PrefBlog

Issue Comments

DC.PR.C: The Debate Continues

Niall McGee of the Globe was kind enough to quote me in his piece Daily Deals: Dundee sweetens preferreds offer and Canaccord hires bankers:

“Since launching our initial proposal, we have learned who our larger holders are and have sought input from a broader group in coming to our revised proposal,” David Goodman, chief executive officer of Dundee, said in an e-mail.

“We listened to the position of others and responded with a proposal that we believe is in everyone’s best interest.”
…
Preferred share fund manager James Hymas, president of Hymas Investment Management Inc., who didn’t care for the original offer, doesn’t like the revised offer much either – calling it “abusive” in a published note on his website, partly because of the omission of a “special retraction right” that allows shareholders to cash out under the original terms.

“Virtually every preferred share term extension voted on by shareholders provides for a special retraction right,” Mr. Hymas wrote.

“No such provision implies that the company is afraid of a mass retraction, which indicates that the company knows its offer is no good.”

Barry Critchley of the Financial Post has declared victory:

The people have spoken and the people, in this case holders of Series 4 preferred shares issued by Dundee Corp. who responded negatively to an initial proposal, have emerged victorious.

But they only won because Dundee listened and changed a plan that seemed destined to be shot down at a meeting originally scheduled for Jan. 7. Put it down as a victory for shareholders and common sense, a victory reflected by the market’s reaction: the prefs shares closed at $16.60 Thursday, up 15 per cent on the news.

“We have consulted and we responded with what we think is a win-win solution,” said David Goodman, chief executive of Dundee.

And I’ll also quote Sacha Peter of the Divestor blog. I don’t normally quote blog posts by those who are not market professionals … but Mr. Peter uses his own name, is a professional in another field [and therefore has something to lose if he says something stupid] and, most importantly, says nice things about me, so why not? His post is titled Dundee Corporation – DC.PR.C – Series 4 Preferred Shares – Amended Exchange Offer:

My own quick summary is: the deal stinks less compared to the original offer, but it still stinks.
…
By far and away the most important provision is the removal of the $0.223/share consent payment. This consent payment introduced the concept of a prisoner’s dilemma where if you believe the deal was going to pass, you would be incentivized to vote in favour of the deal despite how bad it was.

Without a prisoner’s dilemma, there is no incentive to voting yes for a marginal or mildly adverse offering (which was the only way the previous offering had any chance of passing).

This deal still stinks, but the removal of the $0.223/share carrot will remove votes in favour because (and this is my personal speculation) most of the shareholders are angling for the June 30, 2016 redemption.
…
Using Black-Scholes valuation (which is not the best way to value long-dated options, but is good enough for paper napkin purposes such as this post) we get an option value of $1.84/share, or about 46 cents per preferred share (as each share would receive a quarter warrant).

Using some more formal methods involves different results – if you are that bullish on Dundee’s common stock, why bother playing around with the preferred shares when you can simply buy the common shares or even the other preferred shares?
…
Preferred shareholders have an even easier decision this time around – vote against the offer. It is still terrible compared to the existing Series 4 preferred shares.

Today’s closing price of 16.60 allows us to estimate the packages total yield, ignoring the warrant value.

Analysis of DC.PR.C Yield If Plan Succeeds At Current Price of 16.60 Note: Faulty Analysis Revised: see comments
Maturity	Proportion of Shares	Yield to Call
2016-6-30	15%	23.60%
2018-1-31	14.45%	11.41%
2019-6-30	70.55%	9.94%
Total	100%	12.20%

But, as stated in the title of the table, this analysis is wrong. Portfolio Yield is not the mean average of the yield of the individual securities, although it is usually presented this way as being close enough. In this particular case, the total portfolio cash flows are simple enough that we can calculate the Portfolio Yield from first principles, thus:

Date	Face Value	Cash Flow Div	Cash Flow Rdpt	Total Cash Flow
2016-01-07				-16.6
2016-03-31	17.84	0.3345	0	0.3345
2016-06-30	17.84	0.3345	2.676	3.0105
2016-09-30	15.164	0.284325	0	0.284325
2016-12-31	15.164	0.284325	0	0.284325
2017-03-31	15.164	0.284325	0	0.284325
2017-06-30	15.164	0.284325	0	0.284325
2017-09-30	15.164	0.284325	0	0.284325
2017-12-31	15.164	0.284325	0	0.284325
2018-01-31	15.164	0.094775	2.57788	2.672655
2018-03-31	12.58612	0.1573265	0	0.1573265
2018-06-30	12.58612	0.23598975	0	0.23598975
2018-09-30	12.58612	0.23598975	0	0.23598975
2018-09-30	12.58612	0.23598975	0	0.23598975
2018-12-31	12.58612	0.23598975	0	0.23598975
2019-03-31	12.58612	0.23598975	0	0.23598975
2019-06-30	12.58612	0.23598975	12.58612	12.82210975

			XIRR	11.39%
			Compounded Q’ly	10.94%

So that’s a bit of a difference, eh? An xlsx spreadsheet for the calculation is available: DCPRC_YieldAnalysis_160107 [Revised – see comments] and varying the price as it might be today allows us to construct the following chart:

Click for Big

So, from looking at this, and making a ballpark allowance for the value of the warrants which I don’t want and are only offered to provide a little bit of flim-flam for advisors eager to collect their unconscionable proxy-solicitation fees, I’d say that the coupon needs to be 10% or so for the package to trade at par, based on today’s market reaction [in which 67,625 shares traded, mostly at a very steady price of 16.60 and a VWAP of 16.55. This was good volume and a steady price!].

So, I will reiterate my previous recommendation, with a slight alteration to the desired coupon:

I recommend holders of DC.PR.C vote No to the deal and, as before, seriously consider exercising right of dissent. What we want is:

A Special Retraction Right allowing holders to cash out in June on the original terms [which may involve being paid in discounted DC.A shares]
an offered dividend rate that allows a reasonable prospect of the issue trading near par; at the moment, I estimate this at about ~~13%~~ 11% to 12%
a commitment from the company to maintain a credit rating from two major agencies until the retraction date of the issue

Market Action

January 6, 2016

Well, it was a pretty lousy day for equities:

Global equities capped their worst start to a year since 2000, with the Dow Jones Industrial Average sliding more than 250 points, as China unexpectedly weakening its currency fueled fresh concern over the strength of the world economy. Bonds gained.

The MSCI All-Country World Index ended the first three days of 2016 down by 3.3 percent, as U.S. stocks fell to a three-month low and emerging-market shares dropped to their cheapest level since 2009. Brent crude plunged to its lowest point since 2004, while U.S. oil spiked below $34 a barrel as supplies at a hub rose to a record. The dollar pared gains after minutes of the Federal Reserve’s last meeting were released. Treasuries jumped, with yields on 10-year notes dropping seven basis points to 2.17 percent.
…
China’s growing tolerance for a weaker yuan signaled the government is struggling in its efforts to shore up economic growth and rekindled concern last seen in August, when U.S. stocks entered their first correction in four years amid anxiety the slowdown in China would hamper global growth. U.S. crude’s plunge toward $34 a barrel heightened disinflation fears as investors assess the ability of central banks to meet policy goals. The World Bank cut its global growth forecasts for this year and next as markets closed.

… and this had an effect on the loonie …

But on Wednesday, Canada’s benchmark heavy crude price was hit hard again, falling below $20 (U.S.) a barrel for the first time since record-keeping for that grade began seven years ago. It fell in concert with global crude prices such as the international benchmark Brent, which sank to its lowest since 2004.

That helped pull the loonie down half a cent to less than 71 cents. The Canadian currency has been hit by the oil shock, poor prospects for domestic economic growth and the different paths on interest rates being taken by the U.S. Federal Reserve Board and the Bank of Canada.

The Canadian dollar, which sank 16 per cent last year, has now reached depths last seen in August, 2003, and further weakening is possible. That spells more worries for importers as well as travellers heading to the United States.

Meanwhile, the S&P/TSX composite index skidded 193 points to 12,726.80 in its third straight session of losses, pulled lower by energy shares such as Encana Corp. and Paramount Resources Ltd.

… and given the state of overnight markets:

The worst start for Chinese markets in two decades showed no signs of letting up after the central bank cut its yuan reference rate by the most since August, sparking a selloff in stocks that forced the $6.6 trillion market to shut early.

China’s CSI 300 Index plunged 7.2 percent before bourses were halted by circuit breakers in the first half hour of trading, while the onshore yuan weakened 0.6 percent versus the dollar to a five-year low. The People’s Bank of China cut its reference rate on Thursday for an eighth straight day, fueling concern that tepid economic growth is prompting authorities to guide the currency lower.

… it looks like tomorrow might be worse:

U.S. index futures sank after China’s weaker yuan fix spurred a rout in the nation’s equities that triggered a market-wide halt for the second time this week.

Contracts on the Standard & Poor’s 500 Index slid 1.7 percent to 1,953 as of 2:40 p.m. in Hong Kong. Those on the Dow Jones Industrial Average lost 1.6 percent after the gauge capped its worst three-day start to a year since 2008. Chinese stock exchanges closed less than half an hour after they opened as the CSI 300 Index plunged more than 7 percent, setting off a circuit-breaker mechanism.

Meanwhile Fischer is indicating a steady policy of Fed hikes:

Federal Reserve Vice Chairman Stanley Fischer said policy makers’ forecasts predicting four interest-rate increases in 2016 were “in the ballpark,” though China’s slowing economy and other sources of uncertainty make it difficult to predict the path of policy.

“The reason we meet eight times a year is because things happen, and as they happen you want to adjust your policy,” Fischer said in an interview Wednesday on CNBC.

Fischer’s remarks come three weeks after the Fed raised interest rates for the first time in almost a decade. Policy makers said at the time they would continue to monitor real and expected progress on inflation, which remains below their 2 percent target, as they contemplate when to raise again.

And a modest rise in Canadian mortgage rates has the chatteratti going wild!

There’s just one reason for the strength of Canada’s housing market – low, stable mortgage rates.

Rates are still low, but the stable part is in question after Royal Bank of Canada announced a small but still significant round of mortgage rate increases that will take effect Friday. Other banks will likely adjust rates as well, after a brief period of letting RBC draw fire as the first to move.

RBC will increase borrowing costs on special offers for fixed-rate mortgages with terms of two to five years by 0.1 of a percentage point.
…
Lenders are facing higher costs for financing mortgages as a result of new mortgage market rules introduced last year by federal regulators. As well, unsettled financial market conditions are forcing lenders to pay higher rates on the money they raise to lend out as mortgages.

Has anybody seen a lift in GIC rates lately?

TransCanada Corporation, proud issuer of TRP.PR.A, TRP.PR.B, TRP.PR.C, TRP.PR.D, TRP.PR.E, TRP.PR.F, TRP.PR.G and TRP.PR.H, has announced a NAFTA claim regarding the Keystone XL refusal:

TransCanada Corporation (TSX:TRP) (NYSE:TRP) (TransCanada) announced today it has filed a Notice of Intent to initiate a claim under Chapter 11 of the North American Free Trade Agreement (NAFTA) in response to the U.S. Administration’s decision to deny a Presidential Permit for the Keystone XL Pipeline on the basis that the denial was arbitrary and unjustified.

TransCanada also has filed a lawsuit in the U.S. Federal Court in Houston, Texas, asserting that the President’s decision to deny construction of Keystone XL exceeded his power under the U.S. Constitution.

Further, as a result of the permit denial, TransCanada is reviewing the approximate $4.3 billion (US$3.1 billion) carrying value invested in the project and related assets and expects that an estimated $2.5 to $2.9 billion after-tax write-down will be recorded in the company’s fourth quarter results.

DBRS says ‘no big deal’:

DBRS Limited (DBRS) notes that TransCanada Corporation (TCC, or the Company) announced today that it has filed a Notice of Intent to initiate a claim under Chapter 11 of the North American Free Trade Agreement (NAFTA) in response to the U.S. Administration’s decision to deny a Presidential border crossing permit for the Keystone XL pipeline project (KXL) on the basis that the denial was arbitrary and unjustified. Through the NAFTA claim, TCC will be seeking to recover more than USD 15 billion in costs and damages suffered by the Company as a result of the U.S. Administration’s breach of its NAFTA obligations. Concurrently, TCC has filed a lawsuit in the U.S. Federal Court in Houston, Texas, asserting that the President’s decision to deny construction of KXL exceeded his power under the U.S. Constitution.
…
Overall, DBRS views the impact of TCC’s legal actions to be credit neutral. DBRS had previously commented (Press release dated November 6, 2015) that it viewed the denial of the KXL permit as having no impact on the credit ratings of TCC, and its wholly owned subsidiaries (TransCanada PipeLines Limited and Nova Gas Transmission Limited). Today’s announcement does not impact the Company’s business risk profile as the current ratings reflect environmental, regulatory and political risks with respect to several of the Company’s development projects, including KXL. Furthermore, TCC expects the support for this energy infrastructure project from shippers, underpinned by long-term contracts, to continue through the remedial process. DBRS has modeled the impact of the $2.9 billion writedown (maximum of the range) together with TCC’s recent approximately $300 million share buyback (December 2015), and the USD 654 million acquisition of Ironwood Power Plant (October 2015; 100% debt financed, expected to close Q1 2016) on the Company’s credit metrics on a pro forma basis, and has concluded that the writedown does not have an impact on the Company’s financial risk profile as key credit metrics are expected to remain reasonable for the current rating of A (low), with a Stable trend.

