February 2, 2018

February 2nd, 2018

Jobs, jobs, jobs! And pay, too!

U.S. hiring picked up in January and wages rose at the fastest annual pace since the recession ended, as the economy’s steady move toward full employment extended into 2018.

Nonfarm payrolls rose 200,000 — compared with the median estimate of economists for a 180,000 increase — after an upwardly revised 160,000 advance, Labor Department figures showed Friday. The jobless rate held at 4.1 percent, matching the lowest since 2000, while average hourly earnings rose a more-than-expected 2.9 percent from a year earlier, the most since June 2009.

Naturally, the bond market reacted … and then stocks reacted to bonds:

The Dow Jones Industrial Average tumbled 666 points in the biggest plunge since June 2016, as the worsening bond rout stirred angst that the Federal Reserve will accelerate its rate-hike schedule.
….
•The yield on 10-year Treasuries rose five basis points to 2.834 percent. It touched 2.8525 earlier.

I believe that this is the worst week containing a super blue blood moon for equities for over one hundred and fifty years, which is probably pretty significant. Worst of all, some investors had their mellow harshed:

Marijuana stocks tumbled Friday amid a wave of “panic-selling” and concern that companies that had seen ballooning share prices recently are now overvalued. The BI Canada Cannabis Index plunged as much as 19 percent, its biggest intraday drop on record, while the nation’s largest producers including Canopy Growth Corp. and Aurora Cannabis Inc. tumbled more than 40 percent from their January highs.

However, five-year Canadas finished the day at 2.13%, up 5bp, which should be good news for FixedResets unless it isn’t.

Huffing and puffing over NAFTA continues:

Canadian Prime Minister Justin Trudeau made some of his most aggressive comments to date on dealing with U.S. demands to rework the North American Free Trade Agreement, adding he still thinks he can get the right deal for his country.

“We aren’t going to take any old deal,” Trudeau said Friday at a town hall in Nanaimo, British Columbia. “Canada is willing to walk away from Nafta if the United States proposes a bad deal. We won’t be pushed around.”

His comments come days after U.S. President Donald Trump threatened to get tough on trade, though he didn’t single out Nafta, in his State of the Union address. The latest round of Nafta talks wrapped up in Montreal on Monday, with all sides saying there had been progress, while acknowledging significant gaps remain on some issues.

I have decided that I’m a big Taylor Swift fan. She’s awesome. Just consider her latest achievement:

As she prepared to hit the road to support her latest album, Reputation, Swift and Ticketmaster Entertainment Inc. concocted a strategy to neuter the scalpers. They used Ticketmaster’s Verified Fan program, which utilizes in-house technology to identify actual fans and determine which of them should have access to fan-only presale tickets, based on their devotion to Swift as measured by their willingness to buy albums, sign up for a newsletter, and watch her music videos. While prices in the presale were fairly low for most people, Swift and promoter AEG Presents raised the cost of all the tickets in the later general sale to make them less attractive to scalpers.

Imagine that! The problem was scalpers taking too big a slice of the pie … so she raised prices for her shows to capture the increment for herself. It’s incredible! Conventional wisdom, of course, is to whine that the gubmint oughtta do sumpin, with ‘run crying to mommy’ running a close second … but my heroine Taylor Swift thinks way, way, way out of the box. I think she should get at least two Nobel Prizes in Economics for this breakthrough.

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 -0.1839 % 2,903.2
FixedFloater 0.00 % 0.00 % 0 0.00 0 -0.1839 % 5,327.2
Floater 3.42 % 3.59 % 51,686 18.29 4 -0.1839 % 3,070.1
OpRet 0.00 % 0.00 % 0 0.00 0 -0.1089 % 3,148.2
SplitShare 4.66 % 4.29 % 68,580 4.14 5 -0.1089 % 3,759.6
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.1089 % 2,933.4
Perpetual-Premium 5.38 % -0.16 % 64,308 0.09 20 -0.1339 % 2,865.1
Perpetual-Discount 5.30 % 5.29 % 70,092 14.95 14 -0.5490 % 2,992.5
FixedReset 4.20 % 4.46 % 150,427 3.86 101 -0.0876 % 2,542.3
Deemed-Retractible 5.08 % 5.49 % 85,753 5.79 28 -0.3504 % 2,944.7
FloatingReset 3.02 % 2.90 % 43,985 3.76 10 -0.2631 % 2,779.3
Performance Highlights
Issue Index Change Notes
BAM.PF.D Perpetual-Discount -2.11 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-02-02
Maturity Price : 21.92
Evaluated at bid price : 22.22
Bid-YTW : 5.57 %
BAM.PR.M Perpetual-Discount -1.45 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-02-02
Maturity Price : 21.45
Evaluated at bid price : 21.71
Bid-YTW : 5.53 %
SLF.PR.J FloatingReset -1.30 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 19.79
Bid-YTW : 6.37 %
IFC.PR.C FixedReset -1.20 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.81
Bid-YTW : 4.87 %
SLF.PR.B Deemed-Retractible -1.20 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.15
Bid-YTW : 6.24 %
MFC.PR.F FixedReset -1.18 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 19.18
Bid-YTW : 7.17 %
MFC.PR.L FixedReset -1.17 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.55
Bid-YTW : 5.29 %
BAM.PF.E FixedReset -1.08 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-02-02
Maturity Price : 23.08
Evaluated at bid price : 23.91
Bid-YTW : 4.82 %
BAM.PF.I FixedReset -1.00 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2022-03-31
Maturity Price : 25.00
Evaluated at bid price : 25.62
Bid-YTW : 4.28 %
Volume Highlights
Issue Index Shares
Traded
Notes
TD.PR.Z FloatingReset 176,052 YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.82
Bid-YTW : 2.90 %
NA.PR.E FixedReset 158,970 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-02-02
Maturity Price : 23.07
Evaluated at bid price : 24.78
Bid-YTW : 4.61 %
BAM.PR.Z FixedReset 116,516 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-02-02
Maturity Price : 23.13
Evaluated at bid price : 24.88
Bid-YTW : 4.92 %
CM.PR.R FixedReset 112,947 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2022-07-31
Maturity Price : 25.00
Evaluated at bid price : 25.40
Bid-YTW : 4.04 %
BMO.PR.M FixedReset 88,972 YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.88
Bid-YTW : 3.78 %
TD.PF.A FixedReset 75,792 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-02-02
Maturity Price : 23.59
Evaluated at bid price : 23.96
Bid-YTW : 4.47 %
There were 49 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
BAM.PF.J FixedReset Quote: 25.05 – 25.59
Spot Rate : 0.5400
Average : 0.3703

