April 12, 2019

April 12th, 2019
HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices

Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)
Median
YTW
Median
Average
Trading
Value
Median
Mod Dur
(YTW)
Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 0.1314 % 2,150.3
FixedFloater 0.00 % 0.00 % 0 0.00 0 0.1314 % 3,945.6
Floater 5.44 % 5.70 % 41,446 14.37 3 0.1314 % 2,273.9
OpRet 0.00 % 0.00 % 0 0.00 0 0.0050 % 3,274.5
SplitShare 4.89 % 4.70 % 78,695 3.83 8 0.0050 % 3,910.4
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0050 % 3,051.0
Perpetual-Premium 5.57 % -11.86 % 87,538 0.09 10 -0.2116 % 2,962.3
Perpetual-Discount 5.39 % 5.42 % 73,979 14.74 23 -0.0563 % 3,112.1
FixedReset Disc 5.22 % 5.42 % 187,507 14.88 61 0.3666 % 2,202.6
Deemed-Retractible 5.20 % 5.68 % 92,351 8.15 27 0.0456 % 3,088.0
FloatingReset 4.22 % 4.32 % 55,083 2.69 5 0.3131 % 2,420.9
FixedReset Prem 5.06 % 3.65 % 308,725 2.21 22 0.0336 % 2,587.9
FixedReset Bank Non 1.98 % 4.04 % 142,168 2.70 3 0.1395 % 2,637.5
FixedReset Ins Non 4.96 % 6.57 % 112,557 8.28 22 0.2043 % 2,270.7
Performance Highlights
Issue Index Change Notes
MFC.PR.F FixedReset Ins Non -1.80 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2030-01-31
Maturity Price : 25.00
Evaluated at bid price : 14.75
Bid-YTW : 8.84 %
HSE.PR.G FixedReset Disc -1.43 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-12
Maturity Price : 19.27
Evaluated at bid price : 19.27
Bid-YTW : 6.71 %
GWO.PR.N FixedReset Ins Non -1.28 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2030-01-31
Maturity Price : 25.00
Evaluated at bid price : 14.61
Bid-YTW : 8.89 %
HSE.PR.A FixedReset Disc -1.17 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-12
Maturity Price : 12.65
Evaluated at bid price : 12.65
Bid-YTW : 6.49 %
BAM.PF.J FixedReset Disc 1.08 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-12
Maturity Price : 23.00
Evaluated at bid price : 24.26
Bid-YTW : 4.86 %
MFC.PR.N FixedReset Ins Non 1.11 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2030-01-31
Maturity Price : 25.00
Evaluated at bid price : 18.15
Bid-YTW : 7.80 %
TD.PF.C FixedReset Disc 1.11 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-12
Maturity Price : 19.05
Evaluated at bid price : 19.05
Bid-YTW : 5.11 %
PWF.PR.S Perpetual-Discount 1.19 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-12
Maturity Price : 21.86
Evaluated at bid price : 22.15
Bid-YTW : 5.42 %
TRP.PR.F FloatingReset 1.29 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-12
Maturity Price : 14.90
Evaluated at bid price : 14.90
Bid-YTW : 6.10 %
IAF.PR.B Deemed-Retractible 1.33 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2030-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.15
Bid-YTW : 6.11 %
TD.PF.I FixedReset Disc 1.68 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-12
Maturity Price : 22.39
Evaluated at bid price : 23.01
Bid-YTW : 4.99 %
EMA.PR.F FixedReset Disc 1.68 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-12
Maturity Price : 19.32
Evaluated at bid price : 19.32
Bid-YTW : 5.62 %
PWF.PR.T FixedReset Disc 1.81 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-12
Maturity Price : 19.70
Evaluated at bid price : 19.70
Bid-YTW : 5.11 %
TRP.PR.C FixedReset Disc 1.89 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-12
Maturity Price : 13.50
Evaluated at bid price : 13.50
Bid-YTW : 5.74 %
TD.PF.A FixedReset Disc 1.95 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-12
Maturity Price : 18.86
Evaluated at bid price : 18.86
Bid-YTW : 5.16 %
BAM.PR.R FixedReset Disc 2.26 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-12
Maturity Price : 16.27
Evaluated at bid price : 16.27
Bid-YTW : 5.92 %
SLF.PR.G FixedReset Ins Non 2.27 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2030-01-31
Maturity Price : 25.00
Evaluated at bid price : 15.30
Bid-YTW : 8.56 %
TRP.PR.B FixedReset Disc 2.33 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-12
Maturity Price : 12.73
Evaluated at bid price : 12.73
Bid-YTW : 5.68 %
PWF.PR.P FixedReset Disc 2.43 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-12
Maturity Price : 14.35
Evaluated at bid price : 14.35
Bid-YTW : 5.48 %
MFC.PR.M FixedReset Ins Non 2.53 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2030-01-31
Maturity Price : 25.00
Evaluated at bid price : 19.05
Bid-YTW : 7.28 %
NA.PR.W FixedReset Disc 3.07 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-12
Maturity Price : 17.80
Evaluated at bid price : 17.80
Bid-YTW : 5.47 %
Volume Highlights
Issue Index Shares
Traded
Notes
RY.PR.S FixedReset Disc 80,043 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-12
Maturity Price : 21.65
Evaluated at bid price : 22.01
Bid-YTW : 4.85 %
HSE.PR.G FixedReset Disc 61,500 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-12
Maturity Price : 19.27
Evaluated at bid price : 19.27
Bid-YTW : 6.71 %
IAF.PR.G FixedReset Ins Non 53,100 YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2030-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.20
Bid-YTW : 6.24 %
TD.PF.E FixedReset Disc 47,200 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-12
Maturity Price : 21.31
Evaluated at bid price : 21.60
Bid-YTW : 5.13 %
TRP.PR.E FixedReset Disc 38,900 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-12
Maturity Price : 17.05
Evaluated at bid price : 17.05
Bid-YTW : 5.88 %
BIP.PR.F FixedReset Disc 34,500 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-12
Maturity Price : 21.76
Evaluated at bid price : 22.16
Bid-YTW : 5.78 %
There were 28 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
HSE.PR.G FixedReset Disc Quote: 19.27 – 20.07
Spot Rate : 0.8000
Average : 0.4890

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-12
Maturity Price : 19.27
Evaluated at bid price : 19.27
Bid-YTW : 6.71 %

BAM.PF.A FixedReset Disc Quote: 21.07 – 21.65
Spot Rate : 0.5800
Average : 0.3997

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-12
Maturity Price : 21.07
Evaluated at bid price : 21.07
Bid-YTW : 5.60 %

CM.PR.O FixedReset Disc Quote: 18.35 – 18.82
Spot Rate : 0.4700
Average : 0.2986

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-12
Maturity Price : 18.35
Evaluated at bid price : 18.35
Bid-YTW : 5.41 %

EMA.PR.F FixedReset Disc Quote: 19.32 – 19.98
Spot Rate : 0.6600
Average : 0.4893

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-12
Maturity Price : 19.32
Evaluated at bid price : 19.32
Bid-YTW : 5.62 %

SLF.PR.B Deemed-Retractible Quote: 22.50 – 22.96
Spot Rate : 0.4600
Average : 0.2899

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2030-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.50
Bid-YTW : 6.13 %

IFC.PR.C FixedReset Ins Non Quote: 19.29 – 19.84
Spot Rate : 0.5500
Average : 0.3816

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2030-01-31
Maturity Price : 25.00
Evaluated at bid price : 19.29
Bid-YTW : 7.15 %

