Issue Comments

BRF.PR.A To Reset At 3.355%

Brookfield Renewable Energy Partners L.P. has announced:

that it has determined the fixed dividend rate on Brookfield Renewable Power Preferred Equity Inc.’s Class A Preference Shares, Series 1 (“Series 1 Shares”) (TSX: BRF.PR.A) for the five years commencing May 1, 2015 and ending April 30, 2020. If declared, the fixed quarterly dividends on the Series 1 Shares during that period will be paid at an annual rate of 3.355% ($0.2096875 per share per quarter).

Holders of Series 1 Shares have the right, at their option, exercisable not later than 5:00 p.m. (Toronto time) on April 15, 2015, to convert all or part of their Series 1 Shares, on a one-for-one basis, into Class A Preference Shares, Series 2 (the “Series 2 Shares”), effective April 30, 2015.

The quarterly floating rate dividends on the Series 2 Shares will be paid at an annual rate, calculated for each quarter, of 2.62% over the annual yield on three-month Government of Canada treasury bills. The actual quarterly dividend rate in respect of the May 1, 2015 to July 31, 2015 dividend period for the Series 2 Shares will be 0.793468% (3.148% on an annualized basis) and the dividend, if declared, for such dividend period will be $0.198367 per share, payable on July 31, 2015.

Holders of Series 1 Shares are not required to elect to convert all or any part of their Series 1 Shares into Series 2 Shares.

As provided in the share conditions of the Series 1 Shares, (i) if Brookfield Renewable determines that there would be fewer than 1,000,000 Series 1 Shares outstanding after April 30, 2015, all remaining Series 1 Shares will be automatically converted into Series 2 Shares on a one-for-one basis effective April 30, 2015; and (ii) if Brookfield Renewable determines that there would be fewer than 1,000,000 Series 2 Shares outstanding after April 30, 2015, no Series 1 Shares will be permitted to be converted into Series 2 Shares. There are currently 10,000,000 Series 1 Shares outstanding.

The Toronto Stock Exchange (“TSX”) has conditionally approved the listing of the Series 2 Shares effective upon conversion. Listing of the Series 2 Shares is subject to Brookfield Renewable fulfilling all the listing requirements of the TSX and, upon approval, the Series 2 Shares will be listed on the TSX under the trading symbol “BRF.PR.B”.

BRF.PR.A was issued as a FixedReset, 5.25%+262, closing 2010-3-10 after being announced 2010-2-18. The new rate of 3.355% is thus a horrific 36% cut in the dividend.

As stated, the deadline for notification of the company of intent to convert is 5:00 p.m. (Toronto time) on April 15, 2015, but brokers will have earlier internal deadlines. I intend to post on April 10 regarding my recommendation on conversion.

BRF.PR.A is tracked by HIMIPref™ but is relegated to the Scraps index on credit concerns. BRF.PR.B, if it comes into existence as a FloatingReset, will also be tracked.

Press Clippings

Think preferred dividends are safe? Not these ones

John Heinzl of the Globe and Mail was kind enough to quote me extensively in his latest piece, Think preferred dividends are safe? Not these ones:

Well, don’t look now but a whole whack of preferred shares – specifically rate-reset preferreds that have come to dominate the market – could soon take a hatchet to their payments.

Some of these dividend cuts will be “absolutely massive,” said preferred share expert James Hymas, president of Hymas Investment Management in Toronto.

This will come as a surprise to investors who depend on the predictable cash flow of preferreds, but Mr. Hymas has done the calculations and they paint a grim picture. In the next year or so, he expects many rate-reset preferreds to slash their dividends by 25 to 45 per cent. Depending on what happens to bond yields, many more rate-reset preferreds will likely reduce their dividends in coming years.

Here’s a chart that I published in the March edition of PrefLetter, showing the expected change in dividends, given a constant GOC-5 rate of 0.84%, as related to each issue’s next Exchange Date:

PL_150313_App_FR_Chart_26
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Update, 2015-05-03: There was a steep decline in FixedResets at the beginning of April, 2015. One commenter attributed at least part of the descent to this article.

Market Action

March 31, 2015

The BCSC has released an attempt to justify their existence:

In support of Fraud Prevention Month, the British Columbia Securities Commission (BCSC) Chair and CEO Brenda Leong today announced the results of research commissioned by the BCSC into the fraud vulnerability of older British Columbians.
…
Key findings from the survey include:

  • • One-in-eight British Columbians over 50 are vulnerable to investment fraud. When presented with an investment opportunity that guaranteed 14% to 25% monthly and no risk, 10% said they would either look into it further and 3% said they simply didn’t know, suggesting they are not sure enough to reject the offer.
  • • Nearly two-in-five British Columbians over 50 (37%) are afraid of running out of money during retirement. This proportion is significantly higher among those vulnerable to fraud (49%) and those who have been past victims of fraud (47%). It is also higher among those with no savings (51%) and women under 65 (51%).
  • • Only 44% of respondents have a reasonable expectation of annual returns on investments. When asked about annual rates of return, less than half of the respondents expected a rate of return of less than 6% (The five-year average nominal return between 2010 and 2014 on a portfolio containing three common investment types – three-month Treasury bills, Canadian bonds, and Canadian equities – was 5.98%).

I’ve had a look at the survey; I am surprised that so many felt that touted returns of “14% to 25% monthly and no risk” was worth looking into, but it’s not clear exactly what “looking into” means. There’s a clue in the report:

whyLookIntoIt
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It looks to me as if only about half of those who would look into the scheme further are actually vulnerable … and vulnerable is a pretty loose term, too. I’m vulnerable to being hit by an asteroid, but I’m not worried about it, nor am I particularly interested in funding bureaucrats to follow me around with umbrellas.

Additionally, most of us will realize that the simple existence of a problem does not mean that the organization talking about it has a clue. If the BCSC is so convinced that the only appropriate response to a pitch like this from a friend or colleague (a rather important qualifier disclosed in the report but unmentioned in the press release) is to ignore it, then my questions are:

  • What are they doing about it?
  • Do they have any grounds to believe that what they’re doing will have any effect, or is it just guess-and-hope?
  • How effective have their previous efforts along these lines been?

But there’s no discussion of this; in fact, I can only remember seeing one advertisement that discussed ‘investments with no risk’:


Click for Big

The second point of the BCSC press release is peculiar: according to the survey:

Do you agree or disagree with the following statement? I am afraid of running out of money during my retirement.

