plus 2.33 per cent. Subject to certain conditions, holders may elect to convert any or all of their Preferred Shares Series 28 into an equal number of Preferred Shares Series 27 on May 25, 2024 and on May 25 of every fifth year thereafter.

The anticipated closing date is April 23, 2014. The net proceeds from the offering will be used by the Bank for general corporate purposes.

This was quickly followed up by:

Bank of Montreal (TSX:BMO)(NYSE:BMO) today announced that as a result of strong investor demand for its previously announced Basel III-compliant domestic public offering of $300 million of Non-Cumulative 5-year Rate Reset Class B Preferred Shares Series 27 (the “Preferred Shares Series 27”), the size of the offering has been increased to $500 million. As announced earlier today, the revised offering will be underwritten on a bought deal basis by a syndicate led by BMO Capital Markets.

To my chagrin, they did not announce the redemption of BMO.PR.O, a FixedReset, 6.50%+458 which is callable on May 25. Given the fat Issue Reset Spread, a call is as close to certain as one ever gets in this business … but I guess I’ll just have to keep checking their news releases every day.

The new issue is provisionally rated Pfd-2 by DBRS:

DBRS has today provisionally rated Bank of Montreal’s (the Bank) Non-Cumulative 5-Year Rate Reset Class B Preferred Shares, Series 27 (NVCC Preferred Shares Series 27 or Series 27) at Pfd-2 with a Stable trend.

DBRS assigned the NVCC Preferred Shares Series 27 a rating equal to the Bank’s intrinsic assessment less four rating notches because the Series 27 has only an Office of the Superintendent of Financial Institutions (OSFI)-compliant non-viable contingent capital (NVCC) trigger, which is consistent with the OSFI requirements for NVCC instruments, and no additional triggers.

The rating is consistent with DBRS’s criteria titled, “Rating Bank Capital Securities — Subordinated, Hybrid, Preferred & Contingent Capital Securities.”

… and P-2(low) by S&P:

Standard & Poor’s Ratings Services today said it assigned its ‘BBB-‘ global scale and ‘P-2(Low)’ Canada scale ratings to Bank of Montreal’s (BMO) C$300 million non-cumulative five-year rate reset class B preferred shares series 27. The issuer credit rating on BMO is A+/Stable/A-1.

The ‘BBB-/P-2(Low)’ ratings stand three notches below BMO’s stand-alone credit profile (SACP), incorporating:
  • •A deduction of two notches the minimum downward notching from the SACP under our criteria for hybrid capital instruments; and
  • •A deduction of an additional notch to reflect that the preferred shares feature a non-viability contingent conversion trigger provision. Should a trigger event occur (as defined by the Office of the Superintendent of Financial Institutions’ [OSFI] guideline for Capital Adequacy Requirements, Chapter 2), each preferred share outstanding will automatically and immediately be converted, without the holder’s consent, into a number of fully paid and freely tradable common shares of the bank determined in accordance with a conversion formula.

2 Responses to “New Issue: BMO FixedReset, 4.00%+233, NVCC-Compliant”

  1. reikreik70 says:

    Hello.

    I wonder if you are invested in other deemed retractibles that are perhaps “maybe to be called”. I just started reading here and Im trying to piece in some dates but I wonder if you missed an opportunity previously and have focused in on it moving forward.

    In this article you mention “To my chagrin, they did not announce the redemption of BMO.PR.O, a FixedReset, 6.50%+458 which is callable on May 25. Given the fat Issue Reset Spread, a call is as close to certain as one ever gets in this business … but I guess I’ll just have to keep checking their news releases every day. ……………………… now just a few days later for sure this issue was redeemed and it was no surprise – but what about the RY issues a few months back – namely ry-i and ry-j

    On jan 24 when it was announced that both were being reset “RY.PR.I To Reset at 3.52%; RY.PR.L at 4.26%” it was mentioned at the end that “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.”

    From some reading I certainly notice that you like to find suitable pairings within the same names and rotate around within to the one with value. – did the new issue in ry-z present you with some opportunities to re examine ry-i and ry-l and reconsider them for entry near jan 30, 2014 once ry-z opened up for trading – especially considering that the new NVCC issue has a lower then the non-compliant seasoned issues.

