Category: Index Construction / Reporting

Index Construction / Reporting

HIMI Index Rebalancing: May 31, 2007

There was a lot of activity this month: a huge migration from PerpetualPremium to PerpetualDiscount; a transfer of all the Weston issues to Scraps due to credit concerns; and a transfer of several issues from Scraps due to increased volume.

The changes are:

HIMI Index Rebalancing, May 31, 2007
Ticker From To Because
WN.PR.C PerpetualPremium Scraps Credit
SLF.PR.B PerpetualPremium PerpetualDiscount  Price 
MFC.PR.B PerpetualPremium PerpetualDiscount Price 
POW.PR.D PerpetualPremium PerpetualDiscount Price
CM.PR.H PerpetualPremium PerpetualDiscount Price
WN.PR.A PerpetualPremium Scraps Credit
PWF.PR.D Scraps OpRet Volume
LFE.PR.A Scraps SplitShare Volume
FTU.PR.A Scraps SplitShare Volume
BAM.PR.G Scraps FixFloat Volume
WN.PR.B OpRet Scraps Credit
MST.PR.A Interest Scraps Volume
BMO.PR.J PerpetualPremium PerpetualDiscount Price
ELF.PR.G PerpetualPremium PerpetualDiscount Price
RY.PR.B PerpetualPremium PerpetualDiscount Price
CM.PR.I PerpetualPremium PerpetualDiscount Price
WN.PR.D PerpetualPremium Scraps Credit
GWO.PR.H PerpetualPremium PerpetualDiscount Price
PWF.PR.K PerpetualPremium PerpetualDiscount Price
SLF.PR.A PerpetualPremium PerpetualDiscount Price
WN.PR.E PerpetualDiscount Scraps Credit
Index Construction / Reporting

SBN.PR.A Closes: A $45-million Issue

S Split Corp, discussed on April 30 has closed, with 4.5-million shares outstanding. There was the usual price-pop and heavy volume; the issue closed at 10.42-45, 53×10, on volume of 415,750 shares.

I’d say there’s still a little value left: the curvePrice is $10.79, comprised of :

Price due to base-rate :  10.26
Price due to short-term :  -0.30
Price due to long-term :   0.71
Price due to Interest Income :   0.00
Price to to Cumulative Dividends :   0.00
Price due to SplitShareCorp :  -0.22
Price due to Retractibility :   0.37
Price due to Credit Spread (2) :  -0.13
Price due to Liquidity :   0.21
Price due to Floating Rate :   0.00
Price due to Credit Spread (3) :   0.00
Price due to error :   0.03
Price due to Credit Spread (High) :   0.00
Price due to Credit Spread (Low) :  -0.12

Update: This issue has been added to the HIMI Split-Shares Index.

Index Construction / Reporting

BAM.PR.T to be redeemed

Brookfield has announced:

it intends to redeem its 8.30% Preferred Securities due June 30, 2051 (the “Securities”) (CUSIP No. 112585 849) on July 3, 2007. The Redemption Price will be C$25.00 per Security plus accrued and unpaid interest of C$0.017055 thereon up to but excluding the redemption date, representing a total Redemption Price of C$25.017055 per Security.There are currently 5,000,000 outstanding 8.30% Preferred Securities, which are listed on the TSX under the symbol BAM.PR.T.

Hardly a surprise, but a sad event never-the-less. As the May 15 evaluation of the “Interest Bearing” index shows, this was the last of the Operating-Company Interest-Bearers that made life so well worth living a few years ago. The only Preferred Securities left are split-share corporations.

Data Changes

BAM.PR.N : A Ticking Time-Bomb?

The previously announced new issue of BAM 4.75% Perpetuals started trading today under the symbol BAM.PR.N … and I can’t believe my eyes!

I was expecting it to trade in the $24.50 area, simply because that’s where the BAM.PR.M issue promptly slumped to immediately after the new issue was announced … the price level is not a surprise.

The surprise is that it’s now 1:30 pm, only 5,500 shares have traded, and the market is quoted at 24.60-64, 3×7. 3×7? On a new issue? 5,500 shares?

Together with the drop in price being so pre-ordained by the behaviour of BAM.PR.M, what this is telling me is that the underwriters haven’t sold a whole lot of shares. I can’t state that as a definite fact and I’m not the Oracle of Delphi, but that’s my interpretation and I’ll bet anybody who likes an entire dime that I’m right.

