PrefBlog

Well – I said it was pretty certain and every now and then I get something right! CIBC has announced:

its intention to redeem all of its issued and outstanding Non-cumulative Class A Preferred Shares Series 25 for cash. The redemptions will occur on July 31, 2007. The redemption price is $26.00 per Series 25 share.
    The $0.375 per share quarterly dividend declared on May 31, 2007 will be the final dividend on the Series 25 shares and will be paid on July 27, 2007 to shareholders of record on June 28, 2007, as previously announced.

CM.PR.C closed yesterday at 26.10-24.

Charterhouse Preferred Share Index Corporation, which I reviewed last year, is introducing a rather odd shareholders’ resolution:

with respect to the Corporation, a special resolution approving an amendment to the Articles of Incorporation to permit the Corporation without obtaining approval of the Securityholders, to issue Securities at a price per Security that is less than the net asset value per Security at such time.

Their rationale for seeking such authority is:

The Manager is of the view, in respect of each Fund and the Corporation, that the issuance of Securities at a price which may be less than the net asset value per Security of the Fund or the Corporation may, in certain circumstances, be in the best interest of the Fund or Corporation and the Securityholders. For example, the ability to take advantage of certain investment opportunities may depend, in part, on the availability of additional capital to employ at opportune times. By providing the Funds and the Corporation with the ability to issue securities at less than net asset value, without the delay and cost of obtaining Securityholder approval, the Funds and the Corporation would have the ability to efficiently raise additional capital through, for instance, a rights offering, allowing the Funds and the Corporation to take advantage of these time-sensitive investment opportunities, thereby capturing additional returns for Securityholders.

Quite frankly, I’m puzzled. PFD.PR.A is an index fund. Just what “investment opportunities” do they expect to see? To quote from their web page:

The Charterhouse Preferred Share Index Corporation provides holders of the Preferred Shares with:

1. cost-efficient exposure to an indexed portfolio (the “Portfolio”) that is representative of the universe of fixed rate preferred shares and preferred securities of Canadian issuers (“Portfolio Securities”) listed on the Toronto Stock Exchange (“TSX”); and
2. return of capital distributions, paid quarterly

The meeting is set for June 11, full details and the management circular are available on SEDAR, under “Public Companies” – search for “Charterhouse Preferred Share Index Corporation”. If I were a shareholder, I’d have a lot of questions to ask about these “investment opportunities” and I would be voting against the resolution if I didn’t like the answers. My fear would be a rights offering priced significantly under market …. as of May 31, for instance, the NAV was $22.01 and the trading price was $21.70. Now, I’m not sure exactly what limits the TSX puts on rights offerings, but it seems to me that they could issue rights to shareholders allowing the purchase of more stock at $21.00. Now, in a perfectly efficient capital market, I’m basically indifferent as to whether I sell the rights or exercise them. We are not blessed with perfectly efficient capital markets, however, so commissions on the rights sales could leave me worse off, let alone my market risk on the sale.

Shareholders should be looking for answers on this one.

Hat-tip to a Canadian Moneysaver reader for bringing this to my attention!

Well, I wanted to do a little attribution analysis for my own purposes and now find that I have the same viewpoint as a publish-or-perish academic: publish everything! If you have a good laundry list, publish that!

The worst performers of May (of the issues included in the HIMIPref™ Universe) were:

As of May 31, CM.PR.J was quoted at 22.85-90 with a curvePrice of 23.06; GWO.PR.I was quoted at 22.83-85, curvePrice 22.86. These issues are very similar, having the same annual coupon and the same credit rating. It is because these issues now appear reasonably fairly priced that I have characterized the probable cause as “Rationalization”. However, I could just as easily – and perhaps better – characterized the probable cause as simply “Vanishing Liquidity Premium”.

Let’s have a closer look at those curve Prices:

…and…

I discussed the yield curve and the collapse of the liquidity premium in the post HIMI Index Performance, May 2007:

One very interesting thing that happened this month is that a lot of the yieldCurvePremiumLiquidity disappeared, as shown in this graph. I interpret the change in the premium as reflecting a desire by some holders, at least, to get out of the sector in size and quickly; such holders might simply sell their most liquid holdings to adjust portfolio exposures; this will affect the prices of these issues; hence, liquidity will become a lot less expensive. The PerpetualDiscount index is the most liquid of all the sub-indices – it’s dominated by recent issues, apart from anything else – and thus a portion of the decline in this index might be attributed to this factor rather than the intrinsic characteristics of the investment.