April 11, 2019

April 11th, 2019
HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices

Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)
Median
YTW
Median
Average
Trading
Value
Median
Mod Dur
(YTW)
Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 -0.3406 % 2,147.4
FixedFloater 0.00 % 0.00 % 0 0.00 0 -0.3406 % 3,940.5
Floater 5.45 % 5.70 % 42,157 14.38 3 -0.3406 % 2,270.9
OpRet 0.00 % 0.00 % 0 0.00 0 -0.1937 % 3,274.3
SplitShare 4.89 % 4.70 % 79,390 3.83 8 -0.1937 % 3,910.2
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.1937 % 3,050.9
Perpetual-Premium 5.55 % -18.68 % 88,153 0.09 10 0.4052 % 2,968.6
Perpetual-Discount 5.39 % 5.46 % 75,649 14.74 23 -0.4240 % 3,113.9
FixedReset Disc 5.24 % 5.35 % 193,307 14.95 61 0.0487 % 2,194.6
Deemed-Retractible 5.20 % 5.75 % 92,754 8.15 27 -0.0267 % 3,086.6
FloatingReset 4.22 % 4.34 % 55,752 2.69 5 0.2815 % 2,413.4
FixedReset Prem 5.06 % 3.69 % 301,648 2.21 22 0.0779 % 2,587.0
FixedReset Bank Non 1.98 % 4.04 % 137,890 2.71 3 0.0279 % 2,633.8
FixedReset Ins Non 4.98 % 6.56 % 104,759 8.30 22 0.1637 % 2,266.1
Performance Highlights
Issue Index Change Notes
BAM.PR.R FixedReset Disc -2.03 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-11
Maturity Price : 15.91
Evaluated at bid price : 15.91
Bid-YTW : 5.98 %
GWO.PR.R Deemed-Retractible -1.90 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2030-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.66
Bid-YTW : 6.04 %
BAM.PR.N Perpetual-Discount -1.75 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-11
Maturity Price : 20.75
Evaluated at bid price : 20.75
Bid-YTW : 5.78 %
BAM.PR.M Perpetual-Discount -1.71 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-11
Maturity Price : 20.71
Evaluated at bid price : 20.71
Bid-YTW : 5.79 %
PWF.PR.P FixedReset Disc -1.68 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-11
Maturity Price : 14.01
Evaluated at bid price : 14.01
Bid-YTW : 5.53 %
TD.PF.A FixedReset Disc -1.54 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-11
Maturity Price : 18.50
Evaluated at bid price : 18.50
Bid-YTW : 5.19 %
PWF.PR.S Perpetual-Discount -1.44 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-11
Maturity Price : 21.89
Evaluated at bid price : 21.89
Bid-YTW : 5.50 %
NA.PR.W FixedReset Disc -1.37 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-11
Maturity Price : 17.27
Evaluated at bid price : 17.27
Bid-YTW : 5.56 %
BMO.PR.D FixedReset Disc -1.07 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-11
Maturity Price : 21.93
Evaluated at bid price : 22.29
Bid-YTW : 5.32 %
TRP.PR.C FixedReset Disc -1.05 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-11
Maturity Price : 13.25
Evaluated at bid price : 13.25
Bid-YTW : 5.76 %
MFC.PR.K FixedReset Ins Non -1.01 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2030-01-31
Maturity Price : 25.00
Evaluated at bid price : 19.53
Bid-YTW : 7.11 %
BIP.PR.C FixedReset Disc -1.01 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-11
Maturity Price : 23.30
Evaluated at bid price : 24.55
Bid-YTW : 6.21 %
BIP.PR.E FixedReset Disc 1.13 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-11
Maturity Price : 21.90
Evaluated at bid price : 22.30
Bid-YTW : 5.63 %
CU.PR.C FixedReset Disc 1.16 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-11
Maturity Price : 18.39
Evaluated at bid price : 18.39
Bid-YTW : 5.35 %
GWO.PR.S Deemed-Retractible 1.28 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2030-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.61
Bid-YTW : 5.50 %
SLF.PR.J FloatingReset 1.35 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2030-01-31
Maturity Price : 25.00
Evaluated at bid price : 15.00
Bid-YTW : 8.97 %
NA.PR.G FixedReset Disc 1.36 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-11
Maturity Price : 21.43
Evaluated at bid price : 21.69
Bid-YTW : 5.18 %
GWO.PR.N FixedReset Ins Non 1.37 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2030-01-31
Maturity Price : 25.00
Evaluated at bid price : 14.80
Bid-YTW : 8.68 %
MFC.PR.F FixedReset Ins Non 1.56 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2030-01-31
Maturity Price : 25.00
Evaluated at bid price : 15.02
Bid-YTW : 8.57 %
TRP.PR.G FixedReset Disc 2.13 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-11
Maturity Price : 19.15
Evaluated at bid price : 19.15
Bid-YTW : 5.92 %
BIP.PR.D FixedReset Disc 3.56 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-11
Maturity Price : 22.60
Evaluated at bid price : 23.26
Bid-YTW : 5.72 %
Volume Highlights
Issue Index Shares
Traded
Notes
MFC.PR.L FixedReset Ins Non 53,550 YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2030-01-31
Maturity Price : 25.00
Evaluated at bid price : 17.93
Bid-YTW : 7.72 %
MFC.PR.K FixedReset Ins Non 50,355 YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2030-01-31
Maturity Price : 25.00
Evaluated at bid price : 19.53
Bid-YTW : 7.11 %
POW.PR.G Perpetual-Premium 45,480 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-05-15
Maturity Price : 25.50
Evaluated at bid price : 25.70
Bid-YTW : -3.53 %
GWO.PR.M Deemed-Retractible 44,300 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-05-11
Maturity Price : 25.00
Evaluated at bid price : 25.47
Bid-YTW : -14.43 %
GWO.PR.R Deemed-Retractible 35,466 YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2030-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.66
Bid-YTW : 6.04 %
IAF.PR.G FixedReset Ins Non 29,020 YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2030-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.07
Bid-YTW : 6.28 %
There were 40 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
MFC.PR.G FixedReset Ins Non Quote: 20.77 – 21.23
Spot Rate : 0.4600
Average : 0.2863

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2030-01-31
Maturity Price : 25.00
Evaluated at bid price : 20.77
Bid-YTW : 6.59 %

BAM.PR.R FixedReset Disc Quote: 15.91 – 16.50
Spot Rate : 0.5900
Average : 0.4217

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-11
Maturity Price : 15.91
Evaluated at bid price : 15.91
Bid-YTW : 5.98 %

PWF.PR.T FixedReset Disc Quote: 19.35 – 19.75
Spot Rate : 0.4000
Average : 0.2611

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-11
Maturity Price : 19.35
Evaluated at bid price : 19.35
Bid-YTW : 5.13 %

BAM.PF.J FixedReset Disc Quote: 24.00 – 24.40
Spot Rate : 0.4000
Average : 0.2668

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-11
Maturity Price : 22.88
Evaluated at bid price : 24.00
Bid-YTW : 4.92 %

BAM.PF.B FixedReset Disc Quote: 18.72 – 19.12
Spot Rate : 0.4000
Average : 0.2797

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-11
Maturity Price : 18.72
Evaluated at bid price : 18.72
Bid-YTW : 5.78 %

BAM.PF.C Perpetual-Discount Quote: 21.27 – 21.60
Spot Rate : 0.3300
Average : 0.2138

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-11
Maturity Price : 21.27
Evaluated at bid price : 21.27
Bid-YTW : 5.75 %

FFN.PR.A Downgraded to Pfd-4(high) by DBRS

April 11th, 2019

DBRS Limited has announced that it:

downgraded the rating on the Preferred Shares issued by North American Financial 15 Split Corp. (the Company) to Pfd-4 (high) from Pfd-3 (low).