I don’t understand why anybody would disagree with that statement. Well … I tell a fib. I’ve met a couple of people who have so much loot it doesn’t matter what they do, as far as maintaining their standard of living for the next hundred years-odd is concerned. But most people are afraid of running out of money and quite rightly. So I’ll just write this section off as baffling.

The third sections was the most fun and – surprisingly – fairly accurately described in the press release except that they didn’t disclose that the 5.85% average was of an equal weighting of bonds, bills and equities. I wonder if we can take this as a BCSC endorsement of “1/N investing”, in which an investor choosing between N offered choices puts an equal amount into each of them. (This is a real thing, by the way. There’s been some research done on the way DC pension plans get allocated).

So everybody expecting an average return in the future of more than 6% has, according to the BCSC, an unreasonable expectation of annual returns on investments.

Just for fun, I looked at the policies of the CPPIB:

Using reasonable capital market assumptions, the Reference Portfolio is expected to earn at least the real rate of return over the long term that is required over the 75-year projection period in the latest Actuarial Report to sustain the plan at the minimum contribution rate specified therein, assuming all other assumptions by the Chief Actuary are realized. The 26th Actuarial Report assumes a 4.0% real rate of return over the long term. The Board expect the 65% equity/35% debt weighting of the Reference Portfolio to earn at least this rate of return (annualized over the long term).

Phew! Made it! I am relieved to learn that the Canada Pension Plan is in good hands! But maybe the BCSC should take its road-show down south … according to the National Association of State Retirement Administrators’ NASRA Issue Brief: Public Pension Plan Investment Return Assumptions:

Although public pension funds, like other investors, experienced sub-par returns in the wake of the 2008-09 decline in global equity values, median public pension fund returns over longer periods meet or exceed the assumed rates used by most plans. As shown in Figure 1, at 8.8 percent, the median annualized investment return for the 25-year period ended June 30, 2014, exceeds the median assumption of 7.75 percent (see Figure 4), while the 10-year return is below this level.

NASRAMedianAssumption
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So the US pension plans appear to be basing their future expectations on past performance, just like the BCSC implies we all should be doing … and their future expectations are distributed accordingly:

NASRADistributionAssumption
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Since we’re on the topic of pensions, it’s alarming to learn that Canadian DB pensions lost ground on funding in 2015Q1:

Canadian pension plans continued to see their funding decline in the first three months of 2015 as a result of declining long-term interest rates.

A survey of 449 pension plans by consulting firm Aon Hewitt shows average funding stood at 89 per cent as of March 30, a six-percentage-point drop from 95 per cent funding a year earlier.
…
The survey found only 18 per cent of pension plans in Canada were fully funded as of March 30, which a sharp decline from a year earlier, when 36 per cent of pension plans were fully funded.

OSFI released its 2015-16 Report on Plans and Priorities, but there was not much of interest in it:

In the insurance sector, we will continue to implement the reforms set out in the Update to the Life Insurance Regulatory Framework and the changes to property and casualty insurance capital requirements.

TransCanada has issued USD 750 million of 4.6% Senior Notes with a maturity date of March 31, 2045.

BSD.PR.A has been confirmed at Pfd-4(low) by DBRS:

DBRS Limited (DBRS) has today confirmed the rating of Pfd-4 (low) on the Preferred Securities issued by Brookfield Soundvest Split Trust (the Trust). The rating confirmation is in connection with the extension of the termination date from March 31, 2015 to March 31, 2020. The interest rate on the Preferred Securities for the extended term will remain the same at 6.0% per annum.
…
Since the last rating confirmation of the Preferred Shares at Pfd-4 (low) on December 5, 2014, the performance of the Company has been volatile, with downside protection fluctuating between 17.6% and 23.2%. The Portfolio consisted of 72.0% Canadian common stock, 22.0% REITs, 4.0% limited partnerships and 2.0% Canadian preferred stock. Downside protection available to holders of the Preferred Securities was 20.4% as of March 24, 2015. Based on the Q3 2014 Statement of Investments and the yield on the Portfolio as of March 24, 2015, the distribution coverage ratio is 0.63x. The rating on the Preferred Securities continues to be constrained by the large percentage of underlying securities in the Portfolio that are not rated by any rating agency and by the grind on the Portfolio due to distributions exceeding income.

The Canadian preferred share market closed the day on a violently mixed note, with PerpetualDiscounts up 33bp, FixedResets off 36bp and DeemedRetractibles gaining 6bp. The Performance Highlights table is predictably heavy with FixedReset losers, notably BAM, ENB and MFC issues. Floaters did well! Volume was quite high, with a very good crop of issues breaking the 100,000 mark.

For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.

Remember that all rich /cheap assessments are:
» based on Implied Volatility Theory only
» are relative only to other FixedResets from the same issuer
» assume constant GOC-5 yield
» assume constant Implied Volatility
» assume constant spread

Here’s TRP:

impVol_TRP_150331
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TRP.PR.E, which resets 2019-10-30 at +235, is bid at 24.32 to be $1.23 rich, while TRP.PR.G, resetting 2020-11-30 at +296, is $1.01 cheap at its bid price of 24.98.

impVol_MFC_150331
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Another excellent fit, but the numbers are perplexing. Implied Volatility for MFC continues to be a conundrum, although it declined substantially today. It is still too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).

Most expensive is MFC.PR.L, resetting at +216 on 2019-6-19, bid at 23.91 to be $0.64 rich, while MFC.PR.H, resetting at +313bp on 2017-3-19, is bid at 25.60 to be $0.69 cheap.

impVol_BAM_150331
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The fit on this series has suddenly become atrocious. It will be most interesting to see how long it takes for things to readjust.

The cheapest issue relative to its peers is BAM.PF.F, resetting at +286bp on 2019-9-30, bid at 23.52 to be $1.15 cheap (but, mind you, the bid is suspiciously low – see the discussion in the Performance Highlights table, below). BAM.PF.E, resetting at +255bp 2020-3-31 is bid at 24.12 and appears to be $1.36 rich.

impVol_FTS_150331
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This is just weird because the middle is expensive and the ends are cheap but anyway … FTS.PR.H, with a spread of +145bp, and bid at 16.20, looks $1.59 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 23.70 and is $1.15 rich.

pairs_FR_150331
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Investment-grade pairs predict an average over the next five years of a little over 0.20%. TRP.PR.A / TRP.PR.F has normalized. The DC.PR.B / DC.PR.D pair is still off the charts and now predicts an average bill rate over the next 4 3/4 years of -2.48%.

