Archive for September, 2006

BAM.PR.B / Floating-rate Index

Wednesday, September 27th, 2006

“You say you dislike floating rate issues. Why then does the system love BAM.PR.B?”

Well! That was a lovely eMail to receive! Don’t I have enough problems spouting my opinions without having to worry about consistency?

HIMIPref™ does love BAM.PR.B. It is ranked as the best single preferred share in the marketplace, so let’s dig into the numbers a little and see what’s what. Very briefly, the issue is currently callable at $25.00 and pays 70% of Canada prime, so the annual dividend is currently $1.05. It’s a member of the “Floaters” index, so let’s compare it with those issues:

Credit (DBRS) Pfd-2(low) Pfd-2(low) Pfd-2(low) Pfd-2(low)
9/26 quote 24.20-27 24.25-38 25.33-46 26.60-74
Dividend 1.05 1.05 1.05 1.50
Average Trading 222,586 97,663 44,673 53,081
Curve Analysis performed for taxable accounts
Price due to Base Rate 22.04 22.05 22.34 23.33
Price due to Short-Term 0.10 0.10 0.10 0.14
Price due to Long-Term 0.70 0.67 0.67 0.90
Price due to Credit Spread (2) -0.91 -0.87 -0.87 -0.98
Price due to Liquidity 0.99 -0.03 -0.41 -0.40
Price due to FloatingRate 3.47 3.30 3.32 3.78
Price due to Credit Spread (low) -0.40 -0.38 -0.38 -0.43
Price due to Error 0.00 0.14 0.19 0.18
Curve Price 25.99 24.98 24.95 26.52
Price Disparity 1.72 0.60 -0.38 -0.08


The key figure here is the Price Disparity which is a major influence on valuation. “Price Disparity is high” implies “HIMIPref™ loves”.

In tracing the source of the price disparity, we find two table rows of note: the Liquidity adjustment and the Floating Rate adjustment – these are both elements of the Yield Curve Calculation. Briefly: the market is now placing a huge premium on liquidity. When the entire HIMIPref™ universe is analyzed, it is found that there is a very definite liquidity effect: issues with high Average Trading Values are generally a lot more expensive than a straightforward analysis of their expected cashflows would indicate. Similarly, Floating Rate issues are far more expensive than their expected cash flows would indicate (which is why I don’t like ’em!). Note that cash flow expectations for floating rate issues are calculated with the view that Prime is what it is and ever shall be, world without end.

So … that’s why HIMIPref™ loves BAM.PR.B! It’s not due to any particular factor – it is based on the idea that, should the market come to value its characteristics in the same manner as the market values those characteristics for all the other preferreds analyzed, then it will go up in price – big time!

Is this guaranteed? Of course not. There may be elements that the market is pricing that are ignored by HIMIPref™, most obviously “Company Specific Effects”, i.e., maybe the market just doesn’t like BAM. I have not been able to define, parameterize and test a formulation of such an effect that leads to better results, but that doesn’t mean that it doesn’t exist, and certainly doesn’t mean that it doesn’t exist right now at this moment for BAM only!

HIMIPref™ is a statistical system. The market is a sometimes illogical beast. All one can do is make lots of small “bets” when the odds are in your favour (rather than making one big bet!) to give the statistics a chance to work. Some trades will work out nicely, others won’t … the idea is to accept that and to keep rolling the slightly-loaded dice!

September 26, 2006

Tuesday, September 26th, 2006
Note that these indices are experimental; the absolute and relative daily values are expected to change in the final version
Index Current Yield (at bid) YTW Average Trading Value Mod Dur (YTW) Issues Day’s Perf. Index Value
Ratchet 4.37% 4.40% 48,744 16.64 1 0.1608% 1,013.8
Fixed-Floater 4.89% 3.98% 272,642 8.99 6 0.0594% 1,014.3
Floater 4.63% -18.46% 97,450 8.12 4 0.0199% 1,017.2
Op. Retract 4.69% 2.44% 84,419 2.44 18 -0.0139% 1,015.1
Split-Share 4.97% 3.07% 60,026 2.67 10 0.2222% 1,014.0
Interest Bearing 6.85% 4.50% 55,555 2.07 7 0.2376% 1,023.4
Perpetual-Premium 5.14% 4.01% 176,929 4.14 48 -0.0327% 1,027.1
Perpetual-Discount 4.58% 4.60% 331,043 16.23 6 -0.0531% 1,038.5
Major Price Changes
Issue Index Change Notes
There were no index-included issues with major price moves today
Volume Highlights
Issue Index Volume Notes
CM.PR.B PerpetualPremium 257,200 Desjardins crossed 250,000 @ $26.10. With an annual dividend of $1.50, this is a good candidate to be called early next year … if it is, it will still achieve a pre-tax YTW of 3.71% (worth about 5.19% interest equivalent! Not bad for five-month bank paper!)
BC.PR.E Scraps 200,000 Every single share was crossed by Scotia, in three tranches, at various times throughout the day, at $25.17. For an issue recently removed from the ratchet index due to volume concerns, this has sure been trading a lot lately!
CM.PR.A OpRet 182,600 Global crossed 89,200 on a cash basis at $27.21, then ‘another’ 89,200 regular settlement at $26.87. Difference of $0.34, dividend is $0.33125, issue went ex-dividend today. Somebody’s got a capture strategy going!
FTN.PR.A SplitShares 115,540 Pre-tax YTW of 3.24% based on the closing bid of $10.45 and a maturity at $10.00 2008-12-01
IGM.PR.A OpRet 65,902 Scotia crossed 48,900 @ 27.80

