Market Action

April 16, 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 4.14% 4.11% 43,992 17.08 2 +0.5045% 1,041.9
Fixed-Floater 5.02% 4.02% 93,975 17.06 6 -0.4046% 1,018.1
Floater 4.57% -15.74% 56,073 0.13 4 +0.0100% 1,055.8
Op. Retract 4.73% 3.17% 84,022 2.11 17 -0.0949% 1,033.8
Split-Share 5.02% 3.79% 156,666 3.17 12 -0.0604% 1,049.1
Interest Bearing 6.52% 5.60% 63,254 2.28 5 -0.0944% 1,044.5
Perpetual-Premium 5.04% 3.97% 186,958 5.31 53 -0.0256% 1,059.0
Perpetual-Discount 4.53% 4.56% 873,569 16.30 11 -0.0656% 1,064.8
Major Price Changes
Issue Index Change Notes
BCE.PR.G FixedFloater -1.5758% Exchange/Reset date is 2011-05-01. The carnage in BCE issues continues! This issue traded as low as 24.17, a 52-week low, before closing at 24.36-84, 10×10.
CM.PR.P PerpetualPremium -1.0158% Odd! I haven’t noticed the CIBC walking into any sharp objects lately. Now with a very attractive pre-tax bid-YTW of 4.43% based on a bid of 26.31 and a call 2012-11-28 at $25.00.
Volume Highlights
Issue Index Volume Notes
SLF.PR.E PerpetualDiscount 80,935 Desjardins crossed 50,000 at 24.99. Now with a pre-tax bid-YTW of 4.54% based on a bid of 24.92 and a limitMaturity.
CU.PR.B PerpetualPremium 56,400 Nesbitt crossed 40,000 at 27.20, then Scotia crossed 10,000 at the same price. Perhaps the sellers were making room for the pending new issue – but then, what were the buyers doing? Now with a pre-tax bid-YTW of 3.06% based on a bid of 27.02 and a call 2008-07-01 at $26.00 … it won’t yield much more than bonds, unless CU decides to waive the call.
W.PR.H PerpetualPremium 51,200 Scotia crossed 50,000 at 26.65. Now with a pre-tax bid-YTW of 4.25% based on a bid of 26.63 and a call 2013-2-14 at $25.00.
PWF.PR.I PerpetualPremium 41,200 Nesbitt crossed 40,000 at 26.65. Now with a pre-tax bid-YTW of 3.81% based on a bid of $26.50 and a call 2008-05-30 at $26.00.
CM.PR.I PerpetualPremium 32,650 Now with a pre-tax bid-YTW of 4.56% based on a bid of 25.27 and a call 2016-03-01 at $25.00

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

PrefLetter

PrefLetter Live!

I am very pleased to announce that PrefLetter is now accepting subscriptions (from Ontario residents and those registered with the Quebec securities commission).

Top recommendations for “Best of Class” for each type of preferred share!

You may purchase the previous issue, the next issue, or subscribe for a year. Subscribing for a year gets you the previous issue as a bonus.

PrefLetter is prepared from market conditions at the close of the second Friday of each month and is delivered to subscribers prior to the opening of the TSX on the following Monday. Enjoy!

Miscellaneous News

Synthetic Floating Rate Preferreds : Better than BCE?

Readers will have noticed that the market’s extreme dependence upon a single issuer as a source of Floating Rate issues. This dependence has even led to the closing of a major fund to new investment.

So: this is where financial engineering comes in. There is very little need to actually have floating rate issues … one can have a portfolio of perpetuals and swap the income stream into floating rate, via Interest Rate Swaps. Interest rate swaps are a huge market, big enough that the Chicago Board of Trade has designed a thirty-year swap contract to complement its wildly successful 10-year contract.

Swaps in Canada are traded Over-the-Counter by the bigger banks. Essentially, one party agrees to pay a fixed rate for a definite term – this fixed rate will be very closely related to the fixed rate the bank pays on its direct obligations of similar term. In return, the counterparty agrees to pay the three-month Bankers’ Acceptance rate, reset periodically, for the same term. Obligations are netted, to minimize credit risk as far as possible.

