9:00 pm EDT Looks like the TSX has improved their site again … I can’t recover today’s prices, the last date available is the 15th. I’ll check just after midnight and see if I can download the prices.
2006-09-19 12:42 am EDT: HIMIPref™ has now been updated with the 9/18 prices. Index analysis will be posted sometime … er … later today.
Fortis Inc has announced that they will be issuing a new series of prefs: perpetuals paying 4.9% (= $1.225 per share annually).
These become redeemable Dec. 1, 2011 at $26.00, the redemption price declining by $0.25 annually until redeemable at $25.00 on and after Dec. 1, 2015.
It’s a bought deal by Nesbitt, issue size 5-million shares = $125-million. The issue is rated only Pfd-3(high) by DBRS [but P-2(low) by S&P], so if purchased, it should be purchased cautiously. Don’t put a lot of eggs in this basket! I’ll comment on relative valuation later today.
Update: OK, I’m looking at it … a final opinion will have to await the final prospectus, but preliminary indications are not good.
There’s not much to which it can be directly compared: There are only two other P3H (DBRS) fixed-rate perpetuals: FAL.PR.H, with an annual dividend of $1.625; and LB.PR.D, paying $1.50. Both are high-coupon with imminent call dates and cannot be considered directly comparable.
There are three index-included issues to look at, priced near par:
| Issue | Price (bid, 2006-09-13 close) | DBRS Rating | Dividend |
| MFC.PR.B | 25.00 | Pfd-1(low) | 1.1625 |
| RY.PR.B | 25.20 | Pfd-1(low) | 1.175 |
| RY.PR.A | 24.73 | Pfd-1(low) | 1.1125 |
The MFC.PR.B commence their redemption eligibility 2010-3-19 at $26.00, declining by $0.25 annually until redeemable at par commencing 2014-03-19. So even from this very rough comparison, you’re giving up the credit quality of Pfd-1(low) to buy Pfd-3(high) and only picking up $0.0625 annual dividend for the exchange, which seems pretty niggardly. According to Royal Bank trading prices, if we can assume for a minute they’re trading fairly (not really!) that’s worth less than $0.50.
When we perform an indirect comparison (via the yield curve) vs. every issue in the (HIMIPref™) universe, we come up with a total intrinsic value of the cash flows of $23.07, which isn’t very good:
| Price due to base-rate | 24.06 |
| Price due to short-term | 0.07 |
| Price due to long-term | 0.73 |
| Price due to Cumulative Dividends | 0.00 |
| Price due to Credit Spread (3) | -1.85 |
| Price due to error | 0.06 |
which to a large extent confirms our suspicions that arose when we looked at the better quality near-par perps: This thing is basically being priced as a high quality issue even though it’s a Pfd-3(high).
The other Fortis issues, FTS.PR.C and FTS.PR.E are both trading about $0.25 above thier intrinsic cash values – so it would appear that the market likes the prospects for this firm and is rating them at “Pfd-3(high)(and a bit)”, if I can be permitted so qualitative an assessment. Note that these two issues are illiquid enough that a “liquidity discount” of about $0.20 each is assessed against them, so they’re trading at maybe $0.45 above their expected “fair” price.
I’ll hasten to add that Pfd-3(high) isn’t all that bad! Hymas Investment Management will have to get an AWFUL lot bigger and more profitable before it’s able to issue Pfd-3(high) prefs. According to DBRS, “Pfd-3 ratings generally correspond with companies whose senior bonds are rated in the higher end of the BBB category”.
But, at least until I’ve had a look at the prospectus, I’ll be advising against the purchase of these instruments. Not only should holdings of Pfd-3 instruments be limited within a portfolio (even when (high)), but it looks like these are simply being priced too aggressively to be worth going after.
Note added 2006-09-15 : These have been added to HIMIPref™ with the ticker symbol “FTS.PR.?”
Note added 2006-09-27 : Looks like the TSX will be listing this issue with the ticker symbol “FTS.PR.F”
A new version of HIMIPref-2005 has been released via the usual route.
This release allows dividends for one or more accounts to be booked for a specified period automatically – it also allows for immediate cash reversals of these entries for those interested in both performance measurement and keeping the system as strictly a swap-analyzer.
Note that these entries are booked with the ex-date as the trade date of the dividend entry and the pay-date as the value date of the dividend entry.
7:30 pm EDT The bug on the TSX site is still around … I can only hope that they succeed in their ambition of fixing it on the 21st. In the meantime, I’ll check just after midnight and see if I can download the prices.
2:00 am EDT, 2006-08-19 Prices have been updated. I really hope this gets fixed soon. This is killing me.
I have just (8pm EDT) attempted to download the prices and run into the same bug as has plagued operations all week. You have no idea how much I’m looking forward to next Monday, when the TSX says they hope to have their systems fixed! I will update this post as warranted.
August 18, 2006, 12:30 a.m. Prices are in, system is ready to go.
I have been advised by the TSX that they are working on the problem and hope to have it resolved by 2006-08-21. I will post updates on this, but it looks like rather a forlorn hope at the moment – don’t rely on an update appearing prior to tomorrow morning.
Update 2006-08-17 12:30am EDT Well! I can speculate about the nature of TSX’s programming bug a little better now! Prices can be recovered after midnight, and that’s exactly what I’ve done. The system has now been updated to the COB 2006-08-16.
