PrefLetter

PrefLetter Now Available in Alberta!

I am pleased to announce that PrefLetter is now available to residents of Alberta.

PrefLetter is the monthly newsletter recommending individual issues of preferred shares to subscribers. There is at least one recommendation from every major type of preferred share (two of them recently added); the recommendations are taylored for “buy-and-hold” investors.

Preferred share dividends enjoy a privileged position with respect to taxes in Alberta.

The next edition of PrefLetter will be prepared as of the close on Friday, May 8, and be eMailed to subscribers in PDF format prior to the opening of the Toronto Stock Exchange on May 11.

Taxation

Marginal Tax Rates: Alberta

E&Y have analyzed current Alberta tax rates and we may draw some conclusions from these data:

Investors Taxable Income Marginal Rate on Interest Marginal Rate on Dividends Equivalency Factor
Widows & Orphans $30,000 25.00% 0.01% 1.33
Professionals $75,000 32.00% 4.41% 1.41
Plutocrats $150,000 39.00% 14.56% 1.40

It is interesting to note that the equivalency factors have increased slightly since my 2006 post on this topic.

Regulatory Capital

BNS Tier 1 Issue: 7.802%+705

I mentioned on May 1:

I understand that Scotia has done an Innovative Tier 1 Capital deal, described as “650 million deal June 30, 2019-2108 … at 7.804%”, but have no further details, no press release, nothing on SEDAR.

Well, still no press release, but the prospectus is on SEDAR, dated May 1, 2009:

From the date of issue to, but excluding, June 30, 2019 the interest rate on the Scotia BaTS III Series 2009-1 will be fixed at 7.802% per annum. Starting on June 30, 2019 and on every fifth anniversary of such date thereafter until June 30, 2104 (each such date, an “Interest Reset Date”), the interest rate on the Scotia BaTS III Series 2009-1 will be reset at an interest rate per annum equal to the Government of Canada Yield (as defined herein) plus 7.05%. The Scotia BaTS III Series 2009-1 will mature on June 30, 2108. Holders of Scotia BaTS III Series 2009-1 may, in certain circumstances, be required to invest interest paid on the Scotia BaTS III Series 2009-1 in a series of newly-issued preferred shares of the Bank with non-cumulative dividends (each such series is referred to as “Bank Deferral Preferred Shares). See “Description of the Trust Securities — Scotia BaTS III Series 2009-1 — Deferral Right”.
…
The Bank will covenant for the benefit of holders of Scotia BaTS III Series 2009-1 (the “Dividend Stopper Undertaking”) that, in the event of an Other Deferral Event (as defined herein), the Bank will not declare dividends of any kind on any preferred shares of the Bank (“Bank Preferred Shares”) or, failing any Bank Preferred Shares being outstanding, on all of the outstanding common shares of the Bank (“Bank Common Shares” and, collectively with the Bank Preferred Shares, the “Dividend Restricted Shares”) until the 6th month (the “Dividend Declaration Resumption Month”) following the relevant Deferral Date (as defined herein).
…
On or after June 30, 2014 the Trust may, at its option, with the prior approval of the Superintendent, on giving not more than 60 nor less than 30 days’ notice to the holders of the Scotia BaTS III Series 2009-1, redeem the Scotia BaTS III Series 2009-1, in whole or in part. The redemption price per $1,000 principal amount of Scotia BaTS III Series 2009-1 redeemed on any day that is not an Interest Reset Date will be equal to the greater of par and the Canada Yield Price, and the redemption price per $1,000 principal amount of Scotia BaTS III Series 2009-1 redeemed on any Interest Reset Date will be par, together in either case with accrued and unpaid interest to but excluding the date fixed for redemption, subject to any applicable withholding tax. The redemption price payable by the Trust will be paid in cash.
…
It is expected that the closing date will be on or about May 7, 2009 (the “Closing Date”)
…
On or after June 30, 2014 the Trust may, at its option, with the prior approval of the Superintendent, on giving not more than 60 nor less than 30 days’ notice to the holders of the Scotia BaTS III Series 2009-1, redeem the Scotia BaTS III Series 2009-1, in whole or in part. The redemption price per $1,000 principal amount of Scotia BaTS III Series 2009-1 redeemed on any day that is not an Interest Reset Date will be equal to the greater of par and the Canada Yield Price, and the redemption price per $1,000 principal amount of Scotia BaTS III Series 2009-1 redeemed on any Interest Reset Date will be par, together in either case with accrued and unpaid interest to but excluding the date fixed for redemption.
…
Canada Yield Price means the price per $1,000 principal amount of Scotia BaTS III Series 2009-1 calculated by the Bank to provide an annual yield thereon from the applicable date of redemption to, but excluding, the next Interest Reset Date equal to the GOC Redemption Yield plus (i) 1.17% if the redemption date is any time prior to June 30, 2019 or (ii) 2.35% if the redemption date is any time on or after June 30, 2019.
…
GOC Redemption Yield means, on any date, the average of the annual yields at 12:00 p.m. (Eastern time) on the Business Day immediately preceding the date on which the Trust gives notice of the redemption of the Scotia BaTS III Series 2009-1 as determined by two Canadian registered investment dealers, each of which will be selected by, and must be independent of, the Bank, as being the annual yield from the applicable date of redemption to, but excluding, the next Interest Reset Date which a non-callable Government of Canada bond would carry, assuming semi-annual compounding, if issued in Canadian dollars at 100% of its principal amount on the date of redemption and maturing on the next Interest Reset Date.
…
Government of Canada Yield means, on any Interest Reset Date, the average of the annual yields as at 12:00 p.m. (Eastern time) on the third Business Day prior to the applicable Interest Reset Date as determined by two Canadian registered investment dealers, each of which will be selected by, and must be independent of, the Bank, as being the annual yield to maturity on such date which a non-callable Government of Canada bond would carry, assuming semiannual compounding, if issued in Canadian dollars in Canada at 100% of its principal amount on such date with a term to maturity of five years.
…
Interest Reset Date means June 30, 2019 and every fifth anniversary of such date thereafter until June 30, 2104 on which dates the interest rate on the Scotia BaTS III Series 2009-1 will be reset as described in this prospectus.

