Market Action

July 21, 2008

Accrued Interest has deprecated US Preferreds as an investment, using what I call the ‘worst of both worlds’ argument; that the upside is limited compared to common and the downside is much greater (or at least more probable) than senior bonds.

I have written a short post with some background on US TruPS.

As I noted on FWF on the weekend:

I find – when having conversations such as this with stockbrokers – that it is very useful to look at actual numbers. In my article A Vale of Tiers, I looked at various Royal Bank investment vehicles and compared their expected returns to their degree of subordination.

Perhaps this thread could be profitably employed to update and expand the “Table 1” of my article.

Preferred shares represent a range on the risk/return spectrum that will be of interest to many investors. I will note that despite some alarmist stockbroker talk very few issues actually default. There are nine defaulted issues on the NYSE, according to Quantum Online; four of which are from Thornburg Mortgage. As counterexamples, one may consider Citibank and Fortis Bank, both of which have massively diluted their common shareholders and cut the common dividend (the latter to zero) without inconveniencing the preferred shareholders. For many battered companies, issuance of preferred stock is the only palatable option; they are not going to cut their own throats by cutting the dividend with gay abandon.

For investors in Canadian bank preferreds, it should be noted that preferred stock and innovative tier 1 capital are capped at a limit of 30% of total Tier 1 Equity. If they were to slowly drift into bankruptcy, they would be taken over by OFSI and the CDIC when their Tier 1 ratio declined below 4% (possibly at the 5% level). At these levels, there will still be some common equity left; preferred capital will not be impaired.

Therefore, the most realistic nightmare scenario is a jump to default; investors may assign their own probabilities to this.

Diversify!

I would have been much more impressed with the Accrued Interest post had he used actual numbers and made some effort to quantify risk. Yes, you can lose every dime investing in preferreds – you can lose every dime investing in any corporate security. But what are the odds? Let’s see an attempt to quantify risk whenever we quantify return.

That being said, it should be noted that Wachovia had a Tier 1 Ratio of 7.35% (well below the Canadian average of about 9.5%) and a Total Capital ratio of 11.82% (about the Canadian median). Determining the effective subordination of the issue highlighted by Accrued Interest is made a little more difficult by the prospectus note for the issue highlighted (NYSE: WBPRC):

Wachovia receives a significant portion of its revenue from dividends from its subsidiaries. Because it is a holding company, its right to participate in any distribution of the assets of its banking or nonbanking subsidiaries, upon a subsidiary’s dissolution, winding-up, liquidation or reorganization or otherwise, and thus your ability to benefit indirectly from such distribution, is subject to the prior claims of creditors of any such subsidiary, except to the extent that Wachovia may be a creditor of that subsidiary and its claims are recognized. There are legal limitations on the extent to which some of its subsidiaries may extend credit, pay dividends or otherwise supply funds to, or engage in transactions with, it or some of its other subsidiaries. Wachovia’s subsidiaries are separate and distinct legal entities and have no obligation, contingent or otherwise, to pay amounts due under Wachovia’s contracts or otherwise to make any funds available to it. Accordingly, the payments on the LoTSSM, and therefore the Trust Preferred Securities, effectively will be subordinated to all existing and future liabilities of Wachovia’s subsidiaries. At December 31, 2006, Wachovia’s subsidiaries’ direct borrowings and deposit liabilities was $730 billion.

… and I ain’t gonna do it! I will say, however, that before opining on the merits or lack thereof on an investment in these TruPS, it should be done!

Incidentally, further down in the FWF thread where I made my comment, there was another post:

We were talking upthread about corporate versus preferred rates. While the IShares corporate bond ETF has not moved much, I noticed on the Waterhouse Fixed Income site that virtually all corporate banks now have a significant spread against their provincial same-rated counterparts. The spread approaches 1% starting three years out. Just a couple of years ago, that spread would have been maybe 0.2-0.3% (as I recall). So, it would appear that bank corporates have definitely been hit by the credit crisis.

See my note about the BoC Review of June 2008 … financials used to be 40-ish bp tight to industrials … now they’re even-ish.

Here’s another strangeness in which unitholders in the fund have an interest:

BMO Perpetuals
Issue Dividend Quote
7/21		 Pre-Tax
Bid-YTW
7/21
BMO.PR.J 1.1250 18.11-30 6.33%
BMO.PR.K 1.3125 20.90-00 6.40%
BMO.PR.H 1.3250 20.11-26 6.72%
BMO.PR.L 1.4500 23.05-40 6.48%

One of these things is not like the others! One of these things is not quite the same! This is a very sloppy market. I have noted the volatility of the BMO.PR.H / BMO.PR.J spread previously. BMO.PR.H has – just now – been deleted from the TXPR index, so that might – might! – have something to do with it.

Sloppiness aside, PerpetualDiscounts moved up again … but are still below the levels they were at on July 11 and are still down 5.94% on the month.

