4 Responses to “August 16, 2019”

1. CanSiamCyp says:

   August 17, 2019 at 1:12 pm

   Hi James!

   Regarding recent media speculation re the potential migration of negative bond interest rates from Europe and Japan to the US and Canada: what could transpire in the discounted rate-reset pref universe?

   My speculation follows:
   a) as Canadian bond rates grind lower, prefs do their usual thing as retail owners sh!t their pants and sell at fire-sale prices;
   b) 5 year GoC approaches zero and 5 year GIC yields reduce significantly – not to zero but getting closer;
   c) at some point, bright sparks realize that a fixed reset – say with a 250 spread – renewing for a 2.5% dividend (par value) is a hell of a lot sweeter than a 5-year GIC at say 0.5%;
   d) this attracts retail buyers who – after thoroughly laundering their undershorts from the ride down – bid the price upwards as they chase the yield;
   e) AND at least some of the pref issuers consider it advantageous to initiate NCIBs and/or redeem ‘maturing’ 5 year prefs at par (either of which course of action would increase market price).

   Comments? Sound plausible?

   How strong a connection exists between GOC5 and GIC 5-year rates? In Germany, where government bond yields are negative, mortgage rates are low but still above zero – so would assume that German lenders have something analogous to a GIC with a positive interest rate.

   Cheers!

2. mbarbon says:

   August 17, 2019 at 5:36 pm

   Why redeem at par?

   Brookfield Asset Management (NYSE:BAM) gets approval from the Toronto Stock Exchange for its proposed normal course issuer bid to buy up to 10% of the public float of each series of the company’s outstanding class A preference shares listed on the TSX.
   The normal course issuer bid will extend from Aug. 20, 2019 to Aug. 19, 2020.
   Brookfield will pay the market price at the time of acquisition for any preferred shares purchased.

3. CanSiamCyp says:

   August 17, 2019 at 10:00 pm

   Right, but they don’t actually purchase very many shares. Referring to the BAM notice of renewal they provide a table of purchases made in the previous year. Quickly scanning the table, I can see that one issue had about 20% filling of the allowed 10% under the NCIB (i.e., 2% of total issued shares). At that rate it would take 50 years to complete the buyback.

   Redemption at par would make sense if financing by bond issuance (tax deductible for corporation) is cheaper than by pref dividend (paid out of post tax income of corporation).

4. jiHymas says:

   August 20, 2019 at 11:36 pm

   at some point, bright sparks realize that a fixed reset – say with a 250 spread – renewing for a 2.5% dividend (par value) is a hell of a lot sweeter than a 5-year GIC at say 0.5%;

   I believe that this is what will happen (perhaps with different numbers) … eventually! Firstly, the market has to stabilize, which will happen as soon as the bottom-feeding speculators overwhelm the panic-stricken investors. I have no idea when that will happen.

   In Germany, where government bond yields are negative, mortgage rates are low but still above zero – so would assume that German lenders have something analogous to a GIC with a positive interest rate.

   I do not claim great familiarity with the German market, so feel free to correct me – but I believe that German banks generally finance mortgages with Pfandbriefe, which are covered bonds:

   the Pfandbrief sector is comfortably the largest fixed-income instrument in Germany, accounting for just under 35% of the Deutschmark bond market at the end of 1995. Federal government bonds, by contrast, account for just under 28% of the market.

   … and with respect to pricing:

   On June 26, German lender Landesbank Hessen-Thüringen Girozentrale (Helaba) sold the first negative yielding covered bond since a Berlin Hyp issue in 2017. The five-year mortgage pfandbriefe, due July 2024, carried a 0% coupon and a reoffer yield of minus 22.7bp. This comes as just 15% of the stock of outstanding pfandbriefe currently trades with a positive yield.

   Cheap funding might encourage banks to do more real estate and mortgage lending. That doesn’t always end so well.

   Redemption at par would make sense if financing by bond issuance (tax deductible for corporation) is cheaper than by pref dividend (paid out of post tax income of corporation).

   There are strict constraints on issuer bids, not so many on investments. If I was CFO of a major corporation with a desire to cash in on low prices, I would consider issuing bonds to buy a basket of preferreds with characteristics similar to the target of my NCIB, then tell my broker to execute the NCIB and pay for it by selling out of the basket; defeasing the issue, in other words, which is often done by American municipalities.

   Another possibility might be to have a formal issuer bid, a Dutch Auction, perhaps, with the objective of taking out a big chunk of the issue without running into NCIB constraints. I’ve never heard of one of those, however, so you’ll have to find a corporate finance guy to comment on the feasibility!