PrefBlog

Regulatory Capital

RY Capitalization: 1Q09

RY has released its Fourth Quarter 2008 Earnings and Supplementary Package, so it’s time to recalculate how much room they have to issue new preferred shares – assuming they want to!

Step One is to analyze their Tier 1 Capital, reproducing the prior format:

RY Capital Structure October, 2008 & January, 2009
	4Q08	1Q09
Total Tier 1 Capital	25,173	28,901
Common Shareholders’ Equity	115.0%	108.0%
Preferred Shares	10.6%	13.2%
Innovative Tier 1 Capital Instruments	15.4%	14.3%
Non-Controlling Interests in Subsidiaries	1.4%	1.2%
Goodwill	-39.6%	-34.4%
Miscellaneous	-2.7%	-2.4%
‘Miscellaneous’ includes ‘Substantial Investments’, ‘Securitization-related deductions’, ‘Expected loss in excess of allowance’ and ‘Other’

Next, the issuance capacity (from Part 3 of the introductory series):

RY Tier 1 Issuance Capacity October 2008 & January 2009
		4Q08	1Q09
Equity Capital	(A)	18,637	20,949
Non-Equity Tier 1 Limit	B=0.666*A	12,425	13,952
Innovative Tier 1 Capital	(C)	3,879	4,141
Preferred Limit	(D=B-C)	8,546	9,811
Preferred Actual	(E)	2,657	3,811
New Issuance Capacity	(F=D-E)	5,889	6,000
Items A, C & E are taken from the table “Regulatory Capital” of the supplementary information; Note that Item A includes everything except preferred shares and innovative capital instruments Item B is as per OSFI Guidelines; the limit was recently increased. Items D & F are my calculations

and the all important Risk-Weighted Asset Ratios!

RY Risk-Weighted Asset Ratios October 2008 & January 2009
	Note	4Q08	1Q09
Equity Capital	A	18,637	20,949
Risk-Weighted Assets	B	278,579	273,561
Equity/RWA	C=A/B	6.69%	7.66%
Tier 1 Ratio	D	9.0%	10.6%
Capital Ratio	E	11.1%	12.5%
Assets to Capital Multiple	F	20.1x	17.5x
A is taken from the table “Issuance Capacity”, above B, D, E & F are taken from RY’s Supplementary Report C is my calculation.

Derivatives exposure, which was an issue last quarter as their long-term FX contracts grossed up the balance sheet, declined in notional terms but the risk-weighting increased to leave the risk-weighted exposure flat on the quarter. The notional decline was due to a reduction in short-term exposures; values for terms extending beyond one year were flat. It is possible – though not discussed! – that Royal is using its counterparty strength to go after the more profitable long-term business. Additionally, there appears (page 37 of the supplementary PDF) to be a shift from Foreign Exchange to Interest Rate derivatives.

It was a good solid quarter with nothing particularly exciting happening … just the way we like it! Very nice to see the delevering indicated by the Assets to Capital Multiple and improved Preferred Share subordination shown by the the Equity/RWA ratio.

Regulatory Capital

CM Capitalization: 1Q09

CIBC (Stock symbol CM … I can never quite decide how to present it!) has released its 1Q09 Earnings Report and 1Q09 Supplementary Package, so it’s time to recalculate how much room they have to issue new preferred shares – assuming they want to!

Step One is to analyze their Tier 1 Capital, reproducing the prior format:

CM Capital Structure October, 2008 & January, 2009
	4Q08	1Q09
Total Tier 1 Capital	12,365	12,017
Common Shareholders’ Equity	91.2%	92.3%
Preferred Shares	26.1%	26.9%
Innovative Tier 1 Capital Instruments	0%	0%
Non-Controlling Interests in Subsidiaries	1.4%	1.5%
Goodwill	-17.0%	-17.7%
Misc.	-1.8%	-3.0%
Shareholders’ Equity includes “Common Shares”, “Contributed Surplus”, “Retained Earnings”, “Net after tax fair value losses arising from changes in institution’s own credit risk”, “Foreign Currency translation adjustments”, and “Net after tax undrealized holding loss on AFS equity securities in OCI” ‘Misc.’ is comprised of Basel II adjustments to Tier 1 Capital

Next, the issuance capacity (from Part 3 of the introductory series):

