ENB.PR.H To Reset At 4.376%

August 10th, 2018

Enbridge Inc. has announced (on August 2):

that it does not intend to exercise its right to redeem its currently outstanding Cumulative Redeemable Preference Shares, Series H (Series H Shares) (TSX: ENB.PR.H) on September 1, 2018. As a result, subject to certain conditions, the holders of the Series H Shares have the right to convert all or part of their Series H Shares on a one-for-one basis into Cumulative Redeemable Preference Shares, Series I of Enbridge (Series I Shares) on September 1, 2018. Holders who do not exercise their right to convert their Series H Shares into Series I Shares will retain their Series H Shares.

The foregoing conversion right is subject to the conditions that: (i) if Enbridge determines that there would be less than 1,000,000 Series H Shares outstanding after September 1, 2018, then all remaining Series H Shares will automatically be converted into Series I Shares on a one-for-one basis on September 1, 2018; and (ii) alternatively, if Enbridge determines that there would be less than 1,000,000 Series I Shares outstanding after September 1, 2018, no Series H Shares will be converted into Series I Shares. There are currently 14,000,000 Series H Shares outstanding.

With respect to any Series H Shares that remain outstanding after September 1, 2018, holders thereof will be entitled to receive quarterly fixed cumulative preferential cash dividends, as and when declared by the Board of Directors of Enbridge. The new annual dividend rate applicable to the Series H Shares for the five-year period commencing on September 1, 2018 to, but excluding, September 1, 2023 will be 4.376 percent, being equal to the five-year Government of Canada bond yield of 2.256% percent determined as of today plus 2.12 percent in accordance with the terms of the Series H Shares.

With respect to any Series I Shares that may be issued on September 1, 2018, holders thereof will be entitled to receive quarterly floating rate cumulative preferential cash dividends, as and when declared by the Board of Directors of Enbridge. The dividend rate applicable to the Series I Shares for the three-month floating rate period commencing on September 1, 2018 to, but excluding, December 1, 2018 will be 0.88756 percent, based on the annual rate on three month Government of Canada treasury bills for the most recent treasury bills auction of 1.44 percent plus 2.12 percent in accordance with the terms of the Series I Shares (the Floating Quarterly Dividend Rate). The Floating Quarterly Dividend Rate will be reset every quarter.

Beneficial holders of Series H Shares who wish to exercise their right of conversion during the conversion period, which runs from August 2, 2018 until 5:00 p.m. (EST) on August 17, 2018, should communicate as soon as possible with their broker or other intermediary for more information. It is recommended that this be done well in advance of the deadline in order to provide the broker or other intermediary time to complete the necessary steps. Any notices received after this deadline will not be valid.

ENB.PR.H is a FixedReset, 4.00%+212, that commenced trading 2012-3-29 after being announced 2012-3-20. The issue is tracked by HIMIPref™ but relegated to the Scraps 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., ENB.PR.H 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).

pairs_fr_180810
Click for Big

The market appears to be relatively uninterested in floating rate product; the implied rates until the next interconversion bracket the current 3-month bill rate as the averages for investment-grade and junk issues are at +1.49% and +1.22%, 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 ENB.PR.H 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 ENB.PR.H) Trading Price In Current Conditions
  Assumed FloatingReset
Price if Implied Bill
is equal to
FixedReset Bid Price Spread 2.00% 1.50% 1.00%
ENB.PR.H 18.67 212bp 18.42 17.93 17.44

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. Therefore, it seems likely that I will recommend that holders of ENB.PR.H continue to hold the issue and not to convert, but I will wait until it’s closer to the August 17 notification deadline before making a final pronouncement. 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.

MFC.PR.K To Be Extended

August 10th, 2018

Manulife Financial Corporation has announced (although not yet on their website):

that it does not intend to exercise its right to redeem all or any of its currently outstanding 8,000,000 Non-cumulative Rate Reset Class 1 Shares Series 13 (the “Series 13 Preferred Shares”) (TSX: MFC.PR.K) on September 19, 2018. As a result, subject to certain conditions described in the prospectus supplement dated June 17, 2013 relating to the issuance of the Series 13 Preferred Shares (the “Prospectus”), the holders of the Series 13 Preferred Shares have the right, at their option, to convert all or part of their Series 13 Preferred Shares on a one-for-one basis into Non-cumulative Floating Rate Class 1 Shares Series 14 of Manulife (the “Series 14 Preferred Shares”) on September 19, 2018. A formal notice of the right to convert Series 13 Preferred Shares into Series 14 Preferred Shares will be sent to the registered holders of the Series 13 Preferred Shares in accordance with the share conditions of the Series 13 Preferred Shares. Holders of Series 13 Preferred Shares are not required to elect to convert all or any part of their Series 13 Preferred Shares into Series 14 Preferred Shares. Holders who do not exercise their right to convert their Series 13 Preferred Shares into Series 14 Preferred Shares on such date will retain their Series 13 Preferred Shares, unless automatically converted in accordance with the conditions below.

The foregoing conversion right is subject to the conditions that: (i) if, after September 4, 2018, Manulife determines that there would be less than 1,000,000 Series 13 Preferred Shares outstanding on September 19, 2018, then all remaining Series 13 Preferred Shares will automatically be converted into an equal number of Series 14 Preferred Shares on September 19, 2018, and (ii) alternatively, if, after September 4, 2018, Manulife determines that there would be less than 1,000,000 Series 14 Preferred Shares outstanding on September 19, 2018, then no Series 13 Preferred Shares will be converted into Series 14 Preferred Shares. In either case, Manulife will give written notice to that effect to any registered holders of Series 13 Preferred Shares affected by the preceding minimums on or before September 11, 2018.

The dividend rate applicable to the Series 13 Preferred Shares for the 5-year period commencing on September 20, 2018, and ending on September 19, 2023, and the dividend rate applicable to the Series 14 Preferred Shares for the 3-month period commencing on September 20, 2018, and ending on December 19, 2018, will be determined and announced by way of a news release on August 21, 2018. Manulife will also give written notice of these dividend rates to the registered holders of Series 13 Preferred Shares.

Beneficial owners of Series 13 Preferred Shares who wish to exercise their right of conversion should instruct their broker or other nominee to exercise such right before 5:00 p.m. (Toronto time) on September 4, 2018. Conversion inquiries should be directed to Manulife’s Registrar and Transfer Agent, AST Trust Company (Canada), at 1-800-387-0825.

Subject to certain conditions described in the Prospectus, Manulife may redeem the Series 13 Preferred Shares, in whole or in part, on September 19, 2023 and on September 19 every five years thereafter and may redeem the Series 14 Preferred Shares, in whole or in part, after September 19, 2018.