Things are looking a little grim! I’ve just attempted to recover the prices and I’m getting the same thing as yesterday: the TSX Data recovery screen tells me that prices are available until today; so I plug in today’s date for my price list; and a message box appears advising “You have selected an end date for data which is not yet available. This query cannot be processed at this time.”
*sigh*
I sent them an eMail today inquiring as to whether they intended to fix the problem quickly, but have not yet received a response. This post will be updated as more information becomes available.
Update, 2006-08-15 9:30pm EDT: Well, I just gave it one last check and it’s the same old story … not too surprising, really, since it really looks like a programming bug introduced in their latest update rather than a data-updating-bug. So, again, the prices will have to be updated in the morning and I’ll post a note when the process is completed.
Update, 2006-08-16 10am EDT: The prices have been recovered and the system is now updated. I will contact the TSX again today to see what the plans for the future are.
Well, it’s just about 9:30 p.m. EDT, and the daily trading data is not recoverable from the TSX (looks like they improved their system again!). Data will be updated when available.
Update 2006-08-15 10am : The system has now been updated with 8/14 prices.
There is a new release available via http://www.prefshares.com/gettingstarted/downloads.php This is not a major release – it just cleans up a few loose ends with the interface that I hope I’m the only one who’s noticed. There have been no changes on the server-side or in the interfaces, so old versions will continue to work.
If you download and install it, I implore you to remember to back up your userdatabase prior to the uninstallation of the old version. Those who really hate fiddling with re-installation will also want to back up their “userloc” file … this is in the same directory as the programme itself (probably c:Program FilesHymas Investment Management, IncHIMIPref , but the original installation may have put it elsewhere) and the backup-userloc used to over-write the reinstalled-userloc after installation, but prior to running the programme.
RY.PR.S
Friday, August 11th, 2006This is an interesting issue, since it is quoted at $26.31-40, a fat premium despite being imminently callable.
Options on this issue are:
Redemption 2006-08-24 2007-08-23 26.000000
Redemption 2007-08-24 2008-08-23 25.750000
Redemption 2008-08-24 2009-08-23 25.500000
Redemption 2009-08-24 2010-08-23 25.250000
Redemption 2010-08-24 2999-12-29 25.000000
And the YTW Analysis is:
Call 2006-09-23 YTM: -5.90 % [Restricted: -0.69 %] (Prob: 31.33 %)
Call 2006-12-09 YTM: 1.55 % [Restricted: 0.51 %] (Prob: 5.01 %)
Call 2007-09-23 YTM: 3.75 % [Restricted: 3.75 %] (Prob: 8.58 %)
Call 2008-09-23 YTM: 4.32 % [Restricted: 4.32 %] (Prob: 4.24 %)
Call 2009-09-23 YTM: 4.54 % [Restricted: 4.54 %] (Prob: 3.16 %)
Call 2010-09-23 YTM: 4.66 % [Restricted: 4.66 %] (Prob: 2.78 %)
Option Certainty 2035-02-14 YTM: 5.75 % [Restricted: 5.75 %] (Prob: 44.90 %)
Not the kind of issue I’d like to own! I can understand why some people might not wish to hit the current bid of $26.31 – they may have high transaction costs through their brokers, while a redemption will be done for free – buy why would anybody put a bid up there? It pays $1.525 annually with 10-million shares outstanding and Royal has done two perpetual issues this year with coupons of $1.1125 (RY.PR.A, 12-million shares) and $1.175 (RY.PR.B, 12-million shares) … so why would Royal keep it outstanding? Even a cost of $0.75 for brokerage commissions on a new issue sold entirely to retail through other dealers AND a $1.00 premium on early redemption is recouped pretty quickly with those kind of numbers.
And, as is shown below, it’s been a sell candidate for the past year, with a consistently low YTW (except for few pops in YTW recently, which don’t mean a lot given the short term to presumed maturity):
There may be some who look at the very high calculated probability of this issue being extand for nearly thirty years in the future and take issue with the calculation. That’s entirely understandable. I do too. HIMIPref™ is known to have a certain amount of difficulty in calculating meaningful numbers for issues whose prices are constrained by a relatively near term call. For this reason, the parameters minCostBidPseudoModifiedDurationBuy, minWorstBidPseudoModifiedDurationBuy and minYTWModifiedDurationBuy were developed, which put a lower limit on three of the calculated modified duration measures. These parameters have been optimized to values of 1.02, 2.481 and 0.00, respectively (the most stringent condition is applied).
Due to these minima, RY.PR.S is not even eligible for purchase by HIMIPref™ regardless of valuation.
Another quibble that may be addressed is the question of declining redemption premia. It could be argued that due to the known decrease in redemption price of $0.25 annually for the next four years, it is proper to evaluate the chance of redemption of these shares as if they were paying $1.525 – $0.25 = $1.275 per annum, this being the net effect on Royal Bank’s cash flow of waiting a year. This calculated rate certainly is a lot closer to the coupon of the recent issues than the raw rate!
From an investment perspective it doesn’t make a lot a difference, though. Essentially, you are buying these in the hopes that the four year yield-to-worst of 4.66% will be realized. There is no hope of a capital gain – any decline in interest rates will simply increase the very high probability that the issue will be called. Given the hopelessness of the potential for capital gains with rate decreases, the high level of protection agains rate decreases is almost worthless.
Investors can do better. A look at the chart Premium-Perpetual Yield Curve, 2006-07-28 shows that there are plenty of alternatives.
Posted in HIMIPref News, Issue Comments | 1 Comment »