CM Tier 1 Issuance Capacity October 2008 & January 2009
		4Q08	1Q09
Equity Capital	(A)	9,134	8,786
Non-Equity Tier 1 Limit	B=0.666*A	6,089	5,851
Innovative Tier 1 Capital	(C)	0	0
Preferred Limit	(D=B-C)	6,089	5,851
Preferred Actual	(E)	3,231	3,231
New Issuance Capacity	(F=D-E)	2,858	2,620
Items A, C & E are taken from the table “Regulatory Capital” of the supplementary information; Note that Item A is defined as total Tier 1 Capital, less preferred shares. Item B is as per OSFI Guidelines; the limit was recently increased. Items D & F are my calculations

and the all important Risk-Weighted Asset Ratios!

CM Risk-Weighted Asset Ratios October 2008 & January 2009
	Note	4Q08	1Q09
Equity Capital	A	9,134	8,786
Risk-Weighted Assets	B	117,900	122,400
Equity/RWA	C=A/B	7.75%	7.18%
Tier 1 Ratio	D	10.5%	9.8%
Capital Ratio	E	15.4%	14.8%
Assets to Capital Multiple	F	17.9x	17.7x
A is taken from the table “Issuance Capacity”, above B, D & E are taken from CM’s Supplementary Report C is my calculation. F is taken the Shareholders’ Report

The Shareholders’ Report comments:

The Tier 1 ratio was down by 0.7% from the year end mainly due to structured credit charges in the quarter and higher credit risk weighted assets in the trading book resulting primarily from financial guarantor downgrades. The Tier 1 ratio was also adversely impacted by the expiry of OSFI’s transition rules related to the grandfathering of substantial investments pre-December 31, 2006, which were deducted entirely from Tier 2 capital at year end. The Tier 1 ratio benefited from lower risk weighted assets on residential mortgages resulting from higher insured mortgages.
The total capital ratio was down 0.6% from year end mainly due to structured credit charges in the quarter and higher credit risk weighted assets in the trading book, resulting primarily from financial guarantor downgrades. The ratio benefited from lower risk weighted assets on residential mortgages resulting from higher insured mortgages.

The big news in the reports was:

$708 million ($483 million after-tax, or $1.27 per share) loss on structured credit run-off activities

… which meant they didn’t make much money this quarter – only $147-million. They warn:

As at January 31, 2009, the fair value, net of valuation adjustments, of purchased protection from financial guarantor counterparties was $2.4 billion (US$1.9 billion). Market and economic conditions relating to these financial guarantors may change in the future, which could result in significant future losses.

In addition, it should be noted (page 9 of the report) that they still have $38.8-billion of actual ($10.2-billion) and notional ($28.6-billion) exposure in their “run-off portfolio”, offset by notional protection of $36.1-billion. It is the creditworthiness of the notional protection that is an issue.

Roughly half the notional exposure is derivatives written on Corporate Debt, while another quarter is writes on Collaterallized Loan Obligates; protection has been bought within these two sub-classes to basically offset. On Page 13 of the report, they do a very good job of breaking down these exposures by counterparty credit rating. About $8.7-billion of the notional exposure is to counterparties rated below investment grade; they do not disclose collateralization agreements that would give some comfort if they existed.

DRIPs

BNS DRIP: Preferred Dividends into Discounted Common

BNS has announced (a long time ago, but hey! better late than never, right?):

On August 26, 2008, the Bank announced that participants in the Plan will receive a two per cent discount from the Average Market Price (as defined in the Plan) on the purchase of additional common shares with reinvested dividends. The discount will not apply to the purchase of common shares with the optional cash payment or interest reinvestment options of the Plan. The first dividends for which this discount will be effective are the dividends on the Bank’s common and preferred shares declared by the Board of Directors on August 26, 2008 for the quarter ending October 31, 2008. These dividends will be payable on October 29, 2008 to holders of record at the close of business on October 7, 2008. Prior to this announcement, common shares issued under the Plan have been issued with no discount to the Average Market Price (as defined in the Plan).

The two per cent discount for common shares issuable under the dividend reinvestment and stock dividend components of the Plan will continue until further notice.

Market Action

February 26, 2009

Whoosh! The seminar was a lot of fun but it took a lot out of me!

