PrefBlog

Quadravest has announced:

the filing of a preliminary prospectus for a proposed new offering. The offering is an investment in common shares of TMX Group Inc. which is the company resulting from the combination of TSX Group Inc. and Montreal Exchange Inc. The Company will offer two investment choices: Class A Shares (a capital share) and Priority Equity Shares (a preferred share).

XTM Split’s Class A Shares offer regular monthly cash dividends targeted to be 5.00% per annum. The Class A Shares will also provide holders with any capital appreciation or dividend growth achieved in its shares of TMX Group Inc.

XTM Split’s Priority Equity Shares offer fixed, cumulative preferential monthly cash dividends at a yield of 5.25% per annum, with the objective of repaying their original issue price ($10) upon termination on December 1, 2015.

Prospective purchasers may acquire shares by either paying cash for the Priority Equity Shares or Class Shares, or by exchanging freely tradeable common shares of the TMX Group Inc. for a full or partial tax-deferred rollover for Canadian tax purposes.

According to the preliminary prospectus:

Based on the current dividends paid by TSX Group and MX on their common shares (and assuming that TMX pays dividends in an equivalent amount), the Company is expected to generate dividend income of approximately 3.72% per annum which, after deduction of expenses and net of taxes, will be distributed to shareholders. The Company would be required to generate an additional return of approximately 2.88% per annum, including from dividend growth, capital appreciation and option premiums, in order for the Company to maintain its targeted distributions and maintain a stable net asset value, plus approximately an additional 0.55% per annum to increase the Company’s net asset value to an amount sufficient to permit the Company to return the original issue prices of the Priority Equity Shares and the Class A Shares on the Termination Date.

I have not looked very carefully at this issue because …

The Priority Equity Shares have not been rated by any rating organization.

I won’t do it, guys! Maybe I’m good, maybe I’m bad (take your pick!) but I want a second opinion on credit quality and I want to know you’ve lifted your skirts for at least one interested party! I also want there to be public pressure for you to clean up your act, should your act ever need cleaning up.

Royal Bank has announced:

a domestic public offering of $200 million of Non-Cumulative First Preferred Shares Series AH.
The bank will issue eight million Preferred Shares priced at $25 per share and holders will be entitled to receive non-cumulative preferential quarterly dividends in the amount of $0.353125 per share, to yield 5.65 per cent annually. The bank has granted the Underwriters an option, exercisable in whole or in part, to purchase up to an additional 2 million Preferred Shares at the same offering price.
Subject to regulatory approval, on or after May 24, 2013, the bank may redeem the Preferred Shares in whole or in part at a declining premium.
The offering will be underwritten by a syndicate led by RBC Capital Markets. The expected closing date is April 29, 2008.
The net proceeds of this transaction will be used for general business purposes and will strengthen the bank’s capital ratios.

Issue: 5.65% Non-Cumulative First Preferred Shares, Series AH

Amount: 8-million shares @ $25 = $200-million. Greenshoe exercisable prior to closing, for up to 2-million shares.

First Dividend: Long first dividend payable August 24, based on anticipated closing of April 29, of $0.452774.

Redemption: Redeemable at $26.00 commencing May 24, 2013. Redemption price declines by $0.25 every May 24 until May 24, 2017; redeemable at $25.00 thereafter.

Ratings (provisional): DBRS, Pfd-1; S&P, P-1(low).

Underwriting: Bought deal, expected closing April 29, 2008.

This is in addition to the $500-million Innovative Tier 1 Capital, a pretend-10-year priced at Canadas +310bp.

Later, More: Some comparables:

Note that “Curve Price” is a static calculation – it assumes that the yield curve will not change in the future. Convexity effects decrease the value of near-par-by-curve-price issues

It should also be noted – as indicated in the comments by Assiduous Reader madequota – that today, April 21, is the last cum-dividend trading day for the Royal issues. They are all expected to drop in price tomorrow, April 22, to reflect the fact that tomorrow the buyer will not receive this quarter’s dividend.

The conclusion to be drawn from the comparables is … this new issue is quite expensive. Avoid.

National Bank has announced:

that it has entered into an agreement with a group of underwriters led by National Bank Financial Inc. to sell an issue of 6 million Non-Cumulative Fixed Rate First Preferred Shares, Series 20 (the “Preferred Shares”), carrying a face value of $25 per share, to raise gross proceeds of $150 million. Holders will be entitled to receive non-cumulative preferential quarterly dividends in the amount of $0.375 per share, to yield 6.00% annually.