It was another awful day for the Canadian preferred share market, with PerpetualDiscounts off 17bp, FixedResets losing 58bp and DeemedRetractibles down 26bp. The Performance Highlights table is again very lengthy. Volume was well below average.

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

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

Here’s TRP:

Click for Big

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 18.50 to be $1.04 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $1.46 cheap at its bid price of 11.45.

Click for Big

Most expensive is MFC.PR.M, resetting at +236bp on 2019-12-19, bid at 19.68 to be 0.61 rich, while MFC.PR.G, resetting at +290bp on 2016-12-19, is bid at 20.48 to be 0.62 cheap.

Click for Big

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 15.65 to be $1.51 cheap. BAM.PF.E, resetting at +255bp on 2020-3-31 is bid at 19.45 and appears to be $0.93 rich.

Click for Big

FTS.PR.K, with a spread of +205bp, and bid at 18.38, looks $0.85 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 17.30 and is $0.66 cheap.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -1.00%, with one outlier below -2.00%. There is one junk outlier below -2.00% and three above 0.00%.

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	4.76 %	5.77 %	28,945	16.94	1	1.7857 %	1,633.9
FixedFloater	6.82 %	6.05 %	33,401	16.14	1	0.0000 %	2,859.5
Floater	4.19 %	4.37 %	82,161	16.71	4	0.6687 %	1,826.0
OpRet	0.00 %	0.00 %	0	0.00	0	0.0000 %	2,744.2
SplitShare	4.81 %	5.61 %	77,849	2.79	6	0.0000 %	3,211.3
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	0.0000 %	2,505.5
Perpetual-Premium	5.83 %	-0.81 %	90,248	0.09	6	0.1618 %	2,529.8
Perpetual-Discount	5.65 %	5.67 %	97,982	14.40	34	-0.1724 %	2,554.3
FixedReset	5.22 %	4.54 %	246,690	15.61	81	-0.5771 %	1,978.6
Deemed-Retractible	5.23 %	5.05 %	123,119	5.29	34	-0.2673 %	2,575.7
FloatingReset	2.87 %	4.37 %	63,812	5.62	13	-0.0815 %	2,097.5

Performance Highlights
Issue	Index	Change	Notes
BNS.PR.D	FloatingReset	-5.16 %	The closing bid of 18.02 is actually pretty reasonable – the issue traded 6,232 shares today in a range of 18.10-95 before closing at 18.02-29, 1×1. The execution prices nosedived from 18.67 at 3:21pm to 18.10 at 3:53pm on twelve trades out of CIBC totalling 2500 shares. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 18.02 Bid-YTW : 7.17 %
IFC.PR.C	FixedReset	-4.62 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 18.17 Bid-YTW : 7.72 %
CU.PR.C	FixedReset	-3.30 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-06 Maturity Price : 17.90 Evaluated at bid price : 17.90 Bid-YTW : 4.49 %
HSE.PR.A	FixedReset	-3.11 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-06 Maturity Price : 11.85 Evaluated at bid price : 11.85 Bid-YTW : 5.19 %
TRP.PR.C	FixedReset	-3.05 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-06 Maturity Price : 11.45 Evaluated at bid price : 11.45 Bid-YTW : 4.93 %
TRP.PR.B	FixedReset	-2.63 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-06 Maturity Price : 11.10 Evaluated at bid price : 11.10 Bid-YTW : 4.60 %
TRP.PR.D	FixedReset	-2.24 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-06 Maturity Price : 17.90 Evaluated at bid price : 17.90 Bid-YTW : 4.54 %
SLF.PR.I	FixedReset	-2.13 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 19.30 Bid-YTW : 7.01 %
IAG.PR.G	FixedReset	-2.08 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 20.25 Bid-YTW : 6.54 %
FTS.PR.F	Perpetual-Discount	-1.91 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-06 Maturity Price : 22.34 Evaluated at bid price : 22.61 Bid-YTW : 5.48 %
TRP.PR.H	FloatingReset	-1.89 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-06 Maturity Price : 9.84 Evaluated at bid price : 9.84 Bid-YTW : 4.47 %
W.PR.K	FixedReset	-1.83 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-06 Maturity Price : 22.86 Evaluated at bid price : 24.20 Bid-YTW : 5.41 %
BAM.PR.Z	FixedReset	-1.73 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-06 Maturity Price : 19.84 Evaluated at bid price : 19.84 Bid-YTW : 4.81 %
NA.PR.Q	FixedReset	-1.71 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.08 Bid-YTW : 3.98 %
GWO.PR.O	FloatingReset	-1.67 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 12.35 Bid-YTW : 10.61 %
HSE.PR.C	FixedReset	-1.67 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-06 Maturity Price : 17.70 Evaluated at bid price : 17.70 Bid-YTW : 5.69 %
FTS.PR.J	Perpetual-Discount	-1.61 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-06 Maturity Price : 21.70 Evaluated at bid price : 22.00 Bid-YTW : 5.45 %
MFC.PR.I	FixedReset	-1.50 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 20.95 Bid-YTW : 6.16 %
MFC.PR.J	FixedReset	-1.49 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 19.80 Bid-YTW : 6.66 %
BNS.PR.Y	FixedReset	-1.47 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 19.38 Bid-YTW : 6.29 %
BAM.PR.R	FixedReset	-1.32 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-06 Maturity Price : 15.65 Evaluated at bid price : 15.65 Bid-YTW : 4.90 %
MFC.PR.F	FixedReset	-1.31 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 14.27 Bid-YTW : 9.40 %
BNS.PR.Z	FixedReset	-1.27 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 19.50 Bid-YTW : 6.54 %
BAM.PF.H	FixedReset	-1.22 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-06 Maturity Price : 23.21 Evaluated at bid price : 25.15 Bid-YTW : 4.89 %
BAM.PF.B	FixedReset	-1.19 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-06 Maturity Price : 19.15 Evaluated at bid price : 19.15 Bid-YTW : 4.58 %
FTS.PR.G	FixedReset	-1.14 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-06 Maturity Price : 17.30 Evaluated at bid price : 17.30 Bid-YTW : 4.37 %
BAM.PR.X	FixedReset	-1.14 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-06 Maturity Price : 14.80 Evaluated at bid price : 14.80 Bid-YTW : 4.53 %
RY.PR.K	FloatingReset	-1.11 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.25 Bid-YTW : 4.49 %
BIP.PR.A	FixedReset	-1.08 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-06 Maturity Price : 19.30 Evaluated at bid price : 19.30 Bid-YTW : 5.65 %
PWF.PR.T	FixedReset	-1.04 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-06 Maturity Price : 21.93 Evaluated at bid price : 22.25 Bid-YTW : 3.62 %
GWO.PR.N	FixedReset	-1.02 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 13.55 Bid-YTW : 9.92 %
PWF.PR.A	Floater	1.11 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-06 Maturity Price : 12.74 Evaluated at bid price : 12.74 Bid-YTW : 3.75 %
MFC.PR.N	FixedReset	1.15 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 19.31 Bid-YTW : 6.90 %
ELF.PR.G	Perpetual-Discount	1.19 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-06 Maturity Price : 21.26 Evaluated at bid price : 21.26 Bid-YTW : 5.61 %
CCS.PR.C	Deemed-Retractible	1.55 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.95 Bid-YTW : 6.25 %
BAM.PR.E	Ratchet	1.79 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-06 Maturity Price : 25.00 Evaluated at bid price : 14.25 Bid-YTW : 5.77 %
HSE.PR.E	FixedReset	1.92 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-06 Maturity Price : 18.55 Evaluated at bid price : 18.55 Bid-YTW : 5.89 %
TRP.PR.F	FloatingReset	2.27 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-06 Maturity Price : 13.50 Evaluated at bid price : 13.50 Bid-YTW : 4.45 %
BNS.PR.C	FloatingReset	2.63 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.28 Bid-YTW : 4.30 %
BAM.PR.K	Floater	2.76 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-06 Maturity Price : 10.78 Evaluated at bid price : 10.78 Bid-YTW : 4.41 %

Volume Highlights
Issue	Index	Shares Traded	Notes
BMO.PR.Q	FixedReset	102,737	TD crossed 50,000 at 20.29; RBC crossed 46,700 at the same price. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 20.20 Bid-YTW : 5.99 %
RY.PR.Q	FixedReset	99,011	Recent new issue. YTW SCENARIO Maturity Type : Call Maturity Date : 2021-05-24 Maturity Price : 25.00 Evaluated at bid price : 25.61 Bid-YTW : 5.07 %
CU.PR.C	FixedReset	48,687	Scotia crossed 40,700 at 18.55. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-06 Maturity Price : 17.90 Evaluated at bid price : 17.90 Bid-YTW : 4.49 %
BAM.PF.H	FixedReset	32,965	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-06 Maturity Price : 23.21 Evaluated at bid price : 25.15 Bid-YTW : 4.89 %
BNS.PR.E	FixedReset	32,874	Recent new issue. YTW SCENARIO Maturity Type : Call Maturity Date : 2021-04-25 Maturity Price : 25.00 Evaluated at bid price : 25.60 Bid-YTW : 5.07 %
MFC.PR.M	FixedReset	32,247	Scotia crossed 27,500 at 19.80. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 19.68 Bid-YTW : 6.70 %
There were 21 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	This quote is particularly ridiculous in light of the fact that the issue traded 8,965 shares today. Thank you, Nonsense Central! I have not checked whether this lamentable state of affairs is due to inadequate Toronto Stock Exchange reporting or inadequate Toronto Stock Exchange supervision of market-makers. Quote: 12.35 – 20.25 Spot Rate : 7.9000 Average : 6.5170 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 12.35 Bid-YTW : 10.61 %
TD.PR.Y	FixedReset	Quote: 24.00 – 24.50 Spot Rate : 0.5000 Average : 0.3425 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.00 Bid-YTW : 3.67 %
CM.PR.Q	FixedReset	Quote: 19.85 – 20.25 Spot Rate : 0.4000 Average : 0.2534 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-06 Maturity Price : 19.85 Evaluated at bid price : 19.85 Bid-YTW : 4.45 %
BMO.PR.Z	Perpetual-Discount	Quote: 23.58 – 23.99 Spot Rate : 0.4100 Average : 0.2893 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-06 Maturity Price : 23.27 Evaluated at bid price : 23.58 Bid-YTW : 5.36 %
SLF.PR.J	FloatingReset	Quote: 13.60 – 13.98 Spot Rate : 0.3800 Average : 0.2751 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 13.60 Bid-YTW : 9.51 %
TRP.PR.H	FloatingReset	Quote: 9.84 – 10.25 Spot Rate : 0.4100 Average : 0.3063 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-06 Maturity Price : 9.84 Evaluated at bid price : 9.84 Bid-YTW : 4.47 %

Issue Comments

DC.PR.C: Dundee Sweetens Exchange Offer … Still Abusive

Dundee Corporation has announced:

the postponement of its special meeting of holders of its First Preference Shares, Series 4 par value of $17.84 (the “Series 4 Preferred Shares” and the holders thereof, the “Series 4 Preferred Shareholders”), which was originally scheduled for January 7, 2016 until January 28, 2016 in order for Series 4 Preferred Shareholders to consider amendments to the terms of the Company’s previously announced preferred share exchange transaction (the “Amended Exchange Transaction”). The December 3, 2015 record date will remain the same. The amendment follows consultations with a number of the Series 4 Preferred Shareholders. The terms of the Amended Exchange Transaction are outlined below:

•In consideration for extending the date on which the Series 4 Preferred Shares would become retractable by the holder thereof, being June 30, 2016, for an additional three year period to June 30, 2019, each Series 4 Preferred Shareholder will exchange their Series 4 Preferred Share pursuant to a statutory plan of arrangement under the Business Corporations Act (Ontario) for:

◦0.7136 of a First Preference Share, Series 5 par value $25.00 (the “Series 5 Preferred Shares” and each holder thereof a “Series 5 Preferred Shareholder”); plus
◦0.25 of a subordinate voting share purchase warrant (“Warrant”), each whole Warrant entitling the holder thereof to purchase one class A subordinate voting share of the Company (a “Subordinate Voting Share”) at a price of $6.00 per Subordinate Voting Share at any time on or prior to 5:00 p.m. (Toronto time) on June 30, 2019. The Company is applying to the Toronto Stock Exchange (the “TSX”) for the listing of the Warrants.