There hasn’t been a new BNS Fixed-Reset since January and the market has changed a lot since then, so let’s do a quick comparison with the more recent RY.PR.Y 6.10%+413:

  • The preferred dividend is equivalent to 8.54% interest, so there’s a give up of about 75bp to move to the Tier 1 issue. Mind you, RY.PR.Y closed last night with a 25.90 bid to yield 5.40% until its first call at the end of 2014, which eliminates the yield differential quite handily
  • The Tier 1 issue does not reset the rate for 10 years
  • If the Tier 1 issue is called prior to 2019-6-30, holders get a whacking great premium
  • The Tier 1 issue is slightly senior to Preferreds

It would appear that this issue is greatly superior to equivalent bank preferred issues.

New Issues

New Issue: CCS Fixed-Reset 7.25%+521

Co-operators General Insurance Company has announced a new issue:

Issue Name: Non-cumulative 5-Year Rate Reset Class E Preference Shares, Series D

Issue Size: 4-million shares (=$100-million) + greenshoe 0.6-million shares (=$15-million)

Dividend: 7.25% until first Reset Date. Reset to 5-Year GOC + 521bp on each Reset Date

First Dividend: Payable 2009-9-30, $0.6505 (lovely and fat! Mark your calendars!)

Reset Dates: 2014-6-30 and every five years thereafter.

Redemption: Every Reset Data at 25.00

Exchangeable: Every Reset Date to Series E, pay 3-month Treasury Bills + 521bp, reset quarterly. Series E is redeemable on Reset Dates at 25.00 and at 25.50 at all other times.

Closing Date: Scheduled for May 22

Nice to see a new issue come out, even if the credit is not tip-top (Pfd-3 by DBRS). The extant PerpetualDiscount, CCS.PR.C closed last night at 15.20-49 to yield 8.38-20%

Update: Press Release.

Issue Comments

L.PR.A: Pricing Clue from New Note Issue

Loblaws has announced:

intends to issue $350 million principal amount of Medium Term Notes, Series 2-A pursuant to its Medium Term Notes, Series 2 program. The notes are to be offered through an agency syndicate led by CIBC World Markets Inc. and RBC Dominion Securities Inc and are expected to be issued on May 8, 2009. The notes will pay a fixed rate of 4.85% until maturity on May 8, 2014. The notes will be unsecured obligations of the Company and will rank equally with all other unsecured indebtedness of the Company that has not been subordinated. The net proceeds of the offering will be added to the general funds of the Company, used to repay short term debt, refinance other indebtedness and for general corporate purposes.

