Market Action

December 4, 2006

Note that these indices are experimental; the absolute and relative daily values are expected to change in the final version
Index Mean Current Yield (at bid) Mean YTW Mean Average Trading Value Mean Mod Dur (YTW) Issues Day’s Perf. Index Value
Ratchet 4.28% 4.29% 38,041 16.89 1 -0.7646% 1,018.2
Fixed-Floater 4.81% 3.82% 98,094 6.65 7 +0.1698% 1,029.8
Floater 4.47% -20.72% 62,146 6.59 5 -0.0700% 1,038.2
Op. Retract 4.63% -1.03% 82,481 2.21 17 +0.0306% 1,033.1
Split-Share 5.11% 2.94% 156,248 2.73 8 +0.3847% 1,039.2
Interest Bearing 6.90% 5.71% 72,389 3.87 7 +0.0198% 1,024.3
Perpetual-Premium 5.01% 3.39% 261,734 4.63 51 +0.0271% 1,050.8
Perpetual-Discount 4.58% 4.58% 1,015,140 14.71 6 +0.0677% 1,047.9
Major Price Changes
Issue Index Change Notes
LBS.PR.A SplitShare +1.7757 Recovering from yesterday – and then some! Pre-tax bid-YTW is 3.89% based on a bid of $10.89 and a hardMaturity at $10.00 2013-11-29
Volume Highlights
Issue Index Volume Notes
SLF.PR.D PerpetualDiscount 230,717 Recent blue-light special.
CM.PR.R OpRet 154,380 Desjardins crossed 100,000 at $27.15, then another 51,600 at the same price about three and a half hours later. I’d like to meet the purchaser, shake his hand, take him out to dinner, talk a little business and maybe sell him the rights to the Toronto Airport Bridge. The pre-tax bid-YTW is 1.97% based on a bid of $26.95 and a call 2008-5-30 at $25.75. The purchaser may be hoping it hangs on until its softMaturity 2013-4-29 at $25.00, at which point it will have yielded 3.77%, but really! The thing pays $1.238 and CIBC just issued a perpetual that paid only 1.175. You can stretch a point, talk about the savings that CIBC will realize by waiting, adjust the “effective cost”, hope that nobody notices that you’re comparing it with a perpetual and that CIBC would probably pay less than a buck per share per annum on a new retractible … but to get what? 3.77% at the bid? There’s other fish in the sea. Comparable yields computed from the closing ask price of $27.19 are 1.34% and 3.60%.
CM.PR.I PerpetualPremium 135,607 Recent new issue, pre-tax bid-YTW of 4.66% based on a call 2016-3-1 at $25.00.
ELF.PR.G PerpetualPremium 37,600 Recent new issue that continues to amaze me with a closing quotation of $25.60-65, pre-tax bid-YTW of 4.53% based on a call 2015-11-16 at $25.00. DBRS rates this as Pfd-2(low), so you sure aren’t getting much yield increment for the credit spread!
BAM.PR.M PerpetualDiscount 37,495 Recent new issue, pre-tax bid-YTW of 4.79% based on a limitMaturity. It pays $1.1875, exactly the same as the ELF.PR.G mentioned above. Same credit rating. I love this market!

There were seven other index-included issues with over 10,000 shares traded today.

Issue Comments

EN.PR.A Partial Redemption

I will admit to being fascinated at the prospect of client retractions of income-trust-based split share corporations over the next few months.

Energy Split II Corporation has announced that only about 1.547% of the preferred shares outstanding will be redeemed in order to match Capital Units tendered separately.

This is much less than I would have expected; as shown on the company’s website, the NAV got hammered in the aftermath of the Hallowe’en Massacre, with the Capital Units losing almost 28% of their NAV from the October 26 valuation to November 30. They mature next December anyway; it is interesting to note that the only prior redemption possibility, in 2005 after a year on the market, called only about 5.4% of the shares outstanding.