The Terms of the Series 5 Preferred Shares

The rights, privileges, restrictions and conditions of the Series 5 Preferred Shares are identical to those of the Series 4 Preferred Shares, except that:

•The cumulative dividend rate will increase from 5.0% to 7.5% per annum, being an annual dividend of $1.875 per Series 5 Preferred Share, or a quarterly dividend of $0.46875 per Series 5 Preferred Share;
•Up to 15% of the then outstanding Series 5 Preferred Shares of each Series 5 Preferred Shareholder will be subject to redemption at the holder’s option for its par value on June 30, 2016;
•A further 17% of the then outstanding Series 5 Preferred Shares of each Series 5 Preferred Shareholder will be subject to redemption at the holder’s option for its par value on January 31, 2018; and
•The Series 5 Preferred Shares will be redeemable by Dundee at (i) $25.75 per share if redeemed prior to June 30, 2017, (ii) $25.50 per share if redeemed on or after June 30, 2017 and prior to June 30, 2018, (iii) $25.25 per share if redeemed on or after June 30, 2018 and prior to June 30, 2019, and (iv) $25.00 per share if redeemed on or after June 30, 2019, plus, in each case, an amount equal to all accrued and unpaid dividends thereon to but excluding the date fixed for redemption. Currently, the Series 4 Preferred Shares are redeemable by the Company at par together with any accrued and unpaid dividends to but excluding the redemption date.

Consent Payments

The one-time consent fee of up to 1.25% that would have been payable to Series 4 Preferred Shareholders who voted in favour of the prior proposal has been replaced by a 1.5% per year increase in the dividend rate payable to all Series 5 Preferred Shareholders in the event that the Amended Exchange Transaction proceeds. If the Amended Exchange Transaction is completed, Dundee will make certain payments (the “Consent Payments”) to the brokers, investment dealers, banks, trust companies or other intermediaries of the Series 4 Preferred Shareholders (collectively, the “Intermediaries”), subject to certain procedures and conditions which will be outlined in the revised Circular (as defined below):

•a Consent Payment of $0.1784 per Series 4 Preferred Share, representing 1.00% of the par value of the Series 4 Preferred Shares, will be paid by Dundee to Intermediaries in respect of each Series 4 Preferred Share that is voted FOR the Arrangement Resolution (as defined below) on or prior to January 21, 2016, provided such vote is valid and is not subsequently withdrawn; and
•a Consent Payment of $0.0892 per Series 4 Preferred Share, representing 0.50% of the par value of the Series 4 Preferred Shares, will be paid by Dundee to Intermediaries in respect of each Series 4 Preferred Share that is voted FOR the Arrangement Resolution after January 21, 2016 but on or prior to the proxy cut off time of 9:00 a.m. (Toronto time) on January 26, 2016, provided such vote is valid and is not subsequently withdrawn.

The Postponed Meeting

In connection with the Amended Exchange Transaction, a special meeting of the Series 4 Preferred Shareholders has been scheduled for 9:00 a.m. (Toronto time) on January 28, 2016 (the “Meeting”), at the offices of Dundee Corporation, 1 Adelaide St. East, Suite 2100, Toronto, Ontario, Canada, M5C 2V9. The Amended and Restated Management Information Circular of the Company (the “Circular”) for the postponed Meeting will be mailed to the Series 4 Preferred Shareholders and filed on SEDAR shortly.

Series 4 Preferred Shareholders are encouraged to vote regardless of how many Series 4 Preferred Shares they own. Series 4 Preferred Shareholders should follow the instructions on the voting instruction form to be provided by their Intermediary to ensure their vote is counted at the Meeting.

Due to the changes in the proposed terms, any votes and any dissents previously submitted by Series 4 Preferred Shareholders in accordance with the instructions provided in the previous management information circular dated December 3, 2015 will not apply to the amended terms. Shareholders can anticipate receiving a new voting instruction form and control number in the mail. Even if Series 4 Preferred Shareholders have voted previously, in order for their vote to count, they must use the new voting instruction form to instruct their Intermediary how to vote on their behalf. Series 4 Preferred Shareholders who wish to vote or dissent in respect of the Amended Exchange Transaction should refer to the instructions in the Circular on how to do so.

To be effective, the Amended Exchange Transaction must be approved by a resolution (the “Arrangement Resolution”) passed at the postponed Meeting by not less than two-thirds (66 2/3%) of the votes validly cast by the Series 4 Preferred Shareholders present in person or represented by proxy.

The completion of the Amended Exchange Transaction is conditional on, among other things, the holders of the Series 4 Preferred Shares approving the Arrangement Resolution, the approval of the TSX, dissent rights not having been exercised with respect to more than 10% of the issued and outstanding Series 4 Preferred Shares, any required lender approvals and other customary conditions (unless waived by the Company).

Reasons for the Amended Exchange Transaction

The Company has engaged GMP Securities L.P. (“GMP”) as its financial advisor and dealer manager, and Shorecrest Group Ltd. as its proxy advisor and paying agent in connection with the Amended Exchange Transaction.

The board of directors of Dundee (the “Board of Directors”) has unanimously determined that the Amended Exchange Transaction is fair to the Series 4 Preferred Shareholders (as well as to the holders of all other classes and series of shares) and is in the best interests of Dundee, and unanimously recommends that the Series 4 Preferred Shareholders vote FOR the Arrangement Resolution. The determination of the Board of Directors is based on various factors, including a fairness opinion prepared by GMP.

By recommending the Arrangement Resolution to the Series 4 Preferred Shareholders, the Board of Directors believes the Arrangement Resolution provides a number of anticipated benefits to the Series 4 Preferred Shareholders, including, without limitation, the following:

a.The Series 5 Preferred Shares will have a dividend rate of 7.5% per annum, which is greater than the current dividend rate on the Series 4 Preferred Shares of 5% per annum;
b.Each Series 4 Preferred Share (each having a par value and redemption price of $17.84 per Series 4 Preferred Share) will be exchanged for (i) 0.7136 of a Series 5 Preferred Share par value $25.00, aligning with standard market convention; plus (ii) 0.25 of a Warrant, each whole Warrant entitling the holder thereof to purchase one Subordinate Voting Share at a price of $6.00 per Subordinate Voting Share at any time prior to 5:00 p.m. (Toronto time) on June 30, 2019;
c.Up to 15% of the then outstanding Series 5 Preferred Shares of each Series 5 Preferred Shareholder will be subject to redemption at the holder’s option for its par value on June 30, 2016;
d.Up to an additional 17% of the then outstanding Series 5 Preferred Shares of each Series 5 Preferred Shareholder will be subject to redemption at the holder’s option for its par value on January 31, 2018; and
e.Currently, the Series 4 Preferred Shares are redeemable by the Company at its option at par, together with any accrued and unpaid dividends to but excluding June 30, 2016. The Company will not be able to redeem the Series 5 Preferred Shares at its option prior to June 30, 2019 unless it pays a redemption premium over par.

The Board of Directors also believes that the Arrangement Resolution provides a number of anticipated benefits to the Company and indirect benefits to the holders of the other classes (and series) of shares of the Company as follows:

a.By extending the retraction date of the Series 4 Preferred Shares through the issuance of the Series 5 Preferred Shares from June 30, 2016 to June 30, 2019, the Company can repurpose certain capital that would have been needed should the holders have required the Company to redeem the Series 4 Preferred Shares on or after June 30, 2016 at the par price of $17.84 per Series 4 Preferred Share;
b.The Company will maintain financial flexibility for future opportunistic business developments; and
c.The Series 5 Preferred Shares will continue to be serviceable at an attractive cost of capital.

Why is this offer still abusive? Because there is no provision for shareholders who want the original deal to get the original deal. Virtually every preferred share term extension voted on by shareholders provides for a Special Retraction Right, which allows shareholders who so desire to cash out their shares on the original terms. I get extremely upset when such a provision is not made.

The fact that there is no such provision implies that the company is afraid of a mass retraction, which indicates that the company knows its offer is no good – an implication that is given further support by the fact that consent payments to intermediaries are still revoltingly high. But how good should the offer be?

The closing price of 14.43 today will reflect a number of things:

Widespread feeling that the original offer would pass
Some buying pressure from those hoping the deal would fail, and
Some buying pressure from those hoping for a sweetened deal

Ignore, for now, the two positive influences on the share price and consider only the price as it reflects the original offer. The closing price today was 14.43, which the YTC Yield Calculator shows an annual quarterly yield-to-call of 12.94%. So, ignoring relatively minor tax effects, the dividend rate demanded by the market is about 13%, a far cry from the paltry 7.5% offered by the company.

The potential 7.5% coupon implies a price of 15.18 if the issue is to yield 12.94% … a modest improvement, but nowhere near the par value of 17.84.

But, you say, there will be two interim retractions allowed, in June 2016 and June 2018, totalling roughly 1/3 of the issue! Surely that’s worth something! And yes, you’re right … but it’s not clear whether the company will be entitled to pay that out with shares, and it still only applies to a third of the holdings. But, for the sake of an argument, let’s say that these interim retractions make up one-third of the discount, bringing the estimated value of the new shares to $16.07, still far below par.

But that’s not all, shrieks the late night infomercial of a press release! You also get a quarter of a warrant to buy DC.A subordinated voting stock at the low, low price of only $6.00 / share, effective until June 30, 2019. Surely that’s worth something! Well, yes, it is worth something, but not much. It’s only a quarter of a share, after all, so you’d have to make a profit of $1.77 x 4 [the estimated effective discount times 4] = $7.08 on each warrant to cover the current loss of value. This implies a future price of DC.A of 13.08, which I suggest is a very generous price target given today’s closing price of 5.95 [which has been boosted recently by the potential for massive profits on Dundee’s TauRx holding]. I will leave the matter for others better versed in option theory and Dundee’s prospects to value the option: I’ll just say that I don’t think it’s worth very much; that given the nature of Dundee’s prospects I don’t think it can be valued as normal option anyway; and that I think it’s a chrome-plated gizmo that has the intended purpose of confusing retail investors.

So, I recommend holders of DC.PR.C vote No to the deal and, as before, seriously consider exercising right of dissent. What we want is:

A Special Retraction Right allowing holders to cash out in June on the original terms [which may involve being paid in discounted DC.A shares]
an offered dividend rate that allows a reasonable prospect of the issue trading near par; at the moment, I estimate this at about 13%
a commitment from the company to maintain a credit rating from two major agencies until the retraction date of the issue

New Issues

New Issue: PPL FixedReset, 5.75%+500M575

Pembina Pipeline Corporation has announced:

that it has entered into an agreement with a syndicate of underwriters co-led by Scotiabank, BMO Capital Markets and RBC Capital Markets (together, the “Underwriters”) pursuant to which the Underwriters have agreed to purchase from Pembina 6,000,000 cumulative redeemable minimum rate reset class A preferred shares, Series 11 (the “Series 11 Preferred Shares”) at a price of $25.00 per share for distribution to the public.

The holders of Series 11 Preferred Shares will be entitled to receive fixed cumulative dividends at an annual rate of $1.4375 per share, payable quarterly on the 1st day of March, June, September and December, as and when declared by the Board of Directors of Pembina, yielding 5.75 per cent per annum, for the initial fixed rate period to but excluding March 1, 2021. The first quarterly dividend payment date is scheduled for March 1, 2016. The dividend rate will reset on March 1, 2021 and every five years thereafter at a rate equal to the sum of the then five-year Government of Canada bond yield plus 5.00 per cent, provided that, in any event, such rate shall not be less than 5.75 percent per annum. The Series 11 Preferred Shares are redeemable by Pembina, at its option, on March 1, 2021 and on March 1 of every fifth year thereafter at a price of $25.00 per share plus accrued and unpaid dividends.

The holders of Series 11 Preferred Shares will have the right to convert their shares into cumulative redeemable floating rate class A preferred shares, Series 12 (the “Series 12 Preferred Shares”), subject to certain conditions, on March 1, 2021 and on March 1 of every fifth year thereafter. The holders of Series 12 Preferred Shares will be entitled to receive quarterly floating rate cumulative dividends, as and when declared by the Board of Directors of Pembina, at a rate equal to the sum of the then 90-day Government of Canada treasury bill rate plus 5.00 per cent.

Pembina has granted to the Underwriters an option, exercisable at any time up to 48 hours prior to the closing of the offering, to purchase up to an additional 2,000,000 Series 11 Preferred Shares at a price of $25.00 per share.

Closing of the offering is expected on January 15, 2016, subject to customary closing conditions.

The Company intends to use the net proceeds from the offering of Series 11 Preferred Shares to reduce indebtedness of the Company under its credit facilities as well as for capital expenditures and working capital requirements in connection with the Company’s 2016 capital program. The indebtedness of the Company was incurred in the normal course of business to fund the Company’s capital program.

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

Implied Volatility analysis shows that the issue is reasonably priced. While the curve-fitting implies that the issue is a little rich [theoretical price is $24.57], the high level of Implied Volatility leads to the conclusion that there is a very high degree of directional bias in the pricing of PPL’s FixedResets – which is also something affecting other series of other issuers. As this bias recedes (assuming that it ever does!), Implied Volatility will decline, the curve will flatten and the higher-spread issues (most notably the new issue) will significantly outperform the lower-spread issues.

On the other hand, the directional bias could be quite right! There will be many among us who think that +500 is a ridiculous spread, even for a resource-centric junk issue and that spreads will narrow once memories of 2015 fade. Given this particular scenario, the lower-spread issues will shine: a calculation based on projected calculated values of 350bp Spread and 10% Implied Volatility implies that the extant PPL preferreds will enjoy total capital gains in the area of 20%which, if achieved in a reasonable timeframe, will dwarf the yield advantage of the new issue for which capital gains will be a big fat zero; even then, all but one of the extant issues will be trading at a discount!