Therefore, there is no real need to rely on BCE for floating rate preferreds! You can buy a portfolio of bank-issued perpetuals and swap the income stream into something based on the BA rate.

It’s not a perfect hedge. There’s basis risk (bank prefs might not trade the same way as bank bonds, just for starters!), there’s tax risk (if short rates go to 25% then sure, you’ve got a pre-tax hedge, but not a post-tax one!) and there’s term risk (however much I may assume it in the programming, thirty years is not equal to infinity), to name but three.

On the other hand I, for one, would much rather have a bank-floater-equivalent than a BCE floater (all else being equal), so a few risks are acceptable, as long as they are quantified and understood.

I’ve uploaded a more detailed proposal. Does anyone have, say, $50-million in perps they want to convert to floaters?

Market Action

April 13, 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 4.17% 4.14% 45,838 17.04 2 -0.2605% 1,036.7
Fixed-Floater 5.00% 4.01% 92,841 17.10 6 -0.0208% 1,022.3
Floater 4.57% -18.59% 56,979 0.13 4 +0.0592% 1,055.7
Op. Retract 4.72% 3.07% 84,123 2.12 17 -0.0130% 1,034.8
Split-Share 5.01% 3.68% 158,554 3.18 12 +0.0095% 1,049.7
Interest Bearing 6.52% 5.36% 63,646 2.29 5 +0.1509% 1,045.5
Perpetual-Premium 5.04% 3.95% 188,012 5.07 53 -0.0032% 1,059.3
Perpetual-Discount 4.53% 4.55% 890,245 16.31 11 -0.0473% 1,065.5
Major Price Changes
Issue Index Change Notes
BCE.PR.I FixedFloater -1.4022%  Exchange/Reset date is 2011-08-01
BCE.PR.R FixedFloater +1.0971%  Exchange/Reset date is 2010-12-01
Volume Highlights
Issue Index Volume Notes
PWF.PR.I PerpetualPremium 209,690 Now with a pre-tax bid-YTW of 4.35% based on a bid of $26.34 and a call 2008-05-30 at $26.00
TD.PR.O PerpetualPremium 60,100 NationalBank crossed 50,000 @ 26.35. Now with a pre-tax bid-YTW of 4.05% based on a bid of 26.29 and a call 2014-11-30 at $25.00.
PIC.PR.A SplitShare 87,305 National Bank spent the day buying from Nesbitt. Now with a pre-tax bid-YTW of 3.93% based on a bid of $15.87 and a hardMaturity 2010-11-1 at $15.00.
BNS.PR.M PerpetualDiscount 52,600 Recent new issue. Scotia crossed 20,000 @ 24.90. Now with a pre-tax bid-YTW of 4.54% based on a bid of 24.90 and a limitMaturity.
BCE.PR.A FixedFloater 35,650 RBC crossed 30,000 @ 24.95. These are convertable into the not-currently-extant series ‘AB’ Ratchet Rates, 2007-9-1, at which point the current dividend of $1.3625 (5.03% of par) will be reset. Bet it’s lower!

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

Index Construction / Reporting

BCE, Event Risk and the FixedFloater Index

My eagle-eyed readership will have noticed that the FixedFloater index is not doing very well recently.

This is largely due to the fact that it is entirely comprised of BCE issues: BCE has been in the news lately due to speculation that Ontario Teachers might take a run at it … or at least try to pump up the shareholder value … and I don’t mean the PREFERRED shares!

DBRS had this to say today:

DBRS notes that the Company’s largest shareholder, Ontario Teachers’ Pension Plan Board (OTBP or Teachers), has recently changed its long-standing position from being a more passive shareholder to an active shareholder. This change could place further pressure on the Company and thereby heighten its event risk.

DBRS’s current expectations for BCE include the Company maintaining a stable and conservative balance sheet and the balanced deployment of the Telesat proceeds. Should the Company’s response to recent pressure be outside of DBRS’s expectations, DBRS may reconsider the appropriateness of the Company’s A (low)/“A” ratings.