The Company intends to file in Canada a pricing supplement for this issue pursuant to its short form base shelf prospectus dated June 5, 2008 and its prospectus supplement dated May 5, 2009 in respect of the program. Details of the offering will be set out in the prospectus supplement and the pricing supplement, which will be available on the SEDAR website at www.sedar.com.

L.PR.A is a very liquid OperatingRetractible, relegated to the HIMIPref™ Scraps index due to credit concerns. It closed last night at 25.40-70 to yield 5.70-47% until its softMaturity 2015-7-31.

The 5.70% bid-side dividend yield is equivalent to 7.98% interest, so we can say that the pre-tax interest-equivalent spread vs. bonds for this issue is over 310bp … balancing the poorer credit vs. the advantages of retraction, I’d say the preferreds are cheap here.

L.PR.A was last mentioned on PrefBlog in the post L.PR.A Goes Stale on Shelf … it had a difficult underwriting in June 2008.

Interesting External Papers

Addressing Bank Linkages

A good piece – with a lousy conclusion – on VoxEU by Jorge A. Chan-Lau, Marco A. Espinosa-Vega, Kay Giesecke and Juan Sole: Policymakers must prevent financial institutions from becoming too connected to fail:

Some policymakers (e.g., Stern and Feldman 2004) have long recognised this problem and have called for “macro-prudential” oversight and regulation focused on systemic risks, not just individual institutions. However, it is easy to ignore such admonitions when times are good because the probability of an extreme or tail event may appear remote—a phenomenon dubbed “disaster myopia.” Moreover, it is difficult to monitor the linkages that lead to the too-connected-to-fail problem. Yet to make macro-prudential oversight a reality—as G20 nations called for in the communiqué following their April 2 summit – —policymakers must be able to observe information on potentially systemic linkages.
…
Because it is virtually impossible for a country to undertake effective surveillance of potential cross-border systemic linkages alone, the IMF should assume a more prominent global financial surveillance role.

This smells like another IMF power-grab. They nod towards the idea of progressive capital charges – as I have advocated – with credit to Donato Masciandaro, whose VoxEU piece was discussed on January 14, but it’s clear that they want a lot of banks to fill in a lot of forms and send them off to a greatly expanded bureaucracy at the IMF. They’ll have to compete for staff with OSFI, who are expanding with not just one, but two positions in Toronto!

There are simpler ways. Section 3.1.5 of OSFI’s Capital Guidelines states:

Canadian deposit taking institutions (DTIs) include federally and provincially regulated institutions that take deposits and lend money. These include banks, trust or loan companies and co-operative credit societies.

The term bank refers to those institutions that are regarded as banks in the countries in which they are incorporated and supervised by the appropriate banking supervisory or monetary authority. In general, banks will engage in the business of banking and have the power to accept deposits in the regular course of business.

For banks incorporated in countries other than Canada, the definition of bank will be that used in the capital adequacy regulations of the host jurisdiction.

… and Section 3.1.6 states:

Claims on securities firms may be treated as claims on banks provided these firms are subject to supervisory and regulatory arrangements comparable to those under Basel II framework (including, in particular, risk-based capital requirements). Otherwise, such claims would follow the rules for claims on corporates.

Footnote: That is, capital requirements that are comparable to those applied to banks in this Framework. Implicit in the meaning of the word “comparable” is that the securities firm (but not necessarily its parent) is subject to consolidated regulation and supervision with respect to any downstream affiliates.

… and applies credit risk weights according to the credit rating of the sovereign; thus implicitly assuming that there will be a bail-out in times of trouble.

This smacks of bureaucratic bloat. If anything, if the regulators wish to address systemic risk, they must make it harder – requiring more capital – for banks to hold each other’s paper. The risk weight of the assets held should be:

  • based on the credit quality of the unsupported institution
  • subject to concentration penalties (e.g., holding 1% of assets in a single external bank requires more capital than holding 0.5% of assets in each of two external banks), and
  • be more expensive in terms of capital than the paper of a non-regulated, non-financial company

I will not go so far as to state definitely that there is no role for the IMF in bank supervision. I will say, however, that before I support such a role, I want somebody to explain to me, slowly and carefully, why we need a whole new additional set of rules instead of just adjusting the extant system based on experience.