So pays yer money and takes yer chances, gents, roll up, roll up! If you think current market conditions are the new normal, you’ll like the new issue. If you think this is a transitory crash, you won’t.

Click for Big

Market Action

January 5, 2016

Nothing happened today, although at time of writing Asian markets are getting hit again:

Asian stocks slumped along with U.S. index futures after China weakened the yuan, underscoring concern the world’s second-largest economy is struggling. The won fell with shares in Seoul after North Korea conducted its fourth nuclear test.

Japanese equities dropped and contracts on the Standard & Poor’s 500 Indexslid 0.9 percent as of 2:22 p.m. in Tokyo. Kim Jong Un’s regime detonated a hydrogen device at an underground test site in the far northeast, the official Korean Central News Agency said. The yen advanced to a more than two-month high amid demand for safer assets, as Australian government bonds extended their climb and Treasuries advanced for a fifth session. Gold held gains, while zinc led industrial metals lower in London and Shanghai on concerns demand is ebbing in China.
…
The Bloomberg-JPMorgan Asia Dollar Index fell to the lowest level since April 2009 as China’s central bank weakened the yuan’s reference rate for the seventh day in a row, heightening the risk of a currency war. The gap between the yuan rate inside China and that for the currency traded offshore expanded, underscoring speculation the government faces pressure to devalue its currency to aid the economy. China’s CSI 300 Index rose 0.4 percent, gaining for a second session after Monday’s 7 percent rout.

The Globe’s Rob Carrick touts preferred shares:

Avoid preferred shares then? Not necessarily. In fact, now may be the time to start buying. In a recent note to clients, the independent analyst Harry Levant of IncomeResearch.ca argues that the preferred market may have bottomed late in 2015. His suggestion for locking in a solid yield and possibly profiting from a rebound in prices is to buy an exchange-traded fund called the iShares Preferred Share Index ETF (CPD-T).
…
Mr. Levant notes that CPD wasn’t a great choice last year because its portfolio weights rate resets more heavily than the fixed-rate preferred shares that held up comparatively well. With rate resets looking like they may have hit bottom, CPD becomes more attractive.

The distribution yield for CPD in early January was 4.95 per cent. That’s 4.5 per cent on an after-fee basis, which is roughly double the yield on a 30-year Government of Canada bond. Safe, preferred shares are most assuredly not. But they do have rebound potential now, and a pretty fine yield as well.

I’ll note that the distribution yield of 4.95% (or 4.5% after fees) quoted in the article will be as difficult to really understand as anything else with preferred shares these days. On a cash basis, it will overestimate sustainable yield, because there are still a LOT of dividend cuts yet to come although [given a constant GOC-5 yield] we have just about finished with the 40%+ cuts. On the other hand, the calculation of Distribution Yield will not take any account of the special case of insurance company NVCC non-compliant issues – that is, the probability assigned to an extension of the NVCC rules is zero. So prospective buyers should ensure they understand how the quoted yield may change in the future given various interest-rate and regulatory scenarios.

It looked like it was going to be another horrific day for Canadian preferred shares, but a late afternoon rally upgraded the status to merely appalling.

Here’s TXPR:

Click for Big

Click for Big

So preferred share investors partied in the streets!

Click for Big

It was an appalling day for the Canadian preferred share market, with PerpetualDiscounts gaining 7bp, FixedResets down 207bp and DeemedRetractibles off 10bp. As might be expected, the Performance Highlights table is an almost solid wall of FixedReset losers, but there were a few winners bouncing back from yesterday. Volume picked up to just a little below average.

Here’s TRP:

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TRP.PR.E, which resets 2019-10-30 at +235, is bid at 18.65 to be $1.00 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $1.36 cheap at its bid price of 11.81.

Click for Big

A big jump in Implied Volatility today, as is usually the case when there is a dramatically poor day. Given this, and the high levels of Implied Volatility generally, I suspect that this means there is something else going on. Low-Spread FixedResets have a higher degree of leverage to future changes in the GOC-5 yield; I think that this is what is being paid for.

Most expensive is MFC.PR.L, resetting at +216bp on 2019-6-19, bid at 18.70 to be 0.35 rich, while MFC.PR.G, resetting at +290bp on 2016-12-19, is bid at 20.66 to be 0.58 cheap.

Click for Big

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 15.86 to be $1.40 cheap. BAM.PF.E, resetting at +255bp on 2020-3-31 is bid at 19.50 and appears to be $0.85 rich.

Click for Big

FTS.PR.K, with a spread of +205bp, and bid at 18.24, looks $0.65 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 17.50 and is $0.51 cheap.

Click for Big

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

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	4.85 %	5.88 %	28,780	16.81	1	-1.5471 %	1,605.2
FixedFloater	6.82 %	6.05 %	34,824	16.14	1	0.0000 %	2,859.5
Floater	4.21 %	4.35 %	79,991	16.74	4	-0.4439 %	1,813.8
OpRet	0.00 %	0.00 %	0	0.00	0	-0.0795 %	2,744.2
SplitShare	4.81 %	5.75 %	78,083	1.82	6	-0.0795 %	3,211.3
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	-0.0795 %	2,505.5
Perpetual-Premium	5.79 %	-1.96 %	90,870	0.08	6	0.0659 %	2,525.8
Perpetual-Discount	5.62 %	5.67 %	98,669	14.37	34	0.0706 %	2,558.7
FixedReset	5.18 %	4.51 %	252,463	14.84	81	-2.0716 %	1,990.1
Deemed-Retractible	5.21 %	5.11 %	123,037	5.30	34	-0.0986 %	2,582.6
FloatingReset	2.87 %	4.47 %	66,091	5.61	13	-1.4372 %	2,099.2

Performance Highlights
Issue	Index	Change	Notes
MFC.PR.K	FixedReset	-5.67 %	Reasonably real, as the issue traded 5,022 shares in a range of 18.36-22 before closing at 18.29-82, 1×2. VWAP was 18.62; the last trade of the day was at 2:45pm. We’ll give the market maker a pass on this, even though the closing spread is ridiculous. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 18.29 Bid-YTW : 7.40 %
MFC.PR.L	FixedReset	-4.93 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 18.70 Bid-YTW : 7.21 %
IFC.PR.C	FixedReset	-4.75 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 19.05 Bid-YTW : 7.07 %
SLF.PR.H	FixedReset	-4.71 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 17.01 Bid-YTW : 8.03 %
CM.PR.P	FixedReset	-4.60 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-05 Maturity Price : 18.05 Evaluated at bid price : 18.05 Bid-YTW : 4.34 %
CM.PR.O	FixedReset	-4.33 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-05 Maturity Price : 18.55 Evaluated at bid price : 18.55 Bid-YTW : 4.32 %
TD.PF.E	FixedReset	-4.21 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-05 Maturity Price : 20.92 Evaluated at bid price : 20.92 Bid-YTW : 4.38 %
HSE.PR.A	FixedReset	-4.08 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-05 Maturity Price : 12.23 Evaluated at bid price : 12.23 Bid-YTW : 5.02 %
MFC.PR.N	FixedReset	-4.07 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 19.09 Bid-YTW : 7.05 %
BAM.PF.F	FixedReset	-4.01 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-05 Maturity Price : 20.57 Evaluated at bid price : 20.57 Bid-YTW : 4.59 %
FTS.PR.M	FixedReset	-3.99 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-05 Maturity Price : 19.51 Evaluated at bid price : 19.51 Bid-YTW : 4.38 %
TD.PF.A	FixedReset	-3.99 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-05 Maturity Price : 18.55 Evaluated at bid price : 18.55 Bid-YTW : 4.31 %
TD.PF.B	FixedReset	-3.86 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-05 Maturity Price : 18.41 Evaluated at bid price : 18.41 Bid-YTW : 4.33 %
PWF.PR.P	FixedReset	-3.82 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-05 Maturity Price : 13.85 Evaluated at bid price : 13.85 Bid-YTW : 4.25 %
MFC.PR.M	FixedReset	-3.75 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 19.51 Bid-YTW : 6.82 %
TD.PF.D	FixedReset	-3.74 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-05 Maturity Price : 19.84 Evaluated at bid price : 19.84 Bid-YTW : 4.51 %
TRP.PR.C	FixedReset	-3.67 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-05 Maturity Price : 11.81 Evaluated at bid price : 11.81 Bid-YTW : 4.78 %
MFC.PR.I	FixedReset	-3.45 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.27 Bid-YTW : 5.95 %
NA.PR.S	FixedReset	-3.42 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-05 Maturity Price : 18.35 Evaluated at bid price : 18.35 Bid-YTW : 4.46 %
BMO.PR.T	FixedReset	-3.41 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-05 Maturity Price : 18.40 Evaluated at bid price : 18.40 Bid-YTW : 4.31 %
SLF.PR.I	FixedReset	-3.38 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 19.72 Bid-YTW : 6.71 %
MFC.PR.J	FixedReset	-3.37 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 20.10 Bid-YTW : 6.45 %
IAG.PR.G	FixedReset	-3.36 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 20.68 Bid-YTW : 6.25 %
BMO.PR.W	FixedReset	-3.32 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-05 Maturity Price : 18.35 Evaluated at bid price : 18.35 Bid-YTW : 4.29 %
BAM.PR.R	FixedReset	-3.17 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-05 Maturity Price : 15.86 Evaluated at bid price : 15.86 Bid-YTW : 4.84 %
TD.PF.C	FixedReset	-3.17 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-05 Maturity Price : 18.35 Evaluated at bid price : 18.35 Bid-YTW : 4.34 %
BAM.PR.Z	FixedReset	-3.17 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-05 Maturity Price : 20.19 Evaluated at bid price : 20.19 Bid-YTW : 4.72 %
BNS.PR.D	FloatingReset	-3.16 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 19.00 Bid-YTW : 6.21 %
BMO.PR.S	FixedReset	-3.13 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-05 Maturity Price : 18.86 Evaluated at bid price : 18.86 Bid-YTW : 4.31 %
BAM.PR.K	Floater	-2.96 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-05 Maturity Price : 10.49 Evaluated at bid price : 10.49 Bid-YTW : 4.53 %
CU.PR.C	FixedReset	-2.94 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-05 Maturity Price : 18.51 Evaluated at bid price : 18.51 Bid-YTW : 4.34 %
RY.PR.H	FixedReset	-2.89 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-05 Maturity Price : 18.45 Evaluated at bid price : 18.45 Bid-YTW : 4.32 %
NA.PR.W	FixedReset	-2.88 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-05 Maturity Price : 17.86 Evaluated at bid price : 17.86 Bid-YTW : 4.41 %
RY.PR.Z	FixedReset	-2.85 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-05 Maturity Price : 18.41 Evaluated at bid price : 18.41 Bid-YTW : 4.28 %
MFC.PR.H	FixedReset	-2.83 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.95 Bid-YTW : 5.75 %
FTS.PR.K	FixedReset	-2.82 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-05 Maturity Price : 18.24 Evaluated at bid price : 18.24 Bid-YTW : 4.11 %
BAM.PF.G	FixedReset	-2.80 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-05 Maturity Price : 20.80 Evaluated at bid price : 20.80 Bid-YTW : 4.57 %
BNS.PR.C	FloatingReset	-2.73 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.71 Bid-YTW : 4.77 %
BAM.PR.T	FixedReset	-2.63 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-05 Maturity Price : 17.01 Evaluated at bid price : 17.01 Bid-YTW : 4.60 %
BAM.PF.B	FixedReset	-2.61 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-05 Maturity Price : 19.38 Evaluated at bid price : 19.38 Bid-YTW : 4.53 %
RY.PR.J	FixedReset	-2.46 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-05 Maturity Price : 19.84 Evaluated at bid price : 19.84 Bid-YTW : 4.45 %
BAM.PF.A	FixedReset	-2.23 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-05 Maturity Price : 20.56 Evaluated at bid price : 20.56 Bid-YTW : 4.58 %
RY.PR.M	FixedReset	-2.23 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-05 Maturity Price : 19.75 Evaluated at bid price : 19.75 Bid-YTW : 4.36 %
BNS.PR.Z	FixedReset	-2.23 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 19.75 Bid-YTW : 6.31 %
BMO.PR.R	FloatingReset	-2.20 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.20 Bid-YTW : 4.23 %
BMO.PR.Y	FixedReset	-2.16 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-05 Maturity Price : 20.35 Evaluated at bid price : 20.35 Bid-YTW : 4.37 %
TRP.PR.H	FloatingReset	-2.15 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-05 Maturity Price : 10.03 Evaluated at bid price : 10.03 Bid-YTW : 4.39 %
BNS.PR.Y	FixedReset	-2.14 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 19.67 Bid-YTW : 6.02 %
MFC.PR.G	FixedReset	-2.13 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 20.66 Bid-YTW : 6.30 %
TD.PR.T	FloatingReset	-2.01 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.90 Bid-YTW : 4.43 %
TD.PR.Z	FloatingReset	-2.01 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.95 Bid-YTW : 4.47 %
NA.PR.Q	FixedReset	-2.00 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.50 Bid-YTW : 3.66 %
BNS.PR.B	FloatingReset	-1.99 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.62 Bid-YTW : 4.66 %
IFC.PR.A	FixedReset	-1.90 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 15.50 Bid-YTW : 9.21 %
CM.PR.Q	FixedReset	-1.73 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-05 Maturity Price : 19.85 Evaluated at bid price : 19.85 Bid-YTW : 4.45 %
BAM.PR.E	Ratchet	-1.55 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-05 Maturity Price : 25.00 Evaluated at bid price : 14.00 Bid-YTW : 5.88 %
TRP.PR.F	FloatingReset	-1.49 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-05 Maturity Price : 13.20 Evaluated at bid price : 13.20 Bid-YTW : 4.55 %
TD.PR.Y	FixedReset	-1.43 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.05 Bid-YTW : 3.80 %
BAM.PF.E	FixedReset	-1.42 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-05 Maturity Price : 19.50 Evaluated at bid price : 19.50 Bid-YTW : 4.53 %
TRP.PR.B	FixedReset	-1.38 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-05 Maturity Price : 11.40 Evaluated at bid price : 11.40 Bid-YTW : 4.48 %
RY.PR.I	FixedReset	-1.33 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.72 Bid-YTW : 4.16 %
BNS.PR.Q	FixedReset	-1.33 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.79 Bid-YTW : 3.86 %
TRP.PR.E	FixedReset	-1.32 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-05 Maturity Price : 18.65 Evaluated at bid price : 18.65 Bid-YTW : 4.42 %
HSE.PR.E	FixedReset	-1.30 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-05 Maturity Price : 18.20 Evaluated at bid price : 18.20 Bid-YTW : 6.01 %
FTS.PR.J	Perpetual-Discount	-1.28 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-05 Maturity Price : 22.07 Evaluated at bid price : 22.36 Bid-YTW : 5.36 %
BNS.PR.E	FixedReset	-1.28 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-05 Maturity Price : 23.29 Evaluated at bid price : 25.47 Bid-YTW : 5.13 %
BMO.PR.Z	Perpetual-Discount	-1.26 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-05 Maturity Price : 23.29 Evaluated at bid price : 23.60 Bid-YTW : 5.35 %
TRP.PR.G	FixedReset	-1.20 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-05 Maturity Price : 19.76 Evaluated at bid price : 19.76 Bid-YTW : 4.74 %
RY.PR.L	FixedReset	-1.15 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.83 Bid-YTW : 4.09 %
FTS.PR.G	FixedReset	-1.13 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-05 Maturity Price : 17.50 Evaluated at bid price : 17.50 Bid-YTW : 4.32 %
HSE.PR.G	FixedReset	-1.08 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-05 Maturity Price : 18.30 Evaluated at bid price : 18.30 Bid-YTW : 5.96 %
CU.PR.I	FixedReset	-1.05 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2020-12-01 Maturity Price : 25.00 Evaluated at bid price : 25.33 Bid-YTW : 4.32 %
BSC.PR.C	SplitShare	-1.05 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2016-09-22 Maturity Price : 19.71 Evaluated at bid price : 19.74 Bid-YTW : 4.01 %
GWO.PR.S	Deemed-Retractible	-1.05 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.59 Bid-YTW : 5.53 %
ENB.PR.A	Perpetual-Discount	-1.03 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-05 Maturity Price : 22.72 Evaluated at bid price : 23.01 Bid-YTW : 6.05 %
CU.PR.G	Perpetual-Discount	1.33 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-05 Maturity Price : 20.53 Evaluated at bid price : 20.53 Bid-YTW : 5.55 %
ELF.PR.G	Perpetual-Discount	1.50 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-05 Maturity Price : 21.01 Evaluated at bid price : 21.01 Bid-YTW : 5.68 %
GWO.PR.O	FloatingReset	1.95 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 12.56 Bid-YTW : 10.38 %
HSE.PR.C	FixedReset	2.39 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-05 Maturity Price : 18.00 Evaluated at bid price : 18.00 Bid-YTW : 5.59 %
VNR.PR.A	FixedReset	4.55 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-05 Maturity Price : 19.31 Evaluated at bid price : 19.31 Bid-YTW : 4.77 %