National Bank has also granted the underwriters an option to purchase, on the same terms, up to an additional 900,000 Preferred Shares. This option is exercisable in whole or in part by the underwriters at any time up to 30 days after closing of the offering. The maximum gross proceeds raised under the offering will be $172.5 million should this option be exercised in full.

National Bank may redeem the Preferred Shares, subject to regulatory approval, in whole or in part, at a declining premium after five years.

The net proceeds of this offering will be used for general corporate purposes and will qualify as Tier 1 capital for National Bank. The expected closing date is April 16, 2008.

Issue: National Bank of Canada 6.00% Non-Cumulative Fixed Rate First Preferred Shares Series 20

Size: 6-million shares @ $25.00 = $150-million; Greenshoe for 900,000 shares = $22.5-million

Dividend: $0.375 Quarterly; Long first dividend of $0.494178 payable August 15 based on April 16 Closing.

Redemption: Redeemable commencing 2013-5-15 @ $26.00; Redemption price declines by $0.25 annually until 2017-5-15; Redeemable at $25.00 thereafter. [nb: “Redemption” means at the bank’s option]

Priority: Parri Passu with all other 1st Preferred Shares, senior to Second Preferred Shares, Senior to Common shares, junior to everything else.

Provisional Ratings: Pfd-1(low) by DBRS; P-2(high) by S&P; A1 by Moody’s

Closing: April 16, 2008

More Later.

Later, More: Some comparables:

Update, 2008-3-31: After the carnage of March 31 – almost certainly brought about by retail looking at the handle on this coupon – the curvePrice is $25.21.

Bank of Montreal has announced:

a domestic public offering of $200 million of Non-Cumulative Perpetual Class B Preferred Shares Series 15 (the “Preferred Shares”). The offering will be underwritten on a bought deal basis by a syndicate led by BMO Capital Markets. The Bank has granted to the underwriters an option to purchase up to an additional $50 million of the Preferred Shares exercisable at any time up to two days before closing.

The Preferred Shares will be issued to the public at a price of $25.00 per Preferred Share and holders will be entitled to receive non-cumulative preferential quarterly dividends as and when declared by the board of directors of the Bank, payable in the amount of $0.3625 per Preferred Share, to yield 5.80 per cent annually.

Subject to regulatory approval, on or after May 25, 2013, the Bank may redeem the Preferred Shares in whole or in part at a declining premium.

The anticipated closing date is April 2, 2008. The net proceeds from the offering will be used by the Bank for general corporate purposes.

Issue: Non-Cumulative Perpetual Class B Preferred Shares Series 15

Size: 8-million shares @ $25; underwriters’ greenshoe for an additional 2-million shares.

Dividends: 5.80% p.a., payable quarterly. Long first dividend of $0.57603 payable August 25, based on closing of April 2.

Redemption at Bank’s option: Redeemable at $26.00 commencing 2013-5-25; redemption price declines by $0.25 every May 25 until May 25, 2017; redeemable at $25.00 thereafter.

Ratings: S&P, P-1(low); DBRS, Pfd-1; Moody’s, Aa3

Priority: parri passu with all other prefs.

… More Later …

Later, More: Curve Price (the fair value, which does not include dynamic factors) as of the close 2008-3-24 is $25.43.

Later, Even More: BMO has been busy today! They’ve just announced a $600-million sub-debt issue at Canadas + 260bp, stepping up to BAs+200 March 28, 2018 (at which time it is callable at par), maturing March 28, 2023. Prospectus Supplement dated 2008-3-25; 10-year Canadas are now at 3.47%, so say this stuff comes with 6.07-ish coupon.

Later, So Much More You Just Can’t Believe It!: I am advised the BMO sub-debt issue got done at a size of $900-million, Coupon 6.17%, Price 99.97 to give a yield-to-hoped-for-and-very-well-advertised-call of 6.174%,

Later…: CurvePrice as of the close 2008-3-25 is 25.38.

Update, 2008-3-28: There have been some comments made about BMO.PR.K falling out of bed, with speculation about the implications for the opening price of the issue. First, let’s look at the BMO comparables:

Assiduous Readers will be familiar with my article on convexity, in which I estimate that a 15bp yield pickup is required to make holding a near-par instrument worth-while. If we may assume a 5.75% base yield for deep-discount BMO prefs, this implies a 5.90% “fair-ish, sorta” yield for the new BMO issue, which implies a price of about 24.60. We shall see!

Note that the convexity stuff is considered a dynamic factor and is not incorporated into the evaluation of curvePrice, which is restricted to static factors.

