The Bank of Montreal has announced:
a domestic public offering of $250 million of Non-Cumulative 5-Year Rate Reset Class B Preferred Shares Series 46 (Non-Viability Contingent Capital (NVCC)) (the “Preferred Shares Series 46”). The offering will be underwritten on a bought-deal basis by a syndicate of underwriters led by BMO Capital Markets. The Bank has granted to the underwriters an option to purchase up to an additional $50 million of the Preferred Shares Series 46 exercisable at any time up to 48 hours before closing.
The Preferred Shares Series 46 will be issued to the public at a price of $25.00 per share. Holders will be entitled to receive non-cumulative preferential fixed quarterly dividends for the initial period to May 25, 2024, as and when declared by the Board of Directors of the Bank, payable in the amount of $0.31875 per share, to yield 5.10 per cent annually.
Subject to regulatory approval, on May 25, 2024 and on May 25 of every fifth year thereafter, the Bank may redeem the Preferred Shares Series 46 in whole or in part at par. On May 25, 2024, the dividend rate will reset and will reset thereafter every five years to be equal to the 5-Year Government of Canada Bond Yield plus 3.51 per cent. Subject to certain conditions, holders may elect to convert any or all of their Preferred Shares Series 46 into an equal number of Non-Cumulative Floating Rate Class B Preferred Shares Series 47 (Non-Viability Contingent Capital (NVCC)) (“Preferred Shares Series 47”) on May 25, 2024, and on May 25 of every fifth year thereafter. Holders of the Preferred Shares Series 47 will be entitled to receive non-cumulative preferential floating rate quarterly dividends, as and when declared by the Board of Directors of the Bank, equal to the then 3-month Government of Canada Treasury Bill Yield plus 3.51 per cent. Subject to certain conditions, holders may elect to convert any or all of their Preferred Shares Series 47 into an equal number of Preferred Shares Series 46 on May 25, 2029, and on May 25 of every fifth year thereafter.
The anticipated closing date is April 17, 2019. The net proceeds from the offering will be used by the Bank for general banking purposes.
They later announced:
that, as a result of strong investor demand for its previously announced domestic public offering of Non-Cumulative 5-year Rate Reset Class B Preferred Shares Series 46 (Non-Viability Contingent Capital (NVCC)) (the “Preferred Shares Series 46”), the size of the offering has been increased to 14 million shares. The gross proceeds of the offering will now be $350 million. As announced earlier today, the offering will be underwritten on a bought deal basis by a syndicate led by BMO Capital Markets.
The anticipated closing date is April 17, 2019. The net proceeds from the offering will be used by the Bank for general banking purposes.
The new issue is somewhat expensive according to Implied Volatility Analysis:
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Alert Readers will have noticed that the curve has been shifted a bit due to the issue BMO.PR.E, a FixedReset 4.85%+268, NVCC, that commenced trading 2018-09-17 after being announced 2018-09-06 – so let’s try a fitting in which it’s not included.
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According to these analyses, if BMO.PR.E is included in the fitting, the new issue is fairly valued at 24.60, while BMO.PR.E itself has a fair price of 21.14 (as opposed to an actual bid price of 23.00).
If BMO.PR.E is not used to fit the curve, the new issue may be valued at 24.42, while BMO.PR.E is assigned a fair value of 20.80.
It’s interesting to note that the theoretical spread (on a notional non-callable perpetual resettable annuity) is either 345bp or 354bp (depending on whether BMO.PR.E is included), roughly the same as the actual issue spread of 351bp – which means that BMO is basically getting the call options on the issue for free.