Volume Highlights
Issue	Index	Shares Traded	Notes
RY.PR.Q	FixedReset	647,883	Recent new issue. YTW SCENARIO Maturity Type : Call Maturity Date : 2021-05-24 Maturity Price : 25.00 Evaluated at bid price : 25.67 Bid-YTW : 5.02 %
BNS.PR.E	FixedReset	353,322	Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-05 Maturity Price : 23.29 Evaluated at bid price : 25.47 Bid-YTW : 5.13 %
BIP.PR.A	FixedReset	52,230	Nesbitt crossed 50,000 at 19.75. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-05 Maturity Price : 19.51 Evaluated at bid price : 19.51 Bid-YTW : 5.59 %
TD.PF.C	FixedReset	26,660	Desjardins bought 14,000 from National at 18.20. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-05 Maturity Price : 18.35 Evaluated at bid price : 18.35 Bid-YTW : 4.34 %
RY.PR.Z	FixedReset	25,416	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-05 Maturity Price : 18.41 Evaluated at bid price : 18.41 Bid-YTW : 4.28 %
BNS.PR.R	FixedReset	24,926	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.27 Bid-YTW : 3.75 %
There were 28 other index-included issues trading in excess of 10,000 shares.

Wide Spread Highlights
Issue	Index	Quote Data and Yield Notes
BNS.PR.Z	FixedReset	Quote: 19.75 – 20.39 Spot Rate : 0.6400 Average : 0.3788 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 19.75 Bid-YTW : 6.31 %
BMO.PR.R	FloatingReset	Quote: 22.20 – 22.83 Spot Rate : 0.6300 Average : 0.4149 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.20 Bid-YTW : 4.23 %
BAM.PR.Z	FixedReset	Quote: 20.19 – 20.83 Spot Rate : 0.6400 Average : 0.4388 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-05 Maturity Price : 20.19 Evaluated at bid price : 20.19 Bid-YTW : 4.72 %
IFC.PR.C	FixedReset	Quote: 19.05 – 19.70 Spot Rate : 0.6500 Average : 0.4595 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 19.05 Bid-YTW : 7.07 %
PWF.PR.T	FixedReset	Quote: 22.75 – 23.96 Spot Rate : 1.2100 Average : 1.0259 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-05 Maturity Price : 22.27 Evaluated at bid price : 22.75 Bid-YTW : 3.59 %
SLF.PR.H	FixedReset	Quote: 17.01 – 17.85 Spot Rate : 0.8400 Average : 0.6588 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 17.01 Bid-YTW : 8.03 %

New Issues

New Issue: TD FixedReset, 5.50%+466, NVCC

The Toronto-Dominion Bank has announced:

a domestic public offering of Non-Cumulative 5-Year Rate Reset Preferred Shares (non-viability contingent capital (NVCC)), Series 12 (the “Series 12 Shares”).

TD has entered into an agreement with a group of underwriters led by TD Securities Inc. to issue, on a bought deal basis, 12 million Series 12 Shares at a price of $25.00 per share to raise gross proceeds of $300 million. TD has also granted the underwriters an option to purchase, on the same terms, up to an additional 2 million Series 12 Shares. This option is exercisable in whole or in part by the underwriters at any time up to two business days prior to closing.

The Series 12 Shares will yield 5.5% annually, with dividends payable quarterly, as and when declared by the Board of Directors of TD, for the initial period ending April 30, 2021. Thereafter, the dividend rate will reset every five years at a level of 4.66% over the then five-year Government of Canada bond yield.

Subject to regulatory approval, on April 30, 2021 and on April 30 every 5 years thereafter, TD may redeem the Series 12 Shares, in whole or in part, at $25.00 per share. Subject to TD’s right of redemption and certain other conditions, holders of the Series 12 Shares will have the right to convert their shares into Non-Cumulative Floating Rate Preferred Shares (NVCC), Series 13 (the “Series 13 Shares”), on April 30 2021, and on April 30 every five years thereafter. Holders of the Series 13 Shares will be entitled to receive quarterly floating rate dividends, as and when declared by the Board of Directors of TD, equal to the three-month Government of Canada Treasury bill yield plus 4.66%.

The expected closing date is January 14, 2016. TD will make an application to list the Series 12 Shares as of the closing date on the Toronto Stock Exchange. The net proceeds of the offering will be used for general corporate purposes

They later announced:

that as a result of strong investor demand for its previously announced domestic public offering of Non-Cumulative 5-Year Rate Reset Preferred Shares (non-viability contingent capital (NVCC)), Series 12 (the “Series 12 Shares”), the size of the offering has been increased to 28 million Series 12 Shares. The gross proceeds of the offering will now be $700 million. The offering will be underwritten by a group of underwriters led by TD Securities Inc.

The expected closing date is January 14, 2016. TD will make an application to list the Series 12 Shares as of the closing date on the Toronto Stock Exchange. The net proceeds of the offering will be used for general corporate purposes.

Holy smokes! $700-million! Monster!

Implied Volatility analysis shows that the issue is attractively priced. While the curve-fitting implies a decent price concession of $0.25 [theoretical price is $25.25], the very high level of Implied Volatility leads to the conclusion that there is a very high degree of directional bias in the pricing of TD’s NVCC-compliant FixedResets. As this bias recedes (assuming that it ever does!), Implied Volatility will decline, the curve will flatten and the higher-spread issues (most notably the new issue) will significantly outperform the lower-spread issues.

Note that the NVCC non-compliant issues are so obviously differentiated from the NVCC-compliant ones that they are not included in the calculation, although they are shown in the chart.

On the other hand, the directional bias could be quite right! There will be many among us who think that +466 is an utterly ridiculous spread for solid bank – NVCC or no NVCC – and that spreads will narrow once memories of 2015 fade. Given this particular scenario, the lower-spread issues will shine: a calculation based on projected calculated values of 250bp Spread and 10% Implied Volatility implies that the extant TD NVCC-compliant preferreds will enjoy total capital gains in the area of 20% (more precisely, the average of the five extant NVCC-compliant issues is +18.4%) which, if achieved in a reasonable timeframe, will dwarf the yield advantage of the new issue for which capital gains will be a big fat zero.

Click for Big

Market Action

January 4, 2016

For many, the new year started with a hangover:

As losses snowballed in U.S. stocks around midday, the best thing U.S. bulls had to say about the worst start to a year since 2001 was that there are 248 more trading days to make it up.
…
Taking a break and breathing helped: the Dow added almost 150 points in the last 30 minutes to pare its loss to 276 points. Still, investors returning to work from holidays were greeted by the sixth-worst start to a year since 1927 for the Standard & Poor’s 500 Index, which plunged 1.5 percent to erase $289 billion in market value as weak Chinese manufacturing data unnerved equity markets.

The selloff started in China and persisted thanks to a flareup in tension between Saudi Arabia and Iran. A report in the U.S. showed manufacturing contracted at the fastest pace in more than six years added to concerns that growth is slowing.

The rout appears to have paused, due in part to decisive action from the Chinese securities regulator:

Asian stocks erased losses as a selloff in China abated after the regulator sought to reassure investors following Monday’s plunge. Oil and industrial metals rose.

The regional share gauge erased what would have been a second day of declines as Korean and Japanese equities rose. The Shanghai Composite Index wiped out an initial slump of more than 3 percent as China’s central bank injected cash into the banking system and the securities regulator pledged to keep improving its circuit-breaker system that saw stock trading halted amid Monday’s rout. West Texas Intermediate crude rose 0.6 percent.
…
A 7 percent slump in mainland China shares triggered a trading halt there on the first day of business in 2016. The rout, which spread throughout Asia, Europe and the U.S., was sparked by weak factory data in China and exacerbated by a slide in American manufacturing. China Securities Regulatory Commission said it’s studying measures to limit the pace of stock sales by major shareholders, while the central bank Monday conducted the biggest reverse-repurchase operations since September.

Good stuff! If the market’s going down due to selling pressure, make it illegal to sell! That will fix everything!

Meanwhile Federal Reserve Vice Chairman Stanley Fischer has given a boost to the central planners and micro-managers:

He told the American Economic Association on Sunday that the Fed is not as well-equipped with regulatory powers to rein in housing and other asset bubbles as some other central banks. And he questioned whether Congress had gone too far in limiting the Fed’s ability to intervene if a crisis erupted and threatened the financial system.

“We won’t know until it’s very late” whether the Fed has been constrained too much, Fischer said at the AEA’s annual meeting in San Francisco. That’s something “we have to worry about a great deal.”

Fischer’s comments suggest that the central bank may need to rely more on monetary policy to restrain financial excesses than it has in the past. In fact, he told the conference that it might be necessary for the Fed to increase interest rates if financial markets were overheating, though the first line of defense should be the use of regulatory measures to head off bubbles.

In arguing that the Fed has less leeway to restrain speculative excesses than other central banks, Fischer pointed in particular to the property market, the epicenter of the last financial crisis. Faced with run-away real estate prices, many other countries have tightened loan-to-value or debt-to-income ratios to curb borrowing.

“In the United States, responding to such problems with these tools would require inter-agency coordination” between the Fed and other government regulators, he said. That “could make their use cumbersome at critical moments.”

On Dec. 18 the Fed and other agencies issued a thinly veiled warning to banks in which it “reminded” them about “existing regulatory guidance on prudent risk management practices for commercial real estate lending.”

