Issue Comments

Massive S&P Downgrade of Bank Preferreds

Standard & Poor’s has announced:

  • •On Sept. 18, 2014, we published our global criteria for rating bank hybrid capital instruments (see “Bank Hybrid Capital And Nondeferrable Subordinated Debt Methodology And Assumptions”).
  • •Following the criteria publication, we are lowering our issue credit ratings on 68 Canadian bank hybrid capital instruments and removing the “Under Criteria Observation” designation from the ratings.
  • •We believe that banking regulators are adopting a tougher “bail-in” stance (where investors share in the cost of a government’s rescue of a failing bank) toward hybrid capital instruments compared with our expectations in late 2011.
  • •This increases the possibility that banks might have to use hybrid capital instruments to a greater extent to absorb losses, and that regulators would be prepared to see such instruments absorb losses as a response to a bank stress.

Standard & Poor’s Ratings Services today said it lowered its issue credit ratings on 68 bank hybrid capital instruments issued by Canadian banks, and affirmed the ratings on 60 instruments. In addition, we removed the “Under Criteria Observation” (UCO) designation from the ratings, which we had labeled as UCO following the release of our new bank hybrid criteria on Sept. 18 (for more information, see “Bank Hybrid Capital And Nondeferrable Subordinated Debt Methodology And Assumptions” published Sept. 18, 2014, on RatingsDirect).

We have lowered the ratings one notch on Tier 1 preferred shares issued by Bank of Montreal, The Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Laurentian Bank of Canada, National Bank of Canada, Royal Bank of Canada, and The Toronto-Dominion Bank. We have affirmed the ratings on subordinated debt issues of the same issuers that had been placed under criteria observation. We have lowered the ratings on HSBC Bank Canada’s preferred shares and subordinated debt by two and one notches, respectively, based on our group rating methodology and the parent-level ratings on HSBC.

The downgrades reflect our view that regulators in Canada and elsewhere are adopting a tougher “bail-in” stance (where investors share in the cost of a government’s rescue of a failing bank) toward hybrid capital instruments compared with our expectations in late 2011. This increases the possibility that banks might have to use hybrid capital instruments to a greater extent to absorb losses, for example, through coupon nonpayment or conversion to common equity. We believe new regulations position regulators to stop banks from making their payments to hybrid capital investors at what we consider to be earlier-than-before points in the deterioration of a bank’s financial strength. (For details, see “Increasing Bail-In Risks For Bank Hybrid Capital Instruments Are Behind Our Proposed Criteria Change,” published Feb. 6, 2014.
…
In our view, the risks for hybrid capital instruments are higher in jurisdictions such as Canada that are adopting the Basel III framework. The updated criteria provide a consistent basis for applying notches to reflect heightened risks of coupon nonpayment due to the Basel III capital conservation buffer mechanism, and to reflect the risk associated with a contractual or statutory conversion or write-down mechanism. The changes to Tier 1 hybrid instrument ratings in Canada reflect the application of an additional notch for coupon nonpayment risk arising from implementation of the Basel III framework.
…
COMPANIES WITH AFFECTED OUTSTANDING ISSUES (PARENTS ONLY LISTED)
Bank of Montreal
The Bank of Nova Scotia
Caisse centrale Desjardins
Central 1 Credit Union
Canadian Imperial Bank of Commerce
HSBC Bank Canada
Laurentian Bank of Canada
National Bank of Canada
Royal Bank of Canada
Toronto-Dominion Bank (The)

Affected issues are:

New Ratings From S&P 2014-09-29
Issuer Basel III Status
NVCC		 Issues New Rating
BMO Non-compliant BMO.PR.J, BMO.PR.K, BMO.PR.L, BMO.PR.M, BMO.PR.P, BMO.PR.Q, BMO.PR.R P-2(low)
Compliant BMO.PR.S, BMO.PR.T, BMO.PR.W P-3(high)
BNS Non-compliant BNS.PR.A, BNS.PR.B, BNS.PR.C, BNS.PR.L, BNS.PR.M, BNS.PR.N, BNS.PR.O, BNS.PR.P, BNS.PR.Q, BNS.PR.R, BNS.PR.Y, BNS.PR.Z P-2
Compliant None extant. Shelf prospectus rating is preliminary P-2(low)
CM Non-compliant None  
Compliant CM.PR.D, CM.PR.E, CM.PR.G*, CM.PR.O P-3(high)
HSB Non-compliant HBS.PR.C, HSB.PR.D P-2
Compliant None  
LB Non-compliant LB.PR.F P-3
Compliant LB.PR.H P-3(low)
NA Non-compliant NA.PR.L, NA.PR.M, NA.PR.Q P-2(low)
Compliant NA.PR.S P-3(high)
RY Non-compliant RY.PR.A***, RY.PR.B***, RY.PR.C***, RY.PR.D***, RY.PR.E***, RY.PR.F, RY.PR.G***, RY.PR.I, RY.PR.K***, RY.PR.L, RY.PR.Y P-2(high)
Compliant RY.PR.H, RY.PR.Z, RY.PR.W** P-2
TD Non-compliant TD.PR.O, TD.PR.P, TD.PR.Q, TD.PR.R, TD.PR.S, TD.PR.T, TD.PR.Y, TD.PR.Z P-2(high)
Compliant TD.PF.A, TD.PF.B P-2
* CM.PR.G not listed by S&P. Group assignment made by author
** RY.PR.W not listed by S&P. Non-compliant at present, but is convertible into common at issuer’s option, therefore I have deemed it to be compliant
*** Seven RY non-compliant issues are not listed by S&P

All this follows the S&P announcement discussed on PrefBlog in the post S&P Sets Outlook-Negative on Canadian Banks.