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 4.34% 3.96% 36,460 0.08 1 +0.0000% 1,122.4
Fixed-Floater 4.68% 4.41% 71,453 16.31 6 +0.2993% 1,084.3
Floater 4.16% 4.19% 54,301 17.04 3 -0.7064% 886.4
Op. Retract 5.00% 4.75% 143,332 3.57 17 -0.0920% 1,038.7
Split-Share 5.42% 6.61% 63,024 4.01 14 +0.3773% 1,020.3
Interest Bearing 6.16% 6.16% 41,965 3.69 3 -0.1677% 1,118.4
Perpetual-Premium 6.17% 6.17% 71,221 10.63 4 -0.4322% 977.4
Perpetual-Discount 6.42% 6.48% 235,521 13.24 67 +0.4173% 825.1
Major Price Changes
Issue Index Change Notes
PWF.PR.I PerpetualDiscount -3.0928% Now with a pre-tax bid-YTW of 6.41% based on a bid of 16.52 and a limitMaturity.
BAM.PR.B Floater -2.9240%  
TCA.PR.X PerpetualDiscount -2.8970% Now with a pre-tax bid-YTW of 6.19% based on a bid of 45.25 and a limitMaturity.
RY.PR.B PerpetualDiscount -2.4066% Now with a pre-tax bid-YTW of 6.29% based on a bid of 19.06 and a limitMaturity.
IGM.PR.A OpRet -2.0519% Now with a pre-tax bid-YTW of 5.59% based on a bid of 25.30 and a softMaturity 2013-6-29 at 25.00.
BMO.PR.L PerpetualDiscount -1.9149% Now with a pre-tax bid-YTW of 6.48% based on a bid of 23.05 and a limitMaturity.
POW.PR.D PerpetualDiscount +1.8898% Now with a pre-tax bid-YTW of 6.75% based on a bid of 18.69 and a limitMaturity.
HSB.PR.C PerpetualDiscount -1.5707% Now with a pre-tax bid-YTW of 6.87% based on a bid of 18.80 and a limitMaturity.
RY.PR.F PerpetualDiscount -1.3691% Now with a pre-tax bid-YTW of 6.30% based on a bid of 18.01 and a limitMaturity.
BNA.PR.C SplitShare -1.3521% Asset coverage of 3.2+:1 as of June 30, according to the company. Now with a pre-tax bid-YTW of 8.94% based on a bid of 17.51 and a hardMaturity 2019-1-10. Compare with BNA.PR.B (8.48% to 2016-3-25) and BNA.PR.A (6.22% to 2009-10-31).
TD.PR.P PerpetualDiscount -1.1905% Now with a pre-tax bid-YTW of 6.10% based on a bid of 21.58 and a limitMaturity.
RY.PR.A PerpetualDiscount -1.0805% Now with a pre-tax bid-YTW of 6.20% based on a bid of 18.31 and a limitMaturity.
GWO.PR.H PerpetualDiscount +1.0811% Now with a pre-tax bid-YTW of 6.56% based on a bid of 18.70 and a limitMaturity.
CIU.PR.A PerpetualDiscount +1.1170% Now with a pre-tax bid-YTW of 6.16% based on a bid of 19.01 and a limitMaturity.
SLF.PR.C PerpetualDiscount +1.1869% Now with a pre-tax bid-YTW of 6.61% based on a bid of 17.05 and a limitMaturity.
POW.PR.B PerpetualDiscount +1.1988% Now with a pre-tax bid-YTW of 6.66% based on a bid of 20.26 and a limitMaturity.
BAM.PR.M PerpetualDiscount +1.2232% Now with a pre-tax bid-YTW of 7.27% based on a bid of 16.55 and a limitMaturity.
BNS.PR.J PerpetualDiscount +1.2287% Now with a pre-tax bid-YTW of 6.16% based on a bid of 21.42 and a limitMaturity.
PWF.PR.E PerpetualDiscount +1.2315% Now with a pre-tax bid-YTW of 6.73% based on a bid of 20.55 and a limitMaturity.
CM.PR.D PerpetualDiscount +1.2840% Now with a pre-tax bid-YTW of 7.06% based on a bid of 20.51 and a limitMaturity.
CM.PR.J PerpetualDiscount +1.2939% Now with a pre-tax bid-YTW of 6.89% based on a bid of 16.44 and a limitMaturity.
SLF.PR.B PerpetualDiscount +1.3609% Now with a pre-tax bid-YTW of 6.52% based on a bid of 18.62 and a limitMaturity.
WFS.PR.A SplitShare +1.3636% Asset coverage of just under 1.6:1 as of July 10, according to Mulvihill. Now with a pre-tax bid-YTW of 9.75% based on a bid of 8.92 and a hardMaturity 2011-6-30 at 10.00.
BCE.PR.C FixFloat +1.4577%  
ALB.PR.A SplitShare +1.5414% Asset coverage of just under 1.6:1 as of July 17, according to ScotiaManagedCompanies. Now with a pre-tax bid-YTW of 5.78% based on a bid of 24.25 and a hardMaturity 2011-2-28 at 25.00.
CU.PR.A PerpetualDiscount +1.7204% Now with a pre-tax bid-YTW of 6.23% based on a bid of 23.65 and a limitMaturity.
CM.PR.P PerpetualDiscount +1.7551% Now with a pre-tax bid-YTW of 7.03% based on a bid of 19.69 and a limitMaturity.
BNS.PR.N PerpetualDiscount +1.8771% Now with a pre-tax bid-YTW of 6.06% based on a bid of 21.71 and a limitMaturity.
CM.PR.E PerpetualDiscount +1.8782% Now with a pre-tax bid-YTW of 7.02% based on a bid of 20.07 and a limitMaturity.
SLF.PR.A PerpetualDiscount +2.1358% Now with a pre-tax bid-YTW of 6.45% based on a bid of 18.65 and a limitMaturity.
BAM.PR.H OpRet +2.2403% Now with a pre-tax bid-YTW of 5.77% based on a bid of 25.10 and a softMaturity 2012-3-30 at 25.00. Compare with BAM.PR.I (6.31% to 2013-12-30), BAM.PR.J (7.04% to 2018-3-30) and BAM.PR.O (6.47% to 2013-6-30).
ELF.PR.G PerpetualDiscount +2.3573% Now with a pre-tax bid-YTW of 7.27% based on a bid of 16.50 and a limitMaturity.
CM.PR.H PerpetualDiscount +2.4332% Now with a pre-tax bid-YTW of 7.00% based on a bid of 17.26 and a limitMaturity.
PWF.PR.F PerpetualDiscount +2.9186% Now with a pre-tax bid-YTW of 6.57% based on a bid of 20.10 and a limitMaturity.
DF.PR.A SplitShare +3.4375% Asset coverage of just under 1.8:1 as of July 15, according to the company. Now with a pre-tax bid-YTW of 5.47% based on a bid of 9.93 and a hardMaturity 2014-12-1.
POW.PR.A PerpetualDiscount +3.9652% Now with a pre-tax bid-YTW of 6.57% based on a bid of 21.50 and a limitMaturity.
Volume Highlights
Issue Index Volume Notes
TD.PR.O PerpetualDiscount 74,800 (Three different?) Anonymous (es?) bought from Nesbitt 2 blocks of 10,000 each at 20.60, and one block of 12,900 at 20.75. Now with a pre-tax bid-YTW of 5.90% based on a bid of 20.65 and a limitMaturity.
PWF.PR.I PerpetualDiscount 42,750 Nesbitt crossed 38,700 at 24.01. Now with a pre-tax bid-YTW of 6.41% based on a bid of 23.50 and a limitMaturity.
CL.PR.B PerpetualPremium 40,900 Nesbitt crossed 40,000 at 25.26. Now with a pre-tax bid-YTW of 6.02% based on a bid of 25.25 and a call 2011-1-30 at 25.00.
BNS.PR.J PerpetualPremium 39,210 Anonymous bought 10,000 from Nesbitt at 21.35. Now with a pre-tax bid-YTW of 6.16% based on a bid of 21.42 and a limitMaturity.
RY.PR.H PerpetualDiscount 32,800 National Bank crossed 25,000 at 24.10. Now with a pre-tax bid-YTW of 5.95% based on a bid of 24.10 and a limitMaturity.

