April 10, 2019

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

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

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

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

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

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

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

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

Yep, preferreds are cheap, all right!

DBRS also has a warning for Premier Ford:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

5 Responses to “April 10, 2019”

  1. skeptical says:

    TRP.PR.G yielding 6.04%
    This is based on constant current GOC 5 year of 1.55% and spread of 2.96, right?

  2. jiHymas says:

    Why? Do you get markedly different results when using the yield calculator for FixedResets?

  3. jimmy says:

    Hi all,

    Question again pls. Was thinking now is a good time to buy some HPR on the dip. Will there be a little capital appreciation after the sell off in Dec? Any advice pls would be appreciated. Thanks again.

  4. jiHymas says:

    Will there be a little capital appreciation after the sell off in Dec? Any advice pls would be appreciated.

    My advice is not to attempt market timing.

  5. jimmy says:

    ok. Thanks again.

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