There were nineteen other index-included issues trading over 10,000 shares today.

September 25, 2006

Tuesday, September 26th, 2006
Note that these indices are experimental; the absolute and relative daily values are expected to change in the final version
Index Current Yield (at bid) YTW Average Trading Value Mod Dur (YTW) Issues Day’s Perf. Index Value
Ratchet 4.39% 4.42% 46,271 16.61 1 0.0805% 1,012.2
Fixed-Floater 4.89% 3.95% 279,401 8.97 6 0.1909% 1,013.7
Floater 4.63% -18.44% 99,074 8.11 4 0.0501% 1,017.0
Op. Retract 4.68% 2.37% 82,645 2.37 18 0.0920% 1,015.3
Split-Share 4.98% 3.21% 59,456 2.68 10 0.0750% 1,011.7
Interest Bearing 6.86% 4.71% 55,751 2.06 7 -0.1747% 1,021.0
Perpetual-Premium 5.13% 4.01% 176,804 4.15 48 0.0477% 1,027.4
Perpetual-Discount 4.58% 4.60% 331,842 16.24 6 0.2305% 1,039.0
Major Price Changes
Issue Index Change Notes
IAG.PR.A PerpetualDiscount +1.0101% Closed at 25.00-10. Won’t be a “Discount” for much longer at this rate!
ACO.PR.A OpRet +1.2887% Pre-Tax YTW 3.04% based on a call at $26.00 in December 2008. A reasonable chance of doing better, given its unusually steeply declining premium. I’ll have to write a proper comment about this issue …
Volume Highlights
Issue Index Volume Notes
CM.PR.E PerpetualPremium 66,870 Pre-Tax YTW of only 4.18% at the closing bid of $26.89
CM.PR.A OpRet 55,635 Pre-Tax YTW only 1.02% at the closing bid of $27.21, based on a call at $25.75 in November 2007.
BC.PR.E Scraps 50,930 The volume’s increasing on this little guy! He’ll be eligible for inclusion in the ratchet rate index soon!
CM.PR.H PerpetualPremium 26,630 Not a bad issue at the closing quote of 25.46-57… Pre-Tax YTW of 4.66% based on a call in 2014 at par.
BAM.PR.B Floater 25,905  

There were sixteen other index-included issues trading over 10,000 shares today.

BAM.PR.E / BAM.PR.G Reset Rate Percentage Announced

Monday, September 25th, 2006

Brookfield has announced – somewhat quietly! I couldn’t find anything on their site and had to look at SEDAR! – that the Selected Percentage Rate for the upcoming reset will be 108%.

So commencing November 1, 2006, the dividend rate paid on BAM.PR.G will be 108% of the Canada 5-year yield as computed on October 11. The 5-years closed today at about 3.84%, so this implies a yield of about 4.15% on the BAM.PR.G (assuming no change in rates over the next two weeks), or about $1.0375 annually per share.

Horrible! Especially compared with the 5.63% (or $1.4075) they’ve been paying for the last five years!

According to Brookfield’s “Notice of Conversion Privilege” the Designated Percentage (which varies only in accordance with trading price, not by company fiat) of prime paid on the BAM.PR.E is 81%, or currently 4.86%.

 Well, pays yer money and takes yer chances. Going with ratchet-rates means taking a risk on the Designated Percentage AND taking a risk on Prime for the next five years. It’s a tough call, just like the BCE.PR.T / BCE.PR.S conversion that’s coming up … although, mind you, BCE’s fixed-rate offer is 112% of the five year yield.