I suspect that this one will have an Inventory Blow-Out Sale, just like SLF.PR.D did last fall. Maybe early June, but I won’t bet any money on that part of the prediction. In the mean-time, I urge extreme caution when buying both BAM.PR.N and its twin sister BAM.PR.M … at least until the situation clarifies.

The HIMIPref™ database has been updated with the new issue information – BAM.PR.N has been assigned the securityCode A41223, replacing the preIssue code of P43000. A reorgDataEntry has been processed to reflect the change.

Update: Closed at 24.50-60, 3×19, on volume of 9,400 in a trading range of 24.50-75.

At some point, I’m going to do some research on “First Trading Days”. This must be some kind of record.

tick … tick … tick …

Update: This issue has been added to the PerpetualDiscount Index.

Index Construction / Reporting

HIMI Preferred Indices : April 30, 2007 Rebalancing

A fair amount of movement this month – mainly from PerpetualPremium to PerpetualDiscount.

2007-04-30 Index Rebalancing
Ticker From To Because
LFE.PR.E Scraps Add
ALB.PR.A SplitShares Add
PAY.PR.A Scraps SplitShare Volume
RY.PR.D PerpetualPremium PerpetualDiscount Price
RY.PR.E PerpetualPremium PerpetualDiscount Price
BAM.PR.M PerpetualPremium PerpetualDiscount Price
CIU.PR.A PerpetualPremium PerpetualDiscount Price
RY.PR.C PerpetualPremium PerpetualDiscount Price
IAG.PR.A PerpetualPremium PerpetualDiscount Price
MUH.PR.A SplitShare Scraps Volume
ASC.PR.A SplitShare Scraps Volume
PWF.PR.A Floater Scraps Volume
Index Construction / Reporting

Index Performance : April 2007

All over the map this month!

Index Performance, April 2007
Ratchet -7.65%
FixFloat -9.13%
Floater +0.61%
OpRet -0.14%
SplitShare -0.79%
InterestBearing +0.18%
PerpetualPremium -0.82%
PerpetualDiscount -1.19%

Both the FixFloat and the RatchetRate indices are comprised entirely of BCE issues; BCE has no issues included in any of the other indices. 

The S&P/TSX preferred share index was (before the collapse) 7-8% BCE (which is proxied by FixFloat); the BMO-NB 50 is a little higher, about 10%. Diversified Preferred Fund (DPS.UN) lists its 25 largest positions as of Year-end, which include 6 BCE/Bell issues totalling 9.95% of the portfolio at that time, while the Claymore ETF currently lists 2 of these issues in its holdings, currently comprising 6.86% of the portfolio. MAPF hasn’t held any of these issues for a long time … I can’t even remember holding them, but I’m sure I have at some point or other.

By cracky, you young whippersnappers don’t know nuthin’. I can remember when Bell Canada / BCE was a decent credit!

 

 

Index Construction / Reporting

Split Share Discount

On the thread for April 27, Drew asked:

The YTW of split shares and perpetual premium shares seems to have risen over the last month substantially more than that of perpetual discount shares. My impression is that the bond yield curve has not flattened like this. Am I correct and, if so, do you have a theory?

Well, first off, let’s look at the index data: March 30:

Note that these indices are experimental; the absolute and relative daily values are expected to change in the final version. In this version, index values are based at 1,000.0 on 2006-6-30
Index Mean Current Yield (at bid) Mean YTW Mean Average Trading Value Mean Mod Dur (YTW) Issues Day’s Perf. Index Value
Op. Retract 4.72% 3.04% 85,479 2.16 17 -0.0828% 1,034.0
Split-Share 5.01% 3.14% 158,951 3.31 14 +0.0234% 1,052.8
Perpetual-Premium 5.02% 3.56% 219,123 5.15 53 -0.0031% 1,059.8
Perpetual-Discount 4.53% 4.54% 762,721 15.37 10 -0.0157% 1,066.8

…and for April 27:

Note that these indices are experimental; the absolute and relative daily values are expected to change in the final version. In this version, index values are based at 1,000.0 on 2006-6-30
Index Mean Current Yield (at bid) Mean YTW Mean Average Trading Value Mean Mod Dur (YTW) Issues Day’s Perf. Index Value
Op. Retract 4.73% 3.22% 84,115 2.38 17 -0.0108% 1,033.0
Split-Share 5.03% 4.29% 179,611 4.02 12 +0.1756% 1,046.1
Perpetual-Premium 5.07% 4.50% 222,579 6.25 54 -0.1567% 1,051.4
Perpetual-Discount 4.57% 4.59% 924,984 16.22 12 -0.0112% 1,056.4

From these indications, we see huge apparent changes in the yield of split shares. There are, as always, details of the analysis that must be understood before we pat ourselves on the back, however.

