Issue Comments

RON.PR.A: Lowe's Offers $20 As Part Of Takeover

Lowe’s Companies, Inc. and RONA Inc. have announced:

that they have entered into a definitive agreement under which Lowe’s is expected to acquire all of the issued and outstanding common shares of RONA for C$24 per share in cash, and all of the issued and outstanding preferred shares of RONA for C$20 per share in cash. The total transaction value is C$3.2 billion (US$2.3 billion) (the “Transaction”). The offer represents a premium of 104 percent to RONA’s closing common share price on February 2, 2016 and a 38 percent premium to RONA’s 52-week high of C$17.36. Together, Lowe’s Canada and RONA stores will create Canada’s leading home improvement retailer with 2015 pro forma revenues from Canadian operations of approximately C$5.6 billion. Excluding transaction and integration costs, we anticipate the Transaction will be accretive to Lowe’s earnings in the first year following the close of the acquisition.

The Transaction has been unanimously approved by the Boards of Directors of Lowe’s and RONA and is supported by the management teams of both companies. The Transaction is expected to proceed by way of a plan of arrangement by which Lowe’s would acquire all of the outstanding shares of RONA, subject to RONA common shareholder approval and satisfaction of customary conditions, including the receipt of all necessary regulatory approvals. The RONA Board has received an opinion from Scotia Capital Inc. that the consideration to be received by RONA’s common and preferred shareholders pursuant to the Transaction is fair, from a financial point of view.

The RONA Board will recommend that RONA shareholders vote in favor of the plan of arrangement at a special meeting of shareholders expected to be held before the end of the first quarter of 2016. Further information regarding the Transaction will be included in RONA’s information circular to be mailed to RONA shareholders in advance of the special meeting. The arrangement agreement provides that RONA is subject to customary non-solicitation provisions.

$20 is quite the premium over yesterday’s closing quote of 12.41-05!

The consensus is that the deal will succeed – f’rinstance, Frederic Tomesco of Bloomberg:

The fact both boards agreed to the C$3.2 billion ($2.3 billion) offer, along with Lowe’s commitment to preserve head-office jobs and maintain supply agreements, will likely seal the deal. Political conditions in Canada’s second-most populous province also favor the acquisition after helping to scupper a hostile offer in 2012.

Rona’s biggest shareholder, the provincial pension fund manager Caisse de Dépôt et Placement du Québec, said Wednesday it would tender its shares to the offer. Quebec’s new economy minister indicated the government probably wouldn’t stand in the way of a deal.

“If three of the groups that were against Lowe’s last time — the board, the government and the Caisse — are saying it’s a good idea, it would be hard to see it not get the green light,” Karl Moore, a management professor at McGill University’s Desautels Faculty of Management in Montreal, said in a telephone interview. “There’ll be some squawking for sure, but that’s predictable. The opposition has to be against this deal in principle.”

Matthew Townsend and Scott Deveau of Bloomberg point out that the plunging loonie helped a lot:

The Canadian dollar’s loss is Lowe’s gain.

After being rebuffed in its attempt to buy Quebec-based retailer Rona Inc. in 2012, Lowe’s Cos. reached agreement on Wednesday to buy it for C$3.2 billion ($2.3 billion). Two big changes in the past four years made the transaction possible: The Parti Quebecois, which opposed the original deal, is out of power, and the loonie fell to its lowest level against the dollar in more than a decade.
…
Lowe’s withdrew the $1.8 billion unsolicited bid for Rona in 2012 after the board and some Quebec politicians opposed the offer, concerned about a loss of jobs and local control in the French-speaking province. The withdrawal came just 12 days after the separatist Parti Quebecois won elections.

Since then, the Liberals have taken power in Quebec, and the loonie has dropped to 72 cents versus the U.S. dollar, compared with parity when Lowe’s pulled its bid, making it cheaper for Lowe’s to offer a richer premium. So while the C$24 a share bid in Canadian dollar terms is about 65 percent higher than the C$14.50 a share bid that was rejected, in U.S. dollar terms the offer is just 16 percent higher.

CADUSD
Click for Big

… and Bloomberg’s Brooke Sutherland suggests it’s all about footprint:

Focusing on Canada may be a distraction, but it’s a distraction that could pay off for Lowe’s. While the home-improvement company has benefited from a rebounding real estate market, the maturing U.S. retail landscape and the rise of online shopping puts a cap on the growth opportunities for big-box vendors. Many are shuttering stores, or at least slowing down expansion.

Lowe’s, for example, had 1,793 U.S. locations as of January 2015 — a gain of about 76 from a year earlier, much of which could be explained by the acquisition of Orchard Supply Hardware. The way to keep growing its store base is to make more acquisitions and push harder into adjacent markets such as Canada, where Home Depot currently has almost five times as many locations as Lowe’s. With Canada’s home improvement industry valued at C$45 billion, Lowe’s can’t really afford to sit on the sidelines.

feetPrints
Click for Big

John Heinzl was kind enough to quote me when discussing the preferred share part of the deal:

Rona Inc.’s battered preferred-share investors may not be getting as fat a premium as common shareholders in the $3.2-billion takeover by Lowe’s Cos. Inc., but they should be thrilled with what they’re being offered, money managers say.

As part of the deal, the U.S. home-improvements chain is offering $20 for each Class A rate-reset preferred share of Quebec-based Rona. The offer, which is based on a fairness opinion from Scotia Capital, represents a 59-per-cent premium to the closing price of Rona’s preferred shares before the deal was announced.
…
Some Rona preferred shareholders said it’s possible Lowe’s might make a higher offer for the preferreds. “Perhaps they could be persuaded to offer more money. Perhaps. I’m not banking on it but not discounting it either,” said Benj Gallander, co-editor of Contra the Heard Investment Letter. “These are early days.”

Don’t hold your breath, said preferred-share fund manager James Hymas, president of Hymas Investment Management. Rona’s preferred shareholders don’t have the leverage to squeeze more money out of Lowe’s, he said.

“They can always try, but I don’t know how far they’ll get,” said Mr. Hymas, who does not own Rona’s preferred shares.
…
After all the suffering Rona’s preferred investors have endured, they should be happy that Lowe’s is willing to take them out at $20, Mr. Hymas said.

“You don’t want to kill the goose that lays the golden egg,” he said. “They’re not going to sweeten that deal. There is no reason to.”

I base this view on the fact that during the conference call the following statements were made:

what’s important to understand that a positive vote from the pref holders is not a condition precedent to the closing of the transaction.
…
If you don’t have a majority acceptance from the prefs, does RONA continue to report its financial results? … Yes. So the entity would need to continue to report as a public listed entity. Yes.

So a negative vote from RONA preferred shareholders will mean just that the shares will continue to be outstanding. Since RON.PR.A is a FixedReset, 5.25%+265, that commenced trading 2011-2-22 after being announced 2011-2-1, it has a relatively low reset. Absurdly low for junk, albeit more reasonable for investment grade. Investment-grade issues with comparable resets are:

  • MFC.PR.J, +261, bid at 17.89
  • RY.PR.M, +262, bid at 18.45
  • TD.PF.D, +279, bid at 19.00
  • SLF.PR.I, +273, bid at 17.45
  • BAM.PF.B, +263, bid at 16.46
  • BMO.PR.Y, +271, bid at 19.35

So it’s a decent premium over fair value even given an upgrade in credit quality. I’ll suggest that Lowe’s takes the view that they’re willing to give that premium to the preferred shareholders if they’re co-operative, or give it to the lawyers, bookkeepers, auditors and accountants if that’s what the preferred shareholders decide they want. Since the takeover deal is not conditional on preferred shareholder approval they’ve got no reason to pay an extortionate premium for the prefs.

And yes, the credit quality will almost certainly go up if the deal is approved. DBRS confirmed Lowe’s at A(low):

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Unsecured Debt rating of Lowe’s Companies, Inc. (Lowe’s or the Company) at A (low) as well as its Short-Term Rating at R-1 (low), all with Stable trends. This action follows the Company’s announcement that it has entered into a definitive agreement under which Lowe’s is expected to acquire all issued and outstanding common shares of RONA inc. (RONA) for CAD 24 per share in cash and all issued and outstanding preferred shares of RONA for CAD 20 per share in cash. The total transaction value including the assumption of RONA’s debt is CAD 3.2 billion ($2.3 billion; the Transaction or Acquisition).
…
Despite the risks associated with the effective integration of RONA, DBRS believes that the relatively modest magnitude of the Transaction and the temporary increase in financial leverage keep Lowe’s credit risk profile in a range acceptable for the current rating category. Should Lowe’s be challenged to maintain credit metrics in a range acceptable for the current A (low) rating because of weaker-than-expected consolidated operating performance or more aggressive-than-expected financial management (i.e., slower deleveraging), the current ratings could be pressured.

…. while putting RONA on Review-Positive:

DBRS Limited (DBRS) has today placed the ratings of RONA inc. (RONA or the Company) Under Review with Positive Implications following the Company’s announcement that it has entered into a definitive agreement under which RONA will be acquired by Lowe’s Companies, Inc. (Lowe’s; please see separate DBRS press release) for a total transaction value of $3.2 billion (the Transaction). The total transaction value comprises Lowe’s offer to acquire RONA’s issued and outstanding common shares for $24 per share in cash as well as its issued and outstanding preferred shares for $20 per share, plus RONA’s outstanding debt.
…
Rona’s Under Review – Positive Implications status reflects Lowe’s current ratings (A (low) and R-1 (low) as rated by DBRS), the intention to purchase RONA’s outstanding preferred shares and the assumption of RONA’s outstanding senior unsecured debt. As of September 27, 2015, RONA had approximately $313 million of senior unsecured debt outstanding, consisting of $116 million of senior unsecured debentures and $197 million drawn on its revolving credit facility (maximum limit of $700 million). DBRS notes that the Company’s senior unsecured debentures will mature in October 2016.