The Toronto Stock Exchange (“TSX”) has conditionally approved the listing of the Series 14 Preferred Shares effective upon conversion. Listing of the Series 14 Preferred Shares is subject to Manulife fulfilling all the listing requirements of the TSX and, upon approval, the Series 14 Preferred Shares will be listed on the TSX under the trading symbol “MFC.PR.S”.

MFC.PR.K is a FixedReset, 3.80%+222, that commenced trading 2013-6-21 after being announced June 17. It is tracked by HIMIPref™ and is assigned to the FixedReset subindex. Since it is an insurance holding company issue without a NVCC clause, a Deemed Maturity at par as of 2025-1-31 has been added to the redemption schedule as is my normal practice.

I will have more to say once the reset dividend rate is announced on August 21.

August 10, 2018

August 10th, 2018

Jobs, jobs, … part-time civil-service jobs!:

The Canadian economy added about 54,000 new jobs last month, causing the jobless rate to fall two-tenths of a percentage point to 5.8 per cent.

Statistics Canada said Friday that the economy added 82,000 part-time jobs, but that figure was offset by a loss of 28,000 full-time positions.

The public sector added 49,600 new jobs, while the private sector added 5,200 positions.

I was amused to see that everybody’s favourite whipping boys, the Credit Rating Agencies, received another touch of the lash today:

The lira has long been falling on worries about Erdogan’s influence over monetary policy and worsening relations with the United States. That turned into a rout on Friday, with the lira diving more than 18 percent at one point, the biggest one-day drop since Turkey’s 2001 financial crisis.

It has also lost more than 40 percent this year, hitting a new record low after Trump took steps to punish Turkey in a wide-ranging dispute.

Erdogan’s characteristic defiance in the face of the crisis has further unnerved investors. The president, who says a shadowy “interest rate lobby” and Western credit ratings agencies are attempting to bring down Turkey’s economy, appealed to Turks’ patriotism.

Perhaps Mr. Erdogan and his boys will pay them a friendly visit.

… and now it’s time for me to get to work on PrefLetter!

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 -0.0538 % 3,102.2
FixedFloater 0.00 % 0.00 % 0 0.00 0 -0.0538 % 5,692.4
Floater 3.48 % 3.69 % 51,821 18.05 4 -0.0538 % 3,280.5
OpRet 0.00 % 0.00 % 0 0.00 0 0.0079 % 3,212.3
SplitShare 4.57 % 4.38 % 47,201 4.85 5 0.0079 % 3,836.2
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0079 % 2,993.1
Perpetual-Premium 5.62 % -10.73 % 58,245 0.09 10 -0.0551 % 2,911.1
Perpetual-Discount 5.41 % 5.52 % 57,858 14.59 25 -0.1174 % 2,989.3
FixedReset 4.29 % 4.75 % 130,201 3.87 107 -0.2178 % 2,576.9
Deemed-Retractible 5.13 % 5.88 % 56,452 5.41 26 -0.0129 % 2,982.0
FloatingReset 3.43 % 3.63 % 29,850 5.72 7 0.1500 % 2,840.9
Performance Highlights
Issue Index Change Notes
BIP.PR.E FixedReset -1.38 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2023-03-31
Maturity Price : 25.00
Evaluated at bid price : 25.03
Bid-YTW : 5.14 %
MFC.PR.O FixedReset -1.27 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2021-06-19
Maturity Price : 25.00
Evaluated at bid price : 26.35
Bid-YTW : 3.91 %
HSE.PR.A FixedReset -1.23 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-08-10
Maturity Price : 17.71
Evaluated at bid price : 17.71
Bid-YTW : 5.36 %
MFC.PR.N FixedReset -1.17 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.75
Bid-YTW : 5.44 %
GWO.PR.N FixedReset -1.05 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 18.85
Bid-YTW : 7.98 %
TRP.PR.B FixedReset 1.11 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-08-10
Maturity Price : 17.24
Evaluated at bid price : 17.24
Bid-YTW : 5.02 %
TRP.PR.H FloatingReset 1.35 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-08-10
Maturity Price : 17.32
Evaluated at bid price : 17.32
Bid-YTW : 4.05 %
Volume Highlights
Issue Index Shares
Traded
Notes
TD.PF.C FixedReset 152,846 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-08-10
Maturity Price : 23.06
Evaluated at bid price : 23.50
Bid-YTW : 4.77 %
CM.PR.R FixedReset 109,963 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2022-07-31
Maturity Price : 25.00
Evaluated at bid price : 25.30
Bid-YTW : 4.13 %
NA.PR.S FixedReset 72,200 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-08-10
Maturity Price : 22.82
Evaluated at bid price : 23.45
Bid-YTW : 4.96 %
BNS.PR.R FixedReset 43,200 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-01-26
Maturity Price : 25.00
Evaluated at bid price : 25.13
Bid-YTW : 3.01 %
CM.PR.P FixedReset 38,270 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-08-10
Maturity Price : 22.68
Evaluated at bid price : 23.10
Bid-YTW : 4.84 %
TD.PF.I FixedReset 38,211 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2022-10-31
Maturity Price : 25.00
Evaluated at bid price : 25.40
Bid-YTW : 4.14 %
There were 17 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
IFC.PR.E Deemed-Retractible Quote: 24.29 – 24.58
Spot Rate : 0.2900
Average : 0.1926

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.29
Bid-YTW : 5.88 %

MFC.PR.O FixedReset Quote: 26.35 – 26.58
Spot Rate : 0.2300
Average : 0.1379

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2021-06-19
Maturity Price : 25.00
Evaluated at bid price : 26.35
Bid-YTW : 3.91 %

TRP.PR.G FixedReset Quote: 24.30 – 24.50
Spot Rate : 0.2000
Average : 0.1303

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-08-10
Maturity Price : 23.23
Evaluated at bid price : 24.30
Bid-YTW : 5.23 %

BAM.PR.N Perpetual-Discount Quote: 20.80 – 20.98
Spot Rate : 0.1800
Average : 0.1140

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-08-10
Maturity Price : 20.80
Evaluated at bid price : 20.80
Bid-YTW : 5.79 %

GWO.PR.R Deemed-Retractible Quote: 22.38 – 22.55
Spot Rate : 0.1700
Average : 0.1057

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.38
Bid-YTW : 6.98 %

TD.PF.J FixedReset Quote: 25.50 – 25.70
Spot Rate : 0.2000
Average : 0.1364

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2023-04-30
Maturity Price : 25.00
Evaluated at bid price : 25.50
Bid-YTW : 4.28 %

August 9, 2018

August 9th, 2018

FinTech, eh?

Mobile trading apps and web platforms are much less secure than banking apps, according to a report from U.S. cybersecurity firm IOActive Inc., which found a variety of vulnerabilities in a series of recent tests.

