PrefBlog

The Canadian Imperial Bank of Commerce has announced:

that it has completed the offering of 32 million Basel III-compliant Non-cumulative Rate Reset Class A Preferred Shares Series 45 (Non-Viability Contingent Capital (NVCC)) (the “Series 45 Shares”) priced at $25.00 per share to raise gross proceeds of $800 million.

The offering was made through a syndicate of underwriters led by CIBC World Markets Inc. The Series 45 Shares commence trading on the Toronto Stock Exchange today under the ticker symbol CM.PR.R.

The Series 45 Shares were issued under a prospectus supplement dated May 26, 2017, to CIBC’s short form base shelf prospectus dated March 16, 2016.

CM.PR.R is a FixedReset, 4.40%+338, NVCC Compliant issue announced 2017-05-25. It will be tracked by HIMIPref™ and has been added to the FixedResets subindex.

The issue traded 2,454,817 shares today in a range of 24.96-07 before closing at 24.98-00. This volume places it eighteenth on the all-time (well, back until 1993-12-31, anyway) list, just behind TD.PR.H on 2004-4-6 and just ahead of BCE.PR.P on 2002-6-13. Vital statistics are:

Implied Volatility analysis for FixedResets continues to suggest the issue may be a little expensive:

Click for Big

The theoretical price implied by the above calculation is 24.77.

Assiduous Readers will remember that there was an 8% Conversion from the FixedReset ENB.PR.B to the FloatingReset ENB.PR.C, which the company treated as top secret information. I advised readers not to convert, but to continue holding the ENB.PR.B, which have reset to 3.415%.

ENB.PR.C will pay dividends at a rate of 3-Month Canada Treasury Bills plus 240bp, reset quarterly.

The issue was listed yesterday, but didn’t trade – this is largely due to the banks’ hegemony over the Canadian financial system (approved by both securities regulators and the Competition-haha Board) and their total lack of interest in providing competent service to stinking investor scum such as yourselves. These exchanges do not hit client accounts until the day after the company gives effect to them – however, investors can complain to the bank-owned CDS and the (mostly) bank-owned brokerages about this lackadaisical attitude toward client assets and see how far it gets them.

The issue also did not trade today, but at least the spread on the quote narrowed considerably from yesterday’s value.

Vital Statistics are:

The most logical way to analyze the relative value of ENB.PR.C vs ENB.PR.B through the theory of Preferred Pairs, for which a calculator is available. Briefly, a Strong Pair is defined as a pair of securities that can be interconverted in the future (e.g., IAG.PR.G and the FloatingReset that will exist if enough holders convert). Since they will be interconvertible on this future date, it may be assumed that they will be priced identically on this date (if they aren’t then holders will simply convert en masse to the higher-priced issue). And since they will be priced identically on a given date in the future, any current difference in price must be offset by expectations of an equal and opposite value of dividends to be received in the interim. And since the dividend rate on one element of the pair is both fixed and known, the implied average rate of the other, floating rate, instrument can be determined. Finally, we say, we may compare these average rates and take a view regarding the actual future course of that rate relative to the implied rate, which will provide us with guidance on which element of the pair is likely to outperform the other until the next interconversion date, at which time the process will be repeated.

We can show the break-even rates for each FixedReset / FloatingReset Strong Pair graphically by plotting the implied average 3-month bill rate against the next Exchange Date (which is the date to which the average will be calculated).

Click for Big

The break-even T-Bill yield for the ENB.PR.B / ENB.PR.C pair is now 0.46% (given bid prices of 17.56 and 17.00, respectively), well above the junk-pair average of -0.16%, but slightly below the current actual bill rate of 0.54%.

