Category: Issue Comments

Data Changes

ELF.PR.G Holds its Own!

Somewhat to my surprise, the E-L Financial new issue was able to show some strength on its opening day, closing at 25.15-22 on volume of 135,325 shares.

Curve Price Analysis of ELF.PR.G
Component Taxable Curve Non-taxable Curve
Base-Rate 23.87 23.71
Short-Term 0.10 0.92
Long-Term 0.54 0.02
Credit Spread (2) -0.52 -0.68
Credit Spread (Low) -0.52 -0.68
Error 0.06 0.08
Intrinsic Price 23.53 23.37
Liquidity 1.51 1.50
Total Curve Price 25.04 24.87

This one looks fully priced – and that’s fully priced at best, because there’s a big chunk of liquidity value in the analysis. I suspect that as liquidity goes away, the market value of the shares will decrease, as the market comes to realize that a Pfd-2(low) [DBRS] issue should not be trading a mere 7bp yield higher than, for example, POW.PR.D.

This issue has been added to the HIMIPref™ database with a security code of A43087, replacing the Pre-Issue code of P25002. It has also been added to the PerpetualPremium Index.

Data Changes

Strong Opening for LBS.PR.A

As readers of my earlier post may have expected, LBS.PR.A had a very strong opening day, with 1,671,290 shares trading and closing at 10.55-59.

There may be more to come, as the following HIMIPref™ analysis indicates:

Curve Price Analysis of LBS.PR.A
Component Taxable Curve Non-taxable Curve
Base-Rate 10.35 10.26
Short-Term 0.13 0.56
Long-Term 0.33 0.01
Split-Share -0.26 -0.32
Retractible 0.34 0.44
Credit Spread (2) -0.08 -0.11
Error -0.01 0.00
Intrinsic Price 10.80 10.84
Liquidity 0.23 0.25
Total Curve Price 11.03 11.09

The estimate for the liquidity value is, as with all new issues, a little dicey – especially for a split-share issue, there is no guarantee that a huge liquidity premium will be sustained in the long run … in fact, there is a strong possibility of the opposite! But with an intrinsic value in the neighborhood of $10.80, it would appear there’s still some value left in the issue.

For those interested in more traditional measures, the pre-tax YTW of this issue is 4.34%, with a modified duration of 5.97, both measurements based on a maturity on 2013-11-29.

The issue has been added to the HIMIPref™ database with a security code of A47800, replacing the pre-issue code of P50004. It has also been added to the SplitShare Index.

Data Changes

BAM.PR.G Reset Rate Announced

Brookfield has announced that the rate to be paid from Nov. 1, 2006 to October 31, 2011 on BAM.PR.G will be 4.35%, or $1.0875 per share per annum … something of a haircut from the 5.63% they’ve been paying for the last five years!

As previously noted, this issue is exchangeable into BAM.PR.E. The deadline for converting is Wednesday October 18.

BAM.PR.E closed 10/13 at 25.05-45; BAM.PR.G closed 10/13 at 25.00-15.

Issue Comments

BCE.PR.T Reset Rate Announced

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.

Issue Comments

BCE to Make Offer for All BCE / BC Preferred Shares

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.”

Data Changes

Quiet Disaster for SLF.PR.D

Readers will be familiar with my earlier comments on this issue … price-wise, things worked out much as expected – the closing quotation was $24.50-55, 14×61. The volume was a surprise, however, with only 12,300 shares trading on its first day out, which can be interpreted in a number of ways.

 I suspect that the correct interpretation is simply that the issue got sold in large chunks to long term investors (e.g., Balanced and Dividend funds run by the big fundcos), who don’t care what price they pay, as long as they can put eight-figures “to work” on a single ticket – and probably all committed before the issue was even thought about! But who knows? We’ll just have to see how this thing looks going forward.

 I never did issue the press release I had been intending. After some thought, I decided that given the presence of such a close comparable as SLF.PR.C (which closed at $24.64-70, 9×70, on volume of 6,300) made the HIMIPref™ evaluation of the new issue as expensive somewhat less than startling news.

SLF.PR.D has been set up on HIMIPref™ and will be added to “PerpetualDiscount” index and prefInfo in the very near future. The Preissue Security Code was P50005; the permanent code is A48983.

The price is actually quite reasonable at 24.50-55 … Now that the Street has given Sun Life it’s $6-million gift (12-million shares, overpriced by about $0.50, according to the first day of trading, if nothing else), the issue is looking like a much more reasonable investment.

Issue Comments

NA.PR.K / NA.PR.L Dividend Timing

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:

SHARES

BOARD APPROVAL

RECORD DATE

EX-DIVIDEND DATE

DIVIDEND PAYMENT  DATE

Common

2005-12-08

2005-12-29

2005-12-23

2006-02-01

Series 15

2005-12-08

2006-01-13

2006-01-11

2006-02-15

Series 16

2005-12-08

2006-01-13

2006-01-11

2006-02-15

Common

2006-03-02

2006-03-30

2006-03-28

2006-05-01

Series 15

2006-03-02

2006-04-17

2006-04-12

2006-05-15

Séries 16

2006-03-02

2006-04-17

2006-04-12

2006-05-15

Common

2006-05-25

2006-06-22

2006-06-20

2006-08-01

Series 15

2006-05-25

2006-07-07

2006-07-05

2006-08-15

Series 16

2006-05-25

2006-07-07

2006-07-05

2006-08-15

Common

2006-08-31

2006-09-28

2006-09-26

2006-11-01

Series 15

2006-08-31

2006-10-13

2006-10-11

2006-11-15

Series 16

2006-08-31

2006-10-13

2006-10-11

2006-11-15

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:

Ex-Date Day of Month Frequency
4 1
5 3
6 3
7 3
8 1
9 1
11 1
12 1

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.

