Fresh from announcing a new issue for their GWO subsidiary (Fixed Reset, 6.00%+307), Power Financial Corporation has announced a new issue with similar terms:
Issue: Power Financial Corporation Non-Cumulative 5-Year Rate Reset First Preferred Shares, Series M.
Size: 6-million shares (@$25.00, =$150-million) + greenshoe 2-million shares (=$50-million)
Dividend: 6% (=$1.50 p.a.) until 2014-1-31, then reset to 5-year Canadas + 320bp. First Dividend $0.62877 payable 2008-4-30 based on closing 2008-11-28. Dividends reset every Exchange Date.
Convertible: Every Exchange Date, to and from Series N [floaters] pay 3-month bills +320bp, reset quarterly.
Exchange Date: 2014-1-31 and every five years thereafter.
Closing: 2008-11-28. Bought Deal. DBRS = Pfd-1(low); S&P = P-1(low)
Holy smokes, we’re drowning in these things!
Update, 2013-12-2: This issue trades as PWF.PR.M
Sorry if you did it already wiht earlier issues but could you please try to explain how the new PWF resetable may all have been subscribed within 12 hours (according to TD Waterhouse and Royal Bank brokering sites) when PWF straigth perps (E and L) respectively lost 4% and 9% of their value last time I checked today such that they would now yield 7.85% (using the readily available but imperfect yield figure displayed on websites).
Using yesterday’s figures as published on the BOC’s webites, Canada 5 years bonds yielded 2.67 + 320 bps = 5.98% so roughly 6%. This part makes sense.
However, what are the probable scenarios making these new resettables more advantageous than buying the other discount straight perps giving a yield of 7.85% plus their potentail capital gain? I can only see one scenario at the moment, that is, if there was to be significant inflation in the next five years.
So let’s assume there was to be inflation within the next 5 years to a point that the BoC will have reincreased, by the reset date, its prime rate and, as a result, the 5 years Canada yield will have increased above 4.65% (4.65% + 320 bps = 7.85%). I guess it is a fair assumption to make that PWF will not have called the straight perps by then and would not do so given that, at par, the payment only represent a dividend of 5.1% to the issuer based upon the initial consideration of $25 he had received at the time of their issuance.
However, the issuer here also has to the option to call the reset back at par. What are the probabilities or his likely reasoning for him to do so with the resets? I suspect, as I am speculating here for lack of knowledge on the history of normal spreads, that the issuer may then very well be able to issue new straight perps or even new resetable prefs at better terms using the proceeds to buy back the older PWF resetable at par wihtout capital gain for the initial subscriber and with the loss of 1.85% in dividends over five years compared with the buyer of the straights. Am I correct with that? Are there other probable scenarios we should make?
My gut feeling was and remains, subject to your comments, that the reset pref can only be interesting if its reset formula corresponds to the most probable formula straight perps will be issued when things get back to normal (if they ever do). If the “+ xxx bps” component of the reset formula is too high (as I fear is the case with these new PWF and GWO) they will in all likelyhood be bough back in five years such that their buyer at par lost 1.85% dividend for the next five years. If the “+xxx bps” is too low, those will turn into perps with a rate resettable every five year below one can otherwise get. Those will need to be heavily discounted before getting interesting.
The question is, however, what is the optimum reset formula based upon historical yields and prior issuances when things were “normal”?
[…] greenshoe noted in the initial announcement was therefore 50% […]
Re-reading the comments from Louis, 5 years après, he seems “almost” prophetic.
Adrian