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2022-12-31
Maturity Price : 25.00
Evaluated at bid price : 25.05
Bid-YTW : 4.83 %

MFC.PR.F FixedReset Quote: 19.18 – 19.71
Spot Rate : 0.5300
Average : 0.3760

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 19.18
Bid-YTW : 7.17 %

BAM.PF.D Perpetual-Discount Quote: 22.22 – 22.66
Spot Rate : 0.4400
Average : 0.2993

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-02-02
Maturity Price : 21.92
Evaluated at bid price : 22.22
Bid-YTW : 5.57 %

GWO.PR.Q Deemed-Retractible Quote: 24.40 – 24.79
Spot Rate : 0.3900
Average : 0.2494

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.40
Bid-YTW : 5.69 %

SLF.PR.B Deemed-Retractible Quote: 23.15 – 23.49
Spot Rate : 0.3400
Average : 0.2101

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.15
Bid-YTW : 6.24 %

BAM.PF.I FixedReset Quote: 25.62 – 25.97
Spot Rate : 0.3500
Average : 0.2248

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2022-03-31
Maturity Price : 25.00
Evaluated at bid price : 25.62
Bid-YTW : 4.28 %

DBRS Mutters Darkly about Aimia

February 2nd, 2018

DBRS has noted:

that Aimia Inc. (Aimia or the Company) has sold its Nectar loyalty program and related assets to J Sainsbury plc (Sainsbury’s) for approximately $105 million (the Transaction). As part of the Transaction, Aimia will send to Sainsbury’s (1) $183 million of cash to provide coverage against the Nectar redemption liability and (2) $96 million of working capital related to December redemptions. Aimia will use $100 million of the proceeds from the Transaction to repay amounts outstanding on its credit facility.

Aimia purchased the Nectar loyalty program in 2007 for approximately $755 million. Nectar is the largest component of Aimia’s International Coalitions Segment, which generated $550 million of gross billings for the last 12 months (LTM) ended September 30, 2017 (25% of the Company’s total), and $68 million of adjusted EBITDA for the LTM ended September 30, 2017 (29% of the Company’s total).

The Transaction weakens Aimia’s business risk profile because of its impact on the Company’s size and scale, geographic diversification and customer concentration risk. Pro forma the Transaction, DBRS believes the Company’s debt profile is more manageable as a result of the repayment of $100 million of debt to a total of $358 million (pro forma, at September 30, 2017) and the $395 million of cash on the balance sheet (pro forma, at September 30, 2017). While the relevance of the Company’s adjusted debt-to-adjusted EBITDA ratio has been substantially reduced, DBRS expects that, pro forma the Transaction, it will remain near 2.0 times, in line with historical levels.

To receive the required lenders’ consent to complete the Transaction, Aimia agreed to make amendments to its credit agreement. These include (1) the repayment of $100 million outstanding on the credit facility, (2) a reduction in the limit of the facility to $208 million from the previous $300 million, (3) a mandatory quarterly cash flow sweep equal to 50% of the prior quarter’s free cash flow, (4) tighter leverage covenants and restrictions around common and preferred dividend payments, (5) the replacement of the Deferred Redemption Reserve Fund with a minimum liquidity covenant and (6) the restriction of using proceeds from the credit facility to repay any Senior Secured Notes. DBRS notes that Aimia’s $250 million of Senior Secured Notes mature prior to the Company’s credit facility in May 2019, and that the Notes will have to be refinanced or repaid using cash, internally generated cash flow and/or the potential for further non-core asset sales.

DBRS will continue to monitor Aimia’s customer engagement, reward redemptions and the competitive environment on a quarter-by-quarter basis, with the next quarterly results to be released on February 14, 2018. Should mileage accumulation decrease and/or redemptions accelerate more than DBRS’ expectations, in the absence of new partnerships, divestitures and/or capital raises, a downgrade could result.

The common equity got whacked:

The parent company of loyalty card Aeroplan faced another brutal day on the Toronto Stock Market as its shares plummeted Friday after rating agency DBRS warned about a possible downgrade on the sale of its Nectar business at a substantial loss.

Shares of Aimia Inc. fell nearly 17 per cent to $2.31 in Friday trading on the Toronto Stock Exchange after losing 25 per cent on Thursday.

And preferred shareholders aren’t too happy either:

aim_pfd_180202
Click for Big

DBRS downgraded the AIM preferreds to Pfd-5(high) in August 2017, following the suspension of preferred share dividends by the company and the subsequent downgrade to P-4(high) by S&P.

Affected issues are AIM.PR.A, AIM.PR.B and AIM.PR.C.

MAPF Performance: January 2018

February 2nd, 2018

Malachite Aggressive Preferred Fund’s Net Asset Value per Unit as of the close January 31, 2018, was $10.5415.