Market Action

May 5, 2009

The SEC has brought the first insider trading action involving CDS:

The SEC’s complaint alleges that [Deutsche Bank salesman Jon-Paul] Rorech learned information from Deutsche Bank investment bankers about a change to the proposed VNU bond offering that was expected to increase the price of the CDS on VNU bonds. Deutsche Bank was the lead underwriter for a proposed bond offering by VNU. According to the SEC’s complaint, Rorech illegally tipped [former Millenium Partners portfolio manager Renato] Negrin about the contemplated change to the bond structure, and Negrin then purchased CDS on VNU for a Millennium hedge fund. When news of the restructured bond offering became public in late July 2006, the price of VNU CDS substantially increased, and Negrin closed Millennium’s VNU CDS position at a profit of approximately $1.2 million.

“This is the first insider trading enforcement action involving credit default swaps,” said Scott W. Friestad, Deputy Director of the SEC’s Division of Enforcement. “As alleged in our complaint, Rorech and Negrin checked their integrity at the door and schemed to engage in insider trading of CDS to the detriment of investors and our markets.”

The plot thickens with respect to Bernanke’s involvment in the BofA / Merrill Lynch cover-up, discussed on April 24:

“I absolutely did not in any way ask Mr. Lewis to obscure any disclosures or to fail to report information that he should be reporting,” Bernanke said today in testimony to the congressional Joint Economic Committee.

It is not inconsistent with Cuomo’s charges; the Fed wanted the merger to go ahead and did not necessarily say anything about disclosure. But we will see!

In more government interference news, there is a twist to the Chrysler bankruptcy:

Chrysler LLC’s plan to auction most of its assets to an entity managed by Fiat SpA is unfair because it prevents creditors from using their claims to make a non-cash bid, a group of secured lenders told a bankruptcy judge.

The group, calling itself Chrysler’s non-TARP lenders, in reference to the Troubled Assets Relief Program, said the proposed auction chills bids from other parties, and would prevent a so-called “credit bid” from its group.
…
The non-TARP group asked U.S. Bankruptcy Judge Arthur Gonzalez not to reveal the identities of its members, even after the judge asked yesterday that they do so. A lawyer for the group, Thomas Lauria, has said members who have been identified have received death threats.

It might be grandstanding … the fears might be genuine but exaggerated … but the President of the United States has to cool things off a little and back away from his inflammatory rhetoric, as discussed on May 1. At any rate, the judge has ruled that they must identify themselves.

The market had another very good day on high volume, with PerpetualDiscounts leading the way (the way up! about time!) and dragging FixedResets behind them.