However, they somehow managed to continue trading at a premium to NAV – as much as 33% as measured on November 2 – and so it was in the interest of Capital Unitholders to sell in the marketplace rather than retract – to the tune of almost 5% on November 30.

The prefs don’t trade much (averageTradingValue of just over $5,000) and are not eligible for recommendation by HIMIPref™ since pseudoModifiedDuration (Cost) of buy side less than minimum setting : the pseudoModifiedDurationCost is 0.886 and the minimum setting in the current parameterization is 1.020.

Still, y’know: These things have a pre-tax bid-YTW of 5.22% based on their hard-maturity on 2007-12-16 at $25 (because those who buy prior to the ex-date of 2006-12-12 will be getting five dividend payments in a year-and-a-few-days) so some hopeful souls may wish to put in a bid at $25.01, given that the current quotation is $25.00-$26.00, 54×1.

Data Changes

Royal Bank New Issue: 4.5% Perp

Royal Bank has announced a new issue of 4.5% Perpetuals – I am advised that the redemption schedule commences 2012-2-24 at $26.00, but have not yet confirmed this.

This would not appear, at first blush, to be a particularly attractive issue considering the most obvious comparables. Reasonable, but not particularly attractive:

Recent RY Perpetuals
Issue Dividend Rate Quote 11/30
RY.PR.A 4.45% 24.98-00
RY.PR.B 4.70% 25.90-22
RY.PR.C 4.60% 25.35-37

More later.

Later, more:

Royal Bank Perpetuals
Analysis Using AFTER-TAX Curve (except as noted)
Curve price Component RY.PR.A RY.PR.B RY.PR.C RY.PR.W RY.PR.?
Price due to base-rate 23.12 23.91 23.69 24.44 23.29
Price due to short-term 0.04 0.05 0.05 0.04 0.05
Price due to long-term 0.56 0.59 0.57 0.61 0.54
Price to to Cumulative Dividends 0.00 0.00 0.00 0.00 0.00
Price due to Liquidity 1.46 1.50 1.49 0.66 1.49?
Price due to error -0.03 -0.03 -0.03 -0.02 -0.00
CurvePrice 25.16 26.01 25.77 25.74 25.36
Annual Dividend 1.1125 1.1750 1.1500 1.2250 1.1250
2006-12-01 Quote 25.00-08 25.90-09 25.40-50 26.45-52 Issue: $25.00
After-tax Bid YTW 3.55% 3.37% 3.54% 3.19% 3.58%
Pre-Tax Bid YTW 4.47% 4.24% 4.46% 4.01% 4.50%

 

Tax has been included in the calculation of the elements of the above table in accordance with the Ontario Highest Marginal Rate.

This issue has been added to the HIMIPref™ database on a preIssue basis with the securityCode P75000.

Data Changes

5Banc Split New Issue

The 5Banc Split Inc. new issue has been added to the HIMIPref™ database.

The anticipated closing date is 2006-12-15; it pays 4.75% as a cumulative dividend; it’s provisionally rated Pfd-2 by DBRS; and it’s a split share backed by … (wait for it) … five banks! BMO, BNS, CM, RY & TD are the portfolio shares.

I had a hard time deciding whether or not to include this issue in the database. It’s redeemable annually at the $10 issue price and I don’t like that. It means, for one thing, that the YTW will almost always be based on a call at the next annual date (assuming it trades at a premium, which, with a 4.75% dividend, seems likely for the forseeable future). I like the system whereby a declining schedule is put in place … like, f’rinstance, BSD.PR.A has. I’d be prepared to give up a little coupon for such a feature (how much? Consultancy can be easily arranged at a moderate fee).

In the end, I decided – sure, let’s include it. After all, it’s just replacing the FBS.PR.A and given that I expect a lot of redemptions over the next few years, I’d like to ensure I have a lot of issues with some history at all times, just to maintain continuity of the calculations.