Consider the April 27 Split Share Index. Well, it looks like one thing that’s going to happen soon is that MUH.PR.A and ASC.PR.A will be moved to the “Scraps” index, on grounds of insufficient averageTradingValue, but never mind that.

One thing we notice is that DFN.PR.A & FFN.PR.A have much higher YTWs than FTN.PR.A, thanks to the recently approved term extensions on the former two issues. Be sure to write a thank-you note to your friendly neighborhood capital unit holder for the gift! Another thing we notice when looking at the index table is that the Split-Share index has been hit a lot harder than the Operating-Retractible index. This effect is due, I think, to a lack of understanding in the marketplace in general as to the nature of a split-share corporation. For example, one commenter on Financial Webring Forum stated that he was “not interested in … split shares that mature at NAV”.

Well, the preferred share component of a split share corp does not mature at NAV, absent default. The last two words are very important, because as I showed in the article Are Floating Prefs Money Market Vehicles?, Split Shares have, historically, been more susceptible to credit downgrades than other classes of share. However, readers who have read Using Credit Ratings When Buying Preferreds and Split Shares will know how to watch for the signs of an imminent downgrade. It seems to me that DBRS has been tightening its standards for Split Share credit ratings in the past year or two; as well, while the nature of a split share makes the rating more volatile, it also makes credit analysis a lot easier! So, while you have to watch them, so what? You have to watch everything in this uncertain world.

Some institutional investors, as well, don’t like Split Shares: one reasonably good reason is that not only are issue sizes relatively small, but they are rarely available as a new issue bought en bloc unless you also buy the Capital Units. One relatively bad reason is that many institutional guys don’t understand them either, another is that buying them might give the impression that they are sub-contracting asset management to the Split-Share’s sponsor, or at least have to explain to clients why that is not a fair characterization.

So in the end, Split Shares become not just a playground for retail, but for a relatively small component of the retail preferred share buying populace at that. This makes them much more susceptible to volatility and what I currently believe is contagion from the continuing woes of BCE.

I’ve uploaded a graph of the yieldCurvePremiumRetractible and the yieldCurvePremiumSplitShareCorp. On April 27, these values stood at -0.44% and +0.40%, respectively, changing from -0.42% and +0.34%, respectively, on March 30. So, yeah, Split Share spreads have widened quite noticeably over the past month. I’ve also uploaded a graph of the core yield curves at year-end, March month-end and now, for your inspection. All these curves and spreads, I hasten to note before I forget, are AFTER TAX.

Malachite Aggressive Preferred Fund currently has a relatively high exposure to Split Shares, so I could be accused of talking up my inventory. I could also be accused of putting my money where my mouth is. Take your pick – you have been warned!

 

Index Construction / Reporting

BCE, Event Risk and the FixedFloater Index

My eagle-eyed readership will have noticed that the FixedFloater index is not doing very well recently.

This is largely due to the fact that it is entirely comprised of BCE issues: BCE has been in the news lately due to speculation that Ontario Teachers might take a run at it … or at least try to pump up the shareholder value … and I don’t mean the PREFERRED shares!

DBRS had this to say today:

DBRS notes that the Company’s largest shareholder, Ontario Teachers’ Pension Plan Board (OTBP or Teachers), has recently changed its long-standing position from being a more passive shareholder to an active shareholder. This change could place further pressure on the Company and thereby heighten its event risk.

DBRS’s current expectations for BCE include the Company maintaining a stable and conservative balance sheet and the balanced deployment of the Telesat proceeds. Should the Company’s response to recent pressure be outside of DBRS’s expectations, DBRS may reconsider the appropriateness of the Company’s A (low)/“A” ratings.

However, DBRS currently expects that any changes in the Company’s financial policy as outlined above would likely result in one-notch rating change at BCE to BBB (high)/A (low).

Nice, eh? I tell people and tell people : Floating prefs are not money market instruments, no matter how much they quack like those ducks, but nobody ever listens.

A more aggressively pro-shareholder stance by BCE will not lead to another offer for the preferreds – if anything, such an event will be less likely. I bet the old Bell Canada pref holders are now feeling a little blue : they voted to switch to an inferior credit for a trivial consideration and this could be nasty.

How will all this work out? I have no idea. I’d be buying options like crazy if I did. But I did want to ensure that readers understand that the recent decline in the FixedFloater index (down to 1,039.4 today from a peak of 1055.7 on March 15) is not necessarily due to any market disenchantment with FixedFloaters – it is more likely BCE related.