The fund’s superb return on the month was powered by stellar returns from some long-term positions that paid off in spades this month: SLF.PR.J (+11.53%); GWO.PR.N (+9.28%); SJR.PR.A (+8.34%); BPO.PR.N (+6.81%); SLF.PR.G (+6.62%); TRP.PR.C (+6.59%); BAM.PR.X (+6.08%; not really all that old a position!); FFH.PR.G (+5.76%); HSE.PR.A (+5.70%); and BAM.PR.T (+5.61%; mostly bought in December).

Returns to January 31, 2018
Period MAPF BMO-CM “50” Preferred Share Index TXPR*
Total Return
CPD – according to Blackrock
One Month +4.82% +2.67% +1.58% N/A
Three Months +5.91% +3.27% +2.34% N/A
One Year +20.57% +14.17% +10.92% +10.55%
Two Years (annualized) +28.09% +19.38% +17.39% N/A
Three Years (annualized) +6.95% +5.09% +3.24% +2.88%
Four Years (annualized) +6.40% +3.78% +2.69% N/A
Five Years (annualized) +4.33% +2.77% +1.65% +1.28%
Six Years (annualized) +4.77% +3.00% +2.09% N/A
Seven Years (annualized) +4.75% +3.68% +2.74% N/A
Eight Years (annualized) +6.29% +4.59% +3.50% N/A
Nine Years (annualized) +10.71% +6.71% +5.46% N/A
Ten Years (annualized) +10.11% +4.45% +3.32% +2.80%
Eleven Years (annualized) +9.21% +3.52%    
Twelve Years (annualized) +8.90% +3.58%    
Thirteen Years (annualized) +8.66% +3.57%    
Fourteen Years (annualized) +8.87% +3.64%    
Fifteen Years (annualized) +10.00% +3.97%    
Sixteen Years (annualized) +9.54% +3.90%    
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 +1.98%, +2.77% and +11.00%, respectively, according to Morningstar after all fees & expenses. Three year performance is +3.69%; five year is +2.67%; ten year is +3.95%
Figures for Manulife Preferred Income Class Adv [into which was merged Manulife Preferred Income Fund (formerly AIC Preferred Income Fund)] (which are after all fees and expenses) for 1-, 3- and 12-months are +2.63%, +3.23% & +12.16%, respectively. Three year performance is +4.10%.

It will be noted that AIC Preferred Income Fund was in existence prior to August, 2009, but long term performance figures have been suppressed.

Figures for Horizons Active Preferred Share ETF (HPR) (which are after all fees and expenses) for 1-, 3- and 12-months are +2.16%, +3.03% & +12.89%, respectively. Three year performance is +5.25%, five-year is +3.33%
Figures for National Bank Preferred Equity Fund (formerly Altamira Preferred Equity Fund) are +2.12%, +2.85% and +12.06% for one-, three- and twelve months, respectively. Three year performance is +4.36%; five-year is +1.94%

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 +11.52% for the past twelve months. Two year performance is +20.23%, three year is +2.34%, five year is -0.12%.
Figures for Natixis Canadian Preferred Share Class (formerly NexGen Canadian Preferred Share Tax Managed Fund) are -%, +% and -% for one-, three- and twelve-months, respectively.
Figures for BMO Preferred Share Fund are +1.80% and +7.61% for the past three- and twelve-months, respectively. Three year performance is +1.90%.
Figures for PowerShares Canadian Preferred Share Index Class, Series F are +12.89% for the past twelve months. The three-year figure is +4.91%; five years is +2.25%
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 +1.35%, +2.30% and +11.72% for the past one, three and twelve months, respectively. Three year performance is +4.55%.

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.

Obviously, the last twelve months have been superb for both preferred shares in general and the fund in particular, 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 2018-1-12):

pl_180112_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 2018-1-12):

pl_180112_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 +1.33% vs. PerpetualDiscounts of +0.04% in January; over the past three months, FixedResets have outperformed by about 2%. The relative performances for January are probably due to a rise in five-year Canada yields, from 1.83% at year-end to 2.08% at January month-end:

himi_indexperf_180131
Click for Big

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.

A hawkish tilt to Fed rhetoric and strong Canadian economic numbers suggests that further Canadian rate hikes are to be expected but the potential for the collapse of NAFTA makes predictions foolhardy.

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
January, 2018 10.5415 5.73% 1.001 5.724% 1.0000 $0.6034
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%
January, 2018 2.08% 1.18%

Significant positions were held in NVCC non-compliant regulated FixedReset issues on December 29, 2017; 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 recently 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: January, 2018

February 1st, 2018

Turnover eased to about 7% in January.

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 January 31 was as follows:

MAPF Sectoral Analysis 2018-01-31
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 8.4% 4.49% 5.25
Interest Rearing 0% N/A N/A
PerpetualPremium 0% N/A N/A
PerpetualDiscount 5.6% 5.21% 15.03
Fixed-Reset 66.5% 5.79% 9.63
Deemed-Retractible 1.0% 6.77% 5.85
FloatingReset 8.5% 6.09% 6.23
Scraps (Various) 10.2% 6.19% 13.24
Cash -0.1% 0.00% 0.00
Total 100% 5.73% 9.62
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 2.08% and a constant 3-Month Bill rate of 1.18%

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 2018-01-31
DBRS Rating Weighting
Pfd-1 0
Pfd-1(low) 0
Pfd-2(high) 37.2%
Pfd-2 32.5%
Pfd-2(low) 20.2%
Pfd-3(high) 2.7%
Pfd-3 4.2%
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 -0.1%
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 2018-01-31
Average Daily Trading Weighting
<$50,000 16.8%
$50,000 – $100,000 49.1%
$100,000 – $200,000 32.4%
$200,000 – $300,000 0%
>$300,000 1.8%
Cash -0.1%
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 less exposed to Straight Perpetuals
      • About equally exposed to PerpetualDiscounts
      • Much less exposed to DeemedRetractibles
      • 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 a little less exposed to FixFloat / Floater / Ratchet
    • MAPF is a little higher weighted in FixedResets, but has a greater emphasis on lower-spread issues

