FTN.PR.A Proposes Term Extension

June 3rd, 2008

Financial 15 Split Corp. has announced:

that a special meeting of the holders of the Company’s Preferred Shares and Class A Shares will be held at 10:00 a.m. (Eastern standard time) on Wednesday, July 23, 2008. The purpose of the meeting is to consider a special resolution to extend the mandatory termination date for the Company from December 1, 2008 to December 1, 2015. Shareholders of record at the close of business on June 16, 2008 will be provided with the notice of meeting and management information circular in respect of the meeting and will be entitled to vote at the meeting.

If the extension is approved, Class A Shareholders and Preferred Shareholders will be provided with a Special Retraction right which is designed to provide Shareholders with an opportunity to retract their Shares and receive a retraction price that is calculated in the same way that such price would be calculated if the Company were to terminate on December 1, 2008 as originally contemplated.

A term extension would be a good thing for the preferred shareholders; there is good asset coverage with this issue and a coupon of 5.25%. Unfortunately, the capital units are now valued below their issue price, implying that tax consequences to the capital unit-holders for a termination won’t be all that terrible. The ABK.PR.C exchange/extension was a much easier call for those capital unitholders, given the enormous unrealized capital gains they had.

FTN.PR.A is incorporated in the HIMIPref™ SplitShare Index. There are currently 10,174,941 shares outstanding, according to the TSX, with a par value of $10.00 – so it’s a nice size and would be good to keep on the board.

Update: Assiduous Reader cowboylutrell reminds me in the comments that this is a second attempt to extend term. The prior attempt was denied in April 2007 while term extensions for FFN.PR.A and DFN.PR.A were approved.

Update: See also previous commentary for FTN.PR.A

Posted in Issue Comments | 2 Comments »

Index Performance: May 2008

June 3rd, 2008

Performance of the HIMIPref™ Indices for May, 2008, was:

Total Return
Index Performance
May 2008		 Three Months
to
May 30, 2008
Ratchet +1.79% +3.09%
FixFloat -2.37% +0.02%
Floater +10.75% +8.59%
OpRet +0.54% +0.76%
SplitShare +1.52% +0.71%
Interest +1.18% +2.04%
PerpetualPremium +0.46% -0.76%
PerpetualDiscount +1.37% -3.51%
Funds (see below for calculations)
CPD +1.42% -1.52%
DPS.UN +0.98% -0.92%
Index
BMO-CM 50 +1.32% -1.44%

Claymore has published NAV data for its exchange traded fund (CPD) and I have derived the following table:

CPD Return, 1- & 3-month, to May, 2008
Date NAV Distribution Return for Sub-Period Monthly Return
February 29 18.34      
March 26 17.64 0.2082 -2.68% -2.90%
March 31, 2008 17.60   -0.23%
April 30 17.60     0.00%
May 30 17.85 0.00   +1.42%
Quarterly Return -1.52%

The DPS.UN NAV for May 28 has been published so we may calculate the May returns (approximately!) for this closed end fund:

DPS.UN NAV Return, May-ish 2008
Date NAV Distribution Return for period
April 30, 2008 $20.71    
May 28 $20.89   +0.87%
May 30 N/A   +0.11%
Estimated May Return +0.98%
CPD had a NAV of $17.83 on May 28 and $17.85 on May 30. The estimated May end-of-month stub period return for CPD was therefore +0.11%, which is applied to DPS.UN as described above.

Now, to see the DPS.UN quarterly NAV approximate return, we refer to the calculations for March and April:

DPS.UN NAV Returns, three-month-ish to end-April-ish, 2008
March-ish -2.26%
April-ish +0.39%
May-ish +0.98%
Three-months-ish -0.92%

Posted in Index Construction / Reporting | 4 Comments »

June 2, 2008

June 2nd, 2008

On VoxEU, Francesco Giavazzi writes about the suddenly topical OIS / LIBOR spread.

BCE received leave to appeal to the Supreme Court; the case will be heard June 17.

The market drifted downwards, perhaps due to the National Bank Fixed Reset, 5.375%+205 new issue.