The “tougher ‘bail-in’ stance” referred to in the S&P release was discussed on PrefBlog in the post Feds Consulting on Bank Recapitalization Regime.

Issue Comments

DGS.PR.A Resets To 5.25%, Unchanged

A full year ago, DGS.PR.A extended term from 2014-11-30 to 2019-11-28, but did not announce a dividend rate for the coming period – this was fine for preferred shareholders since part of the deal was a retraction at par, exercisable for the original maturity date.

Since then, DGS.PR.A has gotten bigger three times – in October 2013, January 2014 and July 2014 – as, clearly, the sponsor is prepared to put some money into marketing a Split Share Corp as long as it has a decent time to run. I haven’t been recommending it, though, pending notification of the new rate.

Brompton Group announced the new rate on September 23:

Dividend Growth Split Corp. (the “Fund”) announced today that the distribution rate for the Preferred Shares for the 5 year term from December 1, 2014 to November 28, 2019 will be $0.525 per annum (5.25% on the original issue price of $10) payable quarterly. This rate is unchanged from the rate for the previous term. The Preferred Share distribution rate is based on current market rates for preferred shares with similar terms. In addition, the Fund intends to maintain the targeted monthly Class A Share distribution at $0.10 per Class A Share.

The Fund previously announced on October 1, 2013 the extension of the term of the Class A Shares and the Preferred Shares to November 28, 2019 from November 30, 2014. The extension allows shareholders to continue to enjoy the benefit of the Funds’ portfolio of common shares of high quality, large capitalization companies, which have among the highest dividend growth rates of those companies included in the S&P/TSX Composite Index. Currently, the portfolio consists of common shares of the following 20 companies:

Great-West Lifeco Inc. The Bank of Nova Scotia AGF Management Limited Shaw Communications Inc.
Industrial Alliance Insurance and Financial Services Inc. Canadian Imperial Bank of Commerce IGM Financial Inc. TELUS Corporation
Manulife Financial Corporation National Bank of Canada Power Corporation of Canada Canadian Utilities Limited
Sun Life Financial Inc. Royal Bank of Canada Manitoba Telecom Services Enbridge Inc.
Bank of Montreal The Toronto-Dominion Bank Rogers Communications Inc. TransCanada Corporation

In connection with the extension, shareholders who do not wish to continue their investment in the Fund, may retract their Preferred Shares or Class A Shares on November 28, 2014 pursuant to a special retraction right and receive a retraction price that is calculated in the same way that such price would be calculated if the Fund were to terminate on November 30, 2014. Notice must be given by November 14, 2014 at 5:00 p.m. (Toronto time) in order to exercise this right.

I received an eMail about this:

I am one of your newsletter subscribers and I purchased DGS.PR.A on your advice last year (thank-you!).

You are probably aware that it is maturing soon with the option to extend for another five years at the same rate (see below). If you had any advice about whether I should bail out or stay in I would be very appreciative.

Also, I have never been in this situation before… do I contact Dividend Growth Split Corp directly or do I contact my stock broker and ask them to inform Dividend Growth Split Corp if I want to retract?

Flattery will get you everywhere! Well, I know nothing of this client’s financial situation or what else he has in his portfolio, but I will say that the reset of 5.25% is very good for holders; if the position made sense for him a year ago, it almost certainly makes sense for him today. Barring unusual portfolio goals and issuer concentration issues, I say hold on to it.

At today’s bid of 10.13, the issue yields 5.05% to maturity 2019-11-28, which is quite good considering that the issue has quite good credit quality, given a NAV of $18.75 as of September 25 to back up each $10 preferred share.

And if you do want to get rid of it, don’t retract! Unless you have very high transaction costs, you’ll get more money selling in the market, given the current bid of $10.13.

DGS.PR.A is tracked by HIMIPref™ but is relegated to the Scraps index on credit concerns; note that these credit concerns relate only to the Probability of Default and completely ignore the prospects for Recovery Given Default – and this latter figure will be quite substantial, particularly when compared with that of Operating Companies, which is expected to be zero.

Issue Comments

DC.PR.D Commences Trading

Assiduous Reader prefQC gently reminds me that DC.PR.D, the FloatingReset recently converted from DC.PR.B has commenced trading – and I forgot all about it!

At any rate, it has started on a strong note, closing at 24.91-15 today vs. DC.PR.B’s 24.56-68, a very nice premium for the exchange. Vital statistics are:

DC.PR.D FloatingReset YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-09-30
Maturity Price : 25.00
Evaluated at bid price : 24.91
Bid-YTW : 4.86 %

Assiduous Readers might be a little upset that they missed this, particularly since I said:

It is difficult to formulate a recommendation regarding whether holders of DC.PR.B should convert. The two issues resulting after partial conversion will, of course, form a Strong Pair and may be analyzed with the Pairs Equivalency Calculator. Performing an analysis of all current FixedReset/FloatingReset pairs results in the following chart:

FRPairs_140902
Click for Big

This chart was created with the assumed price of the new DC FloatingReset set to 25.22, the same as the price of DC.PR.B. According to this, the DC FloatingReset looks a little bit cheap … but not much. To get to the average Breakeven 3-Month Bill Yield of 1.67%, the price would only need to increase by $0.08, to 25.30.

Mind you, I also said:

Those with a taste for speculation, however, will find the conversion to the FloatingReset attractive, since there’s not much downside and potentially quite a bit of upside.

However, look at the current chart of break-even T-bill yields:

FR_breakeven_141001
Click for Big

That’s the implied rate for the DC.PR.B / DC.PR.D pair way over on the right, the only member so far of the “Junk” group – I remain very interested regarding whether the implied rates for junk and investment-grade will diverge. They shouldn’t … but you never know!