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

Issue Comments

SBN.PR.A Announces Normal Course Issuer Bid

This is unlikely to be a major event, but … they did purchase some last year and they are trading at a discount to NAV so …

Mulvihill has announced:

that today, the Toronto Stock Exchange has accepted its Notice of Intention to make a normal course issuer bid. The Corporation will have the right to purchase under the bid up to a maximum of 458,470 Class A Shares and 458,470 Preferred Shares (representing approximately 10% of the Corporation’s public float), together in Units (each consisting of one Class A Share and one Preferred Share), commencing July 23, 2008. The Corporation may not purchase more than 91,694 of its Units (representing approximately 2% of the Corporation’s 4,584,700 issued and outstanding Class A Shares and approximately 2% of the Corporation’s 4,584,700 issued and outstanding Preferred Shares, both as of July 17, 2008) in any 30-day period under the bid. Purchases made pursuant to the normal course issuer bid will be made in the open market through the facilities of the Toronto Stock Exchange. The normal course issuer bid will remain in effect until the earlier of July 22, 2009, the termination of the bid by the Corporation or the Corporation purchasing the maximum number of Units permitted under the bid.

Class A Shares and Preferred Shares purchased by the Corporation pursuant to the issuer bid will be cancelled. During the previous year, the Corporation purchased 5,700 Class A Shares and 5,700 Preferred Shares at a weighted average price of $20.1899 per Unit pursuant to an issuer bid.

The units are currently trading at a discount of approximately 10% to NAV, according to Mulvihill’s July 10 NAV and current prices of SBN, SBN.PR.A and BNS closing price history.

SBN.PR.A is tracked by HIMIPref™. PrefBlog’s last comment was regarding the DBRS rating of Pfd-2(low).

Issue Comments

FTU.PR.A Provides 11-Sigma Update … but remember WFS.PR.A

11-Sigma? As reported on July 17, it has been claimed that US Financials recently experienced an eleven-standard-deviation price move; not just a black swan, but a black-hole swan!

Perhaps not surprisingly, US Financial 15 Split Corp has made a slight adjustment to their standard valuation page, namely a Fund Update dated July 18:

A myriad of issues have affected the financial markets and have had a dramatic impact on the Company’s portfolio. Overall financial markets continue to be adversely impacted by the confluence of record high commodity prices and the continuing credit related problems originating from the US sub prime lending market. These conditions have caused economic growth to slow considerably in both Canada and the United States while at the same time high commodity prices are beginning to lead to a marked increase in inflationary pressures. In particular, the dramatic increase in oil prices has become a large obstacle for economic recovery. The US Financial Services sector is down approx. 34% year to date and in the last month closed at its lowest level since 1997 (over 11 years).

The combined effect of the market declines and the monthly distributions paid since inception has resulted in a decline in the net asset value of the Company to $9.25 as at July 15, 2008. The recent two day rally in the market has improved the net asset value of the Company by approximately 25% as at July 17, 2008.

One of their core holdings is Merrill Lynch, which got whacked today because of their writedowns, but let’s assume that the portfolio as a whole performed equally to the US S&P 500 Financials index, which is up another 3.05%

So, we’ll estimate the current net asset value of FTU units as 9.25 * 1.28 = $11.84.

Now, this asset coverage of slightly under 1.2:1 isn’t going to reverse the recent downgrade to Pfd-3. But just for fun, suppose we don’t need no stinking credit ratings. The prefs, FTU.PR.A, closed at 7.55-75, 15×10 today, after trading 800 – count ’em, 800 – shares in a range of 7.51-52.

So, say we can put on a huge position at $8.00. Our investment has asset coverage of just under 1.5:1 – not particularly good, but it’s not too long ago that issues were routinely given Pfd-2 credit ratings with this level of coverage – and it pays $0.525 annually until maturity 2012-12-1. That’s a yield of 6.56% on 4.5-year paper with asset coverage of 1.5-ish to 1. Which ain’t bad. And there’s the possibility of a bonus 25% being paid at the end of these 4.5-years if the units can avoid losing more than ~15% of their value over this time.

Which is kind of cool.

