PrefBlog

Well, it didn’t take long for CIBC to replace the capital lost via the redemption of CM.PR.B! They announced a new issue (with a headline announcing a redemption!) that will close on November 15.

 Terms of the issue (Class A Series 31) are:

Dividend: Non-cumulative, 4.7% on $25.00 p.v. is $1.1750

Callable:

• $26.00, 2012-1-31 – 2013-1-30
• $25.75, 2013-1-31 – 2014-1-30
• $25.50, 2014-1-31 – 2015-1-30
• $25.25, 2015-1-31 – 2016-1-30
• $25.00, 2016-1-31 +

DBRS: Pfd-1 (low)

S&P: P-1 (low)

There will be 16-million shares outstanding; underwriters have a greenshoe option for an additional 2-million shares. It’s a bought deal.

The terms of this issue make it a reasonably close match to CM.PR.H, issued 2005-3-10, paying $1.20, call schedule commencing 2001-3-30, closing 2006-11-3 at $25.80-89

Basically, the thing looks pretty good … priced to move! I’ll also note that it yields 10bp more (at issue) than the recently issued RY.PR.C, in terms of PRE-TAX DIVIDENDS, which is about right considering that the credit spread for “Low” is 11bp AFTER TAX.

This issue has been entered into HIMIPref™ with the temporary security code P50007.

I have just learned that Sunlife is coming out with a new issue of preferreds, Series 4.

They are perpetual and pay $1.1125 p.a. Closing is expected to be 2006-10-10.

The redemption schedule is:

• Redemption      2011-12-31      2012-12-30  26.000000
• Redemption      2012-12-31      2013-12-30  25.750000
• Redemption      2013-12-31      2014-12-30  25.500000
• Redemption      2014-12-31      2015-12-30  25.250000
• Redemption      2015-12-31   INFINITE DATE  25.000000

If we compare this issue with

• RY.PR.A, which has the same dividend and credit rating, and is perpetual with the call schedule starting seven months earlier
• SLF.PR.C, which also has the same dividend, is perpetual and has the call schedule starting nine months earlier

, using the yield curve as derived for taxable clients:

Well, I’m going to reserve judgement until I’ve received the prospectus! But this doesn’t look like a very attractive issue at all, given that even after allowing over $1.00 for the privilege of trading a million shares at a time it STILL looks over-valued at the issue price of $25.

Once I’ve seen a prospectus I’ll be issuing a press release. The issue has been added to the HIMIPref™ database and full pre-issue analytics are available to subscribers.

E-L Financial has announced a new perpetual issue. See CCN Mathews for the press release … the actual press releases cannot be linked, but were timestamped 9:47 & 9:48 am, ET, today.

No prospectus is yet available on SEDAR, but informal information available to me indicates that it can be described as follows:

Dividend: 4.75%, or $1.1875 p.a. per share, non-cumulative

Redemption: $26.00 commencing October 17, 2011, declining by $0.25 p.a. until it’s redeemable at $25.00 at any time on or after October 17, 2015. The company has the right to force conversion into stock, using the applicable redemption price and the greater of $1.00 or 95% of the average common price (as defined) to determine the exchange ratio.

Rating: A preliminary rating of P-2(high) from Standard & Poors has been claimed. I have no information regarding a DBRS rating but, for analytical purposes, have assumed a Pfd-2(low) rating, the same as the existing ELF.PR.F.

It’s a bought deal via RBC-DS.

Preliminary analysis using a taxable yield curve indicates the following:

The “Price due to Liquidity” for the ELF.PR.? is a little fishy. As with all new issues, the analysis assumes maximal liquidity, but on the other hand, the ELF is only a $100-million dollar issue. $1.44 liquidity value seems a little steep!

Another way to say the same thing is: I think the EL new issue should be priced at less than the RY.PR.B by the sum of:

• $0.72 for the credit spread
• Somewhere between $0.00 and $1.44 for the liquidity

Well, I won’t be rushing to pull out my chequebook for this one! Seems to me that, like the Fortis new issue, the underwriters are pricing this deal according to the trading levels of all the Pfd-1(low) bank perps and hoping nobody notices the credit difference.

This new issue has been added to the HIMIPref™ database with the symbol ELF.PR.?.

I was asked by eMail to comment on this new issue.

The issue is featured on the Brompton website and the issue characteristics are:

Pays: 5.25% p.a. as dividends, quarterly, cumulative

Options: None relevant.

Maturity:  2013-11-29  @ 10.000000

Rating: Pfd-2 by DBRS. I can’t find anything about the issue on the DBRS website, but I have no reason to believe the prospectus is inaccurate. The OSC would be inclined to take a rather dim view of such shennanigans – and so would DBRS!

Other: Split Share Corporation.

 I’ve entered the information into HIMIPref™ – normally I wouldn’t bother, but I was specifically asked about this issue, so why not? – and on a TAXABLE basis the issue looks cheap compared to the current yield curve:

When discounted by the Pre-Tax curve they’re even better!

Clearly, one’s views of the “fair” price for this instrument will be influenced by whether one is speaking of “taxable” or “non-taxable” accounts, but it is equally clear that this issue is attractively priced at $10.00 regardless of the tax-status of the speaker!

My correspondent also wondered how a split share corporation could pay 5.25% dividends when the underlying investment only pays 3-3.5%. Well, the best underlying yielder (BMO) pays 3.7%, whereas the two worst (IAG & MFC) only pay 1.9% (both figures from the preliminary prospectus), but it’s a reasonable enough guess none-the-less.