There’s an amusing story in the Financial Times:

A whistleblower contacted US regulators more than five years ago with allegations that Sir Allen Stanford’s businesses were involved in an “illegal Ponzi scheme”, the Financial Times has learnt, raising new questions about why authorities waited until last week to shut down the alleged $8bn fraud.

Leyla Basagoitia, a former Stanford employee, raised a series of red flags about the tycoon’s empire in a 2003 employment dispute with her company at a tribunal run by the finance industry’s self-regulatory body. Ms Basagoitia also alerted the US Securities and Exchange Commission at about the same time, her lawyer said, echoing criticisms the agency ignored early warnings about the alleged $50bn Ponzi scheme run by Bernard Madoff.

I think we’re going to see stories like this regarding every fraud for the next five-odd years. It’s hard to know how seriously take them … it’s like the “US was warned of Pearl Harbour” stories one sees … yes, I’m sure the US was warned about Pearl Harbour. I’m equally certain they were warned about Japanese alliances with Mexico (a la Zimmerman) and little green men in Idaho. What was the backup?

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	5.34 %	3.64 %	23,786	18.09	2	-1.2897 %	840.7
FixedFloater	7.39 %	6.94 %	76,976	14.05	7	-0.4457 %	1,359.2
Floater	5.00 %	4.06 %	24,990	17.31	4	0.5509 %	1,050.0
OpRet	5.26 %	4.92 %	141,406	3.96	15	-0.1158 %	2,045.4
SplitShare	6.75 %	11.65 %	72,006	4.00	15	1.0742 %	1,665.5
Interest-Bearing	7.24 %	10.00 %	38,736	0.80	2	0.3561 %	1,952.7
Perpetual-Premium	0.00 %	0.00 %	0	0.00	0	-0.0445 %	1,512.5
Perpetual-Discount	7.13 %	7.26 %	178,609	12.26	71	-0.0445 %	1,393.0
FixedReset	6.14 %	5.74 %	543,196	13.89	27	-0.4579 %	1,794.3