Canaccord Genuity Group Inc. has announced:

the applicable dividend rates for its Cumulative 5-Year Rate Reset First Preferred Shares, Series C (the “Series C Preferred Shares”) and its Cumulative Floating Rate First Preferred Shares, Series D (the “Series D Preferred Shares”), further to its press release dated May 24, 2017 announcing that it does not intend to exercise its right to redeem all or any part of the currently outstanding Series C Preferred Shares and, as a result of which, subject to certain conditions, the holders of the Series C Preferred Shares have the right to convert all or any part of their Series C Preferred Shares into Series D Preferred Shares on a one-for-one basis.

With respect to any Series C Preferred Shares that remain outstanding after June 30, 2017, holders thereof will be entitled to receive quarterly fixed, cumulative, preferential cash dividends, if, as and when declared by the Board of Directors of the Company, subject to the provisions of the Business Corporations Act (British Columbia). The dividend rate for the five-year period commencing on July 1, 2017 and ending on and including June 30, 2022 will be 4.993% per annum, being equal to the sum of the five year Government of Canada bond yield determined as of today, plus 4.03%, in accordance with the terms of the Series C Preferred Shares.

With respect to any Series D Preferred Shares that may be issued on June 30, 2017, holders thereof will be entitled to receive quarterly floating rate, cumulative, preferential cash dividends, if, as and when declared by the Board of Directors of the Company, subject to the provisions of the Business Corporations Act (British Columbia). The dividend rate for the three-month period commencing on July 1, 2017 and ending on and including September 30, 2017 will be 4.559% per annum, being equal to the sum of the three-month Government of Canada Treasury Bill yield determined as of today, plus 4.03% (calculated on the basis of the actual number of days elapsed during such quarterly period divided by 365), in accordance with the terms of the Series D Preferred Shares. The quarterly floating dividend rate will be reset every quarter.

Beneficial owners of Series C Preferred Shares who wish to exercise their conversion right should communicate as soon as possible with their broker or other nominee to ensure their instructions are followed for exercising such right on or prior to the deadline for exercise, which is 5:00 p.m. (Toronto time) on June 15, 2017.

CF.PR.C is a FixedReset, 5.75%+403 that commenced trading 2012-4-10 after being announced 2012-3-22. It has been relegated to the Scraps subindex since inception on credit concerns.

The most logical way to analyze the question of whether or not to convert is through the theory of Preferred Pairs, for which a calculator is available. Briefly, a Strong Pair is defined as a pair of securities that can be interconverted in the future (e.g., IAG.PR.G and the FloatingReset that will exist if enough holders convert). Since they will be interconvertible on this future date, it may be assumed that they will be priced identically on this date (if they aren’t then holders will simply convert en masse to the higher-priced issue). And since they will be priced identically on a given date in the future, any current difference in price must be offset by expectations of an equal and opposite value of dividends to be received in the interim. And since the dividend rate on one element of the pair is both fixed and known, the implied average rate of the other, floating rate, instrument can be determined. Finally, we say, we may compare these average rates and take a view regarding the actual future course of that rate relative to the implied rate, which will provide us with guidance on which element of the pair is likely to outperform the other until the next interconversion date, at which time the process will be repeated.

We can show the break-even rates for each FixedReset / FloatingReset Strong Pair graphically by plotting the implied average 3-month bill rate against the next Exchange Date (which is the date to which the average will be calculated).

Click for Big

The market appears to have a distaste at the moment for floating rate product; most of the implied rates until the next interconversion are lower than the current 3-month bill rate and the averages for investment-grade and junk issues are both well below current market rates, at +0.07% and -0.33%, respectively! Whatever might be the result of the next few Bank of Canada overnight rate decisions, I suggest that it is unlikely that the average rate over the next five years will be lower than current – but if you disagree, of course, you may interpret the data any way you like.

Since credit quality of each element of the pair is equal to the other element, it should not make any difference whether the pair examined is investment-grade or junk, although we might expect greater variation of implied rates between junk issues on grounds of lower liquidity, and this is just what we see.