On the other hand, there’s some competition … the very ominously named “Mulvihill World Financial Split Corp” had asset coverage of just under 1.6:1 as of July 10, with no jiggery-pokery about market-value / par-value. It was downgraded recently to Pfd-2(low). It closed today at 8.80-85, 20×5, after trading 10,100 shares in a range of 8.77-87. At the closing bid, it yields 10.24%, way more than the Split Share Index … but remember, there is no bonus here – the yield calculation assumes full repayment of the $10 principal at maturity on 2011-6-30. Over 10% as a dividend on three-year paper is normally considered a good deal … but careful investors might wish to check the quarterly list of holdings to see if there have been any little accidents.

Update, 2010-08-05: See also Why Banks Failed the Stress Test.

Market Action

July 18, 2008

Naked Capitalism reports that the auction of Cheyne Finance’s assets, mentioned July 15 realized forty-four cents on the dollar. It remains to be seen how many of these assets will actually change hands, as Cheyne’s investors can elect to receive the securities rather than the cash.

The week ended well, but we’re still down from last Friday’s close. PerpetualDiscounts now yield 6.50% dividend, equivalent to 9.00% interest; long corporates … oh, call it 6.20, that’s close enough … PTIE spread of 280bp.

So now all you guys can spend the weekend worrying about whether this is a real rally or a sucker rally. My suggestion is that half of you engage in panic buying of the stuff I’m looking to sell, while the other half dump the stuff I want to buy at whatever price you can get.