The two new junk pairs, AIM.PR.A / AIM.PR.B and FFH.PR.E / FFH.PR.F, are surprisingly well-behaved at +0.24% and +0.72%, respectively.

pairs_FF_150331
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Shall we just say that this exhibits a high level of confidence in the continued rapacity of Canadian banks?

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices
Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)		 Median
YTW		 Median
Average
Trading
Value		 Median
Mod Dur
(YTW)		 Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 1.5866 % 2,369.0
FixedFloater 0.00 % 0.00 % 0 0.00 0 1.5866 % 4,142.2
Floater 3.20 % 3.21 % 64,321 19.18 3 1.5866 % 2,518.5
OpRet 4.06 % 0.69 % 111,633 0.22 1 0.1589 % 2,768.0
SplitShare 4.35 % 4.15 % 34,526 3.46 4 0.0299 % 3,218.1
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.1589 % 2,531.1
Perpetual-Premium 5.31 % -0.62 % 59,782 0.08 25 -0.0283 % 2,525.2
Perpetual-Discount 4.95 % 4.94 % 157,382 15.22 9 0.3259 % 2,827.7
FixedReset 4.43 % 3.49 % 249,819 16.48 85 -0.3632 % 2,406.6
Deemed-Retractible 4.90 % 0.93 % 113,045 0.15 37 0.0565 % 2,659.4
FloatingReset 2.46 % 2.82 % 79,035 6.28 8 0.0582 % 2,359.7
Performance Highlights
Issue Index Change Notes
BAM.PF.F FixedReset -5.96 % Not real. The day’s low was 24.21, nearly 3% above the last bid, so this is just more Toronto Stock Exchange nonsense. I have not checked whether this is due to inadequate Toronto Stock Exchange reporting or inadequate Toronto Stock Exchange supervision of market-makers. It’s bad enough whenever this happens … but pretty disgraceful when it happens on a quarter-end.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-03-31
Maturity Price : 22.59
Evaluated at bid price : 23.52
Bid-YTW : 4.03 %
BAM.PR.T FixedReset -3.29 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-03-31
Maturity Price : 20.55
Evaluated at bid price : 20.55
Bid-YTW : 3.95 %
BAM.PR.R FixedReset -2.67 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-03-31
Maturity Price : 20.05
Evaluated at bid price : 20.05
Bid-YTW : 4.03 %
ENB.PR.P FixedReset -2.06 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-03-31
Maturity Price : 19.50
Evaluated at bid price : 19.50
Bid-YTW : 4.44 %
ENB.PR.Y FixedReset -2.03 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-03-31
Maturity Price : 19.30
Evaluated at bid price : 19.30
Bid-YTW : 4.39 %
ENB.PR.F FixedReset -1.98 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-03-31
Maturity Price : 19.31
Evaluated at bid price : 19.31
Bid-YTW : 4.46 %
HSE.PR.A FixedReset -1.71 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-03-31
Maturity Price : 16.70
Evaluated at bid price : 16.70
Bid-YTW : 3.91 %
BNS.PR.Y FixedReset -1.69 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.48
Bid-YTW : 4.23 %
BAM.PF.G FixedReset -1.64 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-03-31
Maturity Price : 22.99
Evaluated at bid price : 24.55
Bid-YTW : 3.82 %
ENB.PR.T FixedReset -1.52 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-03-31
Maturity Price : 19.50
Evaluated at bid price : 19.50
Bid-YTW : 4.46 %
ENB.PR.D FixedReset -1.40 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-03-31
Maturity Price : 19.01
Evaluated at bid price : 19.01
Bid-YTW : 4.36 %
ENB.PR.H FixedReset -1.32 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-03-31
Maturity Price : 18.01
Evaluated at bid price : 18.01
Bid-YTW : 4.35 %
MFC.PR.J FixedReset -1.15 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.90
Bid-YTW : 3.67 %
MFC.PR.N FixedReset -1.02 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.15
Bid-YTW : 3.92 %
MFC.PR.I FixedReset -1.02 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.34
Bid-YTW : 3.71 %
BAM.PF.E FixedReset 1.01 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-03-31
Maturity Price : 22.83
Evaluated at bid price : 24.12
Bid-YTW : 3.64 %
CIU.PR.C FixedReset 1.03 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-03-31
Maturity Price : 17.68
Evaluated at bid price : 17.68
Bid-YTW : 3.17 %
SLF.PR.G FixedReset 1.15 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 17.55
Bid-YTW : 6.34 %
MFC.PR.C Deemed-Retractible 1.17 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.21
Bid-YTW : 4.95 %
BAM.PR.C Floater 1.24 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-03-31
Maturity Price : 15.50
Evaluated at bid price : 15.50
Bid-YTW : 3.21 %
BAM.PR.K Floater 1.64 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-03-31
Maturity Price : 15.50
Evaluated at bid price : 15.50
Bid-YTW : 3.21 %
BAM.PR.B Floater 1.88 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-03-31
Maturity Price : 15.74
Evaluated at bid price : 15.74
Bid-YTW : 3.16 %
Volume Highlights
Issue Index Shares
Traded		 Notes
CU.PR.C FixedReset 445,232 Desjardins crossed blocks of 116,100 and 170,000, both at 24.90. RBC crossed blocks of 17,000 and 85,000 at the same price. TD crossed 50,000 at the same price again.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-03-31
Maturity Price : 23.48
Evaluated at bid price : 24.82
Bid-YTW : 3.21 %
ENB.PR.B FixedReset 381,592 RBC crossed 360,600 at 18.75.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-03-31
Maturity Price : 18.97
Evaluated at bid price : 18.97
Bid-YTW : 4.36 %
BMO.PR.S FixedReset 273,252 Nesbitt crossed blocks of 150,000 and 60,000, both at 25.16. Scotia crossed 47,700 at the same price.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-03-31
Maturity Price : 23.28
Evaluated at bid price : 25.15
Bid-YTW : 3.14 %
TD.PF.D FixedReset 201,350 Recent new issue.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-03-31
Maturity Price : 23.15
Evaluated at bid price : 25.02
Bid-YTW : 3.46 %
TD.PF.C FixedReset 175,374 TD bought blocks of 18,800 and 12,400 from Canaccord at 24.69, and crossed blocks of 75,000 and 25,000, at the same price.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-03-31
Maturity Price : 23.07
Evaluated at bid price : 24.70
Bid-YTW : 3.17 %
TD.PF.B FixedReset 120,213 TD crossed 100,000 at 24.90.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-03-31
Maturity Price : 23.10
Evaluated at bid price : 24.67
Bid-YTW : 3.17 %
CM.PR.G Perpetual-Premium 118,192 Called for redemption effective April 30.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-04-30
Maturity Price : 25.00
Evaluated at bid price : 24.97
Bid-YTW : 1.47 %
IFC.PR.C FixedReset 111,603 Nesbitt crossed 100,000 at 25.00.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.05
Bid-YTW : 3.55 %
There were 42 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
BAM.PF.F FixedReset Quote: 23.52 – 24.63
Spot Rate : 1.1100
Average : 0.6073