On February 21, 2019, the Company extended the term of the Preferred Shares for additional five years. The new termination date is December 1, 2024. After December 1, 2019, the Company will have the right to amend the dividend rate on the Preferred Shares for the new five-year term. Any such changes are expected to be announced no later than September 30, 2019.

The Portfolio provides approximately 37% of downside protection to holders of the Preferred Shares as at March 15, 2019. The downside protection experienced a decline in 2018, showing only a slow recovery over the past few months. The Preferred Shares currently pay a fixed cumulative monthly dividend of $0.04583 per Preferred Share, yielding 5.5% annually on their issue price of $10 per share. Holders of the Class A Shares receive regular monthly targeted cash distributions of $0.10 per Class A Share, yielding 8.0% annually on the issue price of $15 per share. No distributions will be paid to Class A Shares if the NAV per unit falls below $15 and no special year-end dividends will be paid if, after such payment, the Portfolio’s NAV is less than $25. The Preferred Share dividend coverage ratio was approximately 0.64 times. The average grind on the Portfolio is expected to be 3.1% annually for the next five years.

The affected issue is FFN.PR.A .

April 10, 2019

April 10th, 2019

I am pleased to pass on another data point illustrating just how absurdly cheap the preferred share market is at the moment:

DBRS Limited (DBRS) assigned a rating of A (low) with a Stable trend to TransCanada PipeLines Limited’s (TCPL or the Company) $1.0 billion 4.34% Unsecured Medium Term Note Debentures (the Notes) due 2049. The rating being assigned is based upon the rating on already-outstanding series of the above-mentioned debt instruments.

DBRS notes that the proceeds from the Notes issue will be used to repay existing indebtedness and for general corporate purposes.

The Notes will rank pari passu, except as to sinking funds and other claims preferred by operation of law, with all other unsecured and unsubordinated indebtedness of the Company.

Sadly, TRP does not have any Straight Preferreds outstanding, but they do have a slew of FixedResets, ranging from TRP.PR.C yielding 5.70% to TRP.PR.G yielding 6.04%. So, for the sake of an argument and assuming a reasonably normal relationship, let’s say a TRP discounted Straight Perpetual would yield about 6.00% dividend, equivalent to about 7.80% interest. Its interest-equivalent Modified Duration as a perpetual annuity will be the inverse of this, or about 12.8. I can’t be bothered to work out the Modified Duration of a 30-year par bond yielding 4.34, but it will be more than this. Options on either instrument will lower the Modified Duration, but basically we can say that the Straight Perpetual preferred will have a little bit lower interest rate risk than the new bond.

Credit Risk will be a little higher for the preferred, but I worked out a long time ago that reasonable assumptions regarding default rates lead to a required credit risk premium of about 20bp. OK, so the preferreds are issued by the holding company and the bonds are issued by the operating company. So tack on another 20bp for credit risk, if you’re so inclined. It doesn’t make much difference to the conclusion!

There’s markedly lower liquidity for the preferred, but not so much of a difference that most of us need to care. If you do have an investment portfolio in which such a liquidity difference is significant, please contact me because I would like to make a proposal to manage your account!

So we’re left with 4.34% on the bond and 7.80% on the notional Straight, with about 20bp of the difference accounted for by Credit Risk. And, what’s more, this difference is in-line with the overall Seniority Spread that I estimate weekly (with a bond indicator that has an average term of about 21.25 years), so it’s not just these particular issues, it’s the whole damn market.

Yep, preferreds are cheap, all right!

DBRS also has a warning for Premier Ford:

DBRS Limited (DBRS) confirmed the Issuer Rating and the Senior Unsecured Debentures rating of Hydro One Inc. (HOI or the Company) at A (high) and the Commercial Paper rating at R-1 (low). All trends are Stable.

However, should political interference adversely affect the Ontario Energy Board’s (OEB) independent regulatory rate making framework or HOI’s operating and financial decisions, DBRS could take a negative rating action.

PerpetualDiscounts now yield 5.40%, equivalent to 7.02% interest at the standard equivalency factor of 1.3x. Lonc corporates now yield 3.75%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 325bp, a significant narrowing from the 335bp reported April 3.

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices

Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)
Median
YTW
Median
Average
Trading
Value
Median
Mod Dur
(YTW)
Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 1.0056 % 2,154.8
FixedFloater 0.00 % 0.00 % 0 0.00 0 1.0056 % 3,953.9
Floater 5.43 % 5.70 % 42,363 14.38 3 1.0056 % 2,278.7
OpRet 0.00 % 0.00 % 0 0.00 0 -0.1191 % 3,280.7
SplitShare 4.88 % 4.64 % 78,537 3.84 8 -0.1191 % 3,917.8
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.1191 % 3,056.8
Perpetual-Premium 5.58 % -8.56 % 82,751 0.09 10 -0.0315 % 2,956.6
Perpetual-Discount 5.37 % 5.40 % 76,043 14.79 23 0.3223 % 3,127.1
FixedReset Disc 5.24 % 5.34 % 191,864 14.96 61 -0.2937 % 2,193.5
Deemed-Retractible 5.20 % 5.72 % 93,567 8.15 27 0.0487 % 3,087.4
FloatingReset 4.23 % 4.30 % 52,626 2.70 5 0.0975 % 2,406.6
FixedReset Prem 5.07 % 3.67 % 298,016 2.21 22 0.0088 % 2,585.0
FixedReset Bank Non 1.98 % 4.02 % 135,592 2.71 3 0.1118 % 2,633.1
FixedReset Ins Non 4.98 % 6.55 % 106,900 8.30 22 -0.0477 % 2,262.4
Performance Highlights
Issue Index Change Notes
TRP.PR.G FixedReset Disc -2.85 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-10
Maturity Price : 18.75
Evaluated at bid price : 18.75
Bid-YTW : 6.04 %
BAM.PR.R FixedReset Disc -2.29 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-10
Maturity Price : 16.24
Evaluated at bid price : 16.24
Bid-YTW : 5.86 %
BAM.PR.T FixedReset Disc -2.15 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-10
Maturity Price : 16.35
Evaluated at bid price : 16.35
Bid-YTW : 5.90 %
TD.PF.J FixedReset Disc -1.93 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-10
Maturity Price : 21.54
Evaluated at bid price : 21.81
Bid-YTW : 5.02 %
IFC.PR.G FixedReset Ins Non -1.66 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2030-01-31
Maturity Price : 25.00
Evaluated at bid price : 20.75
Bid-YTW : 6.79 %
BIP.PR.F FixedReset Disc -1.56 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-10
Maturity Price : 21.76
Evaluated at bid price : 22.15
Bid-YTW : 5.78 %
MFC.PR.H FixedReset Ins Non -1.11 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2030-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.25
Bid-YTW : 6.06 %
EMA.PR.H FixedReset Disc -1.09 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-10
Maturity Price : 22.58
Evaluated at bid price : 23.49
Bid-YTW : 5.25 %
BAM.PR.K Floater 1.07 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-10
Maturity Price : 12.24
Evaluated at bid price : 12.24
Bid-YTW : 5.70 %
MFC.PR.K FixedReset Ins Non 1.08 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2030-01-31
Maturity Price : 25.00
Evaluated at bid price : 19.73
Bid-YTW : 6.98 %
TRP.PR.A FixedReset Disc 1.09 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-10
Maturity Price : 14.85
Evaluated at bid price : 14.85
Bid-YTW : 5.95 %
PWF.PR.A Floater 1.10 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-10
Maturity Price : 13.75
Evaluated at bid price : 13.75
Bid-YTW : 5.10 %
CU.PR.G Perpetual-Discount 1.14 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-10
Maturity Price : 21.25
Evaluated at bid price : 21.25
Bid-YTW : 5.37 %
BAM.PR.N Perpetual-Discount 1.54 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-10
Maturity Price : 21.12
Evaluated at bid price : 21.12
Bid-YTW : 5.67 %
SLF.PR.G FixedReset Ins Non 1.90 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2030-01-31
Maturity Price : 25.00
Evaluated at bid price : 15.05
Bid-YTW : 8.69 %
MFC.PR.L FixedReset Ins Non 1.94 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2030-01-31
Maturity Price : 25.00
Evaluated at bid price : 17.91
Bid-YTW : 7.74 %
Volume Highlights
Issue Index Shares
Traded
Notes
VNR.PR.A FixedReset Prem 241,633 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-10
Maturity Price : 23.25
Evaluated at bid price : 24.85
Bid-YTW : 4.38 %
BMO.PR.W FixedReset Disc 67,970 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-10
Maturity Price : 18.15
Evaluated at bid price : 18.15
Bid-YTW : 5.33 %
BIP.PR.F FixedReset Disc 52,155 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-10
Maturity Price : 21.76
Evaluated at bid price : 22.15
Bid-YTW : 5.78 %
BAM.PF.B FixedReset Disc 46,400 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-10
Maturity Price : 18.85
Evaluated at bid price : 18.85
Bid-YTW : 5.74 %
CU.PR.G Perpetual-Discount 41,295 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-10
Maturity Price : 21.25
Evaluated at bid price : 21.25
Bid-YTW : 5.37 %
BAM.PR.N Perpetual-Discount 40,200 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-10
Maturity Price : 21.12
Evaluated at bid price : 21.12
Bid-YTW : 5.67 %
There were 21 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
NA.PR.E FixedReset Disc Quote: 20.19 – 20.69
Spot Rate : 0.5000
Average : 0.3465