The annual no-fee no-pain redemption feature for the capital units just creates a lot of churn (which may be the point, given that the selling commission is 3% on the prefs, 6% on the capital units.). This is a refinancing for 5Banc, with the old capital units eligible for tax-free conversion into the new capital units; the historical units outstanding have been:

5Banc Split Inc. Unit Activity
Date Units
2001-12-28 (Issue) +3,250,000
2002 -168,855
2003 -1,408,167
2004 -605,827
2005 -254,044
For Redemption 2006-12-15 813,107

The dividend is certainly attractive and the issue should go to a premium immediately after issue – and the underwriters are selling the prefs separately. The upside is limited by the very onerous redemption schedule, though, and I calculate a curvePrice of $10.26 (excluding liquidity considerations). One thing to remember about this kind of issue is that redemption will be driven by Capital Unitholders trying to cash in on the Next Big Thing – it will not necessarily have anything to do with prevailing interest rates. You could get redeemed (and receive the $10 par value) if rates are at 10% and the prefs are trading at $7.50. I can’t model that possibility though, and I wouldn’t count on it!

The preIssue securityCode for this issue is P50008.

MAPF

MAPF Returns : November, 2006

The monthly return for Malachite Aggressive Preferred Fund has been calculated.
The unit price as of November 30, 2006, was $9.8314

Returns may therefore be calculated as:

Period Ending November 30, 2006 Return (see Note)
Month +1.74%
Quarter +3.71%
Year +6.61%
Two Years (Annualized) +6.51%
Three Years (Annualized) +9.22%
Four Years (Annualized) +14.22%
Five Years (Annualized) +10.87%
MAPF returns are shown after expenses, but before fees.

Note that past performance should not be taken as a guarantee of future performance. You can lose money investing in MAPF or any other investment.

“But what about risk?” you ask, and I’m glad you asked that question. All issues held in the portfolio are rated Pfd-2(low) or better by DBRS. 43% are rated Pfd-1(low) or better, the remainder are rated Pfd-2(low) or better.

The composition of the portfolio in terms of the HIMI Preferred Indices as of November 30, 2006 is:

Index MAPF Composition
Ratchet 0%
Fixed-Floater 0%
Floating Rate 0%
OpRet 25%
SplitShare 23%
InterestBearing 0%
PerpetualPremium 34%
PerpetualDiscount 20%
Cash -2%

The nice thing about the returns is that they have been virtually entirely dividends and capital gains, resulting in a generally lower tax rate than for interest for most taxable investors.
The fund is available only to accredited investors in Ontario. If you are a Canadian accredited investor not in Ontario with a substantial amount of money to invest, contact me and we can discuss the possibility of Hymas Investment Management Inc. (HIMI) applying for registration in your province or territory.
For more information and documents regarding the fund, see the HIMI website

Miscellaneous News

CIBCWM Likes Prefs

The current issue of Canadian Portfolio Strategy Outlook has a few things to say about prefs:

While trust valuations are likely to bounce back, trust market issuance will be restricted by the new regulations. Hence investors’ search for yield is likely to lead them to new instruments in 2007. A resurgence in preferred share issuance may be one of the new vehicles to pick up the slack.

I’ve been saying this for a while now – every time a trust blew up, in fact – but now the line is being picked up by the majors. I hope that doesn’t mean it’s not likely any more.

An important advantage of preferred shares for taxable investors is that the income, in contrast to the coupon stream from a bond, qualifies for the dividend tax credit. All the more so given Federal tax changes that lowered the effective tax rate on dividend income from 31% to 25% starting this year. Since 2004 preferred shares have offered a higher yield than even long Canada bonds. The average yield at present on Canadian preferred shares is about 5%, versus 4.0% for the GoC 30-year bond and about 4.7% for the typical Canadian corporate bond (Chart 7). However, on an after-tax basis, the spread against the long Canada rises to 150 bps, (Chart 8 ) a huge yield pickup for investors able to tolerate the somewhat larger degree of repayment risk.