Note that these indices are experimental; the absolute and relative daily values are expected to change in the final version. In this version, index values are based at 1,000.0 on 2006-6-30
Index Mean Current Yield (at bid) Mean YTW Mean Average Trading Value Mean Mod Dur (YTW) Issues Day’s Perf. Index Value
Ratchet 4.27% 4.28% 54,032 16.5 1 -0.1574% 1,112.4
Fixed-Floater 4.88% 4.67% 62,870 16.03 7 -0.6986% 1,026.2
Floater 4.07% 4.12% 61,352 17.09 2 -0.6054% 926.9
Op. Retract 4.83% 2.43% 89,456 2.70 15 +0.0389% 1,056.7
Split-Share 5.24% 5.37% 73,028 4.22 15 +0.1323% 1,059.2
Interest Bearing 6.11% 6.20% 51,510 3.81 3 +0.2373% 1,115.2
Perpetual-Premium 5.84% 5.10% 415,115 6.70 13 +0.0033% 1,025.6
Perpetual-Discount 5.67% 5.71% 225,444 14.31 59 -0.1681% 924.9
Major Price Changes
Issue Index Change Notes
BCE.PR.G FixFloat -2.3684%  
RY.PR.F PerpetualDiscount -1.3327% Now with a pre-tax bid-YTW of 5.61% based on a bid of 19.99 and a limitMaturity.
BAM.PR.B Floater -1.2048%  
SLF.PR.C PerpetualDiscount -1.1707% Now with a pre-tax bid-YTW of 5.50% based on a bid of 20.26 and a limitMaturity.
BCE.PR.R FixFloat -1.1178%  
RY.PR.A PerpetualDiscount -1.0779% Now with a pre-tax bid-YTW of 5.56% based on a bid of 20.19 and a limitMaturity.
BCE.PR.I FixFloat -1.0753%  
TD.PR.O PerpetualDiscount -1.0204% Now with a pre-tax bid-YTW of 5.50% based on a bid of 22.31 and a limitMaturity.
SLF.PR.B PerpetualDiscount -1.0078% Now with a pre-tax bid-YTW of 5.54% based on a bid of 21.61 and a limitMaturity.
W.PR.H PerpetualDiscount +1.2074% Now with a pre-tax bid-YTW of 5.91% based on a bid of 23.47 and a limitMaturity.
Volume Highlights
Issue Index Volume Notes
GWO.PR.H PerpetualDiscount 82,050 Nesbitt crossed 25,000 at 22.59. Now with a pre-tax bid-YTW of 5.39% based on a bid of 22.50 and a limitMaturity.
BMO.PR.L PerpetualPremium 74,895 Nesbitt crossed 60,000 at 25.11. Now with a pre-tax bid-YTW of 5.87% based on a bid of 25.12 and a limitMaturity.
FAL.PR.A Ratchet 51,750 Called for redemption. Nesbitt was on the sell side for the day’s last ten trades, starting at 2:12pm and totally 51,650 in a range of 25.38-42.
SLF.PR.B PerpetualDiscount 40,795 National Bank crossed each of the day’s last ten trades, time-stamped 3:52 & 3:53, totalling 16,600 shares, all at 21.65. Now with a pre-tax bid-YTW of 5.54% based on a bid of 21.61 and a limitMaturity.
CM.PR.H PerpetualDiscount 24,475 Now with a pre-tax bid-YTW of 5.89% based on a bid of 20.68 and a limitMaturity.

There were twenty-one other index-included $25-pv-equivalent issues trading over 10,000 shares today.

Posted in Market Action | No Comments »

HIMIPref™ Index Rebalancing: May, 2008

June 2nd, 2008
HIMI Index Changes, May 30, 2008
Issue From To Because
TD.PR.Q PerpetualDiscount PerpetualPremium Price
NA.PR.M PerpetualDiscount PerpetualPremium Price
TD.PR.R PerpetualDiscount PerpetualPremium Price
BMO.PR.L PerpetualDiscount PerpetualPremium Price
POW.PR.C PerpetualDiscount PerpetualPremium Price
CU.PR.A PerpetualPremium PerpetualDiscount Price

There were the following intra-month changes:

HIMI Index Changes during May 2008
Issue Action Index Because
None

There were the following backdated changes:

HIMI Index Backdated Adjustments
2008-5-30
Issue Action Index Because
DF.PR.A Add SplitShare See Post
SBC.PR.A Add SplitShare See Post

Posted in Index Construction / Reporting | 1 Comment »

Critchley Credits Desjardins for Fixed-Reset Issues

June 2nd, 2008

Barry Critchley of the Financial Post today wrote (hat tip: Financial Webring Forum) a column titled Rate Reset Preferreds Catch On, in which he claims:

Given that there are only about four moving parts on any product, Desjardins worked on the yield and came up with a product that saw the yield set at a spread above the yield on five-year Canada bonds. And that spread would remain throughout the life of the issue. At the end of five years, investors were given a choice: another fixed-rate pref or a floating-rate pref. That repricing meant the prefs would be brought back to trading at par, given that investors were being offered a new “market” rate.

This is not correct. Have a look at Chart #1 in my recent article Analysis of Perpetual Resets for a ten year graph of the market spread of PerpetualDiscount issues vs. the five year Canada. It not only varies significantly, but the Credit Crunch has, not surprisingly, brought these spreads to a peak.

It is my belief that the current enormous spreads are being used to sell these issues to retail … “Look at this! 5-Year GOC +XXX bp! Widest in years and there’s a FIXED RESET!”.

However, one must remember that the issuer has options and that one of these options is to call the issue. If, in five years, the rate on a given issue is reset to a specific yield, the issuer will compare this specific yield to the yield at which new preferreds (from that issuer!) could be issued.

  • If the reset yield is greater than the market yield (for that issuer!), investors should assume the issue will be called (which could, I suppose, be construed as “trading around par”, but the investor won’t [or shouldn’t] be too happy about it).
  • If the reset yield is approximately equal to the market yield (for that issuer!), then the investor is happy and the issue will – probably – remain outstanding and trade around par
  • If the reset yield is significantly less than the market yield (for that issuer!) then the issue will – probably – remain outstanding and trade below par.

There is some mitigation of interest rate risk with this structure, but the issues are perpetual. Investors are taking on perpetual credit risk while hoping for – at best – 5-year-money rewards.

Because the rate will not be good enough in bad times, investors must demand a rate that is more than good enough in good times.

One very good example of how attempts to keep perpetual money trading at par can blow up is the Nortel Ratchet Rate issues (NTL.PR.F & NTL.PR.G). The “ratcheting” mechanism was supposed to keep the issue priced around par. It hasn’t done that very well. Same thing for all the BCE issues.

Mr. Critchley goes on to point out that Desjardins takes credit for the structure – I scooped him on that ages ago.

Mr. Critchley is writing a lot about this structure lately – his prior column quoted an unimpressed ex-capital-markets guy.

And … just to make sure nobody missed it … there was yet another new issue with this structure today (number five in a continuing series): National Bank 5.375%+205.

Posted in Miscellaneous News | 2 Comments »

CPD Portfolio Composition: May 2008

June 2nd, 2008

I thought I’d spend a little time looking at CPD in more than usual detail this month, so that it’s major characteristics could be compared with the MAPF Portfolio Composition.

CPD Sectoral Analysis 2008-5-30
HIMI Indices Sector Weighting YTW ModDur
Ratchet 0.9% 3.86% 0.08
FixFloat 5.1% 4.62% 15.9
Floater 3.0% 4.09% 17.2
OpRet 20.3% 2.56% 2.55
SplitShare 0.0% N/A N/A
Interest Rearing 0% N/A N/A
PerpetualPremium 0.0% N/A N/A
PerpetualDiscount 53.6% 5.60% 14.20
Scraps 12.4% 6.07% 5.89
Cash 0.0% 0.00% 0.00
Total 95.3% 4.90% 10.69
The 2.50% holding in BCE.PR.F, 1.39% in “Brookfield Ser ___” and 0.77% in “Fortis 4.9% Series ___” have been ignored.

The totals for yield and duration consider only the 95.3% known holdings.

Credit distribution is:

CPD Credit Analysis 2008-5-30
DBRS Rating Weighting
Pfd-1 34.4%
Pfd-1(low) 27.9%
Pfd-2(high) 7.6%
Pfd-2 0.0%
Pfd-2(low) 15.5%
Pfd-3(high) 9.2%
Pfd-3 5.4%
All issues included – even those three issues excluded from the totals above.