But when discussing Fischer we must remember that he’s basically sound:

Lesson T4: The lender of last resort, TBTF, and moral hazard.9 The role of the central bank as lender of last resort is a central theme in Walter Bagehot’s 1873 classic on central banking, Lombard Street. The case for the central bank to be the lender of last resort is clear in the case of a liquidity crisis–one that arises from a temporary shortage of liquidity, typically in a financial panic–but less so in the case of solvency crises.10

In principle the distinction between liquidity and solvency problems should guide the actions of the central bank and the government in a financial crisis. But in a crisis, the distinction between illiquidity and insolvency is rarely clear-cut–and whether a company goes bankrupt will depend on how the authorities respond to the crisis.

Further, one has to be clear about which aspects of government actions are critical in this regard. If a firm is bankrupt, it may well be optimal for the firm to continue to operate while being reorganized, as typically happens in bankruptcies. In such a case, in which the firm’s capital is negative, the ownership of the bankrupt firm should be changed–unless the owners succeed in mobilizing more capital, in which case the company was probably not bankrupt.

And this isn’t exactly drone news – which I am confident will be prominent on this blog in 2016, if not dominant – but close enough for Government Motors work:

General Motors Co. will invest $500 million in Lyft Inc., giving the ride-hailing startup a valuation of $5.5 billion and a major ally in the global battle against Uber Technologies Inc.

The investment, part of a $1 billion financing round for Lyft, is the biggest move by an automaker to date when it comes to grappling with the meteoric rise of the ride-hailing industry.

GM and Lyft said they will work together to develop a network of self-driving cars that riders can call up on-demand, a vision of the future shared by the likes of Uber Chief Executive Officer Travis Kalanick and Google-parent Alphabet Inc. More immediately, America’s largest automaker will offer Lyft drivers vehicles for short-term rent through various hubs in U.S. cities, the companies said in separate statements on Monday.

John Shmuel of the Financial Post recently touted the interest of institutional investors in the preferred market:

There are also signs that institutional players are taking notice of the market after the recent discounts. Retail investors are usually the biggest buyers of preferred shares, with institutional investors representing only 20 per cent of the buyers of an average issuance.

But that has changed with recent issues. In September, for example, Canadian Utilities Ltd. raised $250 million by offering a rate reset preferred share at a yield of 4.5 per cent, and 70 per cent of the buyers were institutional investors.

The issue also included a new minimum yield feature, offering investors a floor that will prevent the yield from going below what it was issued at.

More recently, Royal Bank of Canada came to market with one of the biggest preferred share issuances ever in Canada, offering investors a rate of 5.5 per cent, which will reset every five years at 4.53 per cent above the government five-year bond yield.

Institutional investors were again the biggest buyers in this issue, scooping up two-thirds of the shares.

Now, this is a little peculiar; something I would want to be asking questions about. As all Assiduous Readers know, new issues are generally deprecated on PrefBlog because they have a very high negative convexity. Sometimes – rarely – the concession makes them worth-while, but in general, the fact that long-term potential capital gains are tightly constrained and that potential capital losses are not make them poor investments. I will certainly agree that a market outlook of unchanging yields can make them more attractive, especially if there is a nice new-issue concession offered; and I will also agree that in an environment of rising yields there is a certain amount of loss-mitigation due to the erosion of the premium for the embedded call; but the article is touting the potential for capital gains, in which case deeply discounted issues are the way to go. It would be interesting to have an honest heart-to-heart with the players who scooped up these new issues … but an outsider will never get that!

Assiduous Reader SafetyinNumbers brings to my attention a Normal Course Issuer Bid for AZP.PR.A, AZP.PR.B and AZP.PR.C:

Atlantic Power Corporation (TSX: ATP) (NYSE: AT) (the “Company” or “Atlantic Power”) and Atlantic Power Preferred Equity Ltd (“APPEL”) announced today that Atlantic Power intends to make a normal course issuer bid (“NCIB”) for each of the following series of the Company’s convertible unsecured subordinated debentures and its common shares and that APPEL intends to make an NCIB for each of the following series of its preferred shares (collectively, the “Public Securities”):
…
Under its previous NCIB, Atlantic Power purchased Cdn$150,000 of its 6.25% debentures at an average price of Cdn$87.12; Cdn$4,661,000 of its 5.6% debentures at an average price of Cdn$91.71; US$13,000,000 of its 5.75% debentures at an average price of US$80.80; and Cdn$10,000,000 of its 6.0% debentures at an average price of Cdn$82.19.

It’s nice to see the company delivering, given its poor credit, but I suspect that prudence will dictate that the company only buys back the debentures.

In the week following Christmas, preferred share investors enjoyed fireworks. Now they get:

Click for Big

It was a horrible start to the year for the Canadian preferred share market, with PerpetualDiscounts off 41bp, FixedResets losing an incredible 297bp and DeemedRetractibles down 56bp. The Performance Highlights table is just silly, of course, with only one winner. Volume was very low – in fact, by my ‘breadth’ measure it wasn’t much more than we saw during the dead week of Christmas to New Year’s,

Here’s TRP:

Click for Big

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 18.90 to be $1.03 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $1.09 cheap at its bid price of 12.26.

Click for Big

Most expensive is MFC.PR.L, resetting at +216bp on 2019-6-19, bid at 19.67 to be 0.66 rich, while MFC.PR.G, resetting at +290bp on 2016-12-19, is bid at 21.11 to be 0.92 0cheap.

Click for Big

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 16.38 to be $1.37 cheap. BAM.PF.G, resetting at +284bp on 2020-6-30 is bid at 21.40 and appears to be $0.71 rich.

Click for Big

FTS.PR.K, with a spread of +205bp, and bid at 18.77, looks $0.83 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 17.70 and is $0.72 cheap.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.89%, with one outliers above 0.00%, and one below -2.00%. Note the scale of the y-axis has changed. There is one junk outlier above 0.00%.

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	4.77 %	5.79 %	29,266	16.92	1	-1.9310 %	1,630.4
FixedFloater	6.82 %	6.05 %	36,225	16.14	1	-0.2151 %	2,859.5
Floater	4.19 %	4.38 %	78,915	16.69	4	-0.3538 %	1,821.9
OpRet	0.00 %	0.00 %	0	0.00	0	-0.1132 %	2,746.4
SplitShare	4.81 %	5.78 %	80,711	1.82	6	-0.1132 %	3,213.8
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	-0.1132 %	2,507.5
Perpetual-Premium	5.79 %	3.20 %	91,891	0.09	6	-0.4462 %	2,524.1
Perpetual-Discount	5.63 %	5.68 %	102,372	14.36	34	-0.4139 %	2,556.9
FixedReset	5.07 %	4.40 %	255,333	14.78	81	-2.9709 %	2,032.2
Deemed-Retractible	5.21 %	5.17 %	125,066	5.30	34	-0.5584 %	2,585.1
FloatingReset	2.82 %	4.27 %	65,184	5.62	13	-1.3557 %	2,129.8