Given that BAM.PR.G closed today at 25.12-32, 3×5 on volume of 2500 shares, I don’t think they’re much of an option … or, to be more explicit, if they’re the best option there is, holders are better off selling them, because a Pfd-2(low) (DBRS) credit on a perpetual paying $1.0375 (at least for the next five years) sure ain’t going to be trading above par for long!

And I just don’t like floaters, anyway, especially ratchet rates. Hard to analyze, hard to plan for, really, really hard to make any capital gains from. Given the current trading price, the percentage of prime will be declining in the near future … perhaps, eventually, to the same level as BCE.PR.S (which have the same credit rating, after all) and then be paying only 64% of prime.

So I’d say these thingies are a “sell” right now. I don’t like either alternative, not when I can get better than par by selling them now.

Hat-tip to Financial WebRing for bringing this to my attention!

Note added 2006-09-28: I have just received an eMail from a concerned user of The summary information regarding dividend rates for BAM.PR.G is stated as:


  • Floating Rate Start Date : 2006-11-01
  • Floating Rate Index ID : Canada Prime
  • FR Formula : Ratchet (#0)
  • Max Ratchet Rate Formula ID : 100% of index (#1)
  • Min Ratchet Rate Formula ID : 50% of index (#2)

My correspondent went to the trouble of reading the prospectus and confirmed for himself that the BAM.PR.G do not, in and of themselves, change to floating rate.

These things are difficult to handle, particularly in the period when, as now, the upcoming reset rate is only “sort-of” known. For the “reset” side of every  Ratchet-Rate-Preferred-Pair, HIMIPref™ assumes that the rate paid on the resettable prefs (which in this case is the BAM.PR.G) will be so lousy that investors will be virtually forced into the “ratchet side” (in this case, the BAM.PR.E).

It’s a conservative assumption, but a difficult one to explain in a brief summary! I’ll put together some kind of post, essentially re-stating this point, and link to it from the appropriate cells on the table … eventually!

FAL.PR.F / FAL.PR.G to be redeemed

Monday, September 25th, 2006

Xstrata has announced that the two captioned issues will be redeemed on November 1, 2006.

each series F share will be redeemed for C$25.50 in cash, each series G share will be redeemed for C$25.00 in cash … plus accrued and unpaid dividends in respect of each share up to, but excluding, 1 November 2006.

FAL.PR.F became a ratchet rate preferred on 2005-07-06 and its most recent dividends have been $0.115 monthly, or $1.38 annually, or 5.52% on the issue price, or 5.41% against the redemption price. It ended today quoted at 25.33-55, 83×100 (big size for this issue!), but with no trading.

FAL.PR.G was its opposite number, and has been paying $0.38125 quarterly, or $1.525 annually, or 6.1% on its issue price (= redemption price).

These shares used to be Noranda and the provisions stated on Page C-6 of the 2005-06-02 Information Circular (sorry, I don’t have the original prospectus handy!) states that the fixed rate option could be as low as 80% of the 5-year Canada Yield. I can only presume that XStrata decided it could not bank on the ratchet-rate prefs yielding a low enough percentage of prime to make a lousy rate on the fixed-rate side worthwhile.

So anyway, there’s a ratchet-rate pref gone!

Research : Dividends & Ex-Dates

Monday, September 25th, 2006

The new (October) issue of Canadian Moneysaver has been released, so now I am releasing the column that was in the old (September) one: Dividends & Ex-Dates.

This article attempts to make sense of the terms “Ex-Date”, “Record-Date” and “Payment Date” for investors who don’t necessarily deal with these concepts every day, but need to understand them in order to calculate preferred share yields correctly. 

  Look for the “Research” Link!

E-L Financial New Issue!

Monday, September 25th, 2006

E-L Financial has announced a new perpetual issue. See CCN Mathews for the press release … the actual press releases cannot be linked, but were timestamped 9:47 & 9:48 am, ET, today.

No prospectus is yet available on SEDAR, but informal information available to me indicates that it can be described as follows:

Dividend: 4.75%, or $1.1875 p.a. per share, non-cumulative

Redemption: $26.00 commencing October 17, 2011, declining by $0.25 p.a. until it’s redeemable at $25.00 at any time on or after October 17, 2015. The company has the right to force conversion into stock, using the applicable redemption price and the greater of $1.00 or 95% of the average common price (as defined) to determine the exchange ratio.

Rating: A preliminary rating of P-2(high) from Standard & Poors has been claimed. I have no information regarding a DBRS rating but, for analytical purposes, have assumed a Pfd-2(low) rating, the same as the existing ELF.PR.F.

