Category: Issue Comments

As noted in the January 5, 2007, Commentary, the yieldToWorst on CL.PR.B has gone negative … again! This happened previously on November 29, 2006 and I suggested then – and I still suggest – that this issue is a prime candidate for redemption.

Great-West’s last issue, GWO.PR.I, was issued in mid-April 2006, is still trading heavily and is yielding 4.53% based on a limitMaturity and GWO (who own CL) may well decide that with all the money flying around during RRSP season, now is a good time to refinance.

I’ve uploaded a graph of yieldToWorst for the past year, along with another one of flatBidPrice.

CL.PR.B hasn’t been a particularly enthralling issue to own for the last year, as this data from the performanceBox shows:

The quarterly numbers do not compare well with the quarterly returns posted by Malachite Aggressive Preferred Fund:

Total return for the period 2005-12-30 to 2007-1-5 is 2.8266%

Via CCN Matthews:

Coastal Value Fund (TSX:CVF.PR.A) announced today that it will redeem all of its issued Senior Preferred shares on February 21, 2007 to holders of record on February 20, 2007. The redemption will be made in accordance with the Fund’s articles and results from a retraction of the Capital shares. Shareholders need not take any action relating to the redemption; the Fund’s transfer agent CIBC Mellon will automatically redeem the shares on February 21, 2007 and deposit cash proceeds directly into shareholder’s accounts equal to $25.4125, representing $25.20 per share plus $0.2125 per share representing accrued and unpaid dividends. Post the redemption, the Senior Preferred shares will no long be listed on the TSX.

It closed today at $25.80-25, 2×2, on no volume. Due to its usual low volume, it is not currently included in any of the HIMI Preferred Indices.

More later.

Later, more: From the graph of flatBidPrice, it is apparent that this issue has participated in the excellent returns posted by preferred shares in the last six months. It is also apparent, from the graph of yieldToWorst, that investors have been ignoring the worst-case scenario when investing.

Down 3.73% on the day (bid/bid), but those unimpressed by headlines will be quick to point out that yesterday’s quote of 27.06-62 was an aberration. They’d be right, too, as a quick look at the graph of flatBidPrice shows.

The new issue announced today puts the future of BNA.PR.A in some doubt and should be causing some investors to look very carefully at the negative yield-to-worst on this issue of –5.36%. The pseudoPortfolioReportBox shows us the following optionCalculationList:

The above calculations are based only on price and leave a lot to be desired. I work at improving the algorithm (and there will be a rather interesting idea announced shortly, provided the results of testing are what I think they might be), but the main things to bear in mind are:

• BNA.PR.A pays $1.5624
• BNA.PR.A is callable right now at 25.75
• The new issue is supposed to closed 2007-1-10
• The new issue pays $1.0875

I suspect that BNA.PR.A’s days are numbered!

Besides the graph above, I’ve uploaded graphs of Yield-toWorst and Modified-Duration-to-Worst.

Update! Always check the prospectus! The original prospectus, dated August 24, 2001, states:

Preferred Shares may be redeemed by the Company at any time prior to the Redemption Date at a price (the ‘‘Preferred Share Redemption Price’’) which, until September 30, 2002 will equal $26.20 and which will decline by $0.20 each year to be equal to $25.00 after September 30, 2007. All Preferred Shares outstanding on the Redemption Date will be redeemed for the Preferred Share Redemption Price, equal to the lesser of $25.00 and Net Asset Value per Unit. The Company will only redeem Preferred Shares prior to the Redemption Date if Capital Shares have been retracted or if there is a take-over bid for the Brascan Shares and the Board of Directors determines that such bid is in the best interest of the holders of the Capital Shares.

However, as has been previously noted, the terms of this issue changed 2003-8-21:

The Corporation’s right to redeem the Preferred Shares prior to maturity will be amended to permit the redemption of the Preferred Shares at the then applicable redemption price, including any premium, using the net proceeds of an issuance of a new series or class of preferred shares. The Corporation has no current intention to redeem the Preferred Shares.

Well, it’s not exactly the biggest surprise in the world … Enbridge announced today (via CCN Matthews) that:

Enbridge Inc. (TSX:ENB)(NYSE:ENB) announced today its intention to redeem all 8,000,000 of its outstanding 7.80% preferred securities, at a price of $25.00 each plus accrued interest of $0.2458 per security, for the period following the previously announced December 31, 2006 interest payment date. The redemption date is February 15, 2007, for all of the 7.80% preferred securities, originally issued in February 2002.

So there goes another one of the lovely high-coupon preferred securities!

The yield-to-worst on POW.PR.B is now negative. It closed today at 26.46-65, but it is currently callable at $26.00:

This gives rise to: 

I’ve uploaded some graphs:

• Yield-to-Worst
• Flat Bid Price
• Modified-Duration-to-Worst

I can’t say I really understand why the price should have gone up so spectacularly recently. One can make the usual argument that since the redemption premium declines by $0.25 annually, the net cost to the company is not the coupon of 1.3375, but $0.25 less than this, or $1.0875, but this is less than the current financing cost only by half the saving. The company’s treasurer has the immediate option of reducing permanent costs by about $0.125 p.a. (gross of issuance costs), at the expense of a few years loss of charges … but this analysis assumes that the current refinancing level will be available a few years hence. It might not be.

And why should the price spike now?

The best an investor can reasonably hope for is a yield of 4.03% if it lasts until its $25.00 call; there are lots of issues with similar characterists that have such a yield without the risk of negative returns. The new RY.PR.D issue settles tomorrow and yields 4.50%. RY.PR.W has a yield to worst of 4.02%, with a 2014 call date, without the risk of an intervening call. The same can be said for POW.PR.D, pre-tax bid-YTW of 4.36% based on a call 2014-11-30, with no intervening call risk – and it’s a more active trader and the same name!

So the whole situation is very mysterious and I consider POW.PR.B to be very expensive at current levels.