February 1, 2018

February 1st, 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 0.2836 % 2,908.6
FixedFloater 0.00 % 0.00 % 0 0.00 0 0.2836 % 5,337.1
Floater 3.42 % 3.59 % 48,714 18.30 4 0.2836 % 3,075.8
OpRet 0.00 % 0.00 % 0 0.00 0 0.1012 % 3,151.6
SplitShare 4.66 % 4.36 % 67,201 4.14 5 0.1012 % 3,763.7
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.1012 % 2,936.6
Perpetual-Premium 5.37 % -1.79 % 64,415 0.09 20 -0.0865 % 2,868.9
Perpetual-Discount 5.27 % 5.28 % 69,959 15.01 14 -0.0586 % 3,009.1
FixedReset 4.20 % 4.45 % 152,717 3.86 101 0.0803 % 2,544.6
Deemed-Retractible 5.06 % 5.41 % 85,718 5.80 28 -0.0296 % 2,955.1
FloatingReset 3.02 % 2.89 % 41,832 3.76 10 0.2899 % 2,786.6
Performance Highlights
Issue Index Change Notes
GWO.PR.N FixedReset -1.71 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 19.56
Bid-YTW : 6.87 %
TRP.PR.B FixedReset 1.22 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-02-01
Maturity Price : 17.38
Evaluated at bid price : 17.38
Bid-YTW : 4.66 %
TRP.PR.H FloatingReset 1.45 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-02-01
Maturity Price : 17.45
Evaluated at bid price : 17.45
Bid-YTW : 3.55 %
MFC.PR.F FixedReset 2.32 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 19.41
Bid-YTW : 6.97 %
TRP.PR.F FloatingReset 2.34 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-02-01
Maturity Price : 21.40
Evaluated at bid price : 21.40
Bid-YTW : 3.65 %
Volume Highlights
Issue Index Shares
Traded
Notes
CM.PR.R FixedReset 192,929 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2022-07-31
Maturity Price : 25.00
Evaluated at bid price : 25.39
Bid-YTW : 4.05 %
TD.PF.C FixedReset 101,340 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-02-01
Maturity Price : 23.32
Evaluated at bid price : 23.66
Bid-YTW : 4.51 %
HSE.PR.A FixedReset 69,100 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-02-01
Maturity Price : 18.14
Evaluated at bid price : 18.14
Bid-YTW : 4.96 %
BNS.PR.Q FixedReset 62,400 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2018-10-25
Maturity Price : 25.00
Evaluated at bid price : 24.99
Bid-YTW : 3.78 %
SLF.PR.G FixedReset 59,839 YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 19.44
Bid-YTW : 7.20 %
NA.PR.E FixedReset 56,677 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-02-01
Maturity Price : 23.06
Evaluated at bid price : 24.77
Bid-YTW : 4.61 %
There were 25 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
GWO.PR.N FixedReset Quote: 19.56 – 20.10
Spot Rate : 0.5400
Average : 0.3374

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 19.56
Bid-YTW : 6.87 %

EML.PR.A FixedReset Quote: 26.53 – 26.88
Spot Rate : 0.3500
Average : 0.2410

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2021-04-17
Maturity Price : 25.00
Evaluated at bid price : 26.53
Bid-YTW : 3.81 %

IFC.PR.A FixedReset Quote: 20.69 – 20.99
Spot Rate : 0.3000
Average : 0.1927

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 20.69
Bid-YTW : 6.72 %

BAM.PF.J FixedReset Quote: 25.30 – 25.59
Spot Rate : 0.2900
Average : 0.1843

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2022-12-31
Maturity Price : 25.00
Evaluated at bid price : 25.30
Bid-YTW : 4.60 %

BMO.PR.D FixedReset Quote: 25.32 – 25.58
Spot Rate : 0.2600
Average : 0.1568

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2022-08-25
Maturity Price : 25.00
Evaluated at bid price : 25.32
Bid-YTW : 4.05 %

CM.PR.O FixedReset Quote: 23.81 – 24.09
Spot Rate : 0.2800
Average : 0.1784

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-02-01
Maturity Price : 23.39
Evaluated at bid price : 23.81
Bid-YTW : 4.57 %

January 31, 2018

January 31st, 2018

PerpetualDiscounts now yield 5.27%, equivalent to 6.85% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 3.85%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 300bp, a slight (and perhaps spurious) widening from the 295bp reported January 31.