If we plug in the current bid price of the CF.PR.C FixedReset, we may construct the following table showing consistent prices for its soon-may-be-issued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:

Based on current market conditions, I suggest that the FloatingResets that will result from conversion are likely to be cheap and trading below the price of their FixedReset counterparts. Therefore, it seems likely that I will recommend that holders of CF.PR.C continue to hold the issue and not to convert, but I will wait until it’s closer to the June 15 notification deadline before making a final pronouncement. I will note that, given the apparent cheapness of the FloatingResets, it may be a good trade to swap the FixedReset for the FloatingReset in the market once both elements of each pair are trading and you can – presumably, according to this analysis – do it with a reasonably good take-out in price, rather than doing it through the company on a 1:1 basis. But that, of course, will depend on the prices at that time and your forecast for the path of policy rates over the next five years. There are no guarantees – my recommendation is based on the assumption that current market conditions with respect to the pairs will continue until the FloatingResets commence trading and that the relative pricing of the two new pairs will reflect these conditions

TransAlta Corporation has announced:

that it does not intend to exercise its right to redeem all or any part of the currently outstanding Cumulative Redeemable Rate Reset First Preferred Shares, Series C (“Series C Shares”) (TSX: TA.PR.F) on June 30, 2017 (the “Conversion Date”).

As a result and subject to certain conditions set out in the prospectus supplement dated November 23, 2011 relating to the issuance of the Series C Shares, the holders of the Series C Shares will have the right to elect to convert all or any of their Series C Shares into Cumulative Redeemable First Preferred Shares, Series D of the Company (“Series D Shares”) on the basis of one Series D Share for each Series C Share on the Conversion Date.

With respect to any Series C Shares that remain outstanding after June 30, 2017, holders thereof will be entitled to receive quarterly fixed cumulative preferential cash dividends, if, as and when declared by the Board of Directors of TransAlta. The annual dividend rate for the Series C Shares for the five-year period from and including June 30, 2017 to but excluding June 30, 2022, will be 4.027%, being equal to the five-year Government of Canada bond yield of 0.927% determined as of today plus 3.10%, in accordance with the terms of the Series C Shares.

With respect to any Series D Shares that may be issued on June 30, 2017, holders thereof will be entitled to receive quarterly floating rate cumulative preferential cash dividends, if, as and when declared by the Board of Directors of TransAlta. The annual dividend rate for the 3-month floating rate period from and including June 30, 2017 to but excluding September 30, 2017 will be 3.629%, being equal to the annual rate for the most recent auction of 90-day Government of Canada Treasury Bills of 0.529% plus 3.10%, in accordance with the terms of the Series D Shares (the “Floating Quarterly Dividend Rate”). The Floating Quarterly Dividend Rate will be reset every quarter.

As provided in the share conditions of the Series C Shares: (i) if TransAlta determines that there would remain outstanding on June 30, 2017, less than 1,000,000 Series C Shares, all remaining Series C Shares shall be converted automatically into Series D Shares on a one-for one basis effective June 30, 2017; or (ii) if TransAlta determines that there would remain outstanding after June 30, 2017, less than 1,000,000 Series D Shares, Series C Shares shall not be entitled to convert their shares into Series D Shares effective June 30, 2017. There are currently 11,000,000 Series C Shares outstanding.

The Series C Shares are issued in “book entry only” form and must be purchased or transferred through a participant in the CDS depository service (“CDS Participant”). All rights of holders of Series C Shares must be exercised through CDS or the CDS Participant through which the Series C Shares are held. The deadline for the registered shareholder to provide notice of exercise of the right to convert Series C Shares into Series D Shares is 3:00 p.m. (MST) / 5:00 p.m. (EST) on June 15, 2017. Any notices received after this deadline will not be valid. As such, holders of Series C Shares who wish to exercise their right to convert their shares should contact their broker or other intermediary for more information and it is recommended that this be done well in advance of the deadline in order to provide the broker or other intermediary with time to complete the necessary steps.

