Deriving a Reset Yield

We have been treated to the spectacle of three FixedResets resetting their dividend on the same day … TRP.PR.A To Reset To 3.266%, AZP.PR.B To Reset To 5.57% and FFH.PR.C To Reset To 4.578%.

Let’s have a little look at how all these rates were calculated. I regret I cannot link directly to the prospectuses because the Canadian Securities Administrators insist that this public information be available to retail scum only in an inconvenient manner.

TRP.PR.A: SEDAR TransCanada Corporation Sep 23 2009 16:14:12 ET Prospectus supplement – English PDF 127 K

‘‘Fixed Rate Calculation Date’’ means, for any Subsequent Fixed Rate Period, the 30th day prior to the first day of such Subsequent Fixed Rate Period.

‘‘Government of Canada Yield’’ on any date means the yield to maturity on such date (assuming semi-annual compounding) of a Canadian dollar denominated non-callable Government of Canada bond with a term to maturity of five years as quoted as of 10:00 a.m. (Toronto time) on such date and that appears on the Bloomberg Screen GCAN5YR Page on such date; provided that if such rate does not appear on the Bloomberg Screen GCAN5YR Page on such date, then the Government of Canada Yield shall mean the arithmetic average of the yields quoted to the Corporation by two registered Canadian investment dealers selected by the Corporation as being the annual yield to maturity on such date, compounded semi-annually, that a non-callable Government of Canada bond would carry if issued, in Canadian dollars, at 100% of its principal amount on such date with a term to maturity of five years.

AZP.PR.B: SEDAR Atlantic Power Preferred Equity Ltd. Oct 21 2009 17:20:19 ET Final short form prospectus – English PDF 229 K:

“Bloomberg Screen GCAN5YR Page” means the display designated on page “GCAN5YR” on the Bloomberg Financial L.P. service (or such other page as may replace the GCAN5YR page on that service for purposes of displaying Government of Canada Bond yields).

“Fixed Rate Calculation Date” means, for any Subsequent Fixed Rate Period, the 30th day prior to the first day of such Subsequent Fixed Rate Period.

“Government of Canada Bond Yield” on any date means the yield to maturity on such date (assuming semi-annual compounding) of a Canadian dollar denominated non-callable Government of Canada bond with a term to maturity of five years as quoted as of 10:00 a.m. (Toronto time) on such date and which appears on the Bloomberg Screen GCAN5YR Page on such date; provided that, if such rate does not appear on the Bloomberg Screen GCAN5YR Page on such date, the Government of Canada Bond Yield will mean the arithmetic average of the yields quoted to the Corporation by two registered Canadian investment dealers selected by the Corporation as being the annual yield to maturity on such date, compounded semi-annually, which a non-callable Government of Canada bond would carry if issued, in Canadian dollars in Canada, at 100% of its principal amount on such date with a term to maturity of five years.

FFH.PR.C: SEDAR Fairfax Financial Holdings Limited Sep 29 2009 18:40:58 ET Prospectus supplement – English PDF 419 K

“Bloomberg Screen GCAN5YR Page” means the display designated as page “GCAN5YRGINDEXH” on the Bloomberg Financial L.P. service (or such other page as may replace the GCAN5YR page on that service) for purposes of displaying Government of Canada bond yields.

“Fixed Rate Calculation Date” means, for any Subsequent Fixed Rate Period, the 30th day prior to the first day of such Subsequent Fixed Rate Period.

“Government of Canada Yield” on any date means the yield to maturity on such date (assuming semi-annual compounding) of a Canadian dollar denominated non-callable Government of Canada bond with a term to maturity of five years as quoted as of 10:00 a.m. (Toronto time) on such date and which appears on the Bloomberg Screen GCAN5YR Page on such date; provided that, if such rate does not appear on the Bloomberg Screen GCAN5YR Page on such date, the Government of Canada Yield will mean the average of the yields determined by two registered Canadian investment dealers selected by the Company, as being the yield to maturity on such date (assuming semi-annual compounding) which a Canadian dollar denominated non-callable Government of Canada bond would carry if issued in Canadian dollars at 100% of its principal amount on such date with a term to maturity of five years.

OK, so according to me these reset yields are calculated in all the same way at the same time. So let’s look at the announced reset yields and see what the GOC-5 yield was:

Issue Announced
Rate
Spread Presumed
GOC-5
Yield
TRP.PR.A 3.266% 192bp 1.346%
AZP.PR.B 5.57% 418bp 1.39%
FFH.PR.C 4.578% 315bp 1.428%

Eight basis points difference? On a five year Canada? When all the calculations are supposed to be performed the same way at the same time?

This is very odd.

Accordingly, I have sent the following eMail to investor_relations@transcanada.com:

Sirs,

I understand that the dividend on TRP.PR.A is to be reset to 3.266% in accordance with the terms of the prospectus, which implies that the “Government of Canada Yield”, as defined in the prospectus, was 1.346% at 10am on December 1.

However, as discussed at http://prefblog.com/?p=26996 , measurements of this yield taken at the same time, in the same manner and for the same purpose by two other companies resulted in assessments of 1.39% and 1.428%, which are very different numbers when one considers what is being measured.

I would appreciate receiving further details of your calculation of the “Government of Canada Yield”, as defined, with any supporting material that you choose to provide.

Sincerely,

… but it appears that I will have to call John Varnell of Fairfax at (416) 367-4941 and Computershare on behalf of Atlantic Power at (800) 564-6253 because those companies haven’t implemented eMail yet, as far as I can tell.

Update, 2014-12-3: TRP got back to me with a link to the prospectus and a quote from it which duplicates part of the text I’ve quoted above. I’ve left a message with John Varnell of FFH, and with the Investor Relations department of AZP.

Update #2, 2014-12-3: TRP’s Investor Relations department has forwarded the query to Treasury, and expect to hear back tomorrow.

Update, 2014-12-5: See the post Deriving Reset Yields: Mystery Partially Resolved

2 Responses to “Deriving a Reset Yield”

  1. prefQC says:

    Thank you James for point out and (with any luck) following up on this important “anomaly”.

    Just out of curiosity, where do you get the 5-year GoC rate that you use each day in calculating yields of fixed-reset issues? (Obviously, it is not critical that the 5-year rates you use in PrefBlog and PrefLetter be rigorously correct.) Would it be possible to include with your daily PrefBlog market action selection the GoC rate (and perhaps also the 90-day rate for floaters) that you are using for that day?

  2. jiHymas says:

    We will have to see what happens with my inquiries, but it generally takes more clout than I’ve got to shake information out of these guys – particularly if there’s the slightest hint of a mistake.

    I get the GOC-5 and 3-Month-Bill rate from CBID, which is linked under “Markets” in the right-hand navigation panel. I update on Mondays, except around PrefLetter weekend, when I update the Friday before and skip the Monday after.

    I don’t think I’ll disclose the rates … it’s just a little extra work and – most of the time – is just a matter of a few beeps difference from the current trading level anyway.

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