Liquidity Distribution is:

CPD Liquidity Analysis 2008-5-30
Average Daily Trading Weighting
<$50,000 2.9%
$50,000 – $100,000 28.0%
$100,000 – $200,000 34.8%
$200,000 – $300,000 16.7%
>$300,000 12.9%
Unknown 4.7%
Unknown issues as specified above.

A spreadsheet has been uploaded.

Posted in Miscellaneous News | 5 Comments »

MAPF Portfolio Composition: May 2008

June 2nd, 2008

Trading continued to be slow in May, with only about 30% of portfolio value being traded – and at that, much of the activity was intra-issuer. On a net basis, there was a slight shift from BMO to RY. 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 2008-5-30
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 0.9% (0) 4.76% 4.91
Interest Rearing 0% N/A N/A
PerpetualPremium 0.3% (0) -2.55% 0.08
PerpetualDiscount 98.6% (-3.5) 5.85% 14.13
Scraps 0% N/A N/A
Cash 0.4% (+3.8) 0.00% 0.00
Total 100% 5.80% 13.95
Totals and changes will not add precisely due to rounding. Bracketted figures represent change from April month-end.

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 2008-5-30
DBRS Rating Weighting
Pfd-1 76.8% (0)
Pfd-1(low) 11.2% (-0.1)
Pfd-2(high) 0.9% (-3.4)
Pfd-2 0.4% (0)
Pfd-2(low) 10.5% (0)
Cash 0.4% (+3.8)
Totals will not add precisely due to rounding. Bracketted figures represent change from April month-end.

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.

Liquidity Distribution is:

MAPF Liquidity Analysis 2008-5-30
Average Daily Trading Weighting
<$50,000 0.8% (0)
$50,000 – $100,000 11.5% (+2.2)
$100,000 – $200,000 28.1% (+9.2)
$200,000 – $300,000 23.1% (-4.2)
>$300,000 36.3% (-10.7)
Cash 0.4% (+3.8)
Totals will not add precisely due to rounding. Bracketted figures represent change from April 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.

Update: A similar analysis has been performed on CPD as of month end. It is interesting to note:

  • MAPF credit quality is superior
  • MAPF liquidity is superior
  • MAPF Yield is higher
  • But … MAPF is more exposed to PerpetualDiscounts

Update, 2008-6-3: May Performance for MAPF has been posted.

Posted in MAPF | 3 Comments »

MAPF Performance: May, 2008

June 2nd, 2008

The fund had a very good return in May; very slightly behind CPD (which returned +1.42% on the month). The BMO-CM “50” index return is not yet available; this post will be updated when it is published.

Returns to May, 2008
Period MAPF Index
One Month +1.39% +1.32%
Three Months -2.53% -1.44%
One Year +2.70% -1.95%
Two Years (annualized) +3.93% -0.47%
Three Years (annualized) +4.36% +0.68%
Four Years (annualized) +5.79% +2.18%
Five Years (annualized) +8.73% +2.58%
Six Years (annualized) +8.35% +3.44%
Seven Years (annualized) +9.47% +3.21%
The Index is the BMO-CM “50”

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
May, 2008 9.0394 5.797% 0.996 5.82% 0.5261
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

Update, 2008-6-3 : Index performance for May has been posted. MAPF Portfolio Composition, as has a similar analysis for CPD, the exchange traded fund.

Posted in MAPF | 1 Comment »

Best and Worst Performers: May, 2008

June 2nd, 2008

These are total returns, with dividends presumed to have been reinvested at the bid price on the ex-date. The list has been restricted to issues in the HIMIPref™ indices.