If TransAlta does not receive an election notice from a holder of Series C Shares during the time fixed therefor, then the Series C Shares shall be deemed not to have been converted (except in the case of an automatic conversion). Holders of the Series C Shares and the Series D Shares will have the opportunity to convert their shares again on June 30, 2022, and every five years thereafter as long as the shares remain outstanding.

The Toronto Stock Exchange (TSX) has conditionally approved the listing of the Series D Shares effective upon conversion. Listing of the Series D Shares is subject to TransAlta fulfilling all the listing requirements of the TSX.

TA.PR.F is a FixedReset 4.60%+310 that commenced trading 2011-11-30 after being announced 2011-11-22. It has been relegated to the Scraps subindex since inception on credit concerns.

The most logical way to analyze the question of whether or not to convert is through the theory of Preferred Pairs, for which a calculator is available. Briefly, a Strong Pair is defined as a pair of securities that can be interconverted in the future (e.g., IAG.PR.G and the FloatingReset that will exist if enough holders convert). Since they will be interconvertible on this future date, it may be assumed that they will be priced identically on this date (if they aren’t then holders will simply convert en masse to the higher-priced issue). And since they will be priced identically on a given date in the future, any current difference in price must be offset by expectations of an equal and opposite value of dividends to be received in the interim. And since the dividend rate on one element of the pair is both fixed and known, the implied average rate of the other, floating rate, instrument can be determined. Finally, we say, we may compare these average rates and take a view regarding the actual future course of that rate relative to the implied rate, which will provide us with guidance on which element of the pair is likely to outperform the other until the next interconversion date, at which time the process will be repeated.

We can show the break-even rates for each FixedReset / FloatingReset Strong Pair graphically by plotting the implied average 3-month bill rate against the next Exchange Date (which is the date to which the average will be calculated).

Click for Big

The market appears to have a distaste at the moment for floating rate product; most of the implied rates until the next interconversion are lower than the current 3-month bill rate and the averages for investment-grade and junk issues are both well below current market rates, at +0.07% and -0.33%, respectively! Whatever might be the result of the next few Bank of Canada overnight rate decisions, I suggest that it is unlikely that the average rate over the next five years will be lower than current – but if you disagree, of course, you may interpret the data any way you like.

Since credit quality of each element of the pair is equal to the other element, it should not make any difference whether the pair examined is investment-grade or junk, although we might expect greater variation of implied rates between junk issues on grounds of lower liquidity, and this is just what we see.

If we plug in the current bid price of the TA.PR.F FixedReset, we may construct the following table showing consistent prices for its soon-may-be-issued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:

Based on current market conditions, I suggest that the FloatingResets that will result from conversion are likely to be cheap and trading below the price of their FixedReset counterparts. Therefore, it seems likely that I will recommend that holders of TA.PR.F continue to hold the issue and not to convert, but I will wait until it’s closer to the June 15 notification deadline before making a final pronouncement. I will note that, given the apparent cheapness of the FloatingResets, it may be a good trade to swap the FixedReset for the FloatingReset in the market once both elements of each pair are trading and you can – presumably, according to this analysis – do it with a reasonably good take-out in price, rather than doing it through the company on a 1:1 basis. But that, of course, will depend on the prices at that time and your forecast for the path of policy rates over the next five years. There are no guarantees – my recommendation is based on the assumption that current market conditions with respect to the pairs will continue until the FloatingResets commence trading and that the relative pricing of the two new pairs will reflect these conditions.