Such a hypothesis gains some support from examination of the changes in the yield curve, which I found a little surprising. The long-end hasn’t moved by nearly as much as one might have expected. Note that this graph is of the TAXABLE curve and refers to SPOT YIELDS … therefore, the x-axis shows the yield one might expect on a “stripped dividend”, after tax.

Hopefully, the tables above will make my meaning a bit more clear. However, I should advise explicitly that the huge importance of liquidity in the above tables is probably over-stated. It comes out of the math, all right, and I have no problems with the mechanical correctness of the math … but as I’ve re-stated above, liquidity is not distributed homogeneously across the HIMIPref™ universe – it is highly concentrated in the PerpetualDiscount segment and this can lead to a confounding of the analysis.

In the comments to the June 1 Market Action Report, assiduous reader tobyone posted:

RE: 5.25% LFE.PR.A bid @10.26 indicates yield of over 5% according to Globeinvestor and TDW yield calculators vs. your table. I hope this is an error because I hold this one but don’t want it @4.73%

Well, Globeinvestor and TDW are enormous companies, with an excellent record of sticking their brand name on various things, but I’ll see what I can do.

I stand by my calculation of 4.73%. First, the details, in all their glory, from the HIMIPref™ cashFlowDiscountingAnalysisBox:

A3555025 0138
2007-07-10        DIVIDEND   0.04   0.995022   0.04
2007-08-10        DIVIDEND   0.04   0.991082   0.04
2007-09-10        DIVIDEND   0.04   0.987158   0.04
2007-10-10        DIVIDEND   0.04   0.983376   0.04
2007-11-10        DIVIDEND   0.04   0.979482   0.04
2007-12-10        DIVIDEND   0.04   0.975729   0.04
2008-01-10        DIVIDEND   0.04   0.971866   0.04
2008-02-10        DIVIDEND   0.04   0.968018   0.04
2008-03-10        DIVIDEND   0.04   0.964433   0.04
2008-04-10        DIVIDEND   0.04   0.960614   0.04
2008-05-10        DIVIDEND   0.04   0.956933   0.04
2008-06-10        DIVIDEND   0.04   0.953145   0.04
2008-07-10        DIVIDEND   0.04   0.949493   0.04
2008-08-10        DIVIDEND   0.04   0.945733   0.04
2008-09-10        DIVIDEND   0.04   0.941989   0.04
2008-10-10        DIVIDEND   0.04   0.938380   0.04
2008-11-10        DIVIDEND   0.04   0.934664   0.04
2008-12-10        DIVIDEND   0.04   0.931083   0.04
2009-01-10        DIVIDEND   0.04   0.927397   0.04
2009-02-10        DIVIDEND   0.04   0.923725   0.04
2009-03-10        DIVIDEND   0.04   0.920421   0.04
2009-04-10        DIVIDEND   0.04   0.916777   0.04
2009-05-10        DIVIDEND   0.04   0.913264   0.04
2009-06-10        DIVIDEND   0.04   0.909648   0.04
2009-07-10        DIVIDEND   0.04   0.906163   0.04
2009-08-10        DIVIDEND   0.04   0.902575   0.04
2009-09-10        DIVIDEND   0.04   0.899002   0.04
2009-10-10        DIVIDEND   0.04   0.895557   0.04
2009-11-10        DIVIDEND   0.04   0.892011   0.04
2009-12-10        DIVIDEND   0.04   0.888593   0.04
2010-01-10        DIVIDEND   0.04   0.885075   0.04
2010-02-10        DIVIDEND   0.04   0.881571   0.04
2010-03-10        DIVIDEND   0.04   0.878418   0.04
2010-04-10        DIVIDEND   0.04   0.874940   0.04
2010-05-10        DIVIDEND   0.04   0.871587   0.04
2010-06-10        DIVIDEND   0.04   0.868137   0.04
2010-07-10        DIVIDEND   0.04   0.864810   0.04
2010-08-10        DIVIDEND   0.04   0.861386   0.04
2010-09-10        DIVIDEND   0.04   0.857976   0.04
2010-10-10        DIVIDEND   0.04   0.854688   0.04
2010-11-10        DIVIDEND   0.04   0.851304   0.04
2010-12-10        DIVIDEND   0.04   0.848043   0.04
2011-01-10        DIVIDEND   0.04   0.844685   0.04
2011-02-10        DIVIDEND   0.04   0.841341   0.04
2011-03-10        DIVIDEND   0.04   0.838331   0.04
2011-04-10        DIVIDEND   0.04   0.835012   0.04
2011-05-10        DIVIDEND   0.04   0.831813   0.04
2011-06-10        DIVIDEND   0.04   0.828520   0.04
2011-07-10        DIVIDEND   0.04   0.825345   0.04
2011-08-10        DIVIDEND   0.04   0.822077   0.04
2011-09-10        DIVIDEND   0.04   0.818822   0.04
2011-10-10        DIVIDEND   0.04   0.815685   0.04
2011-11-10        DIVIDEND   0.04   0.812455   0.04
2011-12-10        DIVIDEND   0.04   0.809342   0.04
2012-01-10        DIVIDEND   0.04   0.806138   0.04
2012-02-10        DIVIDEND   0.04   0.802946   0.04
2012-03-10        DIVIDEND   0.04   0.799972   0.03
2012-04-10        DIVIDEND   0.04   0.796805   0.03
2012-05-10        DIVIDEND   0.04   0.793752   0.03
2012-06-10        DIVIDEND   0.04   0.790609   0.03
2012-07-10        DIVIDEND   0.04   0.787580   0.03
2012-08-10        DIVIDEND   0.04   0.784461   0.03
2012-09-10        DIVIDEND   0.04   0.781356   0.03
2012-10-10        DIVIDEND   0.04   0.778362   0.03
2012-11-10        DIVIDEND   0.04   0.775280   0.03
2012-12-01  FINAL DIVIDEND   0.03   0.773199   0.02
2012-12-01        MATURITY  10.00   0.773199   7.73
Total Cash Flows    12.8739
Total Present Value    10.2597
Discounting Rate 4.7291 % (Annual rate compounded semi-annually)