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 4.34% 3.96% 37,955 0.08 1 +0.0000% 1,122.4
Fixed-Floater 4.70% 4.42% 72,946 16.29 6 -0.1607% 1,081.1
Floater 4.14% 4.15% 53,944 17.11 3 +0.7969% 892.7
Op. Retract 4.99% 4.58% 147,484 3.13 17 -0.0854% 1,039.7
Split-Share 5.44% 6.71% 63,443 4.02 14 +0.0067% 1,016.5
Interest Bearing 6.15% 6.04% 42,084 3.71 3 -0.2004% 1,120.3
Perpetual-Premium 6.14% 6.13% 68,188 10.70 4 +0.8028% 981.7
Perpetual-Discount 6.44% 6.50% 236,930 13.21 67 +0.9341% 821.7
Major Price Changes
Issue Index Change Notes
IAG.PR.A PerpetualDiscount -2.8807% Now with a pre-tax bid-YTW of 7.05% based on a bid of 16.52 and a limitMaturity.
BCE.PR.C FixFloat -2.3984%  
PWF.PR.K PerpetualDiscount -1.2276% Now with a pre-tax bid-YTW of 6.72% based on a bid of 18.52 and a limitMaturity.
CIU.PR.A PerpetualDiscount -1.0526% Now with a pre-tax bid-YTW of 6.22% based on a bid of 18.80 and a limitMaturity.
RY.PR.G PerpetualDiscount +1.0515% Now with a pre-tax bid-YTW of 6.28% based on a bid of 18.26 and a limitMaturity.
BMO.PR.J PerpetualDiscount +1.0615% Now with a pre-tax bid-YTW of 6.33% based on a bid of 18.09 and a limitMaturity.
CU.PR.A PerpetualDiscount +1.0870% Now with a pre-tax bid-YTW of 6.33% based on a bid of 23.25 and a limitMaturity.
RY.PR.A PerpetualDiscount +1.0923% Now with a pre-tax bid-YTW of 6.12% based on a bid of 18.51 and a limitMaturity.
POW.PR.B PerpetualDiscount +1.1111% Now with a pre-tax bid-YTW of 6.74% based on a bid of 20.02 and a limitMaturity.
BNS.PR.N PerpetualDiscount +1.1391% Now with a pre-tax bid-YTW of 6.19% based on a bid of 21.31 and a limitMaturity.
GWO.PR.I PerpetualDiscount +1.1594% Now with a pre-tax bid-YTW of 6.52% based on a bid of 17.45 and a limitMaturity.
TD.PR.Q PerpetualDiscount +1.2864% Now with a pre-tax bid-YTW of 5.95% based on a bid of 23.62 and a limitMaturity.
HSB.PR.C PerpetualDiscount +1.3263% Now with a pre-tax bid-YTW of 6.76% based on a bid of 19.10 and a limitMaturity.
RY.PR.H PerpetualDiscount +1.3276% Now with a pre-tax bid-YTW of 6.10% based on a bid of 23.66 and a limitMaturity.
LBS.PR.A SplitShare +1.3374% Asset coverage of 1.9+:1 as of July 17, according to Brompton Group. Now with a pre-tax bid-YTW of 5.62% based on a bid of 9.85 and a hardMaturity 2013-11-29.
GWO.PR.H PerpetualDiscount +1.3699% Now with a pre-tax bid-YTW of 6.63% based on a bid of 18.50 and a limitMaturity.
SLF.PR.A PerpetualDiscount +1.3881% Now with a pre-tax bid-YTW of 6.58% based on a bid of 18.26 and a limitMaturity.
RY.PR.F PerpetualDiscount +1.3881% Now with a pre-tax bid-YTW of 6.21% based on a bid of 18.26 and a limitMaturity.
MFC.PR.C PerpetualDiscount +1.4085% Now with a pre-tax bid-YTW of 6.34% based on a bid of 18.00 and a limitMaturity.
SLF.PR.B PerpetualDiscount +1.4917% Now with a pre-tax bid-YTW of 6.61% based on a bid of 18.37 and a limitMaturity.
TD.PR.R PerpetualDiscount +1.5424% Now with a pre-tax bid-YTW of 5.93% based on a bid of 23.70 and a limitMaturity.
GWO.PR.G PerpetualDiscount +1.5808% Now with a pre-tax bid-YTW of 6.60% based on a bid of 19.92 and a limitMaturity.
RY.PR.W PerpetualDiscount +1.6550% Now with a pre-tax bid-YTW of 6.16% based on a bid of 20.27 and a limitMaturity.
BMO.PR.K PerpetualDiscount +1.6577% Now with a pre-tax bid-YTW of 6.41% based on a bid of 20.85 and a limitMaturity.
POW.PR.A PerpetualDiscount +1.6716% Now with a pre-tax bid-YTW of 6.83% based on a bid of 20.68 and a limitMaturity.
CM.PR.E PerpetualDiscount +1.8088% Now with a pre-tax bid-YTW of 7.15% based on a bid of 19.70 and a limitMaturity.
PWF.PR.L PerpetualDiscount +1.8221% Now with a pre-tax bid-YTW of 6.75% based on a bid of 19.00 and a limitMaturity.
BNS.PR.O PerpetualDiscount +1.90% Now with a pre-tax bid-YTW of 5.95% based on a bid of 23.61 and a limitMaturity.
CM.PR.D PerpetualDiscount +1.9637% Now with a pre-tax bid-YTW of 7.15% based on a bid of 20.25 and a limitMaturity.
CM.PR.H PerpetualDiscount +2.0594% Now with a pre-tax bid-YTW of 7.17% based on a bid of 16.85 and a limitMaturity.
PWF.PR.L PerpetualDiscount +2.0623% Now with a pre-tax bid-YTW of 6.20% based on a bid of 24.25 and a limitMaturity.
W.PR.J PerpetualDiscount +2.1337% Now with a pre-tax bid-YTW of 6.54% based on a bid of 21.54 and a limitMaturity.
CM.PR.P PerpetualDiscount +2.1647% Now with a pre-tax bid-YTW of 7.15% based on a bid of 19.35 and a limitMaturity.
POW.PR.D PerpetualDiscount +2.1996% Now with a pre-tax bid-YTW of 6.62% based on a bid of 19.05 and a limitMaturity.
CM.PR.J PerpetualDiscount +2.3975% Now with a pre-tax bid-YTW of 6.98% based on a bid of 16.23 and a limitMaturity.
BAM.PR.K Floater +2.4147%  
BMO.PR.L PerpetualDiscount +2.6201% Now with a pre-tax bid-YTW of 6.35% based on a bid of 23.50 and a limitMaturity.
RY.PR.C PerpetualDiscount +2.6761% Now with a pre-tax bid-YTW of 6.23% based on a bid of 18.80 and a limitMaturity.
CU.PR.B PerpetualDiscount +2.7311% Now with a pre-tax bid-YTW of 6.23% based on a bid of 24.45 and a limitMaturity.
ELF.PR.F PerpetualDiscount +3.0491% Now with a pre-tax bid-YTW of 7.33% based on a bid of 18.25 and a limitMaturity.
CM.PR.I PerpetualDiscount +3.1559% Now with a pre-tax bid-YTW of 7.09% based on a bid of 16.67 and a limitMaturity.
POW.PR.B PerpetualDiscount +4.0462% Now with a pre-tax bid-YTW of 6.81% based on a bid of 19.80 and a limitMaturity.
CM.PR.G PerpetualDiscount +4.5030% Now with a pre-tax bid-YTW of 7.14% based on a bid of 19.03 and a limitMaturity.
Volume Highlights
Issue Index Volume Notes
NSI.PR.C Scraps (Would be OpRet but there are volume concerns) 249,000 CIBC crossed 248,800 in two tranches at 25.00. Now with a pre-tax bid-YTW of 4.93% based on a bid of 25.00 and a limitMaturity. This … is an interesting issue. It’s redeemable at 25.00 commencing 2009-4-1 and retractible at 24.75 commencing 2009-7-1. So, although it’s an OpRet kind of issue, in this particular case the potential calls will yield more and the potential puts will yield less than the limitMaturity. My various methods of calculating duration and convexity don’t agree very well for this issue!
RY.PR.C PerpetualDiscount 129,300 Nesbitt crossed 100,000 at 18.50, then RBC crossed 25,000 at the same price. Now with a pre-tax bid-YTW of 6.23% based on a bid of 18.80 and a limitMaturity.
SLF.PR.A PerpetualDiscount 115,930 National crossed 97,500 at 18.30, then CIBC crossed 10,000 at the same price. Now with a pre-tax bid-YTW of 6.58% based on a bid of 18.26 and a limitMaturity.
SLF.PR.C PerpetualDiscount 105,655 National crossed 92,100 at 17.00. Now with a pre-tax bid-YTW of 6.68% based on a bid of 16.85 and a limitMaturity.
BAM.PR.K Floater 78,000 TD bought 24,700 from RBC at 19.50; RBC crossed 25,000 at the same price.
PIC.PR.A SplitShare 106,498 CIBC bought 54,600 from (three different?) “Anonymous” at 14.25 in three tranches. Asset coverage of just under 1.4:1 as of July 10, according to Mulvihill. Now with a pre-tax bid-YTW of 8.28% based on a bid of 14.21 and a hardMaturity 2010-11-1 at 15.00.

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

Issue Comments

Strangeness is Perpetual

There are some surprising strangenesses in prices as of the close today. For instance, remember the RY.PR.W / RY.PR.F inversion? At today’s closing bid of 20.27, RY.PR.W yields 6.16% while RY.PR.F yields 6.21% at $18.26. The price difference of almost exactly $2 can be compared with the difference of about $3.50 (= 22.23 – 18.74) on June 27 when I wrote that post.

And remember the CM issues from June 26?

CM Perpetuals
Issue Dividend Quote
6/26		 Pre-Tax
Bid-YTW
6/26		 Bid
7/18		 Pre-Tax
Bid-YTW
7/18
CM.PR.J 1.125 17.63-83 6.39% 16.23 6.98%
CM.PR.I 1.175 18.70-79 6.29% 16.67 7.09%
CM.PR.H 1.200 19.07-19 6.30% 16.85 7.17%
CM.PR.G 1.350 21.51-73 6.28% 19.03 7.14%
CM.PR.P 1.375 22.22-43 6.17% 19.35 7.15%
CM.PR.E 1.400 23.01-48 6.08% 19.70 7.15%
CM.PR.D 1.4375 23.40-62 6.14% 20.25 7.15%

The CM curve is extraordinarily flat … one would expect relative flatness, given that all the issues have a long way to go before calls become a concern, but one expects a lot of things in this world that don’t happen.