Let’s say the company takes in $100-million, which is 4 million units priced at $25 total. They’re going to have to pay issue expenses – let’s call that $500,000, for the sake of a number, and selling commissions of $4.8-million. So they’re left with $94.7-million to invest, and lets just estimate the average yield of the underlying investments at 3%. So that means the company will be getting dividend income of $2.84-million.

They have 4 million prefs outstanding, and have to pay $0.525 annually on each of them. That comes to $2.1-million. So we can say that the dividends we expect on the prefs are covered quite comfortably by the dividends on the underlying assets – a dividend coverage ratio of about 1.3:1 – which is entirely reasonable. Note that the company has $94.7-million in assets to cover the return of $40-million to the preferred shareholders … an asset coverage ratio of just under 2.37:1, which is great! These calculations help explain why DBRS has put such an attractive credit rating on the issue … the banks and insurance companies in the underlying portfolio would have to go down in price by more than 50% before the company ran out of money to pay the preferred obligations.

All very nice, you say, but what about the class A shares? Well, what about them? I don’t care about them. They’re entitled to the excess dividend income that was estimated above to be about $740,000 … they’re also entitled to all the extra income the company can make from writing options and lending securities. Good for them. And if the price of the shares in the underlying portfolio goes up, they can have all that, too. I don’t care, as long as I get paid on my prefs!

The prospectus states that in order to meet the return projections for the Class A shares (8%), the company will have to produce an annualized return of 9.2%, out of which will come the fees, expenses and, of course, the preferred shareholders slice of the pie. Who knows? Maybe the company will succeed in achieving these gains! 9.2% is certainly a not unheard-of return on financial equities over a 7 year period. However, I look upon most split-share corporations as a vehicle whereby greedy retail investors (who buy the “Class A” residual shares) voluntarily donate money to conservative retail investors (who buy the prefs). The greedy guys are my new best friends!

I wouldn’t buy the Class A shares, but the Prefs look attractively priced and well protected.

Update 2006-10-19 The above calculation of the Dividend Coverage Ratio did not take account of the MER. Oops! If an MER of 0.95% is assumed, then the income available to cover dividends should be reduced by $900,000 in the above example, leaving $1.95-million to cover dividends of $2.1-million, resulting in an estimated DCR of a little over 0.9:1, which is still fine, considering the asset coverage (and the fact that potential income from stock lending and option writing has been ignored. Thanks to Financial Webring for pointing this out.

Update, 2013-10-4: This issue trades as LBS.PR.A.

Fortis Inc has announced that they will be issuing a new series of prefs: perpetuals paying 4.9% (= $1.225 per share annually).

 These become redeemable Dec. 1, 2011 at $26.00, the redemption price declining by $0.25 annually until redeemable at $25.00 on and after Dec. 1, 2015.

 It’s a bought deal by Nesbitt, issue size 5-million shares = $125-million. The issue is rated only Pfd-3(high) by DBRS [but P-2(low) by S&P], so if purchased, it should be purchased cautiously. Don’t put a lot of eggs in this basket! I’ll comment on relative valuation later today.

Update: OK, I’m looking at it … a final opinion will have to await the final prospectus, but preliminary indications are not good.

There’s not much to which it can be directly compared: There are only two other P3H (DBRS) fixed-rate perpetuals: FAL.PR.H, with an annual dividend of $1.625; and LB.PR.D, paying $1.50. Both are high-coupon with imminent call dates and cannot be considered directly comparable. 

There are three index-included issues to look at, priced near par:

The MFC.PR.B commence their redemption eligibility 2010-3-19 at $26.00, declining by $0.25 annually until redeemable at par commencing 2014-03-19. So even from this very rough comparison, you’re giving up the credit quality of Pfd-1(low) to buy Pfd-3(high) and only picking up $0.0625 annual dividend for the exchange, which seems pretty niggardly. According to Royal Bank trading prices, if we can assume for a minute they’re trading fairly (not really!) that’s worth less than $0.50.

When we perform an indirect comparison (via the yield curve) vs. every issue in the (HIMIPref™) universe, we come up with a total intrinsic value of the cash flows of $23.07, which isn’t very good:

which to a large extent confirms our suspicions that arose when we looked at the better quality near-par perps: This thing is basically being priced as a high quality issue even though it’s a Pfd-3(high).

The other Fortis issues, FTS.PR.C and FTS.PR.E are both trading about $0.25 above thier intrinsic cash values – so it would appear that the market likes the prospects for this firm and is rating them at “Pfd-3(high)(and a bit)”, if I can be permitted so qualitative an assessment. Note that these two issues are illiquid enough that a “liquidity discount” of about $0.20 each is assessed against them, so they’re trading at maybe $0.45 above their expected “fair” price.

I’ll hasten to add that Pfd-3(high) isn’t all that bad! Hymas Investment Management will have to get an AWFUL lot bigger and more profitable before it’s able to issue Pfd-3(high) prefs. According to DBRS, “Pfd-3 ratings generally correspond with companies whose senior bonds are rated in the higher end of the BBB category”.

But, at least until I’ve had a look at the prospectus, I’ll be advising against the purchase of these instruments. Not only should holdings of Pfd-3 instruments be limited within a portfolio (even when (high)), but it looks like these are simply being priced too aggressively to be worth going after.

Note added 2006-09-15 : These have been added to HIMIPref™ with the ticker symbol “FTS.PR.?”

Note added 2006-09-27 : Looks like the TSX will be listing this issue with the ticker symbol “FTS.PR.F”