Market Action

March 14, 2007

I now notice that with my customary elan, I have managed to over-write the post for March 13, instead of simply using it as a template. Sorry about that, guys!

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 4.03% 3.89% 77,362 3.87 1 +0.3584% 1,050.7
Fixed-Floater 4.97% 3.58% 107,474 4.60 5 +0.0316% 1,041.1
Floater 4.71% -19.80% 73,119 0.11 3 +0.2892% 1,055.9
Op. Retract 4.71% 2.71% 76,879 2.14 17 +0.0799% 1,034.4
Split-Share 5.06% 0.17% 186,066 3.11 15 +0.2650% 1,048.4
Interest Bearing 6.48% 4.09% 65,421 2.34 5 +0.0906% 1,044.9
Perpetual-Premium 5.01% 3.75% 240,916 5.33 53 +0.0392% 1,057.4
Perpetual-Discount 4.52% 4.52% 942,456 13.49 10 -0.0709% 1,067.6
Major Price Changes
Issue Index Change Notes
DIV.PR.A SplitShare +1.0317% No real story here … I suppose the market maker just realized that it’s being redeemed next week and put a decent bid on it.
Volume Highlights
Issue Index Volume Notes
RY.PR.F PerpetualDiscount 395,889 New issue settled today. Now with a pre-tax bid-YTW of 4.51% based on a bid of $24.75 and a limitMaturity.
TD.PR.M OpRet 75,400 TD crossed 25,000 at 27.20, then Scotia crossed 50,000 at the same price. Now with a pre-tax bid-YTW of 2.59% based on a bid of $27.22 and a call 2009-5-30 at $26.00. The market, obviously, is hoping for the yield of 3.31% resulting if it survives to the softMaturity 2013-10-30 at $25.00. Well, stranger things have happened!
POW.PR.D PerpetualPremium 74,867 Scotia crossed 50,000 at 26.45. Now with a pre-tax bid-YTW of 4.31% based on a bid of $26.36 and a call 2014-11-30 at $25.00.
SLF.PR.A PerpetualPremium 56,910 Scotia crossed 50,000 at $25.75. Now with a pre-tax bid-YTW of 4.27% based on a bid of $25.72 and a call 2014-4-30 at $25.00.
CM.PR.D PerpetualPremium 52,450 Desjardins crossed 50,000 at 27.03. Now with a pre-tax bid-YTW of 2.77% based on a bid of $27.03 and a call 2008-5-30 at $26.00.

There were sixteen other “$25 p.v. equivalent” index-included issues with over 10,000 shares traded today.

Index Construction / Reporting

RY.PR.F : Another New Issue Staggers to Market

The issuers and their salesmen must be trying to extract every dollar from this market since the new Royal Bank issue announced nine days ago staggered to market, trading 395,889 shares and closing at $24.75-80, 73×29. It opened at $24.90, the high for the day.

It seems buyers of new issues only get rewarded by Split Shares nowadays! And, of course, when you buy a split share new issue, you generally get saddled with a capital unit as well.

This issue has been added to the HIMIPref™ database with a securityCode of A45015, replacing the preIssue code of P37500. A reorgDataEntry has been processed.

The issue has been added to the HIMIPref™ PerpetualDiscount Index.

More later.

Later, more

Royal Bank 4.45% Perp New Issue & Comparatives
Data RY.PR.F RY.PR.A RY.PR.E
Price due to base-rate  22.65 22.65  22.90 
Price due to short-term -0.34  -0.34  -0.34 
Price due to long-term 1.27  1.27  1.28 
Price to to Cumulative Dividends 0  0  0 
Price due to Liquidity 1.66  1.66  1.67 
Price due to error -0.04  -0.04  -0.04 
Curve Price (Taxable Curve) 25.20  25.20  25.47 
Dividend Rate $1.1125 $1.1125 $1.125
Quote 3/14  24.75-80 24.89-95  25.11-15 
YTW (after tax) 3.58%  3.57%   3.60%
YTW Date 2037-3-14  2037-3-14   2037-3-14
Credit Rating (DBRS) Pfd-1 Pfd-1 Pfd-1
YTW (Pre-Tax) 4.51%  4.50%  4.53% 
YTW Modified Duration (Pre-Tax) 16.42  16.40  16.29 
YTW Pseudo-Convexity (Pre-Tax) -21.37  -33.51  -54.33 

Observant readers will note that there have been large changes in the YTW Modified Duration and the YTW Pseudo-Convexity. This will be a common occurance when the issue’s price is near its inflection point, as shown on the following graphs:

More later.