Anyway, the implied break-even three-month T-bill rate until the next exchange in September 2019 for this pair is 1.95%, just a hair over the 1.88% average for investment-grade and clearly inside the range. The interesting part of this, however, is what has happened to the average break-even rate since my recommendation as of September 2: the investment-grade average has increased from 1.67% to 1.88%. That’s a big move and has resulted in the big gap between the prices of DC.PR.B and DC.PR.D. What has happened, more or less, is that FixedResets have moved down in price, while FloatingResets are largely unchanged.

I will note that, assuming the three-month bill rate increases uniformly over the five years until the next exchange, this is predicting a yield in September 2019 of about 3%. Fancier expectations should be higher, since most pundits expect policy rates to be kept on hold for the next year, maybe two.

DC.PR.D will be tracked by HIMIPref™, but relegated to the Scraps index on credit concerns.

New Issues

New Issue: BAM FixedReset, 4.50%+284

Brookfield Asset Management has announced:

that it has agreed to issue 8,000,000 Class A Preferred Shares, Series 42 on a bought deal basis to a syndicate of underwriters led by TD Securities Inc., RBC Capital Markets, CIBC and Scotiabank for distribution to the public. The Preferred Shares, Series 42 will be issued at a price of C$25.00 per share, for gross proceeds of C$200,000,000. Holders of the Preferred Shares, Series 42 will be entitled to receive a cumulative quarterly fixed dividend yielding 4.50% annually for the initial period ending June 30, 2020. Thereafter, the dividend rate will be reset every five years at a rate equal to the 5-year Government of Canada bond yield plus 2.84%.

Brookfield has granted the underwriters an option, exercisable until 48 hours prior to closing, to purchase up to an additional 2,000,000 Preferred Shares, Series 42 which, if exercised, would increase the gross offering size to C$250,000,000. The Preferred Shares, Series 42 will be offered in all provinces of Canada by way of a supplement to Brookfield’s existing short form base shelf prospectus. The Preferred Shares, Series 42 may not be offered or sold in the United States or to U.S. persons absent registration or an applicable exemption from the registration requirements under the U.S. Securities Act.

Brookfield intends to use the net proceeds of the issue of Preferred Shares, Series 42 for general corporate purposes. The offering of Preferred Shares, Series 42 is expected to close on or about October 8, 2014.

Later, they further announced:

that as a result of strong investor demand for its previously announced offering it has agreed to increase the size of the offering to 12,000,000 Class A Preferred Shares, Series 42. The Preferred Shares, Series 42 will be issued at a price of C$25.00 per share, for gross proceeds of C$300,000,000. There will not be an underwriters’ option as was previously granted. The Preferred Shares, Series 42 are being offered on a bought deal basis by a syndicate of underwriters led by TD Securities Inc., RBC Capital Markets, CIBC and Scotiabank.

This issue looks fairly priced against BAM.PF.F, a FixedReset 4.50+286, that started trading in June, but looks reasonably cheap against its lower-spread siblings, according to Implied Volatility Theory:

ImpVol_BAM_FR_141001
Click for Big
Market Action

September 30, 2014

The downside of the elimination of bankruptcy law as it relates to banks is becoming apparent:

But after studying the proposals, National Bank Financial analyst Peter Routledge found that, under the new rules, commmon shareholders should be much more concerned, because they are quickly treated as collateral damage under the new regime. Should a new crisis emerge, common shareholders could be quickly wiped out, and that could rewrite the survival playbook.

Employing standard banking assumptions about leverage ratios and balance sheet sizes, Mr. Routledge discovered that just a 6 per cent drop in asset values, possibly from writing down a loan book and securities portfolio, would deplete a bank’s common equity capital. Because the bank’s existing common shareholders would then be wiped out, the preferred shareholders and bondholders would have their securities converted into common shares – making them the bank’s new owners.

Under the old rules, governments tried their best to protect common shareholders by setting up bailout schemes such as the Troubled Asset Relief Program, which purchased preferred shares and took toxic debt off of bank balance sheets, but did not upend the common equity investor base.

Mr. Routledge worries too few people appreciate just how easy it is to wipe out the existing shareholders under the proposed rules. When people start to realize this, possibly during the next crisis, he fears it will have disastrous implications for troubled banks.

Speaking of banks and debt:

Debt reduction through austerity reduces spending and thus slows growth; slower growth reduces incoming revenues and thus limits the ability to reduce debt.

This is a factor in the stubborn lack of global capital investment that has been limiting economic expansion – and Canada is no exception.

Standard & Poor’s on Monday pointed a finger at consumer debt as it lowered its 2014 growth forecast for the Canadian economy to 2.3 per cent from 2.5 per cent.

“Consumers might still be postponing purchases, worried about the heavy debt burdens they built up in the past decade, and this could be short-circuiting the growth we normally see in recoveries,” said S&P global fixed income analyst Robert Palombi. Without that consumer pick-up, he said, businesses lack a key catalyst to invest in expansion, which in turn has stifled employment growth.

New OSFI honcho Jeremy Rudin gave a speech to the Economic Club of Canada but didn’t say anything of interest.

The ruble’s in trouble:

Prospects Russia is considering capital controls amid the worst performance in emerging markets for the nation’s bonds and currency sent the ruble tumbling past the level at which the central bank said it would step in.

The ruble temporarily slid beyond 44.40 against the Bank of Russia’s basket of dollars and euros after two officials said policy makers are considering temporary restrictions if net outflows rise significantly. It pared declines after the central bank said it isn’t considering limits on cross-border capital movements. The yield on 10-year bonds rose six basis points to 9.42 percent, bringing this quarter’s increase to 102 basis points. The Micex Index pared its first gain in four days.