Performance Highlights
Issue	Index	Change	Notes
VNR.PR.A	FixedReset	-7.28 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-04 Maturity Price : 18.47 Evaluated at bid price : 18.47 Bid-YTW : 4.99 %
MFC.PR.G	FixedReset	-6.55 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.11 Bid-YTW : 6.00 %
BMO.PR.Q	FixedReset	-6.44 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 20.21 Bid-YTW : 5.97 %
MFC.PR.H	FixedReset	-6.11 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.59 Bid-YTW : 5.36 %
GWO.PR.O	FloatingReset	-5.95 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 12.32 Bid-YTW : 10.63 %
BAM.PR.X	FixedReset	-5.90 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-04 Maturity Price : 14.98 Evaluated at bid price : 14.98 Bid-YTW : 4.47 %
SLF.PR.H	FixedReset	-5.61 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 17.85 Bid-YTW : 7.37 %
CU.PR.C	FixedReset	-5.45 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-04 Maturity Price : 19.07 Evaluated at bid price : 19.07 Bid-YTW : 4.21 %
TRP.PR.B	FixedReset	-5.25 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-04 Maturity Price : 11.56 Evaluated at bid price : 11.56 Bid-YTW : 4.41 %
MFC.PR.J	FixedReset	-5.24 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 20.80 Bid-YTW : 5.98 %
IFC.PR.A	FixedReset	-5.16 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 15.80 Bid-YTW : 8.94 %
MFC.PR.N	FixedReset	-5.01 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 19.90 Bid-YTW : 6.48 %
MFC.PR.K	FixedReset	-4.95 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 19.39 Bid-YTW : 6.60 %
SLF.PR.G	FixedReset	-4.87 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 14.65 Bid-YTW : 9.01 %
HSE.PR.E	FixedReset	-4.85 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-04 Maturity Price : 18.44 Evaluated at bid price : 18.44 Bid-YTW : 5.93 %
MFC.PR.I	FixedReset	-4.84 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.03 Bid-YTW : 5.47 %
HSE.PR.C	FixedReset	-4.82 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-04 Maturity Price : 17.58 Evaluated at bid price : 17.58 Bid-YTW : 5.72 %
HSE.PR.G	FixedReset	-4.79 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-04 Maturity Price : 18.50 Evaluated at bid price : 18.50 Bid-YTW : 5.90 %
BIP.PR.A	FixedReset	-4.68 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-04 Maturity Price : 19.55 Evaluated at bid price : 19.55 Bid-YTW : 5.58 %
SLF.PR.I	FixedReset	-4.40 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 20.41 Bid-YTW : 6.24 %
CM.PR.P	FixedReset	-4.30 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-04 Maturity Price : 18.92 Evaluated at bid price : 18.92 Bid-YTW : 4.13 %
MFC.PR.M	FixedReset	-4.30 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 20.27 Bid-YTW : 6.29 %
NA.PR.W	FixedReset	-4.22 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-04 Maturity Price : 18.39 Evaluated at bid price : 18.39 Bid-YTW : 4.28 %
BAM.PR.Z	FixedReset	-4.18 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-04 Maturity Price : 20.85 Evaluated at bid price : 20.85 Bid-YTW : 4.57 %
IFC.PR.C	FixedReset	-4.08 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 20.00 Bid-YTW : 6.41 %
FTS.PR.G	FixedReset	-3.80 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-04 Maturity Price : 17.70 Evaluated at bid price : 17.70 Bid-YTW : 4.26 %
RY.PR.K	FloatingReset	-3.79 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.61 Bid-YTW : 4.20 %
IAG.PR.G	FixedReset	-3.69 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.40 Bid-YTW : 5.78 %
MFC.PR.L	FixedReset	-3.67 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 19.67 Bid-YTW : 6.51 %
PWF.PR.T	FixedReset	-3.62 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-04 Maturity Price : 22.36 Evaluated at bid price : 22.89 Bid-YTW : 3.56 %
BMO.PR.S	FixedReset	-3.61 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-04 Maturity Price : 19.47 Evaluated at bid price : 19.47 Bid-YTW : 4.17 %
CM.PR.O	FixedReset	-3.58 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-04 Maturity Price : 19.39 Evaluated at bid price : 19.39 Bid-YTW : 4.13 %
TRP.PR.C	FixedReset	-3.46 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-04 Maturity Price : 12.26 Evaluated at bid price : 12.26 Bid-YTW : 4.61 %
BNS.PR.Z	FixedReset	-3.40 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 20.20 Bid-YTW : 5.90 %
TRP.PR.G	FixedReset	-3.38 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-04 Maturity Price : 20.00 Evaluated at bid price : 20.00 Bid-YTW : 4.68 %
BNS.PR.Y	FixedReset	-3.32 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 20.10 Bid-YTW : 5.63 %
BMO.PR.T	FixedReset	-3.30 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-04 Maturity Price : 19.05 Evaluated at bid price : 19.05 Bid-YTW : 4.16 %
BMO.PR.Y	FixedReset	-3.26 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-04 Maturity Price : 20.80 Evaluated at bid price : 20.80 Bid-YTW : 4.27 %
BAM.PF.G	FixedReset	-3.17 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-04 Maturity Price : 21.40 Evaluated at bid price : 21.40 Bid-YTW : 4.43 %
BAM.PF.E	FixedReset	-3.09 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-04 Maturity Price : 19.78 Evaluated at bid price : 19.78 Bid-YTW : 4.47 %
RY.PR.H	FixedReset	-3.06 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-04 Maturity Price : 19.00 Evaluated at bid price : 19.00 Bid-YTW : 4.19 %
BAM.PF.F	FixedReset	-3.03 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-04 Maturity Price : 21.43 Evaluated at bid price : 21.43 Bid-YTW : 4.40 %
BAM.PF.B	FixedReset	-2.97 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-04 Maturity Price : 19.90 Evaluated at bid price : 19.90 Bid-YTW : 4.40 %
BAM.PR.T	FixedReset	-2.94 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-04 Maturity Price : 17.47 Evaluated at bid price : 17.47 Bid-YTW : 4.47 %
RY.PR.Z	FixedReset	-2.87 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-04 Maturity Price : 18.95 Evaluated at bid price : 18.95 Bid-YTW : 4.15 %
TRP.PR.A	FixedReset	-2.79 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-04 Maturity Price : 16.00 Evaluated at bid price : 16.00 Bid-YTW : 4.34 %
FTS.PR.M	FixedReset	-2.78 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-04 Maturity Price : 20.32 Evaluated at bid price : 20.32 Bid-YTW : 4.20 %
BMO.PR.W	FixedReset	-2.72 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-04 Maturity Price : 18.98 Evaluated at bid price : 18.98 Bid-YTW : 4.14 %
HSE.PR.A	FixedReset	-2.67 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-04 Maturity Price : 12.75 Evaluated at bid price : 12.75 Bid-YTW : 4.82 %
BAM.PF.A	FixedReset	-2.64 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-04 Maturity Price : 21.03 Evaluated at bid price : 21.03 Bid-YTW : 4.47 %
TD.PF.A	FixedReset	-2.62 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-04 Maturity Price : 19.32 Evaluated at bid price : 19.32 Bid-YTW : 4.13 %
TD.PF.C	FixedReset	-2.62 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-04 Maturity Price : 18.95 Evaluated at bid price : 18.95 Bid-YTW : 4.20 %
MFC.PR.F	FixedReset	-2.60 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 14.60 Bid-YTW : 9.09 %
BAM.PR.R	FixedReset	-2.50 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-04 Maturity Price : 16.38 Evaluated at bid price : 16.38 Bid-YTW : 4.68 %
TD.PF.B	FixedReset	-2.49 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-04 Maturity Price : 19.15 Evaluated at bid price : 19.15 Bid-YTW : 4.16 %
GWO.PR.N	FixedReset	-2.43 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 13.65 Bid-YTW : 9.82 %
TRP.PR.D	FixedReset	-2.38 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-04 Maturity Price : 18.45 Evaluated at bid price : 18.45 Bid-YTW : 4.40 %
CIU.PR.C	FixedReset	-2.36 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-04 Maturity Price : 12.40 Evaluated at bid price : 12.40 Bid-YTW : 4.28 %
CM.PR.Q	FixedReset	-2.32 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-04 Maturity Price : 20.20 Evaluated at bid price : 20.20 Bid-YTW : 4.37 %
SLF.PR.A	Deemed-Retractible	-2.24 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.41 Bid-YTW : 6.96 %
BMO.PR.M	FixedReset	-2.20 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.00 Bid-YTW : 3.64 %
MFC.PR.C	Deemed-Retractible	-2.18 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 20.62 Bid-YTW : 7.24 %
TD.PF.D	FixedReset	-2.09 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-04 Maturity Price : 20.61 Evaluated at bid price : 20.61 Bid-YTW : 4.34 %
SLF.PR.J	FloatingReset	-2.00 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 13.72 Bid-YTW : 9.39 %
FTS.PR.I	FloatingReset	-1.96 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-04 Maturity Price : 12.50 Evaluated at bid price : 12.50 Bid-YTW : 3.87 %
MFC.PR.B	Deemed-Retractible	-1.95 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.13 Bid-YTW : 7.06 %
BAM.PR.E	Ratchet	-1.93 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-04 Maturity Price : 25.00 Evaluated at bid price : 14.22 Bid-YTW : 5.79 %
BNS.PR.A	FloatingReset	-1.93 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.41 Bid-YTW : 4.37 %
RY.PR.I	FixedReset	-1.92 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.04 Bid-YTW : 3.91 %
CU.PR.G	Perpetual-Discount	-1.89 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-04 Maturity Price : 20.26 Evaluated at bid price : 20.26 Bid-YTW : 5.63 %
FTS.PR.K	FixedReset	-1.88 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-04 Maturity Price : 18.77 Evaluated at bid price : 18.77 Bid-YTW : 3.98 %
TRP.PR.F	FloatingReset	-1.83 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-04 Maturity Price : 13.40 Evaluated at bid price : 13.40 Bid-YTW : 4.49 %
BMO.PR.R	FloatingReset	-1.77 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.70 Bid-YTW : 3.83 %
RY.PR.J	FixedReset	-1.69 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-04 Maturity Price : 20.34 Evaluated at bid price : 20.34 Bid-YTW : 4.33 %
CU.PR.F	Perpetual-Discount	-1.64 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-04 Maturity Price : 20.35 Evaluated at bid price : 20.35 Bid-YTW : 5.60 %
BAM.PF.C	Perpetual-Discount	-1.62 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-04 Maturity Price : 20.07 Evaluated at bid price : 20.07 Bid-YTW : 6.09 %
SLF.PR.C	Deemed-Retractible	-1.59 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 20.36 Bid-YTW : 7.33 %
BNS.PR.P	FixedReset	-1.57 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.47 Bid-YTW : 3.35 %
CU.PR.E	Perpetual-Discount	-1.53 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-04 Maturity Price : 21.64 Evaluated at bid price : 21.91 Bid-YTW : 5.65 %
POW.PR.D	Perpetual-Discount	-1.46 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-04 Maturity Price : 21.98 Evaluated at bid price : 22.21 Bid-YTW : 5.64 %
TD.PF.E	FixedReset	-1.40 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-04 Maturity Price : 21.53 Evaluated at bid price : 21.84 Bid-YTW : 4.17 %
FTS.PR.H	FixedReset	-1.39 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-04 Maturity Price : 14.16 Evaluated at bid price : 14.16 Bid-YTW : 3.99 %
SLF.PR.B	Deemed-Retractible	-1.37 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.60 Bid-YTW : 6.89 %
SLF.PR.D	Deemed-Retractible	-1.36 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 20.27 Bid-YTW : 7.40 %
BAM.PF.H	FixedReset	-1.35 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2020-12-31 Maturity Price : 25.00 Evaluated at bid price : 25.65 Bid-YTW : 4.45 %
CU.PR.D	Perpetual-Discount	-1.30 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-04 Maturity Price : 21.66 Evaluated at bid price : 21.94 Bid-YTW : 5.64 %
TD.PR.S	FixedReset	-1.22 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.20 Bid-YTW : 3.49 %
CIU.PR.A	Perpetual-Discount	-1.16 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-04 Maturity Price : 20.50 Evaluated at bid price : 20.50 Bid-YTW : 5.69 %
NA.PR.S	FixedReset	-1.09 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-04 Maturity Price : 19.00 Evaluated at bid price : 19.00 Bid-YTW : 4.31 %
IGM.PR.B	Perpetual-Premium	-1.07 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2018-12-31 Maturity Price : 25.00 Evaluated at bid price : 25.03 Bid-YTW : 5.74 %
RY.PR.M	FixedReset	-1.03 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-04 Maturity Price : 20.20 Evaluated at bid price : 20.20 Bid-YTW : 4.26 %
ENB.PR.A	Perpetual-Discount	1.04 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-04 Maturity Price : 22.98 Evaluated at bid price : 23.25 Bid-YTW : 5.98 %

Volume Highlights
Issue	Index	Shares Traded	Notes
RY.PR.Q	FixedReset	190,141	Recent new issue. YTW SCENARIO Maturity Type : Call Maturity Date : 2021-05-24 Maturity Price : 25.00 Evaluated at bid price : 25.66 Bid-YTW : 5.02 %
NA.PR.S	FixedReset	137,370	TD crossed 130,000 at 19.00. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-04 Maturity Price : 19.00 Evaluated at bid price : 19.00 Bid-YTW : 4.31 %
GWO.PR.N	FixedReset	56,825	Scotia crossed 45,000 at 13.90. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 13.65 Bid-YTW : 9.82 %
FTS.PR.M	FixedReset	52,750	Desjardins crossed 50,000 at 20.45. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-04 Maturity Price : 20.32 Evaluated at bid price : 20.32 Bid-YTW : 4.20 %
BIP.PR.B	FixedReset	34,721	Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-04 Maturity Price : 22.78 Evaluated at bid price : 24.00 Bid-YTW : 5.73 %
CM.PR.O	FixedReset	32,000	RBC crossed 25,000 at 19.62. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-04 Maturity Price : 19.39 Evaluated at bid price : 19.39 Bid-YTW : 4.13 %
There were 11 other index-included issues trading in excess of 10,000 shares.

Wide Spread Highlights
Issue	Index	Quote Data and Yield Notes
VNR.PR.A	FixedReset	Quote: 18.47 – 20.00 Spot Rate : 1.5300 Average : 0.8870 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-04 Maturity Price : 18.47 Evaluated at bid price : 18.47 Bid-YTW : 4.99 %
BMO.PR.Q	FixedReset	Quote: 20.21 – 21.27 Spot Rate : 1.0600 Average : 0.6874 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 20.21 Bid-YTW : 5.97 %
SLF.PR.I	FixedReset	Quote: 20.41 – 21.20 Spot Rate : 0.7900 Average : 0.5261 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 20.41 Bid-YTW : 6.24 %
MFC.PR.J	FixedReset	Quote: 20.80 – 21.50 Spot Rate : 0.7000 Average : 0.4445 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 20.80 Bid-YTW : 5.98 %
SLF.PR.H	FixedReset	Quote: 17.85 – 18.56 Spot Rate : 0.7100 Average : 0.4601 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 17.85 Bid-YTW : 7.37 %
PWF.PR.T	FixedReset	Quote: 22.89 – 23.95 Spot Rate : 1.0600 Average : 0.8240 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2046-01-04 Maturity Price : 22.36 Evaluated at bid price : 22.89 Bid-YTW : 3.56 %

Issue Comments

PWF.PR.P To Reset To 2.306%

Power Financial Corporation has announced:

the applicable dividend rates for its Non-Cumulative 5-Year Rate Reset First Preferred Shares, Series P (the “Series P shares”) and Non-Cumulative Floating Rate First Preferred Shares, Series Q (the “Series Q shares”).

With respect to any Series P shares that remain outstanding after February 1, 2016, holders thereof will be entitled to receive quarterly fixed non-cumulative preferential cash dividends, if, as and when declared by the Board of Directors of Power Financial. The dividend rate for the 5-year period from and including February 1, 2016 to but excluding January 31, 2021 will be 2.306%, being equal to the 5-year Government of Canada bond yield determined as of today plus 1.60%, in accordance with the terms of the Series P shares.

With respect to any Series Q shares that may be issued on February 1, 2016, holders thereof will be entitled to receive quarterly floating rate non-cumulative preferential cash dividends, if, as and when declared by the Board of Directors of Power Financial. The dividend rate for the 3-month floating rate period from and including February 1, 2016 to but excluding April 30, 2016 will be 2.100%, being equal to the 3-month Government of Canada Treasury Bill yield determined as of today plus 1.60%, calculated on the basis of the actual number of days in such quarterly period divided by 365, in accordance with the terms of the Series Q shares.

Beneficial owners of Series P shares who wish to exercise their conversion right should communicate with their broker or other nominee to ensure their instructions are followed so that the registered holder of the Series P shares can meet the deadline to exercise such conversion right, which is 5:00 p.m. (EST) on January 18, 2016.

The news about the extension was reported on PrefBlog.

PWF.PR.P is a FixedReset, 4.40%+160, that commenced trading 2010-6-29 after being announced 2010-6-17, so the reset represents a cut of 48% in the dividend rate. Ouch!

As noted in the Press Release, holders have until 5:00 p.m. (EST) on Monday, January 18, to notify the company of a desire to convert to the FloatingReset Series Q. Brokerage deadlines will be earlier; missing the deadline at the brokerage probably means you’re going to have to grovel to get them to try to get the instruction to the company in time and in such a case they will do it only on a ‘best efforts’ basis. So ensure you know well in advance – by which I mean ‘right now’ – just when your brokerage’s internal deadline is.

I will make a recommendation January 13 based on the theory of Preferred Pairs, for which a calculator is available. Given recent market behaviour, it is highly likely that I will recommend holding PWF.PR.P and not to convert, but that won’t be final until I post!

Issue Comments

Low-Spread FixedResets: December, 2015

As noted in MAPF Portfolio Composition: December 2015, the fund now has a large allocation to FixedResets, mostly of relatively low spread.

Many of these were largely purchased with proceeds of sales of DeemedRetractibles from the same issuer; it is interesting to look at the price trend of some of the Straight/FixedReset pairs. We’ll start with GWO.PR.N / GWO.PR.I; the fund sold the latter to buy the former at a takeout of about $1.00 in mid-June, 2014; relative prices over the past year are plotted as:

Click for Big

Given that the November month-end take-out was $6.97, this is clearly a trade that has not worked out very well.

In July, 2014, I reported sales of SLF.PR.D to purchase SLF.PR.G at a take-out of about $0.15:

Click for Big

There were similar trades in August, 2014 (from SLF.PR.C) at a take-out of $0.35. The October month-end take-out (bid price SLF.PR.D less bid price SLF.PR.G) was $5.15, so that hasn’t worked very well either.

November, 2014, saw the third insurer-based sector swap, as the fund sold MFC.PR.C to buy the FixedReset MFC.PR.F at a post-dividend-adjusted take-out of about $0.85 … given a November month-end take-out of $6.09, that’s another regrettable trade, although another piece executed in December at a take-out of $1.57 has less badly.