Overall, the firm reports, its tests of the security on a variety of brokerage firms’ trading apps, which were carried out from mid-2017 to mid-2018, found brokers’ security measures to be much weaker than comparable banking apps. Among other things, it found weaknesses with encryption, denial of service and authentication measures.

In particular, it found desktop apps and mobile apps that transmitted some data unencrypted, including passwords and certain personal information. It also found passwords that are stored unencrypted, which could be vulnerable to hackers.

The company’s blog post about this, which includes a link to the full report, is titled Are You Trading Stocks Securely? Exposing Security Flaws in Trading Technologies.

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 -0.6544 % 3,103.9
FixedFloater 0.00 % 0.00 % 0 0.00 0 -0.6544 % 5,695.4
Floater 3.48 % 3.69 % 51,688 18.06 4 -0.6544 % 3,282.3
OpRet 0.00 % 0.00 % 0 0.00 0 0.0236 % 3,212.1
SplitShare 4.57 % 4.38 % 47,959 4.85 5 0.0236 % 3,835.9
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0236 % 2,992.9
Perpetual-Premium 5.62 % -11.36 % 59,130 0.09 10 0.0197 % 2,912.7
Perpetual-Discount 5.40 % 5.51 % 60,051 14.62 25 0.2024 % 2,992.8
FixedReset 4.28 % 4.71 % 129,777 3.77 107 0.2440 % 2,582.5
Deemed-Retractible 5.13 % 5.88 % 55,289 5.41 26 0.2037 % 2,982.4
FloatingReset 3.35 % 3.53 % 29,650 5.74 7 -0.0391 % 2,836.7
Performance Highlights
Issue Index Change Notes
BAM.PR.B Floater -1.01 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-08-09
Maturity Price : 17.69
Evaluated at bid price : 17.69
Bid-YTW : 3.69 %
NA.PR.E FixedReset 1.01 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-08-09
Maturity Price : 22.84
Evaluated at bid price : 24.12
Bid-YTW : 4.91 %
TRP.PR.D FixedReset 1.02 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-08-09
Maturity Price : 22.16
Evaluated at bid price : 22.85
Bid-YTW : 5.06 %
HSE.PR.A FixedReset 1.30 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-08-09
Maturity Price : 17.93
Evaluated at bid price : 17.93
Bid-YTW : 5.27 %
Volume Highlights
Issue Index Shares
Traded
Notes
GWO.PR.Q Deemed-Retractible 154,400 YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.85
Bid-YTW : 6.17 %
NA.PR.E FixedReset 142,319 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-08-09
Maturity Price : 22.84
Evaluated at bid price : 24.12
Bid-YTW : 4.91 %
CM.PR.S FixedReset 122,470 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-08-09
Maturity Price : 22.82
Evaluated at bid price : 24.01
Bid-YTW : 4.82 %
TRP.PR.C FixedReset 75,715 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-08-09
Maturity Price : 17.79
Evaluated at bid price : 17.79
Bid-YTW : 5.10 %
MFC.PR.Q FixedReset 66,210 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2023-06-19
Maturity Price : 25.00
Evaluated at bid price : 25.10
Bid-YTW : 4.79 %
CM.PR.R FixedReset 61,656 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2022-07-31
Maturity Price : 25.00
Evaluated at bid price : 25.35
Bid-YTW : 4.07 %
There were 29 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
MFC.PR.N FixedReset Quote: 24.03 – 24.50
Spot Rate : 0.4700
Average : 0.2737

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.03
Bid-YTW : 5.21 %

MFC.PR.R FixedReset Quote: 26.17 – 26.45
Spot Rate : 0.2800
Average : 0.1731

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2022-03-19
Maturity Price : 25.00
Evaluated at bid price : 26.17
Bid-YTW : 3.67 %

VNR.PR.A FixedReset Quote: 24.80 – 25.14
Spot Rate : 0.3400
Average : 0.2568

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2022-10-15
Maturity Price : 25.00
Evaluated at bid price : 24.80
Bid-YTW : 4.95 %

CM.PR.S FixedReset Quote: 24.01 – 24.24
Spot Rate : 0.2300
Average : 0.1511

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-08-09
Maturity Price : 22.82
Evaluated at bid price : 24.01
Bid-YTW : 4.82 %

BAM.PR.T FixedReset Quote: 21.25 – 21.48
Spot Rate : 0.2300
Average : 0.1547

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-08-09
Maturity Price : 21.25
Evaluated at bid price : 21.25
Bid-YTW : 5.17 %

TRP.PR.H FloatingReset Quote: 17.09 – 17.42
Spot Rate : 0.3300
Average : 0.2605

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-08-09
Maturity Price : 17.09
Evaluated at bid price : 17.09
Bid-YTW : 4.00 %

August 8, 2018

August 8th, 2018

PerpetualDiscounts now yield 5.53%, equivalent to 7.19% interest at the standard equivalency factor of 1.3x. Long corporates now yield a little over 4.00%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 320bp, unchanged from August 1.

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 0.3350 % 3,124.3
FixedFloater 0.00 % 0.00 % 0 0.00 0 0.3350 % 5,733.0
Floater 3.46 % 3.65 % 53,614 18.15 4 0.3350 % 3,303.9
OpRet 0.00 % 0.00 % 0 0.00 0 -0.0551 % 3,211.3
SplitShare 4.57 % 4.38 % 47,761 4.85 5 -0.0551 % 3,835.0
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0551 % 2,992.2
Perpetual-Premium 5.62 % -11.09 % 59,610 0.09 10 -0.0157 % 2,912.1
Perpetual-Discount 5.40 % 5.53 % 56,651 14.60 25 0.0138 % 2,986.8
FixedReset 4.29 % 4.74 % 128,026 3.84 107 0.1093 % 2,576.2
Deemed-Retractible 5.14 % 5.98 % 55,704 5.41 26 0.0793 % 2,976.3
FloatingReset 3.35 % 3.55 % 30,735 5.74 7 -0.0521 % 2,837.8
Performance Highlights
Issue Index Change Notes
HSE.PR.A FixedReset -1.28 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-08-08
Maturity Price : 17.70
Evaluated at bid price : 17.70
Bid-YTW : 5.34 %
BAM.PF.B FixedReset 1.27 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-08-08
Maturity Price : 23.26
Evaluated at bid price : 23.95
Bid-YTW : 5.10 %
CU.PR.G Perpetual-Discount 1.33 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-08-08
Maturity Price : 21.34
Evaluated at bid price : 21.34
Bid-YTW : 5.37 %
MFC.PR.L FixedReset 8.87 % Mostly reversing yesterday‘s reported loss of 4.93% – but still basically flat on the month-to-date.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.08
Bid-YTW : 5.94 %
Volume Highlights
Issue Index Shares
Traded
Notes
BNS.PR.G FixedReset 103,721 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2021-07-25
Maturity Price : 25.00
Evaluated at bid price : 26.39
Bid-YTW : 3.59 %
TD.PF.C FixedReset 103,642 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-08-08
Maturity Price : 23.08
Evaluated at bid price : 23.51
Bid-YTW : 4.75 %
CM.PR.O FixedReset 103,312 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-08-08
Maturity Price : 22.89
Evaluated at bid price : 23.45
Bid-YTW : 4.85 %
PWF.PR.L Perpetual-Discount 101,375 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-08-08
Maturity Price : 22.81
Evaluated at bid price : 23.09
Bid-YTW : 5.55 %
PWF.PR.F Perpetual-Discount 99,086 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-08-08
Maturity Price : 23.48
Evaluated at bid price : 23.75
Bid-YTW : 5.56 %
BIP.PR.B FixedReset 90,822 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2020-12-31
Maturity Price : 25.00
Evaluated at bid price : 25.62
Bid-YTW : 4.68 %
There were 31 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
CM.PR.P FixedReset Quote: 23.06 – 23.35
Spot Rate : 0.2900
Average : 0.1904