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-10
Maturity Price : 20.19
Evaluated at bid price : 20.19
Bid-YTW : 5.28 %

GWO.PR.S Deemed-Retractible Quote: 24.30 – 24.67
Spot Rate : 0.3700
Average : 0.2452

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2030-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.30
Bid-YTW : 5.65 %

TRP.PR.E FixedReset Disc Quote: 16.90 – 17.20
Spot Rate : 0.3000
Average : 0.1980

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-10
Maturity Price : 16.90
Evaluated at bid price : 16.90
Bid-YTW : 5.86 %

MFC.PR.H FixedReset Ins Non Quote: 22.25 – 22.67
Spot Rate : 0.4200
Average : 0.3199

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2030-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.25
Bid-YTW : 6.06 %

TD.PF.E FixedReset Disc Quote: 21.75 – 22.21
Spot Rate : 0.4600
Average : 0.3708

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-10
Maturity Price : 21.42
Evaluated at bid price : 21.75
Bid-YTW : 5.03 %

GWO.PR.P Deemed-Retractible Quote: 24.80 – 25.09
Spot Rate : 0.2900
Average : 0.2089

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2030-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.80
Bid-YTW : 5.55 %

TRP.PR.D : Convert or Hold?

April 9th, 2019

It will be recalled that TRP.PR.D will reset at 3.903% effective April 30, 2019.

TRP.PR.D is a FixedReset, 4.00%+238, that commenced trading 2013-3-4 after being announced 2013-2-25. The extension was announced 2019-3-15. The issue is tracked by HIMIPref™ and assigned to the FixedReset (Discount) subindex.

The most logical way to analyze the question of whether or not to convert is through the theory of Preferred Pairs, for which a calculator is available. Briefly, a Strong Pair is defined as a pair of securities that can be interconverted in the future (e.g., TRP.PR.D and the FloatingReset that will exist if enough holders convert). Since they will be interconvertible on this future date, it may be assumed that they will be priced identically on this date (if they aren’t then holders will simply convert en masse to the higher-priced issue). And since they will be priced identically on a given date in the future, any current difference in price must be offset by expectations of an equal and opposite value of dividends to be received in the interim. And since the dividend rate on one element of the pair is both fixed and known, the implied average rate of the other, floating rate, instrument can be determined. Finally, we say, we may compare these average rates and take a view regarding the actual future course of that rate relative to the implied rate, which will provide us with guidance on which element of the pair is likely to outperform the other until the next interconversion date, at which time the process will be repeated.

We can show the break-even rates for each FixedReset / FloatingReset Strong Pair graphically by plotting the implied average 3-month bill rate against the next Exchange Date (which is the date to which the average will be calculated).

pair_fr_190409
Click for Big

The market appears to have lost its fleeting interest in floating rate product; the implied rates until the next interconversion are above the current 3-month bill rate as the averages for investment-grade and junk issues are at +0.78% and +1.24%, respectively. Whatever might be the result of the next few Bank of Canada overnight rate decisions, I suggest that it is unlikely that the average rate over the next five years will be lower than current – but if you disagree, of course, you may interpret the data any way you like.

Since credit quality of each element of the pair is equal to the other element, it should not make any difference whether the pair examined is investment-grade or junk, although we might expect greater variation of implied rates between junk issues on grounds of lower liquidity, and this is just what we see.

If we plug in the current bid price of the TRP.PR.D FixedReset, we may construct the following table showing consistent prices for its soon-may-be-issued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:

Estimate of FloatingReset (received in exchange for TRP.PR.D) Trading Price In Current Conditions
  Assumed FloatingReset
Price if Implied Bill
is equal to
FixedReset Bid Price Spread 1.50% 1.00% 0.50%
TRP.PR.D 17.00 238bp 16.98 16.49 16.00

Based on current market conditions, I suggest that the FloatingResets that will result from conversion are likely to be cheap and trading below the price of their FixedReset counterparts, TRP.PR.D. Therefore I recommend that holders of TRP.PR.D continue to hold the issue and not to convert. I will note that once the FloatingResets commence trading (if, in fact, they do) it may be a good trade to swap the FixedReset for the FloatingReset in the market once both elements of each pair are trading and you can – presumably, according to this analysis – do it with a reasonably good take-out in price, rather than doing it through the company on a 1:1 basis. But that, of course, will depend on the prices at that time and your forecast for the path of policy rates over the next five years. There are no guarantees – my recommendation is based on the assumption that current market conditions with respect to the pairs will continue until the FloatingResets commence trading and that the relative pricing of the two new pairs will reflect these conditions.

Those who wish to convert anyway are advised that the deadline for notifying the company of such a desire is 5 p.m. (EDT) on April 15, 2019. Brokers and other intermediaries generally set their internal deadlines a day or two in advance of this date, so if you wish to convert there’s no time to waste! Note that brokers will, in general, try to execute the instruction on a ‘best efforts’ basis if received between the two deadlines, provided that the procrastinating shareholder grovels entertainingly enough.

CWB.PR.B : Convert or Hold?

April 9th, 2019

It will be recalled that CWB.PR.B will reset at 4.301% effective May 1, 2019.