Reimposing restrictions on the flow of money that were abandoned eight years ago threatens to worsen a selloff in Russian assets that has gained momentum as the U.S. and European Union expanded sanctions over the conflict in Ukraine. The ruble slid 14 percent versus the dollar this quarter, breaking record lows in the past three days.

“Capital outflows should sharply increase now,” Stanislav Kopylov, who helps manage 45 billion rubles ($1.14 billion) at UralSib Asset Management in Moscow, said by phone from Moscow. “When you’re threatened like that, you need to urgently pull out the cash.”

And so much for Putin’s grandiose dreams of having a reserve currency:

After proclaiming in 2007 that the ruble was poised to become a haven for global investors, the Russian leader has watched it fade, a victim of his nation’s stagnating economy since the land grab in Ukraine. Now so much money is leaving Russia that its central bank is considering temporary capital controls, according to two officials with direct knowledge of the discussions.

The ruble’s share of global trading dropped to 0.4 percent from 0.6 percent since 2012, falling five places to rank 18th most-traded in the world, while the yuan tripled to 1.5 percent, according to the Society for Worldwide Interbank Financial Telecommunication, or SWIFT. Even as protests in Hong Kong this week challenged China’s leadership, direct trading began between the yuan and the euro, capping a year in which trade with European Union nations grew 12 percent.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts gaining 2bp, FixedResets up 8bp and DeemedRetractibles off 1bp. Volatility was low. Volume was low.

Now to figure out why PrefInfo isn’t working.

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices
Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)		 Median
YTW		 Median
Average
Trading
Value		 Median
Mod Dur
(YTW)		 Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 -0.1783 % 2,680.0
FixedFloater 4.20 % 3.46 % 24,464 18.41 1 0.0000 % 4,127.3
Floater 2.89 % 3.01 % 63,851 19.70 4 -0.1783 % 2,771.4
OpRet 4.05 % 2.18 % 93,842 0.08 1 0.0000 % 2,729.2
SplitShare 4.28 % 3.63 % 100,021 3.87 5 0.1978 % 3,161.6
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0000 % 2,495.6
Perpetual-Premium 5.49 % 2.53 % 75,479 0.08 20 -0.0650 % 2,443.9
Perpetual-Discount 5.29 % 5.17 % 103,207 15.16 16 0.0190 % 2,589.8
FixedReset 4.21 % 3.75 % 177,244 8.47 74 0.0813 % 2,555.8
Deemed-Retractible 5.01 % 2.21 % 104,719 0.40 42 -0.0105 % 2,561.5
FloatingReset 2.56 % -5.17 % 79,595 0.08 6 0.1761 % 2,541.1
Performance Highlights
Issue Index Change Notes
CM.PR.D Perpetual-Premium -1.50 % Called for redemption October 31
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-10-30
Maturity Price : 25.00
Evaluated at bid price : 24.97
Bid-YTW : 1.47 %
PWF.PR.P FixedReset 1.00 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-09-30
Maturity Price : 22.70
Evaluated at bid price : 23.15
Bid-YTW : 3.57 %
Volume Highlights
Issue Index Shares
Traded		 Notes
BMO.PR.W FixedReset 117,600 Desjardins crossed two blocks of 50,000 each, both at 25.13.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-09-30
Maturity Price : 23.18
Evaluated at bid price : 25.08
Bid-YTW : 3.72 %
BMO.PR.T FixedReset 63,200 TD crossed 25,000 at 25.30.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-09-30
Maturity Price : 23.26
Evaluated at bid price : 25.30
Bid-YTW : 3.75 %
CM.PR.E Perpetual-Premium 57,899 NVCC like CM.PR.D, which has been Called for redemption October 31
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-10-30
Maturity Price : 25.00
Evaluated at bid price : 25.12
Bid-YTW : -5.75 %
TD.PR.O Deemed-Retractible 57,750 Called for redemption October 31.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-10-31
Maturity Price : 25.00
Evaluated at bid price : 25.27
Bid-YTW : 1.65 %
FTS.PR.M FixedReset 57,290 Recent new issue.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-12-01
Maturity Price : 25.00
Evaluated at bid price : 25.25
Bid-YTW : 3.93 %
BNS.PR.Y FixedReset 54,870 TD crossed 49,300 at 24.02.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.01
Bid-YTW : 3.44 %
There were 24 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
IAG.PR.A Deemed-Retractible Quote: 22.90 – 23.22
Spot Rate : 0.3200
Average : 0.2208

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.90
Bid-YTW : 5.72 %
BNS.PR.N Deemed-Retractible Quote: 26.15 – 26.37
Spot Rate : 0.2200
Average : 0.1298

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-10-30
Maturity Price : 25.75
Evaluated at bid price : 26.15
Bid-YTW : -3.38 %
CU.PR.E Perpetual-Discount Quote: 24.20 – 24.45
Spot Rate : 0.2500
Average : 0.1667

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-09-30
Maturity Price : 23.81
Evaluated at bid price : 24.20
Bid-YTW : 5.10 %
IFC.PR.A FixedReset Quote: 23.70 – 24.00
Spot Rate : 0.3000
Average : 0.2182

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.70
Bid-YTW : 4.30 %
GWO.PR.H Deemed-Retractible Quote: 23.60 – 23.90
Spot Rate : 0.3000
Average : 0.2260

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.60
Bid-YTW : 5.60 %
IFC.PR.C FixedReset Quote: 25.49 – 25.72
Spot Rate : 0.2300
Average : 0.1560

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-09-30
Maturity Price : 25.00
Evaluated at bid price : 25.49
Bid-YTW : 3.20 %
New Issues

New Issue: NA FixedReset, 3.90%+225

National Bank of Canada has announced (although not yet on their website):

that it has entered into an agreement with a group of underwriters led by National Bank Financial Inc. for an issue on a bought deal basis of 8 million non-cumulative 5-year rate reset first preferred shares series 32 (the “Series 32 Preferred Shares”), at a price of $25.00 per share, to raise gross proceeds of $200 million.