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 3.0948 % 1,019.7
FixedFloater 0.00 % 0.00 % 0 0.00 0 3.0948 % 1,649.1
Floater 3.69 % 4.27 % 70,523 16.84 3 3.0948 % 1,273.9
OpRet 5.07 % 4.32 % 136,957 3.18 15 0.2826 % 2,144.6
SplitShare 6.04 % 7.74 % 48,243 4.28 3 -0.2843 % 1,778.1
Interest-Bearing 6.05 % 7.84 % 27,243 0.63 1 -0.7007 % 1,971.3
Perpetual-Premium 0.00 % 0.00 % 0 0.00 0 0.6612 % 1,680.0
Perpetual-Discount 6.51 % 6.62 % 151,093 13.06 71 0.6612 % 1,547.3
FixedReset 5.79 % 4.92 % 563,241 4.53 36 0.1053 % 1,957.0
Performance Highlights
Issue Index Change Notes
NA.PR.P FixedReset -1.56 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-03-17
Maturity Price : 25.00
Evaluated at bid price : 26.51
Bid-YTW : 5.17 %
PWF.PR.G Perpetual-Discount -1.27 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-05-05
Maturity Price : 21.71
Evaluated at bid price : 21.71
Bid-YTW : 6.86 %
GWO.PR.H Perpetual-Discount 1.08 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-05-05
Maturity Price : 17.79
Evaluated at bid price : 17.79
Bid-YTW : 6.92 %
SLF.PR.E Perpetual-Discount 1.09 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-05-05
Maturity Price : 16.70
Evaluated at bid price : 16.70
Bid-YTW : 6.84 %
TD.PR.P Perpetual-Discount 1.09 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-05-05
Maturity Price : 21.27
Evaluated at bid price : 21.27
Bid-YTW : 6.22 %
BNS.PR.O Perpetual-Discount 1.10 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-05-05
Maturity Price : 22.86
Evaluated at bid price : 23.00
Bid-YTW : 6.13 %
CM.PR.H Perpetual-Discount 1.10 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-05-05
Maturity Price : 18.31
Evaluated at bid price : 18.31
Bid-YTW : 6.61 %
NA.PR.M Perpetual-Discount 1.16 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-05-05
Maturity Price : 22.63
Evaluated at bid price : 22.76
Bid-YTW : 6.62 %
CM.PR.K FixedReset 1.25 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-05-05
Maturity Price : 24.26
Evaluated at bid price : 24.30
Bid-YTW : 4.52 %
BMO.PR.J Perpetual-Discount 1.27 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-05-05
Maturity Price : 18.36
Evaluated at bid price : 18.36
Bid-YTW : 6.15 %
IAG.PR.C FixedReset 1.30 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-05-05
Maturity Price : 24.85
Evaluated at bid price : 24.90
Bid-YTW : 5.55 %
BMO.PR.O FixedReset 1.31 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-06-24
Maturity Price : 25.00
Evaluated at bid price : 27.00
Bid-YTW : 4.94 %
PWF.PR.E Perpetual-Discount 1.36 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-05-05
Maturity Price : 20.84
Evaluated at bid price : 20.84
Bid-YTW : 6.66 %
BMO.PR.L Perpetual-Discount 1.42 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-05-05
Maturity Price : 22.72
Evaluated at bid price : 22.85
Bid-YTW : 6.36 %
POW.PR.B Perpetual-Discount 1.49 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-05-05
Maturity Price : 19.75
Evaluated at bid price : 19.75
Bid-YTW : 6.86 %
SLF.PR.C Perpetual-Discount 1.54 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-05-05
Maturity Price : 16.51
Evaluated at bid price : 16.51
Bid-YTW : 6.85 %
BNS.PR.J Perpetual-Discount 1.55 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-05-05
Maturity Price : 21.56
Evaluated at bid price : 21.56
Bid-YTW : 6.14 %
BAM.PR.J OpRet 1.60 % YTW SCENARIO
Maturity Type : Soft Maturity
Maturity Date : 2018-03-30
Maturity Price : 25.00
Evaluated at bid price : 21.54
Bid-YTW : 7.71 %
TD.PR.O Perpetual-Discount 1.68 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-05-05
Maturity Price : 20.01
Evaluated at bid price : 20.01
Bid-YTW : 6.11 %
POW.PR.C Perpetual-Discount 1.79 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-05-05
Maturity Price : 21.62
Evaluated at bid price : 21.62
Bid-YTW : 6.79 %
MFC.PR.B Perpetual-Discount 1.90 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-05-05
Maturity Price : 17.71
Evaluated at bid price : 17.71
Bid-YTW : 6.68 %
SLF.PR.D Perpetual-Discount 1.98 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-05-05
Maturity Price : 16.51
Evaluated at bid price : 16.51
Bid-YTW : 6.85 %
TD.PR.Q Perpetual-Discount 1.99 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-05-05
Maturity Price : 22.95
Evaluated at bid price : 23.10
Bid-YTW : 6.11 %
CM.PR.J Perpetual-Discount 2.04 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-05-05
Maturity Price : 17.50
Evaluated at bid price : 17.50
Bid-YTW : 6.49 %
HSB.PR.D Perpetual-Discount 2.18 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-05-05
Maturity Price : 18.76
Evaluated at bid price : 18.76
Bid-YTW : 6.77 %
GWO.PR.F Perpetual-Discount 2.18 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-05-05
Maturity Price : 21.72
Evaluated at bid price : 22.01
Bid-YTW : 6.79 %
BAM.PR.B Floater 2.20 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-05-05
Maturity Price : 9.30
Evaluated at bid price : 9.30
Bid-YTW : 4.27 %
BAM.PR.O OpRet 2.65 % YTW SCENARIO
Maturity Type : Option Certainty
Maturity Date : 2013-06-30
Maturity Price : 25.00
Evaluated at bid price : 23.62
Bid-YTW : 6.72 %
SLF.PR.A Perpetual-Discount 2.84 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-05-05
Maturity Price : 17.75
Evaluated at bid price : 17.75
Bid-YTW : 6.80 %
HSB.PR.C Perpetual-Discount 2.88 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-05-05
Maturity Price : 19.29
Evaluated at bid price : 19.29
Bid-YTW : 6.71 %
BMO.PR.K Perpetual-Discount 3.02 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-05-05
Maturity Price : 20.82
Evaluated at bid price : 20.82
Bid-YTW : 6.33 %
TRI.PR.B Floater 5.39 % Quite real! The issue traded 12,225 shares today in a range of 12.82-50, closing at 13.50-00, 1×2.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-05-05
Maturity Price : 13.50
Evaluated at bid price : 13.50
Bid-YTW : 2.94 %
Volume Highlights
Issue Index Shares
Traded		 Notes
RY.PR.Y FixedReset 98,095 Recent new issue.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-12-24
Maturity Price : 25.00
Evaluated at bid price : 25.90
Bid-YTW : 5.40 %
CM.PR.I Perpetual-Discount 49,434 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-05-05
Maturity Price : 17.67
Evaluated at bid price : 17.67
Bid-YTW : 6.71 %
RY.PR.C Perpetual-Discount 44,525 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-05-05
Maturity Price : 18.52
Evaluated at bid price : 18.52
Bid-YTW : 6.24 %
RY.PR.E Perpetual-Discount 41,423 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-05-05
Maturity Price : 18.15
Evaluated at bid price : 18.15
Bid-YTW : 6.22 %
MFC.PR.D FixedReset 39,893 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-07-19
Maturity Price : 25.00
Evaluated at bid price : 26.11
Bid-YTW : 5.89 %
RY.PR.X FixedReset 39,400 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-09-23
Maturity Price : 25.00
Evaluated at bid price : 26.75
Bid-YTW : 4.92 %
There were 56 other index-included issues trading in excess of 10,000 shares.
MAPF