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 1.4970 % 2,900.3
FixedFloater 0.00 % 0.00 % 0 0.00 0 1.4970 % 5,322.0
Floater 3.43 % 3.60 % 48,538 18.27 4 1.4970 % 3,067.1
OpRet 0.00 % 0.00 % 0 0.00 0 -0.0389 % 3,148.4
SplitShare 4.66 % 4.36 % 68,022 4.14 5 -0.0389 % 3,759.9
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0389 % 2,933.6
Perpetual-Premium 5.36 % -1.97 % 65,098 0.09 18 0.0573 % 2,871.4
Perpetual-Discount 5.28 % 5.27 % 70,590 15.03 16 0.0561 % 3,010.8
FixedReset 4.20 % 4.47 % 151,082 3.82 101 0.0674 % 2,542.5
Deemed-Retractible 5.06 % 5.44 % 84,097 5.80 28 -0.0798 % 2,955.9
FloatingReset 3.03 % 2.91 % 41,188 3.76 10 0.1339 % 2,778.5
Performance Highlights
Issue Index Change Notes
MFC.PR.F FixedReset -1.04 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 18.97
Bid-YTW : 7.35 %
BIP.PR.E FixedReset 1.06 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-01-31
Maturity Price : 23.10
Evaluated at bid price : 24.86
Bid-YTW : 5.02 %
BAM.PR.T FixedReset 1.07 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-01-31
Maturity Price : 21.54
Evaluated at bid price : 21.82
Bid-YTW : 4.82 %
GWO.PR.N FixedReset 1.22 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 19.90
Bid-YTW : 6.59 %
PWF.PR.A Floater 1.22 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-01-31
Maturity Price : 19.87
Evaluated at bid price : 19.87
Bid-YTW : 3.03 %
BAM.PF.E FixedReset 1.30 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-01-31
Maturity Price : 23.21
Evaluated at bid price : 24.18
Bid-YTW : 4.75 %
BAM.PR.R FixedReset 1.38 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-01-31
Maturity Price : 21.24
Evaluated at bid price : 21.24
Bid-YTW : 4.90 %
POW.PR.D Perpetual-Discount 1.47 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-01-31
Maturity Price : 23.86
Evaluated at bid price : 24.11
Bid-YTW : 5.22 %
BAM.PR.C Floater 1.57 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-01-31
Maturity Price : 16.86
Evaluated at bid price : 16.86
Bid-YTW : 3.61 %
BAM.PR.K Floater 2.86 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-01-31
Maturity Price : 16.89
Evaluated at bid price : 16.89
Bid-YTW : 3.60 %
Volume Highlights
Issue Index Shares
Traded
Notes
BNS.PR.P FixedReset 251,984 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2018-04-25
Maturity Price : 25.00
Evaluated at bid price : 25.01
Bid-YTW : 3.35 %
CM.PR.S FixedReset 192,908 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-01-31
Maturity Price : 23.12
Evaluated at bid price : 24.87
Bid-YTW : 4.47 %
NA.PR.E FixedReset 168,525 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-01-31
Maturity Price : 23.07
Evaluated at bid price : 24.80
Bid-YTW : 4.60 %
BNS.PR.Q FixedReset 104,200 YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.98
Bid-YTW : 3.81 %
TD.PF.I FixedReset 79,735 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2022-10-31
Maturity Price : 25.00
Evaluated at bid price : 25.41
Bid-YTW : 4.14 %
BMO.PR.B FixedReset 77,722 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2022-02-25
Maturity Price : 25.00
Evaluated at bid price : 26.17
Bid-YTW : 3.54 %
There were 23 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
EIT.PR.A SplitShare Quote: 25.60 – 26.55
Spot Rate : 0.9500
Average : 0.5855

YTW SCENARIO
Maturity Type : Soft Maturity
Maturity Date : 2024-03-14
Maturity Price : 25.00
Evaluated at bid price : 25.60
Bid-YTW : 4.49 %

PWF.PR.R Perpetual-Premium Quote: 25.60 – 25.99
Spot Rate : 0.3900
Average : 0.2528

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2020-04-30
Maturity Price : 25.25
Evaluated at bid price : 25.60
Bid-YTW : 4.82 %

CCS.PR.C Deemed-Retractible Quote: 23.80 – 24.50
Spot Rate : 0.7000
Average : 0.5814

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.80
Bid-YTW : 5.96 %

MFC.PR.F FixedReset Quote: 18.97 – 19.37
Spot Rate : 0.4000
Average : 0.2918

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 18.97
Bid-YTW : 7.35 %

RY.PR.L FixedReset Quote: 25.20 – 25.49
Spot Rate : 0.2900
Average : 0.1849

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-02-24
Maturity Price : 25.00
Evaluated at bid price : 25.20
Bid-YTW : 3.25 %

PWF.PR.F Perpetual-Discount Quote: 24.51 – 24.79
Spot Rate : 0.2800
Average : 0.1790

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-01-31
Maturity Price : 24.22
Evaluated at bid price : 24.51
Bid-YTW : 5.38 %

AX.PR.I Settles Firm on Decent Volume

January 31st, 2018

Artis Real Estate Investment Trust has announced:

that it closed its previously announced public offering, through a syndicate of underwriters led by TD Securities Inc., RBC Capital Markets and Scotiabank (collectively the “Underwriters”), on a bought deal basis, of 5,000,000 cumulative minimum rate reset preferred trust units, Series I (“Series I Units”) at a price of $25.00 per Series I Unit for gross proceeds of $125,000,000 (the “Financing”).

DBRS Limited has assigned a rating of Pfd-3 (low) to the Series I Units.

Artis intends to use the net proceeds from the Financing to redeem its existing U.S. dollar denominated cumulative redeemable preferred trust units, Series C and for general trust purposes.

AX.PR.I is a FixedReset, 6.00%+393M600, ROC issue announced 2018-01-22. It will be tracked by HIMIPref™ but will be relegated to the Scraps subindex on the basis of its Pfd-3(low) rating from DBRS.

The issue traded 419,647 shares today in a range of 24.90-99 before closing at 24.95-97. Vital statistics are:

AX.PR.I FixedReset YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-01-31
Maturity Price : 23.13
Evaluated at bid price : 24.95
Bid-YTW : 5.98 %

Investors should note that according to the prospectus (see SEDAR and search for Artis Real Estate Investment Trust Jan 24 2018 15:21:01 ET Prospectus (non pricing) supplement – English PDF 606 K; I am not permitted to link to this public document on its public website directly, because the Canadian Securities Administrators don’t want you to bother your pretty little heads with things like “prospectuses” and the like. Just do what the nice man at the bank tells you is best. If he wasn’t wise and benevolent, he wouldn’t be working for a bank, would he now?) [emphasis added]:

The holders of Series I Units will have the right, at their option, to reclassify their Series I Units as Preferred Units, Series J (“Series J Units”) of Artis, subject to certain conditions, on April 30, 2023 and on April 30 every five years thereafter.