Industrial Alliance Insurance and Financial Services Inc. has announced:

that it does not intend to exercise its right to redeem all or any part of its currently outstanding Non-Cumulative 5-Year Rate Reset Class A Preferred Shares Series G (the “Series G Shares”) (TSX: IAG.PR.G) on June 30, 2017. As a result and subject to certain conditions set out in the short form prospectus dated April 29, 2011 as supplemented by a prospectus supplement dated May 25, 2012 and a prospectus supplement dated June 20, 2012 (collectively, the “Prospectus”) relating to the issuance of the Series G Shares, the holders of the Series G Shares have the right, at their option, to convert all or any of their Series G Shares into Non-Cumulative Floating Rate Class A Preferred Shares Series H of Industrial Alliance (the “Series H Shares”) on June 30, 2017 on a one-for-one basis. Holders of Series G Shares are not required to elect to convert all or any of their Series G Shares into Series H Shares. Holders who do not exercise their right to convert their Series G Shares into Series H Shares on such date will continue to hold their Series G Shares, unless automatically converted in accordance with the terms of the Series G Shares as summarized in the Prospectus and below.

The foregoing conversion right is subject to the conditions that: (i) if Industrial Alliance determines that there would be less than 1,000,000 Series H Shares outstanding after June 30, 2017, then holders of Series G Shares will not be entitled to convert their shares into Series H Shares, and (ii) alternatively, if Industrial Alliance determines that there would remain outstanding less than 1,000,000 Series G Shares after June 30, 2017, then all remaining Series G Shares will automatically be converted into Series H Shares on June 30, 2017 on a one-for-one basis. In either case, Industrial Alliance will give written notice to that effect to the registered holder of Series G Shares on or before June 22, 2017.

With respect to any Series G Shares that remain outstanding after June 30, 2017, holders of the Series G Shares will be entitled to receive fixed non-cumulative preferential cash dividends, as and when declared by the Board of Directors of Industrial Alliance, payable on a quarterly basis and subject to the provisions of An Act respecting Insurance (Québec). The dividend rate for the five-year period from and including June 30, 2017 to but excluding June 30, 2022 will be 3.777% per annum or $0.2360625 per share per quarter, being equal to the five-year Government of Canada bond yield as at May 31, 2017 plus 2.85%, as determined in accordance with the terms of the Series G Shares as summarized in the Prospectus.

With respect to any Series H Shares that may be issued on June 30, 2017, holders of the Series H Shares will be entitled to receive floating rate, non-cumulative, preferential cash dividends, as and when declared by the Board of Directors of Industrial Alliance, payable on a quarterly basis and subject to the provisions of An Act respecting Insurance (Québec). The dividend rate for the floating rate period from and including June 30, 2017 to but excluding September 30, 2017 will be 0.85169% (3.379% on an annualized basis) and the dividend for such period, if and when declared, will be $0.2129225 per share, being equal to the three month Government of Canada Treasury Bill yield plus 2.85% (calculated on the basis of the actual number of days elapsed in such quarterly period divided by 365), as determined in accordance with the terms of the Series H Shares as summarized in the Prospectus.

The Series G Shares are issued in “book entry only” form and all rights of holders of Series G Shares must be exercised through CDS or the CDS participant through which the Series G Shares are held. Beneficial owners of Series G Shares who wish to exercise their conversion right should communicate as soon as possible with their broker or other nominee to obtain instructions for exercising such right on or prior to the deadline for exercise, which is 5:00 p.m. (Montreal time) on June 15, 2017.

An application will be made to list the Series H Shares on the Toronto Stock Exchange (“TSX”).

IAG.PR.G is a FixedReset 4.30%+285 that commenced trading 2012-6-1 (and was, unusually, re-opened on 2012-6-19) after being announced 2012-5-24. It has been a member of the FixedReset subindex since inception.

As this issue is not NVCC compliant, it is analyzed as having a Deemed Retraction.