How about the PWF Perpetuals from July 8?:

PWF Perpetuals
Issue Dividend Quote
7/8		 Pre-Tax
Bid-YTW
7/8		 Bid
7/18		 Yield
7/18
PWF.PR.K 1.2375 19.51-99 6.36% 18.52 6.72%
PWF.PR.L 1.275 20.00-28 6.39% 19.00 6.75%
PWF.PR.F 1.3125 20.25-49 6.50% 19.53 6.76%
PWF.PR.E 1.375 21.64-75 6.37% 20.30 6.81%
PWF.PR.H 1.4375 23.05-49 6.53% 22.20 6.49%
PWF.PR.G 1.475 24.15-18 6.11% 23.26 6.36%
PWF.PR.I 1.50 24.62-88 6.10% 24.25 6.20%

… which isn’t quite exactly 100% as well behaved as the CM curve.

Do with it what you will! My brain hurts.

Indices and ETFs

TXPR Quietly Drops FAL.PR.H

S&P, which announced the results of its semi-annual rebalancing of TXPR last week, has updated its list of constituents (Excel Spreadsheet), “Effective after the close July 18, 2008”

This list does not include FAL.PR.H, which appears to have been included in press release in error (it was redeemed).

I’m not sure when the list – including or excluding FAL.PR.H – was made available. I confess that I was awaiting a formal press release “clarifying” the situation.

Issue Comments

BMT.PR.A Partial Call for Redemption

BMONT Split Corp. has announced:

that it has called 10,133 Preferred Shares for cash redemption on August 5, 2008 (in accordance with the Company’s Articles) representing approximately 3.311% of the outstanding Preferred Shares as a result of the special annual retraction of 38,400 Capital Shares by the holders thereof. The Preferred Shares shall be redeemed on a pro rata basis, so that each holder of Preferred Shares of record on August 1, 2008 will have approximately 3.311% of their Preferred Shares redeemed. The redemption price for the Preferred Shares will be $27.45 per share.

BMT.PR.A was confirmed at Pfd-2(low) by DBRS in April. Last year’s partial redemption was for 36% of the outstanding.

BMT.PR.A is tracked by HIMIPref™. It is in the “Scraps” index, due to low volume.

Market Action

July 17, 2008

There’s a story in Vanity Fair about the Bear Stearns collapse – good reading! All fluff, of course, but entertaining fluff.

Today’s factoid is the claim that US Financials have just experienced an 11-standard-deviation price move. But don’t tell Merrill!

Speaking of multiple standard deviation events … PerpetualDiscounts didn’t lose money today! The last up-day was June 24; since then, there were sixteen consecutive down days, in the course of which PerpetualDiscounts lost 8.85% of their value, with the weighted-mean dividend yield increasing from 6.01% to 6.63%. I hope that’s some kind of record … all this pain has to be worth something! We shall now wait with bated breath to see whether today’s return represents a turning of the tide or a dead cat bounce.

After the bounce, PerpetualDiscounts yield 6.56%, equivalent to 9.18% interest after the 1.4x conversion factor. Long corporates ticked up to about 6.18%, so the Pre-Tax Interest Equivalent Spread is now about 300bp.