The CRA (as hereinafter defined) has expressed the preliminary view that the reclassification of the Series I Units and Series J Units would likely result in a taxable disposition at that time.

The tax consequences of reclassification are not necessarily a good or bad thing, although note that the fact that such reclassification is an option suggests the issue will be trading below par. It will depend on your Adjusted Cost Base and personal tax circumstances.

Thanks again to Assiduous Reader JB who originally brought this issue to my attention.

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

impvol_ax_180131
Click for Big

This perceived richness has a different source than the other issues discussed here recently, such as the BEP.PR.M issue, the CM.PR.S issue and the NA.PR.E, since the calculated level of Implied Volatility, 9%, is actually quite reasonable.

In this case, the richness is due to the extraordinarily high value that retail – fighting the last war, as always – has placed on the minimum reset guarantee. If, like me, you consider the guarantee to have little or no value, you will expect the new issue to be trading near the price of AX.PR.A, which has an Issue Reset Spread of 406bp (and a current coupon of 5.662%). However, this issue closed today at 23.50 bid, indicating that retail considers the minimum rate guarantee to be worth somewhere around $1.50. Wow! That’s many multiples of the value of the call option in this analysis!

TRI.PR.B on Credit Watch – Negative by S&P

January 31st, 2018

Standard & Poor’s has announced:

  • •Toronto-based Thomson Reuters announced that it has signed a binding agreement to sell a 55% majority stake in its Financial & Risk (F&R) business, which accounts for more than half of its consolidated revenue and EBITDA, to Blackstone Group for about $17 billion.
  • •The company will use most of the net proceeds to fund stock repurchases totaling $9 billion to $11 billion and repay $3 billion in debt.
  • •We are placing our ratings on Thomson Reuters, including the ‘BBB+’ corporate credit rating, on CreditWatch negative.
  • •The CreditWatch placement reflects the possible loss of the diversification benefits we believe support Thomson Reuters’ creditworthiness and the ‘BBB+’ rating. At this stage, it isn’t clear whether the debt repayment and the more focused, smaller and stable remaining business will fully offset the sale.


We aim to resolve the negative CreditWatch placement within 90 days after we review the transaction and speak with Thomson Reuters’ management. We will reassess our rating and our view on Thomson Reuters’ business strategy, operating costs, and financial position and policy. We will also examine whether the benefits of a smaller, and more stable and focused company will offset the loss of the diversification benefits we previously considered supportive of Thomson Reuters’ creditworthiness.

If we believe the sale does not have a material impact on our view of the business risk and expect its pro forma adjusted leverage will remain comfortably below 3x over the next two to three years, we would likely affirm the ratings. Alternatively, if our analysis indicates a deterioration in the company’s creditworthiness or if we expect it will sustain leverage above 3x, we could lower the rating by up to two notches.

S&P currently rates the preferreds at P-2(low), in contrast with the recently confirmed DBRS rating of Pfd-3(high) assigned via downgrade in 2013.

TRI.PR.B is tracked by HIMIPref™ but relegated to the Scraps subindex on credit concerns.

January 30, 2018

January 30th, 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 -1.1385 % 2,857.5
FixedFloater 0.00 % 0.00 % 0 0.00 0 -1.1385 % 5,243.5
Floater 3.48 % 3.62 % 46,941 18.24 4 -1.1385 % 3,021.8
OpRet 0.00 % 0.00 % 0 0.00 0 -0.0311 % 3,149.7
SplitShare 4.66 % 4.25 % 68,580 4.14 5 -0.0311 % 3,761.4
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0311 % 2,934.8
Perpetual-Premium 5.36 % -3.10 % 65,906 0.09 18 0.0743 % 2,869.7
Perpetual-Discount 5.28 % 5.29 % 69,033 14.97 16 0.0134 % 3,009.1
FixedReset 4.20 % 4.45 % 151,744 3.81 101 -0.0941 % 2,540.8
Deemed-Retractible 5.05 % 5.44 % 83,604 5.81 28 -0.0679 % 2,958.3
FloatingReset 3.03 % 2.88 % 41,026 0.97 10 -0.0519 % 2,774.8
Performance Highlights
Issue Index Change Notes
BAM.PR.K Floater -2.84 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-01-30
Maturity Price : 16.42
Evaluated at bid price : 16.42
Bid-YTW : 3.71 %
POW.PR.D Perpetual-Discount -2.02 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-01-30
Maturity Price : 23.49
Evaluated at bid price : 23.76
Bid-YTW : 5.29 %
BAM.PR.R FixedReset -1.83 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-01-30
Maturity Price : 20.95
Evaluated at bid price : 20.95
Bid-YTW : 4.97 %
BAM.PR.C Floater -1.78 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-01-30
Maturity Price : 16.60
Evaluated at bid price : 16.60
Bid-YTW : 3.67 %
CCS.PR.C Deemed-Retractible -1.57 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.87
Bid-YTW : 5.91 %
MFC.PR.C Deemed-Retractible -1.44 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.95
Bid-YTW : 6.86 %
BAM.PR.T FixedReset -1.24 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-01-30
Maturity Price : 21.30
Evaluated at bid price : 21.59
Bid-YTW : 4.87 %
BAM.PF.E FixedReset -1.20 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-01-30
Maturity Price : 23.05
Evaluated at bid price : 23.87
Bid-YTW : 4.82 %
TRP.PR.J FixedReset -1.12 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2021-05-31
Maturity Price : 25.00
Evaluated at bid price : 26.42
Bid-YTW : 3.98 %
TRP.PR.B FixedReset -1.10 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-01-30
Maturity Price : 17.05
Evaluated at bid price : 17.05
Bid-YTW : 4.74 %
Volume Highlights
Issue Index Shares
Traded
Notes
BNS.PR.Q FixedReset 201,200 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2018-10-25
Maturity Price : 25.00
Evaluated at bid price : 24.98
Bid-YTW : 3.80 %
IFC.PR.E Deemed-Retractible 188,000 YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.76
Bid-YTW : 5.48 %
MFC.PR.R FixedReset 163,100 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2022-03-19
Maturity Price : 25.00
Evaluated at bid price : 26.15
Bid-YTW : 3.81 %
CM.PR.S FixedReset 136,756 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-01-30
Maturity Price : 23.12
Evaluated at bid price : 24.88
Bid-YTW : 4.47 %
RY.PR.Q FixedReset 133,000 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2021-05-24
Maturity Price : 25.00
Evaluated at bid price : 26.52
Bid-YTW : 3.45 %
CM.PR.O FixedReset 111,900 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-01-30
Maturity Price : 23.59
Evaluated at bid price : 24.00
Bid-YTW : 4.53 %
TD.PF.D FixedReset 104,751 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2020-07-31
Maturity Price : 25.00
Evaluated at bid price : 24.70
Bid-YTW : 4.13 %
BNS.PR.E FixedReset 103,589 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2021-04-25
Maturity Price : 25.00
Evaluated at bid price : 26.61
Bid-YTW : 3.42 %
There were 20 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
POW.PR.D Perpetual-Discount Quote: 23.76 – 24.38
Spot Rate : 0.6200
Average : 0.3688