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-08-08
Maturity Price : 22.64
Evaluated at bid price : 23.06
Bid-YTW : 4.82 %

EIT.PR.A SplitShare Quote: 25.24 – 25.59
Spot Rate : 0.3500
Average : 0.2639

YTW SCENARIO
Maturity Type : Soft Maturity
Maturity Date : 2024-03-14
Maturity Price : 25.00
Evaluated at bid price : 25.24
Bid-YTW : 4.78 %

MFC.PR.J FixedReset Quote: 25.11 – 25.40
Spot Rate : 0.2900
Average : 0.2072

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2023-03-19
Maturity Price : 25.00
Evaluated at bid price : 25.11
Bid-YTW : 4.92 %

EMA.PR.H FixedReset Quote: 25.55 – 25.85
Spot Rate : 0.3000
Average : 0.2202

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2023-08-15
Maturity Price : 25.00
Evaluated at bid price : 25.55
Bid-YTW : 4.41 %

RY.PR.H FixedReset Quote: 23.60 – 23.89
Spot Rate : 0.2900
Average : 0.2109

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-08-08
Maturity Price : 23.06
Evaluated at bid price : 23.60
Bid-YTW : 4.75 %

TRP.PR.H FloatingReset Quote: 17.17 – 17.43
Spot Rate : 0.2600
Average : 0.1843

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-08-08
Maturity Price : 17.17
Evaluated at bid price : 17.17
Bid-YTW : 3.98 %

EMA.PR.C : No Conversion to FloatingReset

August 8th, 2018

Emera Incorporated has announced:

that after having taken into account all conversion notices received from holders of its outstanding Cumulative Rate Reset First Preferred Shares, Series C (the “Series C Shares”) by the July 31, 2018 deadline for conversion notices, less than the 1,000,000 Series C Shares required to give effect to conversions into Cumulative Floating Rate First Preferred Shares, Series D (the “Series D Shares”) were tendered for conversion. As a result, none of Emera’s outstanding Series C Shares will be converted into Series D Shares on August 15, 2018. The Series C Shares will continue to be listed on the Toronto Stock Exchange (TSX) under the symbol EMA.PR.C.

It will be recalled that after notice of extension the rate was reset to 4.721% and that I recommended against conversion.

EMA.PR.C was issued as a FixedReset, 4.10%+265, that commenced trading 2012-6-7 after being announced 2012-5-29. DBRS discontinued coverage of Emera in June, 2016. The preferreds are rated P-2(low) by S&P. It is tracked by HIMIPref™ and is assigned to the FixedReset subindex.

FFN.PR.A To Get Bigger

August 8th, 2018

Quadravest has announced:

North American Financial 15 Split Corp. (the “Company”) is pleased to announce it will undertake an offering of Preferred Shares and Class A Shares of the Company. The offering will be co-led by National Bank Financial Inc., CIBC, Scotia Capital Inc., RBC Capital Markets and will also include TD Securities Inc., BMO Capital Markets, Canaccord Genuity Corp., Industrial Alliance Securities Inc., Echelon Wealth Partners, GMP Securities L.P., Raymond James, Desjardins Securities Inc., Mackie Research Capital Corporation and Manulife Securities Incorporated.

The Preferred Shares will be offered at a price of $9.90 per Preferred Share to yield 5.6% and the Class A Shares will be offered at a price of $8.80 per Class A Share to yield 13.6%. The closing price on the TSX of each of the Preferred Shares and the Class A Shares on August 7, 2018 was $10.14 and $8.90, respectively.

Since inception of the Company, the aggregate dividends declared on the Preferred Shares have been $7.26 per share and the aggregate dividends declared on the Class A Shares have been $12.15 per share, for a combined total of $19.41. All distributions to date have been made in tax advantage eligible Canadian dividends or capital gains dividends.

The net proceeds of the offering will be used by the Company to invest in an actively managed, high quality portfolio consisting of 15 financial services companies made up of Canadian and U.S. issuers as follows:

Bank of Montreal National Bank of Canada Bank of America Corp.
The Bank of Nova Scotia Manulife Financial Corporation Citigroup Inc.
Canadian Imperial Bank of Commerce Sun Life Financial Services of Canada Inc. Goldman Sachs Group Inc.
Royal Bank of Canada Great-West Lifeco Inc. JP Morgan Chase & Co.
The Toronto-Dominion Bank CI Financial Corp. Wells Fargo & Co.

The Company’s investment objectives are:
Preferred Shares:
i. to provide holders of the Preferred Shares with fixed, cumulative preferential monthly cash dividends currently in the amount of 5.50% annually, to be set by the Board of Directors annually subject to a minimum of 5.25% until
2019; and
ii. on or about the termination date, currently December 1, 2019 (subject to further 5 year extensions thereafter), to pay the holders of the Preferred Shares $10.00 per Preferred Share.
Class A Shares:
i. to provide holders of the Class A Shares with regular monthly cash dividends in an amount to be determined by the Board of the Directors; and
ii. to permit holders to participate in all growth in the net asset value of the Company above $10 per Unit, by paying holders on or about the termination date of December 1, 2019 (subject to further 5 year extensions thereafter) such amounts as remain in the Company after paying $10 per Preferred Share.

The sales period of this overnight offering will end at 9:00 a.m. EST on August 9, 2018. The offering is expected to close on or about August 16, 2018 and is subject to certain closing conditions including approval by the TSX.

So they’re charging 18.70 per Whole Unit, a hefty 8.2% premium to the 2018-07-31 NAVPU of 17.28. What a nice business it is!