Later, More: : I have uploaded some HIMIPref™ reports regarding RY.PR.F on its announcement date, to wit (note that all referenced yields are after-tax):

The enormous effect on duration that a miniscule change in yields produces – the yield difference between the 2016 scenario and the 2037 scenario is less than 1 basis point – shows just why pseudo-convexity is so important! In valuation terms, uncertainties of this nature are discouraged by HIMIPref™ via the optionDoubtPenalty which keys off the optionDoubt attribute, which proxies pseudo-convexity fairly effectively.

I really need to write an article about this stuff.

Issue Comments

BCE.PR.G : HIMIPref™ Valuation Warning

As has been noted, BCE.PR.G is the new symbol for BC.PR.B, and there have been technical problems within HIMIPref™ over the conversion.

The reorgDataRecord for this conversion has been set up with the reorgType REORG_TERMCHANGE. This decision was made due to the lower credit rating on the new shares, as discussed by DBRS:

DBRS notes that prior to this exchange, the Bell preferreds were rated at Pfd-2 with a Stable trend. However, upon exchanging for new BCE preferred shares, the former holders of the Bell preferreds will now have a security that is rated lower resulting from the structural subordination that legally still exists between Bell and BCE. This exchange will now result in approximately $2.7 billion of preferred securities at the BCE holding level.

It was decided that the change in credit rating was significant enough that prior data regarding the trading of this issue should be discarded, just as it is when embeddedOptions or annualDividend gets changed … which happens seldom enough that there is little way of testing any procedures.

On its initial day of trading, volume of BCE.PR.G was 19,081 shares, which set its initial liquidityMeasure to a value greater than the YIELD_CURVE_COMPONENT_CALCULATION_LIQUIDITY_MAXIMUM; that is, HIMIPref™ now thinks that this is a highly liquid instrument, with liquidity for which the market will pay a hefty premium. This state of affairs will last until (and assuming!) the liquidityAverage is reduced through the operation of the instrumentVolumeInfoDecay. This process will probably take about a month at current settings.

The high calculated volume has set the curvePriceComponent corresponding to yieldCurvePremiumLiquidity to a very high value, that is almost certainly spurious – I do not expect the issue to trade 19,081 shares every day just because it’s now a borderline credit.

Therefore, Users of HIMIPref™ are urged to disregard valuations and trade recommendations for BCE.PR.G until the situation has normalized.

I find it fascinating that this warning is not necessary for users of the portfolio method, which has been discussed recently. This is because the optimizableParameter instrumentPriceDisparityValuation has a much lower value in the portfolioMethod (0.086) than in the issueMethod (1.035).

Update & Bump, 2007-03-14 : In response to the comment/query from Drew, I have uploaded the following charts prepared by HIMIPref™:

The outlier confused things and the recent relatively heavy volume has confused things even more! I believe the indicated averageTradingValue is too high at the moment and will require a little more time to determine whether the reasonable value. We should know by month-end.

Note that this caution only applies to users of the issueMethod, which trades like crazy and for which liquidity is very important (since it’s not just enough to get into a position, you have to get out!). Users of the portfolioMethod may use the HIMIPref™ values without a qualm.

Issue Comments

FFN.PR.A : Meeting to Extend Term?

Financial 15 Split II Corp. has not had many of its preferred shares redeemed since issue:

Financial 15 Split II Preferreds Outstanding
Period Action Shares
2004-10-15 Issue 6,700,000
FY 2006 Redemption (49,900)
Current Outstanding   6,650,100

The shares are not redeemable by the company (the “Redemption” in the table above is actually Shareholder Retraction, but I’m following the language of the Annual Report): capital unitholders who wish to retract must tender a pref, or get the company to buy one in the market on their behalf.
The company has announced that:

they will hold a special meeting of the shareholders on April 24, 2007. Shareholders of each Fund are being asked to consider a special resolution to amend the articles of Fund to extend the mandatory redemption date for the Class A Shares and the Preferred Shares of each Corp. to December 1, 2014.

This will be a good deal if the 5.25% dividend isn’t decreased simultaneously! I’ll write more as details become available.

Issue Comments

FTN.PR.A : Meeting to extend term?

Financial 15 Split Corp. is in the happy position of having increased its preferred shares outstanding since issue:

Financial 15 Preferreds Outstanding
Period Action Shares
2003-11-14 Issue 10,600,000
FY 2004 Issue 300,000
FY 2006 Redemption (190,762)
Current Outstanding   10,709,238

The shares are not redeemable by the company (the “Redemption” in the table above is actually Shareholder Retraction, but I’m following the language of the Annual Report): capital unitholders who wish to retract must tender a pref, or get the company to buy one in the market on their behalf.