CWB.PR.B is a FixedReset, 4.40%+276, that commenced trading 2014-2-10 after being announced 2014-1-31. The extension was announced 2019-3-11. The issue is tracked by HIMIPref™ but relegated to the Scraps – FixedReset (Discount) index on credit concerns.

The most logical way to analyze the question of whether or not to convert is through the theory of Preferred Pairs, for which a calculator is available. Briefly, a Strong Pair is defined as a pair of securities that can be interconverted in the future (e.g., CWB.PR.B and the FloatingReset that will exist if enough holders convert). Since they will be interconvertible on this future date, it may be assumed that they will be priced identically on this date (if they aren’t then holders will simply convert en masse to the higher-priced issue). And since they will be priced identically on a given date in the future, any current difference in price must be offset by expectations of an equal and opposite value of dividends to be received in the interim. And since the dividend rate on one element of the pair is both fixed and known, the implied average rate of the other, floating rate, instrument can be determined. Finally, we say, we may compare these average rates and take a view regarding the actual future course of that rate relative to the implied rate, which will provide us with guidance on which element of the pair is likely to outperform the other until the next interconversion date, at which time the process will be repeated.

We can show the break-even rates for each FixedReset / FloatingReset Strong Pair graphically by plotting the implied average 3-month bill rate against the next Exchange Date (which is the date to which the average will be calculated).

pair_fr_190409
Click for Big

The market appears to have lost its fleeting interest in floating rate product; the implied rates until the next interconversion are above the current 3-month bill rate as the averages for investment-grade and junk issues are at +0.78% and +1.24%, respectively. Whatever might be the result of the next few Bank of Canada overnight rate decisions, I suggest that it is unlikely that the average rate over the next five years will be lower than current – but if you disagree, of course, you may interpret the data any way you like.

Since credit quality of each element of the pair is equal to the other element, it should not make any difference whether the pair examined is investment-grade or junk, although we might expect greater variation of implied rates between junk issues on grounds of lower liquidity, and this is just what we see.

If we plug in the current bid price of the CWB.PR.B FixedReset, we may construct the following table showing consistent prices for its soon-may-be-issued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:

Estimate of FloatingReset (received in exchange for CWB.PR.B) Trading Price In Current Conditions
  Assumed FloatingReset
Price if Implied Bill
is equal to
FixedReset Bid Price Spread 1.50% 1.00% 0.50%
CWB.PR.B 19.00 276bp 18.47 17.98 17.48

Based on current market conditions, I suggest that the FloatingResets that will result from conversion are likely to be cheap and trading below the price of their FixedReset counterparts, CWB.PR.B. Therefore I recommend that holders of CWB.PR.B continue to hold the issue and not to convert. I will note that once the FloatingResets commence trading (if, in fact, they do) it may be a good trade to swap the FixedReset for the FloatingReset in the market once both elements of each pair are trading and you can – presumably, according to this analysis – do it with a reasonably good take-out in price, rather than doing it through the company on a 1:1 basis. But that, of course, will depend on the prices at that time and your forecast for the path of policy rates over the next five years. There are no guarantees – my recommendation is based on the assumption that current market conditions with respect to the pairs will continue until the FloatingResets commence trading and that the relative pricing of the two new pairs will reflect these conditions.

Those who wish to convert anyway are advised that the deadline for notifying the company of such a desire is 5:00 p.m. (EDT) on April 15, 2019. Brokers and other intermediaries generally set their internal deadlines a day or two in advance of this date, so if you wish to convert there’s no time to waste! Note that brokers will, in general, try to execute the instruction on a ‘best efforts’ basis if received between the two deadlines, provided that the procrastinating shareholder grovels entertainingly enough.

April 9, 2019

April 9th, 2019
HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices

Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)
Median
YTW
Median
Average
Trading
Value
Median
Mod Dur
(YTW)
Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 -1.0733 % 2,133.3
FixedFloater 0.00 % 0.00 % 0 0.00 0 -1.0733 % 3,914.6
Floater 5.49 % 5.76 % 42,463 14.29 3 -1.0733 % 2,256.0
OpRet 0.00 % 0.00 % 0 0.00 0 -0.1041 % 3,284.6
SplitShare 4.87 % 4.63 % 79,642 3.84 8 -0.1041 % 3,922.5
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.1041 % 3,060.5
Perpetual-Premium 5.57 % -10.58 % 86,153 0.09 10 -0.1021 % 2,957.5
Perpetual-Discount 5.38 % 5.43 % 75,562 14.76 23 -0.3144 % 3,117.1
FixedReset Disc 5.23 % 5.33 % 194,091 14.98 61 -0.2472 % 2,200.0
Deemed-Retractible 5.20 % 5.74 % 96,698 8.16 27 -0.0612 % 3,085.9
FloatingReset 4.23 % 4.23 % 54,490 2.70 5 -0.2595 % 2,404.3
FixedReset Prem 5.07 % 3.59 % 297,789 2.21 22 -0.0769 % 2,584.8
FixedReset Bank Non 1.99 % 4.08 % 136,791 2.71 3 -0.1395 % 2,630.2
FixedReset Ins Non 4.98 % 6.57 % 108,203 8.29 22 -0.1543 % 2,263.4
Performance Highlights
Issue Index Change Notes
BIP.PR.D FixedReset Disc -1.76 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-09
Maturity Price : 21.98
Evaluated at bid price : 22.31
Bid-YTW : 5.98 %
NA.PR.W FixedReset Disc -1.69 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-09
Maturity Price : 17.40
Evaluated at bid price : 17.40
Bid-YTW : 5.52 %
TRP.PR.F FloatingReset -1.69 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-09
Maturity Price : 14.53
Evaluated at bid price : 14.53
Bid-YTW : 6.23 %
MFC.PR.L FixedReset Ins Non -1.62 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2030-01-31
Maturity Price : 25.00
Evaluated at bid price : 17.57
Bid-YTW : 7.97 %
NA.PR.S FixedReset Disc -1.60 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-09
Maturity Price : 18.40
Evaluated at bid price : 18.40
Bid-YTW : 5.42 %
NA.PR.G FixedReset Disc -1.57 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-09
Maturity Price : 21.30
Evaluated at bid price : 21.30
Bid-YTW : 5.29 %
TRP.PR.D FixedReset Disc -1.45 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-09
Maturity Price : 17.00
Evaluated at bid price : 17.00
Bid-YTW : 5.86 %
BAM.PR.N Perpetual-Discount -1.38 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-09
Maturity Price : 20.80
Evaluated at bid price : 20.80
Bid-YTW : 5.76 %
MFC.PR.G FixedReset Ins Non -1.36 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2030-01-31
Maturity Price : 25.00
Evaluated at bid price : 20.96
Bid-YTW : 6.48 %
MFC.PR.H FixedReset Ins Non -1.36 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2030-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.50
Bid-YTW : 5.92 %
BAM.PR.B Floater -1.31 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-09
Maturity Price : 12.08
Evaluated at bid price : 12.08
Bid-YTW : 5.77 %
BAM.PR.K Floater -1.22 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-09
Maturity Price : 12.11
Evaluated at bid price : 12.11
Bid-YTW : 5.76 %
CU.PR.F Perpetual-Discount -1.18 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-09
Maturity Price : 21.00
Evaluated at bid price : 21.00
Bid-YTW : 5.43 %
HSE.PR.A FixedReset Disc -1.17 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-09
Maturity Price : 12.70
Evaluated at bid price : 12.70
Bid-YTW : 6.37 %
PWF.PR.S Perpetual-Discount -1.12 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-09
Maturity Price : 21.82
Evaluated at bid price : 22.10
Bid-YTW : 5.43 %
NA.PR.C FixedReset Disc -1.11 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-09
Maturity Price : 21.92
Evaluated at bid price : 22.30
Bid-YTW : 5.48 %
MFC.PR.K FixedReset Ins Non -1.06 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2030-01-31
Maturity Price : 25.00
Evaluated at bid price : 19.52
Bid-YTW : 7.11 %
BMO.PR.E FixedReset Disc -1.04 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-09
Maturity Price : 22.16
Evaluated at bid price : 22.76
Bid-YTW : 4.88 %
PWF.PR.P FixedReset Disc -1.04 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-09
Maturity Price : 14.25
Evaluated at bid price : 14.25
Bid-YTW : 5.43 %
HSE.PR.E FixedReset Disc -1.01 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-09
Maturity Price : 19.60
Evaluated at bid price : 19.60
Bid-YTW : 6.60 %
NA.PR.E FixedReset Disc 1.25 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-09
Maturity Price : 20.26
Evaluated at bid price : 20.26
Bid-YTW : 5.26 %
IAF.PR.G FixedReset Ins Non 1.25 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2030-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.01
Bid-YTW : 6.31 %
MFC.PR.F FixedReset Ins Non 1.37 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2030-01-31
Maturity Price : 25.00
Evaluated at bid price : 14.75
Bid-YTW : 8.78 %
BAM.PR.X FixedReset Disc 1.70 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-09
Maturity Price : 14.36
Evaluated at bid price : 14.36
Bid-YTW : 5.73 %
Volume Highlights
Issue Index Shares
Traded
Notes
TRP.PR.K FixedReset Prem 209,511 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2022-05-31
Maturity Price : 25.00
Evaluated at bid price : 25.25
Bid-YTW : 4.78 %
BAM.PF.F FixedReset Disc 139,350 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-09
Maturity Price : 19.85
Evaluated at bid price : 19.85
Bid-YTW : 5.65 %
BAM.PR.X FixedReset Disc 78,800 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-09
Maturity Price : 14.36
Evaluated at bid price : 14.36
Bid-YTW : 5.73 %
BAM.PR.K Floater 63,172 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-09
Maturity Price : 12.11
Evaluated at bid price : 12.11
Bid-YTW : 5.76 %
BMO.PR.Y FixedReset Disc 57,235 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-09
Maturity Price : 21.49
Evaluated at bid price : 21.49
Bid-YTW : 5.03 %
RY.PR.S FixedReset Disc 55,550 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-09
Maturity Price : 21.61
Evaluated at bid price : 21.95
Bid-YTW : 4.82 %
There were 32 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
IAF.PR.G FixedReset Ins Non Quote: 21.01 – 22.36
Spot Rate : 1.3500
Average : 0.9398