S&P has also taken a positive view regarding RONA’s ratings:

  • •Home improvement retailers Lowe’s Cos. Inc. and RONA Inc. announced today that they have entered into a definitive agreement under which Lowe’s is expected to acquire RONA for about C$3.2 billion
  • •As a result, we are placing our ratings on RONA Inc., including our ‘BB+ long-term corporate credit rating on the company, on CreditWatch with positive implications.
  • •We intend to resolve the CreditWatch placement on the acquisition’s closing, which we expect by the third quarter of 2016. At that time, we would likely equalize our long-term corporate credit rating on RONA with that on Lowe’s.

…
The CreditWatch placement follows Lowe’s Cos. Inc.’s and RONA Inc.’s announcement that they have entered into a definitive agreement under which Lowe’s is expected to acquire RONA for about C$3.2 billion. As part of the transaction, we expect Lowe’s to purchase all of the issued and outstanding preferred shares of RONA for C$20 per share in cash and assume its C$116.6 million of unsecured notes that mature in 2016.

“The positive CreditWatch placement reflects our view of the potential uplift for RONA creditors from the possible acquisition of the company by the higher-rated Lowe’s,” said Standard & Poor’s credit analyst Alessio Di Francesco.

So, assuming the common shareholders vote in favour of the deal, holders of RON.PR.A will wind up in one of two positions:

  • Owning a perfectly normal investment-grade preferred share trading somewhere around $17-$19, or
  • Getting $20 cash.

I’d rather take the cash and deploy it into something else! However, a formal recommendation will have to await receipt of the management information circular.

At today’s closing bid of 19.95, RON.PR.A yields 4.22% to perpetuity.

Update, 2016-3-3: RONA has filed the Management Proxy Circular with respect to the two offers.

Issue Comments

REI.PR.A To Be Redeemed

RioCan Real Estate Investment Trust has announced:

that it will exercise its right to redeem all of its 5 million outstanding Cumulative Rate Reset Preferred Trust Units, Series A (the “Series A Units”) on March 31, 2016 at the cash redemption price of $25.00 per Series A Unit, for total redemption proceeds of $125 million.

The regular quarterly distribution will be paid in the usual manner on March 31, 2016 to unitholders of record on March 31, 2016.

From and after March 31, 2016, the Series A Units will cease to be entitled to distributions and the only remaining rights of holders of such units will be to receive payment of the cash redemption price.

Beneficial holders who are not directly the registered holder of Series A Units should contact the financial institution, broker or other intermediary through which they hold these units to confirm how they will receive their redemption proceeds. Instructions with respect to receipt of the redemption amount will be set out in the redemption notice to be mailed to the registered holder of the Series A Units shortly. Inquiries should be directed to our Registrar and Transfer Agent, CST Trust Company, at 1-800-387-0825 (or in Toronto 416-682-3860).

REI.PR.A is a FixedReset, 5.25%+262, which commenced trading 2011-1-26 after being announced 2011-1-17.

This redemption is really, really weird. A spread over Canadas of +262bp is not really considered all that much nowadays, not for a junk-rated company when investment-grade issuers are paying close to +500 for new money. I will also point out the following from their 15Q3 Report:

As at September 30, 2015, the weighted average contractual interest rate of RioCan’s debt portfolio is 3.87% (4.12% as at December 31, 2014), a decrease of 27 basis points from the weighted average contractual rate of 4.14% as at September 30, 2014.

So extending this issue would have continued to decrease their average funding cost and at the same time would be permanent capital. Against that, the estimated reset rate of 3.20% is probably a little more than they’re paying at the moment, there is – by definition – recourse to the company, and the rate will be reset in five years just like a regular mortgage. Referring to the 15Q3 Report again for the word “recourse”, we find:

As at September 30, 2015, the Trust’s mortgages payable and drawn lines of credit, was $4.7 billion ($4.6 billion as at December 31, 2014). The vast majority of the Trust’s Canadian mortgage indebtedness provides recourse to the assets of the Trust, as opposed to only having recourse to the specific property charged. RioCan follows this policy as it generally results in lower interest costs than would otherwise be obtained. In the United States, mortgage debt is generally non-recourse financing, with no U.S. secured debt having recourse to the assets of the Canadian operations of the Trust.

We also look back to their 11Q1 Report to see what they had to say about their issue of preferred units:

RioCan was the first Canadian real estate investment trust to issue preferred units, indicative of the Trust moving closer to its objective of becoming “best in class” from a capital markets perspective. The ability to issue preferred units allows RioCan greater flexibility in accessing capital markets and developing a desired capital structure.

RioCan is relatively unscathed by the Sears withdrawal:

Still, RioCan Real Estate Investment Trust, which was Target’s largest landlord, has so far been unscathed by Sears’s latest move to exit more stores. While Sears is leaving a home store in a RioCan-owned mall in British Columbia, the retailer has a deal to sublet the space to Leon’s Furniture Ltd., said Edward Sonshine, CEO of RioCan, which has five other Sears home stores and two of its full-line stores.

Even so, RioCan is already looking for an alternative tenant for one of its other Sears home stores because its lease expires in about a year and “we assume they won’t be renewing,” he said.

However, they recently sold their US portfolio:

RioCan Real Estate Investment Trust is ending its six-year foray into the U.S. with a deal to sell its 49 shopping centers in the country to Blackstone Group LP for $1.9 billion.

The sale to the Blackstone Real Estate Partners VIII fund will provide capital for RioCan’s recently announced acquisition of 23 properties from Kimco Realty Corp. and to cut debt, Canada’s largest retail landlord said in a statement Friday. The U.S. shopping centers are located in the Northeast and Texas.
…
RioCan entered the U.S. market following the financial crisis, purchasing grocery-anchored retail sites at a discount. In July, when the company announced its strategic review of the properties, Sonshine said a weakening Canadian dollar made it costly to expand in the U.S. and RioCan was looking to get more value from the assets.

The total price RioCan paid for the 49 retail sites was C$1.7 billion. The sale at C$2.7 billion, 59 percent more, will provide an internal rate of return of about 16 percent, according to the statement. The Canadian dollar has dropped about 25 percent in the past six years to about 71 cents per U.S. dollar, giving RioCan a sizable currency gain on its investment. The sale is expected to be completed on April 30.

So, I can’t really figure this one out. The best I can come up with is the idea that they don’t really see many new investment opportunities in Canada at the moment and assume that those that do come up can be financed with good old Canadian non-recourse, cut-rate mortgages.

But the price action on the day for the issue was pretty interesting:

REIPRA_160202
Click for Big

You don’t see intra-day changes of 50%+ very often!

REI.PR.C was also up on the day, +12.8% to close at 21.15, presumably on speculation that the same thing will happen to it when its Exchange Date comes on 2017-6-30. It resets at +318, so it’s easy to follow the reasoning!

Update, 2016-2-11: Barry Critchley of the Financial Post has written a piece titled Behind RioCan’s decision to redeem its first-of-its-kind rate reset preferreds. In addition to the sale of the US portfolio noted above, there is the fact that the ratings agencies are not giving any equity credit to preferreds issued by REITS and:

2.The refinancing rate of 262 basis points is not that attractive. “Both of those spreads [on the new fixed and floating rate preferreds] are higher than spreads we can borrow at,” she said. Aside from its operating lines [which are priced at “125 basis points over” the U.S. or Canadian prime rate] RioCan can borrow five-year money on an unsecured basis about 50 basis points lower than the 262 basis points it would be required to pay if it extended the maturing preferreds.

Well, sure, but it’s still not all that convincing. The preferreds are not five-year money; they’re permanent money priced at a spread over five-years. So Cynthia Devine, RioCan’s chief financial officer, is saying she’s not willing to pay a 50bp term premium for this money, and:

“We will have a lot of proceeds and we have made it clear that one of the primary uses is to pay down debt. This is easy to execute because it’s coming due in March,” she said.

… which doesn’t sound like a very good reason to me. At the very least, I would have been sorely tempted to have extended the issue and put in a big Normal Course Issuer Bid; perhaps preceded by a tender offer; or even with a distribution of ‘put rights’ (by which I mean rights distributed to common shareholders that would allow X rights and 1 share of REI.PR.A to be sold to the company for Y dollars).

Ms. Devine may have had very good reasons for doing what she did. But she left a lot of money on the table and that’s not what CFOs are supposed to do.

Update, 2016-2-22: Barry Critchley has written a follow-up piece titled Two tales of preferred redemption, Rona and RioCan REIT, in which Cynthia Devine offers up a new rationale for her decision to redeem:

On Friday, Devine said RioCan “did look at that [a tender offer below $25] but there was a chance that not all of them would be taken out of circulation. Some [investors] may not tender so you have a series outstanding.”

Well, I don’t want to get too vituperative here, because this is only a quote in the press … there may be considerably more nuance and rationale behind this statement than was published.

But the excuse doesn’t cut any ice. The shares closed at $16.00 the day before the announcement, and there are 5-million of them outstanding; so Ms. Devine’s decision awarded windfall gains of $45-million to the holders of the preferred shares.

So the first question is: how did the cost-benefit work? A tender at $20 would – I feel quite certain – have captured all but a handful of the shares, given the preferred shareholders a windfall gain of $20-million and given the ordinary unitholders a gain of $25-million. So, maybe the series would have remained outstanding. What’s the cost of that, compared to $25-million in hand?