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-03-31
Maturity Price : 22.59
Evaluated at bid price : 23.52
Bid-YTW : 4.03 %
ENB.PR.F FixedReset Quote: 19.31 – 19.80
Spot Rate : 0.4900
Average : 0.3483

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-03-31
Maturity Price : 19.31
Evaluated at bid price : 19.31
Bid-YTW : 4.46 %
PWF.PR.R Perpetual-Premium Quote: 26.51 – 26.85
Spot Rate : 0.3400
Average : 0.2255

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2021-04-30
Maturity Price : 25.00
Evaluated at bid price : 26.51
Bid-YTW : 4.55 %
MFC.PR.I FixedReset Quote: 25.34 – 25.75
Spot Rate : 0.4100
Average : 0.2980

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.34
Bid-YTW : 3.71 %
MFC.PR.H FixedReset Quote: 25.60 – 25.99
Spot Rate : 0.3900
Average : 0.2930

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-03-19
Maturity Price : 25.00
Evaluated at bid price : 25.60
Bid-YTW : 3.42 %
GWO.PR.N FixedReset Quote: 18.36 – 18.70
Spot Rate : 0.3400
Average : 0.2576

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 18.36
Bid-YTW : 5.78 %
Issue Comments

AIM.PR.A / AIM.PR.B: 43% Conversion To FloatingReset

AIM.PR.A recently extended with a dividend cut of 31% and I recommended that holders retain their shares in preference to conversion to the FloatingReset issues. More recently, I opined that AIM.PR.A looks cheap relative to AIM.PR.C.

Aimia did not issue a press release with respect to either the conversion percentage or the first day of listing of the FloatingReset AIM.PR.B on the Toronto Stock Exchange, but TMXMoney reports that there are now 3,953,365 shares of AIM.PR.A outstanding relative to 2,946,635 shares of AIM.PR.B, so we may calculate a conversion rate of 43%.

There was no volume in AIM.PR.B reported.

Despite this lack of volume – or, who knows, maybe because of it – the AIM.PR.A / AIM.PR.B Strong Pair ended its first day on the market with an implied average three-month bill rate over the next five years of +0.24%, well within the boundaries set by other pairs.

pairs_FR_150331
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Vital statistics are:

AIM.PR.A FixedReset YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-03-31
Maturity Price : 19.50
Evaluated at bid price : 19.50
Bid-YTW : 5.84 %
AIM.PR.B FloatingReset YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-03-31
Maturity Price : 19.00
Evaluated at bid price : 19.00
Bid-YTW : 5.66 %
Issue Comments

FFH.PR.E / FFH.PR.F: 31% Conversion to FloatingReset

FFH.PR.E recently extended with a dividend cut of 39% and I recommended that holders retain their shares in preference to conversion to the FloatingReset issues.

Fairfax did not issue a press release with respect to either the conversion percentage or the first day of listing of the FloatingReset FFH.PR.F on the Toronto Stock Exchange, but TMXMoney reports that there are now 7,915,539 shares of FFH.PR.E outstanding relative to 3,572,044 shares of the FloatingReset FFH.PR.F, so we may calculate a conversion rate of 31%.

Volume of 8,118 shares of FFH.PR.F was reported in a range of 15.65-75.

This was a fairly good result for FFH.PR.F; the FFH.PR.E / FFH.PR.F Strong Pair ended its first day on the market with an implied average three-month bill rate over the next five years of +0.72%, which may seem low, but is the highest rate implied by all other pairs.

pairs_FR_150331
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Vital statistics are:

FFH.PR.E FixedReset YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-03-31
Maturity Price : 15.68
Evaluated at bid price : 15.68
Bid-YTW : 4.70 %
FFH.PR.F FloatingReset YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-03-31
Maturity Price : 15.65
Evaluated at bid price : 15.65
Bid-YTW : 4.30 %
New Issues

New Issue: PPL FixedReset, 4.75%+391

Pembina Pipeline Corporation has announced:

that it has entered into an agreement with a syndicate of underwriters co-led by Scotiabank and RBC Capital Markets (together, the “Underwriters”) pursuant to which the Underwriters have agreed to purchase from Pembina 8,000,000 cumulative redeemable rate reset class A preferred shares, Series 9 (the “Series 9 Preferred Shares”) at a price of $25.00 per share for distribution to the public.

The holders of Series 9 Preferred Shares will be entitled to receive fixed cumulative dividends at an annual rate of $1.1875 per share, payable quarterly on the 1st day of March, June, September and December, as and when declared by the Board of Directors of Pembina, yielding 4.75 per cent per annum, for the initial fixed rate period to but excluding December 1, 2020. The first quarterly dividend payment date is scheduled for September 1, 2015. The dividend rate will reset on December 1, 2020 and every five years thereafter at a rate equal to the sum of the then five-year Government of Canada bond yield plus 3.91 per cent. The Series 9 Preferred Shares are redeemable by Pembina, at its option, on December 1, 2020 and on December 1 of every fifth year thereafter at a price of $25.00 per share plus accrued and unpaid dividends.

The holders of Series 9 Preferred Shares will have the right to convert their shares into cumulative redeemable floating rate class A preferred shares, Series 10 (the “Series 10 Preferred Shares”), subject to certain conditions, on December 1, 2020 and on December 1 of every fifth year thereafter. The holders of Series 10 Preferred Shares will be entitled to receive quarterly floating rate cumulative dividends, as and when declared by the Board of Directors of Pembina, at a rate equal to the sum of the then 90-day Government of Canada treasury bill rate plus 3.91 per cent.

Pembina has granted to the underwriters an option, exercisable at any time up to 48 hours prior to the closing of the offering, to purchase up to an additional 2,000,000 Series 9 Preferred Shares at a price of $25.00 per share.

Closing of the offering is expected on April 10, 2015, subject to customary closing conditions.

Proceeds from the offering will be used to reduce indebtedness under the Company’s credit facilities, which was incurred in connection with Pembina’s 2015 capital expenditure program.