It’s a bought deal via RBC-DS.

Preliminary analysis using a taxable yield curve indicates the following:

Curve Attribute ELF.PR.? RY.PR.B
Price due to base-rate 23.61 23.57
Price due to short-term 0.08 0.07
Price due to long-term 0.70 0.75
Price due to Credit Spread (2) -0.72 N/A
Price due to error 0.02 -0.01
Price due to Credit Spread (Low) -0.33 -0.38
Total Intrinsic 23.35* 24.00*
Price due to Liquidity 1.44 1.44
Total Curve Price 24.79* 25.45*
*Note Rounding Error

The “Price due to Liquidity” for the ELF.PR.? is a little fishy. As with all new issues, the analysis assumes maximal liquidity, but on the other hand, the ELF is only a $100-million dollar issue. $1.44 liquidity value seems a little steep!

Another way to say the same thing is: I think the EL new issue should be priced at less than the RY.PR.B by the sum of:

  • $0.72 for the credit spread
  • Somewhere between $0.00 and $1.44 for the liquidity

Well, I won’t be rushing to pull out my chequebook for this one! Seems to me that, like the Fortis new issue, the underwriters are pricing this deal according to the trading levels of all the Pfd-1(low) bank perps and hoping nobody notices the credit difference.

This new issue has been added to the HIMIPref™ database with the symbol ELF.PR.?.

New Issue : Brompton Life & Banc Split Corp.

Saturday, September 23rd, 2006

I was asked by eMail to comment on this new issue.

The issue is featured on the Brompton website and the issue characteristics are:

Pays: 5.25% p.a. as dividends, quarterly, cumulative

Options: None relevant.

Maturity:  2013-11-29  @ 10.000000

Rating: Pfd-2 by DBRS. I can’t find anything about the issue on the DBRS website, but I have no reason to believe the prospectus is inaccurate. The OSC would be inclined to take a rather dim view of such shennanigans – and so would DBRS!

Other: Split Share Corporation.

 I’ve entered the information into HIMIPref™ – normally I wouldn’t bother, but I was specifically asked about this issue, so why not? – and on a TAXABLE basis the issue looks cheap compared to the current yield curve:

Curve Price : Taxable Curve
Price due to base-rate 10.21
Price due to short-term 0.10
Price due to long-term 0.38
Price due to SplitShareCorp -0.22
Price due to Retractibility 0.34
Price due to Credit Spread (2) -0.11
Total $10.70

When discounted by the Pre-Tax curve they’re even better!

Curve Price : Non-Taxable Curve
Price due to base-rate 10.25
Price due to short-term 0.50
Price due to long-term 0.01
Price due to SplitShareCorp -0.30
Price due to Retractibility 0.48
Price due to Credit Spread (2) -0.17
Price due to error 0.02
Total $10.80


Clearly, one’s views of the “fair” price for this instrument will be influenced by whether one is speaking of “taxable” or “non-taxable” accounts, but it is equally clear that this issue is attractively priced at $10.00 regardless of the tax-status of the speaker!

My correspondent also wondered how a split share corporation could pay 5.25% dividends when the underlying investment only pays 3-3.5%. Well, the best underlying yielder (BMO) pays 3.7%, whereas the two worst (IAG & MFC) only pay 1.9% (both figures from the preliminary prospectus), but it’s a reasonable enough guess none-the-less.

Let’s say the company takes in $100-million, which is 4 million units priced at $25 total. They’re going to have to pay issue expenses – let’s call that $500,000, for the sake of a number, and selling commissions of $4.8-million. So they’re left with $94.7-million to invest, and lets just estimate the average yield of the underlying investments at 3%. So that means the company will be getting dividend income of $2.84-million.

They have 4 million prefs outstanding, and have to pay $0.525 annually on each of them. That comes to $2.1-million. So we can say that the dividends we expect on the prefs are covered quite comfortably by the dividends on the underlying assets – a dividend coverage ratio of about 1.3:1 – which is entirely reasonable. Note that the company has $94.7-million in assets to cover the return of $40-million to the preferred shareholders … an asset coverage ratio of just under 2.37:1, which is great! These calculations help explain why DBRS has put such an attractive credit rating on the issue … the banks and insurance companies in the underlying portfolio would have to go down in price by more than 50% before the company ran out of money to pay the preferred obligations.