    Are there any other issues that are on the cusp of “maybe being redeemed” like cm-k. cm-m certainly should be redeemed but cm-k seems like its a maybe and if it doesn’t might it also zoom up like ry-l did considering its yield and higher rating (then new same name NVCC issues which have been assigned lower ratings).

    From what I have read – trading anomalies are explored and taken advantage of to augment returns – are there any other prefs that might be drifting down towards par (deemed retractibles) that might not actually get redeemed presenting an opportunity to be long and collect (low 2% return – I know this was addressed in a previous article) but also be in a position to collect much more should the issue not be redeemed (ry-l being a good example of this).

    Ill continue reading to learn more – Im in the US and so Canadian prefs are new to me, so if I have made some mistakes, let me know. Thank you, Reikreik

  2. jiHymas says:

    I wonder if you are invested in other deemed retractibles that are perhaps “maybe to be called”. I just started reading here and Im trying to piece in some dates but I wonder if you missed an opportunity previously and have focused in on it moving forward.

    Not really. My forte is yield-curve analysis and there are, to a greater or lesser extent, opportunities to hold issues that are priced off the yield curve or – more subtly – are priced in a section of the yield curve itself that is undervalued.

    Investing in issues that are “maybe to be called” requires that
    i) there is some degree of uncertainty as to whether or not the issue will be called
    ii) the market has it wrong
    iii) I have it right.

    That’s too complicated for me! There are, doubtless, many investors who are willing to take such views and are also willing to plunk down their (clients’) money that all three conditions are met. I’m not one of them.

    I will also note that the very existence of negative Yields-to-Worst are an indicator of the prevalence of this type of attitude; when you buy (or continue to hold) an issue with a negative YTW, you are implicitly saying that yes, you are aware that the issue could be called to your detriment, but you are willing to bet that there are other factors in play that make holding the issue worth the risk.

    From some reading I certainly notice that you like to find suitable pairings within the same names and rotate around within to the one with value. – did the new issue in ry-z present you with some opportunities to re examine ry-i and ry-l and reconsider them for entry near jan 30, 2014 once ry-z opened up for trading – especially considering that the new NVCC issue has a lower then the non-compliant seasoned issues.

    With my software I am able to examine every single issue in my preferred share universe (about 300 issues) several times a day, bringing all my analytical skills into play with a few minutes of computer time. So yes, the opportunities have been examined.

    Are there any other issues that are on the cusp of “maybe being redeemed” like cm-k. cm-m certainly should be redeemed but cm-k seems like its a maybe and if it doesn’t might it also zoom up like ry-l did considering its yield and higher rating (then new same name NVCC issues which have been assigned lower ratings).

    In every issue of PrefLetter I publish a list of all FixedResets in my universe that have an Exchange Date within the next six months. Take a subscription! Or, maybe, just buy the next issue, which will be produced on the weekend of May 9-11 and delivered prior to the opening on the 12th.

    CM.PR.K has an Issue Reset Spread of 218bp. At 25.28, it’s priced to yield 0.98% to a call 2014-7-31, but yield to DeemedMaturity 2022-1-31 is still only 3.74%, so it doesn’t have as much room to zoom as RY.PR.L did. I don’t take a view on that.

    From what I have read – trading anomalies are explored and taken advantage of to augment returns – are there any other prefs that might be drifting down towards par (deemed retractibles) that might not actually get redeemed presenting an opportunity to be long and collect (low 2% return – I know this was addressed in a previous article) but also be in a position to collect much more should the issue not be redeemed (ry-l being a good example of this).

    Well, I don’t want to take a view on this sort of stuff. You have to get away from yield curve analysis and into balance sheet analysis to do a good job on that, and that’s not how I manage the portfolios.

    I am sure that some searching would turn up a portfolio manager who will be pleased to tell you that his intensive balance sheet analysis made it obvious that the $300-million required to call RY.PR.L was just too much of a strain for Royal to bear on top of all their other redemptions, and that his deep insights into such things made his clients a lot of money … but he won’t tell you about the times he guessed wrong, or what his net result is.

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