FFN.PR.A last got bigger in October, 2017. It will be recalled that there was a temporary boost in preferred Dividend at the end of September, 2017; there is no current word on whether this boost will be extended.

Update, 2018-8-12: The offering was successful:

North American Financial 15 Split Corp. (the “Company”) is pleased to announce it has completed the overnight marketing of up to 3,363,000 Preferred Shares and up to 3,363,000 Class A Shares of the Company. Total proceeds of the offering are expected to be approximately $62.9 million.

August 7, 2018

August 7th, 2018
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 -0.2006 % 3,113.9
FixedFloater 0.00 % 0.00 % 0 0.00 0 -0.2006 % 5,713.8
Floater 3.47 % 3.67 % 54,235 18.10 4 -0.2006 % 3,292.9
OpRet 0.00 % 0.00 % 0 0.00 0 -0.0079 % 3,213.1
SplitShare 4.57 % 4.37 % 47,357 4.86 5 -0.0079 % 3,837.1
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0079 % 2,993.9
Perpetual-Premium 5.62 % -11.72 % 59,838 0.09 10 -0.0433 % 2,912.6
Perpetual-Discount 5.40 % 5.53 % 53,872 14.61 25 0.0224 % 2,986.4
FixedReset 4.30 % 4.73 % 128,385 3.84 107 0.0702 % 2,573.4
Deemed-Retractible 5.15 % 6.07 % 57,898 5.41 26 -0.0226 % 2,974.0
FloatingReset 3.35 % 3.55 % 31,110 5.75 7 0.2221 % 2,839.3
Performance Highlights
Issue Index Change Notes
MFC.PR.L FixedReset -4.93 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.20
Bid-YTW : 7.51 %
CU.PR.G Perpetual-Discount -1.40 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-08-07
Maturity Price : 21.06
Evaluated at bid price : 21.06
Bid-YTW : 5.44 %
BIP.PR.A FixedReset -1.23 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-08-07
Maturity Price : 23.67
Evaluated at bid price : 24.00
Bid-YTW : 5.98 %
EMA.PR.C FixedReset 1.22 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-08-07
Maturity Price : 22.83
Evaluated at bid price : 24.12
Bid-YTW : 5.04 %
BAM.PF.F FixedReset 1.22 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-08-07
Maturity Price : 23.84
Evaluated at bid price : 24.95
Bid-YTW : 5.10 %
TD.PF.E FixedReset 1.60 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2020-10-31
Maturity Price : 25.00
Evaluated at bid price : 24.79
Bid-YTW : 4.14 %
Volume Highlights
Issue Index Shares
Traded
Notes
BMO.PR.Q FixedReset 225,550 YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.12
Bid-YTW : 4.35 %
TD.PF.D FixedReset 71,816 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2020-07-31
Maturity Price : 25.00
Evaluated at bid price : 24.57
Bid-YTW : 4.57 %
MFC.PR.R FixedReset 57,400 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2022-03-19
Maturity Price : 25.00
Evaluated at bid price : 26.01
Bid-YTW : 3.86 %
SLF.PR.H FixedReset 56,909 YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.11
Bid-YTW : 5.88 %
W.PR.K FixedReset 49,500 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2021-01-15
Maturity Price : 25.00
Evaluated at bid price : 26.15
Bid-YTW : 3.43 %
BNS.PR.G FixedReset 46,818 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2021-07-25
Maturity Price : 25.00
Evaluated at bid price : 26.38
Bid-YTW : 3.60 %
There were 11 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
MFC.PR.L FixedReset Quote: 21.20 – 23.19
Spot Rate : 1.9900
Average : 1.3039

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.20
Bid-YTW : 7.51 %

IAG.PR.I FixedReset Quote: 25.16 – 26.16
Spot Rate : 1.0000
Average : 0.5873

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2023-03-31
Maturity Price : 25.00
Evaluated at bid price : 25.16
Bid-YTW : 4.80 %

MFC.PR.Q FixedReset Quote: 24.85 – 25.29
Spot Rate : 0.4400
Average : 0.2979

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.85
Bid-YTW : 4.98 %

CU.PR.G Perpetual-Discount Quote: 21.06 – 21.40
Spot Rate : 0.3400
Average : 0.2056

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-08-07
Maturity Price : 21.06
Evaluated at bid price : 21.06
Bid-YTW : 5.44 %

BIP.PR.A FixedReset Quote: 24.00 – 24.34
Spot Rate : 0.3400
Average : 0.2163

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-08-07
Maturity Price : 23.67
Evaluated at bid price : 24.00
Bid-YTW : 5.98 %

PWF.PR.Q FloatingReset Quote: 21.70 – 22.20
Spot Rate : 0.5000
Average : 0.4026

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-08-07
Maturity Price : 21.38
Evaluated at bid price : 21.70
Bid-YTW : 3.48 %

MAPF Performance: July, 2018

August 4th, 2018

Malachite Aggressive Preferred Fund’s Net Asset Value per Unit as of the close July 31, 2018, was $10.3615.

Returns to July 31, 2018
Period MAPF BMO-CM “50” Preferred Share Index TXPR*
Total Return
CPD – according to Blackrock
One Month +1.07% +1.13% +1.13% N/A
Three Months +2.60% +2.95% +2.41% N/A
One Year +10.59% +6.90% +5.26% +%
Two Years (annualized) +18.90% +13.31% +10.94% N/A
Three Years (annualized) +9.83% +7.89% +6.30% +%
Four Years (annualized) +4.31% +2.82% +1.55% N/A
Five Years (annualized) +5.30% +3.04% +2.18% +%
Six Years (annualized) +4.73% +2.82% +1.89% N/A
Seven Years (annualized) +4.46% +3.06% +2.23% N/A
Eight Years (annualized) +5.81% +4.26% +3.22% N/A
Nine Years (annualized) +6.84% +4.87% +3.74% N/A
Ten Years (annualized) +11.01% +5.03% +3.95% +%
Eleven Years (annualized) +9.22% +3.82% +2.72%  
Twelve Years (annualized) +8.92% +3.55%    
Thirteen Years (annualized) +8.58% +3.52%    
Fourteen Years (annualized) +8.49% +3.63%    
Fifteen Years (annualized) +9.17% +3.79%    
Sixteen Years (annualized) +9.43% +3.94%    
Seventeen Years (annualized) +9.54% +3.95%    
MAPF returns assume reinvestment of distributions, and are shown after expenses but before fees.
The full name of the BMO-CM “50” index is the BMO Capital Markets “50” Preferred Share Index. It is calculated without accounting for fees.
“TXPR” is the S&P/TSX Preferred Share Index. It is calculated without accounting for fees, but does assume reinvestment of dividends.
CPD Returns are for the NAV and are after all fees and expenses. Reinvestment of dividends is assumed.
Figures for National Bank Preferred Equity Income Fund (formerly Omega Preferred Equity) (which are after all fees and expenses) for 1-, 3- and 12-months are +1.06%, +2.07% and +4.61%, respectively, according to Morningstar after all fees & expenses. Three year performance is +6.08%; five year is +2.88%; ten year is +4.34%
Manulife Preferred Income Class Adv has been terminated by Manulife.
Figures for Horizons Active Preferred Share ETF (HPR) (which are after all fees and expenses) for 1-, 3- and 12-months are +1.32%, +2.36% & +6.04%, respectively. Three year performance is +7.79%, five-year is +3.63%
Figures for National Bank Preferred Equity Fund (formerly Altamira Preferred Equity Fund) are +1.24%, +2.27% and +5.20% for one-, three- and twelve months, respectively. Three year performance is +7.00%; five-year is +2.42%