National Bank has also granted the underwriters an option to purchase, on the same terms, up to an additional 2 million Series 32 Preferred 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 maximum gross proceeds raised under the offering will be $250 million should this option be exercised in full.

The Series 32 Preferred Shares will yield 3.90% annually, payable quarterly, as and when declared by the Board of Directors of National Bank, for the initial period ending February 15, 2020. The first of such dividends, if declared, shall be payable on February 15, 2015. Thereafter, the dividend rate will reset every five years at a level of 225 basis points over the then 5-year Government of Canada bond yield. Subject to regulatory approval, National Bank may redeem the Series 32 Preferred Shares in whole or in part at par on February 15, 2020 and on February 15 every five years thereafter.

Holders of the Series 32 Preferred Shares will have the right to convert their shares into an equal number of non-cumulative floating rate first preferred shares series 33 (the “Series 33 Preferred Shares”), subject to certain conditions, on February 15, 2020, and on February 15 every five years thereafter. Holders of the Series 33 Preferred Shares will be entitled to receive quarterly floating dividends, as and when declared by the Board of Directors of National Bank, equal to the 90-day Government of Canada Treasury Bill rate plus 225 basis points.

The net proceeds of the offering will be used for general corporate purposes and are expected to qualify as Tier 1 capital for National Bank. The expected closing date is on or about October 9, 2014. National Bank intends to file in Canada a prospectus supplement to its October 5, 2012 base shelf prospectus in respect of this issue.

They later announced (again, not yet on their website):

that as a result of strong investor demand for its previously announced domestic public offering of Non-cumulative 5-Year Rate Reset First Preferred Shares Series 32, the size of the offering has been increased to 12 million shares. The gross proceeds of the offering will now be $300 million. The offering will be underwritten by a syndicate led by National Bank Financial Inc. The expected closing date is October 9, 2014.

The net proceeds of the offering will be used for general corporate purposes and are expected to qualify as Tier 1 capital for National Bank.

Issue Comments

CM.PR.D To Be Redeemed

The Canadian Imperial Bank of Commerce has announced:

its intention to redeem all of its issued and outstanding Non-cumulative Class A Preferred Shares Series 26 (TSX: CM.PR.D), for cash. The redemptions will occur on October 31, 2014. The redemption price is $25.00 per Series 26 share.

The $0.359375 quarterly dividend announced on August 28, 2014 will be the final dividend on the Series 26 shares and will be paid on October 28, 2014, covering the period to October 31, 2014, to shareholders of record on September 29, 2014.

Holders of the Series 26 shares should contact the financial institution, broker or other intermediary through which they hold the shares to confirm how they will receive their redemption proceeds.

CM.PR.D is a NVCC compliant Straight Perpetual, paying 5.75%.

Issue Comments

S&P Affirms BPO, Credit-Watch Removed

Standard and Poor’s has announced:

  • •Brookfield Property Partners L.P. completed its acquisition of former affiliate and large office landlord Brookfield Office Properties Inc.
  • •Operating fundamentals have improved for office landlords as the U.S. economy has recovered, employment has strengthened, and new office supply additions have been muted.
  • •We are affirming our ‘BBB-‘ corporate credit rating on Brookfield Office and removing all ratings from CreditWatch with developing implications. The outlook is stable.
  • •The stable outlook reflects our view that the company’s competitively positioned office portfolio, with improving occupancy, good quality tenants, and below market rents will support leverage and fixed-charge coverage at current levels.

Standard & Poor’s Ratings Services today affirmed its ‘BBB-‘ corporate credit rating on Brookfield Office Properties Inc. (Brookfield Office), ‘BB+’ rating on the company’s unsecured debt, and ‘BB’ rating on its preferred stock. We removed all ratings on the company from CreditWatch, where we placed them with developing implications on Oct. 4, 2013. These actions affect roughly $1.7 billion of rated corporate debt and preferred securities.
…
We would lower ratings if leverage rises to 60%, fixed-charge coverage measures deteriorate to the 1.3x level, or the common dividend is not adequately supported by operations, since these measures would be more reflective of an “aggressive” financial risk profile. An increase in speculative development activity would also pressure ratings.

We don’t see potential for upgrade momentum over the next few years despite the company’s “strong” business risk profile until the financial risk profile is more firmly positioned within the “significant” category. Specifically, we would look for fixed-charge coverage measures above 1.7x, debt to EBITDA of less than 10x, and stronger coverage of the common dividend. The prudent pursuit and financing of the company’s expanding development pipeline would also be an important consideration for ratings improvement.

The “Watch – Developing” status was previously reported on PrefBlog.

The ultimate parent, Brookfield Asset Management, has the following preferred shares outstanding:
FixedResets BAM.PF.A, BAM.PF.B, BAM.PF.E, BAM.PF.F, BAM.PR.R, BAM.PR.T, BAM.PR.X, BAM.PR.Z
Floaters BAM.PR.B, BAM.PR.C, BAM.PR.K
RatchetRate BAM.PR.E
FixedFloater BAM.PR.G
OperatingRetractible BAM.PR.J
Straight Perpetual BAM.PR.M, BAM.PR.N, BAM.PF.C, BAM.PF.D

BPO has the following preferred share issues outstanding:
OperatingRetractible BPO.PR.H, BPO.PR.J, BPO.PR.K,
FixedReset BPO.PR.L, BPO.PR.N, BPO.PR.P, BPO.PR.R, BPO.PR.T,
Floaters BPO.PR.W, BPO.PR.X, BPO.PR.Y

In addition, there are the following split shares dependent upon BPO:
BPS.PR.U, BPS.PR.A, BPS.PR.B and BPS.PR.C

Market Action

September 29, 2014

I swear, I’m thinking about changing the name of this thing to RealEstateBlog! Whenever I post about real estate prices I get more responses than with respect to anything else. So, Garth Turner, look out!