The company has announced that:

they will hold a special meeting of the shareholders on April 24, 2007. Shareholders of each Fund are being asked to consider a special resolution to amend the articles of Fund to extend the mandatory redemption date for the Class A Shares and the Preferred Shares of each Corp. to December 1, 2014.

This will be a good deal if the 5.25% dividend isn’t decreased simultaneously! I’ll write more as details become available.

Issue Comments

DFN.PR.A : Meeting to Extend Term?

Dividend 15 Split Corp. is a fairly unusual split-share corporation, in that they have been able to increase the number of shares outstanding since they were first traded 2004-3-16:

DFN.PR.A Shares Outstanding
Date Action Shares
2004-3-16 Issue @ $10.00 8,400,000
FY 2006 Issue @ $10.75 1,215,000
FY 2006 Redemption (211,500)
Current Outstanding   9,403,500

This issue has redemption terms I like: there ain’t none. Just the maturity 2009-12-1. Capital unitholders who wish to retract have to go out and buy a matching pref (or have the company do so on their behalf). 

The company has now announced that

it will hold a special meeting of the shareholders on April 24, 2007. Shareholders of each Fund are being asked to consider a special resolution to amend the articles of Fund to extend the mandatory redemption date for the Class A Shares and the Preferred Shares to December 1, 2014.

No word on whether there will be a simultaneous decrease in the dividends payable – but if there isn’t, then the annual dividend of $0.525 (5.25% of par) makes this seem like a good deal!

I’ll write more when the details of the resolutions are release on SEDAR.

Issue Comments

Dundee Wealth Management Preferred Settles

The new issue from Dundee Wealth Management, announced February 22, settled with a sigh today, closing at 24.80-90 on volume of 125,850 shares. It opened at 24.75 and managed to recover to 24.95 before finding its level. Scotia provided an afternoon flourish by crossing 50,000 shares at 24.90.

The issue has been entered into the HIMIPref™ database with a securityCode of A45150, replacing the preIssue code of P25007. A reorgDataEntry has been processed.

More later.

Later, more: I have updated the table of comparatives:

Dundee Wealth New Issue & Comparitives
Data DW.PR.A BAM.PR.J DC.PR.A
Price due to base-rate 24.65 26.23 25.19
Price due to short-term -0.47 -0.49 -0.45
Price due to long-term 1.71 1.77 1.64
Price to to Cumulative Dividends 0.00 0.00 0.00
Price due to SplitShareCorp 0.00 0.00 0.00
Price due to Retractibility 1.09 1.20 0.99
Price due to Liquidity 0.80 -0.17 0.00
Price due to Floating Rate 0.00 0.00 0.00
Price due to Credit Spread (2) 0.00 -0.32 0.00
Price due to Credit Spread (3) -0.90 0.00 -0.82
Price due to Credit Spread (High) 0.00 0.00 0.00
Price due to Credit Spread (Low) 0.00 -0.27 -0.22
Price due to error 0.01 0.04 0.07
Curve Price (Taxable Curve) 26.89 28.00 26.40
Quote 3/13 24.80-90 27.82-97 25.35-50
YTW (after tax) 3.88% 3.20% 3.96%
YTW Date 2017-3-12 2014-4-30 2016-6-29
Credit Rating (DBRS) Pfd-3 Pfd-2(low) Pfd-3(low)
YTW (Pre-Tax) 4.88% 4.04% 4.97%
YTW Modified Duration (Pre-Tax) 7.91 6.01 7.33
YTW Pseudo-Convexity (Pre-Tax) 0.2 -3.3 0.2

