Category: Issue Comments

Well, here it is, the market’s been open for two hours and a mere 35-thousand-odd shares have traded. What a slow day! This might be an indication that the blow-out sale has run its course and the underwriters now have some shelf-space free for the next issue.

It is possible that this has something to do with the banks’ year-end: I will not pretend to be an expert on bank finances, but today is the first day that trades will settle after their year-end, which is October 31. Having sales settle on or prior to this date would go a little way, at least, towards deleveraging their reported balance sheets and improving their capital ratios – but I will leave it to others to determine how much of an incentive this was in the determination of blow-out timing.

All this is now ancient history, of course, and the question on everybody’s lips is “when are these shares going to recover? ARE they going to recover?”. My answer to the latter question is ‘I think so.’ Not ‘I know so’, because the market has a special way of humiliating those who profess to know its secrets, but this issue looks quite cheap by a variety of measures – and is actually trading at even-yield to Sunlife bonds, which means that, if we take the market price as fair, the perpetual nature of this issue is considered to offset the tax benefits of dividend income entirely. This does not sound reasonable!

 Timing? Holy smokes … making predictions about what the market will do is risky enough … making predictions about WHEN it’s going to do it is foolhardy! The price could go up tomorrow … it might go up by the end of November … it might, of course, never happen and leave me looking silly. The last blow-out was the WN.PR.E issue: I’ve prepared a HIMIPref™ graph of the price and Yield-to-Worst of this issue since issuance. It flatlined at $24.00 for a long time, but once it got moving, it moved quickly!

 Now, watch! As soon as I click the “Publish” button for this post, half a million shares will trade at $23.50! Such are the perils of forecasting!

We’ve had a look at RY.PR.K … now let’s have a look at the other constituent of the HIMI OperatingRetractible Index with a negative Yield-to-Worst: BMO.PR.G. The option schedule is:

     
• Redemption      2005-08-25      2006-08-24  25.500000
• Redemption      2006-08-25      2007-08-24  25.250000
• Redemption      2007-08-25   INFINITE DATE  25.000000
• Retraction      2008-05-25   INFINITE DATE  26.040000

Which, when analyzed with the 2006-10-24 closing bid of $25.59 results in the optionCalculationList:

    
• Call  2006-11-23 YTM: -2.10 % [Restricted: -0.17 %] (Prob: 28.69 %)
• Soft Maturity  2008-05-24 YTM: 3.78 % [Restricted: 3.78 %] (Prob: 71.31 %)

These bonds are not recommended by HIMIPref™ as their Eligible For Purchase (Code) has a numerical result of “14” : “pseudoModifiedDuration (Worst) of buy side less than minimum setting”. The pseudoModifiedDurationWorstBid of this issue is 0.11 based on the following calculation:

These data are taken from the pseudoModifiedDurationCalculationBox and pseudoPortfolioReportBox.

The analyticalParametersReportBox shows that the value of minWorstBidPseudoModifiedDurationBuy is an optimizableParameter with a value currently set to 2.481. Thus, we can infer that HIMIPref™ analysis has been found to work better on a long-term portfolio basis when issues with such imminent callability are excluded from consideration.

Readers will remember that I wasn’t too impressed with this issue when it came out.

The market apparently agreed with me, as this issue is now a Blue-Light Special : currently at $23.67-95, last trade at $23.94, down $0.80 on the day. Over 17,000 shares have traded, mostly between $23.94 and $24.00.

 At these levels the issue looks quite attractive! The dividend of $1.1125 represents a current yield of 4.63% on a price of $24.00, and it’s OK to use current yield on a discounted perp! This yields exceeds the issue yield of the new Royal Bank Issue, which I quite liked.

More later.

Later, more: At the close, this looked pretty good! At the closing bid of $24.00 the current yield was 4.64% and the Yield-to-Worst 4.66%, second only to the Pfd-2(low) (DBRS) rated WN.PR.E in the PerpetualDiscount index. There certainly seems to be plenty available, but there’s no telling how long it will stay at these levels … the bid size is 11,900 shares.

 Deep thinkers fresh from reading the FOMC entrails will note that I am assuming that it won’t go down any further. Well … I don’t think it will … the objective of these blow-outs is to put such a ridiculously low price on your inventory you can dump it all quickly and stop worrying about it … but nothing is certain in this wicked world.

Brookfield has announced the results of the BAM.PR.E (Series 8 ) / BAM.PR.G (Series 9 ) conversion privilege, last discussed in this blog here.