I wish I knew where to pick up a basket of good quality prefs yielding an average 5%, but I guess that’s one of the things you learn when you work for a bank. And I think they could have been more specific about taxation. Still – it’s nice to see an organization that has an actual marketting budget talking about these things!

Market Action

December 1, 2006

Note that these indices are experimental; the absolute and relative daily values are expected to change in the final version
Index Mean Current Yield (at bid) Mean YTW Mean Average Trading Value Mean Mod Dur (YTW) Issues Day’s Perf. Index Value
Ratchet 4.25% 4.26% 38,164 16.95 1 +0.5666% 1,026.1
Fixed-Floater 4.81% 3.85% 100,186 6.64 7 -0.2015% 1,028.1
Floater 4.46% -23.73% 62,671 6.58 5 +0.0079% 1,038.9
Op. Retract 4.63% -1.13% 83,641 2.22 17 -0.0015% 1,032.8
Split-Share 5.24% 3.22% 156,377 2.73 8 -0.4350% 1,035.3
Interest Bearing 6.90% 5.69% 72,227 3.88 7 +0.2845% 1,024.1
Perpetual-Premium 5.02% 3.33% 263,313 4.43 51 +0.0448% 1,050.5
Perpetual-Discount 4.58% 4.58% 1,010,196 14.72 6 +0.0751% 1,047.2
Major Price Changes
Issue Index Change Notes
LBS.PR.A SplitShare -1.0176% Surprising, since I consider this issue rather attractive, now with a bid-YTW of 4.19% based on a bid of $10.70 and a hardMaturity 2013-11-29 at $10.00.
BSD.PR.A InterestBearing +2.0387% Still with an attractive pre-tax bid-YTW of 6.00%, based on a bid of $10.01 and a hard maturity at $10.00 2015-3-31. Still no word on the results of the annual retraction privilege, exercisable 2006-11-30.
Volume Highlights
Issue Index Volume Notes
CM.PR.I PerpetualPremium 152,355 Recent new issue.
RY.PR.C PerpetualPremium 58,905 Recent new issue.
SLF.PR.D PerpetualDiscount 47,519 Recent blue-light special.
MFC.PR.C PerpetualPremium 43,859 National Bank crossed 31,800 at $25.04. The issue now has a pre-tax bid-YTW of 4.50%, based on a bid of $25.00 and either a call at $25.00 2015-4-18 or a limitMaturity. Which isn’t too shabby, seeing that the MFC.PR.B, a similar issue, has a pre-tax YTW of 4.30% based on a bid of $25.53 and a call 2014-4-18 at $25.00.
HSB.PR.D PerpetualPremium 31,895 National crossed 30,000 at $26.90. This issue has a pre-tax bid-YTW of 4.06%, base on either a call at $25.25 2014-1-30, or a call at $25.00 2015-1-30.
Index Construction / Reporting

November, 2006 : The Month in Review

Index November
Total
Return
Ratchet +0.11%
FixedFloater +0.30%
Floater +1.56%
OpRet +1.13%
SplitShare +1.70%
InterestBearing -0.29%
PerpetualPremium +1.02%
PerpetualDiscount +1.33%

The worst index-included issue for the month was MST.PR.A, an income-trust-backed interest-bearing issue that lost 1.52% on the month and now has a pre-tax YTW of 5.56% based on a bid of $10.34 and a maturity 2009-9-30.

There were a number of index-included issues with superb monthly performance, led by ACO.PR.A +3.75% (I don’t understand it – see November 29 – it’s trading a lot, but the yield is very low), closely followed by FFN.PR.A +3.49% (which is simply ridiculous.

The pre-rebalancing preliminary indices can be downloaded here. Note that everything in this is subject to change as my final indices get caught up.