MAPF Performance: April 2009

The fund performed well in a month that was as remarkable for its consistency as it was for the strong performance of the preferred share market. As noted in the report of Index Performance, April 2009, the PerpetualDiscount index experienced only three down-days in the month, compared to eighteen gainers:

The fund’s Net Asset Value per Unit as of the close April 30 was $9.8406.

Returns to April 30, 2009
Period MAPF Index CPD
according to
Claymore
One Month +11.42% +6.37% +6.97%
Three Months +13.12% +5.08% +6.36%
One Year +19.08% -8.46% -8.33%
Two Years (annualized) +9.35% -7.05%  
Three Years (annualized) +8.44% -3.44%  
Four Years (annualized) +7.93% -1.77%  
Five Years (annualized) +8.29% -0.31%  
Six Years (annualized) +10.96% +0.76%  
Seven Years (annualized) +9.61% +1.49%  
Eight Years (annualized) +10.41% +1.42%  
The Index is the BMO-CM “50”
CPD Returns are for the NAV and are after all fees and expenses.
Figures for Omega Preferred Equity (which are after all fees and expenses) for 1-, 3- and 12-months are +6.3%, +5.1% and -8.6%, respectively, according to Morningstar after all fees & expenses
Figures for Jov Leon Frazer Preferred Equity Fund (which are after all fees and expenses) for 1-, 3- and 12-months are N/A, N/A & N/A, respectively, according to Morningstar
Figures for AIC Preferred Income Fund (which are after all fees and expenses) for 1-, 3- and 12-months are N/A, N/A & N/A, respectively

Returns assume reinvestment of dividends, and are shown after expenses but before fees. Past performance is not a guarantee of future performance. You can lose money investing in Malachite Aggressive Preferred Fund or any other fund. For more information, see the fund’s main page.

The yields available on high quality preferred shares remain elevated, which is reflected in the current estimate of sustainable income.

Calculation of MAPF Sustainable Income Per Unit
Month NAVPU Portfolio
Average
YTW		 Leverage
Divisor		 Securities
Average
YTW		 Sustainable
Income
June, 2007 9.3114 5.16% 1.03 5.01% 0.4665
September 9.1489 5.35% 0.98 5.46% 0.4995
December, 2007 9.0070 5.53% 0.942 5.87% 0.5288
March, 2008 8.8512 6.17% 1.047 5.89% 0.5216
June 8.3419 6.034% 0.952 6.338% $0.5287
September 8.1886 7.108% 0.969 7.335% $0.6006
December, 2008 8.0464 9.24% 1.008 9.166% $0.7375
March 2009 $8.8317 8.60% 0.995 8.802% $0.7633
April 2009 9.8406 7.82% 0.994 7.867% $0.7742
NAVPU is shown after quarterly distributions.
“Portfolio YTW” includes cash (or margin borrowing), with an assumed interest rate of 0.00%
“Securities YTW” divides “Portfolio YTW” by the “Leverage Divisor” to show the average YTW on the securities held; this assumes that the cash is invested in (or raised from) all securities held, in proportion to their holdings.
“Sustainable Income” is the resultant estimate of the fund’s dividend income per unit, before fees and expenses.