Data Changes

BNS.PR.M Arrives at Market Slightly Discounted

The Scotia new issue, announced March 21, closed its first day of trading at 24.87-89, on heavy volume of 724,590 shares. There was a tight trading range, 24.85-92.

Updated comparatives are:

Scotia Bank 4.45% Perp New Issue & Comparatives
Data BNS.PR.M BNS.PR.L RY.PR.E
Price due to base-rate 22.52 22.43 22.64
Price due to short-term -0.25 -0.25 -0.25
Price due to long-term 1.39 1.39 1.39
Price to to Cumulative Dividends 0.00 0.00 0.00
Price due to Liquidity 1.71 1.71 1.72
Price due to error -0.07 -0.07 -0.07
Curve Price (Taxable Curve) 25.30 25.22 25.43
Dividend Rate $1.125 $1.125 $1.125
Quote 4/5 24.87-89 24.97-98 25.15-23
YTW (at bid, after tax) 3.61% 3.58% 3.60%
YTW Date Infinite 2016-5-27 / Infinite Infinite
Credit Rating (DBRS) Pfd-1 Pfd-1 Pfd-1
YTW (Pre-Tax) 4.54% 4.50% 4.51%
YTW Modified Duration (Pre-Tax) 16.36 16.46 16.24
YTW Pseudo-Convexity (Pre-Tax) -35.01 -63.28 -51.92

Update: The issue has been added to the HIMIPref&trade database with the securityCode A41010, replacing the preIssue code of P50012. A reorgDataEntry has been added to the system.

The issue has been added to the HIMIPref™ PerpetualDiscount Index.

Index Construction / Reporting

LBS.PR.A : Financial Statements & Some Comparatives

I was asked on an old thread to comment on this issue in the light of the release of the split-share corporations first audited financials through Brompton’s dedicated web page.

LBS Balance Sheet, 2006-12-31 (Simplified by James Hymas)
Assets (thousands)
Good Assets 311,659
Assets only an accountant could love 14
Total Assets 311,673
Liabilities  
Misc. Liabilities 3,010
Preferred Shares 120,000
Total Liabilities 123,010
Shareholders’ Equity 188,663
Total Liabilities & Equity 311,673

OK, so remember from the example of Sixty-Split that the Asset Coverage Ratio is defined as Total Money Available / Total Money Required.

Total Money Required is the redemption value of the preferreds: $120-million.

Total Money available is the Shareholders’ Equity plus the amount already earmarked for the prefs less the miscellaneous liabilities (because they get paid first or, at least, earlier) and also less the ephemeral assets of $14-thousand (because they will evaporate prior to the preferreds coming due AND because if the company gets wound up tomorrow there’s no actual cash to be gained from them), or $188,663 + $120,000 – $3,010 – $14 = $305,639.

Correction, posted 2007-4-11 : There is an error in the above. There is no need to subtract the $3,010 in miscellaneous liabilities because they were never added in the first place, since the positive figures being used come from the liability side of the balance sheet. Thus, the cash available is $188,663 + $120,000 – $14 = $308,649 and the coverage ratio is 2.57:1.

Another way to arrive at this number is consider the total money available to the company on liquidation, less the amounts that have to be paid out before the prefholders get paid: $311,659 – $3,010 = $308,649.

Which just goes to show, you have to be careful with this stuff and, if possible, check it with a different method!

Therefore, the Asset Coverage Ratio is $305,639 / $120,000 = 2.55:1.

Or, to put it in DBRS terms, there’s downside protection of 60.7% … in other words, the assets could lose 60.7% of their value and there would still be enough in the kitty to pay off the preferred shareholders (although the capital unit holders would lose their shirts).

Just how much asset protection one wants is a function, in part, of just what the assets are. If LBS held a portfolio of Junior Uranium explorers I would be more concerned, but I take the view that the LBS portfolio of big Canadian Banks and Insurers isn’t going to drop by that much any time soon. I’m happy with the coverage.

By way of comparison, the recent DBRS rating of CFS.PR.A as Pfd-1 started off the summary with:

The rating of the Preferred Shares is based on the following:

(1) The available downside protection, which is 57% to the principal amount of the outstanding Preferred Shares at closing.

….