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2030-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.01
Bid-YTW : 6.31 %

IFC.PR.G FixedReset Ins Non Quote: 21.10 – 21.63
Spot Rate : 0.5300
Average : 0.3174

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2030-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.10
Bid-YTW : 6.57 %

TRP.PR.F FloatingReset Quote: 14.53 – 14.97
Spot Rate : 0.4400
Average : 0.2900

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-09
Maturity Price : 14.53
Evaluated at bid price : 14.53
Bid-YTW : 6.23 %

PWF.PR.L Perpetual-Discount Quote: 23.23 – 23.64
Spot Rate : 0.4100
Average : 0.2674

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-09
Maturity Price : 22.96
Evaluated at bid price : 23.23
Bid-YTW : 5.49 %

RY.PR.S FixedReset Disc Quote: 21.95 – 22.24
Spot Rate : 0.2900
Average : 0.1846

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-09
Maturity Price : 21.61
Evaluated at bid price : 21.95
Bid-YTW : 4.82 %

TRP.PR.D FixedReset Disc Quote: 17.00 – 17.34
Spot Rate : 0.3400
Average : 0.2374

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-09
Maturity Price : 17.00
Evaluated at bid price : 17.00
Bid-YTW : 5.86 %

New Issue: BMO FixedReset 5.10%+351, NVCC

April 8th, 2019

The Bank of Montreal has announced:

a domestic public offering of $250 million of Non-Cumulative 5-Year Rate Reset Class B Preferred Shares Series 46 (Non-Viability Contingent Capital (NVCC)) (the “Preferred Shares Series 46”). The offering will be underwritten on a bought-deal basis by a syndicate of underwriters led by BMO Capital Markets. The Bank has granted to the underwriters an option to purchase up to an additional $50 million of the Preferred Shares Series 46 exercisable at any time up to 48 hours before closing.

The Preferred Shares Series 46 will be issued to the public at a price of $25.00 per share. Holders will be entitled to receive non-cumulative preferential fixed quarterly dividends for the initial period to May 25, 2024, as and when declared by the Board of Directors of the Bank, payable in the amount of $0.31875 per share, to yield 5.10 per cent annually.

Subject to regulatory approval, on May 25, 2024 and on May 25 of every fifth year thereafter, the Bank may redeem the Preferred Shares Series 46 in whole or in part at par. On May 25, 2024, the dividend rate will reset and will reset thereafter every five years to be equal to the 5-Year Government of Canada Bond Yield plus 3.51 per cent. Subject to certain conditions, holders may elect to convert any or all of their Preferred Shares Series 46 into an equal number of Non-Cumulative Floating Rate Class B Preferred Shares Series 47 (Non-Viability Contingent Capital (NVCC)) (“Preferred Shares Series 47”) on May 25, 2024, and on May 25 of every fifth year thereafter. Holders of the Preferred Shares Series 47 will be entitled to receive non-cumulative preferential floating rate quarterly dividends, as and when declared by the Board of Directors of the Bank, equal to the then 3-month Government of Canada Treasury Bill Yield plus 3.51 per cent. Subject to certain conditions, holders may elect to convert any or all of their Preferred Shares Series 47 into an equal number of Preferred Shares Series 46 on May 25, 2029, and on May 25 of every fifth year thereafter.

The anticipated closing date is April 17, 2019. The net proceeds from the offering will be used by the Bank for general banking purposes.

They later announced:

that, as a result of strong investor demand for its previously announced domestic public offering of Non-Cumulative 5-year Rate Reset Class B Preferred Shares Series 46 (Non-Viability Contingent Capital (NVCC)) (the “Preferred Shares Series 46”), the size of the offering has been increased to 14 million shares. The gross proceeds of the offering will now be $350 million. As announced earlier today, the offering will be underwritten on a bought deal basis by a syndicate led by BMO Capital Markets.

The anticipated closing date is April 17, 2019. The net proceeds from the offering will be used by the Bank for general banking purposes.

The new issue is somewhat expensive according to Implied Volatility Analysis:

impvol_bmo_190408_withbmopre
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Alert Readers will have noticed that the curve has been shifted a bit due to the issue BMO.PR.E, a FixedReset 4.85%+268, NVCC, that commenced trading 2018-09-17 after being announced 2018-09-06 – so let’s try a fitting in which it’s not included.

impvol_bmo_190408_withoutbmopre
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According to these analyses, if BMO.PR.E is included in the fitting, the new issue is fairly valued at 24.60, while BMO.PR.E itself has a fair price of 21.14 (as opposed to an actual bid price of 23.00).