The offering is being made by means of a prospectus supplement under the short form base shelf prospectus filed by the Company on March 18, 2015 in each of the provinces of Canada.

There is a whacking great first dividend on this, $0.4685, payable September 1, which will go ex around about maybe the end of July. There may be opportunities for dividend capture strategies in July!

Implied Volatility theory suggests that this issue is cheap relative to its peers – not because it is cheap to the fitted curve, but because the implied volatility is so large – ridiculously large, in fact – and the curve may therefore to be deemed likely to flatten.

impVol_PPL_150331
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Update, 2015-4-6: Rated Pfd-3 by DBRS.

Market Action

March 30, 2015

The Economist has a good piece on income inequality:

Mr Piketty argues that over the long run the rate of return on wealth exceeds economic growth. Over time, this relationship increases inequality as the share of national income going to those who own capital (the rich) rises, while the portion going to labour (everyone else) falls. He also argues that the return on capital in recent history has been remarkably stable, even as economic growth has fallen, and that this trend will continue in the future.

Mr Rognlie has three main criticisms of all this. Several commentators have pointed out that the rate of return from capital should decline in the long run, rather than remaining high as Mr Piketty maintains, owing to the law of diminishing returns. Mr Rognlie expands on this, arguing that Mr Piketty has an inflated idea of the current return. Modern forms of capital, such as software, depreciate faster in value than equipment did in the past: a giant metal press might have a working life of decades whereas a new piece of database-management software will be obsolete in a few years at most. This means that returns from wealth may not necessarily be growing in net terms, since a rising share of the gains that flow to the owners of capital must be reinvested.

Second, Mr Rognlie finds that higher returns to wealth have not been distributed equally across all investments. The return on assets other than housing has been remarkably stable since 1970. In fact, surging house prices are almost entirely responsible for growing returns on capital.

Third, the idea that workers’ share of wealth can continue to decline rests on the assumption that it is easy to substitute capital (ie, robots) for workers. But if lots of the capital in question is tied up in houses, then this switch would be far harder than Mr Piketty suggests.

I don’t find these arguments particularly convincing. With respect to the first point, once capital invested in software depreciates fast enough, it becomes a labour cost in capital clothing: if you need a permanent staff of programmers on hand to keep your business running (whether they are in-house or external), then that’s a labour cost.

The second and third points are interesting, but I suggest that people are spending more on housing because the return on capital is relatively low and relatively volatile – should returns on actual capital increase, then people will stop buying second houses for rental purposes and put their money into the stock market.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts gaining 11bp, FixedResets down 31bp and DeemedRetractibles off 19bp. The Performance Highlights table is relatively length and almost all losers, with Enbridge issues again being prominent on the bad side. Volume was on the high side of average.

For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.

Remember that all rich /cheap assessments are:
» based on Implied Volatility Theory only
» are relative only to other FixedResets from the same issuer
» assume constant GOC-5 yield
» assume constant Implied Volatility
» assume constant spread

Here’s TRP:

impVol_TRP_150330
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TRP.PR.E, which resets 2019-10-30 at +235, is bid at 24.26 to be $1.12 rich, while TRP.PR.G, resetting 2020-11-30 at +296, is $1.13 cheap at its bid price of 24.90.

impVol_MFC_150330
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Another excellent fit, but the numbers are perplexing. Implied Volatility for MFC continues to be a conundrum, although it declined substantially today. It is still too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).

Most expensive is MFC.PR.L, resetting at +216 on 2019-6-19, bid at 23.93 to be $0.56 rich, while MFC.PR.H, resetting at +313bp on 2017-3-19, is bid at 25.75 to be $0.69 cheap.

impVol_BAM_150330
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The fit on this series is actually quite reasonable – it’s the scale that makes it look so weird.

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 20.60 to be $0.78 cheap. BAM.PF.E, resetting at +255bp 2020-3-31 is bid at 23.88 and appears to be $0.78 rich.

impVol_FTS_150330
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This is just weird because the middle is expensive and the ends are cheap but anyway … FTS.PR.H, with a spread of +145bp, and bid at 16.07, looks $1.72 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 23.71 and is $1.13 rich.

pairs_FR_150330
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Investment-grade pairs predict an average over the next five years of about 0.20%. TRP.PR.A / TRP.PR.F has almost normalized, but remains an outlier at +0.05%. The DC.PR.B / DC.PR.D pair is still off the charts and now predicts an average bill rate over the next 4 3/4 years of -2.87%.

Tomorrow we’ll get two more data points for junk: AIM.PR.A / AIM.PR.B and FFH.PR.E / FFH.PR.F.

pairs_FF_150330
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Shall we just say that this exhibits a high level of confidence in the continued rapacity of Canadian banks?