A full analysis is more complicated than that, obviously, but it is clear that on an Asset-Coverage basis, LBS.PR.A has nothing to be ashamed of. So now let’s go to the income statement:

LBS Income Statement (thousands) (Simplified by James Hymas)
Income  
Dividends, Interest & Lending 2,038
Expenses  
Fees (547)
Expenses (185)
Brokerage (66)
Total Costs (799)
Preferred Distributions (1,304)
Capital Unit Distributions (2,981)
Realized & Unrealized Capital Gains 26,858
Total Change In Net Assets 23,813

It should be remembered that these figures are derived from operations for the period October 17 (commencement of operations) to December 31. We’re interested in ratios, not absolute numbers, so we’ll assume – for now, for the purposes of this analysis only – that this INITIAL PARTIAL period gives a good indication of what may be expected (in terms of ratios) for FUTURE COMPLETE periods.

An assumption. For now.  

So: we want to find out the income coverage. Total income for the period is $2,038 [thousands throughout] and is of a nature that appears to be sustainable. We’ll cut the boys a little slack, and ignore the $66 transaction costs … they had to invest all their money in the period, their first since inception, and given that the corporation takes a passive stance towards the stock portfolio, it’s not very likely to recur to the same extent. At the end of the period, they held a total of just over six million shares, so their COMMISSSIONS paid amount to just over a penny a share, which is entirely reasonable.

We have no idea, from just these figures, whether their trading was done competently or not. It is entirely possible that these guys are the most reckless idiots in creation and overpaid for their stock big-time, to the amount of $1.00 per share. It is also possible that they’re the smartest, toughest negotiators & traders in the world and UNDERPAID for their stock, to the amount of $1.00 per share. This somewhat vital information, which may usually be relied upon to be a much greater number than piddly little commission expenses, is completely missing from such completely simplistic moronic idiocy as the Trading Expense Ratio, which, for instance, mutual funds are required to report by policy of the Canadian Securities Administrators, in an apparent effort to ensure that the gullible think they understand something.

But one way or another, we’ll exclude commission costs from the expenses, in the belief (hope?) that they were largely a one-time thing.

So to calculate income coverage, we come up with $2,038 – $547 – $185 = $1,306 presumably recurring net income after expenses, to cover preferred share distributions of $1,304.

Not quite an exact match, but close! We’ll say that income coverage is 100%, for purposes of this analysis. That’s pretty good! The figures shown in my article on split shares are even more out of date than they were when I wrote it, but serve as a reasonable benchmark. One Hundred Percent coverage implies that preferred shareholders may expect that there is a reasonable chance that they will get their dividends without the company having to dip into capital, thereby reducing the Asset Coverage Ratio.

All sorts of bad things could happen in the future, of course. What if the company is too generous in its distributions to the Capital Unit holders (there are limits to this under the prospectus; determining whether these limits are good enough is left as an exercise for the student)? What if all the banks cut their dividends to zero in response to taxation changes? You can never predict the future, but you can extrapolate the present … as long as you retain a healthy skepticism towards this and any other extrapolation (and watch the financials to ensure that you like what’s happening!), the income coverage on this issue looks quite good.  

Not quite as good as DBRS noted for CFS.PR.A:

(3) The Interest Coverage Ratio test of 1.5 times for the Preferred Shares, which ensures a high level of protection to the holders of the Preferred Shares.

but good enough for investment grade.

DBRS rates this issue Pfd-2. There’s a chance I might quibble about this rating if I did a very thorough analysis of comparable issues and historical performances … but there’s nothing in these financials that makes me suspect that such a rating is completely out to lunch.

I’m happy with the rating. That does not imply anything at all about whether I think that LBS.PR.A is a good investment at this time at the current price.

Remember the Tech Wreck? Everybody and his shoe-shine boy was telling everybody else that ‘The Internet is going to change all our lives, and therefore Nortel is a fantastic buy at $110!’. Well, yeah. The internet is going to change our lives. And Nortel is a fine company (although perhaps I should have chosen another example, a company that can keep a set of books, for instance). BUT. BUT. BUT. That does not imply it should be bought irregardless of price.

First you determine value. Then you determine price. Then you subtract. Then you make an investment decision.

So, anyway, I’m not going to comment much on the investment characteristics of LBS.PR.A. I’m happy to rant and rave on and on about issues I consider lousy, but for discriminating between “Weak Sell”, “Hold”, “Buy” and “Strong Buy” (which aren’t actually terms I use, but serve as examples), you’ve got to be a client.

Or, soon (very soon!) a subscriber to PrefLetter!

But, out of the kindness of my heart, I’ve uploaded a recent evaluation of the HIMIPref™ Split-Share Index, to give interested readers a place to start.