Holders of 272,614 Series 8 Preferred Shares have elected to convert these shares into an equivalent number of Series 9 Preferred Shares, and holders of 1,028,770 Series 9 Preferred Shares have elected to convert these shares into an equivalent number of Series 8 Preferred Shares.

These conversions will be effective on November 1, 2006. Following these conversions, there will be 1,805,948 Series 8 Preferred Shares and 6,194,052 Series 9 Preferred Shares issued and outstanding.

So the Series 9, the fixed-reset issue paying 4.35% commencing with the Feb. 1, 2007, payment, will be much more liquid than the ratchet-floaters … on the other hand, there will be more of the ratchets than there were before, so perhaps they’ll make it into the HIMI Index!

Nortel has announced the dividend rate payable for the next five years on the Series 6 shares to which holders of Series 5 shares (NTL.PR.F) are entitled to convert. If they do not convert (or should conversion be cancelled due to insufficient orders), holders will retain their NTL.PR.F shares under the existing terms and conditions.

Nortel Networks Limited announced that the fixed dividend rate for its Cumulative Redeemable Class A Preferred Shares Series 6 will be equal to 80% of the yield on five-year non-callable Government of Canada bonds to be determined on November 10, 2006.

Pretty skimpy! Especially for an issue rated Pfd-5(low) by DBRS! I rather suspect that there will be no conversions.

BCE has announced that, of the 8-million BCE.PR.S shares currently outstanding, 5,918,209 will be converted to BCE.PR.T on November 1.

BCE.PR.T has commenced trading on the TSX today, quoted at $24.75-25, 5×5, zero volume. This issue will be added to the HIMIPref™ database shortly. As previously noted, the BCE.PR.T will pay $1.1255 per $25 p.v. share. There is an offer for both issues that is conditional upon the BCE / Bell Canada Income Trust Conversion proceeding.

We had a look at POW.PR.A yesterday, as an example of an issue in the PerpetualPremium index with a negative YTW; now let’s look at RY.PR.K (previously commented upon on August 22). This is particularly interesting in light of the RY.PR.O redemption recently announced. RY.PR.O was also at an intermediate stage of its call schedule and also had a call price declining by $0.25 p.a. The important differences between these issues are:

• the “K” is retractable and is therefore included as debt on the balance sheet. RY.PR.O is perpetual and therefore may be included in Tier 1 Capital.
• the “K” has an annual dividend of $1.175; the “O” pays $1.375.

This issue was quoted at the close of business, 2006-10-19, at $25.66-62 and has the embedded option schedule:

• Redemption      2003-08-24      2004-08-23  26.000000
• Redemption      2004-08-24      2005-08-23  25.750000
• Redemption      2005-08-24      2006-08-23  25.500000
• Redemption      2006-08-24      2007-08-23  25.250000
• Redemption      2007-08-24   INFINITE DATE  25.000000
• Retraction      2008-08-24   INFINITE DATE  25.000000

So it is currently redeemable at $25.25 and, while one can never be absolutely certain of anything in this world, the idea that it will be redeemed prior to becoming retractible in 2008 is a safer bet than most.

These options, run through the HIMIPref™ software, give rise to the following optionCalculationList:

• Call  2006-11-18 YTM: -6.24 % [Restricted: -0.51 %] (Prob: 31.99 %)
• Call  2007-09-23 YTM: 2.61 % [Restricted: 2.42 %] (Prob: 1.14 %)
• Soft Maturity  2008-08-23 YTM: 3.64 % [Restricted: 3.64 %] (Prob: 66.87 %)

So HIMIPref™ is accounting for the possibility of an immediate call (one maturityNoticePeriod hence) at $25.25, which will result in a realized yield of -6.24%. This is a very odd issue, quite frankly! I noticed it when I was working on my article about Yield-to-Worst as a predictor of future returns (A Call, too, Harms) … at one of the year-ends studied it was among the issues with the lowest YTW but was not called, making my point a little less emphatic, but returning poorly over the ensuing year anyway. I drew attention at that point to the issue:

The other retractable in the low yield-to-worst lists for 2000-2002 that was not called was RY.PR.K. Although it managed to avoid the worst case scenario (a call nine months subsequent to its appearance in the list), it underperformed the index by a cumulative total of about 6% in the following three years. Clearly, dodging the redemption bullet was not, in and of itself, a great cause for celebration!

The continuing oddness can be illustrated over the past year by looking at a graph of the bid price over the past year. The high prices for this issue lead to YTWs that have been negative more often than not.

I don’t understand! Fortunately, however, I don’t need to understand. Knowing where to find the “Sell” button is good enough for me!