PrefBlog

We’ve looked at BMO.PR.G (YTW at the 11/7 closing bid of $25.48 is -9.24%) and at RY.PR.K (YTW at the 11/7 closing bid of $25.52 is -10.64%), but there is another member of the OperatingRetractible Index that has a negative Yield-to-Worst.

The option schedule for BMO.PR.I is:

• Redemption      2005-11-25      2006-11-24  25.500000
• Redemption      2006-11-25      2007-11-24  25.250000
• Redemption      2007-11-25   INFINITE DATE  25.000000
• Retraction      2008-11-25   INFINITE DATE  26.040000

which, at the 11/7 closing bid of $25.51, gives rise to the optionCalculationList:

• Call  2006-12-07 YTM: 1.08 % [Restricted: 0.09 %] (Prob: 16.76 %)
• Call  2006-12-25 YTM: -4.99 % [Restricted: -0.66 %] (Prob: 11.55 %)
• Call  2007-12-25 YTM: 2.69 % [Restricted: 2.69 %] (Prob: 0.44 %)
• Soft Maturity  2008-11-24 YTM: 3.60 % [Restricted: 3.60 %] (Prob: 71.25 %)

So: YTW = -4.99%. If it makes it to the softMaturity, then the yield will be considerably greater (one might even call it respectable: 3.60% in dividends net of capital loss converts to 5.04% interest-equivalent for Ontario Investors who don’t need the money anyway, which is a lot better than you can get at the bank for a two-year deposit … or in the bond market.

There are clearly at least some people who are willing to slap some money on the table and bet that it won’t be called as soon as the call price declines to $25.25!

There may be some validity to this view: BMO.PR.I pays $1.1875 p.a. as a dividend and BMO can save $0.25 by waiting an extra year before calling, giving the shares a net cash cost of $0.9375 for that year, which is simple interest of 3.71% on the $25.25 that they’d have to pony up for the shares, interest-equivalent of 5.20% using the shareholders’ conversion factor … I’m not sure what factor the bank would use.

I’d call it a tossup, really: the answer will be somewhat dependent upon BMO’s balance sheet objectives (since these are retractible, they get counted as long-term debt for capital calculation purposes … perpetuals with non-cumulative dividends get counted as equity) and their ability to refinance. Against that is the consideration that a new issue of prefs would come with issuance costs attached of perhaps 3% of face value (which is a major reason why immediate calls are not calculated to have a larger probability).

 Tossups, feh. Paying $25.51 for this issue is taking too much risk for not enough return, according to me. HIMIPref™ won’t recommend it, firstly because the eligibleForPurchase function doesn’t like the short-term nature of the instrument and secondly because the totalRewardAsk is so low, which is largely due to the negative YTW.

Attached to this post for your delectation and amusement are graphs of this issue’s Yield-to-Worst and flatBidPrice for the past year.

BMO.PR.I has had a total return of 2.97% since 2005-11-30, based on the following data reported by the performanceBox:

 

which just goes to show that you usually shouldn’t put money into issues with lousy YTWs, because you usually get burned!

This entry was posted on Wednesday, November 8th, 2006 at 3:23 pm and is filed under Issue Comments. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.