Category: Issue Comments

Now that the situation regarding RY.PR.O has been clarified, let’s take a look at another constituent of the PerpetualPreferred index with a negative YTW.

POW.PR.A hasn’t been mentioned much in this blog, but made the volume charts on October 11, 2006. At the close of business yesterday, October 18, it was quoted at $25.81-87, pays $1.40, and the next ex-date is (somewhere around) December 20.

The embedded options for this issue are:

• Redemption      2004-06-11      2005-06-10  26.000000
• Redemption      2005-06-11      2006-06-10  25.750000
• Redemption      2006-06-11      2007-06-10  25.500000
• Redemption      2007-06-11      2008-06-10  25.250000
• Redemption      2008-06-11   INFINITE DATE  25.000000

So it is currently redeemable at $25.50.

HIMIPref™ calculates the call probabilities as:

• Call  2006-11-17 YTM: -8.50 % [Restricted: -0.70 %] (Prob: 29.45 %)
• Call  2007-01-16 YTM: 0.69 % [Restricted: 0.17 %] (Prob: 5.99 %)
• Call  2007-07-11 YTM: 2.55 % [Restricted: 1.85 %] (Prob: 9.69 %)
• Call  2008-07-11 YTM: 3.70 % [Restricted: 3.70 %] (Prob: 5.09 %)
• Option Certainty  2036-09-12 YTM: 5.42 % [Restricted: 5.42 %] (Prob: 49.77 %)

Note that all these scenarios are combined at their probabilities to derive portfolioYield, but the worst result is used as Yield-To-Worst.

The various yields calculated for this issue are:

The sum of yield components of valuation of -2.6618 is the lowest value in the perpetualPremium index, the average value for the this calculation for this index is just a hair over 4.00.

Some may wonder at the calculations done here – why not just use YTW? As it turns out, in some analytical environments the other measures of yield are more discriminatory, but there is some variation that may be observed even in the current environment. In the graph, the following data points have been removed in order to increase the resolution of the display: AL.PR.E, TOC.PR.B, AL.PR.F. The graph is here, the regression calculation here.

HIMIPref™ will not recommend this issue for purchase to clients, giving the Eligible For Purchase (Code) as ’14’, which a quick look at the glossary defines as ‘pseudoModifiedDuration (Worst) of buy side less than minimum setting’. In other words, there’s a very good chance (YTW!) the issue will be called in the near future. Not only does HIMIPref™ have trouble discriminating between issues with such small pseudoModifiedDurations, but even if it could do this well then there wouldn’t be much money in it (since a small price change for a short-term instrument can result in a very large change of yield.

It may be noted that there is more scatter in the plot of YTW vs. sumYield when the instruments examined are restricted to those which are purchasable: graph, regression.

It should also be understood, as discussed and graphed on the prefShares site, yields have, ultimately, a minor effect on the valuation of shares once they have been qualified for purchase.

Bottom line: POW.PR.A looks overpriced, to the extent it can be analyzed. There are many alternatives available which can be analyzed effectively and quantitatively … so why go to huge extremes to justify holding it? Research is continuing, as ever, to extend the reach of measurement in which the HIMIPref™ analysis can result in superior performance, but this range of accuracy will not be extended at the expense of confidence in what HIMIPref already does well.

The Royal Bank announced today that RY.PR.O will be redeemed at a price of $25.50 on November 24, 2006.

This is an interesting decision on their part. As noted in my previous post on this topic, the issue pays $1.375 and the premium was declining by $0.25 annually – implying a net cost to Royal of $1.125 annually for the $25 capital, which is quite competitive.

I can only assume that they have a desired capital structure that includes some preferreds … and that the issue of RY.PR.B was an opportunistic move with the proceeds earmarked for this redemption.

RY.PR.O was quoted at the close yesterday, 2006-10-18, at $25.96-23, and had a pre-Tax YTW of -6.48% based on a call 2006-11-17 at $25.50 (OK, so the calculation was one week off! It’s still quite bad enough!). Had the issue survived until called  2008-09-23, the pre-tax YTM realized would have been 3.89 % – still pretty skimpy.