Performance Highlights
Issue	Index	Change	Notes
BNS.PR.R	FixedReset	-3.64 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-26 Maturity Price : 21.20 Evaluated at bid price : 21.20 Bid-YTW : 4.89 %
BCE.PR.Y	Ratchet	-3.56 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-26 Maturity Price : 25.00 Evaluated at bid price : 13.26 Bid-YTW : 7.63 %
BNS.PR.O	Perpetual-Discount	-3.27 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-26 Maturity Price : 20.44 Evaluated at bid price : 20.44 Bid-YTW : 6.95 %
BCE.PR.F	FixedFloater	-3.01 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-26 Maturity Price : 25.00 Evaluated at bid price : 14.50 Bid-YTW : 7.08 %
BAM.PR.B	Floater	-2.75 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-26 Maturity Price : 7.78 Evaluated at bid price : 7.78 Bid-YTW : 6.88 %
TD.PR.Y	FixedReset	-2.66 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-26 Maturity Price : 21.22 Evaluated at bid price : 21.22 Bid-YTW : 4.71 %
HSB.PR.D	Perpetual-Discount	-2.28 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-26 Maturity Price : 17.15 Evaluated at bid price : 17.15 Bid-YTW : 7.45 %
CM.PR.K	FixedReset	-2.27 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-26 Maturity Price : 21.62 Evaluated at bid price : 22.00 Bid-YTW : 5.11 %
PWF.PR.F	Perpetual-Discount	-2.16 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-26 Maturity Price : 17.66 Evaluated at bid price : 17.66 Bid-YTW : 7.55 %
PWF.PR.L	Perpetual-Discount	-2.15 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-26 Maturity Price : 16.87 Evaluated at bid price : 16.87 Bid-YTW : 7.68 %
CM.PR.P	Perpetual-Discount	-2.13 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-26 Maturity Price : 18.37 Evaluated at bid price : 18.37 Bid-YTW : 7.61 %
BMO.PR.L	Perpetual-Discount	-1.69 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-26 Maturity Price : 19.80 Evaluated at bid price : 19.80 Bid-YTW : 7.40 %
LFE.PR.A	SplitShare	-1.67 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2012-12-01 Maturity Price : 10.00 Evaluated at bid price : 7.65 Bid-YTW : 13.50 %
NA.PR.M	Perpetual-Discount	-1.57 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-26 Maturity Price : 20.67 Evaluated at bid price : 20.67 Bid-YTW : 7.34 %
CM.PR.A	OpRet	-1.38 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2009-03-28 Maturity Price : 25.50 Evaluated at bid price : 25.76 Bid-YTW : -2.16 %
PWF.PR.I	Perpetual-Discount	-1.37 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-26 Maturity Price : 20.82 Evaluated at bid price : 20.82 Bid-YTW : 7.31 %
CL.PR.B	Perpetual-Discount	-1.35 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-26 Maturity Price : 21.12 Evaluated at bid price : 21.12 Bid-YTW : 7.57 %
BAM.PR.K	Floater	-1.28 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-26 Maturity Price : 7.70 Evaluated at bid price : 7.70 Bid-YTW : 6.95 %
CM.PR.H	Perpetual-Discount	-1.27 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-26 Maturity Price : 16.30 Evaluated at bid price : 16.30 Bid-YTW : 7.48 %
BNA.PR.A	SplitShare	-1.24 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2010-09-30 Maturity Price : 25.00 Evaluated at bid price : 23.80 Bid-YTW : 9.53 %
PWF.PR.K	Perpetual-Discount	-1.23 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-26 Maturity Price : 16.05 Evaluated at bid price : 16.05 Bid-YTW : 7.83 %
CM.PR.E	Perpetual-Discount	-1.21 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-26 Maturity Price : 18.82 Evaluated at bid price : 18.82 Bid-YTW : 7.56 %
SBC.PR.A	SplitShare	-1.19 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2012-11-30 Maturity Price : 10.00 Evaluated at bid price : 7.50 Bid-YTW : 14.40 %
BMO.PR.M	FixedReset	-1.16 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-26 Maturity Price : 21.30 Evaluated at bid price : 21.30 Bid-YTW : 4.59 %
TD.PR.C	FixedReset	-1.04 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-26 Maturity Price : 23.71 Evaluated at bid price : 23.75 Bid-YTW : 5.21 %
PWF.PR.M	FixedReset	-1.01 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-26 Maturity Price : 24.35 Evaluated at bid price : 24.40 Bid-YTW : 5.63 %
BAM.PR.J	OpRet	1.05 %	YTW SCENARIO Maturity Type : Soft Maturity Maturity Date : 2018-03-30 Maturity Price : 25.00 Evaluated at bid price : 18.30 Bid-YTW : 10.21 %
WFS.PR.A	SplitShare	1.17 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2011-06-30 Maturity Price : 10.00 Evaluated at bid price : 7.75 Bid-YTW : 18.03 %
RY.PR.C	Perpetual-Discount	1.21 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-26 Maturity Price : 16.71 Evaluated at bid price : 16.71 Bid-YTW : 6.95 %
ALB.PR.A	SplitShare	1.29 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2011-02-28 Maturity Price : 25.00 Evaluated at bid price : 19.65 Bid-YTW : 17.45 %
SLF.PR.A	Perpetual-Discount	1.29 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-26 Maturity Price : 15.65 Evaluated at bid price : 15.65 Bid-YTW : 7.60 %
BMO.PR.J	Perpetual-Discount	1.32 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-26 Maturity Price : 16.11 Evaluated at bid price : 16.11 Bid-YTW : 7.05 %
BMO.PR.K	Perpetual-Discount	1.33 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-26 Maturity Price : 18.31 Evaluated at bid price : 18.31 Bid-YTW : 7.24 %
CIU.PR.A	Perpetual-Discount	1.58 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-26 Maturity Price : 16.76 Evaluated at bid price : 16.76 Bid-YTW : 6.91 %
POW.PR.A	Perpetual-Discount	1.58 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-26 Maturity Price : 19.25 Evaluated at bid price : 19.25 Bid-YTW : 7.41 %
GWO.PR.H	Perpetual-Discount	1.86 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-26 Maturity Price : 16.41 Evaluated at bid price : 16.41 Bid-YTW : 7.56 %
FBS.PR.B	SplitShare	1.87 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2011-12-15 Maturity Price : 10.00 Evaluated at bid price : 6.55 Bid-YTW : 21.90 %
FIG.PR.A	Interest-Bearing	2.14 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2014-12-31 Maturity Price : 10.00 Evaluated at bid price : 7.15 Bid-YTW : 13.89 %
BNA.PR.C	SplitShare	2.18 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2019-01-10 Maturity Price : 25.00 Evaluated at bid price : 11.25 Bid-YTW : 15.45 %
BNA.PR.B	SplitShare	2.23 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2016-03-25 Maturity Price : 25.00 Evaluated at bid price : 21.06 Bid-YTW : 7.93 %
GWO.PR.I	Perpetual-Discount	2.37 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-26 Maturity Price : 15.53 Evaluated at bid price : 15.53 Bid-YTW : 7.41 %
LBS.PR.A	SplitShare	2.90 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2013-11-29 Maturity Price : 10.00 Evaluated at bid price : 7.80 Bid-YTW : 11.65 %
MFC.PR.C	Perpetual-Discount	2.93 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-26 Maturity Price : 15.48 Evaluated at bid price : 15.48 Bid-YTW : 7.30 %
PWF.PR.A	Floater	4.00 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-02-26 Maturity Price : 13.00 Evaluated at bid price : 13.00 Bid-YTW : 4.06 %
PPL.PR.A	SplitShare	4.38 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2012-12-01 Maturity Price : 10.00 Evaluated at bid price : 8.57 Bid-YTW : 9.59 %
FFN.PR.A	SplitShare	5.60 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2014-12-01 Maturity Price : 10.00 Evaluated at bid price : 6.03 Bid-YTW : 16.24 %