Click for Big

This trend is not restricted to the insurance sector, which I expect will become subject to NVCC rules in the relatively near future and are thus subject to the same redemption assumptions I make for DeemedRetractibles. Other pairs of interest are BAM.PR.X / BAM.PR.N:

Click for Big

… and FTS.PR.H / FTS.PR.J:

Click for Big

… and PWF.PR.P / PWF.PR.S:

Click for Big

I will agree that the fund’s trades highlighted in this post may be decried as cases of monumental bad timing, but I should point out that in May, 2014, the fund was 63.9% Straight / 9.5% FixedReset while in May 2015 the fund was 12% Straight / 86% FixedReset, FloatingReset and FixedFloater (The latter figures include allocations from those usually grouped as ‘Scraps’). Given that the indices are roughly 30% Straight / 60% FixedReset & FloatingReset, it is apparent that the fund was extremely overweighted in Straights / underweighted in FixedResets in May 2014 but this situation has now reversed. HIMIPref™ analytics have been heavily favouring low-spread issues and the fund’s holdings are overwhelmingly of this type.

Getting back to price spreads between low-spread FixedResets and their Straight Perpetual comparators, we can summarize the data above in tabular form and see:

FixedReset	Straight	Take-out December 2013	Take-out MAPF Trade	Take-out December 2014	November 2015	December 2015
GWO.PR.N 3.65%+130	GWO.PR.I 4.5%	($0.04)	$1.00	$2.95	7.88	6.97
SLF.PR.G 4.35%+141	SLF.PR.D 4.45%	($1.29)	$0.25	$2.16	5.68	5.15
MFC.PR.F 4.20%+141	MFC.PR.C 4.50%	($1.29)	$0.86	$1.20	6.26	6.09
BAM.PR.X 4.60%+180	BAM.PR.N 4.75%	($2.06)		$0.17	4.94	4.09
FTS.PR.H 4.25%+145	FTS.PR.J 4.75%	$0.60		$5.68	7.23	8.26
PWF.PR.P 4.40%+160	PWF.PR.S 4.80%	($0.67)		$3.00	7.47	7.24
The ‘Take-Out’ is the bid price of the Straight less the bid price of the FixedReset; approximate execution prices are used for the “MAPF Trade” column. Bracketted figures in the ‘Take-Out’ columns indicate a ‘Pay-Up’

In January, a slow decline due to fears of deflation got worse with Canada yields plummeting after the Bank of Canada rate cut with speculation rife about future cuts although this slowly died away.

And in late March / early April it got worse again, with one commenter attributing at least some of the blame to the John Heinzl piece in which I pointed out the expected reduction in dividend payouts! In May, a rise in the markets in the first half of the month was promptly followed by a slow decline in the latter half; perhaps due to increased fears that a lousy Canadian economy will delay a Canadian tightening. Changes in June varied as the markets were in an overall decline.

In August we saw increased fear of global deflation emanating from China, although the ‘China Effect’ is disputed.

In September the market just collapsed for no apparent reason; in October the market reversed the September collapse for no apparent reason. In mid-December the Fed finally hiked its policy rate, but this well-telegraphed event has had no major effect as of yet.

All in all, I take the view that we’ve seen this show before: during the Credit Crunch, Floaters got hit extremely badly (to the point at which their fifteen year total return was negative) because (as far as I can make out) their dividend rate was dropping (as it was linked to Prime) while the yields on other perpetual preferred instruments were skyrocketing (due to credit concerns). Thus, at least some investors insisted on getting long term corporate yields from rates based (indirectly and with a lag, in the case of FixedResets) on short-term government policy rates. And it’s happening again!

There is further discussion of the extremely poor performance in the seven months to July 31 of FixedResets in the post eMail to a Client. Things haven’t really changed since that was written; they’ve just gotten ever so much more so.

What happened, essentially, is that the software assumes a certain amount of efficiency in the market. For instance, in 2013 PerpetualDiscounts were trading to yield 250-300bp over FixedResets (see the chart “PDIE-FR Spread”, below, for the PerpetualDiscount Interest Equivalent – FixedReset Spread), where the yield-to-perpetuity of FixedResets was calculated using the contemporary five-year Canada yield of 1.50%-2.00% (see the chart “Historical Government Yields”, below, for the historical government yields). The software assumes the market will get the big things right, so it therefore assumed that this 250-300bp spread would be maintained; and that a spread in this range represented fair value. Therefore, it would only purchase FixedResets if they were sufficiently cheap to other FixedResets to give a good chance of making up this fairly large yield difference.

When this spread started increasing in 2014, FixedResets started looking more attractive as the system assumes a certain amount of mean reversion and the system started buying those issues that were cheap to other FixedResets. However, the underlying assumption that the market would get the big things more-or-less right appears to have been unjustified in this instance: incredibly, the market was not accounting for changes in the five-year Canada rate (and therefore for changes in the projected dividend rate on reset) during this period. So we can call this period an episode of structural change in the markets – and no quantitative system can account for future structural change unless that is programmed into the system … in which case the analysis is no longer quantitative.

Click for Big

Click for Big

Here’s the December performance for FixedResets that had a YTW Scenario of ‘To Perpetuity’ at mid-month.:

Click for Big

The market was very disorderly in November and correlations of performance are negligible, whether against spread or term-to-reset.

Click for Big

Three month performance a little better correlated for both the Pfd-2 and Pfd-3 groups … but not much, at 9% and 13%, respectively:

Click for Big

MAPF

MAPF Portfolio Composition: December 2015

Turnover fell in December, to about 4%.

There is extreme segmentation in the marketplace, with OSFI’s NVCC rule changes in February 2011 having had the effect of splitting the formerly relatively homogeneous Straight Perpetual class of preferreds into three parts:

Unaffected Straight Perpetuals
DeemedRetractibles explicitly subject to the rules (banks)
DeemedRetractibles considered by me, but not (yet!) by the market, to be likely to be explicitly subject to the rules in the future (insurers and insurance holding companies)

This segmentation, and the extreme valuation differences between the segments, has cut down markedly on the opportunities for trading.

To make this more clear, it used to be that there were 70-odd Straight Perpetuals and I was more or less indifferent as to which ones I owned (subject, of course, to issuer concentration concerns and other risk management factors). Thus, if any one of these 70 were to go down in price by – say – $0.25, I would quite often have something in inventory that I’d be willing to swap for it. The segmentation means that I am no longer indifferent; in addition to checking the valuation of a potential buy to other Straights, I also have to check its peer group. This cuts down on the potential for trading.

And, of course, the same segmentation has the same effect on trading opportunities between FixedReset issues.

There is no real hope that this situation will be corrected in the near-term. OSFI has indicated that the long-promised “Draft Definition of Capital” for insurers will not be issued “for public consultation in late 2012 or early 2013”, as they fear that it might encourage speculation in the marketplace. It is not clear why OSFI is so afraid of informed speculation, since the constant speculation in the marketplace is currently less informed than it would be with a little bit of regulatory clarity.

As a result of this delay, I have extended the Deemed Maturity date for insurers and insurance holding companies by three years (to 2025-1-31), in the expectation that when OSFI finally does provide clarity, they will allow the same degree of lead-in time for these companies as they did for banks. This had a major effect on the durations of preferred shares subject to the change but, fortunately, not much on their calculated yields as most of these issues were either trading near par when the change was made or were trading at sufficient premium that a par call was expected on economic grounds. However, with the declines in the market over the past nine months, the expected capital gain on redemption of the insurance-issued DeemedRetractibles has become an important component of the calculated yield.

Due to further footdragging by OSFI, I will be extending the DeemedMaturity date for insurance issues by another two years in the near future.

Sectoral distribution of the MAPF portfolio on December 31 was as follows:

MAPF Sectoral Analysis 2015-12-31
HIMI Indices Sector	Weighting	YTW	ModDur
Ratchet	0%	N/A	N/A
FixFloat	0%	N/A	N/A
Floater	0%	N/A	N/A
OpRet	0%	N/A	N/A
SplitShare	1.4% (+0.9)	6.19%	5.40
Interest Rearing	0%	N/A	N/A
PerpetualPremium	0%	N/A	N/A
PerpetualDiscount	13.4 (-0.3)	5.66%	14.43
Fixed-Reset	56.5% (-4.3)	7.20%	10.33
Deemed-Retractible	5.6% (-0.3)	6.93%	7.20
FloatingReset	12.0% (+4.2)	6.92%	11.93
Scraps (Various)	11.0% (-0.3)	6.65%	13.44
Cash	+0.3% (+0.4)	0.00%	0.00
Total	100%	6.85%	11.15
Totals and changes will not add precisely due to rounding. Bracketted figures represent change from November month-end. Cash is included in totals with duration and yield both equal to zero.
DeemedRetractibles are comprised of all Straight Perpetuals (both PerpetualDiscount and PerpetualPremium) issued by BMO, BNS, CM, ELF, GWO, HSB, IAG, MFC, NA, RY, SLF and TD, which are not exchangable into common at the option of the company. These issues are analyzed as if their prospectuses included a requirement to redeem at par on or prior to 2022-1-31 (banks) or 2025-1-3 (insurers and insurance holding companies), in addition to the call schedule explicitly defined. See OSFI Does Not Grandfather Extant Tier 1 Capital, CM.PR.D, CM.PR.E, CM.PR.G: NVCC Status Confirmed and the January, February, March and June, 2011, editions of PrefLetter for the rationale behind this analysis. (all recent editions have a short summary of the argument included in the “DeemedRetractible” section) Note that the estimate for the time this will become effective for insurers and insurance holding companies was extended by three years in April 2013, due to the delays in OSFI’s providing clarity on the issue.
Calculations of resettable instruments are performed assuming a constant GOC-5 rate of 0.71% and a constant 3-Month Bill rate of 0.46%

The “total” reflects the un-leveraged total portfolio (i.e., cash is included in the portfolio calculations and is deemed to have a duration and yield of 0.00.). MAPF will often have relatively large cash balances, both credit and debit, to facilitate trading. Figures presented in the table have been rounded to the indicated precision.

Credit distribution is:

MAPF Credit Analysis 2015-12-31
DBRS Rating	Weighting
Pfd-1	0 (0)
Pfd-1(low)	0 (-16.8)
Pfd-2(high)	30.6% (-8.3)
Pfd-2	37.6% (+34.5)
Pfd-2(low)	20.6% (-9.4)
Pfd-3(high)	5.5% (0)
Pfd-3	3.2% (0)
Pfd-3(low)	1.8% (-0.2)
Pfd-4(high)	0% (0)
Pfd-4	0%
Pfd-4(low)	0% (0)
Pfd-5(high)	0% (0)
Pfd-5	0.5% (-0.1)
Cash	+0.3% (+0.4)
Totals will not add precisely due to rounding. Bracketted figures represent change from November month-end.
The fund holds a position in AZP.PR.C, which is rated P-5 by S&P and is unrated by DBRS
A position held in NPI.PR.C is not rated by DBRS, but has been included as “Pfd-3(high)” in the above table on the basis of its S&P rating of P-3(high).
A position held in INE.PR.A is not rated by DBRS, but has been included as “Pfd-3” in the above table on the basis of its S&P rating of P-3.

The large changes in the categorizations of credit quality are due to DBRS upgrades of IFC and downgrades of MFC, PWF, SLF and GWO, due to a revision of their insurance company rating methodology.

Liquidity Distribution is:

MAPF Liquidity Analysis 2015-12-31
Average Daily Trading	Weighting
<$50,000	10.1% (+7.6)
$50,000 – $100,000	4.0% (-10.1)
$100,000 – $200,000	43.4% (-12.7)
$200,000 – $300,000	27.0% (+9.8)
>$300,000	15.2% (+4.9)
Cash	+0.3% (+0.4)
Totals will not add precisely due to rounding. Bracketted figures represent change from November month-end.

MAPF is, of course, Malachite Aggressive Preferred Fund, a “unit trust” managed by Hymas Investment Management Inc. Further information and links to performance, audited financials and subscription information are available the fund’s web page. The fund may be purchased either directly from Hymas Investment Management or through a brokerage account at Odlum Brown Limited. A “unit trust” is like a regular mutual fund, but is sold by offering memorandum rather than prospectus. This is cheaper, but means subscription is restricted to “accredited investors” (as defined by the Ontario Securities Commission). Fund past performances are not a guarantee of future performance. You can lose money investing in MAPF or any other fund.

A similar portfolio composition analysis has been performed on the Claymore Preferred Share ETF (symbol CPD) (and other funds) as of August 31, 2012, and published in the October (mainly methodology), November (most funds), and December (ZPR) 2012, PrefLetter. While direct comparisons are difficult due to the introduction of the DeemedRetractible class of preferred share (see above) it is fair to say:

MAPF credit quality is better
MAPF liquidity is a bit lower
MAPF Yield is higher
Weightings
- MAPF is less exposed to Straight Perpetuals (including DeemedRetractibles)
- MAPF is less exposed to Operating Retractibles
- MAPF is more exposed to SplitShares
- MAPF is less exposed to FixFloat / Floater / Ratchet
- MAPF is overweighted in FixedResets

PrefBlog

DC.PR.C: The Debate Continues

January 6, 2016

DC.PR.C: Dundee Sweetens Exchange Offer … Still Abusive

New Issue: PPL FixedReset, 5.75%+500M575

January 5, 2016

New Issue: TD FixedReset, 5.50%+466, NVCC

January 4, 2016

PWF.PR.P To Reset To 2.306%

Low-Spread FixedResets: December, 2015

MAPF Portfolio Composition: December 2015

Archives

Of Interest