And the second question is: if it was deemed absolutely necessary to eliminate the series completely (which requires rather a leap of the imagination), why wasn’t another method tried? A Plan of Arrangement would serve the purpose nicely – just get the preferred shareholders to vote on whether to eliminate the series at $20 / share. Dissenters might get right of dissent, but it is very difficult to see any judge awarding them more than $20, when the prior market value was $16.

The fact of the matter is that any rational holder of the preferred shares would be very happy to have gotten $20 (which could be redeployed into comparables) and this would have given the ordinary unitholders a quick gain of $25-million. This is not an insignificant number: RioCan’s profit for all of 2015 was $142-million. Ms. Devine had the opportunity to realize one-sixth of that, while leaving the preferred shareholders very happy … and chose not to do so.

Issue Comments

BNS.PR.F Listed: Minimal Trading

BNS.PR.F is a FloatingReset, Bills+134bp, resulting from the 32% conversion from BNS.PR.Z, which has reset at 2.063%. The issue will be tracked by HIMIPref™ and has been assigned to the FloatingReset subindex. The two issues constitute a Strong Pair.

The issue traded 200 shares today in a range of 18.20-51 and closed at 17.72-20, 1×1.

Vital statistics are:

BNS.PR.F FloatingReset YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 17.72
Bid-YTW : 8.03 %
Market Action

February 2, 2016

There’s an interesting use of the psychology of dissent from Bridgewater hedge fund:

Along with modeling openness to criticism, [Bridgewater’s founder Ray] Dalio has fought groupthink by refusing to make decisions based on hierarchy. Rather than conducting a vote where the majority rules, or deferring to people with the most seniority or status, he strives to create an idea meritocracy where all perspectives are heard and the best argument wins.

To do that, most leaders assign a devil’s advocate. The hope is to get someone to challenge the majority’s opinion. But according to [Berkeley psychologist Charlan] Nemeth’s research and Bridgewater’s example, we’re doing it wrong.

When people are designated to dissent, they’re just playing a role. This causes two problems: They don’t argue forcefully or consistently enough for the minority viewpoint, and group members are less likely to take them seriously.

“Dissenting for the sake of dissenting is not useful. It is also not useful if it is ‘pretend dissent’ — for example, if role-played,” Nemeth explains. “It is not useful if motivated by considerations other than searching for the truth or the best solutions. But when it is authentic, it stimulates thought; it clarifies and it emboldens.”

The secret to success is sincerity, the old saying goes: Once you can fake that, you’ve got it made. In fact, it’s not easy to fake sincerity. For devil’s advocates to be maximally effective, they need to really believe in the position they’re representing — and the group needs to believe that they believe it, too.

Bond yields plummeted today:

The U.S. 10-year note yield fell one basis point as of 10:54 a.m. in Tokyo, after tumbling 10 basis points Tuesday, according to Bloomberg Bond Trader data. The price of the 2.25 percent security due in November 2025 rose 1/8, or $1.25 per $1,000 face value, to 103 23/32. The last time the yield approached the record low was in January 2015 when it dropped to 1.64 percent.

Japan’s five-year yield declined to a record low of negative 0.12 percent.

Crude oil declined to a 12-year low in January, and the MSCI All Country World Index of shares has fallen more than 7 percent this year. The odds of the Fed following its December rate increase with another in 2016 are less than 50 percent, futures contracts indicate.

Gluskin Sheff + Associates Inc.’s chief economist David Rosenberg has an interesting take on depressed markets:

Those who claim that “break-even” price levels on Middle East oil production are in single digits are only looking at covering direct production costs and are ignoring the fiscal break-even levels. As per the International Monetary Fund, the fiscal break-even oil price for Saudi Arabia is nearly $96 a barrel (hence the government seeing a 20-per-cent deficit-to-GDP ratio); $68 a barrel for the United Arab Emirates (deficit of 4 per cent of GDP); and $58 a barrel for Qatar (budget gap of 1.5 per cent of GDP).

According to estimates I have seen, as of the end of 2015, 56 per cent of the assets that sovereign wealth funds had amassed came from the oil and gas related projects and up to 10 per cent of the total money invested was in global markets.

What has happened is that many governments, especially in the Gulf region (as well as Africa and Asia), have been compelled to draw down these reserves to cover their gaping fiscal deficits.

I am seeing figures that reveal that the Saudi Arabian Monetary Agency (the kingdom’s investment arm) has withdrawn something in the order of $70-billion from external managers in just the past six months to meet its social spending requirements.

The Fed’s new stress test will doubtless cause some excited comment:

In its annual stress test for 2016, the Fed said it will assess the resilience of big banks to a number of possible situations, including one where the rate on the three-month U.S. Treasury bill stays below zero for a prolonged period.

“The severely adverse scenario is characterized by a severe global recession, accompanied by a period of heightened corporate financial stress and negative yields for short-term U.S. Treasury securities,” the central bank said in announcing the stress tests last week.

In that particular simulation, the unemployment rate doubles to 10 percent, the same level it reached in the aftermath of the last financial crisis.

Three-month bill rates have slipped slightly below zero several times in recent years, including in September after the Fed delayed rate liftoff amid global financial market turmoil, touching a low of minus 0.05 percent on Oct. 2.

But in the stress test, banks would have to handle three-month bill rates entering negative territory in the second quarter of 2016, and then falling to negative 0.5 percent and holding there through the first quarter of 2019.

And just so you don’t think I’ve forgotten about them, here’s some drone news:

Dutch police are working with a company called Guard From Above that claims to be “the first company in the world to use birds of prey to intercept hostile drones.”
…
COO and company co-founder Ben de Keijzer said that two of the most impressive characteristics of birds of prey are their speed and their power, both of which come in pretty handy when you’re knocking somebody’s Christmas toy – or a hostile attacker’s weapon – out the sky.

They are “the masters of the air,” he said, which would sound like marketing fluff speak if the video didn’t in fact show birds snapping up UAVs like so many plump chickens.

It’s an interesting idea – and the video embedded in the source is impressive – but surely it’s just a matter of time before an anti-drone drone is developed. I foresee the day when the Bad Guys send in fleets of bombers … the authorities deploy fleets of fighters to attack them … the Bad Guys deploy fighters to protect the bombers … it will be the Battle of Britain all over again!

And it was January all over again in the Canadian preferred share market, with PerpetualDiscounts off 5bp, FixedResets losing 67bp and DeemedRetractibles down 11bp. The Performance Highlights table shows a lot of churn. Volume was very low.

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_160202
Click for Big

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 17.05 to be $0.96 rich, while TRP.PR.C, resetting 2021-1-30 at +154, is $0.76 cheap at its bid price of 11.10.

impVol_MFC_160202
Click for Big

Most expensive is MFC.PR.N, resetting at +230bp on 2020-3-19, bid at 17.78 to be 1.13 rich, while MFC.PR.G, resetting at +290bp on 2016-12-19, is bid at 17.75 to be 1.15 cheap.

impVol_BAM_160202
Click for Big

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 13.41 to be $1.75 cheap. BAM.PF.E, resetting at +255bp on 2020-3-31 is bid at 17.46 and appears to be $0.99 rich.

impVol_FTS_160202
Click for Big

FTS.PR.K, with a spread of +205bp, and bid at 16.16, looks $0.36 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 15.75 and is $0.45 cheap.

pairs_FR_160202
Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -1.06%, with two outliers below -2.00% and one above 0.00%. There are three junk outliers above 0.00%.