Volume Highlights
Issue	Index	Shares Traded	Notes
PPL.PR.A	SplitShare	383,449	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2012-12-01 Maturity Price : 10.00 Evaluated at bid price : 8.57 Bid-YTW : 9.59 %
CM.PR.R	OpRet	137,000	YTW SCENARIO Maturity Type : Soft Maturity Maturity Date : 2013-04-29 Maturity Price : 25.15 Evaluated at bid price : 25.51 Bid-YTW : 4.68 %
TD.PR.N	OpRet	132,601	YTW SCENARIO Maturity Type : Soft Maturity Maturity Date : 2014-01-30 Maturity Price : 25.00 Evaluated at bid price : 25.50 Bid-YTW : 4.24 %
MFC.PR.A	OpRet	110,356	YTW SCENARIO Maturity Type : Soft Maturity Maturity Date : 2015-12-18 Maturity Price : 25.00 Evaluated at bid price : 24.40 Bid-YTW : 4.49 %
RY.PR.R	FixedReset	105,775	YTW SCENARIO Maturity Type : Call Maturity Date : 2014-03-26 Maturity Price : 25.00 Evaluated at bid price : 25.15 Bid-YTW : 6.27 %
TD.PR.M	OpRet	94,500	YTW SCENARIO Maturity Type : Soft Maturity Maturity Date : 2013-10-30 Maturity Price : 25.00 Evaluated at bid price : 25.41 Bid-YTW : 4.42 %
There were 41 other index-included issues trading in excess of 10,000 shares.

Issue Comments

EN.PR.A Revised Capital Unit Dividend Policy

Energy Split Corp II has announced:

it has revised its Capital Yield Share distribution policy and starting with the next distribution date on June 16, 2009, has determined that it will not pay a distribution on the Capital Yield Shares if the Net Asset Value at the time of declaration, after giving effect to the distribution, would be less than or equal to the original issue price of the ROC Preferred Shares. In such circumstances, any excess distributions received on the royalty trust portfolio minus the distributions payable on the ROC Preferred Shares and all administrative and operating expenses will be reinvested in short-term debt securities or used to purchase ROC Preferred Shares in the market for cancellation under a normal course issuer bid.

However, as long as Net Asset Value at the date of declaration exceeds the original issue price of the ROC Preferred Shares, the Company intends to pay a distribution on the Capital Yield Shares equal to the excess of the distributions received on the royalty trust portfolio minus the ROC Preferred Share distributions and all administrative and operating expenses.

The Company’s ongoing dividend policy entitles holders of ROC Preferred Shares to receive quarterly fixed cumulative distributions equal to $0.1718 per ROC Preferred Share. The Capital Yield Shareholders are provided with a leveraged play on the yield and price performance from a fixed portfolio consisting of 16 oil and gas royalty trusts listed on the Toronto Stock Exchange.