All very nice, you say, but what about the class A shares? Well, what about them? I don’t care about them. They’re entitled to the excess dividend income that was estimated above to be about $740,000 … they’re also entitled to all the extra income the company can make from writing options and lending securities. Good for them. And if the price of the shares in the underlying portfolio goes up, they can have all that, too. I don’t care, as long as I get paid on my prefs!

The prospectus states that in order to meet the return projections for the Class A shares (8%), the company will have to produce an annualized return of 9.2%, out of which will come the fees, expenses and, of course, the preferred shareholders slice of the pie. Who knows? Maybe the company will succeed in achieving these gains! 9.2% is certainly a not unheard-of return on financial equities over a 7 year period. However, I look upon most split-share corporations as a vehicle whereby greedy retail investors (who buy the “Class A” residual shares) voluntarily donate money to conservative retail investors (who buy the prefs). The greedy guys are my new best friends!

I wouldn’t buy the Class A shares, but the Prefs look attractively priced and well protected.

Update 2006-10-19 The above calculation of the Dividend Coverage Ratio did not take account of the MER. Oops! If an MER of 0.95% is assumed, then the income available to cover dividends should be reduced by $900,000 in the above example, leaving $1.95-million to cover dividends of $2.1-million, resulting in an estimated DCR of a little over 0.9:1, which is still fine, considering the asset coverage (and the fact that potential income from stock lending and option writing has been ignored. Thanks to Financial Webring for pointing this out.

Update, 2013-10-4: This issue trades as LBS.PR.A.

MAPF Returns : August 2006

Saturday, September 23rd, 2006

I have been remiss! I haven’t yet bragged about the results of Malachite Aggressive Preferred Fund in August.

The fund returned 1.79% in August, after expenses but before fees. In comparison, the BMO-NB 50 returned 0.86% (I use a third party benchmark rather than my own indices, both because my indices are currently still experimental and because I think casual readers may consider external benchmarks more appropriate for my own product).

This makes the 12-month comparison (MAPF after expenses but before fees) to MAPF: +5.92%; Index: +3.64%. There’s lots more information available at the main site. Past performance is not indicative of future results and you can lose money investing in MAPF or any other investment.

Contributers to the success of the fund in August were:

  • BAM.PR.J (a long term holding that is still undervalued, according to me) returned 1.955%
  • RY.PR.B, bought near its July lows, returned 1.6633%
  • PWF.PR.L, bought partially at the issue price (bargain!) and partially on the first day of trading (bargain! just not so good) ended the month up about 2% from the all-in purchase cost

September 22, 2006

Friday, September 22nd, 2006
Note that these indices are experimental; the absolute and relative daily values are expected to change in the final version
Index Current Yield (at bid) YTW Average Trading Value Mod Dur (YTW) Issues Day’s Perf. Index Value
Ratchet 4.40% 4.44% 45,781 16.59 1 0.0805% 1,011.4
Fixed-Floater 4.90% 4.00% 287,783 8.97 6 -0.0910% 1,011.8
Floater 4.64% -18.70% 96,595 8.10 4 -0.0396% 1,016.5
Op. Retract 4.68% 2.32% 82,179 2.20 18 0.0435% 1,014.4
Split-Share 4.98% 3.07% 58,538 2.68 10 0.0191% 1,011.0
Interest Bearing 6.86% 4.61% 55,813 2.08 7 -0.0017% 1,022.8
Perpetual-Premium 5.13% 3.85% 176,827 4.12 48 0.0660% 1,026.9
Perpetual-Discount 4.59% 4.60% 331,945 16.23 6 0.0407% 1,036.6
Major Price Changes
Issue Index Change Notes
There were no index-included issues with absolute value of returns greater than 1% today.
Volume Highlights
Issue Index Volume Notes
GWO.PR.I PerpetualDiscount 261,340 RBC crossed 50,000 @ $24.68, then Scotia crossed 150,000 at the same price.
FTN.PR.A SplitShare 134,240 Scotia crossed 60,000 @ $10.43, then 71,000 at the same price about 80 minutes later. These have a pre-tax YTW of 3.42% at the closing bid of $10.41, maturing in December 2008.
BC.PR.E Scraps 131,600 Scotia crossed 50,000 @ 25.17, then 80,000 at the same price. This is a ratchet-rate preferred, paying $0.10 monthly, or $1.20 p.a., or 4.8% of face, or 80% of prime. It was discussed briefly in this post
GWO.PR.H PerpetualPremium 107,075 Scotia crossed 99,900 @25.40.
POW.PR.B PerpetualPremium 105,000 RBC crossed 100,000 @ 25.85.

There were five other index-included issues trading over 10,000 shares today.