pairs_FF_160202
Click for Big

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 5.29 % 6.43 % 18,792 16.16 1 0.0782 % 1,474.7
FixedFloater 7.66 % 6.69 % 28,958 15.57 1 -1.5873 % 2,595.0
Floater 4.69 % 4.90 % 75,814 15.66 4 -0.7632 % 1,635.3
OpRet 0.00 % 0.00 % 0 0.00 0 0.0069 % 2,700.8
SplitShare 4.89 % 6.30 % 81,252 2.71 6 0.0069 % 3,160.5
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0069 % 2,465.9
Perpetual-Premium 5.86 % 5.86 % 82,558 14.00 6 0.1403 % 2,517.6
Perpetual-Discount 5.80 % 5.84 % 99,234 14.11 33 -0.0487 % 2,487.0
FixedReset 5.49 % 4.97 % 224,497 14.50 84 -0.6746 % 1,836.6
Deemed-Retractible 5.27 % 5.67 % 130,702 6.95 34 -0.1110 % 2,564.1
FloatingReset 3.13 % 4.82 % 56,797 5.56 15 -0.1057 % 1,990.5
Performance Highlights
Issue Index Change Notes
FTS.PR.H FixedReset -4.55 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-02-02
Maturity Price : 12.60
Evaluated at bid price : 12.60
Bid-YTW : 4.47 %
SLF.PR.H FixedReset -3.62 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 14.10
Bid-YTW : 10.70 %
IAG.PR.G FixedReset -3.54 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 18.25
Bid-YTW : 8.04 %
MFC.PR.K FixedReset -3.08 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 16.03
Bid-YTW : 9.31 %
CM.PR.P FixedReset -2.79 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-02-02
Maturity Price : 16.70
Evaluated at bid price : 16.70
Bid-YTW : 4.68 %
FTS.PR.I FloatingReset -2.76 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-02-02
Maturity Price : 10.20
Evaluated at bid price : 10.20
Bid-YTW : 4.72 %
IFC.PR.A FixedReset -2.55 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 14.14
Bid-YTW : 10.59 %
BAM.PR.K Floater -2.50 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-02-02
Maturity Price : 9.75
Evaluated at bid price : 9.75
Bid-YTW : 4.90 %
HSE.PR.A FixedReset -2.30 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-02-02
Maturity Price : 8.50
Evaluated at bid price : 8.50
Bid-YTW : 7.21 %
BNS.PR.B FloatingReset -2.23 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.03
Bid-YTW : 5.21 %
CM.PR.Q FixedReset -2.21 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-02-02
Maturity Price : 18.60
Evaluated at bid price : 18.60
Bid-YTW : 4.74 %
FTS.PR.F Perpetual-Discount -2.17 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-02-02
Maturity Price : 21.37
Evaluated at bid price : 21.64
Bid-YTW : 5.75 %
SLF.PR.G FixedReset -2.15 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 12.75
Bid-YTW : 10.97 %
FTS.PR.M FixedReset -2.14 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-02-02
Maturity Price : 17.87
Evaluated at bid price : 17.87
Bid-YTW : 4.78 %
PWF.PR.P FixedReset -2.12 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-02-02
Maturity Price : 12.00
Evaluated at bid price : 12.00
Bid-YTW : 4.80 %
TRP.PR.G FixedReset -2.09 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-02-02
Maturity Price : 18.26
Evaluated at bid price : 18.26
Bid-YTW : 5.13 %
FTS.PR.J Perpetual-Discount -2.06 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-02-02
Maturity Price : 20.89
Evaluated at bid price : 20.89
Bid-YTW : 5.79 %
RY.PR.P Perpetual-Discount -2.02 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-02-02
Maturity Price : 23.49
Evaluated at bid price : 23.81
Bid-YTW : 5.51 %
TRP.PR.A FixedReset -1.95 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-02-02
Maturity Price : 14.10
Evaluated at bid price : 14.10
Bid-YTW : 4.93 %
BAM.PR.B Floater -1.62 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-02-02
Maturity Price : 9.73
Evaluated at bid price : 9.73
Bid-YTW : 4.91 %
BAM.PR.G FixedFloater -1.59 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-02-02
Maturity Price : 25.00
Evaluated at bid price : 12.40
Bid-YTW : 6.69 %
RY.PR.M FixedReset -1.58 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-02-02
Maturity Price : 18.11
Evaluated at bid price : 18.11
Bid-YTW : 4.67 %
BAM.PF.F FixedReset -1.52 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-02-02
Maturity Price : 18.80
Evaluated at bid price : 18.80
Bid-YTW : 5.03 %
BAM.PF.A FixedReset -1.50 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-02-02
Maturity Price : 18.36
Evaluated at bid price : 18.36
Bid-YTW : 5.13 %
TD.PR.S FixedReset -1.50 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.62
Bid-YTW : 3.81 %
RY.PR.I FixedReset -1.50 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.64
Bid-YTW : 4.10 %
PWF.PR.S Perpetual-Discount -1.43 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-02-02
Maturity Price : 20.70
Evaluated at bid price : 20.70
Bid-YTW : 5.84 %
BAM.PR.Z FixedReset -1.42 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-02-02
Maturity Price : 18.00
Evaluated at bid price : 18.00
Bid-YTW : 5.30 %
BNS.PR.A FloatingReset -1.36 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.44
Bid-YTW : 4.38 %
MFC.PR.J FixedReset -1.35 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 17.56
Bid-YTW : 8.38 %
RY.PR.K FloatingReset -1.29 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.47
Bid-YTW : 5.06 %
W.PR.K FixedReset -1.27 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-02-02
Maturity Price : 22.82
Evaluated at bid price : 24.10
Bid-YTW : 5.46 %
RY.PR.Z FixedReset -1.25 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-02-02
Maturity Price : 17.34
Evaluated at bid price : 17.34
Bid-YTW : 4.45 %
NA.PR.W FixedReset -1.21 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-02-02
Maturity Price : 16.30
Evaluated at bid price : 16.30
Bid-YTW : 4.84 %
IFC.PR.C FixedReset -1.20 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 16.40
Bid-YTW : 9.21 %
RY.PR.H FixedReset -1.20 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-02-02
Maturity Price : 17.32
Evaluated at bid price : 17.32
Bid-YTW : 4.51 %
IAG.PR.A Deemed-Retractible -1.20 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 20.65
Bid-YTW : 7.39 %
MFC.PR.C Deemed-Retractible -1.15 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 20.61
Bid-YTW : 7.32 %
CM.PR.O FixedReset -1.14 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-02-02
Maturity Price : 17.41
Evaluated at bid price : 17.41
Bid-YTW : 4.59 %
BAM.PR.R FixedReset -1.11 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-02-02
Maturity Price : 13.41
Evaluated at bid price : 13.41
Bid-YTW : 5.71 %
MFC.PR.I FixedReset -1.08 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 18.25
Bid-YTW : 8.14 %
TD.PF.B FixedReset -1.04 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-02-02
Maturity Price : 17.20
Evaluated at bid price : 17.20
Bid-YTW : 4.54 %
RY.PR.F Deemed-Retractible 1.05 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.10
Bid-YTW : 5.13 %
TRP.PR.H FloatingReset 1.09 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-02-02
Maturity Price : 9.30
Evaluated at bid price : 9.30
Bid-YTW : 4.70 %
BMO.PR.M FixedReset 1.18 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.05
Bid-YTW : 3.48 %
TRP.PR.D FixedReset 1.23 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-02-02
Maturity Price : 16.50
Evaluated at bid price : 16.50
Bid-YTW : 4.92 %
PWF.PR.L Perpetual-Discount 1.24 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-02-02
Maturity Price : 21.75
Evaluated at bid price : 22.00
Bid-YTW : 5.83 %
GWO.PR.P Deemed-Retractible 1.35 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.10
Bid-YTW : 6.03 %
PWF.PR.A Floater 1.65 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-02-02
Maturity Price : 11.08
Evaluated at bid price : 11.08
Bid-YTW : 4.26 %
TD.PF.E FixedReset 1.75 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-02-02
Maturity Price : 19.73
Evaluated at bid price : 19.73
Bid-YTW : 4.57 %
HSE.PR.G FixedReset 1.96 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-02-02
Maturity Price : 15.60
Evaluated at bid price : 15.60
Bid-YTW : 7.03 %
HSE.PR.E FixedReset 1.98 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-02-02
Maturity Price : 15.42
Evaluated at bid price : 15.42
Bid-YTW : 7.12 %
HSE.PR.C FixedReset 2.62 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-02-02
Maturity Price : 14.50
Evaluated at bid price : 14.50
Bid-YTW : 6.99 %
PWF.PR.Q FloatingReset 4.44 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-02-02
Maturity Price : 11.75
Evaluated at bid price : 11.75
Bid-YTW : 4.39 %
TRP.PR.I FloatingReset 11.11 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-02-02
Maturity Price : 10.00
Evaluated at bid price : 10.00
Bid-YTW : 5.01 %
Volume Highlights
Issue Index Shares
Traded		 Notes
RY.PR.Q FixedReset 110,167 RBC crossed 50,000 at 25.60. Scotia crossed 25,000 at the same price.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-02-02
Maturity Price : 23.31
Evaluated at bid price : 25.55
Bid-YTW : 5.13 %
BAM.PR.C Floater 99,915 Scotia crossed 92,000 at 9.80.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-02-02
Maturity Price : 9.75
Evaluated at bid price : 9.75
Bid-YTW : 4.90 %
NA.PR.X FixedReset 70,505 Recent new issue.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-02-02
Maturity Price : 23.13
Evaluated at bid price : 24.95
Bid-YTW : 5.55 %
BNS.PR.E FixedReset 68,429 RBC crossed 25,000 at 25.72. Desjardins crossed 18,500 at 25.59.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-02-02
Maturity Price : 23.34
Evaluated at bid price : 25.62
Bid-YTW : 5.10 %
SLF.PR.D Deemed-Retractible 43,666 Scotia crossed 40,000 at 20.30.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 20.35
Bid-YTW : 7.42 %
TD.PF.G FixedReset 38,311 Recent new issue.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2021-04-30
Maturity Price : 25.00
Evaluated at bid price : 25.61
Bid-YTW : 5.06 %
There were 15 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
MFC.PR.K FixedReset Quote: 16.03 – 16.59
Spot Rate : 0.5600
Average : 0.3572

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 16.03
Bid-YTW : 9.31 %
BNS.PR.B FloatingReset Quote: 21.03 – 21.80
Spot Rate : 0.7700
Average : 0.5949

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.03
Bid-YTW : 5.21 %
BNS.PR.A FloatingReset Quote: 22.44 – 22.99
Spot Rate : 0.5500
Average : 0.3835

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.44
Bid-YTW : 4.38 %
RY.PR.P Perpetual-Discount Quote: 23.81 – 24.40
Spot Rate : 0.5900
Average : 0.4313

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-02-02
Maturity Price : 23.49
Evaluated at bid price : 23.81
Bid-YTW : 5.51 %
BMO.PR.R FloatingReset Quote: 21.75 – 22.50
Spot Rate : 0.7500
Average : 0.5946

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.75
Bid-YTW : 4.53 %
SLF.PR.H FixedReset Quote: 14.10 – 14.75
Spot Rate : 0.6500
Average : 0.4946

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 14.10
Bid-YTW : 10.70 %
Market Action

February 1, 2016

Nothing happened today. But January’s finished with – that’s enough good news for one day!

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts gaining 9bp, FixedResets up 41bp and DeemedRetractibles off 16bp. The Performance Highlights table is published (I’ve run out of things to say over the past year!). Volume was extremely low.