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices
Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)		 Median
YTW		 Median
Average
Trading
Value		 Median
Mod Dur
(YTW)		 Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 -1.3085 % 2,332.0
FixedFloater 0.00 % 0.00 % 0 0.00 0 -1.3085 % 4,077.5
Floater 3.25 % 3.25 % 64,608 19.09 3 -1.3085 % 2,479.1
OpRet 4.07 % 1.40 % 108,400 0.22 1 -0.0794 % 2,763.7
SplitShare 4.35 % 4.21 % 33,378 3.46 4 0.1198 % 3,217.2
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0794 % 2,527.1
Perpetual-Premium 5.31 % -0.80 % 57,957 0.08 25 0.0892 % 2,525.9
Perpetual-Discount 4.97 % 4.95 % 158,734 15.22 9 0.1103 % 2,818.5
FixedReset 4.41 % 3.46 % 250,790 16.54 85 -0.3141 % 2,415.4
Deemed-Retractible 4.90 % 1.25 % 110,100 0.15 37 -0.1874 % 2,657.9
FloatingReset 2.46 % 2.84 % 82,221 6.29 8 0.0688 % 2,358.3
Performance Highlights
Issue Index Change Notes
ENB.PR.N FixedReset -2.42 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-03-30
Maturity Price : 20.17
Evaluated at bid price : 20.17
Bid-YTW : 4.43 %
TRP.PR.C FixedReset -2.34 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-03-30
Maturity Price : 16.25
Evaluated at bid price : 16.25
Bid-YTW : 3.67 %
ENB.PF.E FixedReset -1.71 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-03-30
Maturity Price : 21.29
Evaluated at bid price : 21.29
Bid-YTW : 4.39 %
BAM.PR.R FixedReset -1.67 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-03-30
Maturity Price : 20.60
Evaluated at bid price : 20.60
Bid-YTW : 3.92 %
BAM.PR.K Floater -1.55 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-03-30
Maturity Price : 15.25
Evaluated at bid price : 15.25
Bid-YTW : 3.27 %
ENB.PF.A FixedReset -1.49 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-03-30
Maturity Price : 21.20
Evaluated at bid price : 21.20
Bid-YTW : 4.38 %
BNS.PR.Y FixedReset -1.44 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.85
Bid-YTW : 3.96 %
FTS.PR.H FixedReset -1.41 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-03-30
Maturity Price : 16.07
Evaluated at bid price : 16.07
Bid-YTW : 3.50 %
MFC.PR.K FixedReset -1.41 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.76
Bid-YTW : 3.95 %
ENB.PR.J FixedReset -1.36 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-03-30
Maturity Price : 21.11
Evaluated at bid price : 21.11
Bid-YTW : 4.26 %
BAM.PR.T FixedReset -1.30 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-03-30
Maturity Price : 21.25
Evaluated at bid price : 21.25
Bid-YTW : 3.82 %
BAM.PR.B Floater -1.28 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-03-30
Maturity Price : 15.45
Evaluated at bid price : 15.45
Bid-YTW : 3.22 %
MFC.PR.F FixedReset -1.27 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 18.61
Bid-YTW : 5.97 %
ENB.PF.G FixedReset -1.16 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-03-30
Maturity Price : 21.35
Evaluated at bid price : 21.35
Bid-YTW : 4.41 %
CIU.PR.C FixedReset -1.13 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-03-30
Maturity Price : 17.50
Evaluated at bid price : 17.50
Bid-YTW : 3.21 %
MFC.PR.C Deemed-Retractible -1.12 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.93
Bid-YTW : 5.10 %
BAM.PR.C Floater -1.10 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-03-30
Maturity Price : 15.31
Evaluated at bid price : 15.31
Bid-YTW : 3.25 %
ENB.PR.T FixedReset -1.00 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-03-30
Maturity Price : 19.80
Evaluated at bid price : 19.80
Bid-YTW : 4.39 %
ENB.PR.F FixedReset 1.03 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-03-30
Maturity Price : 19.70
Evaluated at bid price : 19.70
Bid-YTW : 4.37 %
CGI.PR.D SplitShare 1.23 % YTW SCENARIO
Maturity Type : Soft Maturity
Maturity Date : 2023-06-14
Maturity Price : 25.00
Evaluated at bid price : 25.61
Bid-YTW : 3.44 %
Volume Highlights
Issue Index Shares
Traded		 Notes
ENB.PR.P FixedReset 138,628 Desjardins crossed 126,000 at 20.00.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-03-30
Maturity Price : 19.91
Evaluated at bid price : 19.91
Bid-YTW : 4.35 %
BNS.PR.Z FixedReset 110,872 Nesbitt crossed 100,000 at 23.70.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.58
Bid-YTW : 3.38 %
CM.PR.Q FixedReset 101,360 Recent new issue.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-03-30
Maturity Price : 23.09
Evaluated at bid price : 24.84
Bid-YTW : 3.49 %
TD.PF.D FixedReset 90,353 Recent new issue.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-03-30
Maturity Price : 23.14
Evaluated at bid price : 25.00
Bid-YTW : 3.46 %
CM.PR.O FixedReset 88,715 Scotia crossed two blocks of 40,000 each, both at 24.65.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-03-30
Maturity Price : 23.05
Evaluated at bid price : 24.55
Bid-YTW : 3.20 %
TRP.PR.G FixedReset 64,710 Recent new issue.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-03-30
Maturity Price : 23.09
Evaluated at bid price : 24.90
Bid-YTW : 3.67 %
There were 36 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
ENB.PR.T FixedReset Quote: 19.80 – 20.30
Spot Rate : 0.5000
Average : 0.3640

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-03-30
Maturity Price : 19.80
Evaluated at bid price : 19.80
Bid-YTW : 4.39 %
ENB.PF.G FixedReset Quote: 21.35 – 21.73
Spot Rate : 0.3800
Average : 0.2516

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-03-30
Maturity Price : 21.35
Evaluated at bid price : 21.35
Bid-YTW : 4.41 %
BAM.PR.R FixedReset Quote: 20.60 – 20.90
Spot Rate : 0.3000
Average : 0.1799

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-03-30
Maturity Price : 20.60
Evaluated at bid price : 20.60
Bid-YTW : 3.92 %
MFC.PR.N FixedReset Quote: 24.40 – 24.69
Spot Rate : 0.2900
Average : 0.1720

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.40
Bid-YTW : 3.79 %
MFC.PR.C Deemed-Retractible Quote: 23.93 – 24.25
Spot Rate : 0.3200
Average : 0.2138

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.93
Bid-YTW : 5.10 %
BAM.PR.K Floater Quote: 15.25 – 15.73
Spot Rate : 0.4800
Average : 0.3827

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-03-30
Maturity Price : 15.25
Evaluated at bid price : 15.25
Bid-YTW : 3.27 %

And finally, it seems to me that housing prices is related to wealth, whereas income inequality has increased and is measurable.

Issue Comments

BNS.PR.Y To Reset At 1.82%

The Bank of Nova Scotia has announced:

the applicable dividend rates for its Non-cumulative 5-Year Rate Reset Preferred Shares Series 30 of Scotiabank (the “Preferred Shares Series 30”) and Non-cumulative Floating Rate Preferred Shares Series 31 of Scotiabank (the “Preferred Shares Series 31”).

With respect to any Preferred Shares Series 30 that remain outstanding after April 26, 2015, commencing as of such date, holders thereof will be entitled to receive non-cumulative preferential cash dividends on a quarterly basis, as and when declared by the Board of Directors of Scotiabank and subject to the Bank Act (Canada). The dividend rate for the five-year period commencing on April 26, 2015 and ending on April 25, 2020 will be 1.82%, being equal to the 5-Year Government of Canada bond yield determined as at March 27, 2015 plus 1.00%, as determined in accordance with the terms of the Preferred Shares Series 30.

With respect to any Preferred Shares Series 31 that may be issued on April 26, 2015, holders thereof will be entitled to receive floating rate non-cumulative preferential cash dividends on a quarterly basis, as and when declared by the Board of Directors of Scotiabank and subject to the Bank Act (Canada), based on a dividend rate equal to the 90-day Canadian Treasury Bill yield plus 1.00%, on an actual/365 day count basis, subject to certain adjustments in accordance with the terms of the Preferred Shares Series 31. The dividend rate for the period commencing on April 26, 2015 and ending on July 25, 2015 will be equal to 1.528%, as determined in accordance with the terms of the Preferred Shares Series 31.