Update, 2008-3-31: Quarter-end was a bad day thanks to the National Bank 6.00% Perps! Curve price at the close of business was 25.09.

Update, 2008-4-1: Closes tomorrow. Curve price at the close today was 25.08.

Nice to see some high quality issuance of this kind of note. I have no idea whether it’s any good though! Press Release:

Scotiabank today announced a domestic public offering of 12 million, non-cumulative 5-year rate reset preferred shares Series 18 (the “Preferred Shares Series 18”) at a price of $25.00 per share, for an aggregate amount of $300 million.
    Holders of Preferred Shares Series 18 will be entitled to receive a non-cumulative quarterly fixed dividend for the initial five-year period ending April 25, 2013 of 5.00% per annum, as and when declared by the Board of Directors of Scotiabank. Thereafter, the dividend rate will reset every five years at a level of 205 basis points over the 5-year Canada bond yield.
Shareholders will, subject to certain conditions, have the option to convert all or any part of their shares to non-cumulative floating rate preferred shares Series 19 (the “Preferred Shares Series 19”) of Scotiabank. Holders of the Preferred Shares Series 19 will be entitled to receive a non-cumulative quarterly floating dividend equal to the 3-month Government of Canada Treasury Bill yield plus 205 basis points, as and when declared by the Board of Directors of Scotiabank.
    The Bank has agreed to sell the Preferred Shares Series 18 to a syndicate of underwriters led by Scotia Capital Inc. on a bought deal basis. The Bank has granted to the underwriters an over allotment option to purchase up to an additional $45 million of the Preferred Shares Series 18 at any time up to 30 days after closing.
    Closing is expected to occur on or after March 25, 2008. This domestic public offering is part of Scotiabank’s ongoing and proactive management of its Tier 1 capital structure.

Update: I have some more details on this issue, including one provision that I consider critical: it’s redeemable at par on April 26, 2013 and every five years thereafter. I need to think about this a bit more, but my preliminary thoughts are:

• The reset provisions are very high compared to historical spreads
• The initial fixed-rate is also high when taken as a spread to Canadas, when comparing to historical spreads to Canadas
• The initial fixed-rate is low compared to extant issues
• The redemption provisions on this issue are tilted very highly in the issuer’s favour

These considerations lead me to the following preliminary conclusions:

• BNS [Update 2008-3-14: Desjardins! See here for details] has invented this structure to take advantage of current extreme spreads in the selling process
• The issue will be of great interest to the “Look mummy, I got a spreadsheet” class of investors (who will look at historical spreads without much thought)
• Investors should assume that this the terms of this issue are sufficiently extravagant that the issue will be called in five years on the first reset date
• Therefore, investors are probably being asked to put up 5-year money for a 5% dividend … which ain’t all that bad, mind you, but I’d rather have 5.6% for ten years!
• BNS is attempting to pull a fast one … they need capital, but don’t want to pay 5.6% for ten years. They’d rather pay 5% for five years and refinance once there is a functional credit market.

If these preliminary thoughts survive further thought, discussion, and vicious personal attacks in the comments section, I will recommend investors not buy this issue … although if it ever trades at much of a discount, I’ll snap some up!

I’m going to have to think about whether the issue will be added to the HIMIPref™ Universe. It’s hard to analyze, because it’s hard to determine the “worst rate” on the reset date … with most fixed-floaters, I make the assumption that the issuer will set the fixed rate so low investors are forced to take the floater … and I have lots of floating rate comparables. On this issue:

• I can’t assume a “worst-case” reset
• I have no comparables since
  • all floaters in the universe so far key off Prime – and even Prime / 3-month-bills is a little chancy
  • Nothing I have keys off 5-years at a fixed rate

Update 2008-3-26: This issue has commenced trading 3/26 as BNS.PR.P. It traded 197,776 shares in a range of 25.01-15; closing quote 25.05-10, 8×16.

TD has announced:

that it has entered into an agreement with a group of underwriters led by TD Securities Inc. for an issue of 8 million Non-cumulative Class A First Preferred Shares, Series R (the “Series R Shares”), carrying a face value of $25.00 per share, to raise gross proceeds of $200 million. TD intends to file in Canada a prospectus supplement to its January 11, 2007 base shelf prospectus in respect of this issue.
    TD has also granted the underwriters an option to purchase, on the same terms, up to an additional 2 million Series R Shares. This option is exercisable in whole or in part by the underwriters at any time up to two business days prior to closing. The maximum gross proceeds raised under the offering will be $250 million should this option be exercised in full.
    The Series R Shares will yield 5.60% per cent annually and are redeemable by TD for cash, subject to regulatory consent, at a declining premium after approximately five years.
    The issue is anticipated to qualify as Tier 1 capital for TD and the expected closing date is March 12, 2008.