According to the fund’s fact sheet as of June 30, 2016, the fund’s inception date was October 30, 2015. I do not know how they justify this nonsensical statement, but will assume that prior performance is being suppressed in some perfectly legal manner that somebody at National considers ethical.

The figures for the NAV of BMO S&P/TSX Laddered Preferred Share Index ETF (ZPR) is +5.24% for the past twelve months. Two year performance is +13.34%, three year is +6.23%, five year is +0.44%.
Figures for Natixis Canadian Preferred Share Class Series F (formerly NexGen Canadian Preferred Share Tax Managed Fund) are +0.81%, +2.32% and +3.25% for one-, three- and twelve-months, respectively. Three year performance is 6.14%.
Figures for BMO Preferred Share Fund (advisor series) according to Morningstar are +1.15%, +2.18% and +2.72% for the past one-, three- and twelve-months, respectively. Three year performance is +4.18%.
Figures for PowerShares Canadian Preferred Share Index Class, Series F are +5.31% for the past twelve months. The three-year figure is +8.21%; five years is +2.80%
Figures for the First Asset Preferred Share Investment Trust (PSF.UN) are no longer available since the fund has merged with First Asset Preferred Share ETF (FPR)
Figures for Lysander-Slater Preferred Share Dividend Fund according to Morningstar are +1.01%, +2.33% and +5.31% for the past one, three and twelve months, respectively. Three year performance is +5.79%.
Figures for the Desjardins Canadian Preferred Share Fund A Class, as reported by Morningstar are +1.16%, +2.34% and +4.08% for the past one, three and twelve months, respectively.

MAPF returns assume reinvestment of dividends, and are shown after expenses but before fees. Past performance is not a guarantee of future performance. You can lose money investing in Malachite Aggressive Preferred Fund or any other fund. For more information, see the fund’s main page. The fund is available either directly from Hymas Investment Management or through a brokerage account at Odlum Brown Limited.

The preferred share market seems to have paused its strong advance from the lows of late 2014 to early 2016, but I think that there is still room for outsized gains. The Seniority Spread (the interest-equivalent yield on reasonably liquid, investment-grade PerpetualDiscounts less the yield on long term corporate bonds) is still quite elevated (chart end-date 2018-7-13):

pl_180713_body_chart_1
Click for Big

… and the relationship between five-year Canada yields and yields on investment-grade FixedResets is also well within what I consider ‘decoupled panic’ territory (chart end-date 2018-7-13):

pl_180713_body_chart_5
Click for Big

In addition, I feel that the yield on five-year Canadas is unsustainably low (it should be the inflation rate plus an increment of … 1%? 1.5%? 2.0%?),and a return to sustainable levels is likely over the medium term.

FixedReset performance on the month was +1.35% vs. PerpetualDiscounts of +0.18% in July; over the past three months, the former class has outperformed slightly.:

himi_indexperf_180731
Click for Big

Floaters did well on the month, as they returned +4.42% for July and +29.1% for the past twelve months. But look at the long-term performance:

himi_floaterperf_180731
Click for Big

Some Assiduous Readers will be interested to observe that the ‘Quantitative Easing’ decline was not as bad as the ‘Credit Crunch’ decline, which took the sector down to the point where the 15-year cumulative total return was negative. I wrote about that at the time and still can’t get over it. Fifteen years!

As for the future, of course, it’s one thing to say that ‘spreads are unsustainable and so are government yields’ and it’s quite another to forecast just how and when a more economically sustainable environment will take effect. It could be years. There could be a reversal, particularly if Trump’s international trade policies cause a severe recession or even a depression. And, of course, I could be just plain wrong about the sustainability of the current environment.

I think that a broad, sustainable rally in FixedResets will require higher five-year Canada yields (or a widespread expectation of them) … and although I’m sure this will happen eventually, it would be foolish to speculate on just when it will happen!