The most logical way to analyze the question of whether or not to convert is through the theory of Preferred Pairs, for which a calculator is available. Briefly, a Strong Pair is defined as a pair of securities that can be interconverted in the future (e.g., IAG.PR.G and the FloatingReset that will exist if enough holders convert). Since they will be interconvertible on this future date, it may be assumed that they will be priced identically on this date (if they aren’t then holders will simply convert en masse to the higher-priced issue). And since they will be priced identically on a given date in the future, any current difference in price must be offset by expectations of an equal and opposite value of dividends to be received in the interim. And since the dividend rate on one element of the pair is both fixed and known, the implied average rate of the other, floating rate, instrument can be determined. Finally, we say, we may compare these average rates and take a view regarding the actual future course of that rate relative to the implied rate, which will provide us with guidance on which element of the pair is likely to outperform the other until the next interconversion date, at which time the process will be repeated.

We can show the break-even rates for each FixedReset / FloatingReset Strong Pair graphically by plotting the implied average 3-month bill rate against the next Exchange Date (which is the date to which the average will be calculated).

Click for Big

The market appears to have a distaste at the moment for floating rate product; most of the implied rates until the next interconversion are lower than the current 3-month bill rate and the averages for investment-grade and junk issues are both well below current market rates, at +0.07% and -0.33%, respectively! Whatever might be the result of the next few Bank of Canada overnight rate decisions, I suggest that it is unlikely that the average rate over the next five years will be lower than current – but if you disagree, of course, you may interpret the data any way you like.

Since credit quality of each element of the pair is equal to the other element, it should not make any difference whether the pair examined is investment-grade or junk, although we might expect greater variation of implied rates between junk issues on grounds of lower liquidity, and this is just what we see.

If we plug in the current bid price of the IAG.PR.G FixedReset, we may construct the following table showing consistent prices for its soon-may-be-issued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:

Based on current market conditions, I suggest that the FloatingResets that will result from conversion are likely to be cheap and trading below the price of their FixedReset counterparts. Therefore, it seems likely that I will recommend that holders of IAG.PR.G continue to hold the issue and not to convert, but I will wait until it’s closer to the June 15 notification deadline before making a final pronouncement. I will note that, given the apparent cheapness of the FloatingResets, it may be a good trade to swap the FixedReset for the FloatingReset in the market once both elements of each pair are trading and you can – presumably, according to this analysis – do it with a reasonably good take-out in price, rather than doing it through the company on a 1:1 basis. But that, of course, will depend on the prices at that time and your forecast for the path of policy rates over the next five years. There are no guarantees – my recommendation is based on the assumption that current market conditions with respect to the pairs will continue until the FloatingResets commence trading and that the relative pricing of the two new pairs will reflect these conditions.

Brookfield Asset Management Inc. has announced:

that it has determined the fixed dividend rate on its Cumulative Class A Preference Shares, Series 28 (“Series 28 Shares”) (TSX: BAM.PR.X) for the five years commencing July 1, 2017 and ending June 30, 2022 …

Series 28 Shares and Series 29 Shares

If declared, the fixed quarterly dividends on the Series 28 Shares during the five years commencing July 1, 2017 will be $0.1704375 per share per quarter, which represents a yield of 4.177% on the most recent trading price, similar to the current yield. The new fixed dividend rate that will apply for the five years commencing July 1, 2017 represents a yield of 2.727% based on the redemption price of $25 per share.

Holders of Series 28 Shares have the right, at their option, exercisable not later than 5:00 p.m. (Toronto time) on June 15, 2017, to convert all or part of their Series 28 Shares, on a one-for-one basis, into Cumulative Class A Preference Shares, Series 29 (the “Series 29 Shares”), effective June 30, 2017.

The quarterly floating rate dividends on the Series 29 Shares will be paid at an annual rate, calculated for each quarter, of 1.80% over the annual yield on three-month Government of Canada treasury bills. The actual quarterly dividend rate in respect of the July 1, 2017 to September 30, 2017 dividend period for the Series 29 Shares will be 0.58704% (2.329% on an annualized basis) and the dividend, if declared, for such dividend period will be $0.14676 per share, payable on September 29, 2017.

Holders of Series 28 Shares are not required to elect to convert all or any part of their Series 28 Shares into Series 29 Shares.