Name of issue: Toronto-Dominion Bank (The) Non-cumulative Class A First Preferred Shares, Series R

Size: 8-million shares @ $25; greenshoe option for another 2-million shares

Ratings: DBRS Pfd-1; S&P P-1(low); Moody’s Aa2

Dividend: $1.40 p.a., long first dividend of $0.54082 payable July 31 (assuming March 12 Closing)

Redemption: Redeemable at $26.00 commencing April 30, 2013; Redemption price declines by $0.25 every April 30 until April 30, 2017; redeemable at $25.00 on and after April 30, 2017.

Underwriting terms: bought deal, subject to syndication, “disaster out”, “regulatory out”, “rating change out” and “material adverse change out”.

Closes: 2008-3-12

You don’t need to look far for a comparable! The issue is virtually identical to the recent TD.PR.Q issue, which differs only in a three month shift in the redemption schedule. TD.PR.Q closed 2008-2-29 at 25.59-65.

Update: Using the closing yield curve on 2008-3-3 for taxable accounts, HIMIPref™ calculates a fair value (“curvePrice“) of $25.48 for the new issue, compared with $25.57 for TD.PR.Q.

To my great pleasure, the fitting error of the yield curve has jumped considerably today – more fitting error means more mispricing means more trading opportunities!

Update, 2008-03-04: TD has announced:

that a group of underwriters led by TD Securities Inc. has exercised the option to purchase an additional 2 million Non-cumulative Class A First Preferred Shares, Series R (the “Series R Shares”) carrying a face value of $25.00 per share. This brings the total issue announced on March 3, 2008, and expected to close March 12, 2008, to 10 million shares and gross proceeds raised under the offering to $250 million.

Update 2008-3-4: Using the closing taxable curve, fair value $25.37.

Update 2008-3-7: Closing taxable curve, fair value $25.24.

Update 2008-3-11: Fair value $25.24 when marked to the closing taxable curve. The symbol when it starts trading tomorrow morning will be TD.PR.R. The fair value of the comparable, TD.PR.Q, is 25.29; it closed at 25.10-15.

Hard on the heels of the BNS new issue comes TD Bank’s offering:

Issue: Non-cumulative Class A First Preferred Shares, Series Q

Size: 6-million shares = $150-million. Greenshoe option of up to 2-million shares.

Ratings: DBRS, Pfd-1; S&P P-1(low); Moody’s Aa2

Dividends: $1.40 per annum (5.6%), paid quarterly. First dividend payable April 30, 2008, for $0.345205, assuming closing of January 31.

Redemption: Redeemable at $26.00 commencing January 31, 2013; redemption price declines by $0.25 annually until January 31, 2017; redeemable at $25.00 thereafter.

More later.

Update: Looks good, with a curvePrice of $25.45 based on the yield curve as calculated for Ontario high marginal rates as of the close Jan. 21.

More later

Update, 2008-1-26: Curve price as of the close 1/25 is $25.14.

Update, 2008-1-30: Symbol is TD.PR.Q

Scotiabank has announced a new issue, Non-Cumulative Preferred Shares, Series 17

Size: 8-million shares @ $25 = $200-million

Dividend: 5.60% ($1.40 p.a., paid quarterly); first dividend $0.33753 payable April 28, based on Jan. 31 closing.

Redemption: Redeemable at $26.00 commencing third-last business day of April 2013; redemption price declines by $0.25 annually; redeemable at $25.00 on and after April 26, 2017.

Closing: January 31, 2008

More later.

Update: Looks very good, with a curvePrice of $26.08 based on the yield curve as calculated for Ontario high marginal rates as of the close Jan. 16.However, the S&P/TSX Preferred Share Index is currently getting hammered, probably due to fears that it’s going to be deja vu all over again, with the curve shifting to reflect the new issue, rather than vice versa.

More later

Later, More: What a difference a day makes! The curve price is now $25.67.

Update, 2008-01-21: Curve Price now $25.47

Update, 2008-1-26: Curve price as of 1/25 is $25.15

Update, 2008-1-30: Symbol is BNS.PR.O

Holy smokes, I’m in the wrong business!