Issue Index DBRS Rating Monthly Performance Notes (“Now” means “May 30”)
BCE.PR.Z FixFloat Pfd-2(low)
[Under Review – Negative]		 -4.10%  
BCE.PR.R FixFloat Pfd-2(low)
[Under Review – Negative]		 -3.88%  
CIU.PR.A PerpetualDiscount Pfd-2(high) -3.74% Now with a pre-tax bid-YTW of 5.80% based on a bid of 19.95 and a limitMaturity.
BCE.PR.I FixFloat Pfd-2(low)
[Under Review – Negative]		 -3.73%  
BCE.PR.C FixFloat Pfd-2(low)
[Under Review – Negative]		 -2.95%  
… … … … …
GWO.PR.I PerpetualDiscount Pfd-1(low) +4.78% Now with a pre-tax bid-YTW of 5.35% based on a bid of 21.03 and a limitMaturity.
SLF.PR.C PerpetualDiscount Pfd-1(low) +5.15% Now with a pre-tax bid-YTW of 5.43% based on a bid of 20.50 and a limitMaturity.
BNA.PR.B SplitShare Pfd-2(low) +7.68% Asset coverage of just under 3.2:1 as of April 30 according to the company. Now with a pre-tax bid-YTW of 6.94% based on a bid of 22.08 and a hardMaturity 2016-3-25 at 25.00. Compare with BNA.PR.C (6.58% to 2019-1-10; returned +1.87% on month) and BNA.PR.A (5.97% TO 2010-9-30; returned +1.31% on month).
BAM.PR.K Floater Pfd-2(low) +9.14%  
BAM.PR.B Floater Pfd-2(low) +11.98%  

BCE issues did very poorly on the month, presumably on fears that the Teachers’ deal will not proceed as contemplated.

The two BAM floaters did extremely well – probably a combination of their having been oversold in the first place and a widening consensus that perhaps Canada Prime is not on a one-way march to zero.

Posted in Issue Comments | 1 Comment »

New Issue: National Bank Fixed-Reset, 5.375%+205

June 2nd, 2008

And thick and fast they came at last, and more and more and more! National Bank has announced:

a public offering of 7 million, non-cumulative 5-year rate reset first preferred shares Series 21 (the “Preferred Shares Series 21”) at a price of $25.00 per share, for an aggregate amount of $175 million.

Holders of Preferred Shares Series 21 will be entitled to receive a non-cumulative quarterly fixed dividend for the initial period ending August 15, 2013 of 5.375% per annum, as and when declared by the Board of Directors of National Bank. Thereafter, the dividend rate will reset every five years at a level of 205 basis points over the 5-year Government of Canada bond yield. Holders will, subject to certain conditions, have the option to convert all or any part of their Preferred Shares Series 21 to non-cumulative floating rate first preferred shares Series 22 (the “Preferred Shares Series 22”) of National Bank on August 16, 2013 and on August 16, every five years thereafter. Holders of the Preferred Shares Series 22 will be entitled to receive a non-cumulative quarterly floating dividend equal to the 90-day Canadian Treasury Bill rate plus 205 basis points, as and when declared by the Board of Directors of National Bank.

National Bank has agreed to sell the Preferred Shares Series 21 to a syndicate of underwriters led by National Bank Financial Inc. on a bought deal basis. National Bank has granted to the underwriters an option to purchase up to an additional $26.25 million of the Preferred Shares Series 21 at any time up to 30 days after closing.

Issue: National Bank of Canada Non-Cumulative 5-Year Rate Reset Preferred Shares Series 21

Amount: 7-million shares @ $25.00 = $175-million

Greenshoe: 1,050,000 shares @ $25 = $26,250,000 up to thirty days after closing.

Initial Dividend: 5.375%, changes every Exchange Date

Subsequent Dividend: 5-Year Canadas + 205bp, determined 30 days prior to Exchange Dates

Exchangeable: To Series 22 Floaters, pay 90-day Canada T-Bills + 205, determined quarterly

Exchange Dates: August 15, 2013 and every five years thereafter

Redemption: Series 21 Resets redeemable every exchange date at $25.00. Series 22 Floaters at $25.00 on every exchange date and at $25.50 at all other times.

Rank: On parity with all other First Preferred Shares, senior to common, junior to everything else.

Ratings: S&P: P-2(High); DBRS: Pfd-1(low); Moody’s: A1

Don’t like ’em! The Big Black Mark against this structure is that it can be called in only five years. I’ve published my thoughts on the matter … but some people like ’em and they certainly seem to be selling well.

Update, 2013-8-14: This issue, NA.PR.N, was called for redemption on the first Exchange Date

Posted in New Issues | 5 Comments »

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