If BMO.PR.E is not used to fit the curve, the new issue may be valued at 24.42, while BMO.PR.E is assigned a fair value of 20.80.

It’s interesting to note that the theoretical spread (on a notional non-callable perpetual resettable annuity) is either 345bp or 354bp (depending on whether BMO.PR.E is included), roughly the same as the actual issue spread of 351bp – which means that BMO is basically getting the call options on the issue for free.

April 8, 2019

April 8th, 2019
HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices

Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)
Median
YTW
Median
Average
Trading
Value
Median
Mod Dur
(YTW)
Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 1.5147 % 2,156.5
FixedFloater 0.00 % 0.00 % 0 0.00 0 1.5147 % 3,957.0
Floater 5.43 % 5.68 % 39,376 14.40 3 1.5147 % 2,280.5
OpRet 0.00 % 0.00 % 0 0.00 0 -0.0941 % 3,288.0
SplitShare 4.87 % 4.69 % 79,975 3.85 8 -0.0941 % 3,926.6
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0941 % 3,063.7
Perpetual-Premium 5.57 % -12.13 % 86,090 0.09 10 0.1299 % 2,960.6
Perpetual-Discount 5.36 % 5.40 % 74,557 14.80 23 0.1525 % 3,126.9
FixedReset Disc 5.21 % 5.33 % 196,176 15.00 61 -0.2064 % 2,205.4
Deemed-Retractible 5.20 % 5.75 % 93,132 8.16 27 -0.0408 % 3,087.8
FloatingReset 4.22 % 4.23 % 54,210 2.70 5 -0.2248 % 2,410.5
FixedReset Prem 5.06 % 3.58 % 300,513 2.22 22 -0.0776 % 2,586.8
FixedReset Bank Non 1.98 % 3.96 % 134,431 2.72 3 -0.2088 % 2,633.8
FixedReset Ins Non 4.97 % 6.52 % 111,725 8.32 22 -0.5101 % 2,266.9
Performance Highlights
Issue Index Change Notes
NA.PR.G FixedReset Disc -2.52 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-08
Maturity Price : 21.35
Evaluated at bid price : 21.64
Bid-YTW : 5.19 %
MFC.PR.M FixedReset Ins Non -2.33 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2030-01-31
Maturity Price : 25.00
Evaluated at bid price : 18.48
Bid-YTW : 7.59 %
NA.PR.E FixedReset Disc -2.15 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-08
Maturity Price : 20.01
Evaluated at bid price : 20.01
Bid-YTW : 5.33 %
MFC.PR.F FixedReset Ins Non -1.69 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2030-01-31
Maturity Price : 25.00
Evaluated at bid price : 14.55
Bid-YTW : 8.94 %
TD.PF.K FixedReset Disc -1.59 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-08
Maturity Price : 21.35
Evaluated at bid price : 21.65
Bid-YTW : 5.08 %
TD.PF.I FixedReset Disc -1.29 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-08
Maturity Price : 22.35
Evaluated at bid price : 22.95
Bid-YTW : 5.04 %
TRP.PR.A FixedReset Disc -1.28 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-08
Maturity Price : 14.62
Evaluated at bid price : 14.62
Bid-YTW : 6.04 %
BMO.PR.D FixedReset Disc -1.26 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-08
Maturity Price : 22.20
Evaluated at bid price : 22.69
Bid-YTW : 5.21 %
BAM.PR.X FixedReset Disc -1.26 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-08
Maturity Price : 14.12
Evaluated at bid price : 14.12
Bid-YTW : 5.83 %
GWO.PR.N FixedReset Ins Non -1.23 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2030-01-31
Maturity Price : 25.00
Evaluated at bid price : 14.47
Bid-YTW : 8.93 %
CM.PR.Q FixedReset Disc -1.23 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-08
Maturity Price : 20.15
Evaluated at bid price : 20.15
Bid-YTW : 5.37 %
IFC.PR.A FixedReset Ins Non -1.22 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2030-01-31
Maturity Price : 25.00
Evaluated at bid price : 16.25
Bid-YTW : 8.37 %
PVS.PR.F SplitShare -1.19 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2024-09-30
Maturity Price : 25.00
Evaluated at bid price : 24.95
Bid-YTW : 4.96 %
IAF.PR.G FixedReset Ins Non -1.14 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2030-01-31
Maturity Price : 25.00
Evaluated at bid price : 20.75
Bid-YTW : 6.46 %
MFC.PR.J FixedReset Ins Non -1.12 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2030-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.11
Bid-YTW : 6.52 %
EMA.PR.H FixedReset Disc -1.12 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-08
Maturity Price : 22.72
Evaluated at bid price : 23.78
Bid-YTW : 5.17 %
NA.PR.W FixedReset Disc -1.01 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-08
Maturity Price : 17.70
Evaluated at bid price : 17.70
Bid-YTW : 5.43 %
CU.PR.C FixedReset Disc 1.04 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-08
Maturity Price : 18.43
Evaluated at bid price : 18.43
Bid-YTW : 5.34 %
CCS.PR.C Deemed-Retractible 1.27 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2030-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.17
Bid-YTW : 5.98 %
CM.PR.O FixedReset Disc 1.31 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-08
Maturity Price : 18.51
Evaluated at bid price : 18.51
Bid-YTW : 5.29 %
BAM.PR.B Floater 1.41 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-08
Maturity Price : 12.24
Evaluated at bid price : 12.24
Bid-YTW : 5.69 %
PWF.PR.A Floater 1.48 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-08
Maturity Price : 13.70
Evaluated at bid price : 13.70
Bid-YTW : 5.12 %
HSE.PR.A FixedReset Disc 1.50 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-08
Maturity Price : 12.85
Evaluated at bid price : 12.85
Bid-YTW : 6.30 %
BAM.PR.K Floater 1.66 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-08
Maturity Price : 12.26
Evaluated at bid price : 12.26
Bid-YTW : 5.68 %
PWF.PR.P FixedReset Disc 3.00 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-08
Maturity Price : 14.40
Evaluated at bid price : 14.40
Bid-YTW : 5.38 %
Volume Highlights
Issue Index Shares
Traded
Notes
IGM.PR.B Perpetual-Discount 683,011 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-05-08
Maturity Price : 25.00
Evaluated at bid price : 24.97
Bid-YTW : 3.06 %
BMO.PR.C FixedReset Disc 201,575 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-08
Maturity Price : 22.90
Evaluated at bid price : 23.89
Bid-YTW : 5.08 %
GWO.PR.S Deemed-Retractible 200,038 YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2030-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.60
Bid-YTW : 5.50 %
VNR.PR.A FixedReset Prem 179,733 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-08
Maturity Price : 23.30
Evaluated at bid price : 25.00
Bid-YTW : 4.35 %
TD.PF.C FixedReset Disc 124,600 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-08
Maturity Price : 19.10
Evaluated at bid price : 19.10
Bid-YTW : 5.11 %
RY.PR.H FixedReset Disc 83,500 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-08
Maturity Price : 19.03
Evaluated at bid price : 19.03
Bid-YTW : 5.13 %
There were 38 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
TRP.PR.A FixedReset Disc Quote: 14.62 – 15.35
Spot Rate : 0.7300
Average : 0.4948

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-08
Maturity Price : 14.62
Evaluated at bid price : 14.62
Bid-YTW : 6.04 %

NA.PR.E FixedReset Disc Quote: 20.01 – 20.50
Spot Rate : 0.4900
Average : 0.3078

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-08
Maturity Price : 20.01
Evaluated at bid price : 20.01
Bid-YTW : 5.33 %