CA Bancorp has announced:

that a preliminary prospectus for a newly created mutual fund corporation, C.A. Bancorp Canadian Realty Finance Corporation (the “Corporation”), has been filed with, and a receipt therefor issued by, the securities regulatory authorities in each of the provinces and territories of Canada. The Corporation is offering and will issue preferred shares, Series 1 (the “Preferred Shares”) to the public.

Let’s take a quick look at this … seeing as I was asked so nicely.

The prefs are supposed to pay 6.75% p.a. on a tax-advantaged basis – which is to say, return of capital and capital gains. One should note that capital gains, nowadays, are not as tax-efficient as they used to be compared to dividends … and that return of capital merely defers taxation as a capital gain, it does not eliminated it. The prefs will be redeemed in 2018, making them ten-year paper.

There are a number of things that caught my eye on my first glance at the preliminary prospectus:

• Salesmen are getting a 5.25% commission to flog the thing
• All the capital units will be held by the sponsor
• Asset coverage will probably be about 1.1:1
• The issue will not be rated

Feeling nervous yet? The underlying investment is Canadian commercial mortgages and the reference portfolio has a yield of about 12%.

Let’s very quickly run through some numbers … say the total size of the vehicle is $100-million, of which 90-million is prefs and 10-million capital units. Gross income is $12-million, the pref distribution will be about 6.1-million, fees will be about $2-million. Gross profit to the capital unit holders will be about $4-million, which is a return of about maybe 40% of their investment per annum.

Now … on the positive side of this investment, we can say that the sponsor is stepping up and taking the first loss. This is a good thing. Mind you, though, there’s not really a whole lot of buffer before the pref holders start taking the second loss! After three-odd years, the sponsor has made back his capital and the rest is gravy.

There is no way I would invest in an unrated issue … not because I worship the ratings agencies, but because that’s the price of admission. If an issuer doesn’t want to pay an agency, open its books, submit to the agency’s questions and endure the agency’s press releases, that’s fine … but they won’t be getting any of my money!

I have nothing against high-yielding commercial mortgages as an asset class. If you know what you’re doing, you can make good money – I have no quibbles at all with the stated rationale of the corporation:

The Corporation was created to obtain exposure to the investment performance of an actively managed portfolio of secured loans and investments in the Canadian commercial real estate sector on a tax efficient basis. The Manager believes that there are excellent opportunities for the Corporation to gain exposure to well-structured commercial mortgage and real estate loans with attractive debt yields. Most large Canadian financial institutions focus on the larger loan and longer term mortgage transactions as the loan underwriting and due diligence time required for any size commercial real estate loan is virtually the same. The Manager believes that the lender market that competes for small value and shorter term loans and mortgages is presently under-serviced and highly fragmented.

… but I’m not prepared to let the general partner of such an arrangement skim off so much of the profit. Offer 10%, get a rating, and we can do lunch.

Update, 2008-1-10: It is worth noting that the Commercial Mortgage Backed Security (CMBS) market in Canada has been vapourized:

The $4-billion market for commercial mortgage-backed securities has been “vaporized” almost overnight and resulted in three major American financial institutions shutting down or scaling back their CMBS businesses in Canada.

Layoff notices went out last week for 25% of employees at Merrill Lynch’s Canadian CMBS operations while competitors Column Canada, a division of Credit Suisse First Boston, and Capmark Canada have shut operations.

The CMBS market accounted for about 25% of all new commercial real estate debt in Canada in 2006 and with it in tatters because of global credit concerns, Canadian banks, life insurance companies and pension funds are expected to pick up the slack and profit from the new business.

“The banks and life insurance companies are going to be able to increase their fees because they won’t have to compete with CMBS to attract loans anymore,” said an insurance industry executive, adding the spreads – the difference between Government of Canada bonds and loan rates – have risen by more than 100 basis points in the past couple of months.

To the extent that this new issue is a CMBS – and it basically is, right? – I wish the sponsors well in their endeavors … but guys, you’ve got to share! More money for the preferred shareholders, or more principal protection, one or the other!

Update, 2008-2-1: A final prospectus has been filed.

Update, 2008-3-20: The company has announced:

that C.A. Bancorp Canadian Realty Finance Corporation (the “Corporation”) (TSX:RF.PR.A) has issued an additional 100,000 Preferred Shares, Series 1 (the “Preferred Shares”) for gross proceeds of $2,500,000 pursuant to the exercise by the agents of their over-allotment option.
…

Including the over-allotment, the total gross proceeds of the Corporation’s recent initial public offering are $38,500,000.
…
The Preferred Shares trade on the Toronto Stock Exchange under the symbol RF.PR.A.

RF.PR.A closed on the TSX today at 24.00-25, 1×2.