Capital Yield Shares and ROC Preferred Shares of Energy Split Corp. II Inc. are listed for trading on The Toronto Stock Exchange under the symbols EN and EN.PR.A respectively.

The previous policy was:

Holders of Capital Yield Shares will be entitled to receive distributions that the board of directors of the Company may declare from time to time subject to the prior rights of the Holders of the ROC Preferred Shares. Under the distribution policy adopted by the board of directors, it is expected that Holders of Capital Yield Shares will receive quarterly tax efficient distributions to be paid by the Company on or before the 16th day of March, June, September and December of each year in an amount equal to the distributions paid on the units of Royalty Fund II after payment of the fixed distribution payable on the ROC Preferred Shares and operating expenses of the Company.

EN.PR.A was last mentioned on PrefBlog when it was downgraded to Pfd-3 by DBRS. It is tracked by HIMIPref™ and is a member of the “Scraps” sub-index.

DRIPs

RY Amends DRIP: Preferred Dividends into Discounted Common Stock

Royal Bank has announced:

amendments to its dividend reinvestment plan (the “plan”).

Under the plan, the bank may now offer a discount from the average market price (as defined in the plan) on the reinvestment of dividends in additional common shares issued by the bank from treasury and will provide the preferred shareholders of the bank with the opportunity to participate in the plan by electing to have the dividends paid on their preferred shares reinvested in common shares of the bank.

Under the plan, common and preferred shareholders who reside in Canada and common shareholders in the United States may elect to have dividends paid on their shares reinvested in common shares of the bank.
…
At this time, the bank has decided to issue shares from treasury at a three per cent discount from the average market price until such time as the bank elects otherwise. Most recently the common shares purchased under the plan have been issued from treasury with no discount to the average market price. These changes will be effective starting with the dividend, payable on May 22, 2009 to common and preferred shareholders of record on April 23, 2009.

Under the old plan (not yet modified on RY’s website), preferred shareholders could not participate.

I can see nothing in the 2008 Annual Report to indicate to what degree shareholders are participating in this. In the great scheme of things, I will assume “not much”, since with no discount there has been little or no reason for institutional shareholders to participate.

A 3% discount though – with preferred share eligibility – could make things more interesting.

Thanks to Assiduous Reader DD for bringing this to my attention!

New Issues

New Issue: CM Fixed-Reset 6.50%+433

CIBC (aka CM) has announced:

that it had entered into an agreement with a group of underwriters led by CIBC World Markets Inc. for an issue of 8 million non-cumulative Rate Reset Class A Preferred Shares, Series 37 (the “Series 37 Shares”) priced at $25.00 per Series 37 Share to raise gross proceeds of $200 million.

CIBC has granted the underwriters an option, exercisable in whole or in part prior to closing, to purchase an additional 3 million Series 37 Shares at the same offering price. Should the underwriters’ option be fully exercised, the total gross proceeds of the financing will be $275 million.

The Series 37 Shares will yield 6.50% per annum, payable quarterly, as and when declared by the Board of Directors of CIBC, for an initial period ending July 31, 2014. On July 31, 2014 and on July 31 every five years thereafter, the dividend rate will reset to be equal to the then current five-year Government of Canada bond yield plus 4.33%.

Holders of the Series 37 Shares will have the right to convert their shares into non-cumulative Floating Rate Class A Preferred Shares, Series 38 (the “Series 38 Shares”), subject to certain conditions, on July 31, 2014 and on July 31 every five years thereafter. Holders of the Series 38 Shares will be entitled to receive a quarterly floating rate dividend, as and when declared by the Board of Directors of CIBC, equal to the three-month Government of Canada Treasury Bill yield plus 4.33%.

Holders of the Series 38 Shares may convert their Series 38 Shares into Series 37 Shares, subject to certain conditions, on July 31, 2019 and on July 31 every five years thereafter.

The expected closing date is March 6, 2009. The net proceeds of this offering will be used for general purposes of CIBC.

The first dividend is payable July 31, for $0.65445 … long and fat! There may be dividend capture opportunities around the ex-Date!

New Issues

New Issue: RY Fixed-Reset 6.25%+406

Royal Bank has announced:

a domestic public offering of $200 million of Non-Cumulative, 5 year rate reset Preferred Shares Series AT.