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-01-30
Maturity Price : 23.49
Evaluated at bid price : 23.76
Bid-YTW : 5.29 %

CCS.PR.C Deemed-Retractible Quote: 23.87 – 24.53
Spot Rate : 0.6600
Average : 0.4514

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.87
Bid-YTW : 5.91 %

BAM.PR.K Floater Quote: 16.42 – 16.90
Spot Rate : 0.4800
Average : 0.3062

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-01-30
Maturity Price : 16.42
Evaluated at bid price : 16.42
Bid-YTW : 3.71 %

HSE.PR.G FixedReset Quote: 25.17 – 25.68
Spot Rate : 0.5100
Average : 0.3444

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2020-06-30
Maturity Price : 25.00
Evaluated at bid price : 25.17
Bid-YTW : 4.49 %

BAM.PR.R FixedReset Quote: 20.95 – 21.41
Spot Rate : 0.4600
Average : 0.2987

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-01-30
Maturity Price : 20.95
Evaluated at bid price : 20.95
Bid-YTW : 4.97 %

BAM.PF.E FixedReset Quote: 23.87 – 24.33
Spot Rate : 0.4600
Average : 0.3026

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-01-30
Maturity Price : 23.05
Evaluated at bid price : 23.87
Bid-YTW : 4.82 %

January 29, 2018

January 29th, 2018

Tim Shufelt of the Globe penned a great piece on the stability risks posed by ETFs that included some great quotes from “Mark Kamstra, a professor of finance at York University’s Schulich School of Business, who specializes in the study of financial bubbles.”:

Mass redemptions from active funds could quickly reverse, however, if stock pickers start to reliably beat the market. “People chase returns, so if they see active investors doing great, they’ll plow back into them,” Mr. Kamstra said. Which is why it’s odd to hear active managers complain about ETFs skewing valuations, he said. If that’s actually happening, who better than a skilled stock picker to take advantage of those mispricings. “If I were an active investor, I’d be loving that stuff. It makes for opportunities,” Mr. Kamstra said.

Yep. CPD and ZPR are my best friends. However, I was disappointed that the problem of differential liquidity was not discussed in the article – I quoted the following on August 22, 2014:

The WSJ points out:
While it’s important to look at how ETF shares are trading, the fund’s underlying holdings are really the heart of the liquidity issue, experts say.

One reason: Big investors known as “authorized participants” can swap a basket of the fund’s underlying holdings for ETF shares—or vice versa. This process helps arbitrage away significant gaps between the ETF’s share price and its NAV, the value of its underlying holdings. But when the underlying holdings are costly to trade and tough to obtain, authorized participants are less willing to round up that basket of securities. That means big gaps can develop between an ETF’s share price and its NAV.

One place to watch out for these premiums and discounts is in bond ETFs, especially those focused on areas like corporate investment-grade and high-yield, or “junk,” bonds. The iShares iBoxx $ High Yield Corporate Bond Fund closed within 0.5% of NAV on only four days in the fourth quarter, iShares says, and traded at a premium as large as 2.1% in that period.

When underlying holdings are traded less frequently, or not at all, an ETF’s returns also may diverge from the benchmark it is designed to track. That became an issue for some bond ETFs recently as the Federal Reserve bought up large quantities of agency bonds and mortgage-backed securities, essentially removing them from the market. Vanguard Group recently changed some of its bond index funds and ETFs to benchmarks that exclude these securities purchased by the Fed.

The biggest test of bond-ETF liquidity may be yet to come. So far investors have poured money into these products, and many bond ETFs are trading at significant premiums to NAV. But if investors reverse course and stampede out, the trading could get ugly, experts say. Given the relative illiquidity of many of the underlying bonds, the ETFs could start trading at significant discounts to NAV.

“When everybody tries to get out, it’s going to be a debacle,” says Scott Freeze, president of Street One Financial.

Don’t get me wrong – I think ETFs serve a great purpose and particularly recommend them for retail bond investors. But when you have a liquidity inversion – the ETF being more liquid than all (or even just some) of the underlying assets put together – you face huge problems in that ETF cash flows can overwhelm the cash market, which will lead to galloping, self-reinforcing price trends.