Issue Comments

FTS.PR.F Holds its Own!

The Fortis perpetuals, mentioned earlier as a new issue seemed determined to prove me wrong on their opening day: 152,035 shares traded at prices between $25.05 and $25.25, closing at $25.10-14.
This comes on top of the news that Sunlife is bringing out another new issue, paying 4.45% compared to Fortis’ 4.90%. The funny thing is, I think the Sunlife new issue is also expensive. And I think – on the other hand – that 45bp is actually a pretty reasonable spread between issues with these two credit ratings.
But look, for instance, at the PerpetualDiscount index (as it stands today! Rebalancing is tomorrow, and there may be changes!)

Issue Pre-Tax YTW
SLF.PR.C 4.52%
WN.PR.E 4.82%
GWO.PR.I 4.56%
IAG.PR.A 4.64%
MFC.PR.C 4.54%
RY.PR.A 4.50%

These are good traders and accumulating a stake would certainly take more than a day, but work pays off! These things have an average Modified Duration (of their YTW scenario, which is the 30-year HIMIPref™ limit) of about 16.25 years. Which means that every basis-point of yield is worth 16 basis-points of price … and 16bp on $25 is four cents.

It doesn’t sound like much, I know … but this is FIXED-INCOME analysis! This is the site where we CARE about our pennies … because four cents is nearly two week’s coupon.

 

Index Construction / Reporting

BAM.PR.B / Floating-rate Index

“You say you dislike floating rate issues. Why then does the system love BAM.PR.B?”

Well! That was a lovely eMail to receive! Don’t I have enough problems spouting my opinions without having to worry about consistency?

HIMIPref™ does love BAM.PR.B. It is ranked as the best single preferred share in the marketplace, so let’s dig into the numbers a little and see what’s what. Very briefly, the issue is currently callable at $25.00 and pays 70% of Canada prime, so the annual dividend is currently $1.05. It’s a member of the “Floaters” index, so let’s compare it with those issues:

  BAM.PR.B BAM.PR.K TOC.PR.B AL.PR.E
Credit (DBRS) Pfd-2(low) Pfd-2(low) Pfd-2(low) Pfd-2(low)
9/26 quote 24.20-27 24.25-38 25.33-46 26.60-74
Dividend 1.05 1.05 1.05 1.50
Average Trading 222,586 97,663 44,673 53,081
Curve Analysis performed for taxable accounts
Price due to Base Rate 22.04 22.05 22.34 23.33
Price due to Short-Term 0.10 0.10 0.10 0.14
Price due to Long-Term 0.70 0.67 0.67 0.90
Price due to Credit Spread (2) -0.91 -0.87 -0.87 -0.98
Price due to Liquidity 0.99 -0.03 -0.41 -0.40
Price due to FloatingRate 3.47 3.30 3.32 3.78
Price due to Credit Spread (low) -0.40 -0.38 -0.38 -0.43
Price due to Error 0.00 0.14 0.19 0.18
Curve Price 25.99 24.98 24.95 26.52
Price Disparity 1.72 0.60 -0.38 -0.08

 

The key figure here is the Price Disparity which is a major influence on valuation. “Price Disparity is high” implies “HIMIPref™ loves”.

In tracing the source of the price disparity, we find two table rows of note: the Liquidity adjustment and the Floating Rate adjustment – these are both elements of the Yield Curve Calculation. Briefly: the market is now placing a huge premium on liquidity. When the entire HIMIPref™ universe is analyzed, it is found that there is a very definite liquidity effect: issues with high Average Trading Values are generally a lot more expensive than a straightforward analysis of their expected cashflows would indicate. Similarly, Floating Rate issues are far more expensive than their expected cash flows would indicate (which is why I don’t like ’em!). Note that cash flow expectations for floating rate issues are calculated with the view that Prime is what it is and ever shall be, world without end.

So … that’s why HIMIPref™ loves BAM.PR.B! It’s not due to any particular factor – it is based on the idea that, should the market come to value its characteristics in the same manner as the market values those characteristics for all the other preferreds analyzed, then it will go up in price – big time!

Is this guaranteed? Of course not. There may be elements that the market is pricing that are ignored by HIMIPref™, most obviously “Company Specific Effects”, i.e., maybe the market just doesn’t like BAM. I have not been able to define, parameterize and test a formulation of such an effect that leads to better results, but that doesn’t mean that it doesn’t exist, and certainly doesn’t mean that it doesn’t exist right now at this moment for BAM only!

HIMIPref™ is a statistical system. The market is a sometimes illogical beast. All one can do is make lots of small “bets” when the odds are in your favour (rather than making one big bet!) to give the statistics a chance to work. Some trades will work out nicely, others won’t … the idea is to accept that and to keep rolling the slightly-loaded dice!