Calculation of MAPF Sustainable Income Per Unit
Month NAVPU Portfolio
Average
YTW
Leverage
Divisor
Securities
Average
YTW
Capital
Gains
Multiplier
Sustainable
Income
per
current
Unit
June, 2007 9.3114 5.16% 1.03 5.01% 1.3240 0.3524
September 9.1489 5.35% 0.98 5.46% 1.3240 0.3773
December, 2007 9.0070 5.53% 0.942 5.87% 1.3240 0.3993
March, 2008 8.8512 6.17% 1.047 5.89% 1.3240 0.3938
June 8.3419 6.034% 0.952 6.338% 1.3240 $0.3993
September 8.1886 7.108% 0.969 7.335% 1.3240 $0.4537
December, 2008 8.0464 9.24% 1.008 9.166% 1.3240 $0.5571
March 2009 $8.8317 8.60% 0.995 8.802% 1.3240 $0.5872
June 10.9846 7.05% 0.999 7.057% 1.3240 $0.5855
September 12.3462 6.03% 0.998 6.042% 1.3240 $0.5634
December 2009 10.5662 5.74% 0.981 5.851% 1.1141 $0.5549
March 2010 10.2497 6.03% 0.992 6.079% 1.1141 $0.5593
June 10.5770 5.96% 0.996 5.984% 1.1141 $0.5681
September 11.3901 5.43% 0.980 5.540% 1.1141 $0.5664
December 2010 10.7659 5.37% 0.993 5.408% 1.0298 $0.5654
March, 2011 11.0560 6.00% 0.994 5.964% 1.0298 $0.6403
June 11.1194 5.87% 1.018 5.976% 1.0298 $0.6453
September 10.2709 6.10%
Note
1.001 6.106% 1.0298 $0.6090
December, 2011 10.0793 5.63%
Note
1.031 5.805% 1.0000 $0.5851
March, 2012 10.3944 5.13%
Note
0.996 5.109% 1.0000 $0.5310
June 10.2151 5.32%
Note
1.012 5.384% 1.0000 $0.5500
September 10.6703 4.61%
Note
0.997 4.624% 1.0000 $0.4934
December, 2012 10.8307 4.24% 0.989 4.287% 1.0000 $0.4643
March, 2013 10.9033 3.87% 0.996 3.886% 1.0000 $0.4237
June 10.3261 4.81% 0.998 4.80% 1.0000 $0.4957
September 10.0296 5.62% 0.996 5.643% 1.0000 $0.5660
December, 2013 9.8717 6.02% 1.008 5.972% 1.0000 $0.5895
March, 2014 10.2233 5.55% 0.998 5.561% 1.0000 $0.5685
June 10.5877 5.09% 0.998 5.100% 1.0000 $0.5395
September 10.4601 5.28% 0.997 5.296% 1.0000 $0.5540
December, 2014 10.5701 4.83% 1.009 4.787% 1.0000 $0.5060
March, 2015 9.9573 4.99% 1.001 4.985% 1.0000 $0.4964
June, 2015 9.4181 5.55% 1.002 5.539% 1.0000 $0.5217
September 7.8140 6.98% 0.999 6.987% 1.0000 $0.5460
December, 2015 8.1379 6.85% 0.997 6.871% 1.0000 $0.5592
March, 2016 7.4416 7.79% 0.998 7.805% 1.0000 $0.5808
June 7.6704 7.67% 1.011 7.587% 1.0000 $0.5819
September 8.0590 7.35% 0.993 7.402% 1.0000 $0.5965
December, 2016 8.5844 7.24% 0.990 7.313% 1.0000 $0.6278
March, 2017 9.3984 6.26% 0.994 6.298% 1.0000 $0.5919
June 9.5313 6.41% 0.998 6.423% 1.0000 $0.6122
September 9.7129 6.56% 0.998 6.573% 1.0000 $0.6384
December, 2017 10.0566 6.06% 1.004 6.036% 1.0000 $0.6070
March, 2018 10.2701 6.22% 1.007 6.177% 1.0000 $0.6344
June 10.2518 6.22% 0.995 6.251% 1.0000 $0.6408
July, 2018 10.3615 6.31% 1.0000 6.310% 1.0000 $0.6538
NAVPU is shown after quarterly distributions of dividend income and annual distribution of capital gains.
Portfolio YTW includes cash (or margin borrowing), with an assumed interest rate of 0.00%
The Leverage Divisor indicates the level of cash in the account: if the portfolio is 1% in cash, the Leverage Divisor will be 0.99
Securities YTW divides “Portfolio YTW” by the “Leverage Divisor” to show the average YTW on the securities held; this assumes that the cash is invested in (or raised from) all securities held, in proportion to their holdings.
The Capital Gains Multiplier adjusts for the effects of Capital Gains Dividends. On 2009-12-31, there was a capital gains distribution of $1.989262 which is assumed for this purpose to have been reinvested at the final price of $10.5662. Thus, a holder of one unit pre-distribution would have held 1.1883 units post-distribution; the CG Multiplier reflects this to make the time-series comparable. Note that Dividend Distributions are not assumed to be reinvested.
Sustainable Income is the resultant estimate of the fund’s dividend income per current unit, before fees and expenses. Note that a “current unit” includes reinvestment of prior capital gains; a unitholder would have had the calculated sustainable income with only, say, 0.9 units in the past which, with reinvestment of capital gains, would become 1.0 current units.
DeemedRetractibles are comprised of all Straight Perpetuals (both PerpetualDiscount and PerpetualPremium) issued by BMO, BNS, CM, ELF, GWO, HSB, IAG, MFC, NA, RY, SLF and TD, which are not exchangable into common at the option of the company (definition refined in May, 2011). These issues are analyzed as if their prospectuses included a requirement to redeem at par on or prior to 2022-1-31 (banks) or 2025-1-31 (insurers and insurance holding companies), in addition to the call schedule explicitly defined. See OSFI Does Not Grandfather Extant Tier 1 Capital, CM.PR.D, CM.PR.E, CM.PR.G: Seeking NVCC Status and the January, February, March and June, 2011, editions of PrefLetter for the rationale behind this analysis.

The same reasoning is also applied to FixedResets from these issuers, other than explicitly defined NVCC from banks.

Yields for September, 2011, to January, 2012, were calculated by imposing a cap of 10% on the yields of YLO issues held, in order to avoid their extremely high calculated yields distorting the calculation and to reflect the uncertainty in the marketplace that these yields will be realized. From February to September 2012, yields on these issues have been set to zero. All YLO issues held were sold in October 2012.

These calculations were performed assuming constant contemporary GOC-5 and 3-Month Bill rates, as follows:

Canada Yields Assumed in Calculations
Month-end GOC-5 3-Month Bill
September, 2015 0.78% 0.40%
December, 2015 0.71% 0.46%
March, 2016 0.70% 0.44%
June 0.57% 0.47%
September 0.58% 0.53%
December, 2016 1.16% 0.47%
March, 2017 1.08% 0.55%
June 1.35% 0.69%
September 1.79% 0.97%
December, 2017 1.83% 1.00%
March, 2018 2.06% 1.08%
June 1.95% 1.22%
July, 2018 2.20% 1.43%

Significant positions were held in NVCC non-compliant regulated FixedReset issues on July 31, 2018; all of these currently have their yields calculated with the presumption that they will be called by the issuers at par prior to 2022-1-31 (banks) or 2025-1-31 (insurers and insurance holding companies) or on a different date (SplitShares) This presents another complication in the calculation of sustainable yield, which also assumes that redemption proceeds will be reinvested at the same rate. It will also be noted that my analysis of likely insurance industry regulation as updated is not given much weight by the market.

I will also note that the sustainable yield calculated above is not directly comparable with any yield calculation currently reported by any other preferred share fund as far as I am aware. The Sustainable Yield depends on:
i) Calculating Yield-to-Worst for each instrument and using this yield for reporting purposes;
ii) Using the contemporary value of Five-Year Canadas to estimate dividends after reset for FixedResets. The assumption regarding the five-year Canada rate has become more important as the proportion of low-spread FixedResets in the portfolio has increased.
iii) Making the assumption that deeply discounted NVCC non-compliant issues from both banks and insurers, both Straight and FixedResets will be redeemed at par on their DeemedMaturity date as discussed above.

MAPF Portfolio Composition : July, 2018

August 3rd, 2018

Turnover was anemic in July at 2%.

There is extreme segmentation in the marketplace, with OSFI’s NVCC rule changes in February 2011 having had the effect of splitting the formerly relatively homogeneous Straight Perpetual class of preferreds into three parts:

  • Unaffected Straight Perpetuals
  • DeemedRetractibles explicitly subject to the rules (banks)
  • DeemedRetractibles considered by me, but not (yet!) by the market, to be likely to be explicitly subject to the rules in the future (insurers and insurance holding companies)

This segmentation, and the extreme valuation differences between the segments, has cut down markedly on the opportunities for trading.