Beneficial owners of Preferred Shares Series 30 who wish to exercise their right of conversion should communicate as soon as possible with their broker or other nominee and ensure that they follow their instructions in order to meet the deadline to exercise such right, which is 5:00 p.m. (EDT) on April 13, 2015.

Note that the deadline for notifying the company of a holder’s intent to exchange for the new FloatingReset issue is April 13, but that brokers will have earlier internal deadlines. I intend to recommend whether or not to convert on April 8.

Issue Comments

Market Inefficiency: AIM.PR.A vs. AIM.PR.C

I was challenged on Financial Wisdom Forum to opine on preferred share market inefficiency:

I do wonder if this market is as inefficient as you suggest. It seems to me when inefficiencies exist (that is to say easy money to be made) in capital markets such inefficiencies don’t last long as smart money rushes in to scoop up the cash and thus eliminating the inefficiency . Perhaps Mr Hymas would care to offer an expert opinion on the preferred share market with respect to its inefficiencies or lack there of.

Fortunately enough, there’s an example of inefficient pricing noted just above:

Take AIM.PR.A (which is one of my holdings and is definitely not investment grade). It was yielding 7.3% (current) when I started buying in February. I knew it was resetting end of March at around 4.5% of the redemption price (for a current yield of 5.1% at my ACB), but thought: ‘It must be safe to buy because the market must have priced in whatever.s going to happen’. Well, in early March they announced the details of the reset and then it sunk like a stone! So a week or so after the announcement, I thought: ‘Now the market must really have priced in everything, so now I can buy some more at a bargain’. Which I did. But it kept sinking and sinking and still is sinking!

Let’s look at the yield of AIM.PR.A using the new and improved yield calculator for FixedResets. Assumptions are always necessary when making yield calculations so assume

  • The bid in thirty years will be the same as the close on Friday, 19.31
  • Constant 5-year Canada yield of Friday’s close of 0.79%

and combine that with what we know about the issue

  • Resets 2020-3-31
  • Reset yield is GOC-5 +375bp
  • Paydates are quarterly from June 30

We calculate the yield as 5.85%.

Now look at AIM.PR.C, which closed on Friday at 24.91, currently pays $1.5625 p.a. and resets at five year intervals commencing 2019-3-31 at GOC-5 + 420bp. Make the same assumption of a constant price. The yield is 5.33%.

This relative valuation makes no sense. AIM.PR.C should yield more than AIM.PR.A, since it has greater call risk.

Some people may tell you that the differential makes sense, because when AIM.PR.C resets in four years it is GUARANTEED!!! to reset at a higher level since GOC-5 will DEFINITELY!!! be higher at that time … to which we may retort that in that case, AIM.PR.A will also reset higher since it will reset again one year later.

In order for AIM.PR.C to achieve the 5.85% yield offered by AIM.PR.A, we must assume a constant GOC-5 yield of 1.49%. If we assume that GOC-5 will reach 1.49% and stay there forever, then AIM.PR.A will then yield 6.45% (n.b. a greater increase since the lower price of AIM.PR.A means it is more levered to the GOC-5 rate). So for the realized yields to be equal, we must assume that GOC-5 will increase to 1.49% by the time AIM.PR.C resets in four years, but return to 0.79% when AIM.PR.A resets a year later (there will be infinite equivalent paths for equality of yield, but they will all look more or less like that) and that this zig-zag will continue forever. This seems like a rather complex path to be betting on.

And the above ignores call risk, i.e., assumes that the Volatility of the Market Reset Spread for AIM is zero and that neither issue will be called with 100% certainty. This is another rather aggressive assumption.

If we turn the question around a little, we can determine that, in order for the yield on AIM.PR.A to be equal to the yield on AIM.PR.C (again, with zero allowance made for call risk), then we may say that the constant price of AIM.PR.A should be $21.20, given a constant GOC-5 yield of 0.79 (for both issues!). Thus, we may conclude to a first approximation that AIM.PR.A is about 9% undervalued relative to AIM.PR.C at current prices.

It is not at all unusual to conclude that cheaper issues are unduly cheap relative to their more expensive siblings. I believe that this is due to some feeling among preferred share investors as a group that:

  • Anything priced at around par will always be priced near par, because, dammit, they’re PREFERRED SHARES
  • Anything priced significantly below par is a speculative piece of shit

Regrettably, this hypothesis would be very difficult to prove. And, as the regrettable timing of MAPF’s move into low-spread FixedResets demonstrates, just because something is probably mostly true most of the time doesn’t mean it’s always true all of the time. But … if the odds are with you on all your decisions and you take care that an unlucky streak won’t wipe you out … you’ll do fine.

Market Action

March 27, 2015

The new issue of LBS / LBS.PR.A was priced today at 19.60, compared to its March 26 NAVPU of 18.74. Nice work if you can get it! I have updated the post announcing the offering.

Brookfield Renewable Power Preferred Equity Inc., proud issuer of BRF.PR.A, BRF.PR.C, BRF.PR.E and BRF.PR.F, was confirmed at Pfd-3(high) by DBRS:

DBRS Limited (DBRS) has confirmed the Issuer Rating and the rating on the Senior Unsecured Debentures and Notes of Brookfield Renewable Energy Partners L.P. (BREP or the Company) at BBB (high), and the Class A Preference Shares at Pfd-3 (high), all with Stable trends. The rating actions reflect DBRS’s expectation that BREP will continue to prudently finance its growth initiatives to maintain its deconsolidated key credit metrics in line with the current rating. BREP’s ratings reflect its geographic and resource diversification, and highly contracted portfolio with investment-grade counterparties, while also factoring in the inherent renewable resource risk.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts off 5bp, FixedResets down 23bp and DeemedRetractibles gaining 6bp. The Performance Highlights table was of normal (for the past four months) size and comprised entirely of FixedResets. Volume was average.

For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.

Remember that all rich /cheap assessments are:
» based on Implied Volatility Theory only
» are relative only to other FixedResets from the same issuer
» assume constant GOC-5 yield
» assume constant Implied Volatility
» assume constant spread

Here’s TRP:

impVol_TRP_150327
Click for Big

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 24.41 to be $1.16 rich, while TRP.PR.G, resetting 2020-11-30 at +296, is $1.17 cheap at its bid price of 24.93.

impVol_MFC_150327
Click for Big

Another excellent fit, but the numbers are perplexing. Implied Volatility for MFC continues to be a conundrum, although it declined substantially today. It is still too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).