MFC.PR.M FixedReset Ins Non Quote: 18.48 – 19.00
Spot Rate : 0.5200
Average : 0.3575

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2030-01-31
Maturity Price : 25.00
Evaluated at bid price : 18.48
Bid-YTW : 7.59 %

NA.PR.W FixedReset Disc Quote: 17.70 – 18.12
Spot Rate : 0.4200
Average : 0.2755

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-08
Maturity Price : 17.70
Evaluated at bid price : 17.70
Bid-YTW : 5.43 %

CM.PR.Q FixedReset Disc Quote: 20.15 – 20.60
Spot Rate : 0.4500
Average : 0.3065

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-08
Maturity Price : 20.15
Evaluated at bid price : 20.15
Bid-YTW : 5.37 %

TD.PF.I FixedReset Disc Quote: 22.95 – 23.35
Spot Rate : 0.4000
Average : 0.3060

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-04-08
Maturity Price : 22.35
Evaluated at bid price : 22.95
Bid-YTW : 5.04 %

IAIS Releases ICS 2.0 Consultation Comments

April 5th, 2019

The International Association of Insurance Supervisors has released the comments received to its 2018 ICS 2.0 Consultation. Assiduous Readers will remember that the comment period closed at the end of October, 2018 and included the following questions that are critical to the question of Deemed Maturities for Insurance issues:

The consultation document, downloadable from the above page, contains the critical (for our purposes) question:
173. The IAIS is considering whether to set an additional criterion requiring Tier 1 Limited instruments to have a principal loss absorbency mechanism (PLAM). Such mechanisms would provide a means for financial instruments to absorb losses on a going-concern basis through reductions in the principal amount and cancellation of distributions. Without such mechanisms these instruments might only provide going concern loss absorbency through cancellation of distributions.

deemedretractiblequestion_181103
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The consultation document, and the files with respondents’ answers to the questions, may be downloaded from the IAIS Insurance Capital Standards page. The ‘critical questions’, ##52-54, are found in Section 6 Reference ICS – Capital resources (public). The IAIS notes that:

The IAIS received 56 submissions in response to the 2018 ICS Consultation Document of which 18 were requested by the respondents to be kept confidential. Therefore, the comments that are posted here publicly are a subset of those that the IAIS will be taking into account as it moves forward with the ICS.

Q52 Section 6 Is a PLAM [Principal Loss Absorbency Mechanism] an appropriate requirement for Tier 1 Limited financial instruments? Please explain any advantages and disadvantages of requiring a PLAM.

There were 17 responses, 8 yes and 9 no.

OSFI answered “No”:

A PLAM is one option considered to assess loss absorbency in a going concern. However, OSFI’s view is that PoNV (point of non viability) loss absorbency could also be considered. Specifically, the IAIS could consider loss absorbency on a going concern basis, as well as on a gone concern basis with contractual or statutory) PoNV triggers. It is possible that an insurer could fail before a PLAM trigger occurs due to the lagging nature of PLAM triggers. Moreover, PLAM triggers could have adverse signalling effects in respect of the financial condition of the issuer, which could precipitate non-viability.

This advocacy of ‘point of non viability loss absorbency’ is consistent with the NVCC rules OSFI has imposed on banks and with its answer to the 2016 consultation. Assiduous readers will remember that I consider the ‘adverse signalling effects’ of a PLAM trigger to be a feature, not a bug; high triggers are good things, and I’m not the only one who says so:

Moreover, high-trigger CoCos would presumably get converted not infrequently which, in terms of reducing myopia in capital markets, would have the merit of reminding holders and issuers about risks in banking.

Broadly speaking, Europeans were in favour of PLAM, although some expressed concerns about complexity: China Banking and Insurance Regulatory Commission (CBIRC); European Insurance and Occupational Pensions Authority (EIOPA); Insurance Europe; Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); General Insurance Association of Japan; Financial Supervisory Service (FSS) & Financial Services Commission (FSC); Legal & General; Association of British Insurers. Comments included EIOPA’s remark:

Requiring a PLAM, i.e. write-down or conversion features, provides a means for the principal of a financial instrument to absorb losses on a going-concern basis. Without such mechanisms these instruments only provide going concern loss absorbency through cancellation of distributions.

Naysayers were dominated by American regulators and firms: Dai-ichi Life Holdings, Inc., American Council of Life Insurers, National Association of Mutual Insurance Companies; Prudential Financial, Inc.; American Property Casualty Insurance Association (APCI); MetLife, Inc; Property Casualty Insurers Association of America (PCI); and the National Association of Insurance Commissioners (NAIC). The Americans have a high degree of concern regarding the continued eligibility of “surplus notes”, as exemplified by the response of the National Association of Mutual Insurance Companies:

PLAM is an addition to the discussion that NAMIC strongly opposes. NAMIC does not see any value in a PLAM requirement. It is simply a way to further complicate the ICS 2.0 providing no value. It seems to be designed to reduce the value of allowing surplus notes to qualify as Tier 1 capital resources.

The elephant in the room is AIG and the European bank bail-outs that left Tier 1 noteholders unscathed, at least relatively. How can anybody say with a straight face that loss absorbency via cessation of dividends is sufficient in the face of those memories?

Q53 Section 6 If a PLAM requirement is not introduced, what amount should be included in ICS capital resources for instruments that qualify as Tier 1 Limited, to reflect going concern loss absorbency? Please explain.

OSFI’s answer is a disgrace:

Capital composition limits address the concerns related to loss absorbency of Tier 1 Limited instruments and therefore their full face amount should be included in the ICS capital resources.

In other words, OSFI would have us believe that since Limited Tier 1 Capital is a limited proportion of the insurers’ high quality capital, it doesn’t really matter whether it’s actually high quality or not. Disgusting.

EIOPA and BaFin stepped into the breach:

Without a PLAM requirement, it is difficult to see how the principal of an instrument absorbs losses in a going concern basis.

Interestingly, the Property Casualty Insurers Association of America (PCI) stated:

In support, PCI cites the response of OSFI-Canada to a similar question in the prior ICS consultation

and quoted in full the dovish response to the 2016 consultation … including the grudging support for a NVCC solution.

Others stated that cessation of distributions worked just fine, e.g., American Property Casualty Insurance Association (APCI):

Tier 1 Limited instruments already provide loss absorbency on a going concern loss basis through cancellation of distributions. Reducing the principal amount of these instruments is only necessary during resolution.

Q54 Section 6 Are there other criteria that could be added to enhance the ability of financial instruments to absorb losses on a going concern and / or on a gone concern basis? Please explain.

OSFI had nothing to say. BaFin and EIOPA had identical answers again:

• In T1, mandatory cancellation of distributions on breach of capital requirement (i.e. a lock-in feature).
• In T2, mandatory deferral of distributions and redemption of principal on breach of capital requirement (i.e. a lock-in feature).
• Requirement for early repurchase (within 5 years from issuance) to be funded out of proceeds of new issuance of
same/higher quality (all tiers).

I don’t quite understand this response. Does “cancellation” mean cancellation forever and ever on T1, as opposed to a temporary “deferral” on T2? How about redemptions? Would such instruments have any rights if the issuer actually did go bankrupt ten years later? And I don’t understand what they mean by an early purchase requirement at all.

So, there you have it. I don’t find anything particularly surprising here; there might be some meaning behind the heavy American participation in this consultation, but an outsider such as myself would be foolish to speculate on just what that meaning might be.