Does anybody remember the financial crisis? A big part of the problem was the AAA tranches of sub-prime-mortgage-backed securities. There wasn’t really anything much wrong with the AAA tranches – the junk and mezzanine debt got whacked, but the all that happened to (most!) AAA tranches was a downgrade or two (which is why the politicians like to talk about downgrades when criticizing the banks, not actual defaults). But the downgrades caused selling pressure … and nobody wanted to buy … and the world fell apart. And the same think can happen again if you have billion-dollar cash-flows in a million-dollar market.

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 0.2139 % 2,890.5
FixedFloater 0.00 % 0.00 % 0 0.00 0 0.2139 % 5,303.8
Floater 3.44 % 3.59 % 46,384 18.31 4 0.2139 % 3,056.6
OpRet 0.00 % 0.00 % 0 0.00 0 -0.2716 % 3,150.7
SplitShare 4.66 % 4.28 % 69,104 4.15 5 -0.2716 % 3,762.6
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.2716 % 2,935.7
Perpetual-Premium 5.37 % -0.89 % 66,851 0.09 18 -0.0044 % 2,867.6
Perpetual-Discount 5.28 % 5.30 % 69,503 14.97 16 0.1417 % 3,008.7
FixedReset 4.19 % 4.47 % 151,033 3.80 101 0.1689 % 2,543.2
Deemed-Retractible 5.05 % 5.44 % 83,810 5.81 28 0.0546 % 2,960.3
FloatingReset 3.03 % 2.72 % 42,566 0.97 10 0.2951 % 2,776.3
Performance Highlights
Issue Index Change Notes
PVS.PR.E SplitShare -1.32 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-10-31
Maturity Price : 25.00
Evaluated at bid price : 26.15
Bid-YTW : 4.63 %
TRP.PR.G FixedReset -1.17 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2020-11-30
Maturity Price : 25.00
Evaluated at bid price : 24.45
Bid-YTW : 4.89 %
CU.PR.G Perpetual-Discount -1.04 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-01-29
Maturity Price : 21.51
Evaluated at bid price : 21.80
Bid-YTW : 5.23 %
TRP.PR.D FixedReset 1.02 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-01-29
Maturity Price : 23.37
Evaluated at bid price : 23.85
Bid-YTW : 4.64 %
BAM.PR.M Perpetual-Discount 1.10 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-01-29
Maturity Price : 21.85
Evaluated at bid price : 22.09
Bid-YTW : 5.43 %
GWO.PR.N FixedReset 1.13 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 19.72
Bid-YTW : 6.73 %
BAM.PR.T FixedReset 1.34 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-01-29
Maturity Price : 21.57
Evaluated at bid price : 21.86
Bid-YTW : 4.81 %
BNS.PR.C FloatingReset 1.55 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-01-26
Maturity Price : 25.00
Evaluated at bid price : 24.91
Bid-YTW : 2.70 %
TRP.PR.C FixedReset 1.55 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-01-29
Maturity Price : 18.35
Evaluated at bid price : 18.35
Bid-YTW : 4.66 %
BAM.PR.R FixedReset 1.96 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-01-29
Maturity Price : 21.34
Evaluated at bid price : 21.34
Bid-YTW : 4.88 %
Volume Highlights
Issue Index Shares
Traded
Notes
BMO.PR.T FixedReset 171,765 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-01-29
Maturity Price : 23.60
Evaluated at bid price : 24.00
Bid-YTW : 4.51 %
NA.PR.E FixedReset 146,694 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-01-29
Maturity Price : 23.07
Evaluated at bid price : 24.78
Bid-YTW : 4.61 %
CM.PR.S FixedReset 101,311 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-01-29
Maturity Price : 23.12
Evaluated at bid price : 24.89
Bid-YTW : 4.46 %
RY.PR.E Deemed-Retractible 96,450 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2018-02-28
Maturity Price : 25.00
Evaluated at bid price : 25.24
Bid-YTW : -10.73 %
MFC.PR.R FixedReset 82,850 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2022-03-19
Maturity Price : 25.00
Evaluated at bid price : 26.08
Bid-YTW : 3.88 %
BMO.PR.M FixedReset 61,120 YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.08
Bid-YTW : 3.78 %
There were 29 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
POW.PR.G Perpetual-Premium Quote: 25.65 – 26.25
Spot Rate : 0.6000
Average : 0.3633

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2020-04-15
Maturity Price : 25.25
Evaluated at bid price : 25.65
Bid-YTW : 4.92 %

RY.PR.M FixedReset Quote: 24.52 – 25.00
Spot Rate : 0.4800
Average : 0.2899

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2020-11-24
Maturity Price : 25.00
Evaluated at bid price : 24.52
Bid-YTW : 4.26 %

GWO.PR.N FixedReset Quote: 19.72 – 20.20
Spot Rate : 0.4800
Average : 0.3043

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 19.72
Bid-YTW : 6.73 %

CU.PR.G Perpetual-Discount Quote: 21.80 – 22.30
Spot Rate : 0.5000
Average : 0.3255

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-01-29
Maturity Price : 21.51
Evaluated at bid price : 21.80
Bid-YTW : 5.23 %

GWO.PR.S Deemed-Retractible Quote: 25.30 – 25.68
Spot Rate : 0.3800
Average : 0.2127

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.30
Bid-YTW : 5.15 %

PWF.PR.E Perpetual-Premium Quote: 25.12 – 25.45
Spot Rate : 0.3300
Average : 0.2025

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2018-02-28
Maturity Price : 25.00
Evaluated at bid price : 25.12
Bid-YTW : -0.89 %