So there’s an objective lesson for all readers! It’s all very well to make elegant arguments that something won’t be called based on net cost to issuer, and there may often be a great deal of validity to these arguments. But plain old YTW remains a very powerful tool for avoiding mistakes and decisions made on any single element of valuation will often be in error.

BCE has announced that the dividend rate on BCE.PR.T will be reset to 4.502% (or $1.1255 p.a. on a $25 par value share).

This issue is not currently outstanding, but is being offered in exchange for BCE.PR.S, a ratchet-rate issue.

BCE is currently contemplating reorganizing into an income trust and in connection with this is offering to purchase all outstanding preferred shares. They are offering $25.60 for BCE.PR.S and $25.75 for BCE.PR.T.

 BCE.PR.S closed on October 11 at $25.10-15. From a strictly yield-curve-comparative perspective, this issue is considered expensive by HIMIPref™ but, of course, it’s awfully tempting to buy all one can at these levels, convert to BCE.PR.T and await execution of all of BCE’s plans. Given that all this is event-driven, however, I will not state my views publicly at this time.

According to a news release issued today, BCE will “eliminate its holding company operations and convert Bell Canada into an income trust.”

As part of this transaction “BCE and Bell Canada to make cash offer to repurchase all of their outstanding preferred shares”, specifically:

BCE and Bell Canada expect that the cash offer prices for the preferred shares will be as follows (information from linked press release)

    – $26.05 per share for the Series R First Preferred Shares of BCE (BCE.PR.R closed 10/10 @ 25.45-79)
    – $25.60 per share for the currently redeemable Series S First Preferred Shares of BCE (BCE.PR.S closed 10/10 @ 24.85-05)
    – $25.60 per share for the currently redeemable Series Y First Preferred Shares of BCE (BCE.PR.Y closed 10/10 @ 24.40-54)
    – $25.75 per share for the Series Z First Preferred Shares of BCE (BCE.PR.Z closed 10/10 @ 25.50-59)
    – $25.65 per share for the Series AA First Preferred Shares of BCE (BCE.PR.A closed 10/10 @ 25.39-59)
    – $25.85 per share for the Series AC First Preferred Shares of BCE (BCE.PR.C closed 10/10 @ 25.65-72)
    – $25.60 per share for the currently redeemable Series 15 Class A Preferred Shares of Bell Canada (not tracked by HIMIPref™)
    – $26.05 per share for the Series 16 Class A Preferred Shares of Bell Canada (not tracked by HIMIPref™)
    – $25.95 per share for the Series 17 Class A Preferred Shares of Bell Canada (BC.PR.B closed 10/10 @ 25.10-24)
    – $25.60 per share for the currently redeemable Series 18 Class A Preferred Shares of Bell Canada (BC.PR.E closed 10/10 @ 25.13-25)
    – $26.25 per share for the Series 19 Class A Preferred Shares of Bell Canada (BC.PR.C closed 10/10 @ 25.46-51)

“BCE also intends to directly or indirectly make an offer to acquire any Series T First Preferred Shares of BCE that may be issued on conversion of the currently outstanding Series S First Preferred Shares.”

Those fun-loving directors at the National Bank! Always joking around!

I looked up their Dividend Calendar today in order to update the HIMIPref™ database and there is little, if any, consideration shown for consistency in dividend declaration.

I’ll reproduce their table here:

Just because the ex-Date was on July 5 doesn’t mean that the October ex-Date will be anywhere near the 5th! Be careful! When I look at the past 14 dividends for NA.PR.K (not including the next one) I get the following frequency of ex-date-day-of-the-month:

The 11th and 12th are novel ex-dates, having been introduced only this year.

Yes, I know, it’s a small point. But I see strange trades going through all the time, with some poor retail guy putting through a trade where it’s obvious he hasn’t paid any attention to the ex-date. And by me, when somebody is kind enough to trade your debt on the secondary market, you try to keep things simple for them.