However, DBRS currently expects that any changes in the Company’s financial policy as outlined above would likely result in one-notch rating change at BCE to BBB (high)/A (low).

Nice, eh? I tell people and tell people : Floating prefs are not money market instruments, no matter how much they quack like those ducks, but nobody ever listens.

A more aggressively pro-shareholder stance by BCE will not lead to another offer for the preferreds – if anything, such an event will be less likely. I bet the old Bell Canada pref holders are now feeling a little blue : they voted to switch to an inferior credit for a trivial consideration and this could be nasty.

How will all this work out? I have no idea. I’d be buying options like crazy if I did. But I did want to ensure that readers understand that the recent decline in the FixedFloater index (down to 1,039.4 today from a peak of 1055.7 on March 15) is not necessarily due to any market disenchantment with FixedFloaters – it is more likely BCE related.

Market Action

April 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 4.16% 4.13% 46,302 17.05 2 -0.2194% 1,039.4
Fixed-Floater 5.00% 4.01% 90,778 17.11 6 -0.4378% 1,022.5
Floater 4.58% -18.29% 57,706 0.13 4 +0.0493% 1,055.1
Op. Retract 4.72% 3.06% 85,131 2.12 17 +0.0688% 1,035.0
Split-Share 5.01% 3.71% 159,692 3.19 12 +0.0231% 1,049.6
Interest Bearing 6.53% 5.19% 63,809 2.29 5 -0.2553% 1,043.9
Perpetual-Premium 5.04% 3.93% 188,093 5.09 53 +0.0536% 1,059.3
Perpetual-Discount 4.53% 4.55% 906,951 16.32 11 +0.0367% 1,066.0
Major Price Changes
Issue Index Change Notes
BCE.PR.R FixedFloater -1.0454% Quick, says someone, get out of BCE before a leveraged buy-out turns the credit to junk! This one pays 4.54%, with the rate being reset 2010-12-01, at which point it is also exchangeable into a ratchet-rate.
Volume Highlights
Issue Index Volume Notes
BCE.PR.A FixedFloater 255,890 Desjardins crossed 140,000 at 24.50, then another 98,000 at the same price. Somebody took a real haircut to get out of BCE in size – yesterday it was bid at 25.01, and closed today at 24.83-04. I tell people: this kind of instrument is not money market! Not with perpetual credit risk, it isn’t. But nobody ever listens.
SLF.PR.B PerpetualPremium 44,100 Nesbitt crossed 40,000 at 25.82. Now with a pre-tax bid-YTW of 4.35% based on a bid of $25.80 and a call 2014-10-30 at $25.00.
CM.PR.I PerpetualPremium 24,011 Now with a pre-tax bid-YTW of 4.51% based on a bid of 25.35 and a call 2016-3-1 at $25.00
SLF.PR.D PerpetualDiscount 16,785 Now with a pre-tax bid-YTW of 4.51% based on a bid of 24.76 and a limitMaturity.
BNS.PR.M PerpetualDiscount 16,650 Recent new issue. Now with a pre-tax bid-YTW of 4.54% based on a bid of 24.89 and a limitMaturity.

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

Issue Comments

BNS.PR.M : Underwriters Exercise Entire Overallotment

I guess the headline really says it all! Scotia has announced that:

a syndicate of investment dealers led by Scotia Capital Inc. have fully exercised the over-allotment option to purchase an additional 1.8 million, 4.50% non-cumulative Preferred Shares Series 15 of the Bank at a price of $25.00 per share. It is expected that the closing for the additional 1.8 million shares will occur on April 17, 2007. After the closing of the additional shares, when combined with the existing 12 million shares, there will be a total of 13.8 million of the Preferred Shares Series 15 trading on the Toronto Stock Exchange under the symbol BNS.PR.M.

This issue was announced March 21 and closed April 5

PrefLetter

PrefLetter to Accept Subscriptions Next Week

I’ve written about PrefLetter a few times in the past two months and I’m pleased to say that next week it will be going live.