More simply, I’ll say: OK, this thing pays $0.525 p.a. At a price of $10.26, it will give rise to a $0.26 capital loss on its maturity 2012-12-1. That’s 5.5 years away so call the annual capital loss $0.05 (for the sake of an argument). Therefore, of the $0.525 dividends received every year, $0.475 is income and $0.05 is return of capital. Over the period, my average capital invested is (10.26 + 10.00) / 2 = 10.13. Therefore, my (very roughly calculated) yield is $0.475/$10.13, or 4.69%, which is close enough to my precisely calculated yield of 4.73% that I’m not going to panic.

I’m not familiar with the GlobeInvestor or TDW yield calculators – if you will send me a link, I’ll take a look at them. The most common errors with such things are:

• Are they calculating current yield = $0.525 / $10.26 = 5.12%? This is wrong, since it ignores the capital loss on maturity.
• Are all the dividends incorporated? Ex-dates can be a little tricky.
• Monthly dividends can be a little tricky to jam in to some calculators. Has this been done properly?

I recommend Keith Betty’s Yield Calculator (broken link redirected 2024-2-1).

Now I have another question … you indicated that you didn’t want to own this thing at 4.73%, but you didn’t indicate precisely why. Now, I’m not going to take a public position on the merits of LFE.PR.A as an investment at the current price (and please, don’t spend hours parsing everything I write from here on in trying to decide what I really think!), but the comment makes me suspect that you think a sale at a 4.73% yield is a slam-dunk … and whatever the verdict is, I don’t think it’s a slam-dunk-sell.

In your comment, you mentioned CM.PR.J as a possible buying opportunity, given its closing pre-tax bid-YTW of 5.03%. Now, this is more than LFE.PR.A, but CM.PR.J is a perpetual and there are other differences besides. In terms of the riskAttributes examined by HIMIPref™, the major differences are:

• Credit Quality: CM.PR.J is better.
• Retractible:LFE.PR.A is better.
• SplitShare: CM.PR.J is better
• Various Duration & Convexity Measures: Well, they’re different!
• Cumulative Dividends: LFE.PR.A is better.
• Liquidity: (not a formal risk measure, but it is important) CM.PR.J is better

Anything you can tell me about how you value LFE.PR.A will, at the very least, give me some ideas regarding what to write about!