Assiduous Reader prefhound sends me a clipping with the following assertions:

I conclude that a house is pretty much similar to a financial investment. Even today’s apparently “elevated” house prices seem reasonably similar to today’s “modest” long term future equity investment potential on an after-tax basis.

For example, at today’s house prices, buying a house for X dollars could generate a long run return of about 3% (tax free). I see this as coming from the sum of 4 components:
1. Cost of Property Tax – about 1% of X per year
2. Cost of Maintenance and Ongoing Renovations – about 3% per year. Some years are much lower and some much higher.
3. Long run Price Appreciation of property – about 3% per year if kept livable and up to standard. 3% = 2% inflation plus the long run salary growth due to 1% productivity gains.
4. Rent Savings of approximately 4% of the house value per year.

Add up these items (4% in costs; 7% in gains and savings) and the result is about 3% long run return.

Further, with a little help from a few educated estimates:

With my previous estimates of rents and competitive investment returns after tax (all smoothed to the same return every year – which is an approximation), I then compared the house owning scenario to a renting scenario where the total cash flows were the same, but any excess/shortfall went into/came from investments.

Remarkably, the renting scenario came out with a current investment asset worth about 96% of the current house value. The renting scenario was roughly financially equivalent to owning.

In the renting scenario we were saving a lot of money for the first 15 years, but then drawing down from savings to pay rent in recent years when maintenance was lower.

… and, provocatively:

Another aspect of this discussion is that houses seem like strip bond investments in an asset mix. This is especially true if there is no mortgage making home equity more volatile.

Perhaps asset mix discussions should consider a paid off house as a bond and a fully mortgaged house as equity, so that the fraction equity = current mortgage / value ratio. This may be sensible while working and continuously saving, but when retirement cash flows require drawing on investments, income generating financial fixed income becomes increasingly important.

So, like Assiduous Reader adrian2, prefhound is holding to the ‘house price proportional to inflation plus productivity’ argument.

While pondering this, and wondering why I didn’t become a real-estate analyst, I came across a paper by Peter Harrison titled MEDIAN WAGES AND PRODUCTIVITY GROWTH IN CANADA AND THE UNITED STATES:

In 2008, Sharpe, Arsenault and Harrison attempted to explain why the median earnings of full-time, full-year workers in Canada rose only $53 dollars, from $41,348 (2005 dollars) in 1980 to $41,401 in 2005, while over the same period, total economy labour productivity gains were 37.4 per cent. They identified four key factors: measurement issues, rising earnings inequality, falling terms of trade of labour (the relationship between the prices workers receive for output and the cost of living), and falling labour share. That study in some sense raised more questions than it answered about the relationship between real wages and labour productivity. This research note expands on Sharpe, Arsenault, and Harrison (2008) in order to shed additional light on the relationship.

The guts of the matter is a very interesting table:

Earnings and Productivity Growth Gap (Compound Annual Growth Rates) Canada
(per cent)		 United States (per cent)
Median real hourly wage 0.01 0.33
Labour productivity (Real output per hour) 1.27 1.73
Total Gap 1.26 1.40
Contribution to median real earnings and productivity gap Absolute (points) Relative (per cent) Absolute (points) Relative (per cent)
Inequality from median to average measure 0.35 27.6 0.63 45.1
Labour’s Terms of Trade: from CPI to GDP deflator 0.42 33.3 0.31 22.5
Supplementary Labour Income: from wage to total compensation 0.35 27.3 0.16 11.7
Labour Share of Nominal GDP 0.25 19.8 0.23 16.7
Other measurement issues -0.10 -7.9 – –
Total – All Factors 1.26 100.0 1.34 95.9

This table is applicable to 1980-2005 which is to say from the tail-end of the inflationary period to the middle of the Great Moderation.

Ha! So where’s your productivity gains now, fellas? Admittedly, this analysis refers to the entire labour pool and I suspect that only the upper 60% of the labour pool really counts, but still, that’s a real eye opener. Like I always say, the means of production should controlled by the proletariat, held in trust by me.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts up 12bp, FixedResets off 6bp and DeemedRetractibles gaining 2bp. Volatility was minimal. Volume was absurdly low.