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_160201
Click for Big

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 17.06 to be $0.87 rich, while TRP.PR.C, resetting 2021-1-30 at +154, is $0.80 cheap at its bid price of 11.15.

impVol_MFC_160201
Click for Big

Most expensive is MFC.PR.N, resetting at +230bp on 2020-3-19, bid at 17.79 to be 1.01 rich, while MFC.PR.G, resetting at +290bp on 2016-12-19, is bid at 17.80 to be 1.18 cheap.

impVol_BAM_160201
Click for Big

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 13.56 to be $1.76 cheap. BAM.PF.F, resetting at +286bp on 2019-9-30 is bid at 19.09 and appears to be $0.87 rich.

impVol_FTS_160201
Click for Big

FTS.PR.M, with a spread of +248bp, and bid at 18.26, looks $0.36 expensive and resets 2019-12-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 15.75 and is $0.68 cheap.

pairs_FR_160201
Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -1.24%, with one outlier below -2.00%. There are two junk outliers above 0.00%.

pairs_FF_160201
Click for Big

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 5.30 % 6.43 % 18,358 16.16 1 -0.0781 % 1,473.5
FixedFloater 7.54 % 6.59 % 27,452 15.71 1 0.0794 % 2,636.9
Floater 4.65 % 4.77 % 70,336 15.89 4 -0.1229 % 1,647.9
OpRet 0.00 % 0.00 % 0 0.00 0 0.1252 % 2,700.6
SplitShare 4.89 % 6.38 % 80,844 2.71 6 0.1252 % 3,160.2
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.1252 % 2,465.7
Perpetual-Premium 5.87 % 5.87 % 81,661 14.00 6 0.0334 % 2,514.1
Perpetual-Discount 5.79 % 5.85 % 100,080 14.09 33 0.0877 % 2,488.2
FixedReset 5.49 % 4.93 % 233,222 14.35 83 0.4073 % 1,849.1
Deemed-Retractible 5.26 % 5.61 % 132,652 5.23 34 -0.1624 % 2,566.9
FloatingReset 3.12 % 4.69 % 57,344 5.57 15 -1.1631 % 1,992.6
Performance Highlights
Issue Index Change Notes
HSE.PR.A FixedReset -2.25 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-02-01
Maturity Price : 8.70
Evaluated at bid price : 8.70
Bid-YTW : 7.04 %
GWO.PR.O FloatingReset -2.13 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 11.01
Bid-YTW : 12.22 %
BAM.PR.R FixedReset -2.02 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-02-01
Maturity Price : 13.56
Evaluated at bid price : 13.56
Bid-YTW : 5.65 %
FTS.PR.I FloatingReset -1.96 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-02-01
Maturity Price : 10.49
Evaluated at bid price : 10.49
Bid-YTW : 4.59 %
TD.PF.E FixedReset -1.82 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-02-01
Maturity Price : 19.39
Evaluated at bid price : 19.39
Bid-YTW : 4.65 %
FTS.PR.G FixedReset -1.56 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-02-01
Maturity Price : 15.75
Evaluated at bid price : 15.75
Bid-YTW : 4.79 %
TRP.PR.D FixedReset -1.45 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-02-01
Maturity Price : 16.30
Evaluated at bid price : 16.30
Bid-YTW : 4.99 %
TRP.PR.E FixedReset -1.39 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-02-01
Maturity Price : 17.06
Evaluated at bid price : 17.06
Bid-YTW : 4.84 %
BAM.PF.E FixedReset -1.36 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-02-01
Maturity Price : 17.46
Evaluated at bid price : 17.46
Bid-YTW : 5.08 %
SLF.PR.E Deemed-Retractible -1.29 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 20.60
Bid-YTW : 7.30 %
TRP.PR.F FloatingReset -1.20 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-02-01
Maturity Price : 11.57
Evaluated at bid price : 11.57
Bid-YTW : 5.18 %
HSE.PR.E FixedReset -1.18 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-02-01
Maturity Price : 15.12
Evaluated at bid price : 15.12
Bid-YTW : 7.26 %
BAM.PF.D Perpetual-Discount -1.11 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-02-01
Maturity Price : 19.53
Evaluated at bid price : 19.53
Bid-YTW : 6.36 %
SLF.PR.C Deemed-Retractible -1.11 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 20.58
Bid-YTW : 7.26 %
CIU.PR.C FixedReset 1.04 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-02-01
Maturity Price : 10.68
Evaluated at bid price : 10.68
Bid-YTW : 4.93 %
MFC.PR.I FixedReset 1.10 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 18.45
Bid-YTW : 7.98 %
MFC.PR.M FixedReset 1.12 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 18.00
Bid-YTW : 8.00 %
BMO.PR.M FixedReset 1.24 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.77
Bid-YTW : 3.69 %
BNS.PR.Q FixedReset 1.24 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.75
Bid-YTW : 3.93 %
MFC.PR.K FixedReset 1.29 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 16.54
Bid-YTW : 8.86 %
BMO.PR.Z Perpetual-Discount 1.32 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-02-01
Maturity Price : 22.64
Evaluated at bid price : 23.00
Bid-YTW : 5.43 %
FTS.PR.M FixedReset 1.39 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-02-01
Maturity Price : 18.26
Evaluated at bid price : 18.26
Bid-YTW : 4.68 %
BNS.PR.R FixedReset 1.48 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.95
Bid-YTW : 4.04 %
SLF.PR.I FixedReset 1.53 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 17.26
Bid-YTW : 8.61 %
BAM.PF.F FixedReset 1.54 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-02-01
Maturity Price : 19.09
Evaluated at bid price : 19.09
Bid-YTW : 4.95 %
RY.PR.K FloatingReset 1.64 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.75
Bid-YTW : 4.82 %
BNS.PR.B FloatingReset 1.65 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.51
Bid-YTW : 4.79 %
TRP.PR.H FloatingReset 1.66 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-02-01
Maturity Price : 9.20
Evaluated at bid price : 9.20
Bid-YTW : 4.75 %
BNS.PR.A FloatingReset 1.84 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.75
Bid-YTW : 4.13 %
IFC.PR.C FixedReset 1.84 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 16.60
Bid-YTW : 9.03 %
RY.PR.I FixedReset 1.91 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.00
Bid-YTW : 3.81 %
GWO.PR.N FixedReset 1.91 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 12.25
Bid-YTW : 11.37 %
MFC.PR.L FixedReset 2.05 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 16.95
Bid-YTW : 8.64 %
IFC.PR.A FixedReset 2.11 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 14.51
Bid-YTW : 10.21 %
BIP.PR.B FixedReset 2.17 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-02-01
Maturity Price : 22.57
Evaluated at bid price : 23.55
Bid-YTW : 5.89 %
IAG.PR.A Deemed-Retractible 2.30 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 20.90
Bid-YTW : 7.21 %
BNS.PR.P FixedReset 2.42 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.15
Bid-YTW : 3.62 %
FTS.PR.H FixedReset 2.72 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-02-01
Maturity Price : 13.20
Evaluated at bid price : 13.20
Bid-YTW : 4.26 %
PWF.PR.S Perpetual-Discount 2.74 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-02-01
Maturity Price : 21.00
Evaluated at bid price : 21.00
Bid-YTW : 5.76 %
MFC.PR.J FixedReset 3.19 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 17.80
Bid-YTW : 8.19 %
Volume Highlights
Issue Index Shares
Traded		 Notes
TD.PF.B FixedReset 118,733 Nesbitt crossed blocks of 40,000 and 70,000, both at 17.45.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-02-01
Maturity Price : 17.38
Evaluated at bid price : 17.38
Bid-YTW : 4.50 %
NA.PR.X FixedReset 98,953 Recent new issue.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-02-01
Maturity Price : 23.13
Evaluated at bid price : 24.96
Bid-YTW : 5.55 %
RY.PR.Q FixedReset 65,296 RBC crossed 25,000 at 25.75.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-02-01
Maturity Price : 23.34
Evaluated at bid price : 25.66
Bid-YTW : 5.10 %
BNS.PR.E FixedReset 48,206 RBC crossed 25,000 at 25.70. Desjardins crossed 10,000 at 25.72.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2021-04-25
Maturity Price : 25.00
Evaluated at bid price : 25.70
Bid-YTW : 5.07 %
BMO.PR.W FixedReset 37,655 Scotia crossed 25,300 at 16.86.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-02-01
Maturity Price : 16.91
Evaluated at bid price : 16.91
Bid-YTW : 4.56 %
BMO.PR.T FixedReset 30,823 Desjardins crossed 20,000 at 17.16.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-02-01
Maturity Price : 17.05
Evaluated at bid price : 17.05
Bid-YTW : 4.56 %
There were 11 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
GWO.PR.O FloatingReset Quote: 11.01 – 12.50
Spot Rate : 1.4900
Average : 1.1889

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 11.01
Bid-YTW : 12.22 %
RY.PR.K FloatingReset Quote: 21.75 – 22.58
Spot Rate : 0.8300
Average : 0.5717

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.75
Bid-YTW : 4.82 %
GWO.PR.N FixedReset Quote: 12.25 – 12.90
Spot Rate : 0.6500
Average : 0.4547

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 12.25
Bid-YTW : 11.37 %
TD.PF.E FixedReset Quote: 19.39 – 19.99
Spot Rate : 0.6000
Average : 0.4256

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-02-01
Maturity Price : 19.39
Evaluated at bid price : 19.39
Bid-YTW : 4.65 %
FTS.PR.K FixedReset Quote: 16.15 – 16.59
Spot Rate : 0.4400
Average : 0.2784

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-02-01
Maturity Price : 16.15
Evaluated at bid price : 16.15
Bid-YTW : 4.64 %
MFC.PR.J FixedReset Quote: 17.80 – 18.31
Spot Rate : 0.5100
Average : 0.3650

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 17.80
Bid-YTW : 8.19 %
Issue Comments

PWF.PR.Q Listed: No Trading, Wide Spread

PWF.PR.Q is a FloatingReset, Bills+160bp, resulting from the 20% conversion from PWF.PR.P, which has reset at 2.306%. The issue will be tracked by HIMIPref™ and has been assigned to the FloatingReset subindex. The two issues constitute a Strong Pair.