Market Action

March 12, 2007

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 4.01% 3.82% 83,868 3.88 1 0.3185% 1,050.7
Fixed-Floater 4.97% 3.45% 109,132 4.59 5 +0.0160% 1,041.6
Floater 4.70% -17.30% 74,613 11.03 3 +0.0916% 1,051.0
Op. Retract 4.70% 2.59% 76,216 2.14 17 +0.0623% 1,033.8
Split-Share 5.07% 0.44% 189,839 3.22 15 -0.0188% 1,044.1
Interest Bearing 6.47% 3.25% 67,295 2.33 5 +0.1062% 1,043.0
Perpetual-Premium 5.00% 3.69% 245,160 5.20 53 -0.0206% 1,057.1
Perpetual-Discount 4.53% 4.53% 788,287 12.16 9 +0.1294% 1,068.0
Major Price Changes
Issue Index Change Notes
SXT.PR.A SplitShare +1.1067% Makes at least some sense, since today is the first day of trading in post-redemption shares. I wonder if the sellers knew that?
Volume Highlights
Issue Index Volume Notes
SLF.PR.E PerpetualDiscount 220,785 RBC crossed 214,500 at 25.00. Did both sides pay a nickel a share? Nice work, if so! Now with a pre-tax bid-YTW of 4.49% based on a bid of $25.00 and a call 2016-4-30 at $25.00.
POW.PR.D PerpetualPremium 70,000 Scotia crossed 65,000 at $26.45. Now with a pre-tax bid-YTW of 4.27% based on a bid of $26.43 and a call 2014-11-30 at $25.00.
LBS.PR.A SplitShare 152,322 Scotia crossed 27,700 at $10.60 and 85,000 at 10.70. Now with a pre-tax bid-YTW of 4.31% based on a bid of $10.64 and a hardMaturity 2013-11-29 at $10.00
SLF.PR.A PerpetualPremium 54,050 Scotia crossed 50,000 at $25.74. Now with a pre-tax bid-YTW of 4.27% based on a bid of $25.71 and a call 2014-4-30 at $25.00.
BAM.PR.B Floater 47,165 Desjardins crossed 40,000 at $25.05.

There were fourteen other “$25 p.v. equivalent” index-included issues with over 10,000 shares traded today.

PrefLetter

PrefLetter, March 2007

The March issue of PrefLetter has just been sent to those who have previously indicated that they would like to see a copy.

I am still on schedule for an official launch in April, but it might be tight! Not everything is under my control and there’s a lot of waiting around to do when starting a new venture.

If any other readers would like to see a free copy of the March prototype, please eMail me. Comments will be greatly appreciated, but are not compulsory.

Market Action

March 9, 2007

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 4.02% 3.89% 87,318 3.88 1 0.0000% 1,047.4
Fixed-Floater 4.97% 3.48% 108,894 4.60 5 +0.0951% 1,041.4
Floater 4.71% -17.32% 71,942 11.02 3 +0.0264% 1,050.1
Op. Retract 4.70% 2.65% 77,098 2.15 17 -0.0983% 1,033.1
Split-Share 5.07% 1.31% 191,061 3.23 15 -0.0182% 1,044.3
Interest Bearing 6.47% 3.96% 67,036 2.33 5 +0.1659% 1,041.9
Perpetual-Premium 5.00% 3.56% 247,963 5.39 53 +0.0117% 1,057.3
Perpetual-Discount 4.53% 4.53% 792,348 13.15 9 -0.0040% 1,066.7
Major Price Changes
Issue Index Change Notes
TD.PR.M OpRet -1.5659% On volume of 700 shares – which was enough to knock the quote down to 27.03-59, 55×4. Now with a pre-tax bid-YTW of 2.90% based on the bid and a call 2009-5-30 at $26.00. If it survives until its softMaturity 2013-10-30 at $25.00, it will have yielded 3.42%
BAM.PR.I OpRet +1.3011% An issue with similar terms to the TD.PR.M – the main difference is the credit. It pays $1.375 p.a., as opposed $1.175 for TD.PR.M. It did not trade today, despite the efforts of the bidders to attract attention. Now with a pre-tax bid-YTW of 3.25% based on a bid of $27.25 and a call 2009-7-30 at $25.75 … it if makes it to its softMaturity 2013-12-30, the yield will have been 4.17%
Volume Highlights
Issue Index Volume Notes
PWF.PR.K PerpetualPremium 142,950 RBC crossed 139,000 at 26.20. Now with a pre-tax bid-YTW of 4.34% based on a bid of $26.16 and a call 2014-11-30 at 4.34%.
BAM.PR.M PerpetualPremium 116,200 Desjardins crossed 108,400 at $25.20. Now with a pre-tax bid-YTW of 4.77% based on a bid of $25.25 and a call 2016-03-01 at $25.00.
BCE.PR.S Scraps (would be “ratchet” with more volume) 102,500 Nesbitt crossed 100,000 at $25.20.
WN.PR.E PerpetualDiscount 62,359 Still on credit watch negative. Now with a pre-tax bid-YTW of 4.81% based on a bid of 25.08 and a limitMaturity
TD.PR.N OpRet 50,000 Nesbitt crossed 50,000 at 27.40. Now with a pre-tax bid-YTW of 2.37% based on a bid of $27.28 and a call 2009-5-30 at $26.00. Big Deal. Even if it survives until its softMaturity 2014-1-30, its yield will have been only 3.21% … basically a corporate bond, in fact, after taking account of the Ontario Equivalency Factor of 1.40.

There were twelve other “$25 p.v. equivalent” index-included issues with over 10,000 shares traded today.