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices
Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)		 Median
YTW		 Median
Average
Trading
Value		 Median
Mod Dur
(YTW)		 Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 0.4547 % 2,684.8
FixedFloater 4.20 % 3.46 % 24,686 18.41 1 -0.8772 % 4,127.3
Floater 2.88 % 3.01 % 63,398 19.68 4 0.4547 % 2,776.3
OpRet 4.05 % 2.04 % 95,317 0.08 1 0.0000 % 2,729.2
SplitShare 4.29 % 3.65 % 99,414 3.88 5 0.0875 % 3,155.4
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0000 % 2,495.6
Perpetual-Premium 5.48 % 3.97 % 75,081 0.08 20 0.1900 % 2,445.5
Perpetual-Discount 5.29 % 5.18 % 101,126 15.11 16 0.1169 % 2,589.3
FixedReset 4.25 % 3.75 % 186,603 8.46 75 -0.0612 % 2,553.7
Deemed-Retractible 5.01 % 2.44 % 105,994 0.40 42 0.0200 % 2,561.8
FloatingReset 2.56 % 0.00 % 65,402 0.08 6 -0.1173 % 2,536.6
Performance Highlights
Issue Index Change Notes
TRP.PR.B FixedReset -1.37 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-09-29
Maturity Price : 19.50
Evaluated at bid price : 19.50
Bid-YTW : 3.77 %
MFC.PR.F FixedReset -1.34 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.15
Bid-YTW : 4.67 %
Volume Highlights
Issue Index Shares
Traded		 Notes
IFC.PR.C FixedReset 104,293 RBC crossed 100,000 at 25.54.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-09-30
Maturity Price : 25.00
Evaluated at bid price : 25.53
Bid-YTW : 3.11 %
FTS.PR.M FixedReset 98,435 Recent new issue.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-12-01
Maturity Price : 25.00
Evaluated at bid price : 25.28
Bid-YTW : 3.90 %
BMO.PR.W FixedReset 78,793 Scotia crossed 40,000 at 25.10.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-09-29
Maturity Price : 23.19
Evaluated at bid price : 25.12
Bid-YTW : 3.72 %
RY.PR.H FixedReset 61,000 TD crossed 49,900 at 25.30.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-09-29
Maturity Price : 23.27
Evaluated at bid price : 25.31
Bid-YTW : 3.72 %
ENB.PF.G FixedReset 30,775 Recent new issue.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-09-29
Maturity Price : 23.11
Evaluated at bid price : 25.00
Bid-YTW : 4.22 %
TD.PF.B FixedReset 16,467 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-07-31
Maturity Price : 25.00
Evaluated at bid price : 25.17
Bid-YTW : 3.59 %
There were 12 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
MFC.PR.L FixedReset Quote: 24.70 – 25.10
Spot Rate : 0.4000
Average : 0.2782

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.70
Bid-YTW : 4.01 %
TRP.PR.B FixedReset Quote: 19.50 – 19.86
Spot Rate : 0.3600
Average : 0.2407

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-09-29
Maturity Price : 19.50
Evaluated at bid price : 19.50
Bid-YTW : 3.77 %
GWO.PR.I Deemed-Retractible Quote: 22.28 – 22.64
Spot Rate : 0.3600
Average : 0.2663

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.28
Bid-YTW : 5.96 %
ENB.PR.J FixedReset Quote: 25.00 – 25.25
Spot Rate : 0.2500
Average : 0.1633

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-09-29
Maturity Price : 23.21
Evaluated at bid price : 25.00
Bid-YTW : 4.15 %
PWF.PR.P FixedReset Quote: 22.92 – 23.21
Spot Rate : 0.2900
Average : 0.2057

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-09-29
Maturity Price : 22.49
Evaluated at bid price : 22.92
Bid-YTW : 3.60 %
FTS.PR.J Perpetual-Discount Quote: 23.51 – 23.79
Spot Rate : 0.2800
Average : 0.2089

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-09-29
Maturity Price : 23.18
Evaluated at bid price : 23.51
Bid-YTW : 5.09 %
Market Action

September 26, 2014

On September 24, I mentioned bank account promotions in which depositors effectively received a lottery ticket for making a deposit – this is similar to premium bonds in the UK, but not government-backed. My attention has now been drawn to a more savory alternative:

VISIT an outlet of Chilango, a Mexican food chain in London, and you will be invited to “become part of the story”, not just by eating a burrito but by buying a “burrito bond”. These are four-year loans to the firm of at least £500 ($835), paying annual interest of 8%, along with a variable number of free burritos, depending on how much an individual lends. Helped by Crowdcube, a crowdfunding website, Chilango has already raised £1.8m in this way—80% more than its initial goal—from 585 bond-buyers.

In Britain “mini-bonds” are more loans than bonds, in that they are not tradable (elsewhere they are a less regulated version of conventional bonds). They let individuals lend money directly to small, unlisted businesses. They tend to pay well, albeit with lots of risks and quirks.

We’ll never get that here in Canada. Small, unlisted businesses don’t employ ex-regulators and are therefore beyond the Pale.

There may have been a a little progress made in the battle against bank hegemony:

The Canadian Securities Administrators (the CSA) recently announced that the operation of the CSA National Systems (SEDAR, SEDI and NRD) has been transferred as of January 13, 2014 from CDS INC. to CGI Information Systems and Management Consultants Inc. (CGI).

As a result, CDS INC. (through its affiliate CDS Innovations Inc.) is no longer the exclusive provider of SEDAR data feeds. The CSA will now become the direct provider of these data services to subscribers and data resellers. The services consist of the provision of Canadian public company data filed on SEDAR as well as investment fund data filings. The data is delivered in near real-time (i.e., shortly after the time when made publically available in SEDAR), and includes the original PDF formatted filing, a text conversion of the filed document, and a control file indicating changes in the status of filed information.

Customization of information content received (for example, filtering to receive only certain documents) will continue to be available.

Going forward, these SEDAR data services will be offered directly by the Alberta Securities Commission (ASC), in its capacity as the representative securities regulatory authority authorized to grant licenses and enter into agreements with third parties relating to the use of SEDAR data. SEDAR data services can also be obtained from value-added resellers who have been authorized by the ASC to provide the services.

In addition, data feeds of SEDI data or an organization’s NRD data are no longer delivered by CDS INC. or its affiliate CDS Innovations Inc. These services are now offered directly by the ASC, again in its capacity within the CSA as the representative securities regulatory authority authorized to grant licenses and enter into agreements with third parties relating to the use of SEDI data or NRD data.

SEDI data services consist of providing publicly available information on filings, holdings and transactions by insiders of Canadian public companies who are required to report such trades in SEDI. The SEDI system contains information on almost 50,000 insiders and 6,400 issuers, and averages 20,000 insider reports per month.