The issue traded no shares today and closed at 11.25-17.50 (!), 50×50.

Vital statistics are:

PWF.PR.Q FloatingReset YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-02-01
Maturity Price : 11.25
Evaluated at bid price : 11.25
Bid-YTW : 4.58 %
Issue Comments

TRP.PR.I Listed: No Trading, Wide Spread

TransCanada Corporation has announced:

that 1,285,739 of its 14,000,000 fixed rate Cumulative Redeemable First Preferred Shares, Series 5 (Series 5 Shares) were tendered for conversion today, on a one-for-one basis, into floating rate Cumulative Redeemable First Preferred Shares, Series 6 (Series 6 Shares). As a result of the conversion, TransCanada has 12,714,261 Series 5 Shares and 1,285,739 Series 6 Shares issued and outstanding. The Series 5 Shares will continue to be listed on the Toronto Stock Exchange (TSX) under the symbol TRP.PR.C. The Series 6 Shares will begin trading on the TSX today under the symbol TRP.PR.I.

The Series 5 Shares will continue to pay on a quarterly basis, for the five-year period beginning on January 30, 2016, as and when declared by the Board of Directors of TransCanada, a fixed dividend at an annualized rate of 2.263 per cent.

The Series 6 Shares will pay a floating rate quarterly dividend for the five-year period beginning on February 1, 2016, as and when declared by the Board of Directors of TransCanada. The dividend rate for the Series 6 Shares for the first quarterly floating rate period commencing February 1, 2016 to, but excluding April 30, 2016, is 2.037 per cent and will be reset every quarter.

For more information on the terms of, and risks associated with an investment in, the Series 5 Shares and the Series 6 Shares, please see the Corporation’s prospectus supplement dated June 17, 2010 which can be found under the Corporation’s profile on SEDAR at www.sedar.com.

TRP.PR.I is a FloatingReset, Bills+154bp, resulting from the 9% conversion from TRP.PR.C, which has reset at 2.263%. The issue will be tracked by HIMIPref™ and has been assigned to the FloatingReset subindex. The two issues constitute a Strong Pair.

The issue traded no shares today and closed at 9.00-17.50 (!), 5×50.

Vital statistics are:

TRP.PR.I FloatingReset YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-02-01
Maturity Price : 9.00
Evaluated at bid price : 9.00
Bid-YTW : 5.57 %
Publications

Implied Volatility of Straight Perpetuals

While revising and expanding my essay regarding Implied Volatility for FixedResets I realized that it would be useful to refer to my prior effort regarding Implied Volatility for Straight Perpetuals, which was published in the January, 2010, edition of PrefLetter.

So, the essay Implied Volatility in Perpetual Preferreds (with its addendum, Portfolio Management Implications of Implied Volatility in Perpetual Preferreds) is now publicly available.

Market Action

January 29, 2016

Today’s big news was the Bank of Japan moving the deposit rate to negative:

Bank of Japan Governor Haruhiko Kuroda is matching European Central Bank President Mario Draghi in pursuing negative interest rates, and even pulling ahead when it comes to driving longer-term bond yields lower.

The yen plunged more than 1 percent against the euro after Kuroda unexpectedly cut the rate on excess reserves held by financial institutions at the BOJ to minus 0.1 percent. Two-year Japanese government bond yields sank to minus 0.085 percent, closing the gap on German negative yields, while 10-year JGB yields of 0.09 percent are lower than similar-dated bunds. Kuroda said the central bank will cut the rate further if needed and that he expects to drive yields lower across the bond curve.
…
Kuroda said Friday that negative rates don’t replace quantitative easing, they simply add to the BOJ’s options. The central bank pushed back its time frame for reaching stable 2 percent inflation to around the six months starting in April 2017, the third postponement in less than a year. The bank now sees inflation rising 0.8 percent in the 12 months starting this April, down from a previous forecast of 1.4 percent.

European and Japanese policy makers have faced extra pressure to boost stimulus after the yen and euro outperformed major peers for most of this month amid demand for havens as tumbling crude oil prices and concerns China’s economy is slowing spurred a more than $6 trillion rout in global stock markets.

This had an immediate effect on US equities:

U.S. stocks joined an advance in global equities, while bonds rallied as the Bank of Japan’s unexpected monetary stimulus boosted confidence that central banks remain vigilant of slowing economic growth. The yen tumbled, while oil gained.

The Standard & Poor’s 500 Index extended gains throughout the day to post the biggest advance since Sept. 8, while the Dow Jones Industrial Average rose almost 400 points as Microsoft Corp. rallied on earnings. Yields on 10-year Treasury notes retreated, while Japanese yields fell to records after the BOJ adopted a negative interest rate. The yen weakened versus the U.S. dollar by the most in more than a year. Oil climbed for a fourth day.

… and further doubt was cast on the prospects for Fed hikes:

In the bond market’s view, the chance of a Federal Reserve interest-rate increase this year is practically a toss-up after the Bank of Japan’s surprise policy move.

Yields on sovereign debt fell worldwide after BOJ Governor Haruhiko Kuroda introduced negative interest rates for some bank reserves to support the world’s third-biggest economy. Derivatives traders see less than a 60 percent shot that the Fed will raise its benchmark even once this year, let alone the four quarter-point increases that policy makers projected in December.

The move from Japan is another sign of slowing global economic growth, which triggered volatility across global markets to start the year. The European Central Bank has also signaled it may add stimulus. The divergence between U.S. monetary policy and the stances in Japan and the euro region risk strengthening the greenback by driving global investors to higher-yielding American assets. That could further damp inflation in the U.S., which hasn’t reached the Fed’s 2 percent target since 2012.

FedHikeOdds
Click for Big

And the rise in oil helped out Canada’s market as well:

Canadian stocks climbed a fourth day, trimming a monthly drop that sent shares into a bear market earlier this year, as crude prices rose and data showed the resource-rich nation’s economy expanded for the first time in three months.

The Standard & Poor’s/TSX Composite Index rose 1.8 percent to 12,822.13 at 4 p.m. in Toronto. The index has rallied 8.3 percent since hitting a 2 1/2-year low on Jan. 20. While the benchmark equity gauge posted its first negative January since 2010, the late rally among energy producers has boosted the S&P/TSX’s performance to the best among developed markets this year.

Which is a good thing, because real estate is the only Canadian bright spot:

Softness in the economy has been concentrated in goods-producing sectors, which shrunk by 2.6 percent year-to-date through November. Given the carnage in commodities, the slump in construction tied to non-residential investment and mining and oil and gas extraction comes as no surprise.

Meanwhile, the services sector continues to chug along with real output up 1 percent. This suggests that the commodity collapse has yet to infect the broader economy. The bad news? The majority of that growth–53 percent–can be attributed to a single sub-sector, and one that many economists fear was cyclically overextended even before this stretch of out-performance.

realEstateGrowthProportion
Click for Big

I seem to remember a similar figure being cited for the proportion of US growth attributable to housing in the 2000-2007 period, but can’t find a citation.

But we’ll close for today with a lecture on history modification:

Oxford University’s Oriel College has decided not to tear down its statue of the British colonialist Cecil Rhodes, because of the “overwhelming message” it received that the statue should stay. The true motive appears to have been money.

The college reportedly cut short its promised six-month “listening exercise,” after it became clear that even to continue a debate on the subject could cost as much as £100 million in donations from alumni. That would catch the attention of any educational institution.
…
Chris Patten, the last British governor of Hong Kong and the University’s Chancellor, had it right when he said earlier this month that students were free to speak out against whatever they wish — Rhodes, racism or the British Empire — but not to erase history. If that’s what they need, “they should think about being educated elsewhere”:

We have to listen to those who presume that they can re-write history within the confines of their own notion of what is politically, culturally and morally correct. We do have to listen, yes – but speaking for myself, I believe it would be intellectually pusillanimous to listen for too long without saying what we think, reaffirming the values that are at the heart of Karl Popper’s ‘Open Society’ and the generosity of spirit that animated the life of Nelson Mandela. One thing we should never tolerate is intolerance. We do not want to turn our university into a drab, bland, suburb of the soul where the diet is intellectual porridge.

It was a superb day for the Canadian preferred share market, with PerpetualDiscounts winning 108bp, FixedResets up 99bp and DeemedRetractibles gaining 75bp. The lengthy Performance Highlights table shows two HSE issues at the top – even as HSE was put on Trend-Negative by DBRS. Volume was average.

But however pleasant the day might have been, it’s a big relief to have finished the month! The TXPR Total Return index is down about 10.40% on the month while TXPL is down about 14.73%. This is stunning. As discussed on January 15, the worst month recorded by the BMO-CM “50” since 1993 was November, 2008, at -10.7%, while October, 2008, will probably slip to third place with a mere 8.2% loss. It’s incredible.