Update & bump, 2006-12-01 : The indices have now been rebalanced. Changes are

Ticker From Index To Index Reason
BC.PR.E Ratchet Scraps Volume
CGI.PR.C SplitShares Scraps Volume
BAM.PR.I OpRet Scraps Volume
MFC.PR.C PerpetualDiscount PerpetualPremium Price
CM.PR.I PerpetualDiscount PerpetualPremium Price
WN.PR.E PerpetualDiscount PerpetualPremium Price
BAM.PR.M – PerpetualDiscount New Issue, 11/20
CM.PR.I – PerpetualDiscount New Issue, 11/15
RY.PR.C – PerpetualPremium New Issue, 11/1

 

The revised indices can be downloaded here.

HIMI Preferred Indices

HIMI Preferred Indices : March 1996

All indices were assigned a value of 1000.0 as of December 31, 1993.

HIMI Index Values 1996-03-29
Index Closing Value (Total Return) Issues Mean Credit Quality Median YTW Median DTW Median Daily Trading Mean Current Yield
Ratchet 1,344.3 0 0 0 0 0 0
FixedFloater 1,341.5 0 0 0 0 0 0
Floater 1,265.9 7 1.56 5.36% 14.8 104M 5.65%
OpRet 1,139.5 27 1.36 6.04% 5.6 88M 6.85%
SplitShare 1,139.5 0 0 0 0 0 0
Interest-Bearing 1,139.5 0 0 0 0 0 0
Perpetual-Premium 1,141.1 5 1.00 5.25% 2.0 71M 7.98%
Perpetual-Discount 1,089.4 0 0 0 0 0 0

Index Constitution, 1996-03-29, Pre-Rebalancing

Index Constitution, 1996-03-29, Post-Rebalancing

Market Action

November 30, 2006

Note that these indices are experimental; the absolute and relative daily values are expected to change in the final version
Index Mean Current Yield (at bid) Mean YTW Mean Average Trading Value Mean Mod Dur (YTW) Issues Day’s Perf. Index Value
Ratchet 4.25% 4.18% 31,759 10.44 2 -0.0592% 1,020.3
Fixed-Floater 4.80% 3.83% 102,080 8.43 7 +0.0284% 1,030.1
Floater 4.46% -23.39% 62,948 6.59 5 +0.0863% 1,038.9
Op. Retract 4.65% -0.83% 81,579 2.24 18 +0.1305% 1,032.8
Split-Share 4.96% 2.89% 142,601 3.31 9 +0.4596% 1,039.8
Interest Bearing 6.92% 5.91% 70,697 3.87 7 -0.0537% 1,021.2
Perpetual-Premium 5.04% 3.41% 207,761 4.06 48 +0.1714% 1,050.0
Perpetual-Discount 4.60% 4.61% 1,094,641 14.20 9 +0.0318% 1,046.4
Major Price Changes
Issue Index Change Notes
BSD.PR.A InterestBearing -1.1089% Still bouncing around. It will be most interesting to see what has happened with respect to the annual redemption feature.
FFN.PR.A SplitShare +1.4164% Add this one to the list of Issues I Don’t Understand. At the closing bid of $10.74, this issue has a YTW of 2.66% based on its maturity 2009-12-01 at $10.00. Bond-equivalent is 3.72%, you can do better than that with a three-year Canada.
Volume Highlights
Issue Index Volume Notes
CM.PR.I PerpetualDiscount 96,275 Recent new issue.
SLF.PR.D PerpetualDiscount 51,020 Recent blue-light special.
GWO.PR.I PerpetualDiscount 38,150 Closed at $24.66-69 for a YTW of 4.55% based on a limitMaturity.
BAM.PR.M PerpetualDiscount 25,570 Recent New Issue.
ELF.PR.G PerpetualPremium 25,500 Nesbitt bought every share traded, in six tranches. At the closing bid of $25.41, YTW is 4.63% based on a call at par 2015-11-16.

There were thirteen other index-included issues trading over 10,000 shares today.