The April edition will be produced in accordance with the announced schedule: recommendations will be based on market conditions as of the close on the second Friday of the month (that’s this coming Friday, the 13th) and will be transmitted to subscribers prior to the opening on Monday 16th.

Except, of course, that there are no subscribers as yet! The website is just going through a few final modifications and until everything is perfect, I’m not going to unveil it. If you have received a sample issue in the past and you want to assure me that you will subscribe as soon as I’ve opened the ticket window, I’ll send you a copy as if you had signed up already.

Credit cards are accepted via secure hosting by Bell Canada with a certificate issued by Network Solutions. Credit Card processing will be handled by Chase Paymentech.

Note that subscribers must either be residents of Ontario or be registered with the Quebec Securities Commission.

Early next week, I’ll be unveiling the website, issuing a press release, commencing Internet advertising and accepting subscriptions. I’ll link to the press release in a post on this blog … so watch this space!

Subscribers may choose any of the following options:

– receive the prior issue immediately for $29 + tax

– receive the next issue upon publication for $29 + tax

– subscribe for a full year of twelve monthly issues commencing with next issue, and receive the prior issue immediately as a bonus, for $185 + tax.

Note that by “immediately”, I mean “immediately”. Prior issues will be sent automatically by eMail upon payment. I will accept cheques, but only for full year subscriptions.

There has been a lot of interest expressed in this venture, and my “practice” issues have been well received. Next week is going to be fun!

Market Action

April 11, 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 4.15% 4.12% 47,353 17.07 2 -0.8161% 1,041.7
Fixed-Floater 4.98% 3.98% 88,663 17.12 6 +0.0805% 1,027.0
Floater 4.58% -17.80% 58,087 0.13 4 -0.1275% 1,054.5
Op. Retract 4.72% 3.15% 84,881 2.13 17 +0.0050% 1,034.2
Split-Share 5.00% 3.77% 160,236 3.18 12 +0.0935% 1,049.4
Interest Bearing 6.51% 3.65% 64,109 2.29 5 +0.3053% 1,046.6
Perpetual-Premium 5.04% 3.95% 189,738 5.07 53 +0.0707% 1,058.8
Perpetual-Discount 4.53% 4.55% 933,621 16.32 11 +0.0366% 1,065.6
Major Price Changes
Issue Index Change Notes
BCE.PR.H RatchetRate -1.0396% I thought ratchets weren’t supposed to do this! These will be exchangeable into BCE.PR.G (fixed-reset) May 1, 2011. The BCE.PR.H are currently paying $0.09375 monthly = $1.125 annually = 4.5% = 75% of Canadian Prime.
W.PR.H PerpetualPremium +1.0960% On volume of 6,291 shares, an active day for this issue. It traded as high as 27.00, closing at 26.75-89, 1×1. Now with a pre-tax bid-YTW of 4.15% based on a call 2013-2-14 at $25.00
Volume Highlights
Issue Index Volume Notes
AL.PR.F Scraps (would be Floater, but there are volume concerns) 164,229 Went ex-dividend today, and the indefatigable traders at Global were crossing 82,000 for cash at 25.87, and the same number for regular settlement at 25.58.
CM.PR.J PerpetualDiscount 108,500 Now with a pre-tax bid-YTW of 4.54% based on a bid of 24.77 and a limitMaturity
ACO.PR.A OpRet 101,011 Scotia crossed 50,000 at 27.65, then another 50,000 at the same price. Now with a pre-tax bid-YTW of 2.44% based on a bid of 27.51 and a call 2008-12-31 at $26.00. There is obviously at least one buyer hoping for the softMaturity 2011-11-30 at $25.00, which will yield 3.56%. There are many such optimists: see Retractible Preferreds and Bonds.
BNS.PR.M PerpetualDiscount 71,800 Recent new issue. Now with a pre-tax bid-YTW of 4.53% based on a bid of 24.92 and a limitMaturity.
CM.PR.I PerpetualPremium 28,860 Now with a pre-tax bid-YTW of 4.55% based on a bid of $25.26 and a call 2016-03-01 at $25.00.

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