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_160129
Click for Big

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 17.30 to be $1.07 rich, while TRP.PR.C, resetting 2021-1-30 at +154, is $0.88 cheap at its bid price of 11.15.

impVol_MFC_160129
Click for Big

Most expensive is MFC.PR.N, resetting at +230bp on 2020-3-19, bid at 17.65 to be 1.04 rich, while MFC.PR.G, resetting at +290bp on 2016-12-19, is bid at 17.89 to be 0.92 cheap.

impVol_BAM_160129
Click for Big

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 13.84 to be $1.50 cheap. BAM.PF.E, resetting at +255bp on 2020-3-31 is bid at 17.70 and appears to be $1.07 rich.

impVol_FTS_160129
Click for Big

FTS.PR.K, with a spread of +205bp, and bid at 16.29, looks $0.32 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 16.00 and is $0.37 cheap.

pairs_FR_160129
Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -1.04%, with one outlier below -2.00% and one above 0.00%. There are two junk outliers above 0.00%.

pairs_FF_160129
Click for Big

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 5.29 % 6.43 % 19,060 16.17 1 0.0782 % 1,474.7
FixedFloater 7.55 % 6.59 % 27,928 15.71 1 1.5323 % 2,634.8
Floater 4.65 % 4.77 % 71,286 15.90 4 0.0984 % 1,649.9
OpRet 0.00 % 0.00 % 0 0.00 0 0.4614 % 2,697.2
SplitShare 4.90 % 6.71 % 81,879 2.72 6 0.4614 % 3,156.3
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.4614 % 2,462.7
Perpetual-Premium 5.87 % 5.85 % 84,063 13.94 6 0.7474 % 2,513.2
Perpetual-Discount 5.80 % 5.86 % 101,817 14.09 33 1.0802 % 2,486.0
FixedReset 5.61 % 4.96 % 236,096 14.62 83 0.9863 % 1,841.6
Deemed-Retractible 5.25 % 5.68 % 133,217 6.96 34 0.7483 % 2,571.1
FloatingReset 2.98 % 4.61 % 57,808 5.57 13 -0.0089 % 2,016.1
Performance Highlights
Issue Index Change Notes
IAG.PR.G FixedReset -2.95 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 18.75
Bid-YTW : 7.67 %
RY.PR.K FloatingReset -1.97 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.40
Bid-YTW : 5.12 %
PWF.PR.S Perpetual-Discount -1.49 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-01-29
Maturity Price : 20.44
Evaluated at bid price : 20.44
Bid-YTW : 5.91 %
GWO.PR.N FixedReset 1.01 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 12.02
Bid-YTW : 11.63 %
GWO.PR.I Deemed-Retractible 1.01 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 20.92
Bid-YTW : 7.07 %
RY.PR.P Perpetual-Discount 1.04 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-01-29
Maturity Price : 23.99
Evaluated at bid price : 24.35
Bid-YTW : 5.38 %
BAM.PR.M Perpetual-Discount 1.05 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-01-29
Maturity Price : 19.25
Evaluated at bid price : 19.25
Bid-YTW : 6.25 %
BMO.PR.Z Perpetual-Discount 1.07 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-01-29
Maturity Price : 22.39
Evaluated at bid price : 22.70
Bid-YTW : 5.50 %
ELF.PR.F Perpetual-Discount 1.09 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-01-29
Maturity Price : 22.01
Evaluated at bid price : 22.25
Bid-YTW : 6.00 %
GWO.PR.P Deemed-Retractible 1.10 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.89
Bid-YTW : 6.15 %
BMO.PR.T FixedReset 1.12 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-01-29
Maturity Price : 17.10
Evaluated at bid price : 17.10
Bid-YTW : 4.58 %
GWO.PR.G Deemed-Retractible 1.14 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.08
Bid-YTW : 6.44 %
BNS.PR.M Deemed-Retractible 1.21 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.32
Bid-YTW : 5.05 %
TRP.PR.F FloatingReset 1.21 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-01-29
Maturity Price : 11.71
Evaluated at bid price : 11.71
Bid-YTW : 5.13 %
BAM.PF.D Perpetual-Discount 1.23 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-01-29
Maturity Price : 19.75
Evaluated at bid price : 19.75
Bid-YTW : 6.29 %
PWF.PR.K Perpetual-Discount 1.23 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-01-29
Maturity Price : 21.38
Evaluated at bid price : 21.38
Bid-YTW : 5.83 %
MFC.PR.B Deemed-Retractible 1.24 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.27
Bid-YTW : 7.03 %
RY.PR.N Perpetual-Discount 1.26 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-01-29
Maturity Price : 22.12
Evaluated at bid price : 22.46
Bid-YTW : 5.45 %
TD.PR.S FixedReset 1.27 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.90
Bid-YTW : 3.60 %
NA.PR.Q FixedReset 1.36 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.16
Bid-YTW : 4.76 %
MFC.PR.G FixedReset 1.36 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 17.89
Bid-YTW : 8.37 %
CU.PR.E Perpetual-Discount 1.38 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-01-29
Maturity Price : 21.32
Evaluated at bid price : 21.32
Bid-YTW : 5.85 %
CM.PR.O FixedReset 1.38 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-01-29
Maturity Price : 17.60
Evaluated at bid price : 17.60
Bid-YTW : 4.58 %
BAM.PR.Z FixedReset 1.39 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-01-29
Maturity Price : 18.25
Evaluated at bid price : 18.25
Bid-YTW : 5.26 %
TD.PF.F Perpetual-Discount 1.40 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-01-29
Maturity Price : 22.16
Evaluated at bid price : 22.51
Bid-YTW : 5.46 %
PVS.PR.B SplitShare 1.40 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2019-01-10
Maturity Price : 25.00
Evaluated at bid price : 23.83
Bid-YTW : 6.39 %
POW.PR.G Perpetual-Discount 1.43 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-01-29
Maturity Price : 23.71
Evaluated at bid price : 24.16
Bid-YTW : 5.83 %
CU.PR.D Perpetual-Discount 1.43 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-01-29
Maturity Price : 21.27
Evaluated at bid price : 21.27
Bid-YTW : 5.87 %
RY.PR.A Deemed-Retractible 1.43 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.09
Bid-YTW : 5.13 %
RY.PR.O Perpetual-Discount 1.45 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-01-29
Maturity Price : 22.08
Evaluated at bid price : 22.40
Bid-YTW : 5.46 %
RY.PR.G Deemed-Retractible 1.47 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.17
Bid-YTW : 5.12 %
TRP.PR.A FixedReset 1.48 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-01-29
Maturity Price : 14.40
Evaluated at bid price : 14.40
Bid-YTW : 4.86 %
IFC.PR.A FixedReset 1.50 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 14.21
Bid-YTW : 10.53 %
GWO.PR.H Deemed-Retractible 1.53 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.89
Bid-YTW : 6.82 %
BAM.PR.G FixedFloater 1.53 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-01-29
Maturity Price : 25.00
Evaluated at bid price : 12.59
Bid-YTW : 6.59 %
ELF.PR.H Perpetual-Discount 1.55 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-01-29
Maturity Price : 22.65
Evaluated at bid price : 23.00
Bid-YTW : 6.02 %
CU.PR.C FixedReset 1.65 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-01-29
Maturity Price : 17.30
Evaluated at bid price : 17.30
Bid-YTW : 4.67 %
MFC.PR.H FixedReset 1.66 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 19.54
Bid-YTW : 7.43 %
TRP.PR.G FixedReset 1.70 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-01-29
Maturity Price : 18.50
Evaluated at bid price : 18.50
Bid-YTW : 5.09 %
CIU.PR.C FixedReset 1.73 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-01-29
Maturity Price : 10.57
Evaluated at bid price : 10.57
Bid-YTW : 5.05 %
POW.PR.B Perpetual-Discount 1.77 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-01-29
Maturity Price : 22.69
Evaluated at bid price : 22.98
Bid-YTW : 5.86 %
RY.PR.W Perpetual-Discount 1.78 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-01-29
Maturity Price : 22.66
Evaluated at bid price : 22.90
Bid-YTW : 5.35 %
BAM.PR.X FixedReset 1.79 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-01-29
Maturity Price : 12.53
Evaluated at bid price : 12.53
Bid-YTW : 5.41 %
CU.PR.F Perpetual-Discount 1.80 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-01-29
Maturity Price : 19.80
Evaluated at bid price : 19.80
Bid-YTW : 5.79 %
POW.PR.A Perpetual-Discount 1.95 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-01-29
Maturity Price : 23.83
Evaluated at bid price : 24.08
Bid-YTW : 5.86 %
FTS.PR.F Perpetual-Discount 2.05 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-01-29
Maturity Price : 21.69
Evaluated at bid price : 21.94
Bid-YTW : 5.67 %
TD.PR.Y FixedReset 2.06 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.83
Bid-YTW : 3.84 %
CU.PR.G Perpetual-Discount 2.08 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-01-29
Maturity Price : 19.60
Evaluated at bid price : 19.60
Bid-YTW : 5.85 %
MFC.PR.I FixedReset 2.13 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 18.25
Bid-YTW : 8.15 %
BAM.PR.R FixedReset 2.14 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-01-29
Maturity Price : 13.84
Evaluated at bid price : 13.84
Bid-YTW : 5.58 %
RY.PR.M FixedReset 2.16 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-01-29
Maturity Price : 18.42
Evaluated at bid price : 18.42
Bid-YTW : 4.62 %
MFC.PR.N FixedReset 2.32 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 17.65
Bid-YTW : 8.21 %
PWF.PR.H Perpetual-Premium 2.41 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-01-29
Maturity Price : 24.29
Evaluated at bid price : 24.60
Bid-YTW : 5.87 %
BIP.PR.B FixedReset 2.44 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-01-29
Maturity Price : 22.31
Evaluated at bid price : 23.05
Bid-YTW : 6.03 %
FTS.PR.K FixedReset 2.45 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-01-29
Maturity Price : 16.29
Evaluated at bid price : 16.29
Bid-YTW : 4.64 %
HSE.PR.G FixedReset 2.46 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-01-29
Maturity Price : 15.40
Evaluated at bid price : 15.40
Bid-YTW : 7.15 %
HSE.PR.C FixedReset 2.47 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-01-29
Maturity Price : 14.10
Evaluated at bid price : 14.10
Bid-YTW : 7.23 %
BNS.PR.L Deemed-Retractible 2.50 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.20
Bid-YTW : 5.15 %
MFC.PR.F FixedReset 2.64 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 12.05
Bid-YTW : 11.79 %
MFC.PR.M FixedReset 2.77 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 17.80
Bid-YTW : 8.17 %
FTS.PR.H FixedReset 2.80 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-01-29
Maturity Price : 12.85
Evaluated at bid price : 12.85
Bid-YTW : 4.42 %
FTS.PR.J Perpetual-Discount 2.86 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-01-29
Maturity Price : 21.20
Evaluated at bid price : 21.20
Bid-YTW : 5.70 %
BIP.PR.A FixedReset 2.95 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-01-29
Maturity Price : 17.81
Evaluated at bid price : 17.81
Bid-YTW : 6.16 %
CCS.PR.C Deemed-Retractible 3.04 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.71
Bid-YTW : 7.11 %
FTS.PR.G FixedReset 3.23 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-01-29
Maturity Price : 16.00
Evaluated at bid price : 16.00
Bid-YTW : 4.76 %
FTS.PR.M FixedReset 3.27 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-01-29
Maturity Price : 18.01
Evaluated at bid price : 18.01
Bid-YTW : 4.78 %
FTS.PR.I FloatingReset 3.38 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-01-29
Maturity Price : 10.70
Evaluated at bid price : 10.70
Bid-YTW : 4.52 %
PWF.PR.P FixedReset 3.45 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-01-29
Maturity Price : 12.00
Evaluated at bid price : 12.00
Bid-YTW : 4.86 %
TRP.PR.B FixedReset 3.50 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-01-29
Maturity Price : 10.35
Evaluated at bid price : 10.35
Bid-YTW : 4.96 %
SLF.PR.H FixedReset 3.55 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 14.60
Bid-YTW : 10.22 %
PWF.PR.T FixedReset 4.10 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-01-29
Maturity Price : 21.35
Evaluated at bid price : 21.35
Bid-YTW : 3.82 %
HSE.PR.A FixedReset 4.71 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-01-29
Maturity Price : 8.90
Evaluated at bid price : 8.90
Bid-YTW : 6.96 %
HSE.PR.E FixedReset 5.37 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-01-29
Maturity Price : 15.30
Evaluated at bid price : 15.30
Bid-YTW : 7.20 %
Volume Highlights
Issue Index Shares
Traded		 Notes
TD.PF.G FixedReset 177,471 Recent new issue.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2021-04-30
Maturity Price : 25.00
Evaluated at bid price : 25.61
Bid-YTW : 5.05 %
NA.PR.X FixedReset 103,750 Recent new issue.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-01-29
Maturity Price : 23.12
Evaluated at bid price : 24.94
Bid-YTW : 5.57 %
RY.PR.M FixedReset 56,839 TD crossed 40,600 at 18.30.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-01-29
Maturity Price : 18.42
Evaluated at bid price : 18.42
Bid-YTW : 4.62 %
MFC.PR.G FixedReset 51,500 Scotia crossed 40,000 at 17.66.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 17.89
Bid-YTW : 8.37 %
RY.PR.Q FixedReset 50,272 Desjardins crossed 15,000 at 25.65.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-01-29
Maturity Price : 23.33
Evaluated at bid price : 25.61
Bid-YTW : 5.14 %
SLF.PR.H FixedReset 46,100 Scotia crossed 40,000 at 14.30.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 14.60
Bid-YTW : 10.22 %
There were 31 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
BMO.PR.R FloatingReset Quote: 21.79 – 22.50
Spot Rate : 0.7100
Average : 0.5274

