NA.PR.E Settles Soft on Modest Volume

National Bank of Canada has announced:

that it has closed its domestic public offering of non-cumulative 5-year rate reset first preferred shares series 40 (non-viability contingent capital (NVCC)) (the “Series 40 Preferred Shares”). National Bank issued 12 million Series 40 Preferred Shares at a price of $25.00 per share to raise gross proceeds of $300 million.

The offering was underwritten by a syndicate led by National Bank Financial Inc.

The Series 40 Preferred Shares will commence trading on the Toronto Stock Exchange today under the ticker symbol NA.PR.E.

The Series 40 Preferred Shares were issued under a prospectus supplement dated January 15, 2018 to National Bank’s short form base shelf prospectus dated November 21, 2016.

NA.PR.E is a FixedReset, 4.60%+258, NVCC-Compliant, announced January 12. It will be tracked by HIMIPref™ and has been assigned to the FixedReset subindex.

The issue traded 357,595 shares today in a range of 24.77-89 before closing at 24.78-80. Vital statistics are:

NA.PR.E FixedReset YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-01-22
Maturity Price : 23.07
Evaluated at bid price : 24.78
Bid-YTW : 4.56 %

This issue looks quite expensive to me, according to Implied Volatility Analysis:

impvol_na_180122
Click for Big

We see in this chart many of the same features we saw when reviewing the recent BPO new issue and BEP.PR.M and CM.PR.S:

  • The curve is very steep, with Implied Volatility equal to 40% (a ridiculously large figure), and
  • The extant issues are trading relatively near to, or well above par

The ludicrously high figure of Implied Volatility is something I take to mean that the underlying assumption of the Black-Scholes model, that of no directionality of prices, is not accepted by the market; the market seems to be taking the view that since things seem rosy now, they will always be rosy and everything will trade near par in the future.

I balk at ascribing a 100% probability to this outcome. There may still be a few old geezers amongst the Assiduous Readers of this blog who can still (faintly) remember the Great Bear Market of 2014-16, in which quite a few similar assumptions made earlier turned out to be slightly inaccurate.

For the long term, I suggest that any change in the slope of the curve will be a flattening, with a very high degree of confidence. This will imply that the higher-spread issues will outperform the lower-spread issues.

All told, though, I have no hesitation in slapping an ‘Expensive’ label on this issue – according to the Implied Volatility analysis shown above, the theoretical price of the new issue is 23.77, down sharply from the announcement day estimate of 24.01.

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