To make this more clear, it used to be that there were 70-odd Straight Perpetuals and I was more or less indifferent as to which ones I owned (subject, of course, to issuer concentration concerns and other risk management factors). Thus, if any one of these 70 were to go down in price by – say – $0.25, I would quite often have something in inventory that I’d be willing to swap for it. The segmentation means that I am no longer indifferent; in addition to checking the valuation of a potential buy to other Straights, I also have to check its peer group. This cuts down on the potential for trading.

And, of course, the same segmentation has the same effect on trading opportunities between FixedReset issues.

There is no real hope that this situation will be corrected in the near-term. OSFI has indicated that the long-promised “Draft Definition of Capital” for insurers will not be issued “for public consultation in late 2012 or early 2013”, as they fear that it might encourage speculation in the marketplace. It is not clear why OSFI is so afraid of informed speculation, since the constant speculation in the marketplace is currently less informed than it would be with a little bit of regulatory clarity. While the framework has been updated, the modifications focus on the amount of capital required, not the required characteristics of that capital. However, OSFI has recently indicated that it would support a mechanism similar to the NVCC rule for banks, so we may see some developments as the IAIS deliberations regarding insurance capital continue.

As a result of this delay, I have extended the Deemed Maturity date for insurers and insurance holding companies by three years (to 2025-1-31), in the expectation that when OSFI finally does provide clarity, they will allow the same degree of lead-in time for these companies as they did for banks. This had a major effect on the durations of preferred shares subject to the change but, fortunately, not much on their calculated yields as most of these issues were either trading near par when the change was made or were trading at sufficient premium that a par call was expected on economic grounds. However, with the declines in the market over the past nine months, the expected capital gain on redemption of the insurance-issued DeemedRetractibles has become an important component of the calculated yield.

Due to the footdragging by OSFI, I will be extending the DeemedMaturity date for insurance issues by another few years in the near future.

Sectoral distribution of the MAPF portfolio on June 29 was as follows:

MAPF Sectoral Analysis 2018-07-31
HIMI Indices Sector Weighting YTW ModDur
Ratchet 0% N/A N/A
FixFloat 0% N/A N/A
Floater 0% N/A N/A
OpRet 0% N/A N/A
SplitShare 10.1% 4.78% 5.03
Interest Rearing 0% N/A N/A
PerpetualPremium 0% N/A N/A
PerpetualDiscount 10.6% 5.59% 14.51
Fixed-Reset 60.9% 6.46% 9.72
Deemed-Retractible 8.7% 7.25% 5.48
FloatingReset 0% N/A N/A
Scraps (Various) 9.8% 6.87% 13.18
Cash -0.0 0.00% 0.00
Total 100% 6.31% 9.73
Totals and changes will not add precisely due to rounding. Cash is included in totals with duration and yield both equal to zero.
DeemedRetractibles are comprised of all Straight Perpetuals (both PerpetualDiscount and PerpetualPremium) issued by BMO, BNS, CM, ELF, GWO, HSB, IAG, MFC, NA, RY, SLF and TD, which are not exchangable into common at the option of the company. These issues are analyzed as if their prospectuses included a requirement to redeem at par on or prior to 2022-1-31 (banks) or 2025-1-3 (insurers and insurance holding companies), in addition to the call schedule explicitly defined. See OSFI Does Not Grandfather Extant Tier 1 Capital, CM.PR.D, CM.PR.E, CM.PR.G: NVCC Status Confirmed and the January, February, March and June, 2011, editions of PrefLetter for the rationale behind this analysis.

Note that the estimate for the time this will become effective for insurers and insurance holding companies was extended by three years in April 2013, due to the delays in OSFI’s providing clarity on the issue.

Calculations of resettable instruments are performed assuming a constant GOC-5 rate of 2.20% and a constant 3-Month Bill rate of 1.43%

The “total” reflects the un-leveraged total portfolio (i.e., cash is included in the portfolio calculations and is deemed to have a duration and yield of 0.00.). MAPF will often have relatively large cash balances, both credit and debit, to facilitate trading. Figures presented in the table have been rounded to the indicated precision.

Credit distribution is:

MAPF Credit Analysis 2018-07-31
DBRS Rating Weighting
Pfd-1 0
Pfd-1(low) 0
Pfd-2(high) 31.2%
Pfd-2 32.7%
Pfd-2(low) 26.3%
Pfd-3(high) 3.0%
Pfd-3 3.5%
Pfd-3(low) 2.8%
Pfd-4(high) 0%
Pfd-4 0%
Pfd-4(low) 0%
Pfd-5(high) 0.6%
Pfd-5 0.0%
Cash +0.5%
Totals will not add precisely due to rounding.
The fund holds a position in AZP.PR.C, which is rated P-5(high) by S&P and is unrated by DBRS; it is included in the Pfd-5(high) total.
A position held in INE.PR.A is not rated by DBRS, but has been included as “Pfd-3” in the above table on the basis of its S&P rating of P-3.

Liquidity Distribution is:

MAPF Liquidity Analysis 2018-07-31
Average Daily Trading Weighting
<$50,000 19.8%
$50,000 – $100,000 54.4%
$100,000 – $200,000 21.0%
$200,000 – $300,000 1.2%
>$300,000 3.6%
Cash -0.0%
Totals will not add precisely due to rounding.

MAPF is, of course, Malachite Aggressive Preferred Fund, a “unit trust” managed by Hymas Investment Management Inc. Further information and links to performance, audited financials and subscription information are available the fund’s web page. The fund may be purchased either directly from Hymas Investment Management or through a brokerage account at Odlum Brown Limited. A “unit trust” is like a regular mutual fund, but is sold by offering memorandum rather than prospectus. This is cheaper, but means subscription is restricted to “accredited investors” (as defined by the Ontario Securities Commission). Fund past performances are not a guarantee of future performance. You can lose money investing in MAPF or any other fund.

A similar portfolio composition analysis has been performed on the Claymore Preferred Share ETF (symbol CPD) (and other funds) as of July 31, 2017, and published in the August, 2017, PrefLetter. It is fair to say:

  • MAPF credit quality is much better
  • MAPF liquidity is lower
  • MAPF Yield is higher
  • Weightings
    • MAPF is roughly equally exposed to Straight Perpetuals
      • Much less exposed to PerpetualPremiums
    • Neither portfolio is exposed to Operating Retractibles (there aren’t too many of those any more!)
    • MAPF is more exposed to SplitShares
    • MAPF is less exposed to FixFloat / Floater / Ratchet
    • MAPF is a little higher weighted in FixedResets, but has a greater emphasis on lower-spread issues