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.79
Bid-YTW : 4.50 %
SLF.PR.H FixedReset Quote: 14.60 – 15.10
Spot Rate : 0.5000
Average : 0.3290

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 14.60
Bid-YTW : 10.22 %
BMO.PR.S FixedReset Quote: 17.40 – 17.87
Spot Rate : 0.4700
Average : 0.3032

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-01-29
Maturity Price : 17.40
Evaluated at bid price : 17.40
Bid-YTW : 4.61 %
BNS.PR.P FixedReset Quote: 23.58 – 24.29
Spot Rate : 0.7100
Average : 0.5701

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.58
Bid-YTW : 4.08 %
BAM.PF.F FixedReset Quote: 18.80 – 19.60
Spot Rate : 0.8000
Average : 0.6625

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-01-29
Maturity Price : 18.80
Evaluated at bid price : 18.80
Bid-YTW : 5.06 %
BNS.PR.B FloatingReset Quote: 21.16 – 21.80
Spot Rate : 0.6400
Average : 0.5269

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.16
Bid-YTW : 5.09 %
Issue Comments

HSE: Trend Negative, says DBRS

DBRS has announced that it:

has today taken rating actions on 11 issuers following a full review of the oil and gas portfolio. This review covered 19 issuers and was undertaken in light of the recent price crude oil price declines and the outlook for a continued weak pricing environment. The rating actions are highlighted in the table below. As a result of the announced actions today, all issuers within DBRS’s oil and gas portfolio (with the exception of Suncor Energy Inc., rated A (low), and Canadian Oil Sands Limited (COS), rated BBB (low), which are both Under Review with Developing Implications) now have a Negative trend.
…
The weak pricing environment has created material, near-term financial challenges for oil and gas issuers that has been reflected today by DBRS’s rating and trend changes. Companies have responded to the lower pricing environment by cutting capital expenditure (capex) programs, undertaking asset sales and implementing cost-saving measures. However the sharp contraction in cash flows from oil- and gas-producing activities has been far greater, resulting in cash flow deficits, a drain on liquidity and escalating debt/cash flow ratios. The integrated oil companies and multinational oil companies rated by DBRS (which have downstream exposure) have weathered the pricing storm better but have also experienced weakening financial risk profiles. With expectations for continued weak pricing, the key credit metrics of issuers will remain under pressure. DBRS anticipates companies will announce additional significant capex cuts, cost-saving measures and possible dividend cuts to preserve liquidity and balance sheet strength. As such, DBRS will monitor each issuer closely as more information becomes available. A lack of concrete action by issuers to respond to a period of lower pricing and/or prevent their financial profiles from eroding further could lead to further negative rating actions by DBRS.
…
With the weak pricing outlook for both oil and natural gas, DBRS-rated oil and gas companies were all stress tested under various crude oil and natural gas pricing scenarios over a two-year forecast period. As a base case scenario DBRS used a forecast in line with the forward oil and gas price curves. The base case price forecast incorporated a West Texas Intermediate (WTI) oil price of USD 32 per barrel (bbl) in 2016 and USD 37/bbl in 2017. The natural gas price base case incorporated a forecast of USD 2.25 and CDN 2.25 per thousand cubic feet for NYMEX and AECO natural gas, respectively, in 2016. For 2017 the forecast was USD 2.75 and CDN 2.75 for NYMEX and AECO natural gas, respectively. A CDN/USD $0.70 exchange rate was assumed in the base case. DBRS also considered stressed pricing scenarios as low as USD 25/bbl for WTI in 2016, USD 30/bbl in 2017 and a CDN/USD exchange rate of $0.68. The stress tests focused on the effect that oil and gas prices would have on: (1) internally generated cash flow, (2) discretionary versus committed capex, (3) dividend flexibility, (4) planned asset dispositions, (5) covenant tests, (6) available liquidity, (7) key credit metrics and (8) a recovery rate analysis for high yield credits. Moreover, for non-investment-grade issuers borrowing bases were stress tested, at reductions of 20%, 25%, and 30% of current levels given the uncertainty with the upcoming borrowing base reviews.

Affected issues are HSE.PR.A, HSE.PR.C, HSE.PR.E and HSE.PR.G.

Implied Volatility analysis shows a high level of Implied Volatility (implying a certain amount of directionality in expected pricing is contradicting an assumption of the Black-Scholes analysis) and a very high spread.

impVol_HSE_160129
Click for Big

According to this analysis, HSE.PR.E, resetting at +357bp on 2020-3-31, is $0.17 cheap, while HSE.PR.C, resetting at +313 on 2019-12-31 is $0.11 rich.

Update, 2016-2-19: Moody’s has affirmed HSE at Baa2:

Husky’s Baa2 senior unsecured rating reflects favorably priced contracts for its natural gas production offshore China, integrated upstream and refining operations that provide diversity and lessen cash flow volatility, and strong cash flow-based leverage and interest coverage metrics. These positive attributes are mitigated by the company’s exposure to weak commodity prices in its North American conventional business and risks associated with the ramp up of in-situ oil sands production at Sunrise.

Husky will have good liquidity through 2016. At September 30, 2015 the company had approximately C$2.6 billion available under its C$4 billion revolving credit facilities (C$2 billion of which matures in December 2016 and C$2 billion of which matures in June 2018). We expect the facility maturing in December 2016 to be renewed and extended. We expect negative free cash flow of about C$250 million through December 2016. We expect proceeds from asset sales of approximately C$1.5 billion to be used to fund the negative free cash flow and reduce short term debt. Husky has a US$200 million note maturity in November 2016. The company has numerous assets that could be sold to enhance liquidity.

The stable outlook reflects improving financial metrics in the current low oil price environment.

The rating could be upgraded when RCF/D appears likely to approach 30% after taking into account the reinstatement of a normalized long term dividend.

The rating could be downgraded if it appears that the RCF/D is likely to fall towards 20%.

Husky Energy Inc., headquartered in Calgary, Alberta, is a diversified independent E&P company with principal assets in North America and Southeast Asia. While Husky is a publicly traded company, approximately 69% is owned by entities controlled by Mr. Li Ka-shing of Hong Kong.