As discussed in the post MAPF Portfolio Composition: April 2009, the fund has positions in splitShares (almost all BNA.PR.C) and an operating retractible (YPG.PR.B), both of which skew the calculation. Since the yield on thes positions is higher than that of the perpetuals despite the fact that the term is limited, the sustainability of the calculated “sustainable yield” is suspect, as discussed in August, 2008.

Significant positions were also held in Fixed-Reset issues on April 30 (HSB.PR.E, BMO.PR.O & CM.PR.M); all of which currently have their yields calculated with the presumption that they will be called by the issuers at par at the first possible opportunity.

However, if the entire portfolio except for the PerpetualDiscounts were to be sold and reinvested in these issues, the yield of the portfolio would be the 7.13% shown in the April 30 Portfolio Composition analysis (which is in excess of the 6.80% index yield on April 30). Given such reinvestment, the sustainable yield would be 9.8406 * 0.0713 = $0.7016, an increase from the $0.6712 derived by a similar calculation last month; which I consider rather good considering the increased allocation in April to the lower-yielding Fixed-Reset issues.

Different assumptions lead to different calculations, but the overall positive trend is apparent. I’m very pleased with the results! It will be noted that if there was no trading in the portfolio, one would expect the sustainable yield to be constant (before fees and expenses). The success of the fund’s trading is showing up in

  • the very good performance against the index
  • the long term increases in sustainable income per unit

As has been noted, the fund has maintained a credit quality equal to or better than the index; outperformance is due to constant exploitation of trading anomalies.

Again, there are no predictions for the future! The fund will continue to trade between issues in an attempt to exploit market gaps in liquidity, in an effort to outperform the index and keep the sustainable income per unit – however calculated! – growing.

Seminars

Seminar, May 28: FixedReset Issues

Update, 2009-8-25: To gain access to the on-line video of this seminar and the ancillary written material, please visit PrefLetter.com

I am pleased to announce the next seminar in the series on the theory and practice of preferred share investing.

These seminars will be aimed at active and potential preferred share investors who wish to review relative valuation techniques in preferred share analysis.

All seminars will be presented by James Hymas, who has written extensively on the subject of preferred share investment and has been referred to as a "top expert" on the subject.

Questions are encouraged throughout the seminars, as well as in informal discussion at the end of the session.

Each seminar is two hours in length; coffee and tea will be served. The cost of attendance is $100, but a discount of $50 will be given to participants who have an annual subscription to PrefLetter with at least one issue remaining at the time of the seminar.

All seminars will be video-recorded for future distribution. Please note the slight change of venue: same hotel, different conference room.

Advance registration and payment may be performed on-line.

Thursday, May 28

Preferred Share – Fixed-Reset Issues:
Theory & Practice

"FixedReset Issues" are popular with investors who:

  • wish to obtain tax-advantaged income
  • want protection against future inflation

These issues are characterized by:

  • Mostly issued by financial institutions
  • Exchange Dates occur every five years
  • Dividends are fixed until the first Exchange Date
  • On every Exchange Date:
    • Company may redeem the issue at par
    • Rate until next exchange date is reset to 5-Year Canada bonds plus a spread
    • Issue may be exchanged to Floating Rate issues, paying 3-month Treasury Bills plus a spread, reset quarterly
  • Issues are perpetual

This seminar will review the theory of FixedReset Preferred evaluation, including:

  • Credit Quality
  • Embedded calls
  • Exchange Options
  • The importance of ex-Dividend dates
  • Investment characteristics relative to Straight Perpetuals

Examples of relative valuation in current markets will be supplied and discussed.

Attendence is limited; a reservation will avoid disappointment.

Location: Days Hotel & Conference Center, (at Carlton & College, downtown Toronto) College Room (see map).

Time: May 28, 2009, 6pm-8pm.

Reservations: Please visit the PrefLetter Seminar Page.

Update, 2009-8-24: The seminar and its ancillary material have been accredited for four hours of IDA Professional Development Continuing Education.

Update, 2009-8-24: ◦This program is eligible for four CE credit hours, as granted by CFA Institute. If you are a CFA Institute member, CE credit for your participation in this program will be automatically recorded in your CE Diary.