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 4.33% 3.95% 39,511 0.08 1 +0.000% 1,122.4
Fixed-Floater 4.69% 4.42% 72,218 16.30 6 -0.5099% 1,082.8
Floater 4.16% 4.19% 50,364 17.05 3 -0.7498% 885.7
Op. Retract 4.99% 4.55% 150,496 3.13 17 +0.0064% 1,040.6
Split-Share 5.44% 6.66% 63,769 4.08 14 +0.5637% 1,016.4
Interest Bearing 6.13% 6.05% 43,167 3.72 3 +0.2048% 1,122.5
Perpetual-Premium 6.19% 6.19% 68,639 10.61 4 -0.5206% 973.8
Perpetual-Discount 6.50% 6.56% 236,355 13.13 67 +0.9720% 814.1
Major Price Changes
Issue Index Change Notes
BAM.PR.K Floater -2.3578%  
CU.PR.A PerpetualDiscount -2.1277% Now with a pre-tax bid-YTW of 6.40% based on a bid of 23.00 and a limitMaturity.
TCA.PR.X PerpetualDiscount -1.5707% Now with a pre-tax bid-YTW of 5.93% based on a bid of 47.00 and a limitMaturity.
BCE.PR.G FixFloat -1.4583%  
MFC.PR.C PerpetualDiscount -1.2243% Now with a pre-tax bid-YTW of 6.42% based on a bid of 17.75 and a limitMaturity.
CM.PR.G PerpetualDiscount -1.0864% Now with a pre-tax bid-YTW of 7.46% based on a bid of 18.21 and a limitMaturity.
CL.PR.B PerpetualPremium -1.0588% Now with a pre-tax bid-YTW of 6.03% based on a bid of 25.23 and a call 2011-1-30 at 25.00.
BNA.PR.C SplitShare -1.0556% Asset coverage of 3.2+:1 as of June 30, according to the company. Now with a pre-tax bid-YTW of 8.70% based on a bid of 17.81 and a softMaturity 2019-1-10 at 25.00. Compare with BNA.PR.A (6.22% to 2010-9-30) and BNA.PR.B (8.49% to 2016-3-25).
BCE.PR.Z FixFloat -1.0412%  
PWF.PR.G PerpetualDiscount +1.0385% Now with a pre-tax bid-YTW of 6.34% based on a bid of 23.35 and a limitMaturity.
SLF.PR.B PerpetualDiscount +1.0609% Now with a pre-tax bid-YTW of 6.71% based on a bid of 18.10 and a limitMaturity.
PWF.PR.I PerpetualDiscount +1.1064% Now with a pre-tax bid-YTW of 6.33% based on a bid of 23.76 and a limitMaturity.
BAM.PR.J OpRet +1.1236% Now with a pre-tax bid-YTW of 6.91% based on a bid of 22.50 and a softMaturity 2018-3-30 at 25.00. Compare with BAM.PR.H (6.43% to 2012-3-30), BAM.PR.I (6.16% to 2013-12-30) and BAM.PR.O (6.45% to 2013-6-30).
BNS.PR.O PerpetualDiscount +1.1349% Now with a pre-tax bid-YTW of 6.07% based on a bid of 23.17 and a limitMaturity.
GWO.PR.I PerpetualDiscount +1.1730% Now with a pre-tax bid-YTW of 6.60% based on a bid of 17.25 and a limitMaturity.
RY.PR.G PerpetualDiscount +1.2325% Now with a pre-tax bid-YTW of 6.35% based on a bid of 18.07 and a limitMaturity.
NA.PR.K PerpetualDiscount +1.2742% Now with a pre-tax bid-YTW of 6.35% based on a bid of 23.05 and a limitMaturity.
BNS.PR.M PerpetualDiscount +1.2958% Now with a pre-tax bid-YTW of 6.29% based on a bid of 17.98 and a limitMaturity.
NA.PR.L PerpetualDiscount +1.3514% Now with a pre-tax bid-YTW of 6.75% based on a bid of 18.00 and a limitMaturity.
BNS.PR.K PerpetualDiscount +1.3563% Now with a pre-tax bid-YTW of 6.21% based on a bid of 19.43 and a limitMaturity.
POW.PR.D PerpetualDiscount +1.3594% Now with a pre-tax bid-YTW of 6.76% based on a bid of 18.64 and a limitMaturity.
HSB.PR.D PerpetualDiscount +1.4218% Now with a pre-tax bid-YTW of 6.57% based on a bid of 19.26 and a limitMaturity.
POW.PR.C PerpetualDiscount +1.4741% Now with a pre-tax bid-YTW of 6.85% based on a bid of 21.34 and a limitMaturity.
FBS.PR.B SplitShare +1.4878% Asset coverage of 1.5+:1 as of July 10, according to TD Securities. Now with a pre-tax bid-YTW of 6.42% based on a bid of 9.55 and a hardMaturity 2011-12-15.
CM.PR.J PerpetualDiscount +1.6026% Now with a pre-tax bid-YTW of 7.14% based on a bid of 15.85 and a limitMaturity.
BMO.PR.J PerpetualDiscount +1.6468% Now with a pre-tax bid-YTW of 6.40% based on a bid of 17.90 and a limitMaturity.
RY.PR.A PerpetualDiscount +1.6657% Now with a pre-tax bid-YTW of 6.19% based on a bid of 18.31 and a limitMaturity.
PWF.PR.F PerpetualDiscount +1.7205% Now with a pre-tax bid-YTW of 6.76% based on a bid of 19.51 and a limitMaturity.
SLF.PR.A PerpetualDiscount +1.7514% Now with a pre-tax bid-YTW of 6.67% based on a bid of 18.01 and a limitMaturity.
ELF.PR.F PerpetualDiscount +1.7816% Now with a pre-tax bid-YTW of 7.55% based on a bid of 17.71 and a limitMaturity.
RY.PR.E PerpetualDiscount +1.9608% Now with a pre-tax bid-YTW of 6.30% based on a bid of 18.20 and a limitMaturity.
GWO.PR.G PerpetualDiscount +2.0291% Now with a pre-tax bid-YTW of 6.71% based on a bid of 19.61 and a limitMaturity.
RY.PR.B PerpetualDiscount +2.1053% Now with a pre-tax bid-YTW of 6.17% based on a bid of 19.40 and a limitMaturity.
MFC.PR.B PerpetualDiscount +2.1108% Now with a pre-tax bid-YTW of 6.09% based on a bid of 19.35 and a limitMaturity.
TD.PR.P PerpetualDiscount +2.6963% Now with a pre-tax bid-YTW of 6.06% based on a bid of 21.71 and a limitMaturity.
RY.PR.W PerpetualDiscount +2.7835% Now with a pre-tax bid-YTW of 6.26% based on a bid of 19.94 and a limitMaturity.
DFN.PR.A SplitShare +2.9928% Asset coverage of 2.1+:1 as of July 15 according to the company. Now with a pre-tax bid-YTW of 5.36% based on a bid of 9.98 and a hardMaturity 2014-12-1.
PWF.PR.E PerpetualDiscount +3.0241% Now with a pre-tax bid-YTW of 6.88% based on a bid of 20.10 and a limitMaturity.
CM.PR.E PerpetualDiscount +3.1450% Now with a pre-tax bid-YTW of 7.28% based on a bid of 19.35 and a limitMaturity.
RY.PR.F PerpetualDiscount +3.1501% Now with a pre-tax bid-YTW of 6.30% based on a bid of 18.01 and a limitMaturity.
SLF.PR.D PerpetualDiscount +3.2934% Now with a pre-tax bid-YTW of 6.52% based on a bid of 17.25 and a limitMaturity.
SBC.PR.A SplitShare +3.6269% Asset coverage of 1.9+:1 as of July 10, according to the company. Now with a pre-tax bid-YTW of 5.29% based on a bid of 10.00 and a hardMaturity 2012-11-30 at 10.00.
POW.PR.B PerpetualDiscount +4.0462% Now with a pre-tax bid-YTW of 6.81% based on a bid of 19.80 and a limitMaturity.
ELF.PR.G PerpetualDiscount +4.9020% Now with a pre-tax bid-YTW of 7.47% based on a bid of 16.05 and a limitMaturity.
Volume Highlights
Issue Index Volume Notes
CM.PR.A OpRet 419,550 Nesbit crossed 25,000 at 25.76 and 375,000 at 25.75. Now with a pre-tax bid-YTW of 2.00% based on a bid of 25.76 and a call 2008-11-30 at 25.75.
BNS.PR.L PerpetualDiscount 56,682 Nesbitt crossed 35,000 at 18.00. Now with a pre-tax bid-YTW of 6.31% based on a bid of 17.93 and a limitMaturity.
NA.PR.K PerpetualDiscount 55,400 Nesbitt crossed 50,000 at 23.05. Now with a pre-tax bid-YTW of 6.35% based on a bid of 23.05 and a limitMaturity.
TD.PR.N OpRet 52,750 Nesbitt crossed 50,000 at 25.90. Now with a pre-tax bid-YTW of 3.90% based on a bid of 25.85 and a softMaturity 2014-1-30 at 25.00.
CM.PR.J PerpetualDiscount 44,990 RBC bought 14,500 from Nesbitt at 15.75. Now with a pre-tax bid-YTW of 7.14% based on a bid of 15.85 and a limitMaturity.