The bank will issue 8.0 million Preferred Shares Series AT priced at $25 per share and holders will be entitled to receive non-cumulative quarterly fixed dividend for the initial period ending August 24, 2014 in the amount of $1.5625 per share, to yield 6.25 per cent annually. The bank has granted the Underwriters an option, exercisable in whole or in part, to purchase up to an additional 3.0 million Preferred Shares at the same offering price.

Subject to regulatory approval, on or after August 24, 2014, the bank may redeem the Preferred Shares Series AT in whole or in part at par. Thereafter, the dividend rate will reset every five years at a rate equal to 4.06 per cent over the 5-year Government of Canada bond yield. Holders of Preferred Shares Series AT will, subject to certain conditions, have the right to convert all or any part of their shares to non-cumulative floating rate Preferred Shares Series AU (the “Preferred Shares Series AU”) on August 24, 2014 and on August 24 every five years thereafter.

Holders of the Preferred Shares Series AU will be entitled to receive a non-cumulative quarterly floating dividend at a rate equal to the 3-month Government of Canada Treasury Bill yield plus 4.06 per cent. Holders of Preferred Shares Series AU will, subject to certain conditions, have the right to convert all or any part of their shares to Preferred Shares Series AT on August 24, 2019 and on August 24 every five years thereafter.

The offering will be underwritten by a syndicate led by RBC Capital Markets. The expected closing date is March 9, 2009.

The first dividend will be payable August 24, for $0.71918. That’s a long, fat first dividend! Mark your calendars – there could be some interesting dividend capture opportunities!

Seminars

Seminar on PerpetualDiscounts: Thursday Feb 26, 6pm

Just a reminder – my seminar on PerpetualDiscounts will be Thursday, Feb 26 at 6pm

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.

The seminars will be filmed for later distribution.

Advance registration and payment may be performed on-line.

PerpetualDiscounts: Theory & Practice

"PerpetualDiscounts" are currently the most common type of preferred share in Canada. They are characterized by:

No mechanism whereby the issue can be forced to redeem the shares
A fixed dividend rate
Call provisions in the issuer’s favour
a trading price below their call price

This seminar will review the theory of PerpetualDiscount evaluation, including:

Credit Quality
The embedded call
The importance of ex-Dividend dates
Importance of cumulative dividends
Investment characteristics relative to bonds

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) Yorkville Room (see map).

Time: February 26, 2009, 6pm-8pm.

Banking Crisis 2008

Bank Stress & Dividends

The Fed has announced its formal stress-testing policy, with a handy FAQ.

Q8: What will be the source of capital if supervisors determine that a banking organization requires an additional capital buffer?

A: An institution that requires additional capital will enter into a commitment to issue a CAP convertible preferred security to the U.S. Treasury in an amount sufficient to meet the capital requirement determined through the supervisory assessment. Each institution will be permitted up to six months to raise private capital in public markets to meet this requirement and would be able to cancel the capital commitment without penalty. The CAP convertible preferred securities will be converted into common equity shares on an as‐needed basis. Financial institutions that issued preferred capital under Treasury’s existing Capital Purchase Program (TARP 1) will have the option of redeeming those securities and replacing them with the new CAP convertible preferred securities.

Meanwhile, fresh from his claim that:

“They’re not going to cut the dividend at BMO,” I told Berman, with all the confidence that comes from having an RRSP that’s overweight oil and gas. “There’s no way any of these big banks chop the payout.”

See, I know my Canadian banking history. Only one domestic player has cut its common stock dividend in recent memory – National Bank, after taking a pasting on corporate loans. The bank spent years in the penalty box as a result. No board wants to join this hall of shame.

… Andrew Willis has urged:

None of the five big banks have cut common share dividends since the Great Depression.

I don’t know if history will be made in this downturn.

But I do know that at least one blue-chip board – at Bank of Montreal – should cut the dividend in half.

I will forestall Assiduous Reader Norbert Schlenker and point out that Scotia chopped dividends in WW2.

Anyway, I mention this because ANZ Bank has cut its dividend and so have a lot of US Insurers. Precautionary common dividend cuts are becoming socially acceptable.

Will BMO or others cut their dividend? I’m dubious. They are, at least, still covering their dividend with earnings and while number two and three might come pretty quickly, I don’t think anybody wants to be number one in the line-up. But, frankly … I don’t care a lot! I’m a pref guy!