A registered firm may subscribe to NRD data services to receive a regular feed of its organization’s registered individuals and registration categories.

Should you have interest in or questions about the services noted above, or wish to become a value added reseller, please contact the CSA IT Systems Office at data-distribution-services@csa-acvm.ca

Regrettably, however, this public information is still not public:

Except as otherwise set out in these Terms of Use or unless you have a written agreement in effect with the ASC which states otherwise, you may only provide a hypertext link to this Web Site on another web site, provided that (a) the link is a text-only link clearly marked “SEDAR Home Page”; (b) the user must be linked directly to the URL http://www.sedar.com and not to any other pages within this Web Site; …

Huh. I’ll be writing the ASC and asking for permission to link to the secret public documents. Any bets on my success?

Assiduous Reader MP sends me a link – unlike youse other bums, who never send me NUTHIN’ – to the page for Andrew McCreath’s BNN show, which includes links to two interviews with Nicolas Normandeau, PM of HPR. The first is a competently performed exposition of preferred share basics, the second has a moment of interest when Mr. Normandeau explains his liking for bank-issued DeemedRetractibles. He also doesn’t like FixedResets with low Issue Reset Spreads and claims to have positioned the fund for a modest upwards parallel shift in market yields. Mr. Normandeau works for Fiera, which is controlled by National Bank, as discussed on March 4, 2013.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts off 3bp, FixedResets up 7bp and DeemedRetractibles gaining 2bp. Volatility was nonexistent. Volume was very extremely awfully low.

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices
Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)		 Median
YTW		 Median
Average
Trading
Value		 Median
Mod Dur
(YTW)		 Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 -0.3980 % 2,672.7
FixedFloater 4.17 % 3.43 % 24,483 18.49 1 0.7958 % 4,163.9
Floater 2.89 % 3.02 % 64,020 19.67 4 -0.3980 % 2,763.8
OpRet 4.05 % 1.63 % 95,951 0.08 1 0.0395 % 2,729.2
SplitShare 4.29 % 3.83 % 100,607 3.89 5 0.0716 % 3,152.6
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0395 % 2,495.6
Perpetual-Premium 5.49 % 1.81 % 75,065 0.09 20 0.0828 % 2,440.8
Perpetual-Discount 5.28 % 5.19 % 105,033 15.13 16 -0.0271 % 2,586.3
FixedReset 4.25 % 3.80 % 187,613 8.43 75 0.0678 % 2,555.3
Deemed-Retractible 5.01 % 2.43 % 106,290 0.26 42 0.0190 % 2,561.3
FloatingReset 2.58 % -1.43 % 67,870 0.08 6 0.1239 % 2,539.6
Performance Highlights
Issue Index Change Notes
No individual gains or losses exceeding 1%!
Volume Highlights
Issue Index Shares
Traded		 Notes
ENB.PF.G FixedReset 197,730 Recent new issue.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-09-26
Maturity Price : 23.11
Evaluated at bid price : 25.00
Bid-YTW : 4.27 %
ENB.PR.D FixedReset 84,100 Desjardins crossed 79,000 at 24.10.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-09-26
Maturity Price : 22.96
Evaluated at bid price : 24.09
Bid-YTW : 4.15 %
PWF.PR.H Perpetual-Premium 68,309 Nesbitt crossed 65,000 at 25.52.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-10-26
Maturity Price : 25.00
Evaluated at bid price : 25.50
Bid-YTW : -7.41 %
GWO.PR.L Deemed-Retractible 52,500 Desjardins crossed 11,800 at 25.89. RBC crossed 40,000 at the same price.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-12-31
Maturity Price : 25.25
Evaluated at bid price : 25.90
Bid-YTW : 4.75 %
POW.PR.G Perpetual-Premium 46,950 RBC crossed 37,500 at 26.10.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2021-04-15
Maturity Price : 25.00
Evaluated at bid price : 26.11
Bid-YTW : 4.78 %
BAM.PR.K Floater 44,960 Nesbitt crossed 40,000 at 17.25.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-09-26
Maturity Price : 17.26
Evaluated at bid price : 17.26
Bid-YTW : 3.04 %
There were 12 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
CIU.PR.C FixedReset Quote: 20.42 – 21.11
Spot Rate : 0.6900
Average : 0.4710

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-09-26
Maturity Price : 20.42
Evaluated at bid price : 20.42
Bid-YTW : 3.83 %
GWO.PR.H Deemed-Retractible Quote: 23.71 – 24.06
Spot Rate : 0.3500
Average : 0.2487

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.71
Bid-YTW : 5.54 %
RY.PR.C Deemed-Retractible Quote: 25.56 – 25.84
Spot Rate : 0.2800
Average : 0.1794

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-11-24
Maturity Price : 25.25
Evaluated at bid price : 25.56
Bid-YTW : -0.49 %
POW.PR.A Perpetual-Premium Quote: 25.15 – 25.38
Spot Rate : 0.2300
Average : 0.1398

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-10-26
Maturity Price : 25.00
Evaluated at bid price : 25.15
Bid-YTW : -5.16 %
MFC.PR.H FixedReset Quote: 26.17 – 26.40
Spot Rate : 0.2300
Average : 0.1447

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-03-19
Maturity Price : 25.00
Evaluated at bid price : 26.17
Bid-YTW : 2.69 %
CGI.PR.D SplitShare Quote: 25.25 – 25.49
Spot Rate : 0.2400
Average : 0.1661

YTW SCENARIO
Maturity Type : Soft Maturity
Maturity Date : 2023-06-14
Maturity Price : 25.00
Evaluated at bid price : 25.25
Bid-YTW : 3.65 %