As provided in the share conditions of the Series 28 Shares, (i) if Brookfield determines that there would be fewer than 1,000,000 Series 28 Shares outstanding after June 30, 2017, all remaining Series 28 Shares will be automatically converted into Series 29 Shares on a one-for-one basis effective June 30, 2017; and (ii) if Brookfield determines that there would be fewer than 1,000,000 Series 29 Shares outstanding after June 30, 2017, no Series 28 Shares will be permitted to be converted into Series 29 Shares. There are currently 9,394,373 Series 28 Shares outstanding.

The Toronto Stock Exchange (“TSX”) has conditionally approved the listing of the Series 29 Shares effective upon conversion. Listing of the Series 29 Shares is subject to Brookfield fulfilling all the listing requirements of the TSX and, upon approval, the Series 29 Shares will be listed on the TSX under the trading symbol “BAM.PR.Y”.

BAM.PR.X is a FixedReset 4.60%+180 that commenced trading 2011-2-8 after being announced 2011-1-19. It has been a member of the FixedReset subindex since inception.

Thus, the new rate represents a dividend reduction of 41%. Ouch!

The most logical way to analyze the question of whether or not to convert is through the theory of Preferred Pairs, for which a calculator is available. Briefly, a Strong Pair is defined as a pair of securities that can be interconverted in the future (e.g., BAM.PR.X and the FloatingReset BAM.PR.Y that will exist if enough holders convert). Since they will be interconvertible on this future date, it may be assumed that they will be priced identically on this date (if they aren’t then holders will simply convert en masse to the higher-priced issue). And since they will be priced identically on a given date in the future, any current difference in price must be offset by expectations of an equal and opposite value of dividends to be received in the interim. And since the dividend rate on one element of the pair is both fixed and known, the implied average rate of the other, floating rate, instrument can be determined. Finally, we say, we may compare these average rates and take a view regarding the actual future course of that rate relative to the implied rate, which will provide us with guidance on which element of the pair is likely to outperform the other until the next interconversion date, at which time the process will be repeated.

We can show the break-even rates for each FixedReset / FloatingReset Strong Pair graphically by plotting the implied average 3-month bill rate against the next Exchange Date (which is the date to which the average will be calculated).

Click for Big

The market appears to have a distaste at the moment for floating rate product; most of the implied rates until the next interconversion are lower than the current 3-month bill rate and the averages for investment-grade and junk issues are both well below current market rates, at +0.07% and -0.33%, respectively! Whatever might be the result of the next few Bank of Canada overnight rate decisions, I suggest that it is unlikely that the average rate over the next five years will be lower than current – but if you disagree, of course, you may interpret the data any way you like.

Since credit quality of each element of the pair is equal to the other element, it should not make any difference whether the pair examined is investment-grade or junk, although we might expect greater variation of implied rates between junk issues on grounds of lower liquidity, and this is just what we see.

If we plug in the current bid price of the BAM.PR.X FixedReset, we may construct the following table showing consistent prices for its soon-may-be-issued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:

Based on current market conditions, I suggest that the FloatingResets that will result from conversion are likely to be cheap and trading below the price of their FixedReset counterparts. Therefore, it seems likely that I will recommend that holders of BAM.PR.X continue to hold the issue and not to convert, but I will wait until it’s closer to the June 15 notification deadline before making a final pronouncement. I will note that, given the apparent cheapness of the FloatingResets, it may be a good trade to swap the FixedReset for the FloatingReset in the market once both elements of each pair are trading and you can – presumably, according to this analysis – do it with a reasonably good take-out in price, rather than doing it through the company on a 1:1 basis. But that, of course, will depend on the prices at that time and your forecast for the path of policy rates over the next five years. There are no guarantees – my recommendation is based on the assumption that current market conditions with respect to the pairs will continue until the FloatingResets commence trading and that the relative pricing of the two new pairs will reflect these conditions.