 
 

MAPF

MAPF Portfolio Composition: April 2009

Trading remained steady in April, with portfolio turnover of about 80%, as the market strongly advanced in a very consistent fashion: PerpetualDiscounts had only three down-days, against 18 gainers.

Trades were, as ever, triggered by a desire to exploit transient mispricing in the preferred share market (which may the thought of as “selling liquidity”), rather than any particular view being taken on market direction, sectoral performance or credit anticipation.

MAPF Sectoral Analysis 2009-4-30
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 11.1% (+1.4) 12.74% 6.75
Interest Rearing 0% N/A N/A
PerpetualPremium 0.0% N/A N/A
PerpetualDiscount 63.3% (-10.5) 7.13% 12.39
Fixed-Reset 19.2% (+9.2) 5.45% 4.42
Scraps (FixFloat) 0% (-1.6) N/A N/A
Scraps (OpRet) 5.7% (+2.0) 14.69% 5.87
Scraps (SplitShare) 0.0% (-0.5) N/A N/A
Cash +0.6% (+0.1) 0.00% 0.00
Total 100% 7.82% 9.78
Totals and changes will not add precisely due to rounding. Bracketted figures represent change from March month-end. Cash is included in totals with duration and yield both equal to zero.

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.

The important change was the shift of just under 10% of portfolio weight from PerpetualDiscounts into FixedResets. At month-end, the fund had positions in HSB.PR.E, CM.PR.M and BMO.PR.O. The position in HSB.PR.E was accumulated approximately as follows:

April 2009 Accumulation of HSB.PR.E
Date HSB.PR.E CM.PR.H SLF.PR.A CU.PR.B TD.PR.K
4/8 Bot
25.17		 Sold
17.00		      
4/9 Bot
25.23		   Sold
16.51		 Sold
22.90		  
4/14 Bot
25.24		       Sold
25.45
4/30
Closing
Bid		 26.20 17.63 16.90 24.08 26.20
Trade reconstruction is approximate and represents a best-efforts attempt to show the flow of funds. Full trade details will be released with the MAPF Semi-Annual report

As may be seen, this accumulation has turned out very well so far – only the trade out of CU.PR.B has worked against the fund, which is a good ratio.

Credit distribution is:

MAPF Credit Analysis 2009-4-30
DBRS Rating Weighting
Pfd-1 54.0% (+4.1)
Pfd-1(low) 19.1% (+2.6)
Pfd-2(high) 0.9% (-8.0)
Pfd-2 0% (0)
Pfd-2(low) 19.6% (+0.9)
Pfd-3(high) 5.7% (+0.4)
Cash +0.6% (+0.1)
Totals will not add precisely due to rounding. Bracketted figures represent change from March month-end.

The reduction in weighting of Pfd-2(high) reflects the sale of CU.PR.B, related to the shift in sectors shown above.

The fund does not set any targets for overall credit quality; trades are executed one by one. Variances in overall credit will be constant as opportunistic trades are executed. The overall credit quality of the portfolio is now superior to the credit quality of CPD at August month-end (when adjusted for the downgrade of BCE).

Claymore provides the following ratings breakdown:

Ratings Breakdown
as of 12/31/08
Pfd-1 61.15%
Pfd-2 23.26%
Pfd-3 15.60%

Two events have occurred since the Dec. 31 calculation date of CPD’s credit quality:

Liquidity Distribution is:

MAPF Liquidity Analysis 2009-4-30
Average Daily Trading Weighting
<$50,000 0.4% (-0.1)
$50,000 – $100,000 20.7% (-16.9)
$100,000 – $200,000 53.3% (+38.5)
$200,000 – $300,000 5.7% (-18.1)
>$300,000 19.2% (-3.4)
Cash +0.6% (+0.1)
Totals will not add precisely due to rounding. Bracketted figures represent change from March 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. 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) and those who subscribe for $150,000+. 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) as of August 29. When comparing CPD and MAPF:

  • MAPF credit quality is better
  • MAPF liquidity is similar
  • MAPF Yield is higher
  • Weightings in
    • MAPF weighting in PerpetualDiscounts is similar
    • MAPF is much less exposed to Operating Retractibles
    • MAPF is more exposed to SplitShares
    • MAPF is less exposed to FixFloat / Floater / Ratchet
    • MAPF is more exposed to Fixed-Resets