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

Issue Comments

LSC.PR.C Partial Call for Redemption

Lifeco Split Corporation has announced:

that it has called 10,107 Preferred Shares for cash redemption on July 31, 2008 (in accordance with the Company’s Articles) representing approximately 2.477% of the outstanding Preferred Shares as a result of the special annual retraction of 77,114 Capital Shares by the holders thereof. The Preferred Shares shall be redeemed on a pro rata basis, so that each holder of Preferred Shares of record on July 30, 2008 will have approximately 2.477% of their Preferred Shares redeemed. The redemption price for the Preferred Shares will be $51.19 per share.

LSC.PR.C is not tracked by HIMIPref™.

Update: Thanks to Assiduous Reader cowboylutrell, who pointed out in the comments that this post originally referred to “LSC.PR.A”, which does not exist.

Spreads to Bonds

PerpetualDiscounts: Playing with Numbers

Given the recent skyrocketting of PerpetualDiscount yields, I’ve been thinking a bit about how the spread – which I consider quite excessive, but what do I know? – might be traded away by investors unwilling to time the markets.

OK, so let’s consider the following data:

Fixed Income Investments
Asset Yield Duration
Perpetual
Discount
Preferreds		 9.28%
(Interest
Equivalent)		 13.05
iShares
CDN Bond
Index
(XBB)		 4.32%
-MER 0.25%		 6.4
iShares
CDN Short
Bond Index
(XSB)		 3.96%
-MER 0.25%		 2.8

For PerpetualDiscounts, the Modified Duration is reported as it is on HIMIPref™, which assumes repayment of principal in 30-years. This isn’t quite accurate, but it’s close enough for horseshoes.

So let’s consider an investor who is holding XBB in a taxable account. There are going to be strange tax effects if we do it properly (since the average COUPON is far higher than the average YIELD: he will be paying tax on the coupon, which is partially a return of capital and, logically, getting some of this tax back via a projected capital loss), but we’re not going to do it properly. We’re going to do it on the back of an envelope; those wishing precision can either do it themselves, or pay me a huge amount of money to do it for them.

Anyway, this investor is holding XBB. He wants a duration-neutral switch into a portfolio comprised of XSB and PerpetualDiscount Preferreds, so he solves the equation (let P be the fraction of the new portfolio invested in Preferreds)

Old Portfolio Weighted Duration = New Portfolio Weighted Duration
6.4 = 2.8 (1-P) + 13.05 P
6.4 = 2.8 – 2.8P + 13.05 P
And therefore
3.6 = 10.5P
And therefore
P = 0.34.

Check!
6.4 = 2.8 * (1 – 0.34) + 13.05 * 0.34
6.4 = 2.8 * 0.66 + 13.05 * 0.34
6.4 = 1.8 + 4.4
Close enough!

So basically, a taxable investor holding XBB can swap 2/3 of his holdings into XSB and 1/3 into PerpetualDiscounts and remain duration neutral. Note that other risk-elements are not risk neutral! The portfolio is a barbell, and will underperform expectations if the curve steepens; there is a higher weight of corporates in the new portfolio; there is tax-effect-risk in the new portfolio; there is spread risk on the preferred (the spread can go to a million basis points and nobody will go to jail); there’s a whole list of things that could go wrong and would be listed in a prospectus. All I will say is that the duration-neutrality goes a long, long way towards making the portfolios equal, since to a first approximation the investor will have the same risk relative to parallel shifts in the yield curve, up or down.

OK, so what’s that done to his yield?

His old yield was 4.07% net of MER; his new yield, NY, after deduction of the MER on his perpetualDiscount position (MERP) is:
NY = 0.66*(3.96% – 0.25%) + 0.34*(9.28 – MERP)
= 0.66*(3.71%) + 0.34*9.28% – 0.34*MERP
= 2.44% + 3.16% – 0.34*MERP
= 5.60% – 0.34*MERP

Let’s assume he puts the money in my fund, MAPF, and that he assumes the fund will deliver the PerpetualDiscount yield less 1% fee and less 50bp expenses and no trading gains. Then

NY = 5.60% – 0.34*1.50%
= 5.09%

So … back of an envelope, an investor with a taxable position in XBB can make reasonably conservative assumptions and figure to pick up 100bp pre-tax yield without changing duration by putting 1/3 of his portfolio into perpetualDiscounts and keeping duration constant by swapping the other 2/3 to XSB. You could do your own calculation for the exchange traded funds, CPD and DPS.UN (these are not entirely perpetualDiscounts, so be careful!) or by using direct investment (zero MER!) on the preferred portfolio of your choice.