PrefBlog

What’s up with this issue? It’s not in the HIMI Preferred Indices (at the moment, anyway) due to volume considerations, but today it traded 41,832 shares and closed at 25.90-95, 78×20. AND it went ex-dividend today. Maybe to you and me, that means the price should go down, but not this time!

What makes this strange is that the pre-tax YTW on this issue is now -4.66% [that’s NEGATIVE 4.66% if the word-wrap on your browser is misbehaving!], based on the bid of $25.90 and a redemption call 2007-4-14 at $25.00. If it lasts until its scheduled hardMaturity 2011-3-15, then it will have yielded +4.76%, but just how likely is this contingency, anyway?

When we look at the financials, available via Scotia Managed Companies, we find the following history of units outstanding:

Which in the first place goes a long way towards explaining why the issue no longer qualifies for index inclusion on volume considerations and in the second place demonstrates that the capital unit holders aren’t exactly shy about redeeming units. Scotia says that the SXT Capital Units had a NAVPS of $19.61 as of December 5 … the market didn’t do much today, so say that’s constant … SXT closed at $19.23-84, 40×50.

There will always be those who disagree, of course, but it seems to me that the increase in the Capital Units’ intrinsic value from about $17 last March to the current figure, together with the fact that the Capital Units were trading at a discount to intrinsic value of about 7-8% immediately following the last redemption, that has now been reduced to about 2%, makes the probability of redemption extremely high. Scotia has a great little feature on their website whereby a user can plot the intrinsic value and the market value and the discount over time. Have a look. Same pattern: discount goes to about 8% following the redemption period, increases gradually to about the current figure, then there’s a whacking great redemption.

Given that, I wouldn’t be paying $25.90 for these shares!

As I’ve said before, the world would be a better place if more split share corporations’ preferred shares had some degree of call protection via premia on early-call prices.

I’ve attached two graphs of data over the past year: Flat Bid Price and Yield-to-Worst. Check the glossary for explanations of flatBidPrice and yieldToWorst.

This is BG Income + Growth Split Trust, a preferred security not tracked by HIMIPref™ … but I’ll report on its partial redemption call just for fun anyway!

According to their prospectus, the prefs had good call protection:

Preferred Securities also may be called by the Trust and purchased prior to the Maturity Date (the “”Call Right”), at a price per Preferred Security which until May 31, 2005 will be equal to $10.40 and which will decline by $0.10 each year thereafter to $10.00 after May 31, 2008, plus any accrued and unpaid interest thereon.

Now some of them have been called:

The call of Preferred Securities represents approximately 18.3% of the outstanding Preferred Securities. The Preferred Securities will be called on a pro rata basis such that each holder of Preferred Securities of record on December 6, 2006, as per the records of the Canadian Depository for Securities Limited (CDS), will have approximately 18.3% of their Preferred Securities redeemed. The total redemption amount for the Preferred Securities will be $10.33587 per security, which represents a price of $10.30 plus interest from the date of the last distribution to December 6, 2006.

Given that the maturity is May 31,2009 … call it 2.5 years away … we can say, roughly that a price of 10.30 equates to a call yield of 4.7%. So – the pref holders did fine.

Some of the holders did really well! I see a volume spike – such as it is! – on November 13, when the closing price was over $10.60, and a close of over $10.80 on November 24.

Definately, the world would be a better place if all split-share preferred had some call-protection via premia on the call price.

I will admit to being fascinated at the prospect of client retractions of income-trust-based split share corporations over the next few months.

Energy Split II Corporation has announced that only about 1.547% of the preferred shares outstanding will be redeemed in order to match Capital Units tendered separately.

This is much less than I would have expected; as shown on the company’s website, the NAV got hammered in the aftermath of the Hallowe’en Massacre, with the Capital Units losing almost 28% of their NAV from the October 26 valuation to November 30. They mature next December anyway; it is interesting to note that the only prior redemption possibility, in 2005 after a year on the market, called only about 5.4% of the shares outstanding.

However, they somehow managed to continue trading at a premium to NAV – as much as 33% as measured on November 2 – and so it was in the interest of Capital Unitholders to sell in the marketplace rather than retract – to the tune of almost 5% on November 30.

The prefs don’t trade much (averageTradingValue of just over $5,000) and are not eligible for recommendation by HIMIPref™ since pseudoModifiedDuration (Cost) of buy side less than minimum setting : the pseudoModifiedDurationCost is 0.886 and the minimum setting in the current parameterization is 1.020.

Still, y’know: These things have a pre-tax bid-YTW of 5.22% based on their hard-maturity on 2007-12-16 at $25 (because those who buy prior to the ex-date of 2006-12-12 will be getting five dividend payments in a year-and-a-few-days) so some hopeful souls may wish to put in a bid at $25.01, given that the current quotation is $25.00-$26.00, 54×1.