Most expensive is MFC.PR.N, resetting at +230 on 2020-3-19, bid at 24.64 to be $0.53 rich, while MFC.PR.H, resetting at +313bp on 2017-3-19, is bid at 25.87 to be $0.64 cheap.

impVol_BAM_150327
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The fit on this series is actually quite reasonable – it’s the scale that makes it look so weird.

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 20.95 to be $0.62 cheap. BAM.PF.E, resetting at +255bp 2020-3-31 is bid at 23.74 and appears to be $0.49 rich.

impVol_FTS_150327
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This is just weird because the middle is expensive and the ends are cheap but anyway … FTS.PR.H, with a spread of +145bp, and bid at 16.30, looks $1.59 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 23.71 and is $1.08 rich.

pairs_FR_150327
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Investment-grade pairs predict an average over the next five years of about 0.20% after a big increase today.TRP.PR.A / TRP.PR.F remains an outlier at -0.16%. The DC.PR.B / DC.PR.D pair is still off the charts and now predicts an average bill rate over the next 4 3/4 years of -2.06%.

pairs_FF_150327
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Shall we just say that this exhibits a high level of confidence in the continued rapacity of Canadian banks?

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices
Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)		 Median
YTW		 Median
Average
Trading
Value		 Median
Mod Dur
(YTW)		 Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 0.0644 % 2,363.0
FixedFloater 0.00 % 0.00 % 0 0.00 0 0.0644 % 4,131.5
Floater 3.21 % 3.22 % 64,992 19.19 3 0.0644 % 2,512.0
OpRet 4.07 % 1.01 % 110,149 0.23 1 0.1192 % 2,765.8
SplitShare 4.36 % 4.03 % 32,793 3.48 4 0.2102 % 3,213.3
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.1192 % 2,529.1
Perpetual-Premium 5.31 % 2.61 % 58,333 0.09 25 0.0094 % 2,523.6
Perpetual-Discount 4.97 % 4.99 % 158,961 15.21 9 -0.0465 % 2,815.4
FixedReset 4.40 % 3.39 % 235,021 16.75 85 -0.2263 % 2,423.0
Deemed-Retractible 4.89 % -1.13 % 110,808 0.14 37 0.0629 % 2,662.9
FloatingReset 2.42 % 2.78 % 80,666 6.30 8 0.2229 % 2,356.7
Performance Highlights
Issue Index Change Notes
BAM.PF.E FixedReset -2.10 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-03-27
Maturity Price : 22.66
Evaluated at bid price : 23.74
Bid-YTW : 3.66 %
TRP.PR.C FixedReset -2.00 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-03-27
Maturity Price : 16.64
Evaluated at bid price : 16.64
Bid-YTW : 3.49 %
ENB.PR.H FixedReset -1.89 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-03-27
Maturity Price : 18.20
Evaluated at bid price : 18.20
Bid-YTW : 4.23 %
ENB.PR.F FixedReset -1.52 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-03-27
Maturity Price : 19.50
Evaluated at bid price : 19.50
Bid-YTW : 4.35 %
MFC.PR.M FixedReset -1.24 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.65
Bid-YTW : 3.69 %
BAM.PR.R FixedReset -1.23 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-03-27
Maturity Price : 20.95
Evaluated at bid price : 20.95
Bid-YTW : 3.79 %
MFC.PR.I FixedReset -1.07 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-09-19
Maturity Price : 25.00
Evaluated at bid price : 25.77
Bid-YTW : 3.15 %
CU.PR.C FixedReset 1.07 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-03-27
Maturity Price : 23.37
Evaluated at bid price : 24.56
Bid-YTW : 3.19 %
CIU.PR.C FixedReset 1.14 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-03-27
Maturity Price : 17.70
Evaluated at bid price : 17.70
Bid-YTW : 3.09 %
Volume Highlights
Issue Index Shares
Traded		 Notes
MFC.PR.N FixedReset 93,275 Desjardins crossed 26,800 at 24.64. Scotia crossed 40,000 at the same price and bought 15,100 from RBC at 24.60.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.64
Bid-YTW : 3.64 %
TRP.PR.D FixedReset 76,905 Nesbitt crossed 66,900 at 24.10.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-03-27
Maturity Price : 22.80
Evaluated at bid price : 23.90
Bid-YTW : 3.33 %
BNS.PR.Y FixedReset 63,080 RBC crossed 40,300 at 22.16.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.17
Bid-YTW : 3.66 %
RY.PR.D Deemed-Retractible 50,650 Nesbitt crossed 50,000 at 25.59.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-04-26
Maturity Price : 25.25
Evaluated at bid price : 25.53
Bid-YTW : -4.35 %
RY.PR.J FixedReset 42,220 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-03-27
Maturity Price : 23.15
Evaluated at bid price : 25.01
Bid-YTW : 3.39 %
TRP.PR.E FixedReset 40,392 Desjardins crossed 25,000 at 24.60.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-03-27
Maturity Price : 22.98
Evaluated at bid price : 24.41
Bid-YTW : 3.28 %
There were 31 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
TRP.PR.F FloatingReset Quote: 19.35 – 22.00
Spot Rate : 2.6500
Average : 1.4486

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-03-27
Maturity Price : 19.35
Evaluated at bid price : 19.35
Bid-YTW : 3.10 %
BAM.PF.E FixedReset Quote: 23.74 – 24.35
Spot Rate : 0.6100
Average : 0.3693

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-03-27
Maturity Price : 22.66
Evaluated at bid price : 23.74
Bid-YTW : 3.66 %
CGI.PR.D SplitShare Quote: 25.30 – 26.10
Spot Rate : 0.8000
Average : 0.6403

YTW SCENARIO
Maturity Type : Soft Maturity
Maturity Date : 2023-06-14
Maturity Price : 25.00
Evaluated at bid price : 25.30
Bid-YTW : 3.61 %
SLF.PR.I FixedReset Quote: 25.36 – 25.74
Spot Rate : 0.3800
Average : 0.2607

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-12-31
Maturity Price : 25.00
Evaluated at bid price : 25.36
Bid-YTW : 3.38 %
ENB.PR.F FixedReset Quote: 19.50 – 19.89
Spot Rate : 0.3900
Average : 0.2729

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-03-27
Maturity Price : 19.50
Evaluated at bid price : 19.50
Bid-YTW : 4.35 %
RY.PR.K FloatingReset Quote: 24.17 – 24.45
Spot Rate : 0.2800
Average : 0.1800

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.17
Bid-YTW : 2.93 %