Category: Issue Comments

This member of the premiumPerpetual index slid into negative YTW territory, so let’s have a look at it.

The listing date was 1998-12-01 and it pays $1.375 annually on a par value of $25: 5.5%. The option schedule (as shown on the embeddedOptionsBox) is:

• Redemption      2003-12-02      2004-12-01  26.000000
• Redemption      2004-12-02      2005-12-01  25.750000
• Redemption      2005-12-02      2006-12-01  25.500000
• Redemption      2006-12-02      2007-12-01  25.250000
• Redemption      2007-12-02   INFINITE DATE  25.000000

which at the 2006-11-09 quotation of $25.72-95 leads to the following call scenarios, reported on the pseudoPortfolioReportBox:

• Call  2006-12-09 YTM: 7.42 % [Restricted: 0.61 %] (Prob: 25.91 %)
• Call  2007-01-01 YTM: -0.26 % [Restricted: -0.04 %] (Prob: 13.07 %)
• Call  2007-10-05 YTM: 4.53 % [Restricted: 4.09 %] (Prob: 5.00 %)
• Call  2008-01-01 YTM: 3.87 % [Restricted: 3.87 %] (Prob: 5.43 %)
• Limit Maturity  2036-11-09 YTM: 5.44 % [Restricted: 5.44 %] (Prob: 50.59 %)

One feature of the calculations is the fact that the issue goes ex-Dividend TODAY, November 10, and at time of writing is quoted at 25.46-57 on volume of 2,100 shares. It doesn’t look as if anybody got caught on the ex-Dividend, with the odd skip-day of November 13 (odd because the TSX is open, but banks are closed): the day’s range is 25.46-55. So it’s lost $0.26 (bid/bid) on the day, having gone ex a dividend of $0.34375. Which means it’s actually up!

I’ve attached some graphs, prepared by the graphDocument:

• Yield-to-Worst : Definition, Graph
• Flat Bid Price : Definition, Graph
• Average Volume : Definition, Graph

We’ve looked at BMO.PR.G (YTW at the 11/7 closing bid of $25.48 is -9.24%) and at RY.PR.K (YTW at the 11/7 closing bid of $25.52 is -10.64%), but there is another member of the OperatingRetractible Index that has a negative Yield-to-Worst.

The option schedule for BMO.PR.I is:

• Redemption      2005-11-25      2006-11-24  25.500000
• Redemption      2006-11-25      2007-11-24  25.250000
• Redemption      2007-11-25   INFINITE DATE  25.000000
• Retraction      2008-11-25   INFINITE DATE  26.040000

which, at the 11/7 closing bid of $25.51, gives rise to the optionCalculationList:

• Call  2006-12-07 YTM: 1.08 % [Restricted: 0.09 %] (Prob: 16.76 %)
• Call  2006-12-25 YTM: -4.99 % [Restricted: -0.66 %] (Prob: 11.55 %)
• Call  2007-12-25 YTM: 2.69 % [Restricted: 2.69 %] (Prob: 0.44 %)
• Soft Maturity  2008-11-24 YTM: 3.60 % [Restricted: 3.60 %] (Prob: 71.25 %)

So: YTW = -4.99%. If it makes it to the softMaturity, then the yield will be considerably greater (one might even call it respectable: 3.60% in dividends net of capital loss converts to 5.04% interest-equivalent for Ontario Investors who don’t need the money anyway, which is a lot better than you can get at the bank for a two-year deposit … or in the bond market.

There are clearly at least some people who are willing to slap some money on the table and bet that it won’t be called as soon as the call price declines to $25.25!

There may be some validity to this view: BMO.PR.I pays $1.1875 p.a. as a dividend and BMO can save $0.25 by waiting an extra year before calling, giving the shares a net cash cost of $0.9375 for that year, which is simple interest of 3.71% on the $25.25 that they’d have to pony up for the shares, interest-equivalent of 5.20% using the shareholders’ conversion factor … I’m not sure what factor the bank would use.

I’d call it a tossup, really: the answer will be somewhat dependent upon BMO’s balance sheet objectives (since these are retractible, they get counted as long-term debt for capital calculation purposes … perpetuals with non-cumulative dividends get counted as equity) and their ability to refinance. Against that is the consideration that a new issue of prefs would come with issuance costs attached of perhaps 3% of face value (which is a major reason why immediate calls are not calculated to have a larger probability).

 Tossups, feh. Paying $25.51 for this issue is taking too much risk for not enough return, according to me. HIMIPref™ won’t recommend it, firstly because the eligibleForPurchase function doesn’t like the short-term nature of the instrument and secondly because the totalRewardAsk is so low, which is largely due to the negative YTW.

Attached to this post for your delectation and amusement are graphs of this issue’s Yield-to-Worst and flatBidPrice for the past year.

BMO.PR.I has had a total return of 2.97% since 2005-11-30, based on the following data reported by the performanceBox:

which just goes to show that you usually shouldn’t put money into issues with lousy YTWs, because you usually get burned!

CIBC has announced that CM.PR.B (Non-cumulative Class A
Preferred Shares Series 24) will be redeemed at $26.00 on January 31, 2007. [Note: the link is to a cgi script. If not accessible, try here.]

 Not a surprise, really … perpetuals paying $1.50 are an endangered species, but the idea that they might have saved $0.25 p.a. on the redemption price (due to a declining call price) added a little piquancy to the speculation.

 What will be interesting is the resolution of the question: will they replace them with a new issue?

Update, 2007-5-10: For some odd reason